Free But Not Unfettered

After more than 30 years of exile from local markets, imported textiles and garments may finally find their way into the Egyptian market through legal means. Garment importers-turned-smugglers, having tried all the tricks in the book to satisfy local demand, including simply changing imported garment labels to read "Made in Egypt", may finally be able to operate in daylight.

While a long-standing ban on textile imports was theoretically lifted in 2002 as part of Egypt's commitment to the World Trade Organisation (WTO), imports remained virtually non-existent. In conjunction with the 2002 decision, the government imposed prohibitively high tariffs to take the place of an outright ban. To protect local industries struggling to survive, the decision imposed a "specific tariff" on imported garments that was not related to the value of the item. This specific tariff was as high as LE1,400 for a women's two-piece outfit and LE1,000 for a coat. Such a tariff was biased against cheap imports. It replaced the "ad valorem" tariff which charges a percentage of the value of the product.

These extremely high tariffs shielded the local industry from competition by discouraging imports. But since January 2004, the specific tariff is history. The government has, however, issued Decree 35/2004 wherein it reinstated the ad valorem tariffs, with a ceiling of 40 per cent.

This move was not totally voluntary. In fact, it came in reaction to a request for consultation by the US to the WTO, demanding that Egypt adjust its tariff rates. Consultations are the first phase of the WTO's dispute settlement mechanism, said Ahmed Ghoneim, assistant professor of economics at Cairo University. Specific tariffs were imposed with the explanation that since Egypt was not familiar with the market value of these long-banned imported items, an ad valorem tax was difficult to impose, he added. But that flimsy pretext was soon challenged by both the EU and the US. "We do not represent any kind of threat to them by closing our markets, but they were afraid that it would become a pattern and other countries would abuse the system," Ghoneim said.

The lifting of the ban on ready-made garments is one of the commitments Egypt took upon itself in 1995 in accordance with the WTO's Agreement on Textiles and Clothing (ATC). According to the ATC, Egypt is to liberalise this sector over a 10-year period by lowering its tariffs and removing any quotas or bans by 1 January 2005. The ATC replaced the Multi-Fibre Agreement, which allowed for the imposition of quantitative restrictions when surges in imports threatened to cause market disruption.

Due to pressure by the local textiles and garments industry, which employs some 250,000 workers, the government has always tried to hamper the entry of foreign textiles. Opening up the market could mean the inundation of the market by cheap Chinese, Indian and Pakistani products.

This year's decision to lower tariff barriers is being received with mixed reactions. Mohamed Qassem, head of the Egyptian Garments Exporters Association, is a vocal supporter. Qassem maintains that opening the market to competition will enable local industry to develop.

"We have to face reality," Ghoneim concurred. "Although we have always been protecting local industry, it never grew out of being an infant industry. For 50 years we have failed to solve the industry's problems."

The decision to liberalise textile imports also has its steadfast opponents. "We have to admit that by virtue of this decision, small and under-the-stairs workshops will be out of business," said Mohamed Bahaaeddin Ismail, an exporter and owner of a large textile factory. "Unfortunately, these workshops employ thousands. This decision will definitely direct a serious blow to the country's efforts to encourage small and medium-sized enterprises."

For Ismail, the prospect of thousands of jobs is alarming. "We can not also overlook the dozens of other enterprises that operate as feeding industries. These will also be negatively affected. I fear that the chambers concerned with the textile industry in Egypt are doing nothing to contain the situation," he added.

Even many larger factories will suffer, argues Ali Idris, owner of a garments factory. "We have known that this will happen a long time ago, yet we did not do our homework," Idris said. "I wonder how long the big factories in Egypt will be able to hold their ground against the higher quality, cheaper Southeast Asian products."

To its credit, the government did not leave these industries without support. The same decree annulling the "specific tariff" also abolished all custom duties imposed on the raw materials and production inputs needed by the textile and spinning industries. "That was a major step to encourage the industry," said Khaled Hamza, head of the Export and Customs Committee at the Egyptian Businessmen's Association (EBA).

Textiles and garments producers can now buy new machinery, accessories, fabric and other supplies free of duties. "This will help reduce the production costs and accordingly come up with more competitive products," Hamza said.

Another measure of support for the industry is Decree 68/2004. This law stipulates that factories wishing to export to the Egyptian market need to be registered with the Egyptian Export-Import Control Authority. To register, these factories must be compliant with a number of environmental and labour standards. A team of experts from the Egyptian government will be sent to inspect those factories, and if they are found compliant, their registration will be accepted.

Ali Salah, owner of a garments factory, speaking during an EBA meeting, observed that realistically speaking, these requirements can only be met by major brand names, which are already too expensive for the general public to buy.

On the other hand, he said, "we should not forget that the left-over inventory of these huge companies constitutes a real threat to local goods, as it is of good quality, yet is sold cheaply."

Although a similar procedure is required of Egyptian factories exporting to the US, Qassem said, it is not a government requirement, but rather through a contractual agreement with a trade partner. He described this measure as another temporary attempt to shelter local producers. "How long it will last will depend on the pressure from other countries."

Ghoneim added that this decree could be considered a non-tariff barrier, the kind which the WTO advocates abolishing when it is tantamount to "circumventing the lifting of the tariffs".

It remains to be seen whether these supportive measures on part of the government will be enough to shelter local industries from the effect, and whether local industries will develop and expand or go bankrupt in the face of international competition.