JORDAN GEARS UP FOR ARAB FREE TRADE

UNCLAS SECTION 01 OF 03 AMMAN 005212

SIPDIS

SENSITIVE

DEPT PASS USTR FOR NOVELLI/SAUMS
USDOC FOR 4520/ITA/MAC/ONE/PTHANOS

E.O. 12958: N/A
TAGS: ETRD ECON JO
SUBJECT: JORDAN GEARS UP FOR ARAB FREE TRADE


SENSITIVE BUT UNCLASSIFIED; PLEASE HANDLE ACCORDINGLY.


1. (SBU) SUMMARY: WITH TRADE WITH OTHER ARAB
COUNTRIES MAKING UP A SIZEABLE PORTION OF ITS OVERALL
TRADE, JORDAN WAS ONE OF THE FIRST COUNTRIES TO
EMBRACE THE ARAB FREE TRADE AGREEMENT (AFTA),WHICH
AIMS AT CREATING AN ARAB FREE TRADE AREA BY 2005.
INDEED, SINCE ENTERING INTO FORCE, JORDAN HAS SEEN THE
AFTA CREATE NEW REGIONAL OUTLETS FOR ITS INDUSTRY,
BLUNTING THE IMPACT ON JORDAN'S INDUSTRY OF WTO
MEMBERSHIP AND THE U.S.-JORDAN FTA AND ARGUABLY MAKING
THE COUNTRY MORE ATTRACTIVE TO FOREIGN INVESTORS.
ALTHOUGH THE COVERAGE OF AFTA IS EXPANDING AS LISTS OF
EXEMPTED GOODS DIMINISH AND WITH DISCUSSIONS SLATED ON
EXTENDING IT TO TRADE IN SERVICES, DOUBTS PERSIST AS
TO WHETHER THE AFTA WILL BE EFFECTIVE IN RAISING
INTER-ARAB TRADE OVERALL, THUS HAVING A POSITIVE,
TRADE-CREATING IMPACT ON REGIONAL ECONOMIES. HOW THE
AFTA TREATS FREE TRADE ZONES, LIKE JORDAN'S AQABA
SPECIAL ECONOMIC ZONE OR DUBAI'S JEBEL ALI, IS A MAJOR
QUESTION MARK. END SUMMARY.

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JORDAN'S TRADE WITH ARAB COUNTRIES
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2. (U) TRADE WITH ARAB COUNTRIES ACCOUNTED FOR 28
PERCENT OF JORDAN'S TOTAL TRADE VOLUME IN 2001 AND
MUCH OF THE PAST DECADE. CONSEQUENTLY, ARAB COUNTRIES
COMBINED REPRESENT JORDAN'S LARGEST TRADING PARTNER,
FOLLOWED BY THE EUROPEAN UNION (WHICH ON AVERAGE
ACCOUNTS FOR 24 PERCENT OF JORDAN'S TRADE) AND THE
UNITED STATES (WHICH ACCOUNTED FOR SOME 9.5 PERCENT OF
JORDAN'S TRADE IN 2001). THIS MAKES JORDAN'S RATIO OF
INTER-ARAB TRADE ONE OF THE HIGHEST, IF NOT THE
HIGHEST, AMONG ARAB COUNTRIES, COMPARED WITH AN
AVERAGE OF 8.7 PERCENT FOR ALL ARAB COUNTRIES
COMBINED. THE ARAB COUNTRIES WITH WHICH JORDAN TRADES
THE MOST ARE IRAQ, SAUDI ARABIA, THE UAE, SYRIA,
LEBANON AND EGYPT. IRAQ AND SAUDI ARABIA CONSTITUTE
JORDAN'S FIRST AND FOURTH BIGGEST TRADING PARTNERS
RESPECTIVELY.


