metadata: authors: 0: author: Youssef,Hoda
1: author: Zaki,Chahir
count: Egypt, Arab Republic of
docna: 0: docna: From Currency Depreciation to Trade Reform :
            How to Take Egyptian Exports to New Levels?
docty: Policy Research Working Paper
subtopic: International Trade and Trade Rules,Trade Policy,Rules of Origin,Trade and Multilateral Issues,Energy and Mining
teratopic: Energy,International Economics and Trade
abstracts: cdata!: The Arab Republic of Egypt is yet to
            meet its exports potential, which has been historically
            hampered by several domestic market distortions and multiple
            barriers, resulting in weak export performance and modest
            regional and global integration. Although the liberalization
            of the exchange rate in November 2016 was a necessary step
            to correct the exchange rate misalignment and ease the
            ensuing shortages in foreign currency, it has not been
            sufficient to guarantee a notable improvement in export
            performance. This paper analyzes Egypt's exports along
            three dimensions that are key for export performance and
            future growth: (i) composition and relatedness of exported
            products; (ii) geographic and product concentration; and
            (iii) relatedness to globally traded products. The analysis
            suggests that Egypt continues to specialize in traditional
            areas of comparative advantage and limited value-added or is
            expanding toward products for which global demand is
            declining. The paper uses a gravity model to predict
            bilateral trade flows based on the economic size, geographic
            distance, and other relevant characteristics that should
            typically contribute to facilitated trade and identify
            specific sectors and markets for which Egypt seems to have
            an untapped potential. To understand this underperformance,
            the paper investigates the key impediments to meeting the
            export potential. It explores some of the important supply
            and demand side factors and assesses the role of trade
            policy measures (tariffs and non-tariffs barriers) in
            impeding export growth. The analysis reveals that despite
            significant liberalization efforts, Egypt remains among the
            group of developing countries that have the highest
            frequency index and coverage ratio of non-tariff measures.
            Policy recommendations include a call to improve external
            competitiveness by fostering and diversifying domestic
            production and complement these efforts by engaging in trade
            facilitation reforms to remove the non-tariffs barriers to
            trade, notably, the administrative, technical, and sanitary
            barriers to trade. These are all necessary for the country
            to capitalize on its competitive gains from the currency
            depreciation and to improve the degree of Egypt's
            integration into global markets.
geo_reg_key: 517202,517191
repnme: repnme: From Currency Depreciation to Trade Reform
            : How to Take Egyptian Exports to New Levels?
display_title: From Currency Depreciation to Trade
            Reform : How to Take Egyptian Exports to New Levels
listing_relative_url: /research/2019/04/30969787/currency-depreciation-trade-reform-take-egyptian-exports-new-levels
topicv3: Trade m1326924 698,Non-Tariff Measures m1326926 778,Trade Policy and Integration m1327407 775,Trade Policy m1327640 776,Iron m1503514 2931
publishtoextweb_dt: 2019-04-09T00:00:00Z
historic_topic: Energy,International Economics and Trade
no_of_pages: 43
author_keys: 0: author_key: 1070933
1: author_key: 809665
model_extractions: Policy Research Working Paper 8809 From Currency Depreciation to Trade Reform How to Take Egyptian Exports to New Levels?

_Hoda Youssef Chahir Zaki_ Macroeconomics, Trade and Investment Global Practice April 2019
Policy Research Working Paper 8809

# **Abstract**

The Arab Republic of Egypt is yet to meet its exports potential, which has been historically hampered by several domestic market distortions and multiple barriers, resulting in weak export performance and modest regional and global integration. Although the liberalization of the exchange rate in November 2016 was a necessary step to correct the exchange rate misalignment and ease the ensuing shortages in foreign currency, it has not been sufficient to guarantee a notable improvement in export performance. This paper analyzes Egypt’s exports along three dimensions that are key for export performance and future growth: (i) composition and relatedness of exported products; (ii) geographic and product concentration; and (iii) relatedness to globally traded products. The analysis suggests that Egypt continues to specialize in traditional areas of comparative advantage and limited value-added or is expanding toward products for which global demand is declining. The paper uses a gravity model to predict bilateral trade flows based on the economic size, geographic distance, and other relevant characteristics that should typically contribute to facilitated trade and identify specific sectors and markets for which Egypt seems to have an untapped potential. To understand this underperformance, the paper investigates the key impediments to meeting the export potential. It explores some of the important supply and demand side factors and assesses the role of trade policy measures (tariffs and non-tariffs barriers) in impeding export growth. The analysis reveals that despite significant liberalization efforts, Egypt remains among the group of developing countries that have the highest frequency index and coverage ratio of non-tariff measures. Policy recommendations include a call to improve external competitiveness by fostering and diversifying domestic production and complement these efforts by engaging in trade facilitation reforms to remove the non-tariffs barriers to trade, notably, the administrative, technical, and sanitary barriers to trade. These are all necessary for the country to capitalize on its competitive gains from the currency depreciation and to improve the degree of Egypt’s integration into global markets.

This paper is a product of the Macroeconomics, Trade and Investment Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/research. The authors may be contacted at hyoussef@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
From Currency Depreciation to Trade Reform: How to Take Egyptian Exports to New Levels?<sup>*</sup> Hoda Youssef<sup>1</sup> Chahir Zaki<sup>2</sup> J.E.L. classification: F10, F12 and F14.

Keywords: Egypt, exports, trade reforms, non‐tariff measures, competitiveness.

