US embassy cable - 03AMMAN4735

C O N F I D E N T I A L SECTION 01 OF 05 AMMAN 004735 
 
SIPDIS 
 
STATE PASS USTR FOR NED SAUMS 
USDOC FOR 4520/ITA/MAC/ONE/P.THANOS 
 
E.O. 12958: DECL: 07/10/2013 
TAGS: ETRD, PREL, IS, JO 
SUBJECT: SUPPORTING THE ROADMAP: BUILDING REGIONAL ECONOMIC 
TIES 
 
REF: A. AMMAN 4233 
 
     B. 02 TEL AVIV 5559 
     C. AMMAN 3830 
     D. TEL AVIV 2829 
     E. AMMAN 3785 
 
Classified By: AMBASSADOR EDWARD W. GNEHM, REASONS 1.5 (B,D) 
 
1. (U) This is a joint Amman-Jerusalem-Tel Aviv cable. 
 
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Summary 
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2. (C)  The Aqaba summit and the Dead Sea WEF conference have 
generated new hopes for expanded economic activity between 
Jordan, Israel and -- to a lesser extent -- the West 
Bank/Gaza.  Jordan is particularly emboldened by the recent 
events on its soil.  Israeli sources are also upbeat, but 
caution against overblown expectations.  The Palestinians, to 
a large extent, remain focused on the present economic 
hardships caused by the Israeli closure measures. 
 
Currently, we see movement, or possible future movement, on 
several fronts.  These include: 
 
-- Jordan and Israel have already begun exploring 
improvements to make QIZs, the core of bilateral economic 
relations, more competitive. 
 
-- Although Jordan has expressed interest in establishing 
cumulation agreements with future U.S. FTA partners Morocco 
and Bahrain, it may be hesitant to embrace cumulation, or an 
FTA, with Israel.  Israel would likely be open to both 
cumulation and a "Jordan River Free Trade Area" as part of 
its policy to use economic ties to improve the general 
political relationship.  The Palestinians, who already have a 
customs union with Israel and enjoy duty free trade with both 
the U.S. and the EU, tend to see trade with Jordan as a 
zero-sum game and are not necessarily keen on a FTA with the 
Jordanians. 
 
-- Jordan hopes for cooperation in tourism, civil aviation, 
and water management, but Israeli interest will be 
conditional on meeting economic and security concerns. 
Palestinians also see opportunities for the joint marketing 
of tourist sites in the future. 
 
3. (C) Our continued support for greater economic integration 
would be a low cost way to support roadmap implementation, 
and ultimately to support greater regional stability through 
increased intra-regional trade, along the lines of the 
President's Middle East Trade Initiative (METI).  End summary. 
 
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Business Mood Improving 
----------------------- 
 
4. (C) The end of the war in Iraq and the beginnings of an 
Israeli-Palestinian dialog have created new hopes of improved 
economic relations between Jordan, Israel and the West 
Bank/Gaza.  Optimism and hopes appear to be most pronounced 
in Jordan.  In Israel, optimism is accompanied by caution 
born out of the disappointments of the 1990s, when economic 
realities and ultimately the Intifada destroyed any dreams of 
a New Middle East.  While some in the Palestinian business 
community are hopeful that progress on implementing the 
roadmap will improve economic conditions in WB/G, they remain 
focused on internal obstacles to commerce, such as roadblocks 
and closures, as well as barriers to trade with Israel and 
the outside world imposed by the GOI. 
 
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Pronounced Optimism in Jordan 
----------------------------- 
 
5. (C) In Jordan, both the GOJ and Jordan's private sector 
have been more upbeat on prospects for local and regional 
economic growth (ref a).  GOJ trade and investment promotion 
officials were particularly emboldened by the Aqaba summit 
and the Dead Sea World Economic Forum (WEF) that followed it. 
 They have been thinking, and in some cases have started 
active discussions with Israeli counterparts, about 
mechanisms to increase opportunities under the QIZ 
initiative, the FTA, bilateral agreements, and other areas of 
technical cooperation. 
 
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In Israel, Cautious Optimism 
---------------------------- 
 
6. (C) Israeli officials, too, returned from the WEF upbeat. 
For them, the public appearances with Jordanian officials and 
the positive Jordanian statements about Israel were of 
important symbolic value, since they demonstrated a Jordanian 
commitment to openly acknowledge relations with Israel.  As a 
whole, Israeli businessmen share this new mood.  Both 
government and business contacts hope the new mood will lead 
to improved person-to-person contacts on a small scale, with 
trade and investment increasing as a result.  Invariably, our 
interlocutors in Israel caution against overblown 
expectations.  Israel's highly developed, export-oriented 
economy is not "a natural fit" with the Arab world, we 
repeatedly hear, and even in the most peaceful of worlds 
Israeli trade with Arab countries would remain small compared 
to Israeli trade with the highly industrialized economies of 
the world.  In addition, Israelis are downbeat when 
commenting about the prospects for large-scale cross-border 
projects.  Many such projects conceived in the 1990s were 
politically attractive but did not make economic sense, we 
are constantly told. 
 
