US embassy cable - 02AMMAN5212

UNCLAS SECTION 01 OF 03 AMMAN 005212 
 
SIPDIS 
 
SENSITIVE 
 
DEPT PASS USTR FOR NOVELLI/SAUMS 
USDOC FOR 4520/ITA/MAC/ONE/PTHANOS 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, JO 
SUBJECT: JORDAN GEARS UP FOR ARAB FREE TRADE 
 
 
SENSITIVE BUT UNCLASSIFIED; PLEASE HANDLE ACCORDINGLY. 
 
1.  (SBU) SUMMARY:  WITH TRADE WITH OTHER ARAB 
COUNTRIES MAKING UP A SIZEABLE PORTION OF ITS OVERALL 
TRADE, JORDAN WAS ONE OF THE FIRST COUNTRIES TO 
EMBRACE THE ARAB FREE TRADE AGREEMENT (AFTA), WHICH 
AIMS AT CREATING AN ARAB FREE TRADE AREA BY 2005. 
INDEED, SINCE ENTERING INTO FORCE, JORDAN HAS SEEN THE 
AFTA CREATE NEW REGIONAL OUTLETS FOR ITS INDUSTRY, 
BLUNTING THE IMPACT ON JORDAN'S INDUSTRY OF WTO 
MEMBERSHIP AND THE U.S.-JORDAN FTA AND ARGUABLY MAKING 
THE COUNTRY MORE ATTRACTIVE TO FOREIGN INVESTORS. 
ALTHOUGH THE COVERAGE OF AFTA IS EXPANDING AS LISTS OF 
EXEMPTED GOODS DIMINISH AND WITH DISCUSSIONS SLATED ON 
EXTENDING IT TO TRADE IN SERVICES, DOUBTS PERSIST AS 
TO WHETHER THE AFTA WILL BE EFFECTIVE IN RAISING 
INTER-ARAB TRADE OVERALL, THUS HAVING A POSITIVE, 
TRADE-CREATING IMPACT ON REGIONAL ECONOMIES.  HOW THE 
AFTA TREATS FREE TRADE ZONES, LIKE JORDAN'S AQABA 
SPECIAL ECONOMIC ZONE OR DUBAI'S JEBEL ALI, IS A MAJOR 
QUESTION MARK.  END SUMMARY. 
 
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JORDAN'S TRADE WITH ARAB COUNTRIES 
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2.  (U)  TRADE WITH ARAB COUNTRIES ACCOUNTED FOR 28 
PERCENT OF JORDAN'S TOTAL TRADE VOLUME IN 2001 AND 
MUCH OF THE PAST DECADE.  CONSEQUENTLY, ARAB COUNTRIES 
COMBINED REPRESENT JORDAN'S LARGEST TRADING PARTNER, 
FOLLOWED BY THE EUROPEAN UNION (WHICH ON AVERAGE 
ACCOUNTS FOR 24 PERCENT OF JORDAN'S TRADE) AND THE 
UNITED STATES (WHICH ACCOUNTED FOR SOME 9.5 PERCENT OF 
JORDAN'S TRADE IN 2001).  THIS MAKES JORDAN'S RATIO OF 
INTER-ARAB TRADE ONE OF THE HIGHEST, IF NOT THE 
HIGHEST, AMONG ARAB COUNTRIES, COMPARED WITH AN 
AVERAGE OF 8.7 PERCENT FOR ALL ARAB COUNTRIES 
COMBINED.  THE ARAB COUNTRIES WITH WHICH JORDAN TRADES 
THE MOST ARE IRAQ, SAUDI ARABIA, THE UAE, SYRIA, 
LEBANON AND EGYPT.  IRAQ AND SAUDI ARABIA CONSTITUTE 
JORDAN'S FIRST AND FOURTH BIGGEST TRADING PARTNERS 
RESPECTIVELY. 
 
