CAIRO: Egypt this week became the first Arab country to sign a free trade agreement (FTA) with Mercosur, the South American trading block which includes both Brazil and Argentina.
The agreement — signed on Aug. 2 after six years of negotiations — will allow for preferential treatment of products between both Egypt and Mercosur member countries, which also include Paraguay and Uruguay.
Egypt’s Ministry of Trade said in a statement that the FTA “will reduce the cost of Egyptian imports for key items including sugar, meat and soy oil,” as well as significantly boost trade with the Latin American trading block.
Reuters quoted Rachid as saying that Egypt could triple its trade with Mercosur over the next few years as it pushes to secure food supplies.
Trade between Egypt and Mercosur currently stands at $2.5 billion per year, Beltone Financial, a Cairo-based investment firm, said in a note.
The FTA between Egypt and Mercosur will come into full force in 10 years.
According to reports, the trade agreement orders the removal of tariffs, differentiating between four groups of products according the set time-line. In the first group — comprising meats, butter, wheat, corn, oils and valves — the tariffs will be eliminated immediately. The second group, which includes milk and industrial goods, will see elimination of tariffs within the next four years. The remaining groups will come in line eight to 10 years from now.
Selling points
Speaking with Daily News Egypt, two economists shared their mostly optimistic views on the future economic relationship between Egypt and the Mercosur bloc.
Magda Kandil, executive director and director of research at the Egyptian Center for Economic Studies, said, “Mercosur is a new market that has yet to be tapped, and it presents new dimensions for Egyptian exports,” she continued.
Despite the distance between Egypt and Mercosur in terms of transporting goods as well as existing bureaucratic hurdles, she said, the bloc presents an enormous market, with circa 270 million consumers, and thus, “through economies of scale, the agreement will pay off for Egypt in the long run.”
Egypt imported $1 billion of Argentine goods in 2008, including soy beans, soy oil, corn and beef and sold goods worth $111 million to Argentina, according to ministry figures. Egypt’s exports to Brazil reached $218 million in 2008 and imports, which include meat, sugar and aircraft, came to $1.4 billion.
Gouda Abdel-Khalek, professor of economics at Cairo University, agreed, describing the agreement as “a step in the right direction.”
“Mercosur is an important trading block, and Egypt needs to strengthen its South-South relations; Egypt cannot remain focused only on North-South relations,” he explained.
Kandil sees the FTA as particularly timely, as Egypt needs to focus the nature of its trade policy less on traditional markets, such as the US and the EU, and begin strengthening ties with emerging markets.
This is imperative in her view firstly, because these markets are increasingly competitive; and second, projections show that both the US and the EU are not forecasted to post strong GDP growth figures in the coming years.
Emerging markets, therefore, need to expand to new markets to sustain their growth and competitiveness, she said.
The agreement is also “significant in the context of the WTO Doha negotiations in which Egypt is the spokesperson for Africa and Brazil is the spokesperson for Latin America,” Abdel-Khalek added, which will indirectly bring both continents economically closer.
Increasing trade with Mercosur countries may also trigger a spillover effect by allowing Egypt to penetrate the markets of associated Mercosur member states, such as Columbia, Ecuador, Peru, Chile and Venezuela, Kandil said.
Points of contention
While mostly applauding the agreement, Abdel-Khalek did raise a few reservations, particularly in regards to the number of FTA’s which Egypt has signed: “The more the merrier may sound fine, but it isn’t so simple.”
“Now with the Mercosur deal, Egypt is involved in 30-40 FTAs, such as with the EU and GAFTA (Greater Arab Free Trade Area), which is in addition to about 20 bilateral FTAs,” he said.
In every FTA, he explained, there are specifications regarding rules of origin (ROOs), which stipulate that products covered by the agreement receive preferential treatment.
“Egypt, being involved in so many FTAs, risks conflicting ROOs between the various agreements, [which] could be harmful to trade,” he explained, adding that there should be “a limit to the number of FTAs that a country can sign up to.”
Still, despite his reservations, both economists generally supported the move.
“FTAs lead to higher standards in terms of the quality of goods exchanged, and they also drive up labor standards, as domestic firms, which may have not been faced with fierce competition, will find themselves competing against companies with very high standards,” Kandil noted.
For his part, Abdel-Khalek said, “Generally such an agreement is not a zero-sum game, especially if the structure of the agreement can boost the economies of the countries involved.”
Both Kandil and Abdel-Khalek asserted that policymakers must be mindful of pitfalls, such as certain sectors losing out to new, foreign competition and potentially putting scores of individuals out of work.
Policymakers, they said, should provide compensation to segments of society that may be marginalized as a result of these FTAs. Tax schemes and subsidies could also be provided to sectors that have experienced a negative impact due to foreign competition, Kandil said.
In the end, “this is a public policy issue,” Abedel-Khalek explained.
On the horizon
Asked whether Egypt has overlooked other potentially lucrative FTAs, Kandil was quick to remark that indeed it has. “Africa strikes me as a huge market for Egypt,” especially given its strategic geographical location at the crossroads of Europe, Africa and the Middle East.
There have been a lot of “buzzwords and talk in the air regarding Africa and Egypt” as trade partners, she added, and the current economic crisis has been part of the driving force behind the whirlwind of speculation.
“Due to the economic downturn, Egyptian policymakers and exporters have had to reorient their export strategy…shifting their strategic orientation towards Africa and the Arab world,” she said.
Data demonstrates that Egypt was able to “maximize the potential” of Middle Eastern and African markets during the crisis, she added, which is likely to become a “permanent add-on cushion” for growth in exports on top of having already recovered lost exports in its traditional markets.
Trade Minister Rachid told Reuters that Egypt also expects to start FTA negotiations with Russia in the next six months and with South Africa before the end of the year.
"We’re trying to expand our providers… and at the same time balance the risk of the existing markets," he said.
