US embassy cable - 02AMMAN6952

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 006952 
 
SIPDIS 
 
STATE PASS USTR FOR NED SAUMS 
COMMERCE FOR 4520/ITA/MAC/ONE/P.THANOS 
ROME FOR CUSTOMS ATTACHE 
 
E.O. 12958: DECL: 12/01/2012 
TAGS: ETRD, EINV, IS, IZ, JO 
SUBJECT: QIZ UPDATE - IRAQ WORRIES, TRANSSHIPMENT RUMORS, 
BUT POSITIVE NUMBERS CONTINUE 
 
 
Classified By: Ambassador Edward W. Gnehm, reasons 1.5 (b,d) 
 
Summary 
 
1.  (sbu)  Despite continuing political uncertainty in the 
region, QIZ exporters in Jordan continue to report solid 
production and growth.  Most exporters are booked through the 
winter, some new investor interest is evident, and many 
current investors are expanding production.  Many QIZ 
exporters continue to voice the same business concerns that 
have become a staple of the QIZ story - problems with Israeli 
inputs, procedural delays, and labor cost gripes.  Adding to 
this "background noise," though, is a slowly growing level of 
discomfort over the political situations facing Jordan's 
neighbors.  While increased political instability is unlikely 
to derail QIZ production, West Bank violence or war with Iraq 
will undoubtedly dampen new investor interest and potentially 
increase QIZ production costs in the short term.  End summary. 
 
First, The Good News 
 
2.  (u)  QIZ output numbers continue to show strong growth. 
Exports from the Al Hassan QIZ in Irbid totaled over $229 
million through October 2002, a 47% increase over the same 
period last year.  Similarly, QIZ exports from Al Dulayl QIZ 
near Zarqa totaled over $49 million for the first 9 months of 
2002, compared to $21.5 million for CY 2001.  Dulayl's 
exports this year represent over 31% of total exports from 
the Zarqa Governorate.  Based on these figures, and assuming 
Tajammouat's numbers track in similar fashion (there are no 
separate export figures for Tajammouat), the QIZ's should 
meet our earlier estimate of $400 million in exports for 2002. 
 
3.  (sbu)  Anecdotal evidence supports these aggregate 
numbers nicely.  The dozen or so QIZ exporters we have spoken 
with over the past month have been upbeat about current and 
planned production.  Most exporters are booked through March 
2003 (bookings for April and beyond typically start around 
November/December).  Indeed, a small number of exporters 
claim to be booked beyond their current capacity and are 
looking for local subcontractors.  A number of current 
investors are buying new building space to expand long-term 
production, and there has been a smattering of new 
investments in the past three months.  One exporter in Kerak 
noted that he was "upgrading" his production from generic 
lines to labels, including Ralph Lauren and Jockey.  He also 
said he had been contacted by Jones New York about setting up 
a washing, embroidery, and silkscreen facility in Jordan. 
Another exporter said he was talking to a potential partner 
about establishing a weaving mill and attached bedsheet 
manufacturing facility in the QIZ's. 
 
4.  (sbu)  On the labor front, expat worker percentages 
appear to be roughly stable at around one-third of total 
workers.  There is a great deal of variance in reports from 
the government and the private sector, though, with estimates 
of expat QIZ workers ranging from 25% to 40%.  Of particular 
note on the labor/social front, the management team at 
Tajammouat recently inaugurated a program to boost Jordanian 
employment by recruiting girls from the town of Tafileh in 
southern Jordan and hosting them dormitory-style at the park. 
 The program has been well received in both the QIZ and, we 
are told, by the Tafileh girls.  As a result, management in 
Dulayl is putting together a similar program to bring in 
girls from the Baqaa refugee camp to work in the QIZ's. 
 
Business Complaints 
 
5.  (u)  Business complaints from QIZ exporters remain 
largely the same - requests to reduce Israeli inputs below 
8%, requests to improve QPR approval times on the Israeli 
side, and complaints about product quality of Israeli inputs. 
 In addition to these usual gripes, new specific concerns 
have been raised.  First, some exporters have noted that some 
U.S. freight forwarders and even some customs officials are 
unfamiliar with documentary requirements for imports of QIZ 
goods.  Exporters say this lack of familiarity can delay 
importation of QIZ goods, which can be expensive with 
time-sensitive garment imports.  We have promised to raise 
this issue with Customs. 
 
