US embassy cable - 03AMMAN781

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 000781 
 
SIPDIS 
 
DEPT PASS USTR FOR NED SAUMS 
DEPT ALSO FOR EAP/BCLTV - LAWLESS 
 
E.O. 12958: DECL: 02/02/2013 
TAGS: ETRD, JO, EG, IS 
SUBJECT: EGYPTIAN QIZ'S IN JORDANIAN PERSPECTIVE 
 
REF: CAIRO 846 
 
Classified By: Ambassador Edward W. Gnehm, Reasons 1.5 (b,d) 
 
1.  (c)  SUMMARY:  Activating the QIZ initiative in Egypt 
through parallel protocols would have profound effects on the 
long-term viability of QIZ's in Jordan.  More seriously, such 
a deal would cause deep concern within the GOJ about 
equitable treatment for the politically tough decisions 
Jordan has made with regard to normalizing relations with 
Israel.  Especially at this sensitive time, we believe 
activation of Egyptian participation in the QIZ initiative 
should not be done in such a way as to expose the GOJ to 
strong domestic criticism for giving up more than it had to 
politically vis-a-vis Israel.  End summary. 
 
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ECONOMIC IMPACT PREDICTABLY BAD 
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2.  (c)  We expect senior levels of the GOJ to react with 
dismay when news that Egypt is activating its QIZ option gets 
out.  Economically, this is predictable, as full Egyptian 
participation in the QIZ initiative would severely curtail 
QIZ sales and new investment in Jordan.  For example, the 
Vice President for Sourcing of Target, in a recent visit to 
Amman, told us that preferential access to the U.S. market 
along the lines of the QIZ initiative would make Egypt's 
vertically integrated textile industry a far more 
advantageous place to source from than Jordan, which lacks 
both the high-quality local cotton and the vertical 
integration. 
 
3.  (c)  In addition to the impact on the nascent 
western-oriented business sector, diversion of QIZ business 
to Egypt would have severe repercussions on Jordan's balance 
of payments and the King's efforts to diversify the economy 
away from dependence on foreign aid, remittances, and exports 
to Iraq.  The QIZ's were responsible for over $400 million in 
gross hard currency inflows in 2002 (5% of GDP and 20% of 
total exports).  Exports of $600-800 million are possible 
this year, more than combined U.S. military and economic 
assistance.  According to a recent study by the EU assistance 
mission, QIZ exports have the potential to reach $2.6 billion 
annually as soon as 2007 -- under current conditions. 
 
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POLITICAL COSTS EVEN MORE DAMAGING 
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4.  (c)  More disturbing, though, is the major political 
embarrassment that Egypt's participation in the QIZ 
initiative on "easier" political terms could cause the GOJ. 
Should Egypt activate its QIZ participation in the same 
manner as the GOJ did, i.e. with an agreement between the GOE 
and the GOI, Jordan would have no real political exposure. 
If, however, the Egyptians use a parallel protocols mechanism 
(reftel), we expect the GOJ to register deep concern.  The 
GOJ took brave political risks to initiate the QIZ's, 
invoking the ire of anti-normalization groups and provoking 
death threats against some of the early investors.  Since 
then, the success of the initiative has quieted 
anti-normalization voices.  In addition, in providing jobs to 
over 20,000 (primarily rural, conservative) Jordanians, the 
QIZ's have played an important role in changing public 
attitudes about working with Israel. 
 
5.  (c)  All of these gains would be put at risk if Egypt was 
seen by the GOJ as getting an "easier deal" than Jordan 
received.  The GOJ will perceive this as favoritism toward 
Egypt, obliging Jordan to make public and direct 
government-to-government ties to Israel, while Egypt is not 
asked to take similar risks.  This analysis, irrespective of 
the economic impact of competition for QIZ sales and 
investment, would light a hitherto smoldering fire under the 
anti-normalizers.  Worse, it would dissuade forward-leaning 
Jordanians from taking on new political risks vis-a-vis 
Israel, on the assumption that, if they wait long enough, 
they can get "Egyptian terms."  It will also dissuade liberal 
Jordanian businessmen from reaching out to do business with 
Israel out of fear they could be undercut later on by more 
"favorable" treatment third countries receive.  Finally, it 
will disappoint Jordanian workers (those that remain after 
the economic effects reveal themselves), who will perceive 
Egyptian workers as getting the benefits of the QIZ's without 
having to work with Israel.  Whether or not this is true 
would be irrelevant - the perception would be the same. 
 
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COMMENT 
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6.  (c)  While Egypt's long-overdue participation in the QIZ 
initiative will cause serious economic disruption to Jordan's 
nascent garment sector, this is a normal facet of the 
cut-throat global textile industry.  Jordan has always known 
it would need to deal with competition from abroad, and 
should be expected to find ways to compensate for the 
disruption (re-training, diversification, etc).  In any 
event, there will still be a niche for Jordanian garment 
exports: The inclusion of Egypt might even create new 
partnership opportunities among QIZ exporters, and Jordan 
will still be a good sourcing option for synthetic 
fabric-based garments, where Egyptian advantages in cotton 
and vertical integration are not as much in play.  The GOJ's 
track record on QIZ investor support and on relations with 
Israeli counterparts could also be a distinct advantage. 
 
7.  (c)  That said, bringing Egypt into the QIZ fold needs to 
be managed in such a way that it does not overturn the 
political sacrifices Jordan made.  Preserving the momentum 
the QIZ's have generated in beating back the 
anti-normalization lobby means making sure that hard-won 
benefits are not given to other countries that have not been 
asked to make the same difficult decisions. 
GNEHM