From Currency Depreciation to Trade Reform - World Bank · 2019-04-09 · Figure 3. Depreciation...
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Policy Research Working Paper 8809
From Currency Depreciation to Trade Reform
How to Take Egyptian Exports to New Levels?
Hoda Youssef Chahir Zaki
Macroeconomics, Trade and Investment Global Practice April 2019
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Abstract
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Policy Research Working Paper 8809
The Arab Republic of Egypt is yet to meet its exports potential, which has been historically hampered by sev-eral domestic market distortions and multiple barriers, resulting in weak export performance and modest regional and global integration. Although the liberalization of the exchange rate in November 2016 was a necessary step to correct the exchange rate misalignment and ease the ensu-ing shortages in foreign currency, it has not been sufficient to guarantee a notable improvement in export performance. This paper analyzes Egypt’s exports along three dimensions that are key for export performance and future growth: (i) composition and relatedness of exported products; (ii) geo-graphic and product concentration; and (iii) relatedness to globally traded products. The analysis suggests that Egypt continues to specialize in traditional areas of comparative advantage and limited value-added or is expanding toward products for which global demand is declining. The paper uses a gravity model to predict bilateral trade flows based on the economic size, geographic distance, and other rel-evant characteristics that should typically contribute to
facilitated trade and identify specific sectors and markets for which Egypt seems to have an untapped potential. To understand this underperformance, the paper investigates the key impediments to meeting the export potential. It explores some of the important supply and demand side factors and assesses the role of trade policy measures (tariffs and non-tariffs barriers) in impeding export growth. The analysis reveals that despite significant liberalization efforts, Egypt remains among the group of developing countries that have the highest frequency index and coverage ratio of non-tariff measures. Policy recommendations include a call to improve external competitiveness by fostering and diversifying domestic production and complement these efforts by engaging in trade facilitation reforms to remove the non-tariffs barriers to trade, notably, the administrative, technical, and sanitary barriers to trade. These are all nec-essary for the country to capitalize on its competitive gains from the currency depreciation and to improve the degree of Egypt’s integration into global markets.
This paper is a product of the Macroeconomics, Trade and Investment Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/research. The authors may be contacted at [email protected].
From Currency Depreciation to Trade Reform: How to Take Egyptian Exports to New Levels? *
Hoda Youssef1 Chahir Zaki2
J.E.L. classification: F10, F12 and F14.
Keywords: Egypt, exports, trade reforms, non‐tariff measures, competitiveness.
*The paper and its findings do not necessarily reflect the views of the World Bank management. Any errors are the soleresponsibility of the authors.
1 Senior Economist, World Bank. Email: [email protected] Associate Professor of Economics, Cairo University. Email: [email protected]
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1. INTRODUCTION
The Arab Republic of Egypt is yet to meet its exports potential, which has been historically hampered by several domestic markets distortions and multiple barriers, resulting in a weak export performance and a modest regional and global integration. While the liberalization of the exchange rate in November 2016 was a necessary step to correct for the exchange rate misalignment and ease the ensuing shortages in foreign currency, it is not sufficient to guarantee a notable improvement in export performance. This is because price competitiveness is only one element of countries’ ability to enhance their external competitiveness, but this ability will also depend on three other important factors: (i) the composition of domestic production and its exportability; (ii) the business and regulatory environment in which exporting firms operate; and (iii) the effectiveness of the country’s trade policy.
This paper attempts to answer three main questions. First, does the structure of domestic production explain the modest exports performance? This is key to understand why the country is not meeting its trade potential, as countries export what they are good at producing even if they are able to make other products. Our analysis suggests that Egypt continues to specialize either in traditional areas of comparative advantage and limited value‐added (such as petroleum and raw material) or is expanding towards products for which global demand is declining.
Second, in which specific sectors and markets does Egypt seem to have an untapped potential? This can be identified by comparing the country’s exports composition and destinations to those expected given its economic characteristics and geographical distance to trading partners.
Third, what are the key impediments to meeting this potential? To answer this challenging question, we explore some of the important supply and demand side factors, including the evolution of exports competitive advantage. We also assess the role of trade policy measures (tariffs and non‐tariffs barriers) in impeding exports growth. Our analysis reveals that despite significant liberalization efforts, Egypt remains among the group of developing countries that have the highest frequency index and coverage ratio of non‐tariff measures (NTMs).
The paper is organized as follows. Section 2 briefly introduces the motivation of this paper, by showing historical trends of exports performance and showing how recent economic reforms have yet to substantially reflect on this performance. Section 3 provides a brief review of the existing literature on Egypt’s trade policy and its effect on exports performance. Section 4 presents an overview of the production and exports landscape and looks into exports’ structure in terms of composition, degree of diversification and sophistication, in addition to geographic destination. Section 5 carries out an analytical attempt to understand the key impediments to export growth, including from a supply, demand and policy perspective. Section 6 concludes and presents some policy recommendations for the short and long term.
2. CURRENCY DEPRECIATION: NECESSARY BUT NOT ENOUGH?
After several years of economic and political turmoil, Egypt has embarked on a program of major reforms aimed at redressing the severe macroeconomic imbalances. A combination of domestic and external shocks, in the form of political turmoil, regional geopolitical and security threats and economic slowdown in main trading partners, have had an adverse effect on economic activity and fiscal and external balances. Attempts to address the ensuing shortages in foreign currency through capital controls and restrictions on foreign currency transactions resulted in the emergence of a parallel market and the depletion of international reserves. The spillover effects of macroeconomic pressures came in the form of a slowdown in economic activity and rising unemployment, severe shortages in key commodities, strategic goods and energy supply,
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and a decline in foreign direct investment. The foreign currency scarcity and overvaluation of the exchange rate undermined Egypt’s competitiveness, with exports declining by 15% and 16% in the two consecutive fiscal years (FY) 2015 and 2016, reaching its lowest level of 5.6% of GDP since the early 2000s (Figure 1).
In response to the pressing challenges, notably fiscal and external sustainability, a bold reform program was adopted in 2016. The main pillar of the programs was the liberalization of the exchange rate to address foreign currency shortages and improve competitiveness. The Central bank of Egypt (CBE) abandoned its currency peg and moved to a market‐determined exchange rate regime, resulting in a large depreciation of the local currency (Figure 2).
Figure 1. Trade and Current Account Balances Figure 2. Official and Parallel Markets Exchange Rate
Source: Central Bank of Egypt. Parallel market exchange rate is obtained from news articles.
While the currency depreciation is expected to boost exports by making the price of domestic products more competitive, achieving a rapid and sustained exports growth certainly requires more than a price effect. Figure 3 compares Egypt to other countries that have witnessed episodes of exchange rate depreciation of different magnitudes and plots them against the growth in non‐oil exports that occurred in the following year. The simple benchmarking exercise clearly shows that other countries have seen their exports reacting more sensibly to more modest currency depreciation, while Egypt has not managed to entirely benefit from such a large depreciation. Indeed, over a 100 percent depreciation in the Egyptian pound was followed by an increase in non‐oil exports by only 16 percent in about a year. In the short‐term, this may be expected given the high reliance of domestic production on imported inputs, either in the form of raw material or intermediate goods and equipment. If the effect of the costlier imported input dominates, the depreciation may even generate a J‐curve effect on the trade balance.
The historic evolution of exports performance in Egypt also shows an inability to achieve a sustained progress in exports performance. In its best performing years in the late 2000s, Egyptian exports attained a level that is just comparable to an average middle‐income country, while others who started at the same level or below in the early 2000s have managed to remarkably increase their exports‐to‐GDP ratios (Figure 4). This reflects a persistent inability to substantially benefit from higher globalization trends, possibly due to the existence of high trade costs, before and at the country’s borders. Several types of barriers may also impose high fixed costs on firms that wish to become exporters, thereby affecting the extensive margins of trade.
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Figure 3. Depreciation and Non‐Oil Exports Growth* Figure 4. Benchmarking Egypt’s Exports Trends
Note:* Nominal ER is the official exchange rate (LCU per US$), period average. A positive percentage change in the nominal ER means that the local currency is depreciating against the US dollar. Egypt figures reflect end-of fiscal year. Source:WorldDevelopmentIndicatorsandUNComtrade.
3. A LITERATURE REVIEW OF EGYPT’S TRADE POLICY AND EXPORTS PERFORMANCE
Egypt’s trade policy and its effect on exports performance have been widely studied in the literature. These studies can be divided into three main groups: those focusing on the effect of exchange rate on exports, those focusing on non‐tariff measures and finally trade agreements.
3.1 Exports and Exchange Rate
Most of the studies on the effect of the exchange rate on exports in Egypt use aggregate‐ or sectoral‐level data. Brixiova et al (2014) show that the real exchange rate misalignment contributed to the weak export competitiveness, as the REER of Egypt was overvalued between the mid‐1990s and the late 2000s. They find that structural factors are key to boosting exports, together with avoiding sizeable future misalignments. El‐Ramly and Abdel‐Haleem (2008) find that the adjustment of output to the devaluation of 2003 in Egypt is slow, and attribute it to the fact that exports and imports are not very responsive to the changes in the relative prices caused by devaluations. They recommend that increasing the response of exports requires a diversification and improvement of products and removing bureaucratic obstacles. At the sectoral level and for 59 industries, Bahmani‐Oskooee et al (2015) examine the effect of exchange‐rate volatility on Egypt’s export and import flows with the European Union; they find that a surprisingly small share of Egypt’s trade flows responds to increased volatility in the short run. In the long run however, a relatively large number of industries see their trade flows reduced by increased exchange‐rate risk. Zaki et al (2018) use monthly firm‐level and sector‐level data for the period 2005‐2016 to examine how the intensive (the quantity and value of exports) and the extensive (the probability of exporting a new product to a new destination, exporting a new product to an existing destination or exporting an existing product to a new destination) margins of trade are affected by the devaluation of the Egyptian pound. They find that, at the intensive margin, a depreciation of the real exchange rate increases the value of exports while the quantity of exports is not affected, thereby suggesting that the price effect is more significant than the quantity effect. Yet, the extensive margin, as measured by the number of destinations and the number of products, reacts positively to exchange rate depreciation.
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3.2 Exports and Non‐tariff Measures
Studies that have examined the effect of NTMs in the MENA region are scarce at both the macro and the firm level. Ghali et al (2013) investigate the impact of NTMs on Egyptian imports, by differentiating between different categories of NTMs and find that NTMs have a significant negative effect on both the intensive and extensive margins. In the same vein, Péridy and Ghoneim (2013) calculate the average tariff equivalents (AVEs) of NTMs in selected MENA countries including Egypt, and estimate them at 39%, compared to 34% in Tunisia, 37% in Morocco and 47% in Lebanon. Their analysis of NTMs also shows that almost all NTM categories are trade reducing, especially SPS measures, quantitative restrictions, pre‐shipment inspection, and export‐related measures with technical barriers to trade to a lesser extent.
At the firm level, the effect of technical barriers to trade (TBT), sanitary and phyto‐sanitary measures (SPS) and red tape costs (related to the trade facilitation agreement) was also examined. Enbaby et al. (2016), use firm‐level data to analyze the effects of product standards on the probability to export (firm‐product extensive margin), and on the exported value (firm‐product intensive margin). They find that SPS measures imposed on Egyptian exporters have a negative impact on the probability of exporting a new product to a new destination, while the intensive margin of exports is not significantly affected by such measures. Kamal and Zaki (2018) also examine the impact of TBT on firms’ exports in Egypt over the period 2005‐2011 and find the extensive margin and entry probability are negatively affected by technical barriers whereas exit probability is positively affected. Moreover, smaller firms are more adversely affected by TBT in their export participation and entry and exit decisions. Hendy and Zaki (2014) study the effect of red tape barriers on firms’ exports by merging the Doing Business data set with firm‐level exports data. They find that red tape barriers negatively affect Egyptian firms, with the effect being more robust for the extensive margin (the probability of exporting across different destinations) more than the intensive one (the value of exports).
