Mubarak team seeks to revive wilting carrot for Arab-Israeli peace

Israel is usually better known for exchanging bullets with its neighbors than zippers and paint.

But as Egypt's President Hosni Mubarak and his entourage hold meetings in Washington on Tuesday, the future of a trade deal aimed at changing that will top the list of economic issues they discuss. The Qualified Industrial Zone (QIZ) program, as it is known, allows manufacturers in Arab states who have made peace with Israel to export to the US duty-free – provided they use enough Israeli material.

Egypt is now hoping to expand its program as US officials push for a broader regional peace. The only two Arab states at peace with Israel, Jordan and Egypt, signed on to the QIZ deal in 1997 and 2004 respectively. But the US had thought the financial rewards would have urged more Arab countries to come on board.

The program helped Jordan's exports to the US grow from $16 million in 1997 to $1.3 billion last year and has boosted the bottom line of entrepreneurs such as Magdi Tolba, head of the Cairo Cotton Center, a ready-made garment business. Despite the recession, his sales are on track to grow to $35 million from $26 million last year.

"Most of this growth is in the American market and is because of the QIZ," he says. "The sky can be the limit for the [program's] potential."

Perhaps for Mr. Tolba. But the sun is now setting on Jordan's QIZs, where a new free-trade agreement is scheduled to come into full effect next year, rendering the zones redundant. While Egypt is set to expand the QIZ initiative, they have grown more slowly than the US and Israel had hoped.

How the zones work

To qualify for the QIZ, companies must be located in one of the participating country's designated areas and buy 10.5 percent of their material from Israel.

But with global trade barriers lower than ever, particularly in the ready-made garment industries that have been the principal beneficiaries of the QIZs, tariff-free entry to the US market isn't the enticement it once was. A global quota system that restricted low-cost Indian and Chinese garment producers' access to the US market expired a few years ago, and even Egypt, famous for its cotton, has struggled to compete since.

The Jordanians have also had to contend with the Egyptians, whose stronger industrial base and cheaper labor undermined their exports once both countries received the same tariff treatment.

The number of companies in Jordan's program slipped below 40 this year, down from about 90 five years ago. Next year there may be as few as 10, says Gabby Bar, co-chairman of the QIZ committee at Israel's Ministry of Industry, Trade, and Labor. Though the economic fallout from their decline will not be grave, he says something no less valuable could be lost.

"In what we call the 'cold peace,' this QIZ project came to be a kind of joint goal with no, let's say, patronizing each other," he says. "In Jordan, if the QIZs are going to be disappearing, of course it is a shame, it is a waste of an opportunity."

The crisis

It's been a tough year for clothing sales, and Jordan has been particularly hard hit. As overall US clothing imports fell 11 percent in the first four months of the year, Jordanian clothing exports to the US fell 20 percent.

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