3.  (U) A CLOSER LOOK AT JORDAN'S TRADE DATA WITH ARAB 
COUNTRIES SHOWS THAT CRUDE OIL AND PETROLEUM PRODUCTS, 
WHICH ARE IMPORTED EXCLUSIVELY FROM IRAQ, MAKE UP THE 
BIGGEST PORTION OF JORDAN'S ARAB TRADE (SOME 35 
PERCENT) AND AROUND 10 PERCENT OF JORDAN'S OVERALL 
TRADE VOLUME.  JORDAN IMPORTED JD 821.2 MILLION (USD 
1,149.7 MILLION) OF PRODUCTS FROM ARAB COUNTRIES IN 
2001, REPRESENTING 24 PERCENT OF TOTAL IMPORTS.  CRUDE 
OIL AND PETROLEUM IMPORTS ACCOUNTED FOR 58 PERCENT OF 
THE TOTAL, FOLLOWED BY FOODSTUFFS, PLASTIC PRODUCTS, 
ALUMINUM, IRON AND STEEL.  JORDAN EXPORTED JD 542.5 
MILLION (USD 764.9 MILLION) OF PRODUCTS TO ARAB 
COUNTRIES IN 2001 REPRESENTING SOME 40 PERCENT OF 
TOTAL EXPORTS.  PHARMACEUTICAL EXPORTS CAME FIRST WITH 
21 PERCENT OF THE TOTAL, FOLLOWED BY VEGETABLES, PAPER 
AND CARDBOARD, PLASTIC BAGS, FODDER, AND CEMENT. 
 
4.  (U) JORDAN HAS LONG HAD A TRADE DEFICIT WITH ARAB 
COUNTRIES, AVERAGING AROUND 50 PERCENT OF EXPORTS OVER 
THE PAST THREE YEARS.  THIS IS NOT SURPRISING, SINCE 
JORDAN, WITH ITS LIMITED RESOURCE BASE, HAS 
HISTORICALLY SUFFERED FROM AN OVERALL TRADE DEFICIT. 
OIL IMPORTS COULD ACCOUNT FOR THE WHOLE AMOUNT OF THE 
DEFICIT WITH ARAB COUNTRIES, AND CONSEQUENTLY, THE 
SIZE OF THIS DEFICIT FLUCTUATES ALMOST IN TANDEM WITH 
MOVEMENTS IN THE PRICE OF OIL. 
 
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THE ARAB FREE TRADE AGREEMENT (AFTA) 
------------------------------------ 
 
5.  (U) ARAB COUNTRIES' EFFORTS AT REGIONAL 
COOPERATION LONG FAILED TO PRODUCE TANGIBLE RESULTS, 
ALTHOUGH TALK OF A COMMON MARKET STARTED IN THE 
1950'S.  HOWEVER, IN MARCH 1998, ELEVEN ARAB COUNTRIES 
ESTABLISHED THE ARAB FREE TRADE AGREEMENT (AFTA) ALSO 
KNOWN AS THE GREATER ARAB FREE TRADE AREA (GAFTA) OR 
PAN-ARAB FREE TRADE AREA (PAFTA).  THEIR NUMBER LATER 
INCREASED TO FOURTEEN COUNTRIES INCLUDING: LEBANON, 
JORDAN, SYRIA, EGYPT, MOROCCO, TUNISIA, IRAQ, LIBYA 
AND SIX MEMBERS OF THE GULF COOPERATION COUNCIL (GCC) 
NAMELY BAHRAIN, KUWAIT, OMAN, QATAR, SAUDI ARABIA AND 
THE UNITED ARAB EMIRATES (UAE). 
 
6.  (SBU)  NOTE THAT JORDAN IS PURSUING ITS 
PARTICIPATION IN AFTA ON A SEPARATE TRACK FROM 
BILATERAL AND SUB-REGIONAL EFFORTS TO LIBERALIZE ITS 
TRADE WITH ARAB COUNTRIES.  THESE EFFORTS INCLUDE THE 
"AGADIR PROCESS" OF COUNTRIES WITH EU ASSOCIATION 
AGREEMENTS, TRADE, TRANSPORT AND CUSTOMS AGREEMENTS 
WITH SYRIA, KUWAIT, EGYPT AND OTHERS.  THESE 
AGREEMENTS ARE GENERALLY LESS AMBITIOUS, IN TIMING 
AND/OR IN COVERAGE, THAN THE AFTA, AND ARE SOMETIMES 
DRIVEN IN LARGE PART BY POLITICAL CONSIDERATIONS. 
 