3.3 Exports and Trade Agreements
Two main methods have been used to examine the effect of trade agreements on trade flows: computable general equilibrium (CGE) models (ex‐ante) and gravity models (ex‐post). The CGE literature on the Africa region is relatively rich. Mureverwi (2016) use a multinational CGE model to assess the potential long‐term effects of the African Continental Free Trade Agreement on the African Union member states. The main findings show that African countries benefit from a higher labor demand, more capital accumulation and improved terms of trade, with Egypt being one of the major winners in absolute terms. In the same line, UNCTAD (2018) shows that GDP increases by 0.97 percent and total employment rises by 1.17 percent with a full liberalization in the African Continental Free Trade Agreement (AfCFTA). Mold and Mukwaya (2017) use the GTAP model and database and show a significant increase ‐ thanks to the AfCFTA ‐ in intra‐regional exports as a result of tariff elimination from 9.2% to 11.7%, especially in processed food, textile and apparel.
A gravity model is used by Abedini and Peridy (2008) to show that regional trade has increased by 20% over the period 1988‐2005, following the implementation of GAFTA. Yegizu et al (2103) also study the impact of GAFTA on the volume and pattern of bilateral agricultural trade during the period between 1995 and 2007 and find a heterogenous effect on different countries. Helmy et al (2018) examine the impact of the Egypt‐EU trade agreement on bilateral trade. They also introduce other trade policy variables such as the GAFTA, Agadir, and COMESA agreements and find that the three agreements are positive and significant with GAFTA showing the highest coefficient, followed by Agadir and the Egypt‐EU Association. However, Kheir El Din and Ghoneim (2005) highlight an important concern related to the multiplicity of regional trade agreements, known as the “Spaghetti bowl”. Such an overlapping does not entail a high cost because most of them are shallow creating less friction. Indeed, most of these agreements targeted tariff declines without addressing harmonization of rules and regulations, non‐tariff measures or bilateral investment treaties.
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4. THE PRODUCTION AND EXPORTS LANDSCAPE
To understand why Egypt is not well integrated into global markets, one must look first into the production range as the basis of any trade potential. Product space is a term used to describe the extent to which the goods produced within an economy are related. This rests on the argument that the ability of a country to produce (and export) a product will depend on whether it already produces related products, and that its development path is determined by its capacity to accumulate the capabilities required to produce different and progressively more sophisticated goods. In this context, the concept of relatedness between products is defined by the similarity in the inputs required for their production, including skills, institutional and infrastructure requirements, and technological similarity (Hausmann and Klinger, 2007; Hidalgo et al., 2007; and Hidalgo and Hausmann, 2009). Exports data are usually used to appreciate countries’ product space and their productive structure. This is based on a general acknowledgment that countries can produce many goods but will only export those they are good at producing. Additionally, using trade data allows for an accurate comparability between countries, as well as seeing the evolution of production structure and capabilities at a disaggregated level and over time.3 We analyze Egypt’s exports along three dimensions that are key for exports performance and future growth: (i) composition and relatedness of exported products; (ii) geographic and products concentration; (iii) relatedness to globally‐traded products.
4.1 Composition and Relatedness of Egyptian exports
Egypt’s exports have historically been dominated by oil exports, but their weight has gradually declined from half to around a third of total exports, in favor of non‐oil exports. In FY2017, non‐oil exports constitute close to 70 percent of the total. Yet, exports are chiefly concentrated in products that are either traditional or have a low value‐added. A long tradition of subsidizing energy prices has also favored the energy‐intensive industries and biased the exports structure towards them. In FY17, chemicals and base metals on their own constitute 10 percent and 6 percent of the exports basket, respectively (see Table A1. In Appendix 1).
To understand Egypt’s exports structure, we identify the products for which the country has a revealed comparative advantage and locate them on the network of products space. The notion of revealed comparative advantage (RCA) is a better reflection of a country’s exports capacity than the absolute value of exports. It considers a country as an effective exporter of a certain product if the share of this product within the country’s export basket is larger than the share of this product in the global exports market (RCA > 1). On the contrary, the country is not an effective exporter of this product if its RCA is less than 1.
The analysis of Egypt’s exports basket reveals that the largest exported products are not necessarily those in which Egypt has the highest revealed comparative advantage. For instance, among the 10 top products with highest RCA, only edible vegetables and fertilizers are among the largest exports with an average share of 4.1 and 3.4 percent of total exports, respectively, between FY2012‐2016. At the same time, electrical machinery which is the second largest exported product during the same period, has an RCA that is less than one, indicating that Egypt is not an effective exporter of this product. Observing the relatively low weight of products with high RCA in the exports basket highlights the missing opportunities to further expand into global markets of these promising products. These include for example carpets, edible vegetables and fruits, among others (see Table A.2 and A.3 in Appendix 1).
3 While using trade data offers many advantages, it also has important limitations. First, we note that trade data are only a proxy for the productive structure, and in some cases, can deviate from actual sectoral contributions to GDP. Goods that are produced but not exported are not captured, which does not allow for identifying these products and the impediments to make them globally competitive. At the same time, if the data used include re‐exports, the analysis will not allow for identifying countries that only serve as trading hubs.
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A country’s position in the product space signals its capacity to expand its production to include other related ones, as well as the transformation into more sophisticated products. A representation of all products, it is a visual translation to the concept of relatedness between products: the ability of a country to produce and export a product is closely related to its ability to produce similar products, given that the different capabilities required can be easily redeployed into the production and export of other comparable products. A country producing many goods in the dense core of the product space will find this expansion a much easier process, whereas a country that specializes in peripheral products will find the shift to more and more sophisticated products more challenging. This rests on the design of the product space, where core products are the most well‐connected to the rest of the product space, hereby facilitating the production and exporting of several other products. On the contrary, the production of goods located at the periphery requires capabilities that can hardly be used for producing other goods (see Appendix 3 on the concept of RCA and its use in defining products proximity).
The product space for Egypt has evolved through the years, with two clear trends (Figure 5). First, the space has become more populated (colored nodes), indicating an increase in the number of exported products in which the country has a comparative advantage. Second, the vast majority of products in 2016 are situated in the peripheral region, made of crude petroleum, precious metals and clusters of raw agricultural products, textiles and construction material. Only a limited concentration of products, consisting mainly of chemicals and electric machinery, are reflected in the rich dense region. Not too far from the center is the food processing cluster, while the rest of the product space is quite muted. It is also worth noting that over time, exports of textiles have led to comparative advantages in related products such as fabrics, apparel and garment exports (green nodes), and exports of raw fruits and vegetables (orange nodes) helped expanding into the higher value‐added business of food processing such as fruits juices, jam, frozen and dried fruits, processed vegetables…etc. (yellow nodes).
Figure 5. Evolution of Egypt’s products space
1980 1990
2000 2016
Notes: The product space filters by RCA Threshold>=1. The product space is based on HS92 Product Classification. Source: Atlas of Economic Complexity, Hausmann, Hidalgo et al. 2014.
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4.2 Geographic and products concentration
It is widely acknowledged that countries’ exposure to external economic shocks increases with trade openness, either through high imports dependency or reliance on exports earnings. Yet, while external shocks can typically result in losses in export earnings and adverse effects on investment and growth, the magnitude of the impact will highly depend on the degree of exports diversification vs. concentration. Products and geographical diversification help avoiding excess volatility in exports earnings by avoiding concentration into a narrow exports basket or markets. Diversification of products, particularly if it happens towards more sophisticated, complex and high‐value products, is likely to boost productivity and long‐term growth. Additionally, scaling up and quality improvement of existing products can contribute to higher exports growth, but countries can achieve fast transformation through diversification and by creating new opportunities to upgrade.
Egypt has gradually managed to diversify its exports at both the destination and product levels. Over the last decade, the Herfindhal‐Hirshmann Index (HHI) for products concentration declined from 0.33 to 0.06 (Figure 6). A similar ‐ although less pronounced ‐ trend is observed at the destination level, with the HHI index declining from 0.07 in 2006 to 0.04 during the same period (Figure 6). Yet, the vast majority of exports remain concentrated and highly exposed to few markets. Throughout the last decade, the European Union (EU) countries have been the most important trading partner and first recipient of Egyptian products. The United States used to be an important recipient of exports, but its weight has gradually declined in recent years in favor of the Arab countries. Together, the EU and Arab countries receive close to 70 percent of Egypt’s exports. At the same time, trade engagement with Africa remains underdeveloped (Figure 7).
Figure 6. Exports Concentration Figure 7. Exports by Destination
Note: The HHI index has been calculated by taking the sum of squared shares of Egypt’s exports by product and by destination, respectively. Source:ConstructedbyauthorsusingtheInternationalTradeCenterdataset.
Source: Central Bank of Egypt
4.3 Relatedness to globally‐traded products
The composition of exports raises another important question on whether the products in which Egypt specializes and expands are matching the growth of global demand for these products. This relationship is illustrated in Figure 8 which shows, for Egypt’s main exports, the growth of the country’s share in world exports, compared to the change in global demand for these products.
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While Egypt’s competitveness is growing in a few promising sectors, many of its major exported products are subject to lower global demand. This is particularly the case of cotton and fertilizers, for which Egypt’s share in global trade has been growing in the past few years but global demand has been declining. The country is also losing competitveness in many sectors including textiles, cement, aluminium, ceramic and chemicals, as their share of world’s trade has declined between 2012‐2016 (upper and lower left quadrant).
The few products where the country’s competitveness is growing do not constitute a big share of the exports basket and are subject to lower global demand (lower right quadrant such as tobacco and oil seeds). Those that are subject to accelerating global demand and can be described as winners in growing sectors (upper right quadrant) are few and include electric machinery, essential oils and edible fruits and vegetables. This suggests that, if the country’s exports structure remains concentrated in products that are not traded in global markets, the likelihood of achieving substantial increases in Egyptian exports through these products will remain limited.
Figure 8. Growth of Egypt’s exports and global demand by product (2012‐2016)
Note: Bubbles size reflects products share in Egypt’s exports. Green bubbles represent the top globally traded products. Source: Authors construction using Comtrade data.
5. IDENTIFYING THE UNTAPPED EXPORTS POTENTIAL
Egypt’s geographical location has traditionally been recognized as one of its major assets. Together with its large and diversified economy, this positions the country as a high potential exports hub. Yet, annual world imports from Egypt are only around $25.4 billion, and has only been growing by 8% over the past 10 years. This section is an attempt to assess the untapped exports potential for Egypt, from both markets and products perspectives. The international trade literature typically uses gravity models to predict bilateral trade flows based on the economic size, geographic distance and other relevant characteristics that should typically contribute to facilitated trade. Other factors may also either facilitate or impede bilateral trade. We estimate Egypt’s untapped potential and discuss a number of supply side, demand side and trade policy factors that may explain trade performance.
