Boosting trade and enhancing security cooperation with neighbours and international partners

Egypt’s strategic importance has long led it to seek close trade and diplomatic ties with its neighbours and well beyond. Geography, history and culture link it to Europe, the Middle East and Africa. Since the 1970s, relations with the US have also been a significant element in policy-making, and ties with the Gulf states have benefitted from trade, investment and emigration, as well as shared security concerns. The rise of China has also seen Egypt start to cultivate an increasingly important bilateral relationship.

The European Union

The 28-member EU is Egypt’s biggest trading partner. EU-Egypt bilateral trade reached €23.9bn, its highest-ever level in 2012, despite the eurozone crisis on one hand and Egypt’s economic slowdown and political uncertainty on the other. Trade more than doubled from €11.8bn in 2004, when the association agreement came into force, according to figures from the European Commission, the EU’s executive.

The EU accounted for nearly a quarter of Egypt’s total trade volumes in 2013, at 22.9%, and was the country’s biggest import and export partner.

The single biggest source of export earnings to the EU was fuel and mining products, accounting for 45.6% of the total, followed by chemicals (14.6%) and textiles and clothing (9.8%). In the other direction, machinery and transport equipment accounted for 30.7% of Egypt’s imports from the EU.

In terms of service trade, Egypt’s exports to the EU are dominated by travel services and transport (the tourism industry in particular), while it imports business services from the EU.

The EU and Egypt have had diplomatic relations since 1966, when the former was known as the European Economic Community. In its own words, the EU “seeks to develop a particular close relationship to Egypt, its geographical neighbour, and to support Egypt’s domestic and political reforms”.

Areas of interest addressed in the EU-Egypt bilateral relationship include cooperation on democratic and social reform, economic modernisation as well as migration policy.

Policy Framework

The EU’s relationship with Egypt is managed under the Union’s Neighbourhood Policy, which aims to build close political and economic relations with non-member states to the east and south of Europe, while promoting internal reform. Countries under the neighbourhood policy theoretically have access to some forms of EU financial support, as well as technical and policy support, easier access to the EU’s Schengen visa zone, and closer integration with EU markets.

In 2004 Egypt’s association agreement with the EU came into force. The agreement follows a model that has been implemented with other neighbourhood states and is intended to further strengthen political and economic relations. It incorporates free trade agreements for industrial goods, as well as concessionary deals for trade in agricultural products. It also paves the way for greater liberalisation of rules regarding trade in services and farm goods.

The deal also emphasises the importance of regular dialogue between ministers and senior officials of the two parties, as well as parliamentary contact between Egypt’s parliament (which should be reconstituted in 2015 following temporary suspension) and the European Parliament. Priorities include regional peace and security, enhancing cooperation and, more broadly, working together to promote stability and prosperity across the Mediterranean basin.

A New Deal With EU

In June 2013 Egypt and the EU began initial talks on further strengthening trade and investment ties, potentially through a deep and comprehensive free trade agreement (DCFTA). A DCFTA would have the intention of improving market access opportunities for both parties, but in particular supporting economic reform and improvements to the investment climate in Egypt.

Going beyond the existing association agreement, a DCFTA would also encompass trade in services, government procurement, intellectual property rights, competition legislation and investment protection. In the longer term, it could serve to integrate Egypt with the EU’s single market.

Gulf States

Egypt’s relationship with the Gulf states has grown steadily in importance since independence. Relations have not always been smooth, but recent years have seen an increase in activity on trade, emigration and broader regional security issues.

As countries including Saudi Arabia and the UAE in particular have expanded their diplomatic and economic clout, they have increasingly engaged with the Arab World’s most populous country in trade, diplomacy and investment.

Gulf Support

One of the most significant economic events of the past two years in Egypt should also be seen very much as a diplomatic move, with Saudi Arabia, the UAE and Kuwait together extending $12bn in aid and low-interest loans to Egypt in the immediate aftermath of the military-backed takeover of government in July 2013. Saudi Arabia, which ranks just above Egypt as the biggest economy in the Middle East and North Africa (MENA) region, extended $5bn, with $2bn as a central bank deposit to boost Egypt’s foreign currency reserves, much-reduced since the revolution; $2bn in energy products; and $1bn in cash, according to Saudi officials.

The UAE, meanwhile, offered a total of $3bn in the form of $2bn in an interest-free loan to be deposited with the Central Bank of Egypt, and $1bn in a grant. Kuwait extended a package worth $4bn, with $2bn in a Central Bank of Egypt deposit, $1bn in oil products, and a $1bn grant. In addition, the cash has also allowed Egypt to repay $6bn to Qatar that Doha extended to Cairo after the revolution during the Morsi administration. The three Gulf countries had grouped together to offer aid to other Arab nations also affected by the Arab Spring, but the resources made available to Egypt were particularly significant and reflect the country’s importance to its allies.

