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