Q - What is a Qualifying Industrial Zone (QIZ)?

A - Qualifying Industrial Zones (QIZ) are designated geographic areas, within Egypt, that enjoy a duty free status with the United States. Companies located within such zones are granted duty free access to the US markets, provided that they satisfy the agreed upon Israeli component of 10.5%, as per the pre-defined rules of origin. A lot of industries greatly benefit from the QIZ, however, the industry that benefits the most is the textile and apparel industry which is the oldest and largest Egyptian industry, estimated at approximately EGP 15 billion in assets. The industry employs approximately 1 million workers, and its exports constitute almost 30% of the total manufactured exports.

Q -What are the most important articles of the Protocol?

A - The Protocol consists of six articles: Article 1: Defines the geographical boundaries of the Qualifying Industrial Zones. Zones. Article 2: Defines the establishment and tasks of the joint committee which oversees the implementation of the Protocol. with overseeing the implementation of the protocol. Article 3: Defines the rules of origin and how they are calculated. Article 4: Pertains to the procedures the US tariff authority undertakes to validate the right of Egyptian products to access US markets free of tariffs.free. Article 5:Sets regulations for any future amendments to the Protocol. Article 6: Defines the timing of the Protocol implementation.

Q -Does the Protocol have a defined time frame?

A -As indicated in the Protocol, this agreement is not timed and has no end date.

Q -What is the nature of the preferential treatment granted by the Protocol?

A - This preferential treatment guarantees tariff- and non-tariff barrier-free access to the US market for all products manufactured in these zones. This access is ensured providing that these products comply with rule of origin requirements and consist of the agreed upon 10.5% of Israeli inputs. Conversely, Egypt is not required to grant US products preferential access to the Egyptian market

Q - What is meant by rules of origin?

A - Rules of Origin are the fundamental basis and criteria that determine the origin (nationality) of a tradable commodity; in other words, the country in which it was manufactured. In recent decades it has become essential to determine the nationality of a commodity due to eligibility for preferential treatment under the plethora of trade arrangements and economic blocks granting reductions or eliminations of tariffs between members, based on a commodity’s nationality. Determining a commodity's nationality requires that the commodity undergo a substantial transformation in that country. This can be measured via three criteria: change in tariff heading, percentage of value added produced locally, and/or the number of technical procedures that performed locally. These three criteria are not necessarily mutually exclusive. More than one criterion can be used to determine the origin of a commodity in accordance with the terms agreed upon between the member countries of the different economic blocks.

Q -How are rules of origin determined in the QIZ Protocol?

A - The rules of origin in the QIZ Protocol are very simple. They state that 35% of the product's value must be manufactured in Egypt, of which 10.5% must be of Israeli origin (refer to Article II/D/1.a of the Protocol text) satisfy the agreed upon ratio.

Q - How has the QIZ Protocol affected Egyptian exports to the US?

A - Egyptian exports of textiles and ready-made garments to the US have risen exponentially since 2004, according to the trade figures of the United States International Trade Commission (USITC). Specifically, Egyptian exports in this sector rose from $579 million in 2004 to $626 million in 2005 and $819 million in 2006, reflecting growth rates of 8% as of April 2005, and 31% as of May 2006.

Q - Who are the beneficiaries of the QIZ Protocol?

A - The QIZ Protocol has many beneficiaries. These beneficiaries include both Egyptian and foreign companies operating within the QIZ area and enjoying tariff-free access to US markets. This access has prompted many foreign manufacturers to invest in production operations in Egypt, thereby improving the Egyptian economy as a whole. As these companies reap the benefits of growth in their exports, their expanded operations have allowed them to hire additional employees with the added benefit to the economy of reducing unemployment. Therefore, it can be demonstrated that the QIZ Protocol benefits all layers of Egyptian society.

ََQ - Is the implementation of this Protocol mandatory on all factories in the QIZ?

A - Companies operating within the boundaries are free to export within or outside the QIZ framework. Benefiting from this protocol is optional and left to the discretion of the factories falling within QIZ boundaries. It's worth mentioning that for items that do not bear high US customs, some companies may choose to export to the US outside the QIZ Protocol to avoid having to change their suppliers in order to fulfill the 10.5% required Israeli input.

Q - What are the commitments from the US side?

A - The US has committed to allowing free market access to Egyptian products. This access entails elimination of tariff and non-tariff barriers for all products manufactured by QIZ qualifying companies which satisfy the agreed upon rules of origin requirements. This commitment is not time-limited.

Q - What are the commitments from the Egyptian side?

A - There are no commitments from the Egyptian side. Egypt is neither required to amend any existing trade agreements, nor to amend national boundaries.

Q - What is standing of firms located outside the QIZ?

A - The possibility remains for companies operating outside of QIZ locations to become qualified. More geographic locations may be added upon the joint agreement of all parties to the Protocol.

Q -Does the Protocol of the QIZ contradict the WTO agreement?

A - The QIZ does not contradict the WTO agreement. Preferential arrangements are allowed under the WTO in accordance with item 24 in the 1994 GATT - Uruguay Agreement.