7.  (U) UNDER THE AFTA, MEMBERS ARE REQUIRED TO AFFORD 
GOODS PRODUCED IN OTHER MEMBER STATES NATIONAL 
TREATMENT, RESULTING IN REDUCED TARIFFS, FEES AND 
TAXES ACCORDING TO A GRADUAL LIBERALIZATION SCHEDULE 
STARTING JANUARY 1998.  INITIALLY, THE TARIFF 
REDUCTION WAS SUPPOSED TO BE 10 PERCENT ANNUALLY, 
THEREBY ESTABLISHING A FREE TRADE AREA BY 2007. 
MEMBER COUNTRIES AGREED AT THE BEIRUT ARAB SUMMIT IN 
MARCH 2002 TO ADVANCE THE DATE OF THE ARRIVAL OF THE 
FREE TRADE AREA TO 2005 BY REDUCING EXISTING TARIFFS 
BY 50 PERCENT IN 2002, TEN PERCENT IN 2003 AND 20 
PERCENT IN BOTH 2004 AND 2005.  IN ADDITION, ARAB 
LEADERS AGREED IN PRINCIPLE TO INCLUDE THE 
LIBERALIZATION OF TRADE IN SERVICES IN FUTURE 
DISCUSSIONS.  ACCORDING TO SAMER TAWIL, SECRETARY 
GENERAL OF JORDAN'S MINISTRY OF INDUSTRY AND TRADE, 
THIS YEAR'S TARIFF REDUCTION HAS ALREADY BEEN 
IMPLEMENTED FOR ALL MEMBER STATES EXCEPT FOR MOROCCO, 
WHICH IMPLEMENTED A 30 PERCENT TARIFF REDUCTION ONLY. 
THE REMAINING REDUCTIONS WILL TAKE PLACE ON JANUARY 
FIRST OF EACH YEAR. 
 
8.  (U)  WHILE THE MOST OBVIOUS SHORTCOMING OF THE 
AFTA IS THAT IT DOES NOT APPLY TO SERVICES, ITS 
COVERAGE OF GOODS ALSO LEAVES MUCH TO BE DESIRED. 
WHEN THE AFTA WAS SIGNED, MEMBER COUNTRIES ADOPTED 
LONG, WIDE-RANGING LISTS OF EXEMPTED PRODUCTS 
(NEGATIVE LISTS), PURPORTEDLY TO ALLOW NATIONAL 
INDUSTRIES TIME TO ADJUST TO COMPETITION.  UNDER THE 
AGREEMENT, THESE LISTS ARE SUPPOSED TO BE TEMPORARY IN 
NATURE AND SHOULD NOT ACCOUNT FOR MORE THAN 15 PERCENT 
OF TOTAL INTER-ARAB TRADE VOLUME.  INDEED, LOCAL 
EXPERTS SAY THAT NEGATIVE LISTS AMOUNT TO LESS THAN 6 
PERCENT OF INTER-ARAB TRADE.  THESE EXEMPTIONS ARE 
SLATED TO BE DROPPED BY SEPTEMBER 16, 2002, WITH 
MEMBER COUNTRIES ARE NOT ALLOWED TO INTRODUCE NEW ONES 
WITHOUT A DETAILED EXPLANATION.  HOWEVER, DOUBTS 
LINGER IN BOTH THE PRIVATE SECTOR AND THE JORDANIAN 
GOVERNMENT AS TO WHETHER ALL AFTA MEMBERS WILL ABIDE 
BY THIS STIPULATION.  IN PARTICULAR, MORE THAN ONE 
CONTACT EXPRESSED DOUBT THAT EGYPT WILL REALLY 
ELIMINATE ITS LIST OF EXEMPTED TEXTILE GOODS OR THAT 
MOROCCO WILL DO SO FOR ITS AGRICULTURAL PRODUCTS. 
 
