Get Ready We've Got Company This month sees the long-dreaded appearance of the GATT accords. But are they really to be feared?
By Rania Oteify Business Today Egypt | Date not available http://www.businesstodayegypt.com/article.aspx?ArticleID=3989 In a frenzy similar to the Y2K panic, Egypt's business community and officials have been bracing for further liberalization of trade starting in 2005. How much damage will it do our local industry? Like countless other countries, Egypt will enter a new phase of its obligations under the World Trade Organization (WTO) formerly known as General Agreement on Tariffs & Trade (GATT) in 2005. Fears or misunderstanding of what our obligations are in the coming period has been heightened. But the reality, say analysts, is that while the world will not end by forcing Egypt to comply with some trade liberalization, two major industries namely textiles and pharmaceuticals will be exposed to fierce competition. Egypt signed GATT in 1947. The seven-year Uruguay Round concluded in 1994 established WTO as the governing body of trade agreements. It also added agreements on agriculture trade services (GATS) and intellectual property (TRIPS) to trade liberalization. Egypt joined the WTO in April 1995. Egypt's textile industry has enjoyed decades of protectionism. Now, concerns are being raised about this industry that employs over 1 million people and generates about US$1.25 bn in export revenue, according to BBC figures. The impact of GATT/WTO on the textile industry will be on both local market competition and exports. The reduction of customs tariffs as of 2005 will allow imports from all over the world, particularly cheap imports from Southeast Asia, to compete with local production for the purchasing power of a long-deprived population. "The country had a ban on garment imports till 1998 which we extended to 2000," recalls Ahmed El-Goueli, Secretary-General of the Council on Arab Economic Unity. Under the pressures of liberalization, the country lifted the ban and placed extremely high flat customs rates in 2000, he adds, a move which provoked severe criticism from the WTO. The rates were later reduced. A further decrease starting 2005 will bring customs tariffs from 40 percent to 12-22 percent according to customs categories. However, the Agreement on Textiles and Clothing (ATC) that set the quota for Egypt's export to the world markets expired at the start of 2005. Now the country has to fight for its market share. Access (Not) Guaranteed Textile and clothing trade among WTO members is governed by the Agreement on Textiles and Clothing (ATC), which came into force with the WTO Agreement on January 1, 1995. This agreement means that, alongside progressive application of General Agreement on Tariffs and Trade rules, there will be progressive phasing out of quotas in the EU, US and Canada. These quotas were inherited from the Multifibre Arrangements (MFA). After a 10-year period ending on January 1, 2005, the ATC has expired and all quotas are to be abolished. It may have come as a surprise for analysts that developing countries have grieved over the end of the quota system. According to James Kenworthy, consultant in international trade and investment who worked as an USAID-financed international trade advisor to El-Goueli for about three years in the late 1990s, this expiring regime set bilateral quotas on textiles and clothing in which the importing countries (primarily developed countries) controlled the levels of textile/clothing imports through "negotiated" but in reality imposed quotas. "Therefore they established the maximum market access levels of imports of textiles/clothing allowed for each country for the Harmonized System of Tariffs (HST) items listed in the quota agreement," he says. The MFA system was originally allowed as an exception to the overall governance of the GATT that required "most-favored treatment" to signatories to the GATT (e.g., equality of treatment) and imposed restrictions on the use of quotas in international trade, he explains. "Imposition of MFA-based quotas still required textile/clothing exporters to absorb the often high tariffs developed countries placed on such imports in order to establish a market presence and share in the importing country," he adds. But, under the Uruguay Round's ATC in 1994, all such MFA-based quotas were to be phased out over a five-year period ending January 1, 2005, continues Kenworthy. The ATC contemplated the eventual "reintegration" of trade in textiles/clothing into the normal GATT/WTO framework of rules for global trade that restricts the application of quotas on imported goods. It also requires the implementation of the "most-favored nation" principle of GATT Article II that requires essentially equal treatment for all WTO members, except as permitted for certain regional and bilateral trade agreements or developing country