Smuggling ready-to-wear foreign-made garments into Egypt has wreaked havoc with the local garment industry

28-01-2015 02:38 PM

Hanging by a thread -Nasser Sobhy

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At one time the markets of the Mediterranean coastal town of Port Said east of the Nile Delta were resonant with the hustle and bustle of vendors and shoppers engaging in lively trade. Now those vendors sit idly waiting for a passing customer.
In 1976, in an attempt to rejuvenate the city that had suffered so much in the wars of 1948, 1956 and 1967, President Sadat declared Port Said a free trade zone. The city soon became an economic and trade hub attracting thousands of job seekers from all over Egypt.
But “a death sentence has been inflicted upon us,” one trader says.
The problem is the influx of cheap clothes, often smuggled, which has brought down prices all over Egypt. “Nobody comes to Port Said anymore,” moans the trader. “But this is our only source of living.”
A new law in 2002 cancelled Port Said’s free zone status, and although its application was postponed several times until 24 February 2013 when the Shura Council passed a law cancelling it, the town’s economy never revived; it is now near collapse, and traders are still suffering severely. They believe it is too late to restore the free zone since smuggling has redirected commercial activity to neighbouring Qantara, which is now an ‘informal’ free zone.
According to data provided by the Central Anti-Smuggling Administration, 78,264 ready-made garments were recently seized in 438 separate cases in Qantara; the fines collected on them amounted to EGP227,000.


Legal loopholes
Adel Amer, a lawyer and head of the Centre for Political, Legal and Economic Studies, says smuggling inflicts annual losses of more than EGP10 billion. While smuggled garments represent a threat to the local clothing industry, “the export sector is another less known victim of smuggling,” Dr Amer says. “Textile smugglers in Egypt resort to illegal practices that threaten Egyptian exports. One of these is the import of low-priced textiles from Asia and China; these textiles are labelled ‘Made in Egypt’ and exported to the US as Egyptian-made products, and are deducted from Egypt’s share of exports to American and European markets.” Dr Amer, a member of the Arab League’s Arab and European Institute for Strategic and Political Studies, says smugglers take advantage of loopholes in export laws. The fourth section of Customs Law 66 of 1963 stipulates that a temporary customs exemption is granted in two cases: the first for raw materials imported for manufacturing and the second for goods imported for reparation or completing manufacture. In these cases the drawback system is applied and the duty refunded on export.
However, garment smugglers managed to find a loophole that turned the drawback system into ‘legal’ smuggling by importing textiles for manufacture and re-export while in fact exporting only a portion of the manufactured goods. “Only 50 per cent of the imported textiles are re-exported; the rest are smuggled to the local market,” Dr Amer says. “This is done by falsifying the manufacturing permit and taking advantage of the percentage of waste that the Ministry of Industry sets on imported textiles, which ranges from 20 to 50 per cent. This portion is sold on the market without paying customs or sales taxes. As a result, imported goods are sold at a lower price than their locally manufactured counterparts.”


Arbitrary decisions
Dr Amer says the State is losing billions annually in tax and customs evasion. Recent studies estimate that smuggled goods amount to one-third the volume of trade. Neither prison sentences nor heavy penalties are imposed on smugglers; they merely pay a fine to the Customs Authority.
Many attribute customs evasion to the complicated import procedures. Muhammad al-Masry, Head of the Port Said Chamber of Commerce, says easing customs procedures and reducing duties on foreign imports could help end smuggling and encourage importers to follow legal routes.
Some customs decisions are described as arbitrary, with importers routinely left uninformed. “Traders of ready-made clothing often fall prey to arbitrary decisions by the Customs Authority,” says Magdy Saber, CEO of an import and export company. “When the authorities make a decision the import companies should receive official notification. But this does not happen. The notice is sent to Customs, and the importers only discover it when it is applied. Very often we import merchandise and only after it has been shipped do we discover that it doesn’t adhere to some recent specification that we know nothing about. In such cases the importer resorts to smuggling the merchandise into the country.”
Dr Amer says that lack of effective border supervision facilitates smuggling. The State must have the power to prevent smuggled goods reaching local markets, The failure to curb smuggling will lead to further losses to the State Budget.
Among the reasons traders resort to smuggling are the import checks whereby imported clothes undergo laboratory tests, which may lead to rejects. “The standards against which the garments are being tested are not well-specified, so traders are too wary of losing their goods; smuggling is the easy way out.”



