SUPPORTING QIZ'S IN THE EVENT OF WAR

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 001185 SIPDIS STATE ALSO FOR P, E, EB, IO NSC FOR EDSON, ABRAMS TREASURY FOR QUARLES CENTCOM FOR POLAD DOD FOR OSD STATE PASS USTR FOR NED SAUMS USDOC FOR 2540/ITA/MAC/ONE/COBERG E.O. 12958: DECL: 02/19/2013 TAGS: ETRD EAIR MOPS IS JO SUBJECT: SUPPORTING QIZ'S IN THE EVENT OF WAR REF: A. 02 AMMAN 1721 ¶B. 02 AMMAN 6952 ¶C. AMMAN-NEA/ARN EMAIL OF 04/03/02 Classified By: Ambassador Edward W. Gnehm, reasons 1.5 (b,d) ¶1. (c) SUMMARY: We are beginning to see the first indications of a negative impact on QIZ business as a result of war jitters on the part of U.S. buyers. Given the importance of QIZ exports to Jordan's economic growth and macroeconomic stability, a prolonged downturn in QIZ orders as a result of conflict in Iraq could have serious economic and political repercussions for Jordan. We will be working over the coming weeks and months to try to mitigate the worst of the possible shocks to the QIZ business in the event of war in Iraq. End summary. QIZ'S SEEING FIRST CANCELLATIONS ¶2. (sbu) We recently received our first confirmed case of cancellation of a QIZ contract tied specifically to anxiety over the possibility of war with Iraq. Costandi Yaghnam, CEO of El Zay Ready Wear (a long-established Jordanian suit maker producing high-end labels for U.S. buyers) learned that a major purchaser - Hartmarx - wished to cancel an order for 15,000 suits due to concern over Zay's ability to secure inputs and export product in the event of war. Yaghnam tells us this cancellation will cost his company $1 million in revenue and force him to lay off 90 highly-skilled tailors. Yaghnam is confident he could fill the order, but is having trouble convincing his buyer that his QIZ exports will be able to circumvent logistical problems likely to result from war in Iraq. POTENTIAL IMPACT SIGNIFICANT ¶3. (sbu) We do not expect Zay's case to be unique. If anything, the fact that Zay, a company with long-standing US connections and loyal buyers, is having problems leads us to expect younger, less-established QIZ producers in lower-margin product lines to come under even heavier pressure. The chief concern of U.S. buyers is reliable delivery - if they do not feel they can get this from Jordan, they have other sourcing options. Even isolated delivery failures could have a ripple effect on the Jordanian industry as a whole as word spreads through a buying community that is by nature fickle and, likely, uninformed about actual conditions in the region. ¶4. (u) If conflict with Iraq causes major dislocations to commercial logistics, QIZ exporters could find themselves unable to secure inputs and unable to honor contracts. Alternately, buyers could simply cancel orders pre-emptively to avoid the uncertainty. In either case, the potential impact of cancellations on Jordan's economy and social structure could be significant. The QIZ's are a major hard-currency earner, accounting for some 20% of all Jordanian exports and driving much of Jordan's 4.9% growth in GDP last year. Loss of exports would mean loss of earnings, putting further strain on the economy. ¶5. (u) QIZ's are also a major employer, with over 20,000 Jordanians and some 10,000 expatriates working in QIZ factories. Should these companies lose orders for an extended period, we could see layoffs on a substantial scale, with negative social and political impacts - i.e., workers out of jobs and salaries. We would also note the eagerness of opportunists to play up any problems with the QIZ's because of their ties to Israel. ADAPTING TO A WARTIME ENVIRONMENT ¶6. (sbu) Without question, conflict in Iraq will impact commercial logistics in Jordan, which is likely to be the biggest concern for QIZ buyers in the U.S. Transportation insurance rates will go up, and the number of cargo ships visiting Aqaba (and even Haifa) is likely to go down as a result. Also, to the extent that air and sea cargo lanes are shut down, it will be harder for QIZ exporters to secure inputs and ensure timely delivery of finished goods. ¶7. (sbu) In point of fact, the QIZ's have shown great resiliency and adaptability throughout the intifada. We gauge that they will likely weather any inconveniences posed by conflict in Iraq better than expected (Yaghnam, for example, said it would be "no problem" to warehouse enough inputs in a week's time to meet the full Hartmarx order, provided his buyer did not get cold feet). Thus the key to mitigating the negative impact of conflict on the QIZ's will be to reassure buyers that political and commercial will remains strong to ensure the continued success of the QIZ's, even in trying circumstances. This will also necessitate engaging shippers and insurers about the true level of political risk surrounding exports from Jordan. CONTROLLING THE DAMAGE ¶8. (c) In order to protect the long-term viability of the QIZ initiative as a source of economic growth and social change in Jordan, we suggest the following actions: -- Be prepared during a conflict situation to engage buyers, shippers, insurers, and suppliers in Amman and Washington to make sure they have an accurate picture of the business environment here. -- Facilitate civil-military coordination to deconflict air traffic so as to keep civilian air traffic functioning as normal to the greatest extent possible. -- Establish a mechanism for contacts among USG, GOI, and GOJ authorities to resolve any questions regarding the status of the northern Sheikh Hussein bridge and Haifa port operations. -- Reiterate a clear, public message of support for the continued success of the QIZ's. In the first instance, we plan to send an open letter to the local AmCham expressing strong support for the QIZ's and noting the ability of the QIZ's to operate successfully in a challenging political environment over the past three years. -- Re-examine the option of temporarily suspending Israeli input requirements in the event that circumstances beyond Jordan's control make it impossible to obtain QIZ inputs from Israel, along the lines of the proposal we developed last spring (ref c). GNEHM