TRADE-EGYPT: U.S. Denies Free Trade to Egypt

By Cam McGrath Reprint | | Print |

Cam McGrath

CAIRO, Jun 19 2002 (IPS) - The U.S. has ruled out any immediate introduction of a free trade agreement with Egypt.

The Egyptian Gazette run by the government had reported that the U.S. would offer Egypt a free trade agreement during the visit of U.S. Trade Representative Robert Zoellick last week. But the top trade official clearly had other plans.

“Trade does not exist in a vacuum,” he said. “It has to be connected to the overall effort of the reform process.” The U.S. wants Egypt to make more headway in economic reforms before opening talks on free trade.

“It is hard to talk about free trade unless the customs system is effective and working,” Zoellick said. “It is hard to have a trading system if you have got, sometimes, complications with your currency regime. These are not preconditions, they are basic elements.”

The United States is Egypt’s largest single trading partner, with bilateral trade amounting to 4.6 billion dollars in 2001. Of this, Egyptian exports add up to less than one billion dollars. Its annual trade deficit with the U.S. stands at more than three per cent of Egypt’s Gross Domestic Product (GDP).

Egypt has been asking for a free trade agreement (FTA) since the mid-nineties. Egypt believes such an agreement would boost its economy, particularly the textile industry restricted by export limits. Egyptians say a free trade agreement will reduce its trade deficit and even become a catalyst for economic restructuring.

“An FTA would be the impetus for further economic reform, which is what the U.S. wants,” says Ahmed Galal, executive director of the Egyptian Centre for Economic Studies (ECES).

“An FTA would make a smooth transition from aid to trade,” he says, referring to U.S. plans to cut economic aid to Egypt by five per cent annually over the coming seven years. U.S. aid to Egypt this year is worth about 655 million dollars.

The proposed FTA could take a number of forms, but economists broadly see three models. It could be ‘shallow’, limited to trade liberalisation. It could be ‘deep’, eliminating trade barriers and synchronising domestic economic policies. Or, it could be a mix of the two, which is what most Egyptians seem to want.

Galal says an FTA will benefit both. He cites an independent study in 1998 by the London-based Centre for Economic Policy Research that suggested that free trade with the U.S. would increase Egypt’s GDP by 1.8 per cent, and attract direct foreign investment. The study estimated that the U.S. stands to lose 1.7 billion dollars a year through not agreeing an FTA.

“Without free trade both parties will lose,” says Galal. “For the U.S., the economic loss would be relatively small. Its main gain would be political stability in the region and a steady supply of oil.”

The U.S. is undoubtedly aware of opportunities, but insists that an FTA is not something to be entered into lightly.

“When we do free trade agreements they are very comprehensive,” Zoellick told reporters. “They cover agriculture, they cover services, they cover manufactured goods, and they cover intellectual property. So, the benefit of such an agreement is that they can be very useful in the reform process – as Egypt is exploring.”

The U.S. currently has free trade agreements with Canada, Mexico, Israel and Jordan. It has opened negotiations on free trade agreements with Chile and Singapore.

The U.S. has praised Egypt’s economic reforms but insists that it must further reduce customs tariffs, privatise state firms, and implement tough laws on money laundering and intellectual property rights.

Any agreement has been further complicated by an informal boycott of U.S. goods by Egyptian consumers who are angry over what is seen as a U.S. bias towards Israel in the Palestinian conflict.

“It is disturbing,” said Zoellick. “It creates an environment that makes it harder for U.S. businesses to operate, but frankly, the greatest danger…is for Egyptians, because these firms employ Egyptians and give them good jobs and so that is the greatest harm.”

The boycott may have a psychological effect, but has had little impact on U.S. commodities such as agricultural equipment and products which account for more than a quarter of U.S. exports to Egypt.

“Boycotting in Egypt is just a slogan without deep implications on products and companies,” says economist Magdy Sobhy. “The fact is that the bulk of U.S. trade is in commodities you cannot boycott, like wheat. The U.S. knows this.”