preference agreements, he says. Kenworthy served for six years as counsel to the US Office of Textiles in the Department of Commerce charged with legal review of measures to enforce or facilitate compliance with US MFA-based bilateral quota agreements, usually demanded by the domestic industry. So to his surprise, early in 2004, many of the developing countries that had previously complained of MFA-based quotas came together in the Istanbul Declaration to petition the WTO to extend the effectiveness of the MFA system for up to another ten years, he recalls. "Why? Because the MFA system provided them with guaranteed market access via the quotas, regardless of whether they could actually realize market share by reason of their competitiveness in that market in terms of price, style and quality, in competition with nearly all the other 60 or so developing country exporters," he adds. Egypt is no exception in this matter. El-Goueli agrees that there is a belief that the quota system offered a sort of protection for Egypt's exports, especially to the US market. "We were protected by our quota which no other countries could touch. Now we have to compete in an open ocean," says El-Goueli. With the "reintegration" of trade in textiles/clothing into the GATT/WTO framework, Egypt, like all other textile/clothing exporting countries, must absorb the high tariffs imposed on textile/clothing imports, and actively compete with all other exporters even for market access in terms of consumer preferences. "Egypt has to confront the immense volumes of production, efficiencies of scale, lower costs and greater marketing sophistication of only three or four producing nations, e.g., China, Bangladesh, India and maybe Indonesia (often referred to now as the four "gorillas") without any assurance of a quota-based access to developed country markets," Kenworthy says. Go QIZ The government has realized this challenge. December 2004 witnessed the signing of Egypt's first Qualified Industrial Zone protocol with Israel and the United States. The protocol should allow Egyptian exports better access to the US market, should they include a certain percentage of Israeli components. Three regions have been selected based on their existing exports to the US to become the first QIZs. These are Greater Cairo, Greater Alexandria and Greater Suez/Port Said. The QIZ initiative was first made by former US president Bill Clinton in 1996 to encourage Arab countries, namely Egypt, Palestine and Jordan, to cooperate with Israel and take advantage of the US-Israeli free trade agreement. The recently signed protocol specifies this cooperation means inclusion of 11.7 percent Israeli components in a product in order for it to qualify for export to the US. Local components should constitute at least 35 percent. In remarks to the Arabic daily Al-Ahram following the signature of the QIZ protocol, Minister of Foreign Trade and Industry Rachid Mohamed Rachid asserted that the agreement is part of an integrated plan that would allow Egypt's foreign trade to penetrate world markets. "It is a step towards having a free trade agreement with the US. Our agreement with the EU (the EU-Egypt Association Agreement) has been active for four months after seven years of negotiations. The Arab Free Trade Agreement is coming into effect in January 2005. [Meanwhile], we are discussing free trade agreements with Russia, China, Nigeria and Latin America," he was quoted as saying. In a roundtable discussion on GATT organized by the British Egyptian Business Association (BEBA), Rachid confirmed that the Cabinet's vision is to open Egypt up. "We want to integrate the country competitively into the global economy. We want to modernize our industry and boost our exports," he said. "We will expose local ventures to global competition and teach them not to hide from globalization, but to thrive in it. In close cooperation with Egypt's private sector, we will create a local environment that encourages business and attracts investment an environment built on openness, government and a spirit of entrepreneurship," he added. This new government approach has been welcomed by businesspeople. Gamal El-Nazer, chairman of the Egyptian Businessmen's Association (EBA), praised the government. "Undoubtedly, the government's vision has changed in the last six months, taking the right direction to adhere to market economy principles, transparency, fighting bureaucracy and brave decision marking," he says. Former minister of trade, El-Goueli believes that the country is taking the right path as well. "We have to open our economy and allow competition. We have good industries and the best human resources if given an opportunity. Let them engage with the world. Competition will not only improve Egypt's industries but also serve Egyptian society as a whole. People need more exposure to develop and become better