9.  (U)  MEMBER COUNTRIES ALSO STILL NEED TO FINALIZE 
THE ISSUE OF COUNTRY OF ORIGIN RULES AND PROCEDURES. 
GENERALLY SPEAKING, TO QUALIFY FOR PREFERENTIAL 
TREATMENT UNDER AFTA, GOODS HAVE TO SHOW A 40 PERCENT 
VALUE-ADDED IN THE COUNTRY OF ORIGIN AND A SUBSTANTIAL 
TRANSFORMATION.  AN ARAB LEAGUE ECONOMIC COUNCIL 
(ALEC) MEETING NEXT SEPTEMBER WILL DISCUSS THE ISSUE 
MORE THOROUGHLY, INCLUDING A PROPOSAL TO TIGHTEN RULES 
OF ORIGIN ALONG THE LINES OF EU STANDARDS, WHICH ARE 
FAR STRICTER: 50 PERCENT LOCAL CONTENT WITH ONLY 
CERTAIN PRODUCTION PROCESSES QUALIFYING TOWARDS THAT 
TOTAL.  FINALLY, PROBLEMS OF STANDARDS AND TECHNICAL 
BARRIERS TO TRADE (TBT'S) PERSIST AND A WORKING GROUP 
HAS BEEN ESTABLISHED UNDER THE ALEC TO VISIT MEMBER 
STATES AND STUDY THEIR CUSTOMS PROCEDURES IN ORDER TO 
MAKE RECOMMENDATIONS FOR ALEC ON HOW TO REDUCE THEM. 
 
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PROJECTED IMPACT 
---------------- 
 
10.  (SBU) ACCORDING TO TAWIL, AFTA WILL INCREASE 
OPPORTUNITIES FOR JORDANIAN EXPORTERS TO COMPETE WITH 
LOWER COST ASIAN -- PARTICULARLY CHINESE -- 
COMPETITORS IN OTHER ARAB MARKETS.  HE ESPECIALLY 
NOTED SYRIA AND SAUDI ARABIA AS PROMISING.  LOWER 
DUTIES, TARIFFS AND TAXES, AND -- ESPECIALLY -- LOWER 
TRANSPORTATION COSTS, HE SAID, WOULD COMPENSATE FOR 
RELATIVELY HIGHER LABOR AND PRODUCTION COSTS IN JORDAN 
COMPARED TO EAST ASIA.  BY OPENING ARAB MARKETS, THE 
JORDANIANS ALSO HOPE AFTA WILL SOFTEN THE BLOW OF 
JORDAN'S WTO MEMBERSHIP AND THE U.S.-JORDAN FTA ON 
SMALLER, LESS COMPETITIVE JORDANIAN PRODUCERS WHO 
CATERED TO THE LOCAL MARKET AND SEEN THEIR MARKET 
SHARE DIMINISH.  TAWIL ALSO ARGUES THAT THE 
COMBINATION OF THE AFTA WITH THE U.S. FTA AND EU 
ASSOCIATION AGREEMENT WILL MAKE JORDAN MORE ATTRACTIVE 
TO FOREIGN INVESTORS AS A REGIONAL TRADING HUB. 
 
11.  (U)  ALREADY SOME BENEFITS ARE MEASURABLE: LAST 
YEAR, JORDAN'S EXPORTS TO ARAB COUNTRIES GREW BY 23 
PERCENT.  THE FIRST SIX MONTHS OF THIS YEAR HAVE SEEN 
A 17 OR 18 PERCENT INCREASE.  ACCORDING TO TAWIL, 
EXPORTS TO SYRIA ARE UP BY MORE THAN 100 PERCENT LED 
BY AGRICULTURAL EXPORTS, WHICH ARE UP BY 250 PERCENT. 
IN ADDITION, EXPORTS TO ALGERIA ARE UP BY 180 PERCENT, 
WHILE EXPORTS TO IRAQ ARE UP BY 10 PERCENT SO FAR THIS 
YEAR. 
 
12.  (SBU) THE BUSINESS COMMUNITY, HOWEVER, IS MORE 
SKEPTICAL.  REPORTS OF CUMBERSOME AND ARBITRARY 
CUSTOMS PROCEDURES COUPLED WITH COMPLAINTS ABOUT 
IGNORANT AND INEFFICIENT CUSTOMS OFFICIALS ABOUND FROM 
JORDANIAN EXPORTERS.  THE GAP BETWEEN POLICY AND 
IMPLEMENTATION CAN BE VERY WIDE, ESPECIALLY IN 
COUNTRIES LIKE IRAQ AND SYRIA, WHERE THE TECHNICAL 
EXPERTISE AND PAY OF CUSTOMS OFFICIALS IS VERY LOW. 
SOME FOOD AND PHARMACEUTICALS PRODUCERS REPORTED TO US 
AN ENDLESS SAGA OF COSTLY DELAYS AND EXPENSIVE BRIBES 
WHEN TRYING TO GET THEIR PRODUCTS THROUGH UNDER THE 
LATEST TARIFF REDUCTIONS TO SYRIA.  IN ADDITION, THE 
PLETHORA OF TECHNICAL BARRIERS TO TRADE AND THE FICKLE 
NATURE OF INTER-ARAB RELATIONSHIPS -- AS MANIFESTED IN 
A RECENT KUWAIT-JORDAN TARIFF WAR OVER TRUCK TRANSPORT 
FEES -- RENDERS DOING BUSINESS IN THE ARAB REGION AN 
UNPREDICTABLE GAME. 
 
