US President George W. Bush was not talking about trade when he stood next to President Hosni Mubarak last month and declared that the US and Egypt have "a close and meaningful relationship." Military and security issues dominated Mubarak's four-day visit to Washington, as the two leaders conferred on Israeli-Palestinian bloodshed and America's stance toward Iraq.

But behind the scenes, Mubarak pushed for new talks on a long-envisioned preferential trade deal that would give Egypt's textile and produce industries greater access to the American market: the proposed US-Egypt free trade agreement. Or, more to the point, Mubarak got confirmation that the United States' message to Egypt on the chance of an FTA is as lukewarm as before: Reform your economy first, then we'll talk.

While US and Egyptian trade officials barely referred to the FTA proposal publicly during Mubarak's visit, Business Today Egypt has learned that Mubarak broached the subject briefly in a private meeting with US Commerce Secretary Donald Evans. Evans discussed the FTA idea in greater detail in a subsequent meeting with Foreign Trade Minister Youssef Boutros-Ghali, says Amina Ghenem, a senior assistant to Boutros-Ghali.

"They sort of agreed that this is something that both sides would like to have, and that they need to get things going. Egypt is working on its obligation to comply with the list of the things that the US wants us to do," Ghenem notes, adding that the FTA proposal "is neither in hibernation or alive. It was discussed in the sense of 'What are the things we still have to do?' It is an issue that's considered by the Americans, but we have to comply."

For an Egyptian business establishment now obsessed with increasing its exports, the reaffirmation of Washington's "reforms first, talks later" posture was certain to frustrate.

On one hand, the value of Cairo's friendship becomes more apparent to Washington as other Arab countries raise objections to the US war on terrorism. At the same time, having chased an FTA since 1997, Egyptians may get the sense that they're being leapfrogged in the worldwide competition for preferential trade with the US. Jordan, for example, finalized a free trade deal with the US last fall. Singapore is now reportedly close to inking its own bilateral deal with Washington, while the South American nation of Chile is in talks for its own pact.

"Egypt not only has to compete for political will, but for time," says Hisham Fahmy, executive director of the American Chamber of Commerce in Egypt (AmCham), which has spent considerable effort lobbying for a US-Egypt FTA.

Yet American officials note that while they may be nagging Egypt to liberalize its economic structures -- from customs to patents -- they're also funding massive aid programs geared to support reforms and increase Egyptian exporters' ability to reach new customers in the US and beyond.

Last in line?

The relationship is inherently lopsided. The US sells far more goods on the Egyptian market than it buys back: Imports from America totaled $3.78 billion (LE 17.58 billion) in 2001, largely wheat, corn, arms and high-tech equipment. Egypt exported just $878 million (LE 4.083 billion) in goods to the US in that time, mostly fuels, apparel and textiles. The trade gap has been almost evenly redressed by massive US military and economic aid; only Israel receives a larger share of the US aid pie. But the trade deficit has been growing in the last decade, while economic aid is being gradually reduced.

Business leaders want Egypt to enter the élite club of nations with two-way trade deals with the US in part for symbolic reasons -- to "signal US commitment to Egypt," as the independent Egyptian Center for Economic Studies put it last year in a position paper advocating an FTA.

For the garment and textile industries, however, an FTA would be far from abstract. Egyptian textile shipments into the US are limited by a quota and are subject to tariffs as high as 35%. Industry officials say their most pressing goal is not to expand their US sales -- it's to recover business they feel they're losing to other countries.

Jordan can now avoid most textile tariffs because its FTA eliminates duties on goods flowing to the US. (For more on the Jordan-America FTA, see bt's February 2002 issue, page 34). And textile exports from many sub-Saharan African countries receive preferential treatment under the African Growth and Opportunity Act signed in late 2000 by then-US President Bill Clinton. Those include South Africa, Botswana, Namibia and Lesotho. (On top of that, Bush recently sent his trade representative to Africa to explore the possibility of negotiating comprehensive free-trade pacts with those countries and with the tiny kingdom of Swaziland.)

