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Publication Date: August 25, 2020
DOI: 10.14738/abr.88.8960.
ElGhouty, A. S., Emad, C., & Nagy, M. (2020). Evaluating the Impact of QIZ Protocol on Egypt’s Textile and Clothing Sector. Archives of
Business Research, 8(8). 251-261.
Evaluating the Impact of QIZ Protocol on Egypt’s Textile and
Clothing Sector
Amal Soliman ElGhouty
Dept. of Economics, October University for
Modern Sciences and Arts, Cairo, Egypt
Caroline Emad
Dept. of Economics, October University for
Modern Sciences and Arts, Cairo, Egypt
Merna Nagy
Dept. of Economics, October University for
Modern Sciences and Arts, Cairo, Egypt
ABSTRACT
Since the enforcement of the Qualified Industrial Zones (QIZ) protocol
signed by Egypt in December 2004, the number of QIZ companies have
steadily increased, reaching 1048 companies in 2019. Additionally, the
QIZ textile and clothing exports have increased, as well as its
percentage from Egypt’s total exports to the USA. The paper seeks to
study and explore the conditions and circumstances that induced Egypt
to sign the QIZ agreement. The paper will then review several previous
studies on the impact of the agreement on the Egyptian textile and
clothing sector. We will also review the trend of the number of QIZ
companies. Additionally, in order to assess whether the QIZ protocol
have a positive impact on the textile and apparel sector, we will
evaluate the trends in the Egyptian textile and apparel exports to the
USA and what percentage does these exports constitute from Egypt’s
total exports.
Keywords: QIZ, Exports, Textile sector
INTRODUCTION
Qualified Industrial Zones (QIZ: The US-Israel FTA Enforcement Act describes QIZs as 23 "Israel
and Jordan or Israel and Egypt," locally recognized as the zone where products may be accessed
without duty or excise taxes payable "and the American Trade Representative (US Trade
Representative). Current custom is to issue an intellectual property QIZ status, which allows
individual producers to try their goods for approval (Kardoosh & Director, 2005)) are some
geographical areas within Egypt which are duty-free with the United States. Industries in these
areas are given duty-free entry to the United States, provided that they comply with the Israeli
portion decided in compliance with their predefined rules of origin. The benefits of the QIZ
agreement to Egypt are diverse; the most important facilities of entry are unrestricted, limitless
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ElGhouty, A. S., Emad, C., & Nagy, M. (2020). Evaluating the Impact of QIZ Protocol on Egypt’s Textile and Clothing Sector. Archives of Business
Research, 8(8). 251-261.
quota and a waiver of tariffs and non-obstacles. Certain advantages include low cost and a large
supply of labor.
Enhanced by the additional advantages of trade agreements with other countries, Egypt gives the
companies in those areas endless economic benefits. The positive economic impact of the QIZ so
far was the improvement in competitiveness and productivity in these regions with the keen of
foreign investors and Egyptian companies to seek and enter a business in these regions (QIZ,
2019).
In 1996, the USA developed the concept of Qualified Industrial Zones (QIZ) to strengthen peace in
the Middle East through regional partnerships in Arab countries as well as in Israel. For that reason,
the United States in December 1996 issued Decree 6955, which allowed duty-free entering the
United States under international rules of origin in respect of industrial goods originating in Egypt
and produced in conjunction with Israel (QIZ, 2019).
Jordan became the first nation in the world to join a QIZ Agreement back in 1999 and has
subsequently experienced significant positive economic impacts. In deciding how to enforce a
Policy for Egypt, the government of Egypt took note of this with several other considerations. In
addition to Jordan's results, Egypt also acknowledged the danger to Egypt's foreign
competitiveness in the garment and apparel industry as a consequence of phasing out proportional
quotas for textiles by the World Trade Organization (WTO) (QIZ, 2019).
The government of Egypt concluded the Treaty on the Qualified Industrial Zones with the United
States and Israel on 14 December 2004. This Agreement permits the duty-free entrance into the
United States for goods made by eligible firms in Egypt that fulfill the Israel quality presently
accepted of 10.5 % inside specified geographical locations.
It has been set up to develop economic relations between Israel and its neighbors. Effective
February 2005, the agreement has made duty-free entering the United States possible for the goods
manufactured jointly by Egypt and Israel. Registered goods must have a value-added by QIZ plants
of at least 35%. At least one-third (11.7%) must be contributed by Egypt and 10.5% must be
contributed by Israel. Although the administration of Egypt held discussions in 2017 to lower
Israeli input to 8% and extend the reach of the system to include technology firms, the protocol has
remained unchanged since it started (QIZ, 2019).
The paper is trying to investigate the impact of the QIZ protocol on Egyptian textile and apparel
exports to the United States.