3. (U) A CLOSER LOOK AT JORDAN'S TRADE DATA WITH ARAB
COUNTRIES SHOWS THAT CRUDE OIL AND PETROLEUM PRODUCTS,
WHICH ARE IMPORTED EXCLUSIVELY FROM IRAQ, MAKE UP THE
BIGGEST PORTION OF JORDAN'S ARAB TRADE (SOME 35
PERCENT) AND AROUND 10 PERCENT OF JORDAN'S OVERALL
TRADE VOLUME. JORDAN IMPORTED JD 821.2 MILLION (USD
1,149.7 MILLION) OF PRODUCTS FROM ARAB COUNTRIES IN
2001, REPRESENTING 24 PERCENT OF TOTAL IMPORTS. CRUDE
OIL AND PETROLEUM IMPORTS ACCOUNTED FOR 58 PERCENT OF
THE TOTAL, FOLLOWED BY FOODSTUFFS, PLASTIC PRODUCTS,
ALUMINUM, IRON AND STEEL. JORDAN EXPORTED JD 542.5
MILLION (USD 764.9 MILLION) OF PRODUCTS TO ARAB
COUNTRIES IN 2001 REPRESENTING SOME 40 PERCENT OF
TOTAL EXPORTS. PHARMACEUTICAL EXPORTS CAME FIRST WITH
21 PERCENT OF THE TOTAL, FOLLOWED BY VEGETABLES, PAPER
AND CARDBOARD, PLASTIC BAGS, FODDER, AND CEMENT.


4. (U) JORDAN HAS LONG HAD A TRADE DEFICIT WITH ARAB
COUNTRIES, AVERAGING AROUND 50 PERCENT OF EXPORTS OVER
THE PAST THREE YEARS. THIS IS NOT SURPRISING, SINCE
JORDAN, WITH ITS LIMITED RESOURCE BASE, HAS
HISTORICALLY SUFFERED FROM AN OVERALL TRADE DEFICIT.
OIL IMPORTS COULD ACCOUNT FOR THE WHOLE AMOUNT OF THE
DEFICIT WITH ARAB COUNTRIES, AND CONSEQUENTLY, THE
SIZE OF THIS DEFICIT FLUCTUATES ALMOST IN TANDEM WITH
MOVEMENTS IN THE PRICE OF OIL.

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THE ARAB FREE TRADE AGREEMENT (AFTA)
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5. (U) ARAB COUNTRIES' EFFORTS AT REGIONAL
COOPERATION LONG FAILED TO PRODUCE TANGIBLE RESULTS,
ALTHOUGH TALK OF A COMMON MARKET STARTED IN THE
1950'S. HOWEVER, IN MARCH 1998, ELEVEN ARAB COUNTRIES
ESTABLISHED THE ARAB FREE TRADE AGREEMENT (AFTA) ALSO
KNOWN AS THE GREATER ARAB FREE TRADE AREA (GAFTA) OR
PAN-ARAB FREE TRADE AREA (PAFTA). THEIR NUMBER LATER
INCREASED TO FOURTEEN COUNTRIES INCLUDING: LEBANON,
JORDAN, SYRIA, EGYPT, MOROCCO, TUNISIA, IRAQ, LIBYA
AND SIX MEMBERS OF THE GULF COOPERATION COUNCIL (GCC)
NAMELY BAHRAIN, KUWAIT, OMAN, QATAR, SAUDI ARABIA AND
THE UNITED ARAB EMIRATES (UAE).


6. (SBU) NOTE THAT JORDAN IS PURSUING ITS
PARTICIPATION IN AFTA ON A SEPARATE TRACK FROM
BILATERAL AND SUB-REGIONAL EFFORTS TO LIBERALIZE ITS
TRADE WITH ARAB COUNTRIES. THESE EFFORTS INCLUDE THE
"AGADIR PROCESS" OF COUNTRIES WITH EU ASSOCIATION
AGREEMENTS, TRADE, TRANSPORT AND CUSTOMS AGREEMENTS
WITH SYRIA, KUWAIT, EGYPT AND OTHERS. THESE
AGREEMENTS ARE GENERALLY LESS AMBITIOUS, IN TIMING
AND/OR IN COVERAGE, THAN THE AFTA, AND ARE SOMETIMES
DRIVEN IN LARGE PART BY POLITICAL CONSIDERATIONS.


