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