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American Chamberof Commerce in Egyptw w w. a m c h a m - e g y p t . o r g

Qualifying Industrial Zones in Egypt

DOORKNOCK M I SS ION TO WASH INGTON, D.C . – MARCH 2006

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THE SIGNING OF THE QIZPROTOCOL....

On December 14, 2004, government officials representingEgypt, Israel and the US met in Cairo to sign the QualifyingIndustrial Zones (QIZ) protocol providing quota and duty free

access to US markets for products manufactured in specific industrialzones, provided 35% of the commodity’s valueis manufactured in anEgyptian QIZ, of which one third, or 11.7% consists of Israeli inputs

The QIZ Protocol is intended to encourage stronger economicpartnerships among Egypt, Israel and the U.S. to support the MiddleEast Peace Process. Egypt is the second country to benefit from theQIZ Protocol, following Jordan which started its agreement in 1999.

Implementation of the QIZ protocol began upon ratification by theEgyptian and Israeli sides on February 16, 2005.

QIZ LOCATIONS IN EGYPT….Designated QIZs in Egypt are located in four geographical regionsnamely, greater Cairo, Alexandria, the central Delta and the Suez Canal.

The QIZs encompass Egypt’s largest industrial centers, includingeight public free zones. Greater Cairo and the Suez Canal regioninclude Egypt’s most important textile and clothing manufacturers.

GOVERNMENT SUPPORT FORQIZs....1. Establishing the QIZ Unit *The Minister of Trade and Industry has established a QIZ unit to pro-vide executive and technical support for the Egyptian side of the Joint"Egyptian/Israeli" Committee which is responsible for implementingthe terms of the QIZ Protocol. The unit’s primary tasks include evalu-ating applications from Egyptian companies seeking to export underthe QIZ protocol, ensuring that qualified companies fulfill therequirements of the protocol, providing information to local and for-eign businesses interested in doing business under the protocol, andproviding support to members of the Egyptian side of the JointCommittee. The QIZ unit also provides matchmaking servicesbetween QIZ companies, U.S. importers and Israeli suppliers.

2. Inviting International and Local Investors to ParticipateThe Federation of Egyptian Industries (FEI) conducts targetedcampaigns to raise exporters’ awareness of the advantages availableunder the QIZ Protocol. To serve this purpose FEI held a seminar inApril 2005. Attracting hundreds of entrepreneurs interested inexploring the potential to export within the QIZ framework.

3. Supportive Business/Economic ClimateThe Government of Egypt is committed to invigorating the industrialsector and integrating it into the global economy. For example:• Between 2002 and 2005, Egypt invested $300 million in the

modernization of industrial machinery, $75 million of which was ded-icated to upgrading equipment in the knitting and spinning industry.

• In January 2005, tariffs on textile machinery and spare parts,previously subject to 25% duties, and on dyestuffs, subject to dutiesof 30%, were reduced to zero. Duties on other industrial inputs were

* www.qizegypt.gov.eg

also slashed: tariffs on yarns were cut from 30% to 12%, and thoseon fabrics were reduced from 45% to 22%.• Exporters also received a boost via a tax rebate incentive program,

whereby the government rebates 4-10 % of a firm’s total export bill.• The government is providing assistance to improve the technical

standards of companies located in the QIZs.• The government is committed to encouraging diversification

within the QIZs to ensure that manufacturers from a broad rangeof sectors take advantage of duty- free access to US markets.

Furthermore, Egypt offers very competitive operating costs comparedto global competitors. Egypt’s cost of labor in the textile and clothing(TC) industry is among the lowest in the world, and low-cost powerand water/wastewater supplies are abundant.

QIZs AND EGYPT’S TEXTILE &CLOTHING (TC) INDUSTRY….The leading beneficiary of QIZ implementation has been Egypt's TCindustry. TC manufacturers account for 78% of Egyptian companiesparticipating in the QIZ protocol.Trade between Israel and Egypt has grown 144% between 2004 and2005, from $58 million to $142 million. Imports from Israel includefabrics, chemicals and accessories.Proponents expect QIZs to increase FDI by some $5 billion and add150,000-250,000 jobs over the next five years in the TC industry alone.TC is a key industry in Egypt, contributing 27% of manufacturingoutput, 30% of employment, and 20% of export earnings.It is the only vertically integrated TC industry in the MENA region.* The sector produces a wide range of fiber-based products includingraw cotton, yarns, fabrics, garments and made-up textiles. The privatesector dominates downstream industry with 70% of all garmentmanufacturing.The U.S. and Europe are the primary markets for Egypt’s TC exportswith shares of 40% and 38%, respectively.The U.S. accounts for 50% of total foreign capital in Egypt’s textilesand clothing industry.

International brands such as Gap, Guy Laroche, Pierre Cardin andTommy Hilfiger are made in Egypt under license.

Both textiles and apparel are highly competitive relative to otherexport industries in Egypt. The revealed comparative advantage(RCA) for cotton-made home textiles shows the highest exportpotential for Egypt. Although Egypt’s annual TC exports to the U.S. are no more than2-3% of the U.S. import market, they represent 40% of Egypt’s totalTC exports. Under the QIZ Protocol, TC products are no longer sub-ject to U.S. duties that are as high as 32.2% for some items.Geographical proximity, low operating costs and duty-free access tothe U.S. are expected to drive Egypt to integrate into global supplychains providing benefits to apparel sourcing, which require shorterlead time to get ever changing fashion to market.