7. (U) UNDER THE AFTA, MEMBERS ARE REQUIRED TO AFFORD
GOODS PRODUCED IN OTHER MEMBER STATES NATIONAL
TREATMENT, RESULTING IN REDUCED TARIFFS, FEES AND
TAXES ACCORDING TO A GRADUAL LIBERALIZATION SCHEDULE
STARTING JANUARY 1998. INITIALLY, THE TARIFF
REDUCTION WAS SUPPOSED TO BE 10 PERCENT ANNUALLY,
THEREBY ESTABLISHING A FREE TRADE AREA BY 2007.
MEMBER COUNTRIES AGREED AT THE BEIRUT ARAB SUMMIT IN
MARCH 2002 TO ADVANCE THE DATE OF THE ARRIVAL OF THE
FREE TRADE AREA TO 2005 BY REDUCING EXISTING TARIFFS
BY 50 PERCENT IN 2002, TEN PERCENT IN 2003 AND 20
PERCENT IN BOTH 2004 AND 2005. IN ADDITION, ARAB
LEADERS AGREED IN PRINCIPLE TO INCLUDE THE
LIBERALIZATION OF TRADE IN SERVICES IN FUTURE
DISCUSSIONS. ACCORDING TO SAMER TAWIL, SECRETARY
GENERAL OF JORDAN'S MINISTRY OF INDUSTRY AND TRADE,
THIS YEAR'S TARIFF REDUCTION HAS ALREADY BEEN
IMPLEMENTED FOR ALL MEMBER STATES EXCEPT FOR MOROCCO,
WHICH IMPLEMENTED A 30 PERCENT TARIFF REDUCTION ONLY.
THE REMAINING REDUCTIONS WILL TAKE PLACE ON JANUARY
FIRST OF EACH YEAR.


8. (U) WHILE THE MOST OBVIOUS SHORTCOMING OF THE
AFTA IS THAT IT DOES NOT APPLY TO SERVICES, ITS
COVERAGE OF GOODS ALSO LEAVES MUCH TO BE DESIRED.
WHEN THE AFTA WAS SIGNED, MEMBER COUNTRIES ADOPTED
LONG, WIDE-RANGING LISTS OF EXEMPTED PRODUCTS
(NEGATIVE LISTS),PURPORTEDLY TO ALLOW NATIONAL
INDUSTRIES TIME TO ADJUST TO COMPETITION. UNDER THE
AGREEMENT, THESE LISTS ARE SUPPOSED TO BE TEMPORARY IN
NATURE AND SHOULD NOT ACCOUNT FOR MORE THAN 15 PERCENT
OF TOTAL INTER-ARAB TRADE VOLUME. INDEED, LOCAL
EXPERTS SAY THAT NEGATIVE LISTS AMOUNT TO LESS THAN 6
PERCENT OF INTER-ARAB TRADE. THESE EXEMPTIONS ARE
SLATED TO BE DROPPED BY SEPTEMBER 16, 2002, WITH
MEMBER COUNTRIES ARE NOT ALLOWED TO INTRODUCE NEW ONES
WITHOUT A DETAILED EXPLANATION. HOWEVER, DOUBTS
LINGER IN BOTH THE PRIVATE SECTOR AND THE JORDANIAN
GOVERNMENT AS TO WHETHER ALL AFTA MEMBERS WILL ABIDE
BY THIS STIPULATION. IN PARTICULAR, MORE THAN ONE
CONTACT EXPRESSED DOUBT THAT EGYPT WILL REALLY
ELIMINATE ITS LIST OF EXEMPTED TEXTILE GOODS OR THAT
MOROCCO WILL DO SO FOR ITS AGRICULTURAL PRODUCTS.


