Striking a balance: Looking further afield for trade partners

With its geographical location making it an ideal land bridge between the Mediterranean and the Red Sea, and one of the major channels of commerce between the Levant, Africa and Arabia, Egypt’s status as a centre of trade was already well established by the era of the Old Kingdom in the third millennium BC.

The opening of the Suez Canal in 1869 made the Egyptian route the obvious choice for trade between Europe and Asia and elevated the nation’s status as a commercial centre. Today, the nation remains one of the world’s most strategically important transport links, and one which Egypt is assiduously using as a manufacturing and trading base for investors from some of the world’s fastest-growing economies (see analysis).

THE EU MARKET: Contemporary Egypt has trading partners across the world, the largest of which is the EU, which accounted for 42.4% of the total exports in 2010/11, according to the Ministry of Finance (MoF). The trading relationship between the two was formalised in 2004 with the EU-Egypt Association Agreement, which grants Egypt’s manufactured goods tariff-free access to the EU market, while tariff reductions on EU goods to Egypt are still being gradually implemented on a 12-year schedule. By 2011, about half of Europe’s manufactured exports to Egypt entered the country on a tariff-free basis.

The agreement provides Egypt with room to manoeuvre in reaction to changing economic circumstances, allowing for exceptional measures for specific periods during the transitional stage, “if and when certain domestic industries face a threat as a result of liberalisation of imports of similar goods from the EU”. It incorporates World Trade Organisation and General Agreement on Tariffs and Trade regulations pertaining to anti-dumping, subsidy and safeguard measures, and allows each party to enjoy so-called “most favoured nation” treatment from the other in trading services.

TRADE WITH THE US: A less comprehensive agreement exists between Egypt and the US, which was Egypt’s fourth-largest export market 2010/11, accounting for 13.3% of the total. The Egypt-US Trade and Investment Framework Agreement (TIFA) was signed in 1999, and aims to expand the flow of trade and investment between the two parties. The agreement established a US-Egypt Council on Trade and Investment, known as the TIFA Council, which is composed of representatives of both parties and has met four times in the intervening years to address specific trade matters and work towards the removal of impediments to trade and investment flows. The agreement is seen as a first step towards establishing a free trade agreement (FTA) between the two countries. However, despite hopes in the mid-2000s that a TIFA meeting in Cairo would result in the initiation of talks to that end, an FTA agreement between Egypt and the US has proved elusive. For now, at least, the formal trade arrangement between the two nations is limited to one of consultation and incremental moves towards increased cooperation.

LOOKING SOUTH & EAST: While European trade and the pursuit of a more favourable trading relationship with the US remain central to Egypt’s trade policy, the rapidly developing economies to the south and east of the country have become of increasing interest to the Ministry of Trade and Industry in recent years.

The slow recovery from the global economic crisis of Western economies has lent more credence to the view that Egypt’s most promising trade opportunities lie beyond its traditional markets, and for the past three years the public discourse which surrounds Egypt’s economic policy has contained a notable emphasis on emerging market trade. While a perceived shift of trading activity away from the West is often overstated – exports to Europe are still more than double the size of those to Arab countries, the second-largest export bloc – the reduced demand from sluggish Western economies has highlighted the usefulness of a well-balanced trading portfolio. Indeed, increasing the country’s trading activity with the dynamic economies of the Gulf, Asia and Africa is thus of heightened importance given the post-credit-crunch economic environment.

DIVERSIFICATION: Egypt’s efforts to diversify its trading activity start from a firm base. A framework for regional trade is already well established in the form of the Greater Arab Free Trade Area (GAFTA), which Egypt signed up to in 1997. At that time it consisted of 14 countries which spanned the Middle East and North Africa (MENA) region, from Morocco in the west to Oman in the east. The agreement, which Algeria has since joined, introduced a gradual lifting of Customs duties between the member states, which saw their total elimination by 2005. Also removed from the statue books were the sometimes byzantine layers of administrative, monetary, financial and technical non-tariff barriers which had stifled trade expansion in the region for decades. Since the signing of the GAFTA treaty, a slightly more comprehensive agreement has been reached by the Arab Mediterranean countries of Morocco, Tunisia, Egypt and Jordan. The Agadir Agreement, inked in 2004, established a free trade area which complements the GAFTA provisions, but also contains a framework aimed at boosting economic cooperation between the signatories centred on the idea of increasing industrial integration in order to produce goods for export to the EU, as well as domestic markets.