Potential to Benefit from Safeguards against China:In this regard, the U.S. government approved three safeguard casesfor TC items against China in May 2005. This will limit the growthof Chinese imports to 7.5% of their 2005 level. Furthermore, theU.S. and China signed an MOU on November 8, 2005 wherebyquotas were placed on 34 products starting January 1, 2006 toDecember 31, 2008.Egypt is seen as a candidate to fill the supply vacuum that wouldresult if quotas and safeguards are implemented by the U.S. againstChina in the next several years. Products that are expected tobenefit include sewing thread/combed cotton yarn, special purposefabric, cotton & man-made fiber knit shirts, woven shirts, trousers,underwear, and pile towels.

QIZ PROGRESS TO DATE....As of February 2006, a total of 548 companies have been approved underthe QIZ Protocol. 93 companies established under QIZ had exports valued at $288.5 million during Q2-Q4 (April - December), 2005.

Port Said is among the top zones attracting QIZ projects. It current-ly holds 47 projects contributing with one quarter of Egypt's QIZexports. During its first year of QIZ implementation, Port Said FreeZone alone has attracted 12 new projects and expansions in 11 otherexisting ones with total investments of $36.7 million..

Top U.S. buyers from QIZ exporters include The Gab Inc,. Wal-martFashions, Kmart Corporation, V.F Jeanswear, Levis, May DepartmentStores and Target.

Potential Gains in other Sectors:QIZs have created important investment opportunities, enhancingEgypt’s efforts to attract FDI. Increased investments in QIZs areexpected to lead to new job opportunities and higher standards ofliving. The protocol has also encouraged Egyptian companies withoutany previous export experience to enter the U.S. market.

Investment in a QIZ is particularly attractive to industries subject tohigh tariffs in the U.S. market. In addition to textiles and clothing,these include:

Labor cost ($/hr)Electricity (cent/KWh)Water (Cent/m3)Natural Gas (cent/m3)Building costs ($/m2)

Egypt0.43.0212.5

120

Jordan0.95.0

180-

200

Turkey2.87.746

26.0180

India0.58.670

24.5140

Tunisia1.2

10.0156

-400

Italy159.028

21.0480

Sources: ITMF International Production Cost Comparison 2003; Al Tajamouat Industrial City (QIZ).

HS Code040722426469708294

DescriptionDairy products, eggs, honeyEdible vegetables"Beverages, spirits, tobaccoArticles of leatherFootwear, gaiters and the likeCeramic productsGlass and glasswareTools of base metalFurniture

U.S. Duties*10. -77.72%11.3-29.8%14.67-50.02%10-20%10-57.95%10-26.0%11.3-30%12.1-18.87%12-12.8%

* Excluding Turkey

* Includes ad valorem and specific rates.

Number of QIZ Projects by Location in Egypt

American Chamberof Commerce in Egyptw w w. a m c h a m - e g y p t . o r g

33 Soliman Abaza Street, Dokki 12311 – Cairo, Egypt • Tel: (+20-2) 338-1050 • Fax: (+20-2) 338-1060

Website: www.amcham-egypt.org • E-mail: info@amcham.org.eg

2006 The American Chamber of Commerce in Eg ypt , BSAC

2005 represented a turning point in the Egyptian economy. The

government’s aggressive economic reform program has accelerated

economic growth over the past 18 months:

• Export-led GDP growth reached 5.1% in 2004/05, up from 4% in

2003/04. The World Bank expects it to reach 8% over the next

three years, up from the previous target of 6%.

• Non-oil exports recorded a 31% increase over last year, reaching

$13.8 billion. Major exports include petroleum, textiles & apparel,

and processed food and plant products.

• Exchange rates continued their downward trend following the

stabilization of the pound and the convergence of the official and

parallel market rates in December 2004, reflecting a real depreci-

ation of the pound and increased competitiveness.

• Inflation has remained in the single digits since January 2005.

CPI inflation continued to slide, reaching 3.8% in September

2005 versus 17.3% in September 2004.

• Cairo and Alexandria Stock Exchanges (CASE) set records in

2005, outperforming both developed and emerging markets

according to Standard & Poor’s and Morgan Stanley indices.

Newsweek named Egypt as one of the 10 best-performing stock

markets in the world in 2005.

• Non-oil FDI grew to $1.65 billion in 2005 from $249 million

in 2004.

• Law 8/1997 allows for 100% foreign ownership of companies

and guarantees the right to repatriate profits and capital. In

December 2004, a new chapter was added to the law to facilitate

investment procedures. This included establishing "one-stop

shops" in a number of governorates, accelerating the establishment

of new companies in a maximum of 2-3 days, and centralizing

investment processes under a single authority; the General

Authority For Investment and Free Zones (GAFI).

* Including FDI in the petroleum sectorSources: Ministry of Trade and Industry, Egypt, Monthly Economic Digest, December 2005; CBE, January 2006.

Nominal GDP at Market Prices ($billion)Real GDP Growth (%)Population (million)Real GDP Per Capita ($)Share of Private Sector in GDPUnemployment (%)Nominal Interest RateExchange Rate (End of Period) (LE/$)Period Average Inflation (%)Exports ($billion)Imports ($billion)Current account/GDP (%)Foreign Direct Investment ($million)

2002/0369.3

367.3963

64.99.9

8.316.037.18.2

14.82.39701

2003/0478

468.6

1,03662.2

108.416.22

9.510.518.3

4.4407

2004/0592.6

5.170

1,322.962.3

9.510.25

5.7911.713.824.2

3.23,902*

EGYPT ECONOMIC OUTLOOK....

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