HISTORICAL BACKGROUND
For many years Egypt has been pursuing a Free Trade Agreement (FTA) with the United States to
expand trade. However, due to the shifts in the United States as well as the global trade conditions,
Egypt has failed to reach an Egypt-US FTA. That is why Egypt agreed to the QIZ protocol as the
second-best option to increase the country’s competitiveness in the United States market. There
were three main changes in the trade conditions at that time which induced Egypt to sign the
agreement. First, the phasing out of the Multi-Fiber Agreement (MFA). Trade in the textile and
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clothing sector was controlled by a quota system, for almost 30 years, which restricted the imports
from global competitive producers.
The quota system was completely eliminated on January 2005 and it was expected that this
elimination would have major impact. The first two stages of elimination, which began in 1994, had
no major effect on importers and producers. This was because the quota elimination was applied
mostly to import products that were below their quota limits. Second, China becoming a WTO
member. Before joining the WTO, China could not benefit from the Agreement on Textile and
Clothing (ATC) as well as quotas elimination. Nonetheless, after China joined the WTO in December
2001, it was granted the benefits of the ATC. Consequently, China was expected to become the
leading Textile and Clothing (T&C) exporter since the country has the greatest manufacturing
capacities for cotton, silk, and man-made fibers (MMF). In addition to other factors such as low
wages, high productivity, and advanced technology. Moreover, the T&C exports from China to the
United States and the European Union have increased substantially after its WTO membership,
which threatened other competitors. Third, the increasing number of USA preferential trade
agreements as well as free trade agreements. Egypt’s exports were subjected to the United States
Most Favored Nations (MFN) tariff rates, prior to 2005.
Thus, countries which have signed FTAs or preferential trade agreements with the US had more
favorable positions compared to Egypt. This is because the average tariff rates implemented under
FTAs and unilateral agreements were lower than the average US MFN tariff rates. Therefore, Egypt
sought to have similar trade agreements with the USA, especially after witnessing the great
performance of countries like Mexico and Jordan, which have seen a significant increase in their
exports to the USA market after signing trade agreements (Refaat, 2006).
LITERATURE REVIEW
Refaat (2006), conducted a study in order to evaluate the impact of Egypt’s qualifying industrial
zones (QIZ) agreement on the textile and clothing sector. In addition to examining the changes in
textile and apparel exports to the USA before and after the agreement, the author conducted a
survey as well as interviews with various QIZ companies. This was done in order to assess the
impact of the protocol on the performance of these companies. The results indicate that following
the enforcement of the protocol, the QIZ exports have witnessed an upward trend. In addition, the
number of exporting QIZ firms have increased from 54 to 96 between June 2005 till March 2006.
Most exports are apparel while textile products comprise a small percentage. Between the period
from March 2005 to February 2006, 97% of the exports were apparel and textile products under
the QIZ program. By the beginning of 2006, Egypt’s apparel exports under the QIZ protocol
constituted 90% of total apparel exports to the USA. Regarding the performance of the QIZ
companies, the survey results indicated that 48 companies were already exporters before the QIZ
agreements. Apart from one company, all companies were privately owned. As for the impact of
the protocol on these companies’ activities, 38 companies reported that their exports grew after
the agreement.
Only 7 companies reported that their exports remained constant, while 4 companies reported that
their exports decreased. The average exports increase was 37%. Employment increased in 33
companies with 5,617 workers, mainly Egyptians. With respect to the Israeli inputs, 28 companies
said that Israeli inputs were 20% higher than domestic or foreign substitutes. Additionally, 18
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ElGhouty, A. S., Emad, C., & Nagy, M. (2020). Evaluating the Impact of QIZ Protocol on Egypt’s Textile and Clothing Sector. Archives of Business
Research, 8(8). 251-261.
companies reported that their export prices increased as a result of the higher Israeli input prices.
The paper concluded that major Egyptian exporters were successful in increasing exports and
employment after the agreement. However, exporting was limited to already existing exporting
companies, which is expected since producing competitive goods and exporting them is a lengthy
process. The author stated that in order to benefit from the agreement on the long run, the
competitiveness of domestic companies should be improved, and the government needs to
renegotiate Israeli input share in local content requirement (Refaat, 2006).
Another study conducted by Nugent & Abdel-Latif (2010), sought to examine trade creation and
trade diversion between countries involved in the QIZ agreement. The paper looked into other
effects of the protocol other than trade such as employment. The authors explained that since Egypt
grow cotton locally, it has more raw materials and a well-established textile sector which is less
dependent on imports compared to Jordan. Nonetheless, the integration of Israeli inputs is
mandatory according to the QIZ protocol. Since Egypt’s imports from Israel are mainly
intermediary goods like fabrics, and accessories, which are cheaper in China, this creates trade
diversion. Thus, trade creation benefits of the protocol need to be balanced with this cost of trade
diversion. But since investors are engaging in these QIZ Activities, this means that they consider
the benefits of trade creation are greater than the costs of trade diversion.