REGIONAL TRADE LINKS: The GAFTA and Agadir initiatives represent a useful foundation upon which Egypt can enhance its trade links with its Arab neighbours, a process that the most recent MoF data suggests is already well under way. The value of exports to Arab countries stood at $2.73bn in the 2007/08 financial year, representing 12.4% of the total. By 2010/11 this figure had risen to $4.8bn, or 18% of the total. During this period, Egypt’s partners in the GAFTA and Agadir agreements rose from being its fourth-largest export destination to its second.

Egypt has also worked to enhance its trade links with non-Arab states in the region. In 2005 it signed an FTA with Turkey, the provisions of which are modelled on the Customs-dismantling process established by the EU-Egypt Association Agreement. Egyptian exports to Turkey rose nearly four-fold from $267.2m in 2005 to reach $926.4m in 2010, according to the Turkish Ministry of Foreign Affairs, and during a 2010 meeting between Turkish industrialists and their Egyptian counterparts a target of $10bn for the next phase of growth was set. Relations between the two countries remain strong, and a September 2011 visit to Cairo by Turkish Prime Minister Recep Tayyip Erdoğan was used, in part, to reaffirm Turkey’s commitment to building on the continuing growth in trade.

EYE ON AFRICA: Egypt’s status as an African country has also been of growing commercial importance in recent years. In 1998 it joined the Common Market for Eastern and Southern Africa (COMESA), which aims to promote a more balanced production and marketing structure among its 20 members, as well as encourage joint development across all fields of economic activity. Nine of the COMESA signatories, including Egypt, have brought about a 100% reduction of tariffs on imports from member states, while the remainder are at various stages of implementation.

Trade relations with South Africa, not yet a COMESA participant, came to the fore in 2010 with a Cairo meeting between Hosni Mubarak and South African President Jacob Zuma, who brought with him a retinue of ministers and businessmen. Both parties agreed upon the need for stronger regional economic links, with an Egyptian presidential spokesperson suggesting to the local press that future cooperation might take the form of collaboration between COMESA and the South African Development Community, a regional bloc of which South Africa is a member.

While Egypt’s exports to non-Arab African nations remain relatively small at present – just 2% of the total in 2010/11 – the robust GDP growth of sub-Saharan states makes its continental neighbours a part of its effort to diversify its export activity.

ASIA: Looking ahead, there is an obvious lacuna in Egypt’s list of trade agreements: its trading relationships with Asia’s rapidly expanding economies remain undeveloped, despite the interest with which the Chinese have viewed Egypt since the mid-1990s, culminating in a significant investment in the North West Suez Economic Zone (see analysis). An agreement to implement a quality management system for manufacturing products and to establish an Industrial Technology Centre signed with Korea in 2002 was heralded, along with a similar deal with Japan, as a first step towards greater cooperation, but has yet to be expanded upon.

Technical cooperation has also been established with China in fields as diverse as mushroom cultivation and nanotechnology. Several bilateral agreements signed with India in 2008 and aimed at boosting cooperation in areas such as hydrocarbons, ICT and agriculture represented a step forward in Egypt’s Asian trade policy and may act as another useful starting point from which to expand activity. Exports to Asian nations reached $4bn in 2010/11, representing 14.9% of the total and establishing the region as Egypt’s third-biggest export market. As Egypt moves towards a more balanced trading base, Asian markets will likely grow in importance.

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The Report: Egypt 2012

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