"The damage is already done," says Mohammed Kassem, whose World Trading Co. in Mohandiseen brokers $75 million worth of garments annually. "There is already a diversion of trade from Egypt."

No studies have quantified the drain yet, says Kassem, who also chairs the Egyptian Garment Exporters Association. But fellow businessman Galal Al-Zorba says he's sure he's losing business. Al-Zorba is chairman of Nile Clothing Co., which manufactures 12 million pairs of jeans and 300,000 dress shirts each year for leading brands including Levi's and Van Heusen.

"I talk to the customers in the United States, and they say they feel there is an advantage working with duty-free countries that have a 35% advantage because of the duty rate," Al-Zorba says. "At some point, the production capacity in those duty-free countries will increase, and we'll be out of luck."

Apparel and textiles are Egypt's strongest incentives to get an FTA. But a deal would also benefit some fruit and vegetable producers, says the Foreign Trade Ministry's Ghenem, who notes that few other major sectors would win a significant boost. Non-textile products from Egypt generally face less than 2% tariffs on entry into the US, according to the Egyptian Center for Economic Studies (ECES). Egyptian-made furniture, for instance, already enters the US tariff-free and unlimited by quotas.

Consolation prizes

While there are no talks underway on a US-Egypt FTA, Mubarak's visit ended with questions of bilateral trade being referred to other forums. Officials intend to revive the US-Egyptian Presidents' Council, a board of prominent business leaders from both countries that discusses economic liberalization in Egypt.

Overseen by Mubarak and then-Vice President Al Gore after its formation in 1994, the council will now be led by the countries' trade ministers, Boutros-Ghali and Evans.

And the two countries have already agreed to work on the economic reform measures the US considers a prerequisite to talks on an FTA. The 1999 signing of the Trade and Investment Framework Agreement was seen as a positive step, given that Mexico entered its own TIFA with the US as a precursor to the North American Free Trade Agreement. "Through this framework, we will try to be eligible for a free trade agreement," Ghenem says.

Egyptian officials are pressing for more limited trade concessions in the short term. Boutros-Ghali, after asking his US counterpart to help lower barriers to Egyptian produce, ceramics, construction materials, marble and granite, told reporters that the US side had been "supportive, promising to open up a number of areas for our products."

Bush the free-trader

Despite isolationist rhetoric during the presidential campaign, Bush has become active in pursuing country-to-country trade deals. After furious dealmaking, his administration in December narrowly won approval in the US House of Representatives for trade-promotion authority, also called "fast track," that would let the White House set the specifics of trade pacts, with Congress only approving or rejecting them.

The Senate is now debating final approval; talks on the proposed pact with Chile are awaiting the outcome. Meanwhile, officials in Singapore have expressed optimism that talks on their own FTA could be concluded as early as this month. And Bush announced in January that he wants to start talks with Central American countries with hopes of broadening NAFTA to span the Americas by 2005.

But that doesn't mean that Washington is going FTA-crazy. Jordan's pact was held up until the 9/11 terror attacks presented a pressing reason to shore up support in the region. And not even the war on terrorism makes trade preferences a slam-dunk. After providing vital support for the US bombing in Afghanistan, Pakistan expected the US to reward it by raising quotas and lowering tariffs for its textile and apparel industry. But congressmen from textile-producing states protested and refused to support fast-track until Bush drastically downsized the payback to Pakistan. The dealmaking even forced the administration to revise an existing trade deal with Caribbean nations to the benefit of US dyeing and finishing plants. That turn of events clearly shows how protecting US jobs can nullify foreign policy priorities.

Pakistan's disappointment could also be a bad portent for Egyptians hoping to boost their own textile quota in the US. Meanwhile, Egypt is scheduled to see all tariffs with Europe removed over 15 years through its association agreement with the European Union. That could tilt Egypt's trade interests away from the US and toward Europe.