> *The paper and its findings do not necessarily reflect the views of the World Bank management. Any errors are the sole responsibility of the authors.

> 1 Senior Economist, World Bank. Email: <u>hyoussef@worldbank.org</u>

> 2 Associate Professor of Economics, Cairo University. Email: <u>chahir.zaki@feps.edu.eg</u>
# 1. INTRODUCTION

The Arab Republic of Egypt is yet to meet its exports potential, which has been historically hampered by several domestic markets distortions and multiple barriers, resulting in a weak export performance and a modest regional and global integration. While the liberalization of the exchange rate in November 2016 was a necessary step to correct for the exchange rate misalignment and ease the ensuing shortages in foreign currency, it is not sufficient to guarantee a notable improvement in export performance. This is because price competitiveness is only one element of countries’ ability to enhance their external competitiveness, but this ability will also depend on three other important factors: (i) the composition of domestic production and its _exportability_ ; (ii) the business and regulatory environment in which exporting firms operate; and (iii) the effectiveness of the country’s trade policy.

This paper attempts to answer three main questions. First, does the structure of domestic production explain the modest exports performance? This is key to understand why the country is not meeting its trade potential, as countries export what they are good at producing even if they are able to make other products. Our analysis suggests that Egypt continues to specialize either in traditional areas of comparative advantage and limited value‐added (such as petroleum and raw material) or is expanding towards products for which global demand is declining.

Second, in which specific sectors and markets does Egypt seem to have an untapped potential? This can be identified by comparing the country’s exports composition and destinations to those expected given its economic characteristics and geographical distance to trading partners.

Third, what are the key impediments to meeting this potential? To answer this challenging question, we explore some of the important supply and demand side factors, including the evolution of exports competitive advantage. We also assess the role of trade policy measures (tariffs and non‐tariffs barriers) in impeding exports growth. Our analysis reveals that despite significant liberalization efforts, Egypt remains among the group of developing countries that have the highest frequency index and coverage ratio of non‐tariff measures (NTMs).

The paper is organized as follows. Section 2 briefly introduces the motivation of this paper, by showing historical trends of exports performance and showing how recent economic reforms have yet to substantially reflect on this performance. Section 3 provides a brief review of the existing literature on Egypt’s trade policy and its effect on exports performance. Section 4 presents an overview of the production and exports landscape and looks into exports’ structure in terms of composition, degree of diversification and sophistication, in addition to geographic destination. Section 5 carries out an analytical attempt to understand the key impediments to export growth, including from a supply, demand and policy perspective. Section 6 concludes and presents some policy recommendations for the short and long term.

# 2. CURRENCY DEPRECIATION: NECESSARY BUT NOT ENOUGH?

After several years of economic and political turmoil, Egypt has embarked on a program of major reforms aimed at redressing the severe macroeconomic imbalances. A combination of domestic and external shocks, in the form of political turmoil, regional geopolitical and security threats and economic slowdown in main trading partners, have had an adverse effect on economic activity and fiscal and external balances. Attempts to address the ensuing shortages in foreign currency through capital controls and restrictions on foreign currency transactions resulted in the emergence of a parallel market and the depletion of international reserves. The spillover effects of macroeconomic pressures came in the form of a slowdown in economic activity and rising unemployment, severe shortages in key commodities, strategic goods and energy supply, 2
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# _3.2 Exports and Non‐tariff Measures_

Studies that have examined the effect of NTMs in the MENA region are scarce at both the macro and the firm level. Ghali et al (2013) investigate the impact of NTMs on Egyptian imports, by differentiating between different categories of NTMs and find that NTMs have a significant negative effect on both the intensive and extensive margins. In the same vein, Péridy and Ghoneim (2013) calculate the average tariff equivalents (AVEs) of NTMs in selected MENA countries including Egypt, and estimate them at 39%, compared to 34% in Tunisia, 37% in Morocco and 47% in Lebanon. Their analysis of NTMs also shows that almost all NTM categories are trade reducing, especially SPS measures, quantitative restrictions, pre‐shipment inspection, and export‐ related measures with technical barriers to trade to a lesser extent.

At the firm level, the effect of technical barriers to trade (TBT), sanitary and phyto‐sanitary measures (SPS) and red tape costs (related to the trade facilitation agreement) was also examined. Enbaby et al. (2016), use firm‐level data to analyze the effects of product standards on the probability to export (firm‐product extensive margin), and on the exported value (firm‐product intensive margin). They find that SPS measures imposed on Egyptian exporters have a negative impact on the probability of exporting a new product to a new destination, while the intensive margin of exports is not significantly affected by such measures. Kamal and Zaki (2018) also examine the impact of TBT on firms’ exports in Egypt over the period 2005‐2011 and find the extensive margin and entry probability are negatively affected by technical barriers whereas exit probability is positively affected. Moreover, smaller firms are more adversely affected by TBT in their export participation and entry and exit decisions. Hendy and Zaki (2014) study the effect of red tape barriers on firms’ exports by merging the Doing Business data set with firm‐level exports data. They find that red tape barriers negatively affect Egyptian firms, with the effect being more robust for the extensive margin (the probability of exporting across different destinations) more than the intensive one (the value of exports).

