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Israel Buttons on Egypt Clothes Double Garment Exports to U.S.

Alaa Arafa, who runs Egypt’s biggest clothing exporter, says any of his countrymen concerned about trading with Israel should see how doing so has boosted exports to the U.S.

“Business is business,” the chief executive officer of Al Arafa Investments and Consulting said in an interview in Cairo. “This is creating jobs for women and for young people.”

Sales of Egyptian garments to the American market have doubled to $800 million in the past five years, thanks to a 2005 U.S.-brokered trade accord with Israel, and may increase 25 percent next year alone, Arafa said.

Egypt is now in talks with the U.S. to widen the trade agreement, setting up more so-called Qualifying Industrial Zones in the Arab world’s most populous country and third-largest economy after Saudi Arabia and the United Arab Emirates. The accord allows companies to export goods to the U.S. duty-free if they have an Israeli component, such as buttons and zippers.

The improvement in trade ties comes after decades of uneasy relations between the two countries, which fought each other in four regional wars between 1948 and 1973. Egypt in 1979 became the first Arab state to make peace with Israel, a decision that remains controversial. A government poll in 2006 found that 92 percent of Egyptians consider Israel an enemy.

Photographer: Khaled Desouki/AFP/Getty Images

Egyptian Prime Minister Ahmed Nazif said "Nobody can deny the positive impact of the QIZ." Close

Egyptian Prime Minister Ahmed Nazif said "Nobody can deny the positive impact of the QIZ."

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Photographer: Khaled Desouki/AFP/Getty Images

Egyptian Prime Minister Ahmed Nazif said "Nobody can deny the positive impact of the QIZ."

The Muslim Brotherhood, an Islamist opposition group, is demanding that the government break off ties with the Jewish state. Opposition newspapers in September said gas exports to Israel since 2005 left power stations undersupplied and led to nationwide electricity cuts. The Oil Ministry denied the claims.

“Gas Exports to the Zionist Entity! When Will This Shame End?” read a headline on the Brotherhood’s website.

Expansion Plans

The Egyptian government hasn’t been deterred from doing business with its neighbor. The government plans to expand the zone agreement to include all the provinces in Upper Egypt, a poor region south of Cairo that is a stronghold of the Brotherhood.

Prime Minister Ahmed Nazif said in October that extending the trade zones to the south will help labor-intensive industries. “Nobody can deny the positive impact,” he told reporters in Cairo.

More than 700 Egyptian companies have based themselves in the zones so far. Four areas in northern Egypt were initially designated for the zones, known by their acronym of QIZ, and the deal was extended last year to the provinces of Minya and Beni Suef in the south.

“The QIZ agreement has significantly enlarged Israel’s bilateral exports to Egypt,” said Amira Oren, director of the Egypt department at the Israeli Ministry of Foreign Affairs. Israeli exports to the Arab country rose 50 percent to $90 million in the year after the agreement was signed, she said.

‘Closer Relationship’

The accord “has definitely brought a closer relationship and more understanding among the Israelis and Egyptians involved,” Oren said.

In return for signing the peace treaty, Egypt received more than $28 billion in direct economic assistance from the U.S. through 2006, according to the U.S. Agency for International Development. Egypt is also expected to export some $4 billion of gas to Israel over the next 15 years, Oren said.

Having diplomatic ties with Israel has helped Egypt play a leading role in the region even as Iran and Saudi Arabia increase their influence. Egyptian President Hosni Mubarak, 82, has played host in the past decade to several rounds of Israeli- Palestinian peace talks, the last of which took place in September in the Red Sea resort of Sharm El-Sheikh.

‘Warm’ Ties

Leaders of both countries have found common opponents in militant groups such as Hamas, the Islamist group that controls the Gaza Strip, said Hala Moustafa, a journalist and member of the ruling party’s policy committee. Hamas is considered a terrorist group by Israel, the U.S. and the European Union.

While Moustafa described ties as “very warm,” Israel remains a target for some Egyptians.

In 2008, Culture Minister Faruq Hosni said in parliament that he would burn any Israeli book found in Egypt, a remark for which he later apologized. Writers such as Moustafa and playwright Ali Salem, who promote normalization with Israel, find their patriotism questioned in the media.

“There is a dichotomy between the security cooperation” taking place “and other aspects of the relationship,” such as cultural and social cooperation, that are less advanced, Oren said.

That tension hasn’t stopped Egyptian companies from using the zones. El Nasr Clothes & Textiles, a knitwear company that produces clothes for clients such as London-based Marks & Spencer Group Plc, plans to use the new industrial zones to export to the U.S. market, in the hope this will help it swing back to profitability after enduring a loss last year.

Making Use

“Of course we will make use of the QIZ,” Amr El Sharnoubi, chairman and managing director of the company, based in the Mediterranean city of Alexandria, said in an interview.

Arafa, who declined to give sales figures for his company, says it isn’t just textiles and clothing companies that can benefit from the zones. He suggests exporters focus on goods that incur high tariffs when exported to the U.S., such as dried onion. That product is usually subject to a 36-percent duty absent an Israeli component, such as packaging, he said.

“If you make it here and ship it to the United States you will make a fortune,” he said.

To contact the reporter on this story: Alaa Shahine in Cairo at asalha@bloomberg.net.

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net.

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