"I think once Egypt's market is opened by the EU, then there is no point worrying about anybody else," says AmCham's Fahmy. "If you're competing with the whole of Europe with zero tariffs, then you'd better have your act together by then. It doesn't make any difference if there is a US free-trade agreement or not."

The laundry list

The US has never cited protecting its own textile industry as a reason for delaying FTA talks with Egypt. Rather, the official line has been that Egypt isn't ready yet. Departing US ambassador to Egypt Daniel Kurtzer spelled it out in a March 2001 speech to AmCham's members, saying negotiations on an FTA should not begin until Egypt has conducted "necessary" economic reforms. Specifically, Kurtzer said, Egypt needs to reduce agriculture subsidies, accelerate privatization, reform taxes with incentives for investors, streamline customs and the courts, and pass laws to protect intellectual property rights.

Among FTA-watchers, Kurtzer's prerequisites became known as "the laundry list." But they weren't the pet peeves of a lame-duck diplomat. Rather, they reflected the new demands the world's developed nations have been pressing in international trade: not just open borders, but the same rules on both sides of the fence. Multinational corporations want uniform, efficiently administered regulations from antitrust to product safety in every country in which they operate.

Even if Washington were to come to the table for an FTA with Egypt, some of the conditions might be irksome for Cairo. Congress is expected to approve fast-track authority only with the caveat that future trade pacts give weight to labor and environmental concerns, at the insistence of Democrats.

Ahmed Ghoneim, a Cairo University assistant professor of economics who has consulted with the World Bank on regional free trade, speculates that an FTA might also oblige Egypt to implement human rights protections or alter judicial procedures -- changes that grow from an American perspective that may be out of step with Egypt's moment in its political history.

"The problem is that in order to enter an agreement with the US, there are always other measures that can be related to human rights, or a judiciary regime, that might affect the sovereignty of the Egyptian government and might not be at the right time to implement such changes or reforms," Ghoneim says.

Some non-ideological conditions, too, could be inappropriate to foist on Egypt, Ghoneim adds. He points in particular to Kurtzer's suggestion that negotiations on an FTA should begin after Egypt adopts WTO agreements to completely liberalize telecommunications services and remove tariffs on computer products. "I think that's a matter of sovereignty," Ghoneim notes. "Everyone has his priorities. I know my priorities. You know your priorities. You don't have to push me for it."

Even when Egypt agrees on a concept of economic reform -- such as introducing strong legislation protecting foreign copyrights -- it would be unfair to hold up an FTA until Egypt can implement them to American standards, Ghoneim says, pointing out, "Who said that there is no will to have a strong law regarding intellectual property rights in Egypt? The problem is not having a law. The problem is how to enforce it. You don't have the enforcement capacity to enforce such a law. Therefore you need some technical assistance, and that takes time."

The ECES argued in its policy paper last year that an FTA should not hold Egypt to US environmental standards. An FTA could include "the harmonization of some domestic policies, [but not when] the adoption of one country's standards for certain policies may be costly for the other to adopt in view of differences in their level of development. ... While it would serve the interests of Egypt to adopt new intellectual property rights, it may not be as beneficial to adopt the US level of environmental standards."

At any rate, AmCham argues that all these questions can be addressed at the same time that an FTA is being drafted. "We're saying, 'Let's enter into negotiations and have a timetable and identify the issues that need to be discussed as part of the negotiations, but not as a prerequisite'," Fahmy notes.

The bureaucracy

Egypt is making progress on the laundry list. Laws on e-commerce, intellectual property and investment are moving in the People's Assembly. The US Trade Representative's office praised the Ebeid government in a 2001 report for its privatization of insurance and transportation concerns and its development of low-hassle industrial zones.