# _3.3 Exports and Trade Agreements_

Two main methods have been used to examine the effect of trade agreements on trade flows: computable general equilibrium (CGE) models (ex‐ante) and gravity models (ex‐post). The CGE literature on the Africa region is relatively rich. Mureverwi (2016) use a multinational CGE model to assess the potential long‐term effects of the African Continental Free Trade Agreement on the African Union member states. The main findings show that African countries benefit from a higher labor demand, more capital accumulation and improved terms of trade, with Egypt being one of the major winners in absolute terms. In the same line, UNCTAD (2018) shows that GDP increases by 0.97 percent and total employment rises by 1.17 percent with a full liberalization in the African Continental Free Trade Agreement (AfCFTA). Mold and Mukwaya (2017) use the GTAP model and database and show a significant increase ‐ thanks to the AfCFTA ‐ in intra‐regional exports as a result of tariff elimination from 9.2% to 11.7%, especially in processed food, textile and apparel.

A gravity model is used by Abedini and Peridy (2008) to show that regional trade has increased by 20% over the period 1988‐2005, following the implementation of GAFTA. Yegizu et al (2103) also study the impact of GAFTA on the volume and pattern of bilateral agricultural trade during the period between 1995 and 2007 and find a heterogenous effect on different countries. Helmy et al (2018) examine the impact of the Egypt‐EU trade agreement on bilateral trade. They also introduce other trade policy variables such as the GAFTA, Agadir, and COMESA agreements and find that the three agreements are positive and significant with GAFTA showing the highest coefficient, followed by Agadir and the Egypt‐EU Association. However, Kheir El Din and Ghoneim (2005) highlight an important concern related to the multiplicity of regional trade agreements, known as the “Spaghetti bowl”. Such an overlapping does not entail a high cost because most of them are shallow creating less friction. Indeed, most of these agreements targeted tariff declines without addressing harmonization of rules and regulations, non‐tariff measures or bilateral investment treaties.

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# 4. THE PRODUCTION AND EXPORTS LANDSCAPE

To understand why Egypt is not well integrated into global markets, one must look first into the production range as the basis of any trade potential. Product space is a term used to describe the extent to which the goods produced within an economy are related. This rests on the argument that the ability of a country to produce (and export) a product will depend on whether it already produces _related_ products, and that its development path is determined by its capacity to accumulate the capabilities required to produce different and progressively more sophisticated goods. In this context, the concept of _relatedness_ between products is defined by the similarity in the inputs required for their production, including skills, institutional and infrastructure requirements, and technological similarity (Hausmann and Klinger, 2007; Hidalgo et al., 2007; and Hidalgo and Hausmann, 2009) _._ Exports data are usually used to appreciate countries’ product space and their productive structure. This is based on a general acknowledgment that countries can produce many goods but will only export those they are good at producing. Additionally, using trade data allows for an accurate comparability between countries, as well as seeing the evolution of production structure and capabilities at a disaggregated level and over time.<sup>3</sup> We analyze Egypt’s exports along three dimensions that are key for exports performance and future growth: (i) composition and relatedness of exported products; (ii) geographic and products concentration; (iii) relatedness to globally‐traded products.

## _4.1 Composition and Relatedness of Egyptian exports_

Egypt’s exports have historically been dominated by oil exports, but their weight has gradually declined from half to around a third of total exports, in favor of non‐oil exports. In FY2017, non‐oil exports constitute close to 70 percent of the total. Yet, exports are chiefly concentrated in products that are either traditional or have a low value‐added. A long tradition of subsidizing energy prices has also favored the energy‐intensive industries and biased the exports structure towards them. In FY17, chemicals and base metals on their own constitute 10 percent and 6 percent of the exports basket, respectively (see Table A1. In Appendix 1).

To understand Egypt’s exports structure, we identify the products for which the country has a revealed comparative advantage and locate them on the network of products space. The notion of revealed comparative advantage (RCA) is a better reflection of a country’s exports capacity than the absolute value of exports. It considers a country as an effective exporter of a certain product if the share of this product within the country’s export basket is larger than the share of this product in the global exports market (RCA > 1). On the contrary, the country is not an effective exporter of this product if its RCA is less than 1.

The analysis of Egypt’s exports basket reveals that the largest exported products are not necessarily those in which Egypt has the highest revealed comparative advantage. For instance, among the 10 top products with highest RCA, only edible vegetables and fertilizers are among the largest exports with an average share of 4.1 and 3.4 percent of total exports, respectively, between FY2012‐2016. At the same time, electrical machinery which is the second largest exported product during the same period, has an RCA that is less than one, indicating that Egypt is not an effective exporter of this product. Observing the relatively low weight of products with high RCA in the exports basket highlights the missing opportunities to further expand into global markets of these promising products. These include for example carpets, edible vegetables and fruits, among others (see Table A.2 and A.3 in Appendix 1).

> 3 While using trade data offers many advantages, it also has important limitations. First, we note that trade data are only a proxy for the productive structure, and in some cases, can deviate from actual sectoral contributions to GDP. Goods that are produced but not exported are not captured, which does not allow for identifying these products and the impediments to make them globally competitive. At the same time, if the data used include re‐exports, the analysis will not allow for identifying countries that only serve as trading hubs.