socially, culturally and politically," he says. Half Empty However critics have been against the QIZ protocol, claiming it's unfair to Egypt. "This pact, taken under American pressure, is a hasty Egyptian step towards normalizing economic links with Israel, which will get the upper hand on Egypt's exports," said Hamid Mahmoud, the deputy chairman of the Nasserist Party in remarks to Gulf News. "It also enables Israel to become the catalyst for Arab trade," he said. El-Nazer rejects viewing Israel as a superpower that can control our destiny. "A lot of people have misunderstandings concerning the QIZ. It is not necessarily that we are getting Israeli imports. On the contrary, we can send our products to Israel to have the percentage of components added to it. The whole thing will come back to add to Egypt's benefits. The Israeli input will be limited to stuff like packaging material, accessories, etc., which we do import anyhow," he says. He suggests people look into Jordan's experience, which signed a similar agreement which raised its apparel exports to the US from US$ 52 millions in 2000, to US$ 583 millions in 2003. Accordingly, it is not Israel but the Egyptian manufacturers and exporters of home textiles who will be the main beneficiaries of the QIZ Agreement, says El-Nazer. Workers and investors in Ismailia Free Zone's ready-made garments factories posted petitions to the prime minister and ministers of foreign trade and investment for "equal treatment." "Not listing the Ismailia Free Zone among other QIZs will cause us severe damage and may force all ready-made garments factories to close down, laying off 12,000 Egyptian workers and wasting LE 750 million of Egyptian and foreign investment," the petition says, indicating how the business community has actually realized potential benefits of such an agreement. At press time, negotiations were ongoing for the Ismailia Free Zone to join the QIZ. El-Nazer believes opposition to the protocol is a result of misconception and oversensitivity to cooperation with Israel. "The goal of the QIZ itself was an attempt from the US to get us to cooperate with Israel. No problem. If we have to take on Israeli partners, those of us who are too sensitive to work with Israeli partners can select their partners from Arab Israelis whom we all support," he says. Mohamed Okasha, exports manager of Egyptian Knitting and Ready Made Co., based in the Greater Cairo QIZ is already exporting to the US, England and Ireland. He praises the QIZ Agreement, as it has opened the door to the US market without restrictions on quantities similar to those set by the quota system. "Meanwhile, it does not force me to deal with the US market only. Also, nobody is obliged to enter the QIZ even if their factory is located in one of the zones. On the contrary, factories apply to become partners in this protocol," he says. These currently selected QIZs cover more than 60 percent of Egypt's textiles factories in addition to other industrial sectors, Okasha says. Survival of the fittest With growing competition both at home and abroad, protectionism proves to have been unhelpful to Egyptian industry. Our industries have remained weak and barely fit for local consumption. But it may be time to face liberalization and take the consequences. "We cannot continue living in isolation. We have become used to the protection system. As long as we are protected, we do not see a reason for developing ourselves and our industries. Egypt and the Arab countries are the most closed countries in the world on themselves, which has affected their economy and their people," says El-Goueli. Who will pay the price in the coming phase? Small weak industry players, says El-Goueli. "[For example] in the textiles sector in Egypt, we have a large variety. We have very developed industries that are already exporting. But some are losing already. It is better for the Egyptian economy to have these small industries out of the scene. We need only to have very strong industries," he adds. To avoid this fate, Okasha believes since these small industries will inevitably fail to face the competition, they should consider mergers with bigger and stronger entities. Overall, EBA's El-Nazer is not concerned about the textiles sector because, he believes, Egypt has advantages in textiles that are not anywhere in the world. "We have Egyptian cotton, skilled cheap labor and our long experience in this field. Definitely, there will be a shake-up in this sector. There will be an impact from the GATT, a change in the existing structures, and some industries will close because we are not competitive. Egypt will start seeing a positive outcome based on our ability to absorb the damage and make changes," he says. "But I am optimistic because the changes that have to happen in the sector of knitting and weaving should cause an increase in Egypt's exports from