But perhaps the most difficult issue on the laundry list is also one of the most common complaints by foreign business people: Egypt's import-export bureaucracy is erratic, inefficient and slow. The same USTR report said that tariff rules are complex and that Egyptian customs agents often set tariffs arbitrarily -- for instance, charging tariffs based on a shipment value 10-30% higher than reported because of suspicions that importers may be under-reporting the shipment value.

Businessman Adham Nadim says he knows the trouble with Egyptian customs all too well. Nadim deals with customs as he imports lumber and exports handcrafted furniture from his Dokki factory. In February, Nadim persuaded a French company to let him have a shot at manufacturing a full line of armoires, tables, beds and other furniture. If he could duplicate the company's samples to its satisfaction, the contract would keep his factory busy for a year. The French firm shipped 40 sample pieces; by law, they were supposed to be duty-free.

"The container arrived at customs, and [customs officials] wanted us to pay full duty on the pieces," Nadim says. The samples sat in port for three weeks while Nadim wrangled with officials. Ultimately, he had to give authorities a cash deposit equal to the full duty amount, LE 40,000. He'll get the money back after he pays to ship the samples back to France. The officials also insisted on having an agent sign his name on each piece of furniture to guarantee that the pieces shipped back were the same ones that came in. The foreign client "could not understand the delay in time in producing the samples," Nadim complains.

"And this is repeated over and over again, when we need to get in our lumber, when we have a problem getting spare parts -- it goes on and on," adds Nadim, who's also a board member of ExpoLink, the Egyptian Exporters Association. "When you put that against a top [government] official's statement about the importance of aiding exports, where do we fall? It's a philosophy that needs to be addressed at all levels of government, not just top officials."

Business advocates say the customs bureaucracy resists change, making its reform a stiff challenge for government leaders.

"For a long time, we were trying to convince the Egyptian government of what should be done. Now, when you sit with any minister or the prime minister, they speak as if we were speaking. They know," says AmCham's Fahmy. "It's a matter of, OK, how do you deal with the bureaucracy? How do you get what is being said by the top management -- in this case, ministers -- to filter down to those who are implementing?"

A senior Foreign Trade Ministry official who asked not to be named said changing the culture in the customs bureaucracy will require "a very strong hand that's determined, and a clear vision, with no discretionary [policies], just orders."

With European trade growing in importance, there is doubt that Egypt can meet the US prerequisites in time for it to matter. Export promoter Mahmoud Bayoumi, for one, is optimistic that Egypt can achieve marked systemic changes in a short time.

"The mechanism in the government itself is starting to change," says Bayoumi, an ExpoLink official. "Some changes don't pay off soon. But let me tell you, according to the prevailing indications and the direction in which our government is going, export is becoming a vital issue on all levels. Egypt is entering a new era of improvement in this sense, coping with the 21st century requirements and the international language." -bt

On The Record With US Ambassador C. David Welch

Reform Now, Profit Later

Representing America to Arabs angry with Israel was challenging enough when C. David Welch became US ambassador to Egypt in August 2001, following diplomatic assignments in Damascus, Amman and Riyadh. After 11 September, resentment toward the US war on terrorism made the job harder. But Welch remains steadily optimistic that US ties with Egypt will strengthen. In an exclusive interview with bt in late March, Welch urged patience despite the lack of visible progress toward a US-Egypt Free Trade Agreement. While the US insists on economic reforms as a prerequisite for talks, Welch said such steps would bring immediate benefits by encouraging greater US investment in Egyptian business. Welch also said President George W. Bush "has made no specific decisions" about attacking Iraq.

When President Hosni Mubarak stood beside his US counterpart at a White House press conference in early March, Bush took the occasion to announce "a new initiative to increase economic and educational opportunities" throughout the Middle East. The timing might have suggested that the new initiative would benefit Egypt. Not exactly, as it turns out.