6
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<!-- Start of picture text --> 0.90<br>Losers in growing sectors Winners in growing sectors<br>0.70<br>wo<br>a 68 Articles of stone, plaster,<br>Q : | cement<br>nN 62 Articles of apparel and clothing 050 8 Edible fruit and nuts<br>3S accessories, not knitted or |<br>° crocheted } ~ 7 Edible vegetables<br>o 61 Articles of apparel and clothin| .<br>22rar]=@69 Ceramic. productsaccessories, > knitted63 Otheror crocheted made up textile articles<br>og \ Ze Aluminum : —Bsoa Essential oils, perfumery &<br>==5 -0.895 salt, stone,e lime~~,eBem~ . _ 57 Ca eQ 7 Tobacto~_ae” ) . P 7e 0.60~ 11cosmeticMilling8 industy°0.80<br>= j Dairy produce; 32 Tanning or dyeing extracts e ~ 12 Oil seeds<br>Ssx - | 8 Inorganic che Is<br>$ =) 52Cotton ~20 Preparaftons of vegetables<br>(G)5 Po 050 \_ -<br>(27 Mineral fuels ”<br>-0.90<br>Growth of Egypt's share of world exports between 2012 and 2016<br><!-- End of picture text -->
# _5.1. A Gravity Model to Assess Trade Performance_

Countries’ economic characteristics and geographical distance to trading partners can be used to predict the potential bilateral trade flows and compare the predicted volume to actual trade and estimate the untapped exports potential. We use a gravity model<sup>4</sup> to analyze the determinants of bilateral trade flows, essentially the countries’ income level and the geographical distance between them, in addition to other relevant factors such as common borders, common languages, common legal systems, common currencies and common colonial legacies. The model is also used to test the effectiveness of free trade agreements. The basic model for trade between two countries (i and j) takes the following form: where F stands for the trade flow, G is the constant, D stands for the distance and M stands for the economic dimensions of the countries _i_ and _j_ that are being measured. A better understanding of the gravity equation is achieved by using the logarithmic values of all variables. We use the UN Comtrade database for 175 countries including Egypt, with 99 sectors (two‐digit HS commodities) for the period 1995 – 2016.<sup>5</sup> Our equation takes the following form: lnX���� �β� �β�lnGDP/cap�� �β�lnGDP/cap�� �β� lnDist�� �β�Contig�� �β�Comleg�� � β�Col�� �β�ComLang��� β�Landlocked� β�GAFTA��� �β��Agadir���� β��EgyptEU��� � β��COMESA��� �σt�σj�ε���� where _Xijkt_ is the bilateral trade flow between Egypt (the exporter) and country _j_ (the importer) in year _t_ for sector _k_ ; lnGDP/cap�� and lnGDP/cap�� are country _i_ and j’s real gross domestic product per capita in year _t_ ; _lnDistij_ is the bilateral distance between the two countries, measured as the great circle distance between Cairo and the capital city of its trading partner, in miles. The distance variable is meant to represent typical trade barriers such as transport costs and time and cultural unfamiliarity. _Contigij, Colij, ComLegij, ComLangij and Landlocked_ are dummy variables that take the value of 1 if the two countries share common borders, had previous colonial links, have common legal origin, have common language, or the destination is landlocked, respectively, as these characteristics are expected to boost trade. We also introduce three variables of trade policy measuring the most important trade agreements for Egypt. Three dummy variables take the value of 1 to capture the association agreement between Egypt and EU countries (changing over time as each EU member joined in different years); _Agadir_ a dummy variable that takes the value of 1 for Tunisia, Jordan and Morocco starting 2005, _GAFTA_ a dummy variable that takes the value of 1 for GAFTA countries starting 1998 and _COMESA_ a dummy variable that takes the value of 1 for COMESA countries.

The predicted level of trade is estimated from the gravity model as the difference between the observed level and the residual of the regression (2) as follows: The observed level of trade is then compared to the estimated level of trade as predicted by the gravity model:

> 4 Gravity models (Tinbergen, 1962 and Anderson, 1979) witnessed significant theoretical and empirical improvements (Mac Callum, 1995; Feenstra et al., 2001; Feenstra, 2002; Evenett and Keller, 2002; Anderson and van Wincoop, 2003; Santos Silva and Tenreyro, 2006), enforcing its theoretical base and narrowing the gap between theoretical and empirical findings.

> 5 The lists of countries and sectors included in the data set are included in Table A.4 and A.5 in Appendix 2.

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Ratios below the value of 1 indicate the country is under‐trading with the trading partner, compared to what the economic, geographic and trade agreement characteristics of Egypt and its trading partners would suggest. On the contrary, a ratio that is greater than 1 indicates a bias (or overtrading) towards these markets, beyond the predicted level. A narrow margin around 1 is being considered as very close to 1. Ratios below 0.9 are classified as under‐trading, while ratios above 1.1 are classified as over‐trading.

Results show that classical gravitational variables have the expected sign and level of significance (see Table A.6 in Appendix 2). Indeed, the income level at destination measured by the GDP/capita of the importer is positively associated to Egypt’s exports.<sup>6</sup> Distance is associated to trade negatively, while sharing common borders, common language, common legal origin and colonial links boost trade between Egypt and its trade partners. Additionally, a landlocked destination has a negative impact on Egypt’s exports. This is particularly important as most of the African countries are landlocked. Raballand (2003) estimates that the fact of being landlocked reduces trade by more than 80% because imported and exported products transit in many countries and experience delays before reaching their destination.