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5.1. A Gravity Model to Assess Trade Performance Countries’ economic characteristics and geographical distance to trading partners can be used to predict
the potential bilateral trade flows and compare the predicted volume to actual trade and estimate the untapped exports potential. We use a gravity model4 to analyze the determinants of bilateral trade flows, essentially the countries’ income level and the geographical distance between them, in addition to other relevant factors such as common borders, common languages, common legal systems, common currencies and common colonial legacies. The model is also used to test the effectiveness of free trade agreements. The basic model for trade between two countries (i and j) takes the following form:
Fij = G ∗ Mi ∗ Mj / Dij (1)
where F stands for the trade flow, G is the constant, D stands for the distance and M stands for the economic dimensions of the countries i and j that are being measured. A better understanding of the gravity equation is achieved by using the logarithmic values of all variables. We use the UN Comtrade database for 175 countries including Egypt, with 99 sectors (two‐digit HS commodities) for the period 1995 – 2016.5 Our equation takes the following form:
𝑙𝑛𝑋 𝛽 𝛽 𝑙𝑛𝐺𝐷𝑃/𝑐𝑎𝑝 𝛽 𝑙𝑛𝐺𝐷𝑃/𝑐𝑎𝑝 𝛽 𝑙𝑛𝐷𝑖𝑠𝑡 𝛽 𝐶𝑜𝑛𝑡𝑖𝑔 𝛽 𝐶𝑜𝑚𝑙𝑒𝑔𝛽 𝐶𝑜𝑙 𝛽 𝐶𝑜𝑚𝐿𝑎𝑛𝑔 𝛽 𝐿𝑎𝑛𝑑𝑙𝑜𝑐𝑘𝑒𝑑 𝛽 𝐺𝐴𝐹𝑇𝐴 𝛽 𝐴𝑔𝑎𝑑𝑖𝑟 𝛽 𝐸𝑔𝑦𝑝𝑡𝐸𝑈 𝛽 𝐶𝑂𝑀𝐸𝑆𝐴 𝜎𝑡 𝜎𝑗 𝜀 (2)
where Xijkt is the bilateral trade flow between Egypt (the exporter) and country j (the importer) in year t for sector k; 𝑙𝑛𝐺𝐷𝑃/𝑐𝑎𝑝 and 𝑙𝑛𝐺𝐷𝑃/𝑐𝑎𝑝 are country i and j’s real gross domestic product per capita in year
t; lnDistij is the bilateral distance between the two countries, measured as the great circle distance between Cairo and the capital city of its trading partner, in miles. The distance variable is meant to represent typical trade barriers such as transport costs and time and cultural unfamiliarity. Contigij, Colij, ComLegij, ComLangij and Landlocked are dummy variables that take the value of 1 if the two countries share common borders, had previous colonial links, have common legal origin, have common language, or the destination is landlocked, respectively, as these characteristics are expected to boost trade. We also introduce three variables of trade policy measuring the most important trade agreements for Egypt. Three dummy variables take the value of 1 to capture the association agreement between Egypt and EU countries (changing over time as each EU member joined in different years); Agadir a dummy variable that takes the value of 1 for Tunisia, Jordan and Morocco starting 2005, GAFTA a dummy variable that takes the value of 1 for GAFTA countries starting 1998 and COMESA a dummy variable that takes the value of 1 for COMESA countries.
The predicted level of trade is estimated from the gravity model as the difference between the observed level and the residual of the regression (2) as follows:
𝑙𝑛𝑋𝑒𝑠𝑡 𝑙𝑛𝑋 𝜀 (3)
The observed level of trade is then compared to the estimated level of trade as predicted by the gravity model:
𝑅𝑎𝑡𝑖𝑜 𝑙𝑛𝑋 /𝑙𝑛𝑋𝑒𝑠𝑡 (4)
4 Gravity models (Tinbergen, 1962 and Anderson, 1979) witnessed significant theoretical and empirical improvements (Mac Callum, 1995; Feenstra et al., 2001; Feenstra, 2002; Evenett and Keller, 2002; Anderson and van Wincoop, 2003; Santos Silva and Tenreyro, 2006), enforcing its theoretical base and narrowing the gap between theoretical and empirical findings.
5 The lists of countries and sectors included in the data set are included in Table A.4 and A.5 in Appendix 2.
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Ratios below the value of 1 indicate the country is under‐trading with the trading partner, compared to what the economic, geographic and trade agreement characteristics of Egypt and its trading partners would suggest. On the contrary, a ratio that is greater than 1 indicates a bias (or overtrading) towards these markets, beyond the predicted level. A narrow margin around 1 is being considered as very close to 1. Ratios below 0.9 are classified as under‐trading, while ratios above 1.1 are classified as over‐trading.
Results show that classical gravitational variables have the expected sign and level of significance (see Table A.6 in Appendix 2). Indeed, the income level at destination measured by the GDP/capita of the importer is positively associated to Egypt’s exports.6 Distance is associated to trade negatively, while sharing common borders, common language, common legal origin and colonial links boost trade between Egypt and its trade partners. Additionally, a landlocked destination has a negative impact on Egypt’s exports. This is particularly important as most of the African countries are landlocked. Raballand (2003) estimates that the fact of being landlocked reduces trade by more than 80% because imported and exported products transit in many countries and experience delays before reaching their destination.
We introduce four important trade agreements for Egypt, namely the GAFTA, Agadir, COMESA and Egypt‐EU association agreements. To capture the individual effect of these agreements, we run a separate regression for each then combine them together. When each agreement is introduced alone, GAFTA, COMESA and Agadir are positive and statistically significant while Egypt‐EU agreement is insignificant. By contrast, when combined, all agreements become positive and statistically significant with GAFTA showing the highest coefficient, followed by COMESA, Agadir and then the Egypt‐EU Association (see Table A.6 in Appendix 2). This result might be explained considering the existing link between the Agadir agreement and the EU countries through an Association Agreement or an FTA. The objective of this agreement was to facilitate integration between Arab states and the EU under the broader EU‐Mediterranean process through more simplified rules of origin. Indeed, the EU allows its Mediterranean FTA partners to cumulate value‐added regardless of the place where value was added (as long as it is in an FTA partner country) in order to take advantage of preferential access to the EU market. By contrast, the US only considers value added domestically only in the country exporting to the US. These conflicting regimes give the EU an advantage in its competition with US and make the EU in a better position than US with respect to Agadir countries since the latter can cumulate the share of their value‐added. Finally, the COMESA agreement seems to exert a positive impact on Egypt’s trade, suggesting a large trade potential with African countries despite the small share in Egypt’s current exports.
The predicted level of trade (computed based on the gravity model) is then compared to the observed level of trade to determine whether Egypt is meeting its potential as suggested by its own characteristics and those of its commercial partners. Results suggest that Egypt’s actual trade falls short of the trade volumes predicted by the gravity model, hereby suggesting the presence of significant trade barriers that prevent the country from meeting this potential. Table A.7 shows that Egypt is under‐trading with 63 percent of destinations, with African countries representing half of these destinations. The other half encompasses other small Asian and European countries and American and Pacific islands. At the same time, the country is over‐trading with around 20 percent of the markets, mainly with the USA, EU countries, China, Japan, Canada and some Asian countries, compared to the expected levels. The remainder 10 percent of Egypt’s trade partners has an index close to 1 (from 0.90 to 1.10), pointing out that the observed level of trade is in line with the expected level.
At the product level, Egypt is under‐trading in 53 percent of the products and over‐trading 13 percent, while 32 percent of its products are in line with the expected level of trade. Surprisingly, some of the under‐traded products are among those in which Egypt has a comparative advantage such as textiles, garments,
6 The variable capturing Egypt’s GDP per capita is dropped when year dummies are introduced as they are perfectly correlated.
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fertilizers, chemicals and wooden products (Table A.10 in Appendix 2). This suggests that even in these promising sectors, Egypt is not exploiting its full trade potential, which raises questions around other factors that may hinder the development of these exports sectors.
Again, we compare the products in which Egypt is undertrading to those that are subject to increased global demand. The growth of world demand has been calculated as follows: we compute the annual growth rate of the world demand measured by the sum of world imports of each product. Products then fall into one of the following two categories: (i) products characterized by a high world demand (when the growth rate of world demand is greater than the median one) and (ii) low world demand (when the growth rate of world demand is greater than the median one). This classification shows that 13 products in which Egypt has a comparative advantage are undertraded despite being subject to high demand at the global level. This group, representing around 27% of Egypt’s exports, embodies the lost opportunity for Egyptian exports. These include dairy products, oil seeds, animal or vegetable fats and oils, salt, lime and cement, inorganic chemicals, plastics and articles thereof, articles of stone, iron and steel. Egyptian exporters are also under‐trading 17 products that are highly demanded by the Rest of the World (around 23% of total exports) but where Egypt does not have a comparative advantage (such as meat, cocoa and cocoa preparations, articles of iron or steel, miscellaneous articles of base metal, electrical machinery and equipment). For a detailed list of these products (see Table A.10 in Appendix 2).
5.2. Explaining Trade Performance
The gravity model analysis of Egypt’s trade patterns suggests that Egypt’s actual trade falls short of the expected levels for several markets and products, while bilateral trade flows exceed the predicted value for others. This provides important insights on additional factors (not considered by the gravity model) that may either facilitate or impede bilateral trade. We discuss below three major factors related to the supply and demand‐sides, in addition to trade policy factors that may explain both under‐ and over‐performance.
5.2.1 Supply‐Side Factors
Supply‐side factors are related to the ability of Egyptian products to compete in the global markets. As explained above, the concept of revealed competitive advantage (RCA) captures this competitiveness and can also be tracked over time. Changes can occur over time in the pattern of comparative advantage across countries and industries, with many reasons, including trade and economic policies, adoption of modern technologies, and knowledge transfers, explaining these changes. We analyze the evolution of Egypt’s revealed comparative advantage between 2001 and 2016 and divide them into four distinctive groups (see Figure A1 In Appendix 2).
Products with maintained comparative advantage: these are some traditional products (a total of 25), which can then be divided in two sub‐categories. First, those whose RCA increased (14 over 25 products such as edible vegetables, edible fruit and nuts, oil seeds, sugars, preparations of vegetables, fertilizers, soap, articles of apparel and clothing accessories, articles of stone, plaster, cement and glass and glassware) and those whose RCA decreased (11 over 25 products such as animal or vegetable fats, mineral fuels, mineral oils and products of their distillation, inorganic chemicals; cotton, other vegetable textile fibers; paper yarn, some articles of apparel and clothing accessories, other made‐up textile articles; ceramic products, iron, steel and aluminum). Whereas an increasing comparative advantage shows that Egypt can maintain its competitiveness in the first category, the second one points out the decline in the competitiveness of Egyptian exporters who were not able to keep their market shares over this period.
Products whose comparative advantage in 2001 has vanished in 2016: Although small in terms of number, such products represent a loss in Egypt’s trade performance and market share. This is the case for coffee, tea, cereals and rubber.
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Products with no comparative advantage in 2001 but have become more competitive in 2016: With a total of 23 products, the group embodies notably dairy products, plastic, papers, carpets and furniture.
Products with no comparative advantage neither in 2001 nor in 2016: these include organic chemicals, pharmaceutical products, articles of leather, footwear, articles of iron, steel, machinery and mechanical appliances). They also include products with high‐value added and intensive advanced technologies, which are weakly used in Egypt’s industrial sector compared to other countries. This is in line with the country’s weak capacity of innovation (Figure 9) and its low share of medium and high‐tech activities in its industrial sector (Figure 10).