The study also found that the growth rates of Egyptian exports because of the protocol witnessed
the highest increase of 42% in 2006/2007. A decrease in the following year was recorded because
exports have shifted to the European Union market. Another crucial observation is that in the first
quarter of 2009, exports surpassed the previous year by 12.4% despite of the global recession and
the financial crisis. In contrast, other major exporters witnessed a poor performance and a greater
decrease in their exports. This increase in Egypt’s exports came at a time when there was a
decrease by 16% in US apparel imports which indicated that Egypt has gained status in the US
market. Additionally, the authors found that increasing garment exports to the US market has
created more jobs. The QIZ agreement also had a positive transfer of technology and know-how to
Egyptian producers due to the sophistication of US consumers.
QIZ researches are rare, and this is so in Egypt in particular. Two economic surveys in Jordan and
Egypt concentrate on QIZs ' direct production and export outcomes, in order to determine short- and medium-term economic impacts. All studies argue that QIZs have not provided economic
change though considering the agreement's political essence (Strikou, 2018).
These are part of US efforts to encourage international markets on the grounds of the premise that
global investment would strengthen socioeconomic classes or new business, thereby contributing
to the democratization and normalization of ties with Israel. As predicted, authors consider quite
the contrary impact because business oriented people misuse their former social and political
structures and they do not turn them into the international exchange (Strikou, 2018).
QIZ became a vital part of the former Egyptian President Hosni Mubarak's attempts to ensure the
future of his government through the notion of national interest. He concluded that Mubarak used
the strategic significance of Egypt through the project to alleviate US pressure on human rights and
democracy, and to encourage economic liberalization in Egypt (Strikou, 2018).
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EFFECTS OF THE GLOBAL CRISIS ON THE EGYPTIAN TEXTILES AND CLOTHING SECTOR
The textiles and clothing (TC) division did not escape the slowdown. Nevertheless, it has
deteriorated as a consequence of a growing economic climate since 2001. The recession had badly
impacted shipments, which were saved by the Qualified Industrial Zones (QIZ) and Euro- Cooperation Agreements. The liberalization led domestic revenues to decrease, and non-QIZ
exporters who were unguarded by the deal were struggling against non-exports into the domestic
sector. By compensating for the export growth, if domestic revenues begin to decline, the sector
would continue to decrease. Short-term stabilization programs should be called to provide banks
with liquidity and social security for employees in troubled businesses in order to deal with this
crisis. Nevertheless, the industry had underlying systemic flaws that contributed to rising costs.
This has accelerated the loss of an already challenging sector, so it required a longer-term approach
beyond the recession, including the transition to the supply chain of the textile business, reciprocal
export opportunities, improving expertise and full structural change (El-Haddad, 2012).
THEORETICAL FRAMEWORK
Throughout history various theories have tried to explain how and why countries should trade
with each other. Adam Smith; for instance, proposed the theory of absolute advantage. He believed
that for countries to gain from trade, each country should specialize in the production of goods that
have absolute advantage; goods that the country can produce with lower costs. Nonetheless, this
theory failed to explain why countries who lack an absolute advantage still engage in international
trade. David Ricardo attempted to bridge this gap by stating that countries should trade based on
comparative advantage rather than absolute advantage. He explained that a country should
produce and export commodities in which it has the higher comparative advantage and import
commodities in which it has the lower comparative advantage. Later, Eli Heckscher and Bertil Ohlin
developed the Heckscher-Ohlin model from David Ricardo’s theory.
They stated that trade is based on differences in factor endowments. A country will produce and
export goods which requires the intensive use of the country’s abundant factor and import goods
that require the intensive use of the countries scare factor. We can conclude that the classical trade
theory focused only on trade between different countries. Consequently, the new trade theories
focused on explaining intra-industry trade and trade between nations that have similar or equal
factor endowments. The new trade theories draw more attention on economies of scale, product
differentiation, and imperfect competition (Binh, Duong, & Cuong, 2011).
The Gravity Model
Bilateral trade flows have been widely explained by the gravity model. The model is based on
Newton’s universal law of gravitation. The application of the gravity model in international trade
was initially done by the Dutch economist Timbergen in 1962. According to this model, the trade
flow between two countries can be determined by their gross domestic product along with the
geographical distance between them. The larger the distance between the two countries the
smaller the trade flow while the larger the gross domestic product the greater the trade flow (Binh,
Duong, & Cuong, 2011).
The gravity model is usually written as follows:
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ElGhouty, A. S., Emad, C., & Nagy, M. (2020). Evaluating the Impact of QIZ Protocol on Egypt’s Textile and Clothing Sector. Archives of Business
Research, 8(8). 251-261.