We introduce four important trade agreements for Egypt, namely the GAFTA, Agadir, COMESA and Egypt‐ EU association agreements. To capture the individual effect of these agreements, we run a separate regression for each then combine them together. When each agreement is introduced alone, GAFTA, COMESA and Agadir are positive and statistically significant while Egypt‐EU agreement is insignificant. By contrast, when combined, all agreements become positive and statistically significant with GAFTA showing the highest coefficient, followed by COMESA, Agadir and then the Egypt‐EU Association (see Table A.6 in Appendix 2). This result might be explained considering the existing link between the Agadir agreement and the EU countries through an Association Agreement or an FTA. The objective of this agreement was to facilitate integration between Arab states and the EU under the broader EU‐Mediterranean process through more simplified rules of origin. Indeed, the EU allows its Mediterranean FTA partners to cumulate value‐added regardless of the place where value was added (as long as it is in an FTA partner country) in order to take advantage of preferential access to the EU market. By contrast, the US only considers value added domestically only in the country exporting to the US. These conflicting regimes give the EU an advantage in its competition with US and make the EU in a better position than US with respect to Agadir countries since the latter can cumulate the share of their value‐added. Finally, the COMESA agreement seems to exert a positive impact on Egypt’s trade, suggesting a large trade potential with African countries despite the small share in Egypt’s current exports.

The predicted level of trade (computed based on the gravity model) is then compared to the observed level of trade to determine whether Egypt is meeting its potential as suggested by its own characteristics and those of its commercial partners. Results suggest that Egypt’s actual trade falls short of the trade volumes predicted by the gravity model, hereby suggesting the presence of significant trade barriers that prevent the country from meeting this potential. Table A.7 shows that Egypt is under‐trading with 63 percent of destinations, with African countries representing half of these destinations. The other half encompasses other small Asian and European countries and American and Pacific islands. At the same time, the country is over‐ trading with around 20 percent of the markets, mainly with the USA, EU countries, China, Japan, Canada and some Asian countries, compared to the expected levels. The remainder 10 percent of Egypt’s trade partners has an index close to 1 (from 0.90 to 1.10), pointing out that the observed level of trade is in line with the expected level.

At the product level, Egypt is under‐trading in 53 percent of the products and over‐trading 13 percent, while 32 percent of its products are in line with the expected level of trade. Surprisingly, some of the under‐ traded products are among those in which Egypt has a comparative advantage such as textiles, garments,

> 6 The variable capturing Egypt’s GDP per capita is dropped when year dummies are introduced as they are perfectly correlated.

11
fertilizers, chemicals and wooden products (Table A.10 in Appendix 2). This suggests that even in these promising sectors, Egypt is not exploiting its full trade potential, which raises questions around other factors that may hinder the development of these exports sectors.

Again, we compare the products in which Egypt is undertrading to those that are subject to increased global demand. The growth of world demand has been calculated as follows: we compute the annual growth rate of the world demand measured by the sum of world imports of each product. Products then fall into one of the following two categories: (i) products characterized by a high world demand (when the growth rate of world demand is greater than the median one) and (ii) low world demand (when the growth rate of world demand is greater than the median one). This classification shows that 13 products in which Egypt has a comparative advantage are undertraded despite being subject to high demand at the global level. This group, representing around 27% of Egypt’s exports, embodies the lost opportunity for Egyptian exports. These include dairy products, oil seeds, animal or vegetable fats and oils, salt, lime and cement, inorganic chemicals, plastics and articles thereof, articles of stone, iron and steel. Egyptian exporters are also under‐trading 17 products that are highly demanded by the Rest of the World (around 23% of total exports) but where Egypt does not have a comparative advantage (such as meat, cocoa and cocoa preparations, articles of iron or steel, miscellaneous articles of base metal, electrical machinery and equipment). For a detailed list of these products (see Table A.10 in Appendix 2).

# _5.2.Explaining Trade Performance_

The gravity model analysis of Egypt’s trade patterns suggests that Egypt’s actual trade falls short of the expected levels for several markets and products, while bilateral trade flows exceed the predicted value for others. This provides important insights on additional factors (not considered by the gravity model) that may either facilitate or impede bilateral trade. We discuss below three major factors related to the supply and demand‐sides, in addition to trade policy factors that may explain both under‐ and over‐performance.

# _5.2.1 Supply‐Side Factors_

Supply‐side factors are related to the ability of Egyptian products to compete in the global markets. As explained above, the concept of revealed competitive advantage (RCA) captures this competitiveness and can also be tracked over time. Changes can occur over time in the pattern of comparative advantage across countries and industries, with many reasons, including trade and economic policies, adoption of modern technologies, and knowledge transfers, explaining these changes. We analyze the evolution of Egypt’s revealed comparative advantage between 2001 and 2016 and divide them into four distinctive groups (see Figure A1 In Appendix 2).

- _Products with maintained comparative advantage:_ these are some traditional products (a total of 25), which can then be divided in two sub‐categories. First, those whose RCA increased (14 over 25 products such as edible vegetables, edible fruit and nuts, oil seeds, sugars, preparations of vegetables, fertilizers, soap, articles of apparel and clothing accessories, articles of stone, plaster, cement and glass and glassware) and those whose RCA decreased (11 over 25 products such as animal or vegetable fats, mineral fuels, mineral oils and products of their distillation, inorganic chemicals; cotton, other vegetable textile fibers; paper yarn, some articles of apparel and clothing accessories, other made‐up textile articles; ceramic products, iron, steel and aluminum). Whereas an increasing comparative advantage shows that Egypt can maintain its competitiveness in the first category, the second one points out the decline in the competitiveness of Egyptian exporters who were not able to keep their market shares over this period.