Figure 9. Capacity for Innovation Figure 10. Share of medium and high‐tech activities
Note: Data for 2014. A greater value of the index indicates better performance (from 1 to 10). Source:GlobalCompetitivenessIndex
Note: Competitive industrial performance composed of 8 indicators assessing industrial performance based on an economy’s ability to competitively produce and export manufactured goods. Each indicator is weighted on a scale of 0 to 1. Source: Global Competitiveness Index
5.2.2 Demand‐side factors
From a demand perspective, demand for Egyptian products has been volatile and increasing at a slower pace. Addressed demand7 is calculated by taking the sum of the imports of Egypt’s trade partners weighted by the share of Egyptian exports to them. Second, its slope tends to be negative showing that the demand for Egypt’s products, though increasing, has a declining growth rate. The latter, hence, points out the risk of total exports decrease in the long run.
Moreover, a detailed look at the sectoral level suggests a relative disconnection between Egypt’s exports and the rest of the world’s imports (see Table A.11 in Appendix 2). Egypt is still producing some products that do not figure among the highest 10 products imported by the world. Indeed, only four products exported by Egypt (representing 38% of total exports) appear among the 10 most imported products by the rest of the world. While two of these products are natural resources (mineral fuels and natural and precious metals), the Spearman correlation coefficient8 between the rank of the World’s imports and Egypt’s exports is weakly negative (‐0.12) pointing out the disconnection between the demand and the supply side.
7 The concept of addressed demand aims at measuring the weight of Egypt’s exports in its total trade partners’ imports. When summed, it measures the global addressed demand to Egypt.
8 Spearman's correlation coefficient measures the strength and direction of association between two ranked variables. Hence, we examine the correlation between the ranking of what is being exported by Egypt and what is being imported by the rest of the world in order to analyze to what extent the latter matches the former.
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Figure 11. Growth Rate of the Addressed Demand to Egyptian Exports
Note: Addressed demand is calculated using this formula DEMi= ∑ 𝛼𝑖𝑗 𝑀𝑗 with n the number of trade partners, j partners, αij the weight of Egyptian exports to country j in its total exports αij =Xij/ΣXij and Mj the total imports of country j. Source: Constructed by the author using International Trade Center data.
5.2.3 Trade Policy
Amalyzing Egypt’s trade policy can also help explain why Egypt is under‐trading in some products and over‐trading in others. Despite significant reforms and liberalization efforts, significant trade barriers prevent the country from fully exploiting its trade potentials and maximizing its gains from trade. Egypt remains among the group of developing countries with the highest frequency index and coverage ratio of NTMs.9 These non‐tariff measures vary between technical requirements, conformity assessment, export related barriers and rules of origin. Egypt has signed several preferential trade agreements, but some of these agreements remain shallow and overlapping, leading to a more complex trade regime with a limited impact on trade. This section, looks at Egypt’s trade policy from the tariffs perspective to assess the country’s openness to trade. It also examines several non‐tariff measures that are hindering the fast development of exports. These include administrative and technical barriers to trade, as well as other sanitary and phyto‐sanitary (SPS) measures. It also discusses why the country’s preferential trade agreements have not yielded the expected results.
a. Tariffs
Since Egypt’s accession to the WTO, nearly 99 percent of Egypt's tariff lines are bound. Most Favored Nation (MFN) tariffs applying to non‐agricultural products are generally lower than those applying to agricultural goods, with an average of 12.8 percent and 66.4 percent respectively. For some agribusiness products, average tariffs can exceed 1,000 percent, such as those on beverages and spirits. Egypt’s tariffs for 2017 are based on the HS 2012 version of the Harmonized Commodity Description and Coding System and contains 7,850 tariff lines at the HS 10‐digit level, of which 99.7 percent carry ad‐valorem duties.
Tracing Egypt’s tariffs policy over time shows that, on one hand, applied tariffs have dropped significantly between 1995 and 2012, with simple and weighted averages of applied tariffs falling from 24 percent and 16.7
9 The frequency index captures the percentage of products that are subject to one or more NTMs, while the coverage ratio captures the percentage of imports that is subject to one or more NTMs.
y = ‐0.0102x + 0.1394R² = 0.1259
‐30%
‐20%
‐10%
0%
10%
20%
30%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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percent to 9.8 percent and 7.4 percent, respectively (see Table 1). On the other hand, the primary sector remains more protected, compared to the manufacturing sector which has been significantly liberalized (see evolution of tariffs in Figure 12). In Egypt, an increasing trend in the tariffs for primary goods was initially taking place, with tariffs exceeding 50% on average in the late 2000s, before a declining trend takes place afterwards. In comparison to other countries, Egypt’s weighted tariffs remain higher than middle‐income or high‐income countries, with the gap being significantly wide for primary products.
Figure 12. Evolution of Tariff Rates, by Sector ‐ 1996 & 2012
Source: Constructed by authors.
Table 1. Tariff Rate by Sector, 1996‐2012
Country Year Applied ‐ simple mean Applied ‐ weighted mean
All Manuf. Prim. All Manuf. Prim.
Egypt
1996 24.3 24.1 25.9 16.7 22.4 7.7
2000 25.1 21.6 52.3 16.8 20.0 12.9 2005 14.2 11.4 37.0 8.8 10.7 6.3
2010 10.9 8.2 32.9 9.6 10.9 7.7 2012 9.8 7.3 28.6 7.4 10.0 4.7
Middle Income
1996 14.0 14.0 14.0 13.0 13.2 12.3 2000 14.4 14.2 15.8 12.8 12.9 12.7 2005 10.2 9.8 13.2 6.1 6.1 5.9 2010 7.3 7.2 8.2 4.2 5.1 2.5 2012 8.2 7.8 11.0 4.9 6.0 2.9
High Income
1996 5.8 5.0 10.3 39.4 3.5 141.9 2000 5.0 4.5 8.2 2.4 2.1 3.3 2005 3.4 3.1 5.3 1.8 1.7 2.0 2010 2.8 2.6 4.1 1.8 1.9 1.8 2012 3.9 3.7 5.0 1.7 1.8 1.5
Note: The wide gap between applied and weighted tariff rates in the primary sector than in manufacturing (28.7% and 4.7% respectively for primary, compared to 7.2% and 9.9% respectively for manufacturing). Such differences are due to high tariffs imposed on some products with little weight in international trade, such as in the case of tobacco and alcohol. Source: World Development Indicators
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b. Non‐Tariff Measures
Non‐tariff measures (NTMs) are meant to provide legitimate non‐trade objectives such as the protection of human health. Yet, the gradual removal of traditional trade barriers carried a temptation to use non‐tariffs measures as a protective mechanism for domestic production, hereby adding an additional (non‐directly measurable) cost. Excessive use of these measures in an increasingly globalized and competitive world hinders countries’ integration into global markets by affecting the ability and willingness of the private sector to invest and flourish. It also prevents the benefits of global integration to accrue to consumers, while many exporting firms, particularly the smaller ones, can exit the exports market because of the ensuing costs. The surviving firms will simply transfer this extra cost to the final price paid by consumers.
While NTMs can take the form of various technical and regulatory requirements, this section focuses on selected measures that are more relevant to Egypt and to its trading partners vis‐à‐vis Egypt’s exports. This is important for a better understanding of its exports ability to survive against NTMs that may be imposed against, and for an enhanced capacity to negotiate future arrangements on harmonization and mutual recognition, with the ultimate goal to enhance trade.
i. Administrative Barriers to Trade
Administrative barriers are a major impediment to trade. Egypt’s performance on trading across borders (World Bank Doing Business) is lagging behind, ranking 171/189 in 2018, with its score showing a deterioration across time, from a peak of 71.1 in 2014 to an all time low of 42.2 in 2018. , affecting 20 percent of exporting firms. Trade procedures and documentation create a lengthy and costly clearance process for imported and exported goods, especially when compared to MENA and other lower middle income countries (see Figure 13 and 14 and Table 2). Regarding exports, the inefficiency seems to be more pronounced on the procedures time rather than on the cost side. Moreover, the administrative barriers to import are much higher than comparator countries on both the procedural and cost sides. This exerts a negative effect on exports, given the large reliance of domestic production on imported intermidate inputs.
From the firms’ perspective, customs and trade regulations are identified as a major constraint by 20 percent of the surveyed firms (World Bank, 2016), which shows a notable deterioration compared to the 9 percent of 2013 (Figure 13). Again, this is mainly due to a lengthier time to clear exports and imports, as time to import increased from 9.2 to 12.3 days while time to export remain relatively stable but high (Figure 14 and Table 2). This is primarily due to the high number of required documents and procedures,10 in addition to the lack of clarity is some cases which gives officials a bargaining power in granting clearances. The lack of electronic processing in the customs clearance also contributes to unnecessary delays and gives room for discretionary decisions and corruption (World Bank, 2018). In some cases, security control of borders can cause additional delays. The process is further complicated by the involvement of multiple entities including the customs authority, the ports authorities, the General Organization for Export & Import Control (GOEIC),11 among others.
Such cumbersome measures can be costlier than tariffs, as evidenced by the ad‐valorem equivalents (AVEs) of time to export and time to import (Figure 15). These AVEs are higher than tariffs for products that have a higher value‐added such as chemicals, non‐metallic products and machinery, which constitute an impediment to exports of sophisticated products.
10 For example, 28 steps are currently required to clear shipments at Alexandria port. 11 GOEIC is the authority in charge of ensuring the quality and standards of all imports of regulated products into the country.
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Figure 13. Percentage of firms identifying customs & trade regulations as a major constraint
Figure 14. Days to clear direct exports & imports through customs
Source:WorldBankEnterpriseSurvey
Figure 15. Tariffs and Ad‐Valorem Equivalent of Time to Export and to Import
Source: World Trade Organization and Zaki (2015) for the ad‐valorem equivalents of time to export and time to import.
Table 2. Trading Across Borders, Doing Business Indicators 2018
Indicator Egypt MENA Lower Middle Income
OECD
Time to export
Documentary compliance (hours) 88 67.9 64 2.4
Border compliance (hours) 48 58 72 12.5
Cost to export
Documentary compliance (US$) 100 244.6 140 35.2
Border compliance (US$) 258 442.4 403 139.1
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Indicator Egypt MENA Lower Middle Income
OECD
Time to import
Documentary compliance (hours) 265 75.5 71 3.4
Border compliance (hours) 240 105.4 99 8.5
Cost to import
Documentary compliance (US$) 1,000 269 209 25
Border compliance (US$) 554 536 503 100.2
Source: World Bank Doing Business Indicators (2019)
ii. Technical Barriers to Trade
Technical barriers to trade refer to those related to procedures for assessment of conformity with technical regulations and standards that are related to products or processes and production methods, including packaging, marking or labeling requirements, procedures for testing and inspection, evaluation, verification and assurance of conformity; registration, accreditation, etc.
According to the ITC business survey on non‐tariff measures, strict technical requirements applied by partner countries and their associated conformity assessment procedures represent the most reported NTMs for exporters of agri‐food products in Egypt. Figure 16 shows that more than two‐thirds of the concerns are made for the non‐agriculture sector. Table 3 presents the distribution of TBT by product (at the HS2 level), which reveals that chemicals (organic, inorganic and fertilizers) and engineering sectors face the highest share of TBTs. In terms of trade partners, Figure 17 shows that the top maintaining countries who are imposing different TBT are the European Union, China and the United States followed by India and Brazil.
