By Jeremy Howell
BBC Business reporter in Cairo, Egypt
The Egyptian government is expected to sign a special trade agreement with the US and Israel next week.
Cotton provides one million Egyptian jobs
The agreement's aim would be to help its textile industry which is under threat from harsh competition from Asia once global trade rules come into effect in January.
The cotton clothes and textiles industry is one of the mainstays of Egypt's economy. At a time when Egypt is facing rising unemployment, it employs over one million people and generates about $1.25bn (£643m) in export revenue.
But in less than a month's time, new international trading rules will come into force which could hobble the sector, leading to factory closures and mass job losses.
To avoid the worst impact, Egypt is expected to sign a Qualified Industrial Zone (QIZ) agreement with the US, the biggest market for clothes and textiles, as well as with Israel.
Adopting Israel as a trading partner may be too much for the Egyptian public to bear. But the government of Egypt is caught between the prospect of facing public outrage if it signs the agreement and the prospect of job losses and factory closures if it does not.
Falling market share
Egypt's clothes and textiles industry has up until now benefited from a system of international import quotas which countries set up to protect their markets being flooded by produce from low-cost producers like China and India.
Trade rule changes are reaching into Egyptian lives
But on 1 January 2005, the so-called multi-fibre agreement, part of the General Agreement on Tariffs and Trade, is due to end, putting an end to all these quotas.
A study by the Egyptian Centre for Economic Studies predicts India, which currently has a 4% share of the world market, will quickly gain a 15% share and that China, which has a 16% share, will gain a share of no less than 50%.
Egypt, which is unable to match their low production costs and low prices, is one of the countries being squeezed out.
"We will be losing between 40 and 45% of what we are selling right now," says Dr Mohamed Marzouk, General Manager of Giza Spinning and Weaving.
"Egypt is exporting between $550m and $600m. That will come down to around $300m or $250m dollars, coming 2005. We're starting to feel it right now."
Qualified Industrial Zones
However, setting up the Qualified Industrial Zones, Egypt's exporters will gain an advantage in the world's largest market for clothes and textiles, the USA.
The deal with the US offers a solution, with strings attached
The trade deal will involve economic co-operation with Israel. If goods produced in these zones contain a minimum amount of material originating from Israel, then they can be imported into the USA tariff-free.
Since the US tariffs on clothes and textiles go as high as 35%, it would put Egyptian produce at a great price-advantage.
The Kingdom of Jordan established such zones in the late 1990s, with remarkable results for its clothes producers.
"Jordan moved from $40m of exports with the United States to $750m within a period of five years, without a great industrial structure," says Mahmoud Kamal, chief executive of El Nile Tricot, a clothes factory in Cairo.
"We do have an industrial structure, which can be built on. After the implementation of QIZs, you could find 500 Israeli factories working in Egypt."
Egypt's business community sees Qualified Industrial Zones as their great salvation and has been lobbying the government to close the deal.
The government, which is newly appointed and business-friendly, appears keen to do so and has asked the US for leave to set up no fewer than 16 of the zones.
But ministers are aware that the prospect of doing business with Israel is unpopular with many ordinary Egyptians.
Nearly half of Egypt's cotton exports are at risk
"The industrialists might think this is a good deal, so let's go ahead with it," says Rached Mohamed Rached, Egypt's Minister of Foreign Trade and Industry.
"The public at large, being influenced by the situation in Palestine, have certain sensitivities."