US embassy cable - 03AMMAN1185

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 001185 
 
SIPDIS 
 
STATE ALSO FOR P, E, EB, IO 
NSC FOR EDSON, ABRAMS 
TREASURY FOR QUARLES 
CENTCOM FOR POLAD 
DOD FOR OSD 
STATE PASS USTR FOR NED SAUMS 
USDOC FOR 2540/ITA/MAC/ONE/COBERG 
 
E.O. 12958: DECL: 02/19/2013 
TAGS: ETRD, EAIR, MOPS, IS, JO 
SUBJECT: SUPPORTING QIZ'S IN THE EVENT OF WAR 
 
REF: A. 02 AMMAN 1721 
 
     B. 02 AMMAN 6952 
     C. AMMAN-NEA/ARN EMAIL OF 04/03/02 
 
Classified By: Ambassador Edward W. Gnehm, reasons 1.5 (b,d) 
 
1.  (c)  SUMMARY:  We are beginning to see the first 
indications of a negative impact on QIZ business as a result 
of war jitters on the part of U.S. buyers.  Given the 
importance of QIZ exports to Jordan's economic growth and 
macroeconomic stability, a prolonged downturn in QIZ orders 
as a result of conflict in Iraq could have serious economic 
and political repercussions for Jordan.  We will be working 
over the coming weeks and months to try to mitigate the worst 
of the possible shocks to the QIZ business in the event of 
war in Iraq.  End summary. 
 
QIZ'S SEEING FIRST CANCELLATIONS 
 
2.  (sbu)  We recently received our first confirmed case of 
cancellation of a QIZ contract tied specifically to anxiety 
over the possibility of war with Iraq.  Costandi Yaghnam, CEO 
of El Zay Ready Wear (a long-established Jordanian suit maker 
producing high-end labels for U.S. buyers) learned that a 
major purchaser - Hartmarx - wished to cancel an order for 
15,000 suits due to concern over Zay's ability to secure 
inputs and export product in the event of war.  Yaghnam tells 
us this cancellation will cost his company $1 million in 
revenue and force him to lay off 90 highly-skilled tailors. 
Yaghnam is confident he could fill the order, but is having 
trouble convincing his buyer that his QIZ exports will be 
able to circumvent logistical problems likely to result from 
war in Iraq. 
 
POTENTIAL IMPACT SIGNIFICANT 
 
3.  (sbu)  We do not expect Zay's case to be unique.  If 
anything, the fact that Zay, a company with long-standing US 
connections and loyal buyers, is having problems leads us to 
expect younger, less-established QIZ producers in 
lower-margin product lines to come under even heavier 
pressure.  The chief concern of U.S. buyers is reliable 
delivery - if they do not feel they can get this from Jordan, 
they have other sourcing options.  Even isolated delivery 
failures could have a ripple effect on the Jordanian industry 
as a whole as word spreads through a buying community that is 
by nature fickle and, likely, uninformed about actual 
conditions in the region. 
 
4.  (u)  If conflict with Iraq causes major dislocations to 
commercial logistics, QIZ exporters could find themselves 
unable to secure inputs and unable to honor contracts. 
Alternately, buyers could simply cancel orders pre-emptively 
to avoid the uncertainty.  In either case, the potential 
impact of  cancellations on Jordan's economy and social 
structure could be significant.  The QIZ's are a major 
hard-currency earner, accounting for some 20% of all 
Jordanian exports and driving much of Jordan's 4.9% growth in 
GDP last year.  Loss of exports would mean loss of earnings, 
putting further strain on the economy. 
 
5.  (u)  QIZ's are also a major employer, with over 20,000 
Jordanians and some 10,000 expatriates working in QIZ 
factories.  Should these companies lose orders for an 
extended period, we could see layoffs on a substantial scale, 
with negative social and political impacts - i.e., workers 
out of jobs and salaries.  We would also note the eagerness 
of opportunists to play up any problems with the QIZ's 
because of their ties to Israel. 
 
ADAPTING TO A WARTIME ENVIRONMENT 
 
6.  (sbu)  Without question, conflict in Iraq will impact 
commercial logistics in Jordan, which is likely to be the 
biggest concern for QIZ buyers in the U.S.  Transportation 
insurance rates will go up, and the number of cargo ships 
visiting Aqaba (and even Haifa) is likely to go down as a 
result.  Also, to the extent that air and sea cargo lanes are 
shut down, it will be harder for QIZ exporters to secure 
inputs and ensure timely delivery of finished goods. 
 
7.  (sbu)  In point of fact, the QIZ's have shown great 
resiliency and adaptability throughout the intifada.  We 
gauge that they will likely weather any inconveniences posed 
by conflict in Iraq better than expected (Yaghnam, for 
example, said it would be "no problem" to warehouse enough 
inputs in a week's time to meet the full Hartmarx order, 
provided his buyer did not get cold feet).  Thus the key to 
mitigating the negative impact of conflict on the QIZ's will 
be to reassure buyers that political and commercial will 
remains strong to ensure the continued success of the QIZ's, 
even in trying circumstances.  This will also necessitate 
engaging shippers and insurers about the true level of 
political risk surrounding exports from Jordan. 
CONTROLLING THE DAMAGE 
 
8.  (c)  In order to protect the long-term viability of the 
QIZ initiative as a source of economic growth and social 
change in Jordan, we suggest the following actions: 
 
-- Be prepared during a conflict situation to engage buyers, 
shippers, insurers, and suppliers in Amman and Washington to 
make sure they have an accurate picture of the business 
environment here. 
 
-- Facilitate civil-military coordination to deconflict air 
traffic so as to keep civilian air traffic functioning as 
normal to the greatest extent possible. 
 
-- Establish a mechanism for contacts among USG, GOI, and GOJ 
authorities to resolve any questions regarding the status of 
the northern Sheikh Hussein bridge and Haifa port operations. 
 
 
-- Reiterate a clear, public message of support for the 
continued success of the QIZ's.  In the first instance, we 
plan to send an open letter to the local AmCham expressing 
strong support for the QIZ's and noting the ability of the 
QIZ's to operate successfully in a challenging political 
environment over the past three years. 
 
-- Re-examine the option of temporarily suspending Israeli 
input requirements in the event that circumstances beyond 
Jordan's control make it impossible to obtain QIZ inputs from 
Israel, along the lines of the proposal we developed last 
spring (ref c). 
GNEHM