Figure 16. Sectors facing concerns over NTMs (2004‐2010)
Figure 17. Top 10 Maintaining Countries
Source:Authors’constructionusingWTO’sTBTSTCsdatabase.
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Table 3. Share of TBT measures imposed on Egyptian exports (by product ‐ HS2 level)
Labels Share
Inorganic chemicals; organic or inorganic compounds of precious metals, of rare‐earth 24.9%
Organic chemicals 20.5%
Miscellaneous chemical products 12.2%
Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other coloring 7.3%
Essential oils and resinoids; perfumery, cosmetic or toilet preparations 3.4%
Soap, organic surface‐active agents, washing preparations, lubricating preparations 3.4%
Albuminoidal substances; modified starches; glues; enzymes 3.4%
Photographic or cinematographic goods 3.4%
Pharmaceutical products 2.9%
Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible prep. 2.9%
Fertilizers 2.4%
Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal ... 1.3%
Fish and crustaceans and other aquatic invertebrates 1.2%
Meat and edible meat offal 1.1%
Others 9.2%
Total 100%
Source: Own construction using WTO’s TBT STCs database.
iii.Sanitary and Phyto‐sanitary (SPS) Measures
The distinction between SPS and technical measures is not always clear, in particular because both apply to agricultural and industrial products. Yet, SPS measures refer to requirements imposed to protect life or health of animal, plant or human from pertinent health risks (such as additives, contaminants, toxins or disease‐causing organisms in foods, beverages or feedstuffs), whereas technical barriers – as described above – refer to the products regulations and standards.
The positive impact of lower tariffs in Egypt has been offset by the number of SPS measures imposed on Egypt ( 18). More specifically, SPS measures are among the largest obstacles facing exporters of agricultural products. SPS measures imposed on Egypt’s exports mainly originate from EU Member countries, which are also the most important trade partner for Egypt (Figure 19). The EU mainly imposes SPS measures on leguminous vegetables, beans and seeds, with food safety and protection of humans, animals and plants from pests and diseases being the reasons for imposing such measures. At the HS2 level, edible vegetables are subject to the highest number of SPS measures. SPS measures applying to this category represent more than triple those on meat and meat offal, and live animals which arrive at the the second and third places respectively (Figure 20). In recent years, Egyptian exports to the GCC countries also started to face SPS measures. For instance, between 2012 and 2019, six notifications of SPS measures and Specific Trade Concerns (STCs) were raised by UAE and Saudi Arabia against agricluture products, with egyptian exports of agriculture and animal products being suspended or banned entry to these markets (WTO, 2019). If repeated, these concerns may result in Egypt losing its comparative advantages in favor of other competitors. In the framework of the EU‐Egyptian Association Agreement, Egypt is currently working on the development of an Egyptian policy on food safety, and on the establishment of a unified Food Safety Authority.
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Figure 18. Number of SPS Measures 2006‐2012 Figure 19. SPS Measures Imposed by European Countries on
Egyptian Exports (%)
Source: El‐Enbaby et al (2016).
Figure 20. SPS Measures Imposed on Egyptian Exports (by sector, at the HS2 level)
Source: El‐Enbaby et. Al. (2016)
c. Preferential trade agreements
Egypt has signed several preferential trade agreements with its trade partners. Indeed, unilateral trade liberalization efforts have been coupled with many bilateral and multilateral free trade agreements (FTAs). On the bilateral front, Egypt has concluded free‐trade agreements with the European Union (2004), the members of EFTA (the Republic of Iceland, the Principality of Liechtenstein, the Kingdom of Norway, the Swiss Confederation, 2004), Turkey, and other Arab countries. Exploratory discussions on the Deep and Comprehensive Free Trade Agreement (DCFTA) began in 2012, followed by a dialogue that was launched in June 2013. However, these negotiations are currently on hold.
At the regional level, Egypt has acceded to the Greater Arab Free Trade Area (GAFTA), the Common Market of Eastern and Southern Africa (COMESA) and the Agadir Free Trade Agreement (with Tunisia, Jordan and Morocco). According to the latter, member countries are to remove all tariffs on trade between them and to harmonize their legislation with regard to standards and customs procedures. Egypt also has some framework agreements that should turn into free trade ones, such as the agreement with the MERCOSUR
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countries, as well as one with the West African Economic and Monetary Union (UEMOA). Finally, Egypt signed the Qualified Industrial Zones (QIZ) Protocol12 in December 2005 with the United States and Israel. All these agreements have contributed to the increase of exports and imports in Egypt since 2004 as shown in the empirical part.
Nevertheless, the multiplicity of these agreements suffers from two main drawbacks. First, many of these agreements are shallow. The only progress achieved was on trade liberalization, yet these were limited in terms of depth (tariff waiving without further harmonization of processes and market conditions) and scope (not all sectors covered such as services and investment provisions). Second, Egypt is involved in a variety of overlapping bilateral and multilateral trade agreements leading to the so‐called “spaghetti bowl” (Bhagwati, 1995). The latter refers to the negative effect induced by the mulitplicity of PTAs being paradoxically counter‐productive in promoting freer and more opened global trades. Indeed, the latter leads to more discrimnatory policies with an increased uncertainty which dampens exporters and importers and thus reduces welfare. This is why, from a policy perspective, trade negotiations should target deeper and more comprehensive trade agreements that address non‐tariff measures, harmonization of standards and inclusion of services and investment provisions. This will help Egypt develop regional and global value chains which in turn boosts trade and help small and medium enterprises export (Osnago, Rocha, and Ruta, 2016).
6. CONCLUSIONS AND POLICY RECOMMENDATIONS
Egypt has undergone a major transformation by adopting a flexible exchange rate. By eliminating the overvaluation of its local currency, this has helped boost its external competitiveness and contributed to narrow its trade deficit. Yet, the increase in exports was not commensurate with the magnitude of currency depreciation, thereby suggesting that other factors are playing an inhibiting role. Our gravity model has shown that Egypt is still under‐trading with many countries, compared to its potential. Understanding the reasons behind this sub‐optimal performance is key to unleash this potential.
Our analysis shows that the limited external competitiveness starts domestically and may find part of its roots in what the country produces. Egypt’s position in the product space signals a weak capacity to expand and diversify production, as well as to transform into more sophisticated products. When combined with the analysis of the world’s growing demand, it shows that Egypt's exports are still centered around many products for which global demand is declining. Moreover, some of the products in which Egypt used to have some competitive advantage have lost their competitiveness over time. This suggests that reforms should start in the real sector, with specific solid policies to support the industrial sector and ease the business environment around exporting firms. The hurdles may not be entirely different than what non‐exporting firms are facing, but the exporting sectors need further attention and technical assistance, especially the small and medium businesses that lack the financial and human resources needed to survive in the global markets. Expanding to sectors with higher value added and intensive technologies also requires policies to encourage innovation.
Yet, all these efforts may struggle to translate into substantial improvement in exports performance if not supported by trade facilitation reforms to remove the non‐tariffs barriers to trade. On top of these come the administrative barriers, which in the case of Egypt constitute a major impediment to trade, affecting a large segment of exporting firms. Moreover, these are not limited to exporting procedures, but are also prevalent for imports, which affects exporting firms given the large reliance of domestic production on imported intermediate inputs. In that respect, Egypt could largely benefit from the modernization and
12 Qualifying Industrial Zones (QIZ) are designated geographic areas, within Egypt, that enjoy a duty‐free status with the
United States. Companies located within such zones are granted duty‐free access to the US markets, provided that they
satisfy the agreed upon Israeli component of 10.5%, as per the predefined rules of origin.
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automation of these administrative processes, which should translate into a decline in the cost of and time to trade. It also has the merit to reduce corruption by establishing a clear and transparent system.
Given the weight of the technical and sanitary barriers, Egypt should intensify its efforts to comply with its trading partners’ standards and requirements. Ongoing efforts to develop an Egyptian policy on food safety, and on the establishment of a unified Food Safety Authority are very much needed and should be accelerated. The government is also deploying several efforts in the chemical sector since 80 percent of Egypt’s technical and mandatory standards are based on standards issued by international institutions such as the Geneva‐based International Organization for Standardization.
Finally, taking advantage of preferential trade agreements between Egypt and the rest of the world is key to ensure greater access to various foreign markets and build on the boost induced by the currency depreciation. Yet, the multiplicity of PTAs can be paradoxically counter‐productive if it leads to discriminatory policies and increased uncertainty. This suggests that any trade negotiations should target deeper and more comprehensive trade agreements that address non‐tariff measures, harmonization of standards and inclusion of services and investment provisions. This should help Egypt develop regional and global value chains and yield favorable effects for exports and exporting firms.
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[22] World Bank (2018) “Privilege‐Resistant Policies in the Middle East and North Africa. Measurement and Operational Implications”, MENA Development report.
[23] World Bank (2016), Enterprise Survey for Egypt.
[24] WTO, Sanitary and Phytosanitary Information Management System, last consulted March 2019 http://spsims.wto.org/
[25] Zaki, C., Ehab, M. and Abdallah, A. (2017) “How Do Trade Margins Respond to Exchange Rate? The Case of Egypt”, Egyptian Center for Economic Studies Working Paper No. 189.
[26] Zaki, C. (2016) “Employment, Gender and International Trade: A Micro‐Macro Evidence for Egypt”, Review of Economics and Political Science.
