World Economy

A small pocket of Middle East peace comes from an unexpected industry

Key Points
  • With American help, Israel and Egypt create special commercial zones
  • The two countries then produce clothing sold all over the world
  • Tens of thousands of jobs are being created

An island of peace, cooperation and opportunity is breaking out in the Middle East, fueled by one of the most beaten down sectors in the United States: retail.

One of Egypt’s textile demonstration booths at the TexWorld USA textile convention in New York City.
Jason Gewitz | CNBC

Qualified Industrial Zones are fostering new relations between Israel and Egypt. While the two countries have been at peace since a 1979 deal, it's been a cold peace with few people-to-people relations between the two nations that fought four full-fledged wars between 1948 and 1973.

The zones, established in connection with the U.S., allow Egypt to sell textiles by taking advantage of Israel's status as a nation with a free trade agreement with Washington.

Turning enemies into friends

Representatives and business leaders from the textile industries of both countries are holding court at the TexWorld USA Expo in New York City this week. Monday saw three men seated together in a special multi-flagged booth: Ashraf El Rabiey, who manages the special zones for Egypt; Mohamed Kassem of World Trading Company, which exports textiles; and Gabby Bar, co-chairman of the Qualified Industrial Zones for Israel's Ministry of Economy and Industry.

Egypt’s Muhamed Kassem of World Trading Company and Ashraf El Rabiey, head of Egypt’s Qualified Industrial Zones meet with Israel’s Gabby Bar, co-chairman of Israel’s QIZ at TexWorld USA.
Jason Gewitz | CNBC

Curious attendees of the textile conference stopped and starred at the rare site of an Egyptian and Israeli flag flying side by side. Over the years, the three men, who were all of military age during a 1973 Arab-Israel military conflict (known as the Yom Kippur War in Israel and the October War in Egypt) have become close friends with two goals.

The first mission is to produce t-shirts, dress shirts, jeans, slacks, swimwear and coats. Their second goal, however, is to help turn that cold peace into something warmer.

Each side needs the other, according to El Rabiey: "What I can do for them, and what they can do for me puts us in a place where we have become true partners."

Inside the deal

Here's how it works: Since 1985, Israel has had a free trade agreement with the United States. Egypt does not have such a deal, but it can benefit from Israel's.

If at least 10.5 percent of an item's total value comes from components made in Israel, and it's produced in one of five Egyptian zones, then Egypt may sell and ship the finished product under the same free trade status as Israeli goods. Those special zones include the greater Cairo area, Alexandria and the Suez Canal area.

In practice, that 10.5 percent threshold means some of the cloth or chemicals that go into a garment must be produced in Israel — or perhaps Israel manufactures and supplies the buttons, zippers or packaging material.

Representatives meet at the TexWorld USA conference at an Egyptian textile booth.
Jason Gewitz | CNBC

The partnership produces clothes for American brands including Gap, J.C. Penney, Old Navy, Calvin Klein, Fruit of the Loom, PVH, Sears, Russell, Timberland and Aeropostale.

The product that Egypt ships stateside accounts for a small percentage of the clothing sold in the U.S., but to Egypt and Israel it amounts to big business and the creation of tens of thousands of jobs.

The dividend for Israel

Israel's interests in the program are three-fold: peace through cooperation, new markets and cheaper labor.

"Israel now has a high cost of labor, approaching what many western countries have," said Bar. "The costs are lower in Egypt. Combining the labor of both countries makes the end product less expensive."

The zone also opens new markets for Israeli companies that have traditionally been shunned in Arab countries. In fact, many Middle Eastern countries still have either an official or unofficial embargo on doing business with Israel.

But the Israeli government's main objective is the hope that it will share a peaceful border with Egypt.

"Without the Qualified Industrial Zone, we would not see these flags together today," said Kassem, a former Egyptian trade representative to the U.S. and now an executive selling clothing materials and finished products, motioning to the flags at the booth.

Without skipping a beat, Bar added, "They know me as a person, that's better for business."

Talking politics

The zone scheme took off immediately after it was put into place in 2005. Kassem and El Rabiey said the companies involved on average saw double-digit growth into 2011. Then Egypt fell into chaos as the Arab Spring brought uncertainty and violence, and so the partnership with Israel slowed.

Since then, sales have recovered to some extent. In the first quarter of 2017, double-digit growth began to reappear.

To some potential suppliers and customers at TexWorld, the alliance between Israel and Egypt seemed a bit confusing. A woman looking to partner with Israeli textile manufacturers saw the badge of one Israeli commerce official attending the show. She stopped and asked, "Where's your booth?"

Palestinian youths clash with Israeli Police in Jerusalem.
Getty Images

When he said the booth was shared with Egypt, the confused woman stopped and stared, then began taking pictures of the business cards of Egyptian manufacturers who partner with Israel.

But 5,600 miles away from New York, rioting continued in Jerusalem for a third day as Israel installed metal detectors after gunmen reportedly killed two Israeli police officers last week at a site holy to both Muslims and Jews.

When asked if the Israelis and Egyptians ever discuss politics, Bar, Israel's co-chair of the zones, asked, "Why would we do that? We have enough to disagree about when we talk business."