US embassy cable - 02AMMAN5485

UNCLAS SECTION 01 OF 04 AMMAN 005485 
 
SIPDIS 
 
STATE FOR NEA DAS CHENEY 
STATE PASS USTR FOR NED SAUMS, DOUG BELL 
STATE PASS USAID FOR MSCOVILL 
USDOC FOR 4520/ITA/MAC/ONE/P.THANOS 
 
E.O. 12958:  N/A 
TAGS: ETRD, EINV, JO, IS 
SUBJECT:  JORDAN AND THE QIZ EXPERIENCE 
 
REFS:  A) AMMAN 3761; B) 01 AMMAN 5728 
 
1.  The Qualifying Industrial Zones (QIZ) initiative has had 
a net positive, and increasingly widely-felt, effect on 
Jordan's economy, political dynamics, and social structure. 
While the success of the initiative to date is irrefutable, 
the QIZ's will have to face a number of hurdles in the near 
future.  These include continuing regional instability, the 
rise of competing tariff preference programs in other parts 
of the world, and the wholesale reconfiguration of the 
global textile market in 2005 with the advent of the WTO's 
multifiber arrangement (MFA).  The QIZ's are well-equipped 
to meet these challenges and, in combination with Jordan's 
Free Trade Agreement with the U.S., will maintain a place 
for Jordan in the global textile production market. 
 
WHAT THE INITIATIVE IS 
 
2.  The QIZ initiative was created by Presidential 
proclamation in November 1998.  It extended benefits of the 
U.S.-Israel Free Trade Agreement to certain industrial zones 
in Jordan identified and agreed upon by the U.S., Israeli, 
and Jordanian governments.  Goods produced in such zones 
were given duty-free access to the U.S., provided a certain 
percentage of the value added of the good came from the QIZ, 
Israel, and/or the West Bank/Gaza, in the following 
proportions:  11.7% QIZ origin; 11.7% Israeli origin; 11.6% 
QIZ/Israeli/WB/Gaza origin.  The balance of the value of the 
good could be from anywhere in the world.  In February 1999, 
the Israeli and Jordanian governments amended these 
percentages on a temporary basis, reducing the required 
Israeli input to 7% for high-tech goods and 8% for all other 
goods for five years.  (Note:  The QIZ concept has been on 
offer to Egypt as well since 1998, but Egypt has not yet 
requested QIZ designation for any industrial parks.  End 
note.)  The initiative was designed to provide an incentive 
for Jordanian and Israeli businesses to develop partnerships 
or even joint ventures in QIZ parks, thus creating a 
constituency in favor of normalization within both 
countries' business communities. 
 
ECONOMIC IMPACT 
 
3.  The QIZ's have enjoyed enormous economic success, due in 
large part to the initiative's unforeseen attractiveness to 
foreign textile producers who came to the QIZ's both to 
escape quota ceilings in their own countries and to take 
advantage of tariff breaks of 30% or more on a wide range of 
apparel products.  The speed and effectiveness with which 
the QIZ's have sparked export-led growth in Jordan is 
impressive:  in 1999, total Jordanian exports to the U.S. 
were barely $13 million.  In 2002, QIZ exports to the U.S. 
are estimated to reach $400 million.  Because of the QIZ's, 
the U.S. is now Jordan's largest export market, and Israel 
(Jordan's other market for QIZ goods) is Jordan's fifth 
largest export market.  The initiative has created over 
21,000 new jobs directly, and an unknown level of indirect 
employment.  The QIZ's have also attracted over $200 million 
in new investment from some 11 countries, including Jordan, 
Israel, the U.S., the UAE, India, Pakistan, and China/Hong 
Kong/Taiwan.  While the bulk of QIZ investment initially 
came from East Asia, there are now as many Jordanian QIZ 
exporters as there are from any other investing country. 
 
4.  These national-level figures come into even sharper 
focus at a regional level.  QIZ parks are routinely becoming 
engines of growth in their communities.  The QIZ in Irbid, 
Jordan's third-largest city, draws laborers from a half- 
dozen nearby communities, and QIZ exports from the Al Hassan 
Industrial Estate account for 80% of the park's exports. 
Previously, Al Hassan was primarily home to small industrial 
and engineering concerns linked to the Iraqi market.  In 
Zarqa, Jordan's biggest industrial governorate, the impact 
is even more noticeable.  The private sector-run QIZ park in 
nearby Al Dulayl, despite a slow start, is now the clear 
production leader for the region.  Al Dulayl's exports 
account for 50% of all exports from the governorate.  Even 
regions without functioning QIZ parks benefit from the 
program.  The port of Aqaba receives most of the imports of 
inputs for QIZ goods, and fully 40% of QIZ exports use Aqaba 
as well.  This translates into jobs for truckers and port 
workers, jobs which had been scarce in the years following 
imposition of sanctions on Iraq. 
 