25
Appendix 1. Egypt’s Exports Basket
Table A1. Composition of Egypt’s Exports Basket
FY13 FY14 FY15 FY16 FY17 FY18*
Oil merchandise 48.3% 47.9% 40.0% 30.3% 30.3% 34.0%
Crude oil 27% 30% 28% 19% 18% 18%
Oil products 11% 12% 9% 9% 10% 14%
Bunker and jet fuel 5% 3% 3% 2% 1% 2%
Natural gas 6% 3% 0% 0% 1% 1%
Foodstuff of which: 5% 6% 8% 15% 14% 12%
Dairy products and eggs 1% 1% 1% 2% 1% 1%
Fruits 1% 1% 2% 3% 3% 3%
Animal and vegetable fats, greases & oils 0% 0% 0% 1% 1% 0%
Raw sugar and its products 1% 1% 1% 1% 1% 1%
Edible vegetables, plants, roots and tubers 0% 0% 0% 5% 3% 3%
Cereals merchandise 1% 1% 2% 1% 1% 1%
Merchandise of cotton & its products & other textiles, of which:
8% 8% 9% 10% 9% 9%
Cotton textiles 3% 3% 3% 4% 3% 3%
Ready‐made clothes 3% 3% 4% 4% 3% 3%
Carpets and other floor coverings 1% 1% 1% 1% 1% 1%
Chemicals merchandise, of which: 10% 9% 8% 9% 10% 11%
Organic & inorganic chemicals, and carbon 3% 3% 2% 2% 3% 3%
Pharmaceuticals 1% 1% 1% 1% 1% 2%
Fertilizers 3% 3% 2% 3% 4% 4%
Merchandise of machinery, appliances, electric equipment & parts thereof, of which:
2% 3% 5% 11% 9% 9%
Household electric‐motor appliances 0% 1% 2% 3% 2% 3%
Electrical appliances for telephone (including Intercom)
0% 0%
0% 1% 1% 0%
Wires and cables 0% 0% 0% 3% 2% 2%
Merchandise of base metals & products, of which:
6% 6% 5% 5% 6% 6%
Iron ore, steel & articles thereof 3% 3% 2% 2% 3% 4%
Aluminum ore and its articles 1% 1% 1% 1% 1% 1%
Copper ore and its articles 1% 0% 1% 1% 1% 1%
Merchandise of vehicles, cars and other means of transportation, of which:
1% 1% 1% 2% 2% 1%
Cars and vehicles for transport of passengers & goods
0% 0% 1% 1% 1% 0%
Car accessories, batteries and spare parts 0% 0% 0% 1% 1% 0%
* Preliminary. Source: Central bank of Egypt
26
Table A.2 – Top 10 exported items, average 2012‐2016
Sector ID
Sector Description Share of sector's exports (% of total exports)
Average RCA
27 Mineral fuels, mineral oils and products 22.4 1.7
85 Electrical machinery and equipment and parts thereof 6.04 0.5
39 Plastics and articles thereof 5.5 1.6
71 Natural or cultured pearls, precious or semi‐precious stones, precious metals
4.9 1.2
8 Edible fruit and nuts; peel of citrus fruit or melons 4.3 7.4
7 Edible vegetables and certain roots and tubers 4.1 10.9
31 Fertilizers 3.4 9.5
62 Articles of apparel and clothing accessories, not knitted or crocheted
3.2 2.6
72 Iron and steel 2.3 1.1
76 Aluminum and articles thereof 2.2 2.3
Source: Authors calculations using Comtrade data
Table A.3– Exports with highest RCA, average 2012‐2016
Sector ID
Sector Description Share of sector's exports (% of total exports)
Average RCA
57 Carpets and other textile floor coverings 1.4 16.5
7 Edible vegetables and certain roots and tubers 4.1 10.9
31 Fertilizers 3.4 9.5
58 Special woven fabrics, tufted textile fabrics, lace …etc 0.6 8.5
13 Lac, gums, resins and other vegetable saps and extracts 0.4 8.1
25 Salt, sulphur, stone, plastering materials, lime and cement
1.8 7.5
8 Edible fruit and nuts; peel of citrus fruit or melons 4.2 7.4
52 Cotton 1.9 5.6
69 Ceramic products 1.5 5.1
17 Sugars and sugar confectionery 1.2 4.7
Source: Authors calculations using Comtrade data
27
Appendix 2 – The Gravity Model
Table A.4 List of Countries
Afghanistan Dominican Republic Lesotho Sao Tome & Principe
Albania East Timor Liberia Saudi Arabia
Algeria Ecuador Libyan Arab Jamahiriya Senegal
Andorra Egypt Lithuania Serbia & Montenegro
Angola El Salvador Luxembourg Seychelles
Anguilla Equatorial Guinea Macau (Aomen) Sierra Leone
Antigua and Barbuda Eritrea Macedonia Singapore
Argentina Estonia Madagascar Slovakia
Armenia Ethiopia Malawi Slovenia
Aruba Falkland Islands Malaysia Solomon Islands
Australia Faroe Islands Maldives Somalia
Austria Fiji Mali South Africa
Azerbaijan Finland Malta Spain
Bahamas France Marshall Islands Sri Lanka
Bahrain French Guiana Martinique Sudan
Bangladesh French Polynesia Mauritania Suriname
Barbados Gabon Mauritius Swaziland
Belarus Gambia Mexico Sweden
Belgium and Luxembourg Georgia Micronesia Switzerland
Belize Germany Moldova, Rep.of Syria
Benin Germany Mongolia Taiwan
Bermuda Ghana Morocco Tajikistan
Bhutan Gibraltar Mozambique Tanzania
Bolivia Greece Namibia Thailand
Bosnia and Herzegovina Greenland Nepal Togo
Botswana Grenada Netherland Antilles Tonga
Brazil Guadeloupe Netherlands Trinidad & Tobago
British Virgin Islands Guatemala New Caledonia Tunisia
Brunei Darussalam Guinea New Zealand Turkey
Bulgaria Guinea‐Bissau Nicaragua Turkmenistan
Burkina Faso Guyana Niger Tuvalu
Burma Haiti Nigeria Uganda
Burundi Honduras Norway Ukraine
Cambodia Hong Kong Oman UAE
Cameroon Hungary Pakistan United Kingdom
Canada Iceland Palau USA
Cape Verde India Palestine Uruguay
Central African Republic Indonesia Panama Uzbekistan
Chad Iran Papua New Guinea Vanuatu
Chile Iraq Paraguay Venezuela
China Ireland Peru Viet Nam
Christmas Island Israel Philippines Yemen
Colombia Italy Poland Zambia
Comoros Jamaica Portugal Zimbabwe
Congo Japan Puerto Rico
Congo (Democratic Republic) Jordan Qatar
Cook Islands Kazakstan Reunion
Costa Rica Kenya Romania
Côte d'Ivoire Kiribati Russian Federation
Croatia Korea Rwanda
Cuba Korea, Dem. Rep. of Saint Helena
Cyprus Kuwait Saint Kitts and Nevis
Czech Republic Kyrgyzstan Saint Lucia
Denmark Lao's Saint Vincent & the Grenadines
Djibouti Latvia Samoa
Dominica Lebanon San Marino
28
Table A.5 List of Sectors
Code Product label
'01 Live animals
'02 Meat and edible meat offal
'03 Fish and crustaceans, molluscs and other aquatic invertebrates
'04 Dairy produce; birds' eggs; natural honey; edible products of animal origin, not elsewhere ...
'05 Products of animal origin, not elsewhere specified or included
'06 Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage
'07 Edible vegetables and certain roots and tubers
'08 Edible fruit and nuts; peel of citrus fruit or melons
'09 Coffee, tea, maté and spices
'10 Cereals
'11 Products of the milling industry; malt; starches; inulin; wheat gluten
'12 Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal ...
'13 Lac; gums, resins and other vegetable saps and extracts
'14 Vegetable plaiting materials; vegetable products not elsewhere specified or included
'15 Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal ...
'16 Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates
'17 Sugars and sugar confectionery
'18 Cocoa and cocoa preparations
'19 Preparations of cereals, flour, starch or milk; pastrycooks' products
'20 Preparations of vegetables, fruit, nuts or other parts of plants
'21 Miscellaneous edible preparations
'22 Beverages, spirits and vinegar
'23 Residues and waste from the food industries; prepared animal fodder
'24 Tobacco and manufactured tobacco substitutes
'25 Salt; sulphur; earths and stone; plastering materials, lime and cement
'26 Ores, slag and ash
'27 Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral ...
'28 Inorganic chemicals; organic or inorganic compounds of precious metals, of rare‐earth metals, ...
'29 Organic chemicals
'30 Pharmaceutical products
'31 Fertilisers
'32 Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other colouring ...
'33 Essential oils and resinoids; perfumery, cosmetic or toilet preparations
'34 Soap, organic surface‐active agents, washing preparations, lubricating preparations, artificial ...
'35 Albuminoidal substances; modified starches; glues; enzymes
'36 Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations
'37 Photographic or cinematographic goods
'38 Miscellaneous chemical products
'39 Plastics and articles thereof
'40 Rubber and articles thereof
'41 Raw hides and skins (other than furskins) and leather
'42 Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles ...
'43 Furskins and artificial fur; manufactures thereof
'44 Wood and articles of wood; wood charcoal
'45 Cork and articles of cork
'46 Manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork
'47 Pulp of wood or of other fibrous cellulosic material; recovered (waste and scrap) paper or ...
'48 Paper and paperboard; articles of paper pulp, of paper or of paperboard
29
'49 Printed books, newspapers, pictures and other products of the printing industry; manuscripts, ...
'50 Silk
'51 Wool, fine or coarse animal hair; horsehair yarn and woven fabric
'52 Cotton
'53 Other vegetable textile fibres; paper yarn and woven fabrics of paper yarn
'54 Man‐made filaments; strip and the like of man‐made textile materials
'55 Man‐made staple fibres
'56 Wadding, felt and nonwovens; special yarns; twine, cordage, ropes and cables and articles thereof
'57 Carpets and other textile floor coverings
'58 Special woven fabrics; tufted textile fabrics; lace; tapestries; trimmings; embroidery
'59 Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable ...
'60 Knitted or crocheted fabrics
'61 Articles of apparel and clothing accessories, knitted or crocheted
'62 Articles of apparel and clothing accessories, not knitted or crocheted
'63 Other made‐up textile articles; sets; worn clothing and worn textile articles; rags
'64 Footwear, gaiters and the like; parts of such articles
'65 Headgear and parts thereof
'66 Umbrellas, sun umbrellas, walking sticks, seat‐sticks, whips, riding‐crops and parts thereof
'67 Prepared feathers and down and articles made of feathers or of down; artificial flowers; articles ...
'68 Articles of stone, plaster, cement, asbestos, mica or similar materials
'69 Ceramic products
'70 Glass and glassware
'71 Natural or cultured pearls, precious or semi‐precious stones, precious metals, metals clad ...
'72 Iron and steel
'73 Articles of iron or steel
'74 Copper and articles thereof
'75 Nickel and articles thereof
'76 Aluminium and articles thereof
'78 Lead and articles thereof
'79 Zinc and articles thereof
'80 Tin and articles thereof
'81 Other base metals; cermets; articles thereof
'82 Tools, implements, cutlery, spoons and forks, of base metal; parts thereof of base metal
'83 Miscellaneous articles of base metal
'84 Machinery, mechanical appliances, nuclear reactors, boilers; parts thereof
'85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television ...
'86 Railway or tramway locomotives, rolling stock and parts thereof; railway or tramway track fixtures ...
'87 Vehicles other than railway or tramway rolling stock, and parts and accessories thereof
'88 Aircraft, spacecraft, and parts thereof
'89 Ships, boats and floating structures
'90 Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical ...
'91 Clocks and watches and parts thereof
'92 Musical instruments; parts and accessories of such articles
'93 Arms and ammunition; parts and accessories thereof
'94 Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; ...