- _Products whose comparative advantage in 2001 has vanished in 2016:_ Although small in terms of number, such products represent a loss in Egypt’s trade performance and market share. This is the case for coffee, tea, cereals and rubber.

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<!-- Start of picture text --> 9.7<br>74<br>6.5<br>3528 3.8<br>4 , &<br>Egypt Jordan LebanonMorocco Tunisia Turkey Brazil Poland<br><!-- End of picture text --> <!-- Start of picture text --> 0.519 0.51<br>0.45 0.47<br>0.41<br>0.26<br>a; tt 4 f<br>Egypt Jordan LebanonMorocco Tunisia Turkey Brazil Poland<br><!-- End of picture text -->
<u>Figure 11. Growth Rate of the Addressed Demand to Egyptian Exports</u> <!-- Start of picture text --> 30%<br>20%<br>y = ‐0.0102x + 0.1394<br>10% R2 = 0.1259<br>0%<br>‐10%<br>‐20%<br>‐30%<br>2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br><!-- End of picture text --> � Note: Addressed demand is calculated using this formula DEMi= ∑��� αij Mj with n the number of trade partners, _j_ partners, _αij_ the weight of Egyptian exports to country _j_ in its total exports αij =Xij/ΣXij and _Mj_ the total imports of country _j_ . _Source: Constructed by the author using International Trade Center data._

# _5.2.3 Trade Policy_

Amalyzing Egypt’s trade policy can also help explain why Egypt is under‐trading in some products and over‐trading in others. Despite significant reforms and liberalization efforts, significant trade barriers prevent the country from fully exploiting its trade potentials and maximizing its gains from trade. Egypt remains among the group of developing countries with the highest frequency index and coverage ratio of NTMs.<sup>9</sup> These non‐ tariff measures vary between technical requirements, conformity assessment, export related barriers and rules of origin. Egypt has signed several preferential trade agreements, but some of these agreements remain shallow and overlapping, leading to a more complex trade regime with a limited impact on trade. This section, looks at Egypt’s trade policy from the tariffs perspective to assess the country’s openness to trade. It also examines several non‐tariff measures that are hindering the fast development of exports. These include administrative and technical barriers to trade, as well as other sanitary and phyto‐sanitary (SPS) measures. It also discusses why the country’s preferential trade agreements have not yielded the expected results.

# _a. Tariffs_

Since Egypt’s accession to the WTO, nearly 99 percent of Egypt's tariff lines are bound. Most Favored Nation (MFN) tariffs applying to non‐agricultural products are generally lower than those applying to agricultural goods, with an average of 12.8 percent and 66.4 percent respectively. For some agribusiness products, average tariffs can exceed 1,000 percent, such as those on beverages and spirits. Egypt’s tariffs for 2017 are based on the HS 2012 version of the Harmonized Commodity Description and Coding System and contains 7,850 tariff lines at the HS 10‐digit level, of which 99.7 percent carry ad‐valorem duties.

Tracing Egypt’s tariffs policy over time shows that, on one hand, applied tariffs have dropped significantly between 1995 and 2012, with simple and weighted averages of applied tariffs falling from 24 percent and 16.7

> 9 The frequency index captures the percentage of products that are subject to one or more NTMs, while the coverage ratio captures the percentage of imports that is subject to one or more NTMs.

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<!-- Start of picture text --> All Goods Manufactured Goods Primary Goods<br>30 _<br>25<br>20<br>15 ee<br>5 Le<br>0<br>1996 2012 1996 2012 1996 2012<br>—Egypt <= Middle Income —— High Income<br><!-- End of picture text -->
# _b. Non‐Tariff Measures_

Non‐tariff measures (NTMs) are meant to provide legitimate non‐trade objectives such as the protection of human health. Yet, the gradual removal of traditional trade barriers carried a temptation to use non‐tariffs measures as a protective mechanism for domestic production, hereby adding an additional (non‐directly measurable) cost. Excessive use of these measures in an increasingly globalized and competitive world hinders countries’ integration into global markets by affecting the ability and willingness of the private sector to invest and flourish. It also prevents the benefits of global integration to accrue to consumers, while many exporting firms, particularly the smaller ones, can exit the exports market because of the ensuing costs. The surviving firms will simply transfer this extra cost to the final price paid by consumers.

While NTMs can take the form of various technical and regulatory requirements, this section focuses on selected measures that are more relevant to Egypt and to its trading partners vis‐à‐vis Egypt’s exports. This is important for a better understanding of its exports ability to survive against NTMs that may be imposed against, and for an enhanced capacity to negotiate future arrangements on harmonization and mutual recognition, with the ultimate goal to enhance trade.

# i. Administrative Barriers to Trade

Administrative barriers are a major impediment to trade. Egypt’s performance on trading across borders (World Bank Doing Business) is lagging behind, ranking 171/189 in 2018, with its score showing a deterioration across time, from a peak of 71.1 in 2014 to an all time low of 42.2 in 2018. , affecting 20 percent of exporting firms. Trade procedures and documentation create a lengthy and costly clearance process for imported and exported goods, especially when compared to MENA and other lower middle income countries (see Figure 13 and 14 and Table 2). Regarding exports, the inefficiency seems to be more pronounced on the procedures time rather than on the cost side. Moreover, the administrative barriers to import are much higher than comparator countries on both the procedural and cost sides. This exerts a negative effect on exports, given the large reliance of domestic production on imported intermidate inputs.

