US embassy cable - 02AMMAN3296

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 003296 
 
SIPDIS 
 
STATE PASS USTR FOR NED SAUMS 
USDOC FOR 4520/ITA/MAC/ONE/PTHANOS 
STATE PASS USAID FOR MSCOVILL 
TREASURY FOR PIPATANAGUL 
 
E.O. 12958: DECL: 06/12/2012 
TAGS: ETRD, EINV, IS, JO 
SUBJECT: JORDAN:  TRADE MINISTRY IN TALKS WITH ISRAEL TO 
RESTRUCTURE QIZ REQUIREMENTS 
 
Classified By: DCM Greg Berry, reasons 1.5(b,d) 
 
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SUMMARY 
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1.  (c)  GOJ Trade Ministry officials tell us they have begun 
talking to their Israeli counterparts about improving current 
QIZ operations and regulations.  The GOJ's proposals include 
both improvements to existing logistical procedures as well 
as changes to the structure of required Israeli inputs into 
QIZ goods.  The GOJ hopes improvements agreed to through 
these talks will help spur new investment in the QIZ's 
following stagnation of new investment into the sector since 
2001.  If proposed improvements take hold, there could be a 
measurable impact on the sustained competitiveness of QIZ's 
and some diversification of the manufacturing base under the 
initiative.  End summary. 
 
2.  (c)  Jordanian Trade Ministry Secretary General Samer 
Tawil said he is in active discussion with his Israeli 
counterparts to improve the functioning of the QIZ 
initiative.  The ministry is building its position around a 
report on QIZ sustainability recently completed by a trade 
expert contracted for the Ministry by the USAID-funded 
Jordan-US Business PArtnership for that purpose (report to be 
pouched to NEA/ARN).  The ministry's position also reflects a 
number of long-standing concerns voiced by QIZ exporters over 
the past two years about inefficiencies in QIZ procedures and 
rules. 
 
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New Procedures Sought 
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3.  (u)  Recommendations in the report fall into two broad 
categories: procedural adjustments to current QIZ product 
processing requirements, and adjustments to the 
sub-regulations on rules of origin and Israeli content 
requirements.  In the first category are a number of 
seemingly sound recommendations.  The first is a 
recommendation to extend and institutionalize the use of the 
on-line QPR (qualifying product registration) approval 
process developed with USAID assistance last year.  The 
program is not widely used now, due in part to early 
technical glitches and in part to lack of awareness among 
exporters that the system is available.  Widespread use of 
the system could greatly reduce QPR approval times on the 
Jordanian side, and adaptation of the program to Israeli QIZ 
auditing processes could have a similar effect on the Israeli 
side. 
 
4.  (sbu)  The second recommendation of the study is to 
extend the validity of QPR's beyond the current period of 12 
months, which would allow exporters to continue production on 
identical styles year-on-year without clogging the QPR 
approval pipeline with what amount to pro-forma approvals. 
The third recommendation is for more frequent meetings of the 
Israel-Jordan joint committee for QIZ issues.  The committee, 
which is also supposed to include observers from the USG as 
needed, has met at best sporadically in the past two years, 
according to Tawil.  Finally, the report recommends creation 
of a storage facility at the Gateway QIZ for stockpiling 
Israeli inputs.  Following the sharp spike in violence in the 
West Bank in the spring, many manufacturers have concerns 
about disruption of access to inputs during another regional 
crisis.  Having a store of inputs at Gateway could ease those 
tensions. 
 
5.  (c)  Most of the procedural recommendations make 
intuitive sense, though some - like the Gateway project - are 
probably better handled through private sector initiative. 
More sweeping, though, are proposals for changes to current 
Israeli content rules under the QIZ initiative.  Many of 
these ideas are based on long-standing gripes from exporters 
that Israeli inputs are too expensive and/or not of 
acceptable quality, but must be used because of current 
content requirements.  However, the GOJ's arguments are 
becoming more sophisticated, and are even beginning to show 
an interest in a solution that will benefit both sides. 
 
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New Israeli Content Proposals 
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6.  (c)  The GOJ's opening position in its talks with Israeli 
counterparts, says Tawil, will be to secure a straight 
reduction in Israeli content from 8% to 4% for textiles, with 
an offer by the GOJ to accept an "increase" of content 
requirements on hi-tech, jewelry, and medical/surgical goods 
to 11.7% (note: under the current agreement, the 8% content 
requirement is a temporary measure, with content due to be 
reset to 11.7% for all goods in February 2004.  End note). 
According to MoIT officials, the fallback GOJ position (not 
elucidated in the study) is to propose a sliding scale of 
content requirements for textiles, starting at 8% (or more, 
depending on the good) for low-end products like T-shirts and 
underwear and sliding to 4% or even 2% for higher-end goods 
including suits, evening wear, leather apparel, and the like. 
 
7.  (c)  At the same time, the GOJ is making a parallel 
proposal to move from per-item pre-production audits to 
year-end cumulative audits to certify Israeli content.  The 
end result of such a switch would be the same as a sliding 
scale - the governments would need to verify only the 8% 
Israeli content on total exports by a given company, allowing 
them to produce some goods with more than 8% content, and 
some with less, over the course of the year. 
 
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Jordan's New Approach 
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8.  (c)  While the proposals are not shockingly new, the 
rationale behind them is.  The GOJ argues, with some 
accuracy, that the current set-up restricts the growth of the 
QIZ's out of low-end garment production, due to the 
difficulty of meeting the 8% content rule for high-end goods 
due to the limited availability of suitable, 
price-competitive inputs from Israel.  They argue that the 
proposed changes in content rules will attract a wider 
variety of manufacturers, which will in turn substantially 
boost production, thereby leading to a net increase in 
Israeli inputs sold, even at lower percentages.  The GOJ thus 
sees lowering - but not eliminating - Israeli content as a 
gain for both sides.  The GOJ also argues that, as the 
U.S.-Jordan FTA matures, the relative benefit of production 
under the QIZ initiative will vanish, leaving exporters in 
Jordan with little incentive to continue doing business with 
Israel, where input prices are seen as high and quality low. 
Thus they will argue that making content requirements more 
flexible will help make production of Israeli inputs a more 
sustainable business. 
 
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Comment 
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9.  (c)  With new investment in the QIZ's relatively stagnant 
in 2001, the GOJ is eager to find a way to jump-start 
interest in the QIZ's without undermining the basic 
philosophy of Jordanian-Israeli cooperation that underpins 
the initiative.  The GOJ has parroted for months the narrow 
interest of exporters in minimizing Israeli content 
requirements.  It seems they may have finally found a way to 
package a proposal that will show the Israeli side its 
interest in more flexible content rules, as well as boosting 
the initiative as one of the benefits of the peace process 
that is supporting economic growth and stability in Jordan. 
Taken together, the content and procedural proposals could 
indeed spark diversification in the QIZ's and as a result 
increase business on both sides of the border.  Getting 
there, though, will mean convincing Israeli input producers 
to reduce their guaranteed business in what amounts to a 
captive market.  It could also mean convincing Israel that it 
should negotiate on the assumption that 8% is the proper 
status quo, and not the temporary measure it was originally 
designed to be. 
Gnehm