Q - Why hasn’t Egypt executed a QIZ with the European Union (EU), similar to Jordan’s, since the EU absorbs 35% of Egypt’s textiles exports?

A - QIZ agreement with the European Union is not necessary because the Egyptian textile and clothing exports already have free access to European markets with neither tariff nor non-tariff barriers as of January 1, 2004 through the Egypt-EU Partnership Agreement.

Q - Is it possible to implement the generalized system of preferences (GSP) on Egyptian textile and clothing exports?

A - While Egypt is eligible to implement the GSP, it is not possible for Egyptian textile and clothing exports to benefit from this system. Implementation of this system requires two main conditions. First, the country must be eligible to benefit from this system. Second, the commodities must be eligible within the GSP framework. While Egypt is a GSP-eligible country, most of the textile and clothing products manufactured within Egypt are not included within the list of eligible goods.

Q - Is it possible that compliance with the rules of origin in the Protocol might pose a threat to domestic inputs?

A - It is not expected that compliance with rules of origin will pose a threat to domestic inputs. Historically, imported foreign inputs have reached 53% in the manufacturing industries and 52% in the clothing industry, according to data from the Ministry of Planning for 1998/1999. Further, Egyptian producers generally choose inputs that increase their products’ competitiveness, whether based on higher quality or lower cost.

Q - What are Egypt’s main trade agreements?

A - • QIZ (Qualifying Industrial Zones) • COMESA (Common Market of Eastern and Southern Africa) • Egypt-European Union Partnership Agreement • Great Arab Free Trade Area (GAFTA) For further information, please visit the official website of the Ministry of Trade & Industry: www.mti.gov.eg

Q - What are the most imported items from Israel under the QIZ Protocol?

A - Egyptian companies working under the QIZ Protocol primarily import fabrics followed by chemicals, zippers, threads, packaging material and other ready-made garments' accessories.

Q -Is it true that Israel suppliers charge higher prices than the market?

A - Prices of Israeli products vary depending on the product. According to figures released by the Egyptian Readymade Garments Export Council, whose members are the top ready-made garment manufacturers; these prices range from more expensive to sometimes cheaper than those available in Egypt or elsewhere, depending on the product. While on average, Israeli products were found to be 20-30% more expensive than world prices, it is necessary to note that the Israeli market is a free and competitive market, which would make it difficult for a single supplier to raise prices to Egyptian buyers in order to exploit the QIZ Protocol. Moreover, Egyptian companies have a broad spectrum of products from which to buy, which again places competition pressures against raising prices.

Q -What are the most exported items to the US under the QIZ Protocol?

A - According to the latest figures, Ready-made garments and textiles encompass the largest volume of exports to the US under the QIZ Protocol. Specific ready-made garments include: jackets, pants, shirts, tops, T-shirts, shorts, jackets, twin-sets and pullovers. Exported textiles include towels and bed sheets.

Q -What sectors - other than the textiles and apparel sectors- can benefit from the QIZ Protocol?

A - Several Egyptian industrial sectors stand to gain from the QIZ Protocol. The food sector presents a significant opportunity for Egyptian QIZ exports due to its comparatively high custom rates. For example, prepared vegetables as well as dried onions and garlic have US custom rates of 10-30% which are eliminated under the QIZ Protocol. Similar opportunities also exist for leather products, athletic footwear and glassware.

Q - What sectors have actually exported under the QIZ Protocol other than textiles and apparel?

A - In addition to the textile and apparel sector, the food sector has also started accessing the QIZ custom-free advantage starting from the fourth quarter of 2005. Food product exports to the US have increased since that time, as has the number of food manufacturers participating in QIZ. As the Egyptian food sector becomes more familiar with sourcing options from Israel and with Israeli suppliers, it is anticipated that QIZ food exports will increase significantly. Additionally, several food processing manufacturers have begun studying the US market needs in processed foods in an effort to better target their exports.

Q -How does the QIZ Protocol fit within the Ministry’s industrial modernization efforts?

A -The QIZ Unit works in cooperation with the Industrial Modernization Center (IMC) towards upgrading QIZ companies through a buyer-driven upgrading model. The IMC has earmarked a large fund for this goal, and some of the largest QIZ ready-made garment exporters have agreed to cooperate with the program to help upgrade their suppliers.

Q -What are the future prospects for the development of exports under the QIZ Protocol?

A -Egyptian exports under the QIZ Protocol are gradually increasing and gaining momentum as new investments have led to an overall increase in production capacity. Additionally, as a result of a maturing industry and an increasingly higher quality of garment production, the interest of US buying offices to source in Egypt -including high-end brand names- has increased. Nevertheless, achieving the desired growth targets will take some time as the industry builds the necessary capacity. The QIZ Protocol in Jordan helped the country increase ready-made garment exports from $50 million to over $1 billion over five years. It is anticipated that Egypt, however, with its already well-established industry and much stronger industrial base, will enjoy a higher positive impact on the economy than the Jordanian experience.

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