ú¿∆ = l
k¿k∆
«¿∆
»
Where: ú¿∆ represents the trade flow from country i to country j
k¿ and k∆ represent the gross domestic product of country i and country j
«¿∆ represents the distance between country i and country j
A represents a constant term
The gravity model has been used to estimate flow after trade agreements. Other important
variables have been added to the standard model like income difference, infrastructure, and
exchange rates. These were found to be vital determinants of trade flow between countries (Binh,
Duong & Cuong, 2011).
Economic Integration
The removal of discriminator measures at national borders, elimination of trade barriers and the
joining of separate economies into one great economic region, is referred to as economic
integration. Economic integration can have different forms and stages; Free Trade Area, Custom
Union, Common Market, and Economic Union. The implications of economic integrations have been
widely discussed. One of the prominent theories regarding the advantages and disadvantages of
economic integration is Viner’s Customs Unions Theory. Viner has divided the possible impacts of
economic integration into two effects; trade creation and trade diversion. If two nations or more
form a trade agreement and trade moves from a member country producing at high cost to a
member country producing at low cost, this case is referred to as trade creation. On the other hand,
if imports move from a non-member country producing at a lower cost to a member country
producing at a higher cost, it is referred to as trade diversion.
This can occur as a result of common tariff in the union which protects the high cost producers
inside the union. Viner stressed that gain from trade will be high only if trade creation was greater
than trade diversion (Hosny, 2013).
RESEARCH METHODOLOGY AND DATA DESCRIPTION:
This research paper would mainly use secondary data. Both qualitative and quantitative secondary
data would be used. In order to evaluate the impact of the QIZ agreement, data will include
numbers of QIZ companies along with their distribution by locations, and the values of QIZ exports
of textile and apparel to the US market. Data will be compiled from several resources including;
QIZ Egypt official website, and World Integrated Trade Solution mainly from 2005 till 2019.
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STATISTICAL DESCRIPTION
Number of QIZ companies
Figure 1: Number of QIZ Companies
Source: QIZ (2019).
Figure 1 shows the number of QIZ companies from 2005 to 2019. The graph shows that there is an
upward trend and the number of companies is constantly increasing, which can indicate that the
textile sector is highly profitable. In addition, this increase coincides with Nugent & Abdel-Latif
(2010) suggestion that investors have greater trade creation benefits compared to trade diversion
costs, thus they continue to engage in QIZ activities.
Table (1): QIZ Companies Distribution by Location (2019)
Location Number of Companies
Alexandria 263
10th of Ramadan 177
Shoubra El Kheima 96
Port Said 66
Nasr City 51
Other Cairo Area 52
Gharbeyya Govr. 42
Ismailia 35
South Giza 21
15th May 13
Kalioub 20
Gesr Suez 12
Giza 23
Badr City 7
Damietta Govr. 3
Beni Suef Govr. 18
Minya Govr. 17
Qualifying Factory 3
El Obour 32
471
655 667 693 724 757 774 801
847
883 901 918 922 949
1048
0
200
400
600
800
1000
1200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Number of Companies
Year
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ElGhouty, A. S., Emad, C., & Nagy, M. (2020). Evaluating the Impact of QIZ Protocol on Egypt’s Textile and Clothing Sector. Archives of Business
Research, 8(8). 251-261.
6th of October 46
Suez 9
Monofeya Govr. 31
Dakahleyya Govr. 9
EL Sharkia Govr 2
Total 1048
Source: QIZ (2019).
These specific areas are the locations of QIZ companies. The geographical industrial places in Egypt
were determined by the Egyptian government, with the approval of the American government
(Ministry of Foreign Trade & Industry, 2005).
Table (2): QIZ Companies by Sector (2019)
Sector Number of Companies
Textile & textile articles 843
Processed Agricultural Products 78
Chemical products 29
Base metals 16
Leather products 15
Plastic products 11
Articles of stone 10
Furniture 9
Footware & headgear 8
Machinery Equipment 6
Electrical Equipment 6
Engineering Industries 4
Printing Industries 3
Marble & Granite 3
Glass Manufacturing 2
Animal products 2
Drying, and packing of medicinal plants 1
Medical Equipment 1
Stationery 1
Total 1048
Source: QIZ (2019).
In addition to the textile and clothing sectors the QIZ Protocol benefits several Egyptian industries.
Because of its relatively high tariffs, the food industry represents a significant opportunity for
Egyptian QIZ exports. For example, the US custom rate is 10-30 percent of prepared vegetables as
well as of dried onions and garlic, which are eliminated under QIZ. Leather products, athletic
footwear and glassware also have similar opportunities (QIZ, 2019).
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technological products, since this would further diversify its exports so as not to depend on only
one major sector.
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