this sector. In the last decade, our textiles exports ranged between LE 1-2 billion. Egypt has the potential to reach LE 10-12 billion," says El-Nazer. Opening the economy will benefit the Egyptian industry as it will necessitate its development, but we also have to look at the whole issue from another perspective says El-Nazer. "We look usually at what will happen to producers but we do not think of the consumers' rights. Consumers have the right to find good commodities at suitable prices, which is a trend worldwide", he adds. But here Okasha calls on consumers to have some sense of patriotism. Echoing the "Buy Egyptian" campaign, he calls on everyone to buy Egyptian products if prices and quality are similar to imports. "We expect people to prefer the local product to support the local industries. When we have imported apparel coming to you, I bet you will find some local production much better," he says proudly. El-Nazer agrees that this may be the reason that our imports will not spiral out of control. "I do not believe there will be a huge surge in [the value of] imports because most of these imports (coming from the Far East) are cheap in price. Additionally, there is a certain market capacity. How much clothing can people buy? I do not think it will pressure our resources of foreign currency especially if we apply as soon as possible our measures concerning exports increase. On the contrary, we may have an increase rather than a decrease in foreign currency resource," adds El-Nazer. Aside from any other advantages QIZ protocol can offer to Egyptian exporters, Egyptian producers may have learned the lesson that unless they develop their production and become more competitive, they will not have a market share anywhere. Kenworthy suggests that Egyptian producers face two possible paths in trying to generate economic growth through textile/clothing exports. The first, according to him, is that they must target their apparel exports to those countries to which they can absorb freight transportation costs and still be price-competitive in their markets. Within those national markets, they must target "niche" consumers with certain high-end, designer-related apparel for which price is not necessarily a consumer purchasing factor. Alternatively, they can concentrate on textile production in order to competitively export apparel inputs to adjacent markets (Maghreb, Masstricht or the Gulf) where their geographical proximity permits reduced freight transportation costs. Bracing for the coming competition, Okasha advises big factories to develop high-production capacity and state-of-the-art machinery in order to remain qualified for exports. "We should replace specialization with variety and flexibility in production to cope with market demands based on people and culture in order to export more and penetrate different markets. Finally, we have to work on reducing our costs," he adds. Double whammy While it was expected that Egypt would have extra obligations with the coming of 2005, some sectors seemed to be unprepared. On top of that list is the pharmaceutical sector which will have to comply with Trade-Related Intellectual Property Protection (TRIPS). The agreement extends the patent for prescribed drugs from 10 to 20 years. It also protects the drug and its ingredients, according to Khaled Hamada, intellectual property specialist at the Ministry of Foreign Trade and Industry. "Egypt has modified its intellectual property law to comply with TRIPS Agreement. The new law was passed late in 2002," Hamada adds. Egypt has been a major generic pharmaceutical producer, comments international trade consultant Kenworthy, with its main markets in Africa, especially given the market access possibilities derived from its membership in Common Market of Eastern and Southern Africa (COMESA) and the new Arab Free Trade Area, he adds. "But the Uruguay Round Agreement on TRIPS imposes strong restrictions on the use of already patented pharmaceutical and agricultural chemical products to produce generic products. Most WTO members were required to implement the TRIPS Agreement requirements assuring patent-holding companies of protection for unauthorized use of their patented processes in the production of drugs," says Kenworthy. Egypt has had problems in compliance with the TRIPS requirements, he continues. However, one of the results of the WTO Doha Ministerial Conference in 1999, that initiated the current "Doha Development Agenda" round of multilateral trade negotiations, was to postpone the TRIPS implementation requirements until 2005. What have we done since then? Not much, says El-Goueli, who was minister of trade at the time. "I used to nag pharmaceutical companies when I was the minister to focus on research and development. But not much has been accomplished," he says. Egypt needs to come to terms with the TRIPS Agreement requirements