SUPPORTING THE ROADMAP: BUILDING REGIONAL ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 05 AMMAN 004735 SIPDIS STATE PASS USTR FOR NED SAUMS USDOC FOR 4520/ITA/MAC/ONE/P.THANOS E.O. 12958: DECL: 07/10/2013 TAGS: ETRD PREL IS JO SUBJECT: SUPPORTING THE ROADMAP: BUILDING REGIONAL ECONOMIC TIES REF: A. AMMAN 4233 ¶B. 02 TEL AVIV 5559 ¶C. AMMAN 3830 ¶D. TEL AVIV 2829 ¶E. AMMAN 3785 Classified By: AMBASSADOR EDWARD W. GNEHM, REASONS 1.5 (B,D) ¶1. (U) This is a joint Amman-Jerusalem-Tel Aviv cable. -------------- Summary -------------- ¶2. (C) The Aqaba summit and the Dead Sea WEF conference have generated new hopes for expanded economic activity between Jordan, Israel and -- to a lesser extent -- the West Bank/Gaza. Jordan is particularly emboldened by the recent events on its soil. Israeli sources are also upbeat, but caution against overblown expectations. The Palestinians, to a large extent, remain focused on the present economic hardships caused by the Israeli closure measures. Currently, we see movement, or possible future movement, on several fronts. These include: -- Jordan and Israel have already begun exploring improvements to make QIZs, the core of bilateral economic relations, more competitive. -- Although Jordan has expressed interest in establishing cumulation agreements with future U.S. FTA partners Morocco and Bahrain, it may be hesitant to embrace cumulation, or an FTA, with Israel. Israel would likely be open to both cumulation and a "Jordan River Free Trade Area" as part of its policy to use economic ties to improve the general political relationship. The Palestinians, who already have a customs union with Israel and enjoy duty free trade with both the U.S. and the EU, tend to see trade with Jordan as a zero-sum game and are not necessarily keen on a FTA with the Jordanians. -- Jordan hopes for cooperation in tourism, civil aviation, and water management, but Israeli interest will be conditional on meeting economic and security concerns. Palestinians also see opportunities for the joint marketing of tourist sites in the future. ¶3. (C) Our continued support for greater economic integration would be a low cost way to support roadmap implementation, and ultimately to support greater regional stability through increased intra-regional trade, along the lines of the President's Middle East Trade Initiative (METI). End summary. -------------- Business Mood Improving -------------- ¶4. (C) The end of the war in Iraq and the beginnings of an Israeli-Palestinian dialog have created new hopes of improved economic relations between Jordan, Israel and the West Bank/Gaza. Optimism and hopes appear to be most pronounced in Jordan. In Israel, optimism is accompanied by caution born out of the disappointments of the 1990s, when economic realities and ultimately the Intifada destroyed any dreams of a New Middle East. While some in the Palestinian business community are hopeful that progress on implementing the roadmap will improve economic conditions in WB/G, they remain focused on internal obstacles to commerce, such as roadblocks and closures, as well as barriers to trade with Israel and the outside world imposed by the GOI. -------------- Pronounced Optimism in Jordan -------------- ¶5. (C) In Jordan, both the GOJ and Jordan's private sector have been more upbeat on prospects for local and regional economic growth (ref a). GOJ trade and investment promotion officials were particularly emboldened by the Aqaba summit and the Dead Sea World Economic Forum (WEF) that followed it. They have been thinking, and in some cases have started active discussions with Israeli counterparts, about mechanisms to increase opportunities under the QIZ initiative, the FTA, bilateral agreements, and other areas of technical cooperation. -------------- In Israel, Cautious Optimism -------------- ¶6. (C) Israeli officials, too, returned from the WEF upbeat. For them, the public appearances with Jordanian officials and the positive Jordanian statements about Israel were of important symbolic value, since they demonstrated a Jordanian commitment to openly acknowledge relations with Israel. As a whole, Israeli businessmen share this new mood. Both government and business contacts hope the new mood will lead to improved person-to-person contacts on a small scale, with trade and investment increasing as a result. Invariably, our interlocutors in Israel caution against overblown expectations. Israel's highly developed, export-oriented economy is not "a natural fit" with the Arab world, we repeatedly hear, and even in the most peaceful of worlds Israeli trade with Arab countries would remain small compared to Israeli trade with the highly industrialized economies of the world. In addition, Israelis are downbeat when commenting about the prospects for large-scale cross-border projects. Many such projects conceived in the 1990s were politically attractive but did not make economic sense, we are constantly told. -------------- In WB/G, Other Worries -------------- ¶7. (C) Even during more promising times before the latest Intifada, Palestinians engaged in little trade with Jordan, and focused their efforts on improving economic relations with Israel and promoting exports to the United States and Europe. The Jordanian and Palestinian economies are competitive, not complementary, and Palestinians tend to think of trade with Jordan as a zero-sum game. However, they enjoy a comparative advantage in labor costs with