A Welcome Step in Reengaging Egypt

May 29, 2009 3:15 PM

On May 27, 2009, US Trade Representative Ron Kirk and Egyptian Minister of Trade and Industry Rachid Mohamed Rachid agreed to develop a "Plan for a Strategic Partnership" that would "deepen and broaden trade and investment relations." They directed senior trade officials to develop a program in 90 days to implement the plan.

This accord is a welcome step. In a forthcoming paper, we argue that the success of the United States' Middle East strategy depends on the future of US-Egypt economic relations. Deepening bilateral commercial and investment ties can pay both economic and political dividends as the Obama administration refocuses US strategy in the Middle East.

For three decades, Egypt and the United States have been strategic and economic partners. This relationship has evolved from one dominated by US economic and military aid (more than $50 billion since 1979) to increasing trade and investment. Egypt signed the first US bilateral investment treaty (BIT) in 1982 (it came into force in 1992), a trade and investment framework agreement (TIFA) in 1999, and an accord establishing a qualifying industrial zone (QIZ) program in 2004, allowing duty-free entry into the US market for Egyptian goods manufactured with Israeli content. But long-anticipated free trade negotiations were stillborn in late 2005 because of US objections to human-rights and civil-liberties conditions in Egypt related to its presidential election.

US-Egyptian commercial relations remain underdeveloped. Bilateral merchandise trade in 2007 totaled less than $8 billion and represented only 5 percent of US trade with the entire Middle East and North Africa region. US foreign direct investment (FDI) in Egypt, valued at almost $6 billion at the end of 2007, remains concentrated in the mining and petroleum sector.

The new plan for a strategic partnership aims to "deepen and broaden trade and investment relations between the United States and Egypt, including through identifying and working to remove impediments to trade and investment between the two countries." Market-opening measures are important for creating jobs for young workers, and they can also help Egypt "lock in" its domestic economic reforms. We urge the officials who will flesh out this strategic partnership to not set their sights too low and to strive not only to eliminate barriers to bilateral trade but also to help Egypt promote investment in economic infrastructure, education, and housing. Enhanced trade and investment ties, while necessary, are not sufficient for meeting this goal.

What should the United States do to advance this agenda and deepen the partnership with Egypt? We set out three tranches with specific actions that could be pursued to expand bilateral trade and investment and to broaden the scope of development assistance.

Enhance market access in goods and services.

The United States should expand the QIZ so that the rules of origin are no less restrictive than the Jordan QIZ, which requires 8 percent Israeli content (the Egypt QIZ currently requires 10.5 percent) and approve additional QIZ sites with a view toward expanding trade and investment opportunities beyond the traditional focus on textiles to sectors where Egypt has a revealed comparative advantage, including prepared foods and stoneware.

In addition, Egypt and the United States should work together to amplify two areas of commercial relations: trade in services and investment. First, the United States and Egypt could negotiate a free trade agreement in services, supplemented by technical cooperation that will help enhance Egypt's competitiveness and its ability to serve as a regional services hub. For example, US technical cooperation could help Egypt increase its maritime- and land-transport infrastructure, which would have additional benefits for the tourism sector. Second, efforts should be made to modernize the bilateral investment treaty. Particular attention should be given to expanding sectoral coverage, improving transparency of investment laws and regulations, and upgrading procedures to resolve disputes. While such improvements do not guarantee the attraction of new US investment in Egypt, they would send a signal to investors and complement the policy reforms underway or under consideration in Egypt.

Cooperation on trade facilitation measures.

In addition to working on interim measures to further liberalize trade and investment, the US-Egypt partnership could involve technical assistance oriented toward helping Egypt implement the World Trade Organization customs agreement and meeting the new port safety standards mandated under new US container security legislation. Similarly, the United States could help Egypt implement its new intellectual property legislation and develop new disciplines to cover emerging technologies.

Development cooperation: Enhance Egypt's trade capacity.

US officials should strongly consider the participation of Egypt for programs funded by the Millennium Challenge Corporation (MCC), a semi-independent government corporation designed to foster good governance and economic reforms. Egypt exceeds most of the requirements and has made great strides in the main criterion: market reform. MCC funds target exactly the general development activities needed in Egypt to improve the business environment and increase the possibility of enhancing prosperity: infrastructure and human capital/education. Programs of the Overseas Private Investment Corporation (OPIC) in support of residential investment could complement these initiatives.

An additional reason to include Egypt in the MCC is its strong performance on the Natural Resource Management Indicator and its pressing needs related to the environment and climate change. The United States and Egypt share interests in securing a global climate change pact that commits developed and developing countries to cooperation in cutting greenhouse gas emissions.

The plan for a strategic partnership offers an opportunity to use commercial diplomacy to support economic progress in Egypt. Revitalizing US-Egypt economic relations can open new opportunities in Egypt through expanded trade and investment, spur innovation and productivity gains, and create precedents for future regional initiatives. As Lawrence and Galal (Anchoring Reform with a US-Egypt Free Trade Agreement, 2004) argued several years ago, deeper bilateral economic ties can help anchor Egyptian reforms; similarly, a more stable and prosperous Egypt can provide a solid foundation for building a broader US economic partnership in the region.

Barbara Kotschwar and Jeffrey J. Schott are coauthors of the book Reengaging Egypt: Options for US-Egypt Economic Relations (2009).

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Barbara Kotschwar Former Research Staff
Jeffrey J. Schott Senior Research Staff

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