'95 Toys, games and sports requisites; parts and accessories thereof
'96 Miscellaneous manufactured articles
'97 Works of art, collectors' pieces and antiques
'99 Commodities not elsewhere specified
30
Table A.6. Empirical Findings of the Gravity Model
Ln(Trade) Ln(Trade) Ln(Trade) Ln(Trade) Ln(Trade) Ln(Trade)
Ln(GDP/cap) 0.652*** 0.582*** 0.665*** 0.652*** 0.710*** 0.635***
(0.00741) (0.00751) (0.00742) (0.00796) (0.00777) (0.00852)
Ln(Distance) ‐1.336*** ‐1.164*** ‐1.291*** ‐1.336*** ‐1.364*** ‐1.120***
(0.0172) (0.0175) (0.0173) (0.0181) (0.0172) (0.0185)
Landlocked ‐1.598*** ‐1.400*** ‐1.551*** ‐1.598*** ‐1.792*** ‐1.610***
(0.0320) (0.0321) (0.0320) (0.0320) (0.0329) (0.0329)
Contig. 0.588*** 1.256*** 0.776*** 0.587*** 0.0147 0.768***
(0.0737) (0.0746) (0.0741) (0.0742) (0.0772) (0.0786)
Colony 2.775*** 3.642*** 2.826*** 2.775*** 2.665*** 3.539***
(0.0690) (0.0709) (0.0689) (0.0690) (0.0690) (0.0708)
ComLang 2.519*** 0.0664 2.318*** 2.518*** 2.492*** ‐0.0815
(0.0344) (0.0618) (0.0356) (0.0359) (0.0343) (0.0619)
ComLeg 0.159*** 0.123*** 0.130*** 0.159*** 0.113*** 0.0323
(0.0239) (0.0238) (0.0239) (0.0239) (0.0239) (0.0239)
GAFTA 3.318*** 3.414***
(0.0697) (0.0723)
Agadir 1.599*** 1.027***
(0.0761) (0.0774)
Egypt‐EU ‐0.00249 0.347***
(0.0420) (0.0423)
COMESA 0.964*** 1.177***
(0.0396) (0.0395)
Constant 11.49*** 10.65*** 11.02*** 11.49*** 11.22*** 9.820***
(0.193) (0.193) (0.194) (0.194) (0.193) (0.195)
Year dum. YES YES YES YES YES YES
Sector dum. YES YES YES YES YES YES
Observations 191,033 191,033 191,033 191,033 191,033 191,033
R‐squared 0.312 0.320 0.314 0.312 0.314 0.324
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
31
Table A.7 Under/Over‐Trade Performance (by country)
Over‐trading Theoretical Under‐trading
Code Obs/Est Code Obs/Est Code Obs/Est Code Obs/Est Code Obs/Est
JPN 4.57 NLD 1.1 CYP 0.89 CHL 0.53 VEN 0.29
USA 3.69 IDN 1.08 ISR 0.89 IRN 0.5 SLV 0.29
AFG 3.53 TCD 1.08 MAR 0.89 PAN 0.5 TTO 0.28
BGR 2.23 CIV 1.04 JOR 0.89 COL 0.49 DOM 0.28
AGO 2.13 SGP 1.02 LBY 0.88 NOR 0.48 CPV 0.27
CHN 2.05 NER 0.98 KWT 0.88 FIN 0.48 MDA 0.26
BGD 1.94 KOR 0.98 MYS 0.87 HRV 0.48 GUY 0.25
ZMB 1.88 VNM 0.95 ZWE 0.86 PER 0.47 SWZ 0.25
PRT 1.84 GBR 0.93 MEX 0.85 ALB 0.47 JAM 0.22
CAN 1.75 LBN 0.93 GIN 0.84 GAB 0.47 DMA 0.22
ITA 1.74 UKR 0.93 TUN 0.81 MDG 0.45 SUR 0.21
FRA 1.64 CMR 0.93 TUR 0.81 CUB 0.45 PNG 0.21
DEU 1.63 SDN 0.92 RWA 0.79 GTM 0.44 NPL 0.2
MNG 1.57 PAK 0.92 BFA 0.79 URY 0.43 FJI 0.2
AUS 1.56 DZA 0.91 POL 0.78 GEO 0.42 STP 0.19
MHL 1.5 SLE 0.9 YEM 0.78 TJK 0.42 NIC 0.19
BEL 1.47 LKA 0.9 MOZ 0.77 BDI 0.41 GRD 0.19
AUT 1.46 DJI 0.76 ECU 0.41 LUX 0.18
KEN 1.44 OMN 0.74 KGZ 0.4 COM 0.18
ESP 1.38 QAT 0.74 ARM 0.39 ATG 0.18
PHL 1.37 AZE 0.73 KHM 0.38 ISL 0.18
CHE 1.32 THA 0.72 MDV 0.37 SYC 0.17
NGA 1.32 KAZ 0.7 HTI 0.36 NAM 0.17
SAU 1.31 SWE 0.69 CZE 0.36 TKM 0.17
GHA 1.29 GMB 0.69 CAF 0.36 BMU 0.17
SEN 1.27 HUN 0.69 COG 0.36 KNA 0.16
LBR 1.26 BHR 0.68 HND 0.35 VUT 0.16
BRA 1.24 DNK 0.67 LTU 0.34 BRB 0.16
ZAF 1.24 MUS 0.67 BOL 0.33 LCA 0.16
HKG 1.22 IRQ 0.65 LVA 0.33 BRN 0.16
GRC 1.18 TGO 0.64 BLR 0.32 BWA 0.13
RUS 1.16 ERI 0.63 BIH 0.32 VCT 0.12
ARE 1.15 MLT 0.62 CRI 0.32 BLZ 0.11
IRL 0.61 MRT 0.32 WSM 0.11
MWI 0.6 EST 0.32 GNQ 0.11
UZB 0.56 MLI 0.31 BHS 0.1
NZL 0.55 LAO 0.3 MAC 0.1
SVN 0.55 PRY 0.29 BTN 0.1
SLB 0.07 LSO 0.03
32
Source: Contrsucted by the authors.
Table A.8 Under/Over‐Trade Performance (by product)
Code Label Index
Over‐trading
'64 Footwear, gaiters and the like; parts of such articles 393.01
'97 Works of art, collectors' pieces and antiques 4.32
'59 Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suit. 3.55
'81 Other base metals; cermets; articles thereof 3.45
'65 Headgear and parts thereof 3.11
'14 Vegetable plaiting materials; vegetable products not elsewhere specified or included 2.77
'95 Toys, games and sports requisites; parts and accessories thereof 2.62
'24 Tobacco and manufactured tobacco substitutes 1.58
'05 Products of animal origin, not elsewhere specified or included 1.58
'43 Furskins and artificial fur; manufactures thereof 1.26
'11 Products of the milling industry; malt; starches; inulin; wheat gluten 1.23
'41 Raw hides and skins (other than furskins) and leather 1.11
'22 Beverages, spirits and vinegar 1.11
Observed = Theoretical
'49 Printed books, newspapers, pictures and other products of the printing industry; man. 1.08
'53 Other vegetable textile fibers; paper yarn and woven fabrics of paper yarn 1.04
'76 aluminum and articles thereof 1.02
'40 Rubber and articles thereof 1.00
'17 Sugars and sugar confectionery 0.99
'42 Articles of leather; saddlery and harness; travel goods, handbags and similar contain. 0.99
'31 Fertilizers 0.98
'19 Preparations of cereals, flour, starch or milk; pastry cooks' products 0.98
'69 Ceramic products 0.97
'52 Cotton 0.96
'87 Vehicles other than railway or tramway rolling stock, and parts and accessories 0.96
'30 Pharmaceutical products 0.96
'34 Soap, organic surface‐active agents, washing preparations, lubricating prep., art. 0.96
'27 Mineral fuels, mineral oils and products of their distillation; bituminous substances. 0.95
'23 Residues and waste from the food industries; prepared animal fodder 0.94
'10 Cereals 0.93
'21 Miscellaneous edible preparations 0.92
'94 Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furn. 0.92
'29 Organic chemicals 0.91
'33 Essential oils and resinoids; perfumery, cosmetic or toilet preparations 0.91
'63 Other made‐up textile articles; sets; worn clothing and worn textile articles; rags 0.91
'09 Coffee, tea, maté and spices 0.91
'84 Machinery, mechanical appliances, nuclear reactors, boilers; parts thereof 0.91
'03 Fish and crustaceans, molluscs and other aquatic invertebrates 0.90
33
'02 Meat and edible meat offal 0.90
'62 Articles of apparel and clothing accessories, not knitted or crocheted 0.90
'32 Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and col 0.90
'25 Salt; sulphur; earths and stone; plastering materials, lime and cement 0.90
'48 Paper and paperboard; articles of paper pulp, of paper or of paperboard 0.90
'73 Articles of iron or steel 0.90
'92 Musical instruments; parts and accessories of such articles 0.90
'39 Plastics and articles thereof 0.90
Under‐trading
'28 Inorganic chemicals; organic or inorganic compounds of precious metals of rare met 0.89
'90 Optical, photographic, cinematographic, measuring, checking, precision, medical 0.89
'06 Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental f 0.89
'12 Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or 0.89
'85 Electrical machinery and equipment and parts thereof; sound recorders and TV 0.88
'72 Iron and steel 0.88
'55 Man‐made staple fibers 0.88
'74 Copper and articles thereof 0.87
'08 Edible fruit and nuts; peel of citrus fruit or melons 0.87
'96 Miscellaneous manufactured articles 0.87
'07 Edible vegetables and certain roots and tubers 0.87
'01 Live animals 0.87
'58 Special woven fabrics; tufted textile fabrics; lace; tapestries; trimmings; embroidery 0.86
'70 Glass and glassware 0.86
'68 Articles of stone, plaster, cement, asbestos, mica or similar materials 0.86
'57 Carpets and other textile floor coverings 0.86
'61 Articles of apparel and clothing accessories, knitted or crocheted 0.85
'20 Preparations of vegetables, fruit, nuts or other parts of plants 0.85
'38 Miscellaneous chemical products 0.85
'15 Animal or vegetable fats and oils and their cleavage products; prepared edible fats; 0.83
'79 Zinc and articles thereof 0.81
'44 Wood and articles of wood; wood charcoal 0.80
'04 Dairy produce; birds' eggs; natural honey; edible products of animal origin 0.79
'71 Natural or cultured pearls, precious or semi‐precious stones, precious metals, metals 0.78
'75 Nickel and articles thereof 0.76
'83 Miscellaneous articles of base metal 0.73
'89 Ships, boats and floating structures 0.63
'13 Lac; gums, resins and other vegetable saps and extracts 0.61
'18 Cocoa and cocoa preparations 0.48
'78 Lead and articles thereof 0.44
'37 Photographic or cinematographic goods 0.41
'82 Tools, implements, cutlery, spoons and forks, of base metal; parts of base metal 0.40
'16 Preparations of meat, of fish or of crustaceans, molluscs or other 0.39
'54 Man‐made filaments; strip and the like of man‐made textile materials 0.31
34
'80 Tin and articles thereof 0.28
'88 Aircraft, spacecraft, and parts thereof 0.27
'51 Wool, fine or coarse animal hair; horsehair yarn and woven fabric 0.26
'36 Explosives; pyrotechnic products; matches; pyrophoric alloys… 0.25
'60 Knitted or crocheted fabrics 0.25
'45 Cork and articles of cork 0.21
'91 Clocks and watches and parts thereof 0.18
'66 Umbrellas, sun umbrellas, walking sticks, seat‐sticks, whips, riding‐crops and parts 0.17
'67 Prepared feathers and down and articles made of feathers or of down… 0.08
'47 Pulp of wood or of other fibrous cellulosic material; recovered (waste and scrap) 0.04
'26 Ores, slag and ash 0
'35 Albuminoidal substances; modified starches; glues; enzymes 0
'46 Manufactures of straw, of esparto or of other plaiting materials; basketware 0
'50 Silk 0
'56 Wadding, felt and nonwovens; special yarns; twine, cordage, ropes and cables 0
'86 Railway or tramway locomotives, rolling stock and parts thereof; railway or tram. 0
'93 Arms and ammunition; parts and accessories thereof 0
'99 Commodities not elsewhere specified 0
Source: Contrsucted by the authors.
Table A.9. RCA, Growth of Global Demand and Over/Under Trade
With RCA
High Low Total
Under 13 7 20
26.5% 8.4% 35.0%
Over 1 3 4
0.4% 1.2% 1.6%
Without RCA
High Low Under 17 24 41
22.9% 3.8% 26.7%
Over 2 7 9
0.1% 0.1% 0.2%
Share of trade under/overtrading 63.5% Share of trade where observed trade is equal to theoretical one
36.5%
Source: Contrsucted by the authors. Note: High stands for sectors having a growth rate that is greater than the median one of all sectors. Low stands for sectors having a growth rate that is lower than the median one. RCA is the revealed comparative advantage. Under stands for under‐trading and over for over‐trading. Figures in italic show the share of each category in total exports.
