Opening Up Trade Channels

CAIRO - 3 January 2018: Egypt has been seeking to attract investors worldwide, inviting them to invest in the country and benefit from a list of bilateral, regional and international free trade agreements that it has signed with other African, Arab and European markets.

A new agreement has recently been added to this list, with the trade deal signed between members of the South American Common Market (Mercosur) compromising Argentina, Brazil, Uruguay and Paraguay, coming into force in September.

The trade deal, which covers food, cars, auto parts and industrial supplies, was signed by Egypt and Mercosur members in 2010, but it did not go into effect because Argentina’s congress had not approved it. Argentina’s congress approved the deal in May and Argentina then sent Mercosur its formal ratification, the last step needed for implementation.

The implementation of the deal entails the immediate elimination of tariffs on a list of products for both sides, while a gradual reduction of customs duties will be applied to other products over the upcoming 10 years. After this period, products will enjoy tariff-free movement among Mercosur countries and Egypt.

According to the agreement, Egypt will be able to export textiles, agricultural products, fertilizers and spare car parts with no customs duties to these countries.

The aim of the agreement is to strengthen relations between Egypt and the Mercosur countries, promote trade and boost economic relations. Trade Minister Tarek Kabil said that the agreement will help increase the volume of trade between Egypt and the Mercosur countries, which stood at $5.3 billion in 2016. The agreement is expected to double that figure within 10 years.

The deal also aims to attract more Latin American capital inflows to the Egyptian market in the fields of agricultural production, technology, petrochemicals and food manufacturing, Kabil said.

Economic expert Mokhtar el-Sherif said that the trade pact will help increase Egypt’s foreign trade and boost its presence in international markets. He said that Egypt could boost its exports to these markets by exporting goods such as petroleum products, heavy machinery and chemical products.

He explained that the conditions of Mercosur countries are similar to Egypt, since they are all emerging markets, noting that strengthening relations with similar economies will give weight to emerging markets and boost their role and impact in world trade.

Mercosur countries are similar to Egypt regarding importing capital goods for production, which put them into competition with Egypt. “The benefit of this agreement is that it will promote trade cooperation between Egypt and these South American markets instead of competition,” Sherif told Business Today Egypt.

He added that the deal will help attract investment to Egypt at a time when the country is seeking to lure investments from across the globe. “Egypt has a strategic location that it still didn’t make full use of. This agreement is an attempt to benefit from this location,” Sherif said.

Benefits and concerns

According to a recent study by the Egyptian Furniture Export Council (EFEC), the trade agreement between Egypt and the Mercosur bloc will benefit the Egyptian furniture market, which will receive an annual 10% reduction in the custom duties on exporting to South American markets.

EFEC Executive Director Yasmin Helal said last month that this would help boost Egypt’s trade with Mercosur countries, which had a GDP exceeding $1.7 trillion in 2016, while achieving a GDP growth of 7.1%.

Although Brazil is one of the furniture-manufacturing countries, Helal noted, production levels have been dwindling on the back of deterioration in the value of the Brazilian Real against the U.S. dollar, levying hefty taxes on the industry and labor strikes over insurance and wages. Helal affirmed that it is important to create partnerships with Brazilian companies aiming for mutual benefit and boosting trade in the wood and furniture sectors.

However, there are some obstacles that stand in the way of making full use of the agreement, according to Helal. These include the high cost of shipping between Egypt and Mercosur countries as well as the fact that the four countries speak Spanish, which is not widely used in Egyptian companies’ trade transactions.

One producer, who preferred to remain anonymous, voiced his concern regarding competition with the local industry. He said that eliminating tariffs on products coming from Mercosur countries entailed strong competition with local products as well as imports from other countries.

For the local industry to compete, it has to increase production, develop and upgrade the quality of products and sell them at reasonable prices, he argued. However, this might not be an easy task, given the problems facing producers in Egypt such as financing and bureaucracy, the producer said, highlighting the importance of resolving these issues so that local industries can develop and compete.

A recent report by N Gage Consulting, a company offering public strategy advice, showed the positive spillovers of the agreement on Egypt, saying that it will enhance trade relations between Egypt and the Mercousr bloc to take advantage of the wide market of member countries.

The report said that it would liberate trade between both parties over a 10-year period, taking into consideration that 47% of the Egyptian exports will be immediately fully exempted from all custom duties upon entry of the agreement into force.

Other benefits include reducing the expenses of Egyptian imports from Mercosur countries, attracting more investments from Mercosur in case they faced any obstacles during the transition period of liberating imports from Mercosur nations, and the presence of an institutional mechanism to resolve problems that cripple trade between the two parties: the annual joint committee meeting.

The deal has also entailed the protection of domestic industries against increased imports under preferential treatment that cause or threaten to harm it, the report added.

Sub-regional bloc

The Mercosur bloc was founded in 1991. Its full members are Argentina, Brazil, Paraguay and Uruguay. Venezuela is a full member but has been suspended since December 1, 2016. Its associate countries are Bolivia, Chile, Peru, Colombia, Ecuador and Suriname, while observer countries include New Zealand and Mexico. The bloc’s purpose is to promote free trade and the smooth movement of goods, people and currency.

The volume of trade exchange between Egypt and Mercosur countries has risen by 58.7% from 2004 to 2009 to stand at $2.1 billion, according to Egypt’s State Information Service. Egypt is considered the first of Arab and African countries to sign such agreement with Latin American countries.

The agreement comes as a development of the framework agreement signed between Egypt and Mercosur countries on July 7, 2004 to establish a free trade area between the two sides.

The agreement entailed the establishment of clear rules for the future to promote the development of trade and mutual investments between Egypt and the four Mercosur countries, as well as a commitment to promote international trade regimes in accordance with the rules of the World Trade Organization (WTO).

The process of economic integration includes progressive and reciprocal liberalization of trade as well as the establishment of comprehensive economic cooperation.