As the United States threatens to terminate military assistance to Egypt over the controversial indictment of American NGO employees, fears over the future of bilateral security cooperation have crowded out an equally urgent concern: the possibility that the current diplomatic crisis could derail US-Egypt economic ties and prospects for future trade partnerships.

While US and Egyptian officials are focused on the short-term diplomatic crisis, they would do well to remember that their two countries have much to gain from each other economically over the long-run. With bilateral cooperation on hold pending the resolution of the current NGO crisis, the political climate is not currently conducive to reopening negotiations for a free trade agreement. However, the current strains in the bilateral relationship will likely be smoothed over by the time the military transfers power to civilian leaders by June, and policy makers on both sides should be prepared to revisit the possibility of a trade agreement that could yield significant economic benefits for Egypt and the United States.

The foundations for long-term trade cooperation between Egypt and the United States have already been laid. Since the 1995 World Trade Organization’s Uruguay Round, trade relations between the US and Egypt have steadily increased. The European Union, however, maintains even stronger ties as Egypt’s largest trading partner and the key competitor in the Egyptian market. US House Rules Committee Chairman David Dreier highlighted the immense potential for US business in the Egyptian markets that could also serve as a launching pad into other emerging African markets. Last November, Chairman Dreier introduced House Resolution 472 that agued for a Free Trade Agreement (FTA) with Egypt, stating that, "Strong, sustained economic growth and development would provide the necessary resources for Egypt to build democratic institutions and solidify public support for democratic governance, as well as ensure strong labor, environmental, and human rights protections." The US should broker an FTA with Egypt to maximize mutually beneficial political, economic, and diplomatic opportunities. Politically, the US needs an FTA to anchor Egypt to the West and to counter trade diversion as a result of interaction with the EU. Egypt’s social, political, and economic priorities could certainly benefit from US engagement.

Whether or not a trade agreement can be negotiated will depend on how Egypt’s next leaders and key political forces will weigh the gains of an FTA agreement with its costs. Other factors that will influence the process are possible opposition from Egyptian labor unions and the potential benefits to key political interests from delaying FTA talks until after the presidential election expected in May. In addition, there are concerns that resuming trade negotiations while the ruling Supreme Council for the Armed Forces (SCAF) is still in power could further consolidate the military’s economic interests and control of the political process.

Economically, Egypt is bleeding foreign currency as its Central Bank reserves fell by 44 percent. As a result, Fitch Ratings downgraded Egypt from BB to a BB+ negative outlook. Morever, Egypt has been borrowing from the domestic market at a higher rate compared the international market, which hurts the economy in two ways: 1) high borrowing places an additional burden on the budget and 2) prevents the private sector from accessing available these funds.
In order to convince the Egyptian public of the value of an FTA, Egypt’s leaders will need to channel the benefits of trade into the informal sector, which accounts for an estimated 40 percent of Egypt’s economic activity. One way to accomplish this is through the promotion of inclusive growth by taking steps to gradually formalize the “gray” economy. 
There is no denying that Egypt’s immediate financing crisis requires short-term relief measures before the economic environment is stable enough to allow for the resumption of FTA negotiations. If one of the goals of an FTA, from a US policy standpoint, is to provide incentives for economic and political reforms in Egypt, than the US should supplement this strategy with other tools for engagement, including technical assistance and grants for Egyptian SMEs and entrepreneurs. 

FTAs are a symbol of confidence and durability in bilateral relations, and thus will be impossible to negotiate until the US-Egypt relationship is back on solid ground. However, policymakers on both sides can send reassuring signals by indicating their openness to resuming trade talks once the political situation has stabilized. 

Mehrunisa Qayyum is a freelance international development consultant and editor of PitaPolicy, a blog focusing on the political economy of the Middle East and North Africa.

Photo Credit: Ahram