From the firms’ perspective, customs and trade regulations are identified as a major constraint by 20 percent of the surveyed firms (World Bank, 2016), which shows a notable deterioration compared to the 9 percent of 2013 (Figure 13). Again, this is mainly due to a lengthier time to clear exports and imports, as time to import increased from 9.2 to 12.3 days while time to export remain relatively stable but high (Figure 14 and Table 2). This is primarily due to the high number of required documents and procedures,<sup>10</sup> in addition to the lack of clarity is some cases which gives officials a bargaining power in granting clearances. The lack of electronic processing in the customs clearance also contributes to unnecessary delays and gives room for discretionary decisions and corruption (World Bank, 2018). In some cases, security control of borders can cause additional delays. The process is further complicated by the involvement of multiple entities including the customs authority, the ports authorities, the General Organization for Export & Import Control (GOEIC),<sup>11</sup> among others.

Such cumbersome measures can be costlier than tariffs, as evidenced by the ad‐valorem equivalents (AVEs) of time to export and time to import (Figure 15). These AVEs are higher than tariffs for products that have a higher value‐added such as chemicals, non‐metallic products and machinery, which constitute an impediment to exports of sophisticated products.

> 10 For example, 28 steps are currently required to clear shipments at Alexandria port.

> 11 GOEIC is the authority in charge of ensuring the quality and standards of all imports of regulated products into the country.

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<!-- Start of picture text --> 21.1<br>20.1<br>17.8<br>EGYPT EGYPT ALL MENA<br>2013 2016 COUNTRIES<br><!-- End of picture text --> <!-- Start of picture text --> BAI| Countries MENA MEgypt 2013 m Egypt 2016<br>123<br>i i ig<br>10.0<br>9:2<br>74 74 75<br>6.4<br>DAYS TO CLEAR DIRECT DAYS TO CLEAR<br>EXPORTS IMPORTS<br><!-- End of picture text -->

<!-- Start of picture text --> Tariff MAVETimetoExp MAVE Time to lmp<br>70%<br>60%<br>50%<br>40%<br>30%<br>20%<br>=oe talOE de ee |ee Li aall looksee hl<br>“o Ss . es<" _ CS° © MK? PK? PKS KSwi S? Ss2°<br>e e RY » o ge © a » SY aS Go »<br>© © e o A Ss © RN RY © Or aN ny<br>r kg ~ ° ¢ 9 S » : x<br>° « s Ps © o<br>S<br><!-- End of picture text -->
<!-- Start of picture text --> 7.<br>64.4% _ \<br>\5.5%<br>= AGR © Both #Non-AGR<br><!-- End of picture text --> <!-- Start of picture text --> CAN<br>CS<br>KOR<br>IND<br>RAs<br>CN<br>DN<br>COL =<br>Ww<br>0 5 10 15 20 25 30 35<br><!-- End of picture text -->
‐ <u>Table 3. Share of TBT measures imposed on Egyptian exports (by product HS2 level)</u>

|Labels|Share|
|---|---|
|Inorganic chemicals; organic or inorganic compounds of precious metals, of rare‐earth|24.9%|
|Organic chemicals|20.5%|
|Miscellaneous chemical products|12.2%|
|Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other coloring|7.3%|
|Essential oils and resinoids; perfumery, cosmetic or toilet preparations|3.4%|
|Soap, organic surface‐active agents, washing preparations, lubricating preparations|3.4%|
|Albuminoidal substances; modified starches; glues; enzymes|3.4%|
|Photographic or cinematographic goods|3.4%|
|Pharmaceutical products|2.9%|
|Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible prep.|2.9%|
|Fertilizers|2.4%|
|Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal ...|1.3%|
|Fish and crustaceans and other aquatic invertebrates|1.2%|
|Meat and edible meat offal|1.1%|
|Others|9.2%|
|Total|100%|

_Source: Own construction using WTO’s TBT STCs database._ iii.Sanitary and Phyto‐sanitary (SPS) Measures The distinction between SPS and technical measures is not always clear, in particular because both apply to agricultural and industrial products. Yet, SPS measures refer to requirements imposed to protect life or health of animal, plant or human from pertinent health risks (such as additives, contaminants, toxins or disease‐causing organisms in foods, beverages or feedstuffs), whereas technical barriers – as described above – refer to the products regulations and standards.

The positive impact of lower tariffs in Egypt has been offset by the number of SPS measures imposed on Egypt ( 18). More specifically, SPS measures are among the largest obstacles facing exporters of agricultural products. SPS measures imposed on Egypt’s exports mainly originate from EU Member countries, which are also the most important trade partner for Egypt (Figure 19). The EU mainly imposes SPS measures on leguminous vegetables, beans and seeds, with food safety and protection of humans, animals and plants from pests and diseases being the reasons for imposing such measures. At the HS2 level, edible vegetables are subject to the highest number of SPS measures. SPS measures applying to this category represent more than triple those on meat and meat offal, and live animals which arrive at the the second and third places respectively (Figure 20). In recent years, Egyptian exports to the GCC countries also started to face SPS measures. For instance, between 2012 and 2019, six notifications of SPS measures and Specific Trade Concerns (STCs) were raised by UAE and Saudi Arabia against agricluture products, with egyptian exports of agriculture and animal products being suspended or banned entry to these markets (WTO, 2019). If repeated, these concerns may result in Egypt losing its comparative advantages in favor of other competitors. In the framework of the EU‐Egyptian Association Agreement, Egypt is currently working on the development of an Egyptian policy on food safety, and on the establishment of a unified Food Safety Authority.

