Why Africa’s free trade agreement could be problematic for Egypt’s textile industry

Cairo Dyehouse, El Fasla Magazine

When Sierra Leone and the Sahrawi Republic ratified the African Continental Free Trade Agreement (AfCFTA) in April, the world’s biggest free trade bloc was officially brought to life and launched into its implementation phase. The two countries were the 21st and 22nd to ratify the agreement in the African Union (AU). The landmark agreement, which could potentially create a $3.4 trillion free trade zone, was launched in an official capacity by the union’s leaders at the AU summit in Niger in July.

As it stands, 54 countries have signed the agreement, including the initially-reluctant Nigeria – the continent’s biggest economy. Earlier this year, Africa’s second and third biggest economies – South Africa and Egypt – ratified the agreement, and are particularly poised to leverage the free trade zone on account of their diverse economies and relatively well-developed infrastructure. However, what may be good news for many modernized industries in both countries could prove lethal to others, at the forefront of which is Egypt’s heavily protected textile industry.

The status of Egypt’s textile industry
Now synonymous with struggle, the textile industry is one of the country’s oldest and biggest. Textile and apparel factories, which totaled 7,413 (2016), export products worth $2.7 billion (2017, including cotton exports) and employ over half a million Egyptians, not to mention cotton farmers and workers in other adjacent industries. In the golden days of Egyptian cotton, the industry dominated the country’s economy, but has since witnessed rapid deterioration on account of neglected upgrades to its infrastructure, lesser government protection (i.e. lesser tariffs on foreign products) and fierce competition by cheaper apparel from countries like China – infamous for drowning foreign markets in cheap products to undermine competition.

The AfCFTA is set to face many obstacles en-route to full economic integration across the continent; however, if fully realized and committed to, it could deal the final blow to the local industry.

How Ethiopia benefitted from the AfCFTA
The case cannot be made clearer than by putting the lens on Ethiopia, which ratified the AfCFTA last March and is also becoming an increasingly active player in the global textile industry. With plans to exponentially expand its textile exports to $30 billion in 2030, the 56-million nation boasts of a number of factors that make it especially attractive to foreign textile investors – namely Chinese and Indian. With increased labor costs in both countries – which is also the case in neighboring Bangladesh, Vietnam and Indonesia – said investors are looking to Ethiopia for its huge production potential and market, liberalized economy, easy access to land and raw material and an average monthly pay for a factory worker of $50 per month, as reported by Textile Today.

How Egypt will be affected – and how it could mitigate the negative impact
If the AfCFTA happens to become fully realized by 2030, as well as Ethiopia’s ambitious plan for its textile industry, its Egyptian counterpart could witness its demise. However, not to paint a grim picture, the scenario can be averted.

Egypt’s industry, in which 70% of factories are in need of dire upgrades, still holds many advantages over Ethiopia and other African nations. Egypt’s huge production capacity, bigger home market and higher average income mean that if Egypt is to move forward with a fully-realized development vision for its industry, it could position itself to not only avoid the looming crisis, but potentially turn it into a success story.

However, a lot needs to be done and could potentially come at a great cost. In this case, it is called opportunity cost: what you need to pay upfront to achieve grassroots development.

The Egyptian government recently announced a LE20 billion plan to boost the industry, merging the 32 public sector textile companies into only ten companies to increase the sector’s efficiency. Each one of the companies would have a comparative advantage, as put by Egypt’s Prime Minister Moustafa Madbouly. The five-year plan will include increasing cotton production, introducing cheaper and more in-demand types of cotton and upgrading textile and apparel production facilities. While ambitious and potentially helpful to strengthening the struggling industry, the plan falls short in providing a long-term growth strategy compared to Ethiopia’s.

But with only 175 textile units in its possession today, Egypt’s southern neighbor still has a long way to go.

Through serious structural reform, upgrading facilities and product quality and creative solutions to the industry’s ongoing struggles, it could be that Egypt will share the cake with Ethiopia, or even take the lead.

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