The United States celebrated on Saturday the 4th of July holiday, also known as Independence Day. It is a federal holiday in the country, commemorating the Declaration of Independence in 1776. On the occasion, Daily News Egypt sheds light on Egyptian-US trade and investment relations, and how the novel coronavirus (COVID-19) pandemic has affected these relations. We will also look into the two countries’ efforts to increase this cooperation.
Daily News Egypt also takes a look into the trade agreements between the two countries, in addition to reviewing the efforts to increase Egyptian exports to the US.
Egypt-US economic relations
The most recent data from the US Department of Commerce showed that Egypt was the second-largest recipient of US direct investment in Africa after Mauritius in 2017. It was also the fourth in the Middle East after Israel, the UAE, and Saudi Arabia, according to the American Chamber of Commerce in Egypt (AmCham).
According to the Central Bank of Egypt’s (CBE) latest data, US foreign direct investments (FDI) in Egypt reached $279.4m during the second quarter (Q2) of fiscal year (FY) 2019/20.
The trade exchange between the US and Egypt recorded $2984.9m during the first two quarters of the recently ended FY 2019/20. Egypt’s exports to the US amounted to $1368.8m during the period from July to December 2019, while Egypt’s imports from the US reached $1616.1m, according to the CBE.
Alaa Ezz, Secretary-General of the Federation of Egyptian Chambers of Commerce (FEDCOC), told Daily News Egypt that the majority of Egyptian exports to the US are value-added manufactured goods. On the other hand, the majority of US exports to Egypt are industrial and agricultural inputs, as well as machinery and equipment, which contributes significantly to job creation on both sides.
He said that Egyptian exports to the US went up 35.7% to $2,489m in the period from January to September 2019, compared to only $1,834m in the same period in 2018.
Ezz revealed that Egyptian non-oil exports to the US went up 24.7% to $1,551m from January to September 2019. This compared to only $1,243m in the same period in 2018, showing an increase of $308m, representing 62.4% of total exports.
He added that Egyptian oil exports to the US also went up 58.5% to $938m during the first nine months of 2019, compared to the $591m recorded in the same period in 2018, representing 37.6% of total exports.
“The main Egyptian export items to the US, worth $854.1m equivalent to 34.3% of total exports, are readymade garments during the period from January to September 2019,” said Ezz.
Other Egyptian exports to the US include artworks and handicrafts, petrochemicals and plastics, salt and sulphur, iron and steel, fertilisers, aluminium and its products, meat and fish, vegetables, glass and its products, oilseeds, and fruits.
Ezz noted that US exports to Egypt went up 11.3% to $4,304m in the first nine months of 2019, compared to $3,866m in the equivalent period in 2018, an increase of $438m.
Main US exports to Egypt include transport equipment and spare parts, oilseeds, petroleum and its products, machinery and equipment, cars and its components, petrochemicals, cereals, and electric equipment.
“Egypt’s trade deficit with the US went down by 10.6% reaching $1,815m during the first nine months of 2019, compared to $2,032m during the same period in 2018,” according to Ezz.
Alaa Arafa, Chairperson of Arafa Holding, said the global industrial sector has been affected by the coronavirus, and that as long as there is no demand, there will be no supply.
He explained that markets worldwide have closed down on the back of the pandemic, and subsequently factories are not working with the same capacity, so the exports globally are affected.
“As the global clothing industry shrank due to the COVID-19 pandemic, Egypt was also affected, as clothing make up about a third of Egyptian exports to the US,” Ezz said. “However, the decline in 2020 might be offset by an increase in other export items, bouncing into supply chains of American multinationals. Accordingly, Egypt’s non-oil exports might increase by end of 2020.”
Responding to DNE’s question about methods of increasing Egypt’s exports to the US, especially amid the coronavirus, Ezz said that Egyptian companies should work fast on filling part of the gap created by the supply chain disruption in the past three months.
This could take place either by exporting such products or networking with technology and brand owners for local subcontracting. This will be win-win cooperation as such locally manufactured items could be exported not only to the US, but also free trade areas of over 2.7bn consumers in the EU, Africa, the Arab world, and the Southern Common Market (Mercosur).
QIZ Egypt launches “Why should you shift your sourcing to Egypt” webinar
While digging into Egyptian exports to the US, the Qualified Industrial Zones Protocol (QIZ) must be highlighted. According to AmCham Egypt, QIZ exports made up 35% of Egypt’s total exports to the US and 53% of non-oil exports in 2018.
The economic recession in the US and the loss of 40m jobs has led to a 14% decline in imports to the country. Subsequently, Egypt’s exports to the US through QIZ has decreased by about 15.9%, during the period from January until April 2020, according to Ashraf El Rabiey, Head of the QIZ unit at Egypt’s Ministry of Trade and Industry.
During the first four months of 2020, Egyptian exports to the US under QIZ recorded $277.1m, down from $329.4m during the same period last year, he explained.
