Sources: US, Egypt and Israel agree to reduce the Israeli input in QIZ agreement products

Egypt, Israel and the United States have agreed to lower the required Israeli component in duty-exempt Egyptian exports to the US from 10.5 percent to 8.2 percent.

This arrangement is part of the Qualifying Industrial Zones Agreement (QIZ) between the three countries, a free trade agreement that conditions duty-free access to US markets for Egyptian products on cooperating with Israel.

Though the agreement is meant to open US markets to Egyptian imports, Israeli goods often don't meet the needs of Egyptian manufacturers, industry figures told Mada Masr.

As a result, and after years of effort from Egypt, the United States, Egypt and Israel have agreed to lower the bar for Egyptian-Israeli industrial cooperation under the Qualifying Industrial Zones Agreement, according to informed sources who spoke to Mada Masr on condition of anonymity.

Though most of the bureaucratic steps are complete, the agreement is yet to be signed, the sources said, and is pending approval from two sovereign entities. They said it is hard to know when the agreement will be signed, given Israel’s ongoing aggression on the Gaza Strip.

Egypt’s government signed in 2004 for the QIZ Protocol, an agreement designed to incentivize economic cooperation with Israel in the wake of the Oslo Accords. Under the agreement, goods made in designated geographic locations in Egypt can be exported to the US duty-free on one condition: that 11.7 percent of the inputs for the final product come from Israel.

The required Israeli input was reduced to 10.5 percent two years later. But since at least 2017, Egypt has been trying to reduce the required input to around eight percent.

Israel can’t provide the inputs that the Egyptian exporters need in order to meet the required percentage, said House of Representatives Trade and Industry Specialized Committee member Sayed Morshedy. “This means several exports end up halted,” he said, adding that others have to seek out Israeli service providers, such as shipping companies, in order to qualify, instead of raw materials providers from whom to buy inputs.

“I stopped exporting to the US five years ago,” said QIZ registered textile company director Siddiq Nofal who explained that Israel couldn’t provide the raw materials he needed and priced the required inputs at non-competitive rates.

Nofal is not alone. Clothing industry exports, which represent around 80 percent of the companies registered under QIZ,  have taken a hit over recent months both inside and outside of the agreement. With a major foreign currency shortage hampering Egypt’s economy, many have been unable to import the inputs they would normally use in their manufacturing processes. 

As a result, the volume of textile exports going to the US has dropped dramatically. Clothing exported to the US through the QIZ was worth just US$855 million in October of this year in comparison to $1.1 billion in 2022, one of the major clothing exporters to the US through QIZ told Mada Masr on condition of anonymity. 

“Clothing exports under the agreement decreased by around 23 percent during the first ten months of the year 2023,” they said.

In theory, QIZ aims to make companies more profitable and competitive. The new, planned reduction of the required Israeli component could benefit export growth, said the clothing exporter who spoke on condition of anonymity. 

But House of Representatives Trade and Industry Specialized Committee deputy head Saad Awadallah said that the slight decrease in the percentage will only benefit Egypt’s economy if the new inputs are produced locally instead of imported. 

Awadallah explained that Egypt imports around 60 percent of its inputs for products that are ultimately exported. The country has a major balance of payments issue, which, alongside expanding foreign debt, has placed a major strain on its foreign currency reserves.

QIZ is ultimately a relatively small boost for Egyptian companies. Data from the US Chamber of Commerce in Egypt showed that Egypt’s non-oil exports to the US under QIZ were worth $1.5 billion at most. That leaves Egypt in a negative trade balance with the US, as Egypt imports around $3 billion worth of goods and services from the US.

It makes more sense commercially to trade with Turkey, for example, which was the largest destination for Egyptian exports during the first half of 2023, with Egypt selling around $2.3 billion worth of goods to Turkey over that period according to the Central Agency for Public Mobilization and Statistics (CAMPAS). “The Turkish market has now become popular as a port for Egyptian textiles and clothing exports,” Nofal said.

But it is not only trade considerations which go into the QIZ agreement. Signing that type of agreement, said Morshedy, can be more a question of politics than trade.