JORDAN: TRADE MINISTRY IN TALKS WITH ISRAEL TO

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 003296

SIPDIS

STATE PASS USTR FOR NED SAUMS
USDOC FOR 4520/ITA/MAC/ONE/PTHANOS
STATE PASS USAID FOR MSCOVILL
TREASURY FOR PIPATANAGUL

E.O. 12958: DECL: 06/12/2012
TAGS: ETRD EINV IS JO
SUBJECT: JORDAN: TRADE MINISTRY IN TALKS WITH ISRAEL TO
RESTRUCTURE QIZ REQUIREMENTS

Classified By: DCM Greg Berry, reasons 1.5(b,d)

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SUMMARY
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1. (c) GOJ Trade Ministry officials tell us they have begun
talking to their Israeli counterparts about improving current
QIZ operations and regulations. The GOJ's proposals include
both improvements to existing logistical procedures as well
as changes to the structure of required Israeli inputs into
QIZ goods. The GOJ hopes improvements agreed to through
these talks will help spur new investment in the QIZ's
following stagnation of new investment into the sector since

2001. If proposed improvements take hold, there could be a
measurable impact on the sustained competitiveness of QIZ's
and some diversification of the manufacturing base under the
initiative. End summary.


2. (c) Jordanian Trade Ministry Secretary General Samer
Tawil said he is in active discussion with his Israeli
counterparts to improve the functioning of the QIZ
initiative. The ministry is building its position around a
report on QIZ sustainability recently completed by a trade
expert contracted for the Ministry by the USAID-funded
Jordan-US Business PArtnership for that purpose (report to be
pouched to NEA/ARN). The ministry's position also reflects a
number of long-standing concerns voiced by QIZ exporters over
the past two years about inefficiencies in QIZ procedures and
rules.

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New Procedures Sought
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3. (u) Recommendations in the report fall into two broad
categories: procedural adjustments to current QIZ product
processing requirements, and adjustments to the
sub-regulations on rules of origin and Israeli content
requirements. In the first category are a number of
seemingly sound recommendations. The first is a
recommendation to extend and institutionalize the use of the
on-line QPR (qualifying product registration) approval
process developed with USAID assistance last year. The
program is not widely used now, due in part to early
technical glitches and in part to lack of awareness among
exporters that the system is available. Widespread use of
the system could greatly reduce QPR approval times on the
Jordanian side, and adaptation of the program to Israeli QIZ
auditing processes could have a similar effect on the Israeli
side.


4. (sbu) The second recommendation of the study is to
extend the validity of QPR's beyond the current period of 12
months, which would allow exporters to continue production on
identical styles year-on-year without clogging the QPR
approval pipeline with what amount to pro-forma approvals.
The third recommendation is for more frequent meetings of the
Israel-Jordan joint committee for QIZ issues. The committee,
which is also supposed to include observers from the USG as
needed, has met at best sporadically in the past two years,
according to Tawil. Finally, the report recommends creation
of a storage facility at the Gateway QIZ for stockpiling
Israeli inputs. Following the sharp spike in violence in the
West Bank in the spring, many manufacturers have concerns
about disruption of access to inputs during another regional
crisis. Having a store of inputs at Gateway could ease those
tensions.


5. (c) Most of the procedural recommendations make
intuitive sense, though some - like the Gateway project - are
probably better handled through private sector initiative.
More sweeping, though, are proposals for changes to current
Israeli content rules under the QIZ initiative. Many of
these ideas are based on long-standing gripes from exporters
that Israeli inputs are too expensive and/or not of
acceptable quality, but must be used because of current
content requirements. However, the GOJ's arguments are
becoming more sophisticated, and are even beginning to show
an interest in a solution that will benefit both sides.

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New Israeli Content Proposals
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6. (c) The GOJ's opening position in its talks with Israeli
counterparts, says Tawil, will be to secure a straight
reduction in Israeli content from 8% to 4% for textiles, with
an offer by the GOJ to accept an "increase" of content
requirements on hi-tech, jewelry, and medical/surgical goods
to 11.7% (note: under the current agreement, the 8% content
requirement is a temporary measure, with content due to be
reset to 11.7% for all goods in February 2004. End note).
According to MoIT officials, the fallback GOJ position (not
elucidated in the study) is to propose a sliding scale of
content requirements for textiles, starting at 8% (or more,
depending on the good) for low-end products like T-shirts and
underwear and sliding to 4% or even 2% for higher-end goods
including suits, evening wear, leather apparel, and the like.


7. (c) At the same time, the GOJ is making a parallel
proposal to move from per-item pre-production audits to
year-end cumulative audits to certify Israeli content. The
end result of such a switch would be the same as a sliding
scale - the governments would need to verify only the 8%
Israeli content on total exports by a given company, allowing
them to produce some goods with more than 8% content, and
some with less, over the course of the year.

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Jordan's New Approach
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8. (c) While the proposals are not shockingly new, the
rationale behind them is. The GOJ argues, with some
accuracy, that the current set-up restricts the growth of the
QIZ's out of low-end garment production, due to the
difficulty of meeting the 8% content rule for high-end goods
due to the limited availability of suitable,
price-competitive inputs from Israel. They argue that the
proposed changes in content rules will attract a wider
variety of manufacturers, which will in turn substantially
boost production, thereby leading to a net increase in
Israeli inputs sold, even at lower percentages. The GOJ thus
sees lowering - but not eliminating - Israeli content as a
gain for both sides. The GOJ also argues that, as the
U.S.-Jordan FTA matures, the relative benefit of production
under the QIZ initiative will vanish, leaving exporters in
Jordan with little incentive to continue doing business with
Israel, where input prices are seen as high and quality low.
Thus they will argue that making content requirements more
flexible will help make production of Israeli inputs a more
sustainable business.

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Comment
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9. (c) With new investment in the QIZ's relatively stagnant
in 2001, the GOJ is eager to find a way to jump-start
interest in the QIZ's without undermining the basic
philosophy of Jordanian-Israeli cooperation that underpins
the initiative. The GOJ has parroted for months the narrow
interest of exporters in minimizing Israeli content
requirements. It seems they may have finally found a way to
package a proposal that will show the Israeli side its
interest in more flexible content rules, as well as boosting
the initiative as one of the benefits of the peace process
that is supporting economic growth and stability in Jordan.
Taken together, the content and procedural proposals could
indeed spark diversification in the QIZ's and as a result
increase business on both sides of the border. Getting
there, though, will mean convincing Israeli input producers
to reduce their guaranteed business in what amounts to a
captive market. It could also mean convincing Israel that it
should negotiate on the assumption that 8% is the proper
status quo, and not the temporary measure it was originally
designed to be.
Gnehm