Apparel exports to the US from Egyptian qualified industrial zones are soaring, manufacturing investments are on the up, and retailers and importers are putting more business into the country. Jozef De Coster reports on one of the industry's recent success stories. 

After a shaky start in 2005, apparel exports to the United States from Egypt's Qualified Industrial Zones (QIZ) are currently soaring.
 
Several Egyptian companies situated in the QIZ are expanding their operations, and some Turkish and south Asian (but not Chinese) companies are examining investment and export opportunities.
 
However, it is not yet clear whether a report published in May 2006 by the National Labor Committee (NLC) - a New York based human rights advocacy group - alleging sweatshop-like conditions in some QIZ plants in Jordan, will encourage US buyers to switch to Egypt instead.
 
The US first offered Egypt and Jordan - the two Arab countries that signed peace treaties with Israel - the benefits of the QIZ-formula in 1996. But it wasn't until the end of 2004, when Egypt and Israel launched a trade partnership with the US, that the US Trade Representative (USTR) designated the first QIZs in Egypt.
 
Two-pronged benefits
The QIZs have a double goal: to help broaden support for the Middle East peace process, and to produce tangible economic benefits for Jordan and Egypt by stimulating their economies.

How do they work? Certain products, especially apparel and textile items originating from Qualified Industrial Zones, are permitted to enter the US duty free. They must, however, meet strict rules-of-origin requirements. Under the Israeli-Egyptian agreement, 11.7% of the inputs in the products must be made in Israel.

Egypt has the largest population (72m) and the largest economy in the Middle East, and when it finally decided to take advantage of QIZ benefits after eight years of hesitation and difficult internal debates, it had good reasons to do so.

First, the Egyptian government expected that the lifting of quotas on textiles and apparel from 1 January 2005 would deal a big blow to Egypt's exports to the US. There were fears that Egypt's exports to the US would be crowded out and could result in the loss of 150,000 jobs in the industry (out of a total of around 1m).

Secondly, Egypt could observe the positive impact of QIZs on the Jordanian economy since 1998.

The Jordanian apparel industry, which accounts for 99.9% of all QIZ exports to the US, had grown 80-fold between 1998 and 2005 to US$1.3bn - though in 2005, the growth in QIZ exports from Jordan levelled off to only a 2% ahead of 2004 figures. It is estimated that QIZs have created around 50,000 new jobs in Jordan, mainly for women.

Export growth
In 2005, exports of ready-made garments to the US represented 89% of all Egyptian QIZ exports to the US, with exports of textiles at 5% of the total.

According to US statistics, Egyptian exports of ready-made garments to the US rose 5.3% from US$421.6m in 2004 to US$443.8m in 2005.

Wael Samir, investment promotion and matchmaking manager of the QIZ unit at the Ministry of Trade and Industry, stresses that 5.3% growth really is an achievement following the end of the MFA textile quota system.

He points out that during the first nine months of 2006, 160 Egyptian companies were exporting under the QIZ protocol (compared to only 93 in 2005). Egyptian QIZ exports during this period reached US$459.9m or 59% more than during the 9-month period from March-December 2005 when the QIZ protocol came into effect.

Khaled Raafat, president of the Egyptian Textiles Export Council, believes that with help from the QIZ, total Egyptian textile and garment exports could soar from US$1.1bn in 2005 to US$2bn in 2007.
 
QIZ investments
Several Egyptian apparel exporters to the US are currently expanding their QIZ-production capacities. Among them are Cairo Cotton Center, Farouk Salem Group and Glass Co.

Both Target and Gap reportedly plan to increase their sourcing from Egypt to around US$200m in 2007 or 2008.

Khaled Elkahim, senior merchandise manager at Li & Fung Egypt, says that the market is very active and that manufacturing capacity is now being booked much earlier by the sourcing offices/buyers.

American buyers through sourcing offices in Egypt include Wal-Mart (knits, wovens), Fruit of the Loom (knits), Banana Republic (woven bottoms) and Levi Strauss (denim articles). Liz Claiborne is said to be back in Egypt after six years of absence, while Victoria's Secret, H&M and Zara are mentioned as newcomers.

Wael Samir says that a number of big Indian companies - potential investors - recently visited the Egyptian QIZs.

Hoping for useful technology transfers, Minister of Trade and Industry Rachid Mohamed Rachid is targeting Italian companies. Pakistani, Sri Lankan and Bangladeshi companies are also interested in the QIZ benefits.

Most numerous, however, are the Turkish, who are re-locating substantial slices of their garment industry to Egypt, where cut, make and trim (CMT) minute prices are only half of those in Turkey.