JORDAN, ISRAEL UPGRADE TRADE AGREEMENT TO CREATE

UNCLAS SECTION 01 OF 02 AMMAN 000013

SIPDIS

SENSITIVE

STATE FOR NEA/ELA
STATE PASS TO USTR - C. NOVELLI, E. SAUMS

E.O. 12958: N/A
TAGS: ETRD PREL KTIA KTEX IS JO
SUBJECT: JORDAN, ISRAEL UPGRADE TRADE AGREEMENT TO CREATE
QIZ'S TO EXPORT TO EU

REF: A. FBIS GMP20041223000082

B. 04 AMMAN 9246 (NOTAL)

C. 04 AMMAN 8997 (NOTAL)

D. 04 AMMAN 8145 (NOTAL)

E. LAWLESS-SAUMS EMAIL ON JORDANIAN APPROVED JC
NOTES (09/16/04)

SENSITIVE BUT UNCLASSIFIED. FOR USG USE ONLY.


1. (SBU) Jordan hosted the signing of an upgraded trade
agreement with Israel December 23 to take aim at a Qualifying
Industrial Zone (QIZ) arrangement with the EU using
cumulation of content under a pending Pan-Euro-Mediterranean
rules of origin system. The pact moves Jordan and Israel
toward a Free Trade Agreement (FTA) by 2010. Jordanian
Minister of Industry and Trade (MOIT) Ahmad Hindawi stressed
the goal of the FTA with Israel was to enhance the investment
climate in Jordan by opening the market to the EU for
Jordanian products. MOIT senior officials noted privately
that it may take up to a year before the EU QIZ agreement is
in place. (The agreement must go to Brussels for EU
approval, as well as be presented to Jordan's parliament for
its consideration.)


2. (U) Jordanian QIZ factories exporting garments to the
United States have been hugely successful over their six-year
run to date, achieving exports of over USD 900 million in
2004 and employing 40,000 production workers (REFS B-D). The
exporters qualify for duty-free entry into the U.S. if they
can demonstrate that at least 8 percent of the content is
derived from Israel and show a total of 35 percent value
added under a relatively simplified rules of origin scheme.


3. (U) Israeli Deputy Prime Minister and Minister of Trade
and Industry Ehud Olmert told a crowd of diplomats and
journalists attending the signing ceremony that the agreement
was a step forward in promoting greater exports from the
region to the EU. He noted the agreement was first and
foremost a business arrangement that would create jobs and
develop the two countries' economies. Olmert also called the
improved trade pact a symbol of cooperation and friendship
that he hoped would be a role model for other nations in the
region. Hindawi echoed Olmert's comments, referring to King
Abdullah's vision for economic development, but also noting
the king's reminder that development is not complete without
a comprehensive and just peace in the region.


4. (SBU) The mood of the signing was pleasant and
businesslike. When a journalist asked for comments on the
Jordanian professional association's protest against the
agreement that same day, DPM Olmert asked why the two sides
should not support jobs and wealth creation. GOJ Trade
Minister Hindawi, who will be facing some pointed opposition
in parliament, was brief but supportive of the agreement in
his replies.

Reaction Mixed
--------------


5. (SBU) Jordanian reaction to the new agreement was mixed
at best. Proponents, such as former Trade Minister Mohammad
Halaiqa, noted that exports to the EU under this arrangement
would never reach the levels found with the U.S.-directed
QIZ's. He and other analysts nonetheless praised the move as
potentially lowering Jordan's trade deficit with Europe.
Rashe'ed Darwazeh, the head of Jordan's garment
manufacturer's association, JGATE, noted that EU rules of
origin were "tough" to meet, thus making it difficult to
export to that market.


6. (SBU) Prime Minister Fayez faced strong criticism in the
Lower House of Parliament on December 26, especially from
Islamic Action Front deputies. Fayez emphasized that signing
the agreement stems from the government,s objective of
bolstering the national economy, highlighting that Jordan,s
13 QIZs have created thousands of job opportunities for
Jordanian citizens. (NOTE: Nine QIZ's are currently active.
END NOTE.) During the session, Hindawi rejected allegations
that Jordan,s trade relationship with Israel had allowed
Israel to penetrate Arab markets. Eventually, the debate
moved beyond the merits of the agreement itself and devolved
into a low-toned controversy over semantics, as the PM
declared that he would "deal with the devil in the interest
of Jordan." IAF MP Ali Abu Sukkar criticized the PM,s
comments as impious and unconstitutional, contending that
such talk is unacceptable because Jordan,s state religion is
Islam. Al-Rai columnist Sultan Hattab defended the PM's use
of the phrase as merely figurative, and criticized the MPs
who attacked the PM as more or less ignorant.

More Regional Accumulation; A Precursor to MEFTA?
-------------- --------------

7. (SBU) MOIT senior official Amer Hadidi explained that
the EU had for some time signaled that it would move on the
QIZ concept once the Jordan-Israel agreement had been beefed
up into a more equitable, bilateral preferential trading
pact. (The original, 1995 agreement had been heavily
weighted in favor of Jordan.) The agreement also took into
account the Pan-Euro-Med rules of origin, to accommodate the
three-way coordination of trading rules, he said. MOIT
officials noted that EU rules of origin were quite complex,
often outlined item by item in the list of thousands of
products delineated by harmonized system of tariffs (HS)
codes. The textiles rules, in particular, were
"yarn-forward" and thus not as easy to meet as the U.S.
minimal content rules. Nonetheless, Hadidi added, if content
was just 1 percent beyond defined "minimal operations" there
was great flexibility for Jordanian manufacturers to mix
content from Israel and eventually the region. Jordan's
Agadir trade agreement with Tunisia, Egypt, and Morocco, is
also built on the Pan-Euro-Med system (but it has still not
been ratified in all countries, including in Jordan).

COMMENT
--------------


8. (SBU) The Israel-Jordan agreement aimed at the EU offers
the first opportunity to demonstrate the cumulation of
content between two nations in the region outside the
fixed-content formula seen in the U.S.-Israel-Jordan QIZ
agreement. In that sense, it could bring to fruition what
has to date remained only a promise under the Middle East
Free Trade Area (MEFTA) proposed by the U.S. in 2003. (In
Ref B, a QIZ factory manager told CODEL Thomas that the fixed
formulae of the U.S.-sanctioned QIZ agreement made Israeli
inputs 2-3 times more expensive than in the world market.
This causes trade diversion, and makes the prices for inputs
higher than would be seen in the more flexible, open market
cumulation arrangement seen in the EU agreement; it also
makes Jordanian QIZs less competitive in the U.S. in the
post-quotas global textiles market.) Hadidi reminded Acting
Econ/C that Jordan is anxious to pursue a similar formula for
content cumulation with the United States under the
U.S.-Jordan FTA and promised that a concept paper on such
cumulation, first proposed at last June's bilateral FTA Joint
Committee meeting, would be forthcoming by the end of January.
HALE