El Rabiey said that the ready-made garments, textiles, and furnishings accounted for 97% of the total value of Egyptian exports under the QIZ.
This decline is attributed to the closure of retail companies or brands in the US for months due to the coronavirus pandemic, which has caused financial problems. This, in turn, has negatively affected the ability of companies to pay their obligations to Egyptian companies.
Therefore, several companies or brands have either significantly reduced their imports from the Egyptian market or cancelled their orders.
Regarding expectations for Egyptian exports through QIZ to the US during the coming period, El Rabiey expects a decline. He added that the percentage of this decline depends on the American companies’ policies and US stock levels.
“I don’t expect any growth in the Egyptian QIZ exports to the US this year, but we are trying as much as possible to avoid a significant rate of decline,” he said.
Moreover, El Rabiey said that about 1,000 companies are registered within the QIZ agreement, adding that only 200 companies out of the 1,000 are considered active.
He pointed out that the QIZ unit is about to liquidate and write off the inactive companies from the list of companies operating under the QIZ agreement.
Regarding efforts to push Egyptian exports to the US under QIZ, he mentioned that on 17 June, the QIZ unit in Egypt and the US Fashion Industry Association (USFIA) organised a webinar, entitled “Why you should shift your sourcing to Egypt”. Representatives from 70 American companies and several Egyptian exporters attended the webinar.
During the webinar, speakers from the Egyptian and Israeli government and private sectors shed light on the QIZ protocol, and explained how US buyers can benefit from importing duty-free garments from Egypt.
According to El Rabeiy, the virtual meeting aimed to create publicity for the ready-made garments and textiles industries in Egypt. It encouraged US companies to reconsider Egypt’s industrial potential, especially in light of the current ongoing tensions between the US and China.
During the webinar, the industrial potentials for Egypt were reviewed, whilst presenting that Egyptian-made products have a competitive edge in.
El Rabiey said that Egyptian exports to the US through QIZ represent a higher percentage of the country’s total exports to the latter, evidencing that in 2019 Egyptian exports to the US through the QIZ recorded over $1bn.
According to CBE data, Egypt’s total exports to the US in 2019 recorded about $2.9bn.
Why is Egypt not exporting all its products to the US through GSP?
When exporting through QIZ, there are two main aspects to focus on, namely exporting a product that has high tariffs in the US, and that is highly in demand, El Rabiey said.
He explained that Egypt has many options for exporting its products to the US, including the QIZ and the Generalized System of Preferences (GSP).
The GSP provides preferential duty-free treatment for over 3,500 products from a wide range of designated beneficiary developing countries (BDCs), including many least-developed beneficiary developing countries (LDBDCs). An additional 1,500 products are GSP-eligible only when imported from LDBDCs.
According to Ezz, QIZ exports to the US went up by 14.4% reaching $760.6 m during the first nine months of 2019, compared to $664.7m during the same period in 2018. This means that QIZ comprised around 31% of Egypt’s total exports to US.
GSP exports to the US went up by 124.7% reaching $148.3m during the period from January to September 2019, compared to only $66.3m in 2018. This means that the GSP comprised about 6% of Egypt’s total exports to US.
Regarding the major differences between GSP and QIZ, the QIZ unit Head explained that products that are exported through the GSP are completely Egyptian, without any Israeli component.
The QIZ agreement was signed by Egypt, the US and Israel in 2004, according to which Egyptian products and goods are exported to the US without customs. This is provided that Egyptian factories joining the agreement import a percentage of production inputs from Israel.
When the QIZ agreement was launched in 2005, the percentage of Israeli components stood at about 11.5% of the final product, before it was reduced to 10.5% in 2007. The Egyptian government seeks to reduce the Israeli component percentage to 8% through negotiations between the two sides.
Responding to our inquiry about why Egypt is not exporting all its products to the US through the GSP, El Rabiey explained that not all the exported products are included under the GSP list of products.
He added that the ready-made garments, textiles, and furnishings that are Egypt’s most exported products to the US, and are not included in the list of products for the GSP. Shoemaking products are also not included in the GSP list.
He said that the QIZ encouraged and supported establishing the first integrated factory for sports shoes in Africa, the Middle East, and Europe.
The factory will be specialised in producing shoe materials and final products, which is set to start production within the next two months, according to El Rabiey.
Hany Qesses, Managing Director of Misr for Industry and Trade (Mintra) the company which owns the factory, told Daily News Egypt that the building has been under construction since April 2018.
“The first phase will be inaugurated with investments worth EGP 1bn as paid-up capital, on an area of 75,000 sqm at the free zone in Nasr City,” Qesses said in late 2018
Finally, Egypt and the US have for years been keen to sign a bilateral free trade agreement (FTA). This agreement, if signed, will benefit the both sides. In late January, US Ambassador Jonathan Cohen said on the sidelines of a conference at the AmCham in Cairo, that Egypt and the US will re-enter negotiations over a bilateral trade agreement next year.