US embassy cable - 04TELAVIV1676

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 001676 
 
SIPDIS 
 
DEPT FOR NEA/IPA, NEA/ENA, NEA/ARN, NEA/REA, EB/BTA/ANA 
ROME FOR DHS/CBP STIRITI 
USDOC FOR LASHLEY AND 4250/DOC/MAC/ONE/CLOUSTAUNAU 
USDOC FOR 4250/ITA/MAC/ANESA/TSAMS 
DEPT PASS TO USTR CNOVELLI AND ESAUMS 
 
E.O. 12958: DECL: 03/17/2014 
TAGS: ETRD, PREL, ECON, EG, IS, ECONOMY AND FINANCE, GOI EXTERNAL, LABOR AND COMMERCE 
SUBJECT: QIZ TALKS: GETTING CLOSER, BUT ISRAELI, EGYPTIAN 
NEGOTIATORS DEFER CONTENTIOUS INPUT ISSUE TO THEIR MINISTERS 
 
REF: CAIRO 2024 AND PREVIOUS 
 
Classified By: Economic Counselor Ted Mann, Reasons 1.4(B) and (D) 
 
1. (U) This is a joint cable from Embassies Tel Aviv and 
Cairo. 
 
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Summary 
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2.  (C) The third round of Israeli/Egyptian QIZ talks ended 
without an agreement on March 17 in Jerusalem.  As in the 
previous discussions in Jerusalem and Cairo, the stumbling 
block remained the minimum Israeli content requirement for 
any goods produced in future Egyptian QIZs.  Each side made a 
single additional improvement over its final offer from the 
second round of talks on March 11 in Cairo (reftel), but it 
was not enough to bridge the gap.  They two sides agreed 
that, after three rounds of talks, they had achieved all they 
could on the content issue.  They agreed to defer the issue 
to their respective ministers, Israeli Vice Premier Ehud 
Olmert and Egyptian Minister of Foreign Trade Youssef Boutros 
Ghali.  No date was set for the ministers' dialogue, which 
the negotiators agreed could take place either by phone or in 
a face-to-face meeting sometime between March 25 and April 3. 
 The two delegations also failed to reach agreement on 
whether the two governments should submit their QIZ proposal 
to the USG jointly or separately.  As in the previous 
meeting, the atmosphere was cordial, and the two delegations 
expressed satisfaction with the day's progress.  End summary. 
 
 
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The Newest Offers 
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3. (C) Egyptian negotiator Sayed Elbous said the GOE would 
now accept 10.5 percent minimum Israeli content for the first 
two years.  Thereafter the minimum content should drop to 8 
percent.  In the previous meeting, Elbous said Egypt would 
accept 9 percent for the first two years and 8 percent 
thereafter.  GOI negotiators Gabby Bar and Yair Shiran 
offered two options.  In the first, Israeli content would 
remain at 12.5 percent permanently.  In the second, Israeli 
content would be 13 percent for the first two years and 12 
percent thereafter.  During the previous week's talks in 
Cairo, the GOI had suggested starting at 14.5 percent with a 
reduction to 11.7 percent over the course of four years.  The 
Israeli content requirement remains the most contentious 
issue because Israeli inputs are considered more expensive 
than those available from other sources. 
 
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The QIZ's Impact on Israel 
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4. (C) The issue of input percentages, and the brief exchange 
of offers, came near the end of a day dominated by a drawn 
out discussion over the negative impact that Egyptian QIZs 
would have on some parts of the Israeli textile industry.  As 
in the second round of talks in Cairo, the discussion, 
attended in full by EconOffs from Embassies Cairo and Tel 
Aviv, was cordial, although the GOE's Elbous expressed some 
impatience over the fact that the Israelis did not broach the 
content issue until late in the day.  Bar and Shiran 
explained at length that Israel recognized the political and 
economic benefits stemming from QIZ cooperation with Egypt. 
However, they also said that Egyptian QIZs would create 
competition for Israeli firms, and that "thousands" of jobs 
would probably be lost because large Israeli textile 
companies were looking to move production to Egypt if the two 
countries signed a QIZ agreement.  (Note: Our discussions 
with Israeli industry sources suggest that the losses would 
be more in the neighborhood of hundreds of jobs, but 
particularly painful as they would be in economically 
hard-hit developments towns like Kiryat Gat.  End note.) 
Elbous encouraged the GOI to recognize that traditional 
textile manufacturing had no future in a high-cost country 
like Israel, and that competition on the world's markets 
would force the industry's demise with or without Egyptian 
QIZs.  The GOI should see the opportunities for Israeli 
suppliers, and recognize the political benefits that 
increased business and governmental contacts between the two 
countries would bring to Israel. 
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Negotiators Finally Broach Other Issues 
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5. (C) After agreeing that they could not reach a consensus 
on the minimum Israeli input requirement, the two sides 
touched upon, for the first time since direct negotiations 
began in January, other issues related to the establishment 
of Israeli/Egyptian QIZs.  Another sticking point dating back 
to last year's informal discussions between the two 
governments -- the manner in which the two governments should 
formally submit their QIZ proposal to the USG -- was 
discussed but not solved.  Elbous suggested that each side 
send separate letters to the USG requesting recognition of 
certain industrial zones as QIZs.  The GOI's Bar insisted 
that the two trade ministers write a joint letter.  Bar 
received strong support from MFA Director for Middle East 
Economic Affairs Ilan Baruch, who was also present at the 
meeting.   Baruch said the issue was of critical importance 
for Israel, since it would demonstrate the two governments' 
intention of closer relations.  Elbous agreed to discuss the 
Israeli proposal with his political leadership. 
 
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GOI Suggests New Model for Calculating Input Requirement 
--------------------------------------------- ----------- 
 
6. (C) Bar also proposed a new model for calculating how 
future Egyptian QIZ factories met the minimum Israeli input 
requirement.  In Jordanian QIZ factories, Bar explained, each 
piece of produced apparel had to contain the minimum level of 
Israeli inputs.  This system was inflexible for the factories 
and created administrative headaches for the government 
officials administering the program, he told Elbous.  Bar 
said the GOI would be satisfied if QIZ companies or 
individual factories purchased the minimum level of Israeli 
inputs on a quarterly basis.  Missing the minimum requirement 
on individual production batches would be acceptable to the 
GOI if this were balanced out by other batches containing 
more than the minimum input percentage.  Elbous said the GOE 
would be open to such suggestions.  Both sides told EconOffs 
that they might ask USG Customs experts to participate in 
future meetings where technical issues are discussed.  Bar 
and Elbous agreed, however, that another face-to-face meeting 
made little sense until their respective political leaders 
had found a compromise on the Israeli content issue. 
 
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Comment 
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7. (C) After a long day of negotiations, all participants 
showed visible relief after both sides had made their sole 
offer on minimum Israeli content and decided to refer the 
contentious issue to their superiors.  Both the Israeli and 
Egyptian industry representatives who were on hand to act as 
informal consultants also seemed relieved and happy with this 
result.  They denied there was some pre-arranged Ministerial 
fix in the offing, but seemed to believe that once the 
Ministers got directly involved, larger political imperatives 
would prevail and yield a result acceptable to both sides. 
End comment. 
 
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