35
Table A.10. List of Products by RCA, Growth of Global Demand and Over/Under Trade
With RCA
High‐Growth Low‐Growth
Under‐Trading
4 Dairy produce; birds' eggs; natural honey; edible products of animal origin, not elsewhere.
Under‐Trading
6 Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage
7 Edible vegetables and certain roots and tubers
57 Carpets and other textile floor coverings
8 Edible fruit and nuts; peel of citrus fruit or melons
58 Special woven fabrics; tufted textile fabrics; lace; tapestries; trimmings; embroidery
12 Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal.
61 Articles of apparel and clothing accessories, knitted or crocheted
13 Lac; gums, resins and other vegetable saps and extracts
62 Articles of apparel and clothing accessories, not knitted or crocheted
15 Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal ...
70 Glass and glassware
20 Preparations of vegetables, fruit, nuts or other parts of plants
97 Commodities not elsewhere specified
25 Salt; sulphur; earths and stone; plastering materials, lime and cement
28 Inorganic chemicals; organic or inorganic compounds of precious metals, of rare‐earth metals, ...
39 Plastics and articles thereof
68 Articles of stone, plaster, cement, asbestos, mica or similar materials
72 Iron and steel
74 Copper and articles thereof
Over‐Trading
11 Products of the milling industry; malt; starches; inulin; wheat gluten
Over‐Trading
14 Vegetable plaiting materials; vegetable products not elsewhere specified or included
24 Tobacco and manufactured tobacco substitutes
41 Raw hides and skins (other than furskins) and leather
Source: Constructed by authors.
36
Table A.10. List of Products by RCA, Growth of Demand and Over/Under Trade
Without RCA
High‐Growth Low‐Growth
Under‐Trading
2 Meat and edible meat offal
Under‐Trading
1 Live animals
18 Cocoa and cocoa preparations 3 Fish and crustaceans, molluscs and other aquatic invertebrates
26 Ores, slag and ash 16 Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates
38 Miscellaneous chemical products 32 Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other coloring ...
71 Natural or cultured pearls, precious or semi‐precious stones, precious metals, metals clad ...
35 Albuminoidal substances; modified starches; glues; enzymes
73 Articles of iron or steel 36 Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations
75 Nickel and articles thereof 37 Photographic or cinematographic goods
77 Lead and articles thereof 44 Wood and articles of wood; wood charcoal
78 Zinc and articles thereof 45 Cork and articles of cork
79 Tin and articles thereof 46 Manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork
82 Miscellaneous articles of base metal 47 Pulp of wood or of other fibrous cellulosic material; recovered (waste and scrap) paper or ...
84 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television.
48 Paper and paperboard; articles of paper pulp, of paper or of paperboard
85 Railway or tramway locomotives, rolling stock and parts thereof; railway or tramway track fixtures
50 Silk
88 Ships, boats and floating structures 51 Wool, fine or coarse animal hair; horsehair yarn and woven fabric
89 Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical ...
54 Man‐made filaments; strip and the like of man‐made textile materials
92 Arms and ammunition; parts and accessories thereof
55 Man‐made staple fibres
95 Miscellaneous manufactured articles 56 Wadding, felt and nonwovens; special yarns; twine, cordage, ropes and cables and articles thereof
60 Knitted or crocheted fabrics
66 Umbrellas, sun umbrellas, walking sticks, seat‐sticks, whips, riding‐crops and parts thereof
37
67 Prepared feathers and down and articles made of feathers or of down; artificial flowers; articles ...
81 Tools, implements, cutlery, spoons and forks, of base metal; parts thereof of base metal
87 Aircraft, spacecraft, and parts thereof
90 Clocks and watches and parts thereof
91 Musical instruments; parts and
accessories of such articles
Over‐Trading
22 Beverages, spirits and vinegar
Over‐Trading
5 Products of animal origin, not elsewhere specified or included
80 Other base metals, cermets, article thereof
43 Furskins and artificial fur; manufactures thereof
59 Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable ...
64 Footwear, gaiters and the like; parts of such articles
65 Headgear and parts thereof
94 Toys, games and sports requisites;
parts and accessories thereof
96 Works of art, collectors' pieces and
antiques
Source: Constructed by the authors.
38
Figure A1. Evolution of RCA between 2001 and 2016
RCA in 2016
RCA in 2011
Yes No
Yes
No
Source: Constructed by the authors.
11 12 14
15 17 20 25 27
34 41 52
53 61 63 68
69
28 31
76 70 72 98
62
8 7
6 13 18
19 21 24 32 33
4 5
48 51 54
55 56 57 58 71
35 39
95 77 93
3 16 22 23 26
29 30 36
1
42 43
44 45 46 47 49 50
37 38
64 65 66 67 73 74
75 78
59
60
81 82 83
84 85 86 87 88
79 80
91 94 96
89 90
2
40
9 10
97
39
Note: Products names have been shortened for space reasons. See Table A.5 for the exact definition of products. Code Product label
'01 Live animals
'02 Meat
'03 Fish and crustaceans
'04 Dairy produce
'05 Products of animal origin
'06 Live trees and plants
'07 Edible vegetables
'08 Edible fruit and nuts
'09 Coffee, tea, spices
'10 Cereals
'11 Products of the milling industry
'12 Oil seeds
'13 Lac; gums, resins
'14 Vegetable plaiting materials
'15 Animal or vegetable fats
'16 Preparations of meat, or fish
'17 Sugars and sugar confectionery
'18 Cocoa and cocoa preparations
'19 Preparations of cereals, flour
'20 Preparations of vegetables, fruit
'21 Miscellaneous edible preparations
'22 Beverages, spirits and vinegar
'23 Residues and waste from food industries
'24 Tobacco
'25 Salt
'26 Ores, slag and ash
'27 Mineral fuels and oils
'28 Inorganic chemicals
'29 Organic chemicals
'30 Pharmaceutical products
'31 Fertilisers
'32 Tanning or dyeing extracts;
'33 Essential oils, perfumery, cosmetic
'34 Soap
'35 Albuminoidal substances;
'36 Explosives
'37 Photographic or cinematographic goods
'38 Miscellaneous chemical products
'39 Plastics
'40 Rubber
'41 Raw hides and skins
'42 Articles of leather
'43 Furskins and artificial fur
'44 Wood and articles
'45 Cork and articles
'46 Manufactures of straw
'47 Pulp of wood
'48 Paper and paperboard
'49 Printed books, newspapers
'50 Silk
'51 Wool, animal hair
'52 Cotton
'53 Other vegetable textile fibres
'54 Man‐made filaments
'55 Man‐made staple fibres
'56 Wadding
'57 Carpets
'58 Special woven fabrics
'59 textile fabrics; textile articles of a kind suitable
'60 Knitted or crocheted fabrics
'61 Articles of apparel, knitted or crocheted
'62 Articles of apparel, not knitted or crocheted
'63 Other made‐up textile articles
'64 Footwear
'65 Headgear and parts thereof
'66 Umbrellas
'67 Prepared feathers
'68 Articles of stone
'69 Ceramic products
'70 Glass and glassware
'71 Natural or cultured pearls
'72 Iron and steel
'73 Articles of iron or steel
'74 Copper and articles thereof
'75 Nickel and articles thereof
'76 Aluminum and articles thereof
'78 Lead and articles thereof
'79 Zinc and articles thereof
'80 Tin and articles thereof
'81 Other base metals
'82 Tools, implements, cutlery
'83 Miscellaneous articles of base metal
'84 Machinery, mechanical appliances
'85 Electrical machinery
'86 Railway or tramway locomotives
'87 Vehicles other than railway or tramway
'88 Aircraft, spacecraft
'89 Ships, boats
'90 Optical, photographic, cinematographic
'91 Clocks and watches
'92 Musical instruments
'93 Arms and ammunition
'94 Furniture
'95 Toys
'96 Miscellaneous manufactured articles
'97 Works of art
'99 Commodities not elsewhere specified
40
Table A.11 Ranking of the Ten Most Imported by the Rest of the World/ Exported Products by Egypt (2016)
Highest Ten Imported Products by the World
Product code Product label
Share World
Share Egypt
1 '85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television ... 15.4% 6.8%
2 '84 Machinery, mechanical appliances, nuclear reactors, boilers; parts thereof 12.1% 0.5%
3 '27 Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral ... 9.6% 14.3%
4 '87 Vehicles other than railway or tramway rolling stock, and parts and accessories thereof 8.5% 0.7%
5 '71 Natural or cultured pearls, precious or semi‐precious stones, precious metals, metals clad ... 4.0% 11.8%
6 '39 Plastics and articles thereof 3.4% 5.2%
7 '90 Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical ... 3.3% 0.3%
8 '30 Pharmaceutical products 3.3% 1.3%
9 '29 Organic chemicals 2.3% 0.6%
10 '99 Commodities not elsewhere specified 2.1% 0.0%
Highest Ten Exported Products by Egypt
Product code Product label
Share World
Share Egypt
1 '27 Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral 9.6% 14.3%
2 '71 Natural or cultured pearls, precious or semi‐precious stones, precious metals, metals clad 4.0% 11.8%
3 '85 Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television. 15.4% 6.8%
4 '08 Edible fruit and nuts; peel of citrus fruit or melons 0.7% 5.3%
5 '39 Plastics and articles thereof 3.4% 5.2%
6 '07 Edible vegetables and certain roots and tubers 0.4% 4.3%
7 '31 Fertilizers 0.3% 3.8%
8 '62 Articles of apparel and clothing accessories, not knitted or crocheted 1.2% 3.4%
9 '52 Cotton 0.3% 2.1%
10 '72 Iron and steel 1.9% 2.0%
Source: Constructed by the authors using the International Trade Center.
41
Appendix 3. Explaining the Revealed Comparative Advantage Concept and its use in defining Proximity
The product space is a representation of all products, built on the concept of proximity between different goods.
RCAjk = Xjk / ∑jk Xjk
_______________ ∑j Xjk / ∑j ∑k Xjk
Where Xjk is the value of exports by country j of good k. Using RCA as an indication of a country effectively exporting a good, Hausmann and Klinger (2007) define the proximity between goods k and y as:
Qky = min {P (RCAk > 1|RCAy > 1), P (RCAy > 1|RCAk > 1)} where P (RCAk > 1|RCAy > 1) is defined as the probability that a country exports good k with RCA > 1, given it also exports good y with RCA > 1. More specifically, proximity is calculated by comparing how many countries that export product k with RCA > 1 also export product y with RCA > 1. For example, if 50 countries export product k with RCA > 1, and 25 out of those 10 countries also export product y with RCA > 1, then the probability to export product k in relation to product y is 0.5. This definition considers the minimum of the two conditional probabilities because conditional probability is not symmetric. Focusing on the minimum of the pairs of conditional probabilities solves this problem since we would get a high value of proximity only if all countries exporting good k would also export good y. For example, suppose Egypt is the only country in the world that exports Pharaonic statues. If we consider the simple conditional probability as a measure of proximity, then all other goods exported by Egypt, like fertilizers or cotton shirts would appear to be very close to Pharaonic statues. Yet, focusing on the minimum of the pairs of conditional probabilities instead implies that the probability of exporting cotton shirts given that you export Pharaonic statues is large, but the probability that you export Pharaonic statues given that you export cotton shirts is very low, since many other countries do not export Pharaonic statues but do export cotton shirts. If the two products were really related, all countries exporting cotton shirts would also export Pharaonic statues, but this is not the case and the proximity measure captures it.