Price war
“The more complicated the customs procedures, the more merchandise is smuggled; we end up with the market flooded with cheap imported garments that local manufacturers cannot possibly compete against,” Mr Saber says.
Measuring the extent of the problem is no easy task since all the figures are estimates. Yehia al-Zananiri, first deputy of the clothing division at the Chamber of Commerce, says imported garments represent about 60 per cent of the merchandise on the Egyptian market. “This 60 per cent consists of 45 per cent smuggled versus 15 per cent sold legally, meaning that smuggled garments make some 80 per cent of the total garment imports.”
Mr Zananiri, himself a garment factory owner who incurs losses because of smuggling, says that the value of garments bought annually by Egyptians ranges between EGP12 and 15billion, and the consequent annual losses from customs evasion incurred by the treasury amount to EGP2 billion. “Duties imposed on imported clothing consist of 30 per cent customs and 10 per cent taxes. These are not high enough to protect the local clothing industry,” he says. He also accuses some traders of tampering with the receipts of the imported merchandise to reduce the taxes imposed on them. He cites the example of the already cheap Chinese products that become even cheaper after some importers falsify the import documents. The consumers’ demand is high on these low-priced products, whereas local manufacturers are unable to face the fierce price war.
“There are more than 5,000 garment factories in Egypt, with production estimated at almost EGP6 billion,” Mr Zananiri says. “Most of these factories are experiencing a major crisis. My factory has halved its production for the past three years and laid off workers because of the economic slowdown brought about by the Arab Spring turmoil.”




Even though Port Said has suffered heavily on account of the smuggling of garments, the Delta town of Mehalla al-Kubra is even worse off. Port Said has suffered in terms of trade activity, but Mehalla has been the bastion of the spinning and weaving industry in Egypt since the beginning of the 20th century.
According to Hassan Balha, who heads the Mahalla Investors Association, the industry has been hard hit by the declined value of the Egyptian Pound owing to the nosedive the economy took in the wake of the Arab Spring, the rise in raw material prices, and the huge leap in the price of gas and electricity. “With widespread smuggling on top of that,” he says, “there is an abundance of good quality imports that sell at much cheaper prices than the locally produced, and we have reached the point where only a third of the factories in Mehalla are today working at full capacity.” Not a few spinners, weavers, and ready-made garment manufacturers had to shut down altogether, he says.
Textile factory owners and workers complain about the slowdown in production. “We used to compete with India, Pakistan and Turkey in quality and production,” says 35 year-old Maged Qellini, a textile worker for twelve years. “Now our production is halted and we wait for an occasional client to place an order. After it is delivered production again stops until another client shows up.”
“We tried to devise a plan to occupy the workers during the periods of no production and decided to do minor production tasks such as textile dyeing,” says Ansary Abdel-Moneim who has been in the field for 15 years.





What chance garment industry?
Last year traders in Port Said took to the streets to protest against the increase in smuggling, which is ruining their trade—the city’s main source of income—and demand that the government put an end to the illegal practice. The government responded by assigning the manpower and sending the equipment needed to block the trails used by the smugglers to leak the merchandise in. Some of the equipment came from the local authorities, but a substantial part was donated by the army.
General Wael Abdel-Razeq, director of the Ports Security Authoity (PSA), says that the seizure of smuggled goods increased sharply once the Customs and the Armed Forces stepped up control of most smuggling routes. This should help reduce the volume of smuggled goods on the market, he says, which should in turn help the local garment industry and the trading in Port Said.
Muhammad al-Salhawi, head of the Customs Authority, told Watani that a number of measures were being implemented to upgrade and widen customs supervision, and a new law is being drafted to increase fines from double to triple the item’s value. Bonuses will be awarded to customs officers to encourage them to put more effort into preventing smuggled goods from finding their way into the country.
Ahmed al-Aref, professor of textiles at the National Research Centre, says spinning and weaving represents about 25 per cent of Egypt’s total exports. The industry employs 950,000 workers in almost 4,000 factories, and it is struggling to survive.
Unless smuggling is curbed, however, the industry stands little chance.

Watani International
28 January 2015



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