ARAB AFFAIRS - Dec 14 - Trade Deal Helps Thaw For Israel And Egypt.

Egypt and Israel agree a rare trade co-operation deal. The two countries and the US signed a protocol to set up seven special zones, where goods would gain free access to US markets provided that 35% of their inputs comes from co-operation between Egyptian and Israeli companies. The so-called Qualified Industrial Zones comes amid a remarkable change of mood between the two countries. Since the Palestinian intifada began four years ago, the "cold peace" between Israel and Egypt - which signed a peace agreement in 1979 - has become even frostier. But the two countries exchanged prisoners earlier this month. And Hosni Mubarak, the Egyptian president, last week described Ariel Sharon the Israeli prime minister - a man regularly reviled and insulted in the Egyptian state media - as the best chance for the Palestinians to reach peace. The trade protocol stipulates that 11.7% of the content of the goods exported from the zones should originate in Israel. Egypt expects the deal to throw a lifeline to its textile industry, which faces a big drop in exports to its crucial US market in January after the expiry of the import quota system. The Egyptian state press has been trumpeting the expected positive impact on exports and employment in a bid to prepare public opinion for economic co-operation with Israel. The minister of international trade and industry said: In the past there has always been an emotional reaction to co-operation with Israel on the public side. We wanted to make sure that we included the maximum number of people because we wanted Egyptians to feel that there are benefits to the economy at all levels". Analysts in Cairo say the thaw in relations with Israel is driven by Egyptian confidence that the peace process between Israelis and Palestinians will be relaunched after the death last month of Yassir Arafat, the Palestinian leader. Egyptian officials are already closely involved in mediating between Palestinians and Israelis over the Israeli withdrawal from the Gaza Strip, planned for next year. A negotiator involved in talks about future security arrangements in Gaza said Cairo had received assurances that Israel would withdraw its forces from the Philadelphia corridor, which runs along Gaza's border with Egypt. This has been a key Egyptian demand. The former Egyptian ambassador in Tel Aviv Mohammad Bassiouni, told FT Israel had dropped its initial insistence on maintaining control of the corridor after its planned departure from Gaza. In Israel, however, a foreign ministry official said that while Israel's goal was a withdrawal from the Philadelphi corridor, a decision had not been reached yet.