5.  At the local level, the QIZ initiative is having perhaps 
its strongest, yet least-publicized, impact.  In Irbid, QIZ 
exporters put $2 million in wages into the local economy 
each month.  The multiplier effect of these wages is felt in 
the retail sector, the transportation sector, and the food 
and personal services sectors in the city and beyond, to 
name just a few.  While no systematic study of these 
ancillary benefits has been undertaken, the anecdotal 
evidence of increased income growth can be seen on the 
streets in new goods in shops, new business and residential 
construction, and the like. 
 
6.  The QIZ experience has also had proven structural 
benefits.  It is creating a trained industrial labor force 
on a large scale for the first time ever.  It has also given 
government and private-sector actors a crash-course in 
investment promotion.  The improvement in Jordan's ability 
to sell itself to foreign investors, particularly in the 
private sector, has been marked in the past three years. 
The private sector-run Al Tajammouat QIZ outside Amman is 
the best example.  A relative late-comer to the QIZ game, 
Tajammouat's management has aggressively marketed the park 
in East and South Asia.  As a result, Tajammouat is now home 
to more QIZ exporters than any other QIZ park (including the 
original park in Irbid).  In fact, Tajammouat's investment 
promotion officers have helped train the usually 
lackadaisical Jordan Investment Board in promoting the 
QIZ's.  Finally, the initiative is providing technology 
transfer, helping to create in Jordan a cadre of business 
managers, accountants, line supervisors, and workers who 
understand global standards for quality, timeliness of 
delivery, and dependability.  Such tech transfer is also 
visible in the creation of these new, modern industrial 
parks themselves, which will help Jordan to attract non-QIZ 
businesses in the future to take advantage of the FTA. 
 
THE POLITICAL IMPACT 
 
7.  The political impact of the QIZ's has been more 
measured, but notable nevertheless.  At a macro level, the 
QIZ's have helped to moderate somewhat debate over 
normalization.  As early as 2000, it was not uncommon to see 
editorials sharply criticizing QIZ's because of the Israeli 
content requirement, calls for the discontinuation of the 
program, blackballing of businesses investing in QIZ's, and 
the like.  With the success of the initiative, notably the 
jobs it has created, that criticism has all but disappeared 
from the English-language press, and is far more muted in 
even the more vitriolic Arabic papers.  It is becoming 
increasingly difficult for the Muslim Brotherhood, for 
example, to call for the destruction of an initiative that 
is providing good incomes for thousands of families, many of 
them in traditionally poor, conservative communities.  Even 
at the lowest points of the Intifada, when Jordanian 
opposition groups were calling for breaking of diplomatic 
relations with Tel Aviv, the QIZ's were given barely a 
mention.  While there is still underlying discomfort with 
QIZ's among many conservative Jordanians, and while many 
Jordanian businessmen still shy away from QIZ investment 
(either in opposition to Israeli participation or fear of 
being blackballed for dealing with Israel), the public 
debate over the relative merits of the QIZ's seems to have 
been won by moderate elements. 
 
 THE SOCIAL IMPACT 
 
8.  This is perhaps the most interesting, unforeseen, impact 
of the QIZ's.  Some 70% of QIZ workers are women, and a 
significant percentage of those are new entrants into the 
workforce.  In addition, many of these women come from 
small, traditional villages.  Scores of women interviewed by 
the embassy reported an improved sense of self-worth, a 
greater feeling of independence, and a greater degree of 
overall satisfaction compared to their previous work in the 
home.  This increased sense of empowerment has found form 
in, among other things, women's discussion groups formed at 
some factories in at least one QIZ park, where women say 
they can talk about social and political issues that would 
be frowned upon back in the village.  Limited interviews 
with families have shown that, in many cases, a number of 
women in the same family often take jobs in QIZ's , thereby 
greatly increasing family income - especially in families 
where the males have been jobless for some time.  The base 
rate for a QIZ worker is Jordan's minimum wage of about 
$112/month, but in reality labor competition has driven 
those rates up to as much as $200-$250/month.  These changes 
have of course created some stresses, notably in families 
where women out-earn men, and in conservative family units 
where the patriarch may force women in the family to quit 
jobs or control their income through the use of direct- 
deposit into patriarch-controlled bank accounts.  In 
addition, many young women who take QIZ jobs leave the 
workforce upon marriage, creating a turnover and training 
problem.  These attitudes, though, are beginning to shift. 
 
ISSUES AHEAD 
 
9.  The Jordanian government will have to face a number of 
procedural and structural issues to maintain the health of 
the QIZ's in the coming years.  Most immediately, they will 
need to renegotiate input percentages with the Israeli 
government.  The 8% input level reverts to 11% in February 
2004, and current investors are already howling about the 
negative impacts of returning to the higher levels.  Jordan 
has an interest in, de minimus, maintaining the 8% level, or 
in restructuring the percentages to allow for more flexible 
application of the Israeli input rule - both to keep current 
investors and attract new ones.  To their credit, the 
Jordanian government has for the first time framed this 
issue in terms of benefit to Israel of restructuring the 
regime, arguing that doing so will substantially increase 
investment and broaden production into new product lines, 
which would mean more business for Israeli firms as volumes 
increase. 
 