Israel. This, combined with physical proximity to Israel, the common Israeli/Palestinian market, and the difficulties of getting goods to Jordan due to tariffs, Israeli security measures and other non-trade barriers, explains why trade and labor flows with Israel have long dominated the Palestinian economy. -------------- QIZs -------------- ¶8. (SBU) QIZs remain at the center of Jordanian/Israeli economic relations. At meetings at the Dead Sea, Jordanian and Israeli trade ministers agreed to restructure the Israeli input calculations for QIZ exports. The GOJ and GOI are now close to inking an agreement to move away from a straight 8 percent content requirement and replace it with a "sliding scale" (ref b). The aim is to attract higher-value, more diversified products into the QIZ scheme by reducing the total Israeli content necessary for higher-value goods. -------------- "Cumulation Agreements" -------------- ¶9. (C) At the WEF, then-Trade Minister Salah Bashir told A/USTR Novelli of Jordan's interest in pursuing cumulation arrangements with new U.S. FTA partners including Morocco and, eventually, Bahrain (ref c). Jordan has been open to such agreements with the WB/G, but its willingness to pursue cumulation with Israel has waned since the outbreak of the Intifada. On the other hand, we expect Israel to be open to any overtures. The Israelis would likely argue that any cumulation agreements would need to encompass both Israel and the WB/G due to the Israeli/Palestinian customs union. The USG has never canvassed Palestinian officials about the notion of Palestinian/Jordanian cumulation. ¶10. (SBU) On a related note, the GOJ recently reached agreement to allow Israeli cumulation for textile goods exported to Europe under the Association Agreement. This essentially allows Jordan to apply the QIZ model to exports to Europe, but is also a rare example of Jordan-Israel cooperation outside the U.S. market context, and could set a precedent for further cooperation. -------------- A "Jordan River Free Trade Area"? -------------- ¶11. (C) In ref d, Embassy Tel Aviv suggested exploring the possibility of merging our existing FTAs with Israel and Jordan into a trilateral agreement. We believe the GOI would be open to examining such an initiative, since it would fit in well with Israel's policy of using economic relations to further political ties. Israeli business interests would likely support the idea, although many smaller companies would probably fear the Jordanian competition. GOI contacts tell us that Jordan is not yet keen on the idea, although King Abdullah did speak out publicly in favor of an FTA with Israel at the WEF. ¶12. (C) Palestinian officials and business leaders have voiced rhetorical support for the concept of increasing intra-Arab trade and economic cooperation, partially in an emotional response to increased Israeli restrictions on bilateral trade. Indeed, some Arab countries - albeit not Jordan - have lowered or eliminated tariffs on exports from the WB/G in an effort to aid the Palestinian economy, and a limited number of Palestinians have taken advantage of this largess. But for the same reasons that intra-Arab trade is so marginal, short-term opportunities for greater Palestinian trade with Jordan and the Arab world remain extremely limited. Considering the similarity of the Palestinian and Jordanian economies, the Palestinians will likely continue to focus on developing trade with other non-Arab partners. -------------- - Non-Tariff Barriers (NTBs): Security Concerns -------------- - ¶13. (C) Although bilateral trade has grown rapidly thanks to the QIZs, important problems remain. GOJ officials have said repeatedly since the beginning of the Intifada that Jordanian products are under-represented in the Palestinian and Israeli-Arab markets. They note that Jordanian products traditionally sold well in these markets in the past. The GOJ says Israeli labeling and "back-to-back" shipping requirements as well as periodic restrictions to cargo access into/out of the West Bank have all combined to keep Jordanian products out of "natural" markets in northern Israel and the WB/G. Israeli government officials say they are aware of these concerns, but say any delays are purely security related. They have indicated little willingness to move on the Jordanian wishes. Palestinians argue that Jordanian products are in low demand in the WB/G because their quality is poor compared to the Israeli and domestically produced goods that dominate their market. -------------- NTBs: Strike-related delays -------------- ¶14. (C) The GOJ says the Israeli customs and port strikes in spring 2003 did far more damage to QIZ exports and future orders than the war being conducted in Iraq at the same time. The GOJ now hopes for some sort of Israeli "national security" exemption in the event of future strikes. The GOI tells us it tried to accommodate the QIZ goods by creating an interagency committee to respond to Jordanian requests during the strike. They seem unwilling, however, to institutionalize any sort of special treatment for QIZ goods. -------------- NTBs: Informal Boycotts -------------- ¶15. (C) From the Israeli perspective, alleged latent discrimination and outright boycotts of Israeli goods and/or businessmen are the main NTB with Jordan. In particular, the GOI is angry at the Jordanian lawyers' union refusal to represent Israeli businessmen. In effect, this boycott means that Israeli