9. (U) MEMBER COUNTRIES ALSO STILL NEED TO FINALIZE
THE ISSUE OF COUNTRY OF ORIGIN RULES AND PROCEDURES.
GENERALLY SPEAKING, TO QUALIFY FOR PREFERENTIAL
TREATMENT UNDER AFTA, GOODS HAVE TO SHOW A 40 PERCENT
VALUE-ADDED IN THE COUNTRY OF ORIGIN AND A SUBSTANTIAL
TRANSFORMATION. AN ARAB LEAGUE ECONOMIC COUNCIL
(ALEC) MEETING NEXT SEPTEMBER WILL DISCUSS THE ISSUE
MORE THOROUGHLY, INCLUDING A PROPOSAL TO TIGHTEN RULES
OF ORIGIN ALONG THE LINES OF EU STANDARDS, WHICH ARE
FAR STRICTER: 50 PERCENT LOCAL CONTENT WITH ONLY
CERTAIN PRODUCTION PROCESSES QUALIFYING TOWARDS THAT
TOTAL. FINALLY, PROBLEMS OF STANDARDS AND TECHNICAL
BARRIERS TO TRADE (TBT'S) PERSIST AND A WORKING GROUP
HAS BEEN ESTABLISHED UNDER THE ALEC TO VISIT MEMBER
STATES AND STUDY THEIR CUSTOMS PROCEDURES IN ORDER TO
MAKE RECOMMENDATIONS FOR ALEC ON HOW TO REDUCE THEM.

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PROJECTED IMPACT
--------------


10. (SBU) ACCORDING TO TAWIL, AFTA WILL INCREASE
OPPORTUNITIES FOR JORDANIAN EXPORTERS TO COMPETE WITH
LOWER COST ASIAN -- PARTICULARLY CHINESE --
COMPETITORS IN OTHER ARAB MARKETS. HE ESPECIALLY
NOTED SYRIA AND SAUDI ARABIA AS PROMISING. LOWER
DUTIES, TARIFFS AND TAXES, AND -- ESPECIALLY -- LOWER
TRANSPORTATION COSTS, HE SAID, WOULD COMPENSATE FOR
RELATIVELY HIGHER LABOR AND PRODUCTION COSTS IN JORDAN
COMPARED TO EAST ASIA. BY OPENING ARAB MARKETS, THE
JORDANIANS ALSO HOPE AFTA WILL SOFTEN THE BLOW OF
JORDAN'S WTO MEMBERSHIP AND THE U.S.-JORDAN FTA ON
SMALLER, LESS COMPETITIVE JORDANIAN PRODUCERS WHO
CATERED TO THE LOCAL MARKET AND SEEN THEIR MARKET
SHARE DIMINISH. TAWIL ALSO ARGUES THAT THE
COMBINATION OF THE AFTA WITH THE U.S. FTA AND EU
ASSOCIATION AGREEMENT WILL MAKE JORDAN MORE ATTRACTIVE
TO FOREIGN INVESTORS AS A REGIONAL TRADING HUB.


11. (U) ALREADY SOME BENEFITS ARE MEASURABLE: LAST
YEAR, JORDAN'S EXPORTS TO ARAB COUNTRIES GREW BY 23
PERCENT. THE FIRST SIX MONTHS OF THIS YEAR HAVE SEEN
A 17 OR 18 PERCENT INCREASE. ACCORDING TO TAWIL,
EXPORTS TO SYRIA ARE UP BY MORE THAN 100 PERCENT LED
BY AGRICULTURAL EXPORTS, WHICH ARE UP BY 250 PERCENT.
IN ADDITION, EXPORTS TO ALGERIA ARE UP BY 180 PERCENT,
WHILE EXPORTS TO IRAQ ARE UP BY 10 PERCENT SO FAR THIS
YEAR.


12. (SBU) THE BUSINESS COMMUNITY, HOWEVER, IS MORE
SKEPTICAL. REPORTS OF CUMBERSOME AND ARBITRARY
CUSTOMS PROCEDURES COUPLED WITH COMPLAINTS ABOUT
IGNORANT AND INEFFICIENT CUSTOMS OFFICIALS ABOUND FROM
JORDANIAN EXPORTERS. THE GAP BETWEEN POLICY AND
IMPLEMENTATION CAN BE VERY WIDE, ESPECIALLY IN
COUNTRIES LIKE IRAQ AND SYRIA, WHERE THE TECHNICAL
EXPERTISE AND PAY OF CUSTOMS OFFICIALS IS VERY LOW.
SOME FOOD AND PHARMACEUTICALS PRODUCERS REPORTED TO US
AN ENDLESS SAGA OF COSTLY DELAYS AND EXPENSIVE BRIBES
WHEN TRYING TO GET THEIR PRODUCTS THROUGH UNDER THE
LATEST TARIFF REDUCTIONS TO SYRIA. IN ADDITION, THE
PLETHORA OF TECHNICAL BARRIERS TO TRADE AND THE FICKLE
NATURE OF INTER-ARAB RELATIONSHIPS -- AS MANIFESTED IN
A RECENT KUWAIT-JORDAN TARIFF WAR OVER TRUCK TRANSPORT
FEES -- RENDERS DOING BUSINESS IN THE ARAB REGION AN
UNPREDICTABLE GAME.