In November 2014, the press reported that Egypt, Saudi Arabia, the UAE and Kuwait were working together on a proposed military and security alliance including a possible joint military force to intervene against Islamist militants in the Middle East.

This could see joint operations against perceived threats in countries such as Libya and Yemen, without working under a US-organised alliance, as had been the case in Arab air strikes against the Islamic State in Syria and Iraq.

Africa

For much of the period since the Free Officer’s Coup, Cairo has kept close ties with the rest of the continent, including through the neutral Non-Aligned Movement, and a number of national liberation movements in Africa. Hosni Mubarak was twice chairman of the Organisation of African Unity, to which it is a major financial and diplomatic contributor, and as president he encouraged the country’s participation in pan-African affairs as well as bilateral relations with African countries.

With Africa’s profile now rising in the broader investment and trade community, thanks to robust GDP growth and a host of structural improvements to economies across the continent, Egypt is in an enviable position. A number of Egyptian companies invest elsewhere in the continent, with holdings ranging from railways to manufacturing facilities.

It is not without its challenges of course. Water security and water resources are an area of common interest and contention between Egypt and the East African nations upstream of it on the Nile, which supplies more than 90% of Egypt’s fresh water.

President Abdel Fattah El Sisi and Hailemariam Desalegn, the Ethiopian Prime Minister, met at an African Union summit in Malabo in June 2014, where they embarked on an initiative to ease tensions and enhance cooperation. Then in November 2014 an Egyptian delegation, led by Foreign Minister Sameh Shoukry, was in Addis Ababa to sign a memorandum of understanding in areas including education, trade and health as well as iron out disagreements over the Grand Ethiopian Renaissance Dam, which Egypt fears may disrupt the Nile’s flow. However, such issues have not kept the country from working to expand its profile elsewhere on the continent. The previous month, Egypt and Sudan agreed to work together to tackle an Islamist uprising in Libya – a significant move given that Cairo has had tense relations with both Tripoli and Khartoum for some time.

The US 

Relations between the US and Egypt accelerated significantly during the 1970s. The peace deal between Egypt and Israel signed in 1979 was brokered by US and, aside from securing greater peace and stability in the Middle East, also allowed a substantial deepening of ties between Washington, DC and Cairo. In the two decades following the deal, Egypt reportedly became the second-largest recipient of US military aid outside NATO, after Israel.

Egypt was the second-largest contributor to the US-led allied force in the 1991 Gulf War, and Egyptian troops have cooperated in peacekeeping missions in Africa in particular.

Trade between the two countries is also substantial, particularly given their geographical distance, reaching $6.8bn in 2013, with Egypt exporting goods worth $1.6bn to the US, according to the Office of the US Trade Representative.

Egypt’s main imports from the US were machinery, oil products and wheat, and its exports apparel and textiles, oil products and fertilisers (Egypt both imports and exports oil products). The US foreign direct investment stock in Egypt totalled $17.1bn in 2012, the last year for which data were available.

Building BRICS

By some measures, Egypt’s trade with China now exceeds that of trade with the US – it was estimated at around $9bn in 2013. China and Egypt had a mixed relationship during the Gamal Abdel Nasser era, with good relations occasionally tempered by Cairo’s support of the Soviet Union in disputes with Beijing. In recent years, however, as Egypt has courted investment and China looked for new markets in Africa, relations have grown closer.

Egypt is seeking Chinese investment in infrastructure in particular – like many other African countries. In September 2014 the Egyptian government established a special committee to attract more Chinese investment, with the Prime Minister Ibrahim Mahlab as chairman. Chinese companies are expected to invest in high-speed rail in Egypt, as well as the Suez Canal Corridor project, part of a huge industrial development that involves the canal’s expansion.

In recent years, Egypt has also been reaffirming historically strong ties with Russia. Russian companies are also expected to invest in the Suez Canal area, potentially in a special Russian free trade zone according to local press. In 2014 relations with Russia took another step forward with discussions about boosting trade. This is particularly significant in the wake of the Ukraine crisis, which has seen the EU and US impose trade sanctions on Russia, providing an opportunity for Egyptian exporters.

Egypt is also the world’s largest wheat importer, and on an August 2014 visit by President El Sisi to Moscow, Russian President Vladimir Putin said that he expected Russia to export around 5m tonnes of wheat to Egypt that year. Russia is also offering to help Egypt build its first nuclear power plant.

Egypt is also strengthening links with India, with bilateral trade worth around $5bn. The Egyptian government announced an aim to double that in 2013, and to build on a trade deal that placed particular emphasis on the two countries’ mutual strengths in the ICT and technology sectors. Indian companies are also lining up investments in Egypt’s manufacturing sector, including petrochemicals.

As of 2013 around 50 Indian companies, including conglomerate Aditya Birla Group, consumer goods company Dabur and Kirloskar, a manufacturer of pumps, had invested around $2.5bn in Egypt.

Given India’s import needs and Egypt’s growing export sectors, and vice versa, there is a useful strategic fit that could ideally benefit both countries.