JORDAN FTA: ACCELERATE TARIFF REDUCTIONS WHILE

UNCLAS SECTION 01 OF 02 AMMAN 008359 SIPDIS SENSITIVE STATE FOR NEA/ARN - A. SCHEDLBAUER STATE FOR EB/TPP/BTA/ANA - E. P. WHITAKER PASS TO USTR FOR E. SAUMS E.O. 12958: N/A TAGS: ETRD ECON PREL IS JO SUBJECT: JORDAN FTA: ACCELERATE TARIFF REDUCTIONS WHILE SEEKING ISRAELI CUMULATION IN CONTENT REF: A. TPSC DRAFT DOCUMENT 2003-442 (12/17/03) ¶B. AMMAN 7292 SENSITIVE BUT UNCLASSIFIED. FOR USG USE ONLY. HANDLE ACCORDINGLY. SUMMARY -------------- ¶1. (SBU) Embassy notes that the Trade Policy Staff Committee is reviewing (REF A) a proposal by the Government of Jordan (GOJ) to accelerate tariff elimination for certain apparel products under the U.S.-Jordan Free Trade Agreement (FTA). Jordan currently already exports most of these products (over $500 million worth this year) under the QIZ arrangement, which requires at least 8% Israeli content for duty-free status. Phase out of the FTA tariffs now would benefit Jordan's economy by attracting more investors in the garment industry (particularly in view of the 2005 end of quotas under the Multifiber Agreement) and bolster perceptions of the FTA as a U.S. supported engine of export-led growth. For these reasons, we favor the immediate phase-out of all 31 apparel product category tariffs as requested by Jordan. ¶2. (SBU) This move will mean the accelerated demise of the QIZ concept before 2010, the date by which many high-value garment tariffs were to be zeroed out under the original terms of the FTA. The QIZs have benefited Israeli-Jordanian relations and economic ties and kept the two-way trade afloat during the worst days of the Intifadah. If the QIZs go, there could be negative consequences for the growing Israeli-Jordanian trade relationship and its ancillary political benefits. To address these concerns, we propose that the USG pursue cumulation of content in Jordanian goods with Israeli inputs, as provisionally foreseen in the FTA. While these issues should be examined together, they should not be linked given the potential political and technical complexity of the cumulation issue. QIZs: Both Economic and Political Benefits -------------- ¶3. (SBU) A TSPC decision to allow no-tariff garment exports from Jordan (which has no quotas) under the FTA in all of the major revenue-producing tariff lines will eliminate the need for manufacturers to locate in special Qualifying Industrial Zones (QIZs) while meeting a requirement that eight percent of the 35 percent total value-added come from Israel. Over the past five years, garment exports to the U.S. from QIZs have been a tremendous boost to the Jordanian economy: with the U.S. now being Jordan's number one trade partner and absorbing almost 30 percent of its exports. At the end of October, total exports had reached about $525 million for the year. QIZ exports will likely top out at over $500 million for 2003, of which over 95 percent are garments. Changing the FTA tariff schedule will merely shift these benefits to the FTA. Indeed, investors would likely find exporting under the FTA more attractive than the QIZs, especially as they look at the potential effects of the MFA-mandated end of garment quotas in 2005. With the benefits of FTA more readily apparent to the remainder of the Arab world, U.S. efforts to negotiate FTAs in the region could also be enhanced. ¶4. (SBU) However, the benefits of the QIZs are not exclusively in the realm of trade. The QIZ law of 1996 arose from many considerations, including a desire to promote economic integration in the region that would foster peaceful relations. The QIZs provided an economic incentive for such interaction that resulted in a constant flow into Jordan of Israeli cloth, unfinished apparel, and accessories. Jordan's exports to Israel in the last few years grew strongly, breaking the $100 million mark in 2002, even as the Intifadah tore people apart. Because of the QIZs, Israeli and Jordanian businessmen made deals and worked together to develop strategies to lobby their respective governments on key issues of importance -- such as cross-border land transportation and customs procedures. The QIZ benefits also make the GOJ think twice before taking precipitate action as problems arise elsewhere in the relationship with Israel, which is often strained by the more aggressive anti-Israel elements in Jordan. ¶5. (SBU) If we go ahead with the GOJ's requested tariff eliminations, the trade in QIZ garments with Israeli content would not disappear overnight. A knowledgeable GOJ Ministry of Trade analyst who has been following QIZs since their inception suggests that at least half of the QIZ trade with Israel would continue for a number of reasons, including well-established Israeli-Jordanian business relationships and the habits of some U.S. garment buyers who insist on the QIZ label with Israeli content. The analyst is quick to add that there is as yet no firm basis for determining the size of the reduction. However, over time the QIZ business with Israel, even if it held steady at half the current market, would diminish as a share of Jordan's growing trade with the U.S. Explore Other Forms of Content Cumulation with Israel -------------- -------------- ¶6. (SBU) In order to maximize the economic benefit of the FTA while at the same time preserving the political gains of the QIZ arrangement, we suggest that Washington take a new look at paragraph 13 of Annex 2.2 of the FTA, which states that the United States and Jordan will discuss the extent to which products of a "territory contiguous to Jordan" may be cumulated with Jordanian products to meet the value added criterion of the FTA rules of origin. Cumulation with Israel within the FTA would not only have benefits for Jordan, but could serve as a model for cumulation with new FTA partners such as Morocco or Bahrain, and within the future MEFTA. ¶7. (SBU) Embassy is aware that cumulation presents its own potentially difficult technical problems. The agreements with Israel and Jordan use different origin regimes. Because the U.S., Jordan, and Israel are not members of the same FTA, and given that Israel and Jordan do not have any FTA between themselves, some trading partners could claim that cumulation is inconsistent with the WTO Agreement. While the issues are difficult, both parties would have an economic incentive to join us in seeking a solution. COMMENT -------------- ¶8. (SBU) Given the importance of preserving the political gains from the QIZs, Embassy recommends that the USG pursue cumulation of content in Jordanian goods with Israeli inputs. While we urge that the issues be examined together, we do not think it would be feasible to make accelerated tariff elimination contingent on accepting cumulation given the technical problems and the fact that the issue could be politically charged for the GOJ domestically -- although the problems should be less severe than they were last year at this time. We think that, properly prepared, cumulation would be an excellent subject for discussion at the Joint Committee meeting planned for early next year. GNEHM GNEHM