As Welch explained to bt, the new initiative, led by Secretary of State Colin Powell, will come with significant new foreign aid dollars. But since the US already sends Egypt aid second only to Israel -- including $959 million on an accelerated schedule after 11 September -- the new money isn't coming here, Welch confirms: "Frankly, when Israel and Egypt are such high beneficiaries of our existing assistance, there's a lot of competition for the remainder and any new assistance. I think the new assistance will be directed elsewhere."

Conceivably, the Powell Plan could inspire new programs here with Egypt's existing aid, Welch adds. More likely, though, is that the US will look to replicate successful Egyptian programs elsewhere, Welch says: "We think we have some good stuff going here, and we can offer some ideas."

Other excerpts:

BT: Has there been any recent progress toward negotiating a US-Egypt FTA?

Welch: When President Mubarak went to Washington [in early March], there were a number of ideas that were put on the table on how to deepen and enrich economic dialogue. The possibility of a free trade agreement is out there. It is real. You will see, in the coming weeks, some further movement toward that.

It's a long process to get to negotiations, and then to turn those negotiations into an agreement. [US Trade Representative Robert] Zoellick met with Mubarak. They have agreed on a sequence of steps that would enumerate what is necessary to get into negotiations. I expect that Ambassador Zoellick will visit Egypt to push this along further no later than the latter part of this year.

Without an FTA, we do a considerable amount of trade and investment in Egypt. This interaction between us, up and before an FTA, could do a lot to improve this. American companies want to do business here. That means jobs for Egyptians workers. But all complain that the cost of doing business is high in Egypt. That ranges from the pure bureaucratic legwork to high import duties on inputs. This stuff can be fixed. It can be fixed tomorrow.

I can tick off several things that ought to be done: Reducing the cost of doing business. Tariff reform. Taxation reform. Labor reform. The ability to do something as simple as convert foreign currency. A business needs this to operate.

Let's find a way to make it easy -- rather than have the shipments sit in customs for three to six months, have 50 different ways to tax them, and have all kinds of rules about how you can hire and fire employees.

BT: Did 11 September have a chilling effect on US business initiatives in the region?

Welch: I was very attentive to that potential problem after 11 September, and I'm quite proud to say that American companies that are involved here in Egypt didn't run for the hills. They're still here. In contrast, we've got a couple of significant new interests in Egypt. QualComm made a major commitment to pursuing opportunities in wireless. Apache Oil has made major new commitments.

We've gotten several other indications of interest from companies that are still competing. Private American investors have come in to buy companies that are up for privatization. That those people are still willing to come and invest means that, however they calculate the political risk, they're looking at the business opportunity as more important.

BT: There is a perception in Egypt that the US rubber-stamps everything Israel does. How can the US persuade this region that it is even-handed?

Welch: It's our responsibility to protect the interests of the United States. We have decided that the way to do that in this region is to seek peace between the Arabs and the Israelis. We have a long record of accomplishments in doing that. Our responsibility is to continue that, not to allow ourselves to be frustrated by the setbacks that occur.

There is a responsibility that lies on the side of the people in this region and their governments. That is to understand that they're players, too. What they say and do count. It is bitterly disappointing to Americans to note that as we are trying everything we can to address this problem, we are still labeled as part of the problem. In some cases, there is even anti-Americanism in the media [and] intellectual circles that sometimes spills over into what I would call racist hatred. That's fundamentally antithetical to our values and very damaging to the image of those who say they espouse a principled cause.

BT: What is the likelihood of US military action in Iraq?

Welch: Oh, that's a completely hypothetical question at this point. We've got a lot of other stuff that were doing in the war against terrorism. We're still fully occupied in Afghanistan, closing down Al Qaeda and the Taliban [and are] quite immersed with the diplomacy to calm the violence and restore negotiations on the Palestinian front.

The President has expressed his deep concern about the threat that Iraq poses, but he's made no specific decisions. Those matters will be addressed in due course. I would caution you against any heavy breathing.

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