6.  (u)  Second, a number of exporters are frustrated by 
contractual obligations imposed by U.S. garment retailers. 
Many retailers require exporters to work with, e.g., a 
particular trim manufacturer or a particular hanger maker. 
This ties the hands of exporters, who cannot source these 
items out of Israel and so meet their 8% requirements. 
Compounding the problem, they say Israeli trim makers etc. 
have not made an effort to become "approved" suppliers for 
many larger retailers for these goods. 
 
7.  (u)  Finally, we are hearing increasing rumors of 
transshipment of third-country garments through Jordan.  In 
particular, we have heard reports of (mostly Chinese) 
garments being shipped in to Aqaba, re-labeled in the QIZ, 
and exported as QIZ goods to the U.S.  These rumors are short 
on specifics, making it difficult to track them.  Jordanian 
customs has confirmed that there have been isolated incidents 
of attempted transshipment.  We have also heard 
counter-rumors that customs officials have refused entry to 
trans-shipments and have begun to closely scrutinize QIZ 
exporters with chequered pasts.  Jordanian customs has thus 
far been unable to confirm those rumors. 
 
Uneasiness Over Political Developments 
 
8.  (c)  In addition to the usual "background noise" of 
complaints over Israeli inputs, some exporters and park 
managers have expressed a low, but growing, sense of disquiet 
over continued political uncertainty in the neighborhood. 
Some of this unease is simply generalized anxiety over the 
smorgasbord of problems in the region, from possible war with 
Iraq to ongoing violence in the West Bank and Israel to 
increased incidents of violence against Americans in the 
region.  Some exporters have cited cancellation of orders 
tied to this generalized uncertainty, while others note that 
new orders are coming in more slowly than usual - due in part 
to a slow U.S. economy, partly to the first quarter being a 
traditionally slow time, and partly to political uncertainty. 
 Similarly, the investment promotion officer for Tajammouat 
noted that, during a recent trip to China, previously 
scheduled meetings with prospective investors were canceled 
at the last minute because they were no longer interested in 
investing in a "war zone." 
 
9.  (c)  This generalized anxiety has been compounded by 
growing concern over the impact of war with Iraq on the 
QIZ's.  Specifically, exporters note that, in the previous 
war with Iraq, sea and air ports in Israel and Jordan were 
closed for a time and war risk insurance premiums kept boats 
out of Aqaba.  Should history repeat, some exporters fear 
increased production costs from raised insurance premiums, 
problems importing inputs from Israel or East Asia, and 
problems exporting finished goods.  They note that similar 
concerns arise from the possibility of a sharp increase in 
violence in the West Bank causing closure of border crossings 
and hence, access to Israeli inputs.  We have continued to 
reiterate both the USG's and the Israeli government's support 
for the QIZ's, noting that the northern crossing has closed 
for security reasons for only a handful of days in the last 
two years, including closure after the September 11 terror 
attacks in the U.S.  Exporters nevertheless continue to seek 
assurances that we have contingency plans in place to support 
continued QIZ operations in the event that access to Israeli 
inputs is curtailed for an extended period of time. 
 
Comment 
 
10.  (sbu)  Overall, news form the QIZ's remains positive. 
Park managers and key investors are particularly excited 
about the proposed QIZ event to be held December 13 on the 
margins of the FTA Joint Commission meeting in Washington, 
which they feel will go a long way toward relieving retailer 
concerns over political instability, and will ultimately lead 
to increased sourcing and new investment for Jordan.  Most of 
the complaints we continue to hear are normal complaints from 
businessmen trying to optimize profit and efficiency.  The 
Israeli and Jordanian governments are currently talking about 
restructuring Israeli input requirements, and the result of 
those talks should have a net positive impact on current 
investors.  The fact that the complaints over the 8% continue 
and that U.S. retailers are looking for contract suppliers of 
inputs indicates that, once tariff relief under the FTA 
approximates relief under the QIZ's, many current exporters 
will export under the FTA, reducing costs and increasing 
quality by moving away from Israeli suppliers.  On the 
political side, it will be useful to have a mechanism in 
place in the future to address the possibility of loss of 
access to Israeli inputs for QIZ production. 
GNEHM