businessmen cannot expect to enforce contracts in Jordan. With the help of offshore companies and Jordanian partners, Israeli business interests are now learning to live with this problem. -------------- Red Sea Partners: Jordanian Hopes and Israeli Reality -------------- ¶16. (SBU) Various proposals have been floated to utilize Aqaba airport to serve both Eilat and Aqaba. The Aqaba airport's close proximity to the border could be exploited to create dual immigration, customs and security control points. ¶17. (C) As politically attractive as these ideas may sound, they have collided with the political and economic realities of the region. Most importantly, Israel is worried about losing jobs to Jordan if Eilat airport is closed. The plan has suffered from the deteriorated political environment caused by the Intifada, as well as from Israeli environmental concerns and Jordanian questions about sovereignty issues. Israeli officials say the airport idea is not yet dead, although they do admit that a proposal is being floated to build a new airport for Eilat on Israeli soil. ¶18. (C) An agreement allowing several hundred Jordanian workers into Eilat to work at day jobs, mostly in construction, has been a success in the eyes of the GOI. A further Israeli proposal to repeat the scheme farther north, in the Arava valley, reportedly found no support with the GOJ, which feared that Israel may have sought to replace Palestinian workers shut out of Israel by GOI security measures. ¶19. (C) Opportunities in Iraq may be a further catalyst for intensifying economic ties across the Jordan River. Government officials, businessmen and NGOs have all approached Embassy Tel Aviv in recent weeks about selling Israeli products to Iraq via Jordanian intermediaries. Post has alerted these parties to contact addresses for Iraq reconstruction, and has helped them network among themselves. Post knows of at least one case where Jordanian and Israeli business interests are actively negotiating with Iraqis over the delivery of Israeli goods and services. -------------- Tourism -------------- ¶20. (SBU) Should violence in the region recede, Israeli-Jordanian-Palestinian cooperation could help revive the flagging tourism sector. A substantial increase in cross-border traffic between Aqaba-Eilat and East Bank-Jerusalem, which has dropped to the single digits when measured in terms of tourists per day, would energize the currently-depressed sector on both sides of the Jordan River. Regional officials in Israel have suggested opening a new border crossing in the Arava valley that would dramatically reduce the travel time from Israel to Petra, and hence increase the number of tourists to Jordan's prime historical treasure. The Jordanians reportedly balked, fearing that an increase in day tourists would have a negative impact on Jordanian hotels at Petra. Palestinians are also enthusiastic about the joint marketing of regional tourism opportunities. At the same time, Palestinian tourism operators often complain that Israel engages in unfair practices that serve to encourage tourists visiting Jerusalem to spend their money in (Israeli) West Jerusalem, rather than in (Arab) East Jerusalem or Palestinian tourist centers such as Bethlehem. -------------- Read Dead Redux -------------- ¶21. (SBU) An ambitious and controversial plan to save the Dead Sea by building a canal linking the Red Sea to the Dead Sea has been re-energized by efforts beginning at the 2002 World Summit on Sustainable Development in Johannesburg, followed up by the recent trilateral panel session at the WEF (ref e),the first-ever public meeting of Israeli, Jordanian and Palestinian representatives to discuss the project. The WEF panel did not directly address the $10-13 million cost of a comprehensive feasibility study. Only the Jordanian Minister of Water and Irrigation hinted at the $1-2 billion needed for the initial phase of the expected $5-6 billion project, which, in its entirety, proposes recharging the evaporating Dead Sea, generating hydro-electric power, desalinating Red Sea water, and conveying potable water to urban centers. The project is widely viewed as being more about water and regional cooperation than environmental protection, and environmentalists and hydrologists are still carefully examining the ecological consequences of mixing the seas. The GOI is cautious about the project, only saying that it would greet a feasibility study while stressing that it will not help pay for it. -------------- Comment -------------- ¶22. (C) The trade and technical cooperation opportunities outlined above could be a catalyst for progress both on the roadmap and on the President's METI agenda. We will continue to support local efforts to boost multilateral trade in the region, and to promote joint marketing of tourism in the Holy Land. Actions can include supporting the QIZ initiative, exploring, under Washington's guidance, the possibility of establishing cumulation agreements and an FTA, facilitating bilateral discussions to remove or soften trade barriers, and supporting US trade and investment delegations to the region and to future Fora like the WEF. We also believe that a high-level USG visit aimed at explaining and promoting the METI would help us maintain the momentum and capitalize on the current mood of optimism. We welcome Washington agency input on how we can contribute to strengthening the efforts that are currently underway in the region. GNEHM