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.

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Summary
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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.

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Business Mood Improving
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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.

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Pronounced Optimism in Jordan
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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.

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In Israel, Cautious Optimism
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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.

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In WB/G, Other Worries
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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.

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QIZs
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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.

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"Cumulation Agreements"
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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.

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A "Jordan River Free Trade Area"?
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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.

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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.

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NTBs: Strike-related delays
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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.


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NTBs: Informal Boycotts
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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.

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Red Sea Partners: Jordanian Hopes
and Israeli Reality
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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.

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Tourism
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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.

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Read Dead Redux
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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.

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Comment
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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