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<!-- Start of picture text --> Fats and oils (15) i<br>Edible prepared meat, fish, etc. (16) i<br>Beveragesand vinegar (22) iz<br>Animal products (05) ia<br>Food & animal feed residues (23) iz<br>Coffee, tea and spices (09) imma<br>Cereals(10) =m<br>Edible fruits & nuts (083) =m<br>Fish and crustanceans (03) =a<br>Oil seeds and misc. grains (04) —<br>Dairy and other edible products (14) mmm<br>licanas()) =—<br>Vet (2) OOX—d<br>iM vHey _ l=<br>0 200 400 600 800 1000 1200<br><!-- End of picture text -->
countries, as well as one with the West African Economic and Monetary Union (UEMOA). Finally, Egypt signed the Qualified Industrial Zones (QIZ) Protocol<sup>12</sup> in December 2005 with the United States and Israel. All these agreements have contributed to the increase of exports and imports in Egypt since 2004 as shown in the empirical part.

Nevertheless, the multiplicity of these agreements suffers from two main drawbacks. _First_ , many of these agreements are shallow. The only progress achieved was on trade liberalization, yet these were limited in terms of depth (tariff waiving without further harmonization of processes and market conditions) and scope (not all sectors covered such as services and investment provisions). _Second_ , Egypt is involved in a variety of overlapping bilateral and multilateral trade agreements leading to the so‐called “spaghetti bowl” (Bhagwati, 1995). The latter refers to the negative effect induced by the mulitplicity of PTAs being paradoxically counter‐ productive in promoting freer and more opened global trades. Indeed, the latter leads to more discrimnatory policies with an increased uncertainty which dampens exporters and importers and thus reduces welfare. This is why, from a policy perspective, trade negotiations should target deeper and more comprehensive trade agreements that address non‐tariff measures, harmonization of standards and inclusion of services and investment provisions. This will help Egypt develop regional and global value chains which in turn boosts trade and help small and medium enterprises export (Osnago, Rocha, and Ruta, 2016).

# 6. CONCLUSIONS AND POLICY RECOMMENDATIONS

Egypt has undergone a major transformation by adopting a flexible exchange rate. By eliminating the overvaluation of its local currency, this has helped boost its external competitiveness and contributed to narrow its trade deficit. Yet, the increase in exports was not commensurate with the magnitude of currency depreciation, thereby suggesting that other factors are playing an inhibiting role. Our gravity model has shown that Egypt is still under‐trading with many countries, compared to its potential. Understanding the reasons behind this sub‐optimal performance is key to unleash this potential.

Our analysis shows that the limited external competitiveness starts domestically and may find part of its roots in what the country produces. Egypt’s position in the product space signals a weak capacity to expand and diversify production, as well as to transform into more sophisticated products. When combined with the analysis of the world’s growing demand, it shows that Egypt's exports are still centered around many products for which global demand is declining. Moreover, some of the products in which Egypt used to have some competitive advantage have lost their competitiveness over time. This suggests that reforms should start in the real sector, with specific solid policies to support the industrial sector and ease the business environment around exporting firms. The hurdles may not be entirely different than what non‐exporting firms are facing, but the exporting sectors need further attention and technical assistance, especially the small and medium businesses that lack the financial and human resources needed to survive in the global markets. Expanding to sectors with higher value added and intensive technologies also requires policies to encourage innovation.

Yet, all these efforts may struggle to translate into substantial improvement in exports performance if not supported by trade facilitation reforms to remove the non‐tariffs barriers to trade. On top of these come the administrative barriers, which in the case of Egypt constitute a major impediment to trade, affecting a large segment of exporting firms. Moreover, these are not limited to exporting procedures, but are also prevalent for imports, which affects exporting firms given the large reliance of domestic production on imported intermediate inputs. In that respect, Egypt could largely benefit from the modernization and

> 12 Qualifying Industrial Zones (QIZ) are designated geographic areas, within Egypt, that enjoy a duty‐free status with the United States. Companies located within such zones are granted duty‐free access to the US markets, provided that they satisfy the agreed upon Israeli component of 10.5%, as per the predefined rules of origin.

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automation of these administrative processes, which should translate into a decline in the cost of and time to trade. It also has the merit to reduce corruption by establishing a clear and transparent system.

Given the weight of the technical and sanitary barriers, Egypt should intensify its efforts to comply with its trading partners’ standards and requirements. Ongoing efforts to develop an Egyptian policy on food safety, and on the establishment of a unified Food Safety Authority are very much needed and should be accelerated. The government is also deploying several efforts in the chemical sector since 80 percent of Egypt’s technical and mandatory standards are based on standards issued by international institutions such as the Geneva‐ based International Organization for Standardization.

Finally, taking advantage of preferential trade agreements between Egypt and the rest of the world is key to ensure greater access to various foreign markets and build on the boost induced by the currency depreciation. Yet, the multiplicity of PTAs can be paradoxically counter‐productive if it leads to discriminatory policies and increased uncertainty. This suggests that any trade negotiations should target deeper and more comprehensive trade agreements that address non‐tariff measures, harmonization of standards and inclusion of services and investment provisions. This should help Egypt develop regional and global value chains and yield favorable effects for exports and exporting firms.

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