- The Washington Times - Tuesday, December 14, 2004

TEL AVIV — Egypt and Israel will sign a joint free-trade agreement with the United States in Cairo today, a sign that a recent thaw in the relations between the Middle East neighbors is helping spur broader economic cooperation.

The fledgling business contacts between Israel and its Arab neighbors in the years after Oslo peace accords shriveled with the outbreak of the Palestinian uprising in September 2000.

But that should begin to change with the new accord, the subject of about 18 months of negotiations, which will give Egyptian exporters who use Israeli investment and materials an exemption from U.S. Customs and trade quotas.

The agreement was finalized in recent months as the two countries stepped up talks on a Palestinian settlement and a plan to evacuate Israeli forces from the Gaza Strip.

Although the economic impact on both the Egyptian and Israeli economies is likely to be imperceptible, the agreement is expected to bring important political benefits to both sides.

U.S. Trade Representative Robert B. Zoellick, who is in Cairo for the signing ceremony, called the accord “the most important economic agreement between Egypt and Israel in two decades.”

“It is a concrete, practical result of President Bush’s plan to promote closer U.S. trade ties with the Middle East so as to strengthen development, openness and peaceful economic links between Israel and its neighbors,” Mr. Zoellick said.

The agreement provides for the establishment of three trade zones in Egypt, where goods made with a minimum level of Israeli input will be given preferred entry into the United States.

The new zones “will create a daily opportunity to build business and personal relationships among Egyptians, Israelis and Americans,” Mr. Zoellick said.

Hagit Ben-Yaakov, an economics officer at the Israeli Foreign Ministry who specializes in the Middle East, also described the deal as “an important agreement.”

“Relations are being built up like a house. This is another step,” he said. “When economic relations are good, it immediately affects the political relations.”

The agreement is based on U.S. legislation dating from 1996, which provides for “qualified industrial zones” (QIZ) in which Israeli companies can invest or provide materials toward goods made by Arab exporters. Those goods then receive preferential treatment when entering the United States.

Egypt, which is struggling to pull itself out of an economic recession, hopes that establishing the QIZs will boost exports while drawing foreign investment from businesses that want a leg up in the American market.

“We are talking about a real agreement. It’s not just rhetoric for improving the relationship,” said Hala Mustafa, a political scientist at Cairo’s Al Ahram Center for Political and Strategic Studies. “This is both significant and symbolic. It will create a groundwork for coexistence, integration and peace.”

Awash in the euphoria over the Israeli-Palestinian peace agreements in the 1990s, Israelis and Arabs held a series of annual regional business conferences that discussed the possibility of regional economic interdependence. Israeli Nobel Peace Prize laureate Shimon Peres called it a “New Middle East.”

The flare-up in Israeli-Palestinian fighting four years ago brought a retreat in economic ties. Arab countries from North Africa and the Gulf closed up economic missions in Tel Aviv, and Egypt recalled its ambassador. Joint projects were shelved.

The QIZ initiative is one of a few that survived the downturn in relations.

Even as violence between Israelis and Palestinians ebbed and flowed, QIZs in Jordan prospered. Started in the Irbid Qualified Industrial Zone in 1998, the QIZ program has been expanded to 10 industrial parks and is expected to include $1 billion of exports to the United States this year.

The free-trade status has been a boon to Jordanian’s infant textile industry, with QIZ sales to the United States accounting for about one-third of Jordan’s exports. Experts say the economic link with Israel has served as a bulwark in Jordanian-Israeli relations amid the strain of the Palestinian uprising.

“The peace treaty gave birth to the economic agreements. The economic agreements strengthen the peace,” said Yitzhak Gal, a fellow at Tel Aviv University’s Dayan Center for Middle East and North African Studies.

“The intifada interferes with the economic agreements. But the economic agreements are strong enough that despite the intifada, there won’t be an explosion.”

With a much more mature textile industry than Jordan’s, exports from the Egyptian QIZs are expected to grow rapidly. The first industrial zones to enjoy the special trade status will be located in the Cairo metropolitan area, Port Said and Alexandria.

Since the two countries signed a peace agreement in 1979, bilateral ties have been chilly. Even so, some economic links have developed. Two major Israeli textile manufacturers, Delta Galil Industries Ltd. and Tefron Ltd., set up factories in Egypt, while Egyptian resorts in the Sinai rely on Israeli tourists.

During the years of the Palestinian uprising, Israeli exports to Egypt dropped from $59 million in 2000 to $26.4 million in 2003 — a small fraction of Israel’s $31.8 billion in exports last year.

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