10.  More generally, Jordan must cope with the rise of 
competing tariff preference programs in other parts of the 
world.  The Caribbean Basin Initiative and the Africa Growth 
and Opportunities Act are both fighting to attract the same 
pool of new investors from South and East Asia.  Jordan will 
need to do an even better job selling itself, and will need 
to further improve the functionality of the QIZ paperwork 
process, to ensure they can continue to attract those 
investors.  So far, Jordan has been fairly successful at 
trumping these two competitors.  Another concern for Jordan 
is the possibility of a Turkish-Israeli QIZ.  Domestic U.S. 
textile concerns make it unlikely that any such QIZ would 
include the textile sector, but a Turkish QIZ could steal 
potential higher-end manufacturers away from Jordan down the 
road - investors Jordan has not been successful in 
attracting so far. 
 
11.  Politically, the QIZ's will continue to be affected by 
instability in the region.  Instability in either Iraq or in 
the West Bank/Israel has a negative affect on attracting new 
investors.  This has been particularly true in the West 
Bank, where spikes in Israeli/Palestinian violence have 
correlated exactly with drop off's in new investor interest. 
However, none of the turmoil to date has affected existing 
investor interest.  None of the spikes in violence resulted 
in lost production or sustained lost access to Israeli 
inputs or the port of Haifa.  Partly as a result of the 
ability of QIZ producers to thrive even during instability 
in the West Bank, new investor interest has traditionally 
returned to the QIZ's about three months after each spike in 
violence.  In the long term, both Jordan and Israel have an 
interest in making sure QIZ production is unaffected by 
instability in the West Bank.  Thus we can expect both sides 
to work hard to make sure access to inputs is maintained and 
the northern border crossing to Haifa remains open. 
 
12.  Internally, Jordan's biggest challenge will be 
continuing to be able to provide a trained industrial labor 
force to a growing list of interested investors.  Industrial 
labor training programs in Jordan are underfunded and poorly 
targeted.  Most investors train their own employees, and 
wage competition has started to be felt in the more 
established QIZ's in Irbid, Zarqa and Amman as the most 
highly trained workers can now command more than double the 
normal wage.  While a labor squeeze is not yet a serious 
problem, it may not be far off, and could slow investment 
interest in the country.  The kingdom recently took initial 
steps to improve and expand industrial labor training 
through a joint Labor Ministry/Armed Forces training 
program, but much more needs to be done.  On a related note, 
the QIZ's continue to experience periodic isolated episodes 
of labor complaints, usually surrounding payment of wages to 
expatriate workers.  While these incidents remain few, they 
are still an irritant that the GOJ will need to monitor and 
take corrective action on as necessary to avoid any labor 
stigma being attached to the QIZ's. 
 
13.  The biggest structural challenge for the QIZ's, though, 
is the entry into force of the WTO multifiber arrangement in 
2005.  On January 1 of that year, quotas on textile imports 
into the U.S. will be eliminated, which will give low-cost, 
high volume producers like China and Pakistan a massive 
advantage in the textile sector.  Jordan's challenge will be 
to maintain its current investors and try to attract new 
ones in a far more competitive global textile market.  A 
number of potential new investors interviewed by the Embassy 
have indicated that, even in the post-2005 environment, they 
would be interested in establishing facilities in Jordan. 
Many of them believe that U.S. import quotas will be 
replaced with increased duties, either under safeguards 
measures or anti-dumping cases.  Should this be the case, 
Jordan's tariff benefit under the QIZ's will be even more 
pronounced.  In addition, many producers have a policy of 
diversifying their sources of production to hedge against 
instability in any one country.  Thus it appears Jordan, 
with aggressive management by the government, will be able 
to maintain a viable textile sector even after the 
implementation of the multifiber arrangement in 2005. 
 
THE FTA AND THE QIZ'S 
 
14.  The U.S.-Jordan Free Trade Agreement will, by 2010, 
eliminate tariffs on all textile products.  Thus, eventually 
the QIZ's will be anachronistic as the FTA matches tariff 
breaks and provides for more straight-forward rules of 
origin (i.e., no Israeli input requirements).  Such a 
distinction will matter little for Jordan's economy or 
ability to attract investment, as its tariff preferences 
into the U.S. market relative to third countries will remain 
the same.  However, if Israel hopes to continue to reap the 
political and economic benefits of the QIZ's it will have to 
scramble to keep Jordan-based textile producers interested 
in the QIZ initiative.  Such an interest is not nearly so 
pressing for Jordan, whose main benefit from the QIZ's has 
been jobs, investment, and technology transfer -- all things 
that will continue under the FTA. 
 
COMMENT 
 
15.  The QIZ's are an important success story for Jordan and 
for the ability of economic cooperation to foster political 
cooperation.  They have also had a number of unintended - 
and overwhelmingly positive - consequences, from industrial 
labor force and investment promotion training to women's 
empowerment.  Growth in new businesses has slowed from its 
early heyday, due in part to continuing regional instability 
and constraints on availability of trained labor.  In 
addition, the uncertainty of the post-2005 global textile 
environment is legitimate cause for pause in some Jordanian 
circles.  Nevertheless, the QIZ initiative continues to draw 
interested textile sector investors and to lay the 
groundwork for attracting investors under the FTA. 
GNEHM