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Can Sourcing in Egypt Diffuse Political Turmoil in the Middle East?

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Despite ongoing tensions in Gaza, one apparel trade program is encouraging neighboring Middle East nations to collaborate peaceably.

Under the U.S.-authorized Qualifying Industrial Zone (QIZ) program, Egypt can export goods to the United States duty free provided the products contain 10.5% Israeli inputs, which has fostered partnership in trade between the two nations.

And because U.S. tariffs on textiles and apparel can be as high as 32 percent, skirting these added costs by making goods in QIZs should be an attractive option for American buyers, but many aren’t taking advantage of the peace-making preference program.

The QIZ initiative, signed in 2004, came into effect in 2005 and has so far dramatically increased trade—and cooperation—between Egypt and Israel.

For QIZ-produced products to be eligible to enter the U.S. duty free, articles must contain 35 percent local input (24.5% Egyptian, 10.5% Israeli), and that 35 percent minimum content can include costs incurred in Israel, Egypt or the U.S. If an Egyptian company exports $1 million worth of goods through a QIZ, for example, it must show that it imported $105,000 worth of inputs from Israel to produce them.

Mohamed Samy Ashour, consulate general for the Egyptian Embassy in New York, said beyond facilitating trade, the idea behind the QIZ program is to have stability in the region. “When people work together from the two countries, they start to have mutual interests, and they start to have an issue to discuss more than political issues,” he said. “It’s a very important agreement to sustain stability of the peace.”

The Office of the United States Trade Representative (USTR) has the right to designate QIZs and can declare duty elimination on articles produced in the West Bank, Gaza, and QIZs in Egypt and Jordan. There are six QIZs in Egypt: Greater Cairo, the Alexandria, the Suez Canal, the Central Delta, the Beni Suef and the Al Minya zones. And in March 2013, the Office of the U.S. Trade Representative (USTR) liberalized the designation of the existing QIZs to allow all production facilities in these zones to be eligible to export goods duty free to the U.S.

Israel currently has 80 factories that export to those QIZs, and most are SMEs (small and medium-sized enterprises). Israel’s Ministry of Economy and Manufacturers’ Association estimates that the QIZ directly employs roughly 1,500 workers, and the current annual Israeli input exports through the QIZ is between $80-$85 million.

Since 2004, the year before the first Egyptian QIZ was established, Egypt’s total exports to the U.S. totaled $1.3 billion and by 2012 grew nearly 124 percent to $2.9 billion. Since 2005, QIZ exports have grown at an even faster rate of 265 percent $266 million to $971 million in 2012, according to Israel’s Ministry of Economy. For apparel and clothing accessories specifically, Egypt’s exports to the U.S. totaled $870 million in 2012, and now that number has reached $1 billion. Prior to the QIZ, Israel’s exports to Egypt were a low $29 million in 2004, and that total has now jumped to $100 million.

While Egypt has concentrated on tapping the European market because of its closer proximity and ultimately shorter lead times, Ashour said there’s much for American buyers to benefit from. Quality standards are high in the country and Egypt is known for its fine extra long staple cotton. The problem is, Ashour said, “The buyer is still going to the Asian market, to China, because they are looking for price not for quality. For quality and price we are the cheapest,” he said.

Anat Katz, head of trade mission for the Embassy of Israel in Washington, D.C., added that producing through QIZs in Egypt “provides a good opportunity for American buyers for sourcing that can really compete with merchandise that is coming from other places in the world.”

The main products coming out of Egypt are denim and knits, but the country’s capabilities range from T-shirts and polos to woven shirts, suits and dress pants.

With the growth of the activewear industry, Israel is working to step up its synthetic offerings. Companies like Nilit, a fully-integrated manufacturer of nylon 6.6 for thermoplastics and apparel applications, whose line ranges from mid-denier to super-fine and microfiber yarns, are constantly innovating to keep up with consumer demand.

Mohamed Kassem, chairman of Egypt’s Ready Made Garments Export Council, said Levi’s, VF, Gap and Ralph Lauren are already working with Egypt, which is spreading word that the country is trading well with the U.S. However, he said, “We still have a few major players that are not taking advantage of the situation in Egypt.” He added, “We have to reach out to new tiers of customers and bring more demand into Egypt, that’s the main goal now.”

Ongoing unrest in the region has been a concern for many buyers worried about whether their business will be disrupted by discord, and many have opted to avoid the region altogether. But according to Katz, the QIZ program has been very successful over time, and was not in any way set back despite external changes and circumstances in the region. “There has not been a lack of political turmoil in the region in recent years, but at the same time, you can see that this has been really, really stable,” she said.

Ashour added that the recent unrest did cause Egypt to forfeit production, but the country has started to recover clients this year.

Katz said she believes there is considerable potential to expand the QIZ from its current $1 billion in exports to $2 or $3 billion. “It’s a process,” she said. “We’ve been discussing trilaterally how to expand it, so this is a testament that it is working well. It’s a story of success and it’s a story of a mechanism that we think could grow and reach definitely higher.”

With an even more optimistic outlook, Gabi Bar, head of Israel’s QIZ program, said, ”I believe in the end of the road, we can be at $4-$5 billion of exports from Egypt in two to three years. It’s not so complicated to make these volumes. We will need a lot of will from our sides. From the Israeli side, our will to export is very strong.”

Kassem said the QIZ has created a significant number of jobs in both countries and developed partnerships between the two sides. “When you look at what’s happening, the instability and the aggression in both areas, the QIZ is perhaps the only initiative that is producing results as far as the Arab-Israeli conflict is concerned, so that is the crux of the project,” he said.

Both Egypt and Israel are looking to extend QIZ beyond just textiles and into more garments and even other sectors like processed food. The nations will be meeting and negotiating with relevant stakeholders in the coming year to promote the region and the program, and to stimulate trade through QIZs.

Egypt will showcase its quality and capabilities with a presence at MAGIC in Las Vegas next February, and will host an event to commemorate the tenth anniversary of signing the QIZ initiative.

Yaron Harel, chairman of the Textile Union – Garment Manufacturers in Israel, part of the Manufacturers Association of Israel (MAI) said, “Our country now is in a war with Gaza. According to me, the only solution is economic. The moment that we can have even factories in Gaza, I think this is what will solve the problem in the area. When somebody has a place to go in the morning and is coming back home, you don’t want to make any problems. We call it economic peace.”

And the American understands better than anybody that a good economy brings good peace, Harel added. The QIZ program with Egypt has been generally underpublicized and underutilized, but according to Harel, more American buyers will bring more investment in the region, lead to building more factories to produce goods and ultimately be a trilateral benefit.

“It’s very easy, we just need some cooperation with American companies that will check the possibilities in Egypt, the product quality, the lead times, the prices,” Harel said, “After that, all the other things will come.”

According to a USTR spokeswoman, “The hope is that a program like this leads to expanded jobs, expanded trade and more peace.”

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