while also continuing to develop an efficient, credible pharmaceutical production capacity that can compete in major markets. A study conducted by the Egyptian Center for Economic Studies (ECES) in 1997 concluded that as the TRIPS Agreement will force pharmaceuticals producers to move away from imitation-based production, the competitive advantage in Egypt's pharmaceutical sector will shift to foreign companies whose production is based on research and development. Only a small share of the current market, however, will be affected, says the study. In a BEBA Roundtable on GATT, Rachid confirmed that the impact of TRIPS will only be on new drugs coming into Egypt. It is true, says Hamada, that patent right will apply only on new drugs. "For old drugs, if they have got patents, their patent owners can stop us from producing them. The problem will be in those coming new to the market. Most of them are drugs coming starting after 2002 to 2005 because it takes usually around three years to receive a patent. The percentage of these drugs which can be affected in terms of protection is almost 2 percent," he says. The People Assembly's Health Committee discussed possible implications of TRIPS on Egypt's pharmaceuticals sector. Hamdi El-Sayed, head of the Doctors' Syndicate and the PA Health Committee was quoted by financial daily Al-Alam Al-Youm as saying that Egypt will only be able to import drugs from India, Brazil and China, which are not part of the TRIPS Agreement. El-Sayed also called on the Ministry of Health to establish a Medicine Support Fund. "The pharmaceutical industry is very dynamic and cannot be developed without mergers. Meanwhile, medicine prices cannot be left to the market powers of supply and demand. We have to establish fair rules that allow companies to make profits so that they can produce and develop while setting criteria to protect people's interest and needs for drugs," he says. This tough equation has led to the government's insistence that pharmaceutical companies not raise their prices over the last couple of years, which has made them unprofitable. EBA's El-Nazer pities pharmaceutical companies which, he says, have already been suffering losses. "The pharmaceutical industry is already suffering since the devaluation of the Egyptian pound. While almost every product with imported ingredients has increased in price, these companies have been obliged not to raise their prices, with very few exceptions," El-Nazer says. However, how much damage the TRIPS Agreement will have on the pharmaceuticals sector is still unclear. "Even though it has come into effect as of January 2005, there are a lot of loopholes in this issue. For example, there are several attempts from developing countries to produce alternative drugs using the ingredients of existing ones. These drugs should be much lower in price, even though it may be illegal. But it is an attempt to build factories to produce ingredients," says El-Nazer. But El-Nazer says that multinationals may be right in setting their own prices as they like, but we have to take into consideration that a large number of this planet's population cannot afford these high prices. "It is a very important and critical issue. A large number of developing countries are strongly opposing this trend, whether they will succeed or not, nobody knows," he adds. On pricing issues, Hamada comments that the law stops these companies from raising prices, by maintaining the right to force them to give licenses to other companies in case of an emergency. "Meanwhile, research centers have to work on producing Egyptian medicine. Egypt has vast areas of desert that should have herbs that can be possibly used to produce all kinds of drugs. We hope this will happen soon. Egyptian companies and research centers should work on producing Egyptian medicine or get into alliances with foreign companies, which is a trend everywhere in the world," he adds. Finally, El-Goueli has a prescription for the pharmaceutical industry. "We should protect our local production, which covers 94% of people's consumption. We should not let it fall or be sold to foreigners. We have to consolidate research centers, otherwise, we will not take one step forward. If we remain dependent on the West for doing everything, we are doomed to extinction. We have huge universities, professors and educated people who should be utilized in doing research," he says. How Egypt's industries will be able to survive competition in the world of globalization is to be seen in the years to come. The country may not be among the top beneficiaries of globalization, but hopefully, if the coming challenges do not kill its industries, they will make them stronger. ------------------------ Yahoo! Groups Sponsor --------------------~--> Get fast access to your favorite Yahoo! Groups. 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