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FREE TRADE ZONES EXCLUDED?
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13. (SBU) A CONCERN OF DIRECT BEARING ON U.S.
COMPANIES IS HOW THE AFTA TREATS PRODUCTS OF DOMESTIC
TAX-FREE OR "FREE TRADE" ZONES. ACCORDING TO THE
JORDANIAN TRADE MINISTRY, AFTA MEMBERS SIGNED AN
AGREEMENT THIS SPRING THAT EXCLUDED EXPORTS OF SUCH
ZONES FROM THE BENEFITS OF AFTA PENDING FURTHER STUDY
BY MEMBERS. IN MANY CASES, THIS HAS ACTUALLY RESULTED
IN AN INCREASE IN TARIFFS ON EXPORTS FROM THESE ZONES
TO AFTA MEMBERS. FOR EXAMPLE, ONE U.S. COMPANY WITH A
REGIONAL DISTRIBUTION CENTER IN JEBEL ALI HAS
COMPLAINED THAT IT NOW FACES NEW JORDANIAN TARIFFS OF
30% ON PROCESSED FOOD PRODUCTS BROUGHT IN FROM DUBAI,
FIVE TIMES THE PREVIOUS RATE. IF THIS STAYS, THIS
WOULD OBVIOUSLY BE A MAJOR GAP IN THE AGREEMENT THAT
WORKS AGAINST GREATER REGIONAL AND GLOBAL INTEGRATION
FOR THE ARAB WORLD.

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COMMENT
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14. (SBU) IN A WORLD OF REGIONAL TRADING BLOCS AND
TRADE AGREEMENTS, INTER-ARAB TRADE REMAINS VERY LOW
AND FRAGMENTED. AFTER TAKING OUT OIL AND MINERALS,
INTER-ARAB TRADE IS ONLY 16 PERCENT OF TOTAL ARAB
TRADE AND IS LARGELY CONCENTRATED ON TRADE IN
AGRICULTURAL PRODUCE. THE ARAB FREE TRADE AGREEMENT
(AFTA) INITIATIVE IS AIMED AT ADDRESSING THIS DISMAL
STATE OF AFFAIRS BY TRYING TO CREATE AN ARAB FREE
TRADING AREA OF SORTS AND EVEN ARRIVING IN DUE COURSE
AT AN ARAB CUSTOMS UNION. HOWEVER, GIVEN THE VARYING
POLITICAL AND ECONOMIC SYSTEMS IN ARAB COUNTRIES AND
SMALL AMOUNT OF INTER-ARAB TRADE, A NAFTA- OR EU-TYPE
TRADE BLOC SEEMS FARFETCHED. IN ADDITION, THE AFTA
ITSELF HAS A NUMBER OF LOOPHOLES THAT NEED TO BE
CLOSED, RANGING FROM RULES OF ORIGIN TO LONG LISTS OF
EXEMPTED PRODUCTS EXTENSIVE TBT'S, AS WELL AS
EXCLUSION OF FREE TRADE ZONES. THESE WILL GREATLY
DAMPEN THE GROWTH POTENTIAL SUCH AN AGREEMENT COULD
PROVIDE. THAT SAID, TO THE EXTENT THE AFTA IS
IMPLEMENTED, COUNTRIES LIKE JORDAN THAT HAVE TAKEN
BOLDER STEPS AT ECONOMIC LIBERALIZATION ALREADY STAND
TO GAIN THE MOST -- AS THE INCREASED TRADE FIGURES OF
THE LAST 18 MONTHS SUGGEST.
BERRY