US embassy cable - 05TELAVIV5077

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 005077 
 
SIPDIS 
 
DEPARTMENT PLEASE PASS TO USTR: ESAUMS 
 
E.O. 12958: DECL: 08/15/2015 
TAGS: ECON, ETRD, IS, ECONOMY AND FINANCE 
SUBJECT: SECOND MEETING OF THE EGYPT-ISRAEL QIZ COMMITTEE 
 
 
Classified By: Deputy Chief of Mission Gene A. Cretz for reasons 1.4 (b 
) and (d) 
 
1. (C) Summary: The second meeting of the Egypt-Israel 
Qualifying Industrial Zones (QIZ) committee met on August 14 
in Jerusalem.  The GOE claimed that more than USD 61 million 
worth of QIZ products have been sent to the U.S. during the 
period under review, consisting of at least USD 8.6 million 
worth of Israeli inputs.  The committee certified that 50 of 
54 companies that exported to the U.S. during the first 
quarter of operation met the content requirements for QIZ 
qualification.  In addition to the routine certification 
work, the Egyptians encouraged the GOI to approve a joint 
request to USTR for expansion of the zones.  Finally, Israel 
noted a systemic problem with the Israeli input purchases by 
Egyptian manufacturers, and proposed the adoption of a table 
that would outline the acceptable percentage of inputs for 
QIZ textile products; the GOE did not agree with the request. 
 End summary. 
 
----------- 
The numbers 
----------- 
 
2. (C) The Egypt-Israel QIZ committee met in Jerusalem on 
August 14.  The meeting was co-chaired by Gabby Bar (GOI) and 
Sayed Elbous (GOE), and attended by members of the Egyptian 
and Israeli Ministries of Trade, Foreign Affairs, Finance and 
Departments of Customs.  EconOff attended as an observer. 
The six-hour meeting began with the certification of 
companies that sent exports to the U.S. during the period 
February 22-June 30, 2005.  The committee noted: 
 
--54 total factories sending QIZ products to the US (total 
value of over USD 61 million) 
--50 companies in compliance (approximately a 93% success 
rate for the first period of review) 
--4 companies not in compliance with the minimum Israeli 
content requirements 
--19 new companies approved to participate in existing QIZs 
 
The committee approved 19 new companies located within 
existing QIZs for export to the U.S. from August 14, 
2005-Feburary 15, 2006; bringing the total number of Egyptian 
companies eligible for export to 464.  (Note: Only 12% of the 
companies that were approved for QIZ production during the 
March 22, 2005 meeting in Cairo actually exported QIZ 
products to the U.S. during the first review period. End 
note.)  Based on their failure to meet the 11.7% minimum 
Israeli content requirements, four companies, Cotton Belt 
Egypt (#33), American Group Bitotex International (#75), 
Eurotextile Co (#286), and Nazmy for Clothing & Tricot (#334) 
were disqualified from exporting to the U.S. under the QIZ 
rules from August 15-November 14, 2005.  Copies of all 
official joint committee documents have been faxed to USTR 
and NEA/IPA, originals will follow. 
 
----------------------- 
Transshipped QIZ inputs 
----------------------- 
 
3. (C) The GOI Department of Customs, Senior Chief 
Coordinator for rules of origin, David Houry raised the issue 
of Politsur, an Israeli company that was found transshipping 
Turkish inputs to the Egyptian QIZ companies.  The GOI noted 
that Politsur is under legal investigation by the Department 
of Customs' prosecutors office.  There is no evidence of 
malfeasance on the part of the Egyptian companies that 
purchased inputs from Politsur - believing them to be of 
Israeli origin - and the GOI has not concluded what 
percentage of the merchandise sent by Politsur to Egypt as 
QIZ input was actually transshipped.  The committee decided 
not to disqualify companies that had purchased from Politsur 
during this quarter.  The Egyptian delegation stated that 
they would "blacklist" Politsur to make sure that during the 
next quarter there would not be a similar problem. 
 
4. (C) The GOE asked the GOI for assistance in preventing 
such cases of fraud in the future.  Alaa Arafa, Chairman of 
Arafa Group and owner of one of the largest companies 
currently sending QIZ products to the U.S. market, stated 
that Egyptian businessmen need a "whitelist" and a 
"blacklist" so that they will know which companies to buy 
from, since it was "impossible" to conduct independent 
checks.  The GOE also proposed issuance of "official" GOI 
certificates of origin to help eliminate fraud.  The GOI did 
not agree to either option, but determined that better 
information sharing could limit the influence of such 
fraudulent businessmen in the future.  The committee agreed 
to discuss options to cut back on transshipment fraud, during 
the next joint committee meeting. 
 