-------------------------- 
FREE TRADE ZONES EXCLUDED? 
-------------------------- 
 
13.  (SBU)  A CONCERN OF DIRECT BEARING ON U.S. 
COMPANIES IS HOW THE AFTA TREATS PRODUCTS OF DOMESTIC 
TAX-FREE OR "FREE TRADE" ZONES.  ACCORDING TO THE 
JORDANIAN TRADE MINISTRY, AFTA MEMBERS SIGNED AN 
AGREEMENT THIS SPRING THAT EXCLUDED EXPORTS OF SUCH 
ZONES FROM THE BENEFITS OF AFTA PENDING FURTHER STUDY 
BY MEMBERS.  IN MANY CASES, THIS HAS ACTUALLY RESULTED 
IN AN INCREASE IN TARIFFS ON EXPORTS FROM THESE ZONES 
TO AFTA MEMBERS.  FOR EXAMPLE, ONE U.S. COMPANY WITH A 
REGIONAL DISTRIBUTION CENTER IN JEBEL ALI HAS 
COMPLAINED THAT IT NOW FACES NEW JORDANIAN TARIFFS OF 
30% ON PROCESSED FOOD PRODUCTS BROUGHT IN FROM DUBAI, 
FIVE TIMES THE PREVIOUS RATE.  IF THIS STAYS, THIS 
WOULD OBVIOUSLY BE A MAJOR GAP IN THE AGREEMENT THAT 
WORKS AGAINST GREATER REGIONAL AND GLOBAL INTEGRATION 
FOR THE ARAB WORLD. 
 
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COMMENT 
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14.  (SBU)  IN A WORLD OF REGIONAL TRADING BLOCS AND 
TRADE AGREEMENTS, INTER-ARAB TRADE REMAINS VERY LOW 
AND FRAGMENTED.  AFTER TAKING OUT OIL AND MINERALS, 
INTER-ARAB TRADE IS ONLY 16 PERCENT OF TOTAL ARAB 
TRADE AND IS LARGELY CONCENTRATED ON TRADE IN 
AGRICULTURAL PRODUCE.  THE ARAB FREE TRADE AGREEMENT 
(AFTA) INITIATIVE IS AIMED AT ADDRESSING THIS DISMAL 
STATE OF AFFAIRS BY TRYING TO CREATE AN ARAB FREE 
TRADING AREA OF SORTS AND EVEN ARRIVING IN DUE COURSE 
AT AN ARAB CUSTOMS UNION.  HOWEVER, GIVEN THE VARYING 
POLITICAL AND ECONOMIC SYSTEMS IN ARAB COUNTRIES AND 
SMALL AMOUNT OF INTER-ARAB TRADE, A NAFTA- OR EU-TYPE 
TRADE BLOC SEEMS FARFETCHED.  IN ADDITION, THE AFTA 
ITSELF HAS A NUMBER OF LOOPHOLES THAT NEED TO BE 
CLOSED, RANGING FROM RULES OF ORIGIN TO LONG LISTS OF 
EXEMPTED PRODUCTS EXTENSIVE TBT'S, AS WELL AS 
EXCLUSION OF FREE TRADE ZONES.  THESE WILL GREATLY 
DAMPEN THE GROWTH POTENTIAL SUCH AN AGREEMENT COULD 
PROVIDE.  THAT SAID, TO THE EXTENT THE AFTA IS 
IMPLEMENTED, COUNTRIES LIKE JORDAN THAT HAVE TAKEN 
BOLDER STEPS AT ECONOMIC LIBERALIZATION ALREADY STAND 
TO GAIN THE MOST -- AS THE INCREASED TRADE FIGURES OF 
THE LAST 18 MONTHS SUGGEST. 
BERRY