--------------- 
Time to expand? 
--------------- 
 
5. (C) Throughout the meeting Elbous raised the issue of 
expanding the size and scope of the QIZs.  He indicated that 
the GOE is anxious to receive a reply from Israel regarding a 
joint request to USTR for expansion.  Bar noted that although 
the GOI is reviewing the request, Minister of Industry, 
Trade, and Labor (MOITL) Ehud Olmert wanted to study the 
results of the August 14 meeting before making a decision to 
move forward with expansion.  (Note: Bar told EconOff that 
there was no plan to file an expansion request until Olmert 
had met USTR Portman.  With Olmert's time now split between 
MOITL and the Ministry of Finance, Bar was not able to 
project a proposed meeting time.  End note.) 
 
-------------- 
Israeli Inputs 
-------------- 
 
6. (C) After concluding the certification, the GOI passed a 
proposed list of input guidelines to the GOE.  The GOI 
explained that they had noticed a significant number of 
Egyptian companies that were importing a single input from 
only one Israeli source.  The GOI questioned if it was 
proper, given the language in the QIZ protocol that states 
that inputs must be "direct and relevant," to be included in 
meeting the 11.7% minimum Israeli content requirement.  One 
example noted by Bar was of a company that had purchased 
stone wash detergent powder from an Israeli manufacturer 
which totaled 11.7% of the value of products shipped to the 
U.S.  While there was no question that the purchase was made 
from an Israeli company, Bar indicated that analysis by the 
Israeli Manufacturers' Association indicated that such a 
quantity of stone wash detergent was enough to wash "millions 
of jeans pants."  Bar commented that although this powder 
could be considered part of an Israeli input for the 
production of jeans, it was unreasonable to believe that such 
a single input (with the possible exception of fabric for 
textile production) could really amount to 11.7% of the value 
of a product.  However, Bar noted that the GOI proposed the 
inputs list as only a guideline for Egyptian factory owners 
so they would know what was considered a reasonable input by 
the committee.  In addition, Bar noted that there were no 
plans to apply the list retroactively to the 54 companies 
that had already sent products to the U.S. 
 
7. (C) Elbous replied that such an approach was never 
discussed during the negotiations related to the QIZ and that 
what was being proposed was a drastic change to the nature of 
the agreement.  He called into question the ability of Israel 
to supply inputs for the Egyptian QIZ manufacturers, and 
noted that there had been parliamentary inquiry over the cost 
of Israeli inputs.  Arafa told Bar that such a drastic change 
in the agreement would, "kill the new baby that we have just 
created" and urged the GOI to "give it time." 
 
------------------------ 
Prospects for the Future 
------------------------ 
 
8. (C) Comment: Both parties left the meeting dissatisfied by 
the failure to reach agreement over the issues of expansion 
of the zones and the definition of inputs.  Additional 
negotiating sessions, either in person or via phone,  are 
necessary to resolve these issues before the third joint 
committee meeting on November 15.  The undertone to the GOI 
request for a maximum percentage list of acceptable inputs is 
the possibility that the GOI team will not agree to certify 
companies that purchase only one input from only one supplier 
during the next committee meeting.  The draft list only 
includes textile inputs, but the GOI will include other 
products, if applicable. 
 
--------------------- 
Impact on Jordan QIZs 
--------------------- 
 
9. (C) Comment continued: The Jordanian government has 
requested that the certification for Jordanian QIZ products 
be conducted on a quarterly basis parallel to the Egypt QIZ 
process.  (Note: Products are currently certified for minimum 
Israeli content on an item-by-item basis for Jordanian QIZ 
producers.  End note.)  The GOI has indicated that its 
willingness to move towards this approach for Jordanian 
producers will be based on successful implementation in the 
Egyptian QIZs.  Based on the GOI team's view of the results 
of the meeting, it is doubtful that they will offer to employ 
the quarterly certifications for Jordanian producers in the 
near future.  Finally, the GOE noted that it was aware of the 
Jordanian request to lower Israeli content to 5% of QIZ 
products, and that such a model seemed illogical if Egypt 
would still be expected to meet the 11.7% Israeli content 
requirement.  Israeli negotiators appeared displeased that 
the GOE was aware of what they deemed an "informal" Jordanian 
request for lower Israeli content.  End comment. 
 
********************************************* ******************** 
Visit Embassy Tel Aviv's Classified Website: 
http://www.state.sgov.gov/p/nea/telaviv 
 
You can also access this site through the State Department's 
Classified SIPRNET website. 
********************************************* ******************** 
KURTZER