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In WB/G, Other Worries 
---------------------- 
 
7. (C) Even during more promising times before the latest 
Intifada, Palestinians engaged in little trade with Jordan, 
and focused their efforts on improving economic relations 
with Israel and promoting exports to the United States and 
Europe.  The Jordanian and Palestinian economies are 
competitive, not complementary, and Palestinians tend to 
think of trade with Jordan as a zero-sum game. However, they 
enjoy a comparative advantage in labor costs with Israel. 
This, combined with physical proximity to Israel, the common 
Israeli/Palestinian market, and the difficulties of getting 
goods to Jordan due to tariffs, Israeli security measures and 
other non-trade barriers, explains why trade and labor flows 
with Israel have long dominated the Palestinian economy. 
 
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QIZs 
---- 
 
8. (SBU) QIZs remain at the center of Jordanian/Israeli 
economic relations.  At meetings at the Dead Sea, Jordanian 
and Israeli trade ministers agreed to restructure the Israeli 
input calculations for QIZ exports.  The GOJ and GOI are now 
close to inking an agreement to move away from a straight 8 
percent content requirement and replace it with a "sliding 
scale" (ref b).   The aim is to attract higher-value, more 
diversified products into the QIZ scheme by reducing the 
total Israeli content necessary for higher-value goods. 
 
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"Cumulation Agreements" 
----------------------- 
 
9. (C) At the WEF, then-Trade Minister Salah Bashir told 
A/USTR Novelli of Jordan's interest in pursuing cumulation 
arrangements with new U.S. FTA partners including Morocco 
and, eventually, Bahrain (ref c).  Jordan has been open to 
such agreements with the WB/G, but its willingness to pursue 
cumulation with Israel has waned since the outbreak of the 
Intifada.  On the other hand, we expect Israel to be open to 
any overtures.  The Israelis would likely argue that any 
cumulation agreements would need to encompass both Israel and 
the WB/G due to the Israeli/Palestinian customs union.  The 
USG has never canvassed Palestinian officials about the 
notion of Palestinian/Jordanian cumulation. 
 
10. (SBU) On a related note, the GOJ recently reached 
agreement to allow Israeli cumulation for textile goods 
exported to Europe under the Association Agreement.  This 
essentially allows Jordan to apply the QIZ model to exports 
to Europe, but is also a rare example of Jordan-Israel 
cooperation outside the U.S. market context, and could set a 
precedent for further cooperation. 
 
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A "Jordan River Free Trade Area"? 
--------------------------------- 
 
11. (C) In ref d, Embassy Tel Aviv suggested exploring the 
possibility of merging our existing FTAs with Israel and 
Jordan into a trilateral agreement.  We believe the GOI would 
be open to examining such an initiative, since it would fit 
in well with Israel's policy of using economic relations to 
further political ties.  Israeli business interests would 
likely support the idea, although many smaller companies 
would probably fear the Jordanian competition.  GOI contacts 
tell us that Jordan is not yet keen on the idea, although 
King Abdullah did speak out publicly in favor of an FTA with 
Israel at the WEF. 
 
12. (C) Palestinian officials and business leaders have 
voiced rhetorical support for the concept of increasing 
intra-Arab trade and economic cooperation, partially in an 
emotional response to increased Israeli restrictions on 
bilateral trade.  Indeed, some Arab countries - albeit not 
Jordan - have lowered or eliminated tariffs on exports from 
the WB/G in an effort to aid the Palestinian economy, and a 
limited number of Palestinians have taken advantage of this 
largess.  But for the same reasons that intra-Arab trade is 
so marginal, short-term opportunities for greater Palestinian 
trade with Jordan and the Arab world remain extremely 
limited.  Considering the similarity of the Palestinian and 
Jordanian economies, the Palestinians will likely continue to 
focus on developing trade with other non-Arab partners. 
 
--------------------------------------------- - 
Non-Tariff Barriers (NTBs):  Security Concerns 
--------------------------------------------- - 
 
13. (C) Although bilateral trade has grown rapidly thanks to 
the QIZs, important problems remain.  GOJ officials have said 
repeatedly since the beginning of the Intifada that Jordanian 
products are under-represented in the Palestinian and 
Israeli-Arab markets.  They note that Jordanian products 
traditionally sold well in these markets in the past.  The 
GOJ says Israeli labeling and "back-to-back" shipping 
requirements as well as periodic restrictions to cargo access 
into/out of the West Bank have all combined to keep Jordanian 
products out of "natural" markets in northern Israel and the 
WB/G.   Israeli government officials say they are aware of 
these concerns, but say any delays are purely security 
related.  They have indicated little willingness to move on 
the Jordanian wishes.  Palestinians argue that Jordanian 
products are in low demand in the WB/G because their quality 
is poor compared to the Israeli and domestically produced 
goods that dominate their market. 
 
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NTBs: Strike-related delays 
--------------------------- 
 
14. (C) The GOJ says the Israeli customs and port strikes in 
spring 2003 did far more damage to QIZ exports and future 
orders than the war being conducted in Iraq at the same time. 
 The GOJ now hopes for some sort of Israeli "national 
security" exemption in the event of future strikes.  The GOI 
tells us it tried to accommodate the QIZ goods by creating an 
interagency committee to respond to Jordanian requests during 
the strike.  They seem unwilling, however, to 
institutionalize any sort of special treatment for QIZ goods. 
 
 
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NTBs: Informal Boycotts 
----------------------- 
 
15. (C) From the Israeli perspective, alleged latent 
discrimination and outright boycotts of Israeli goods and/or 
businessmen are the main NTB with Jordan.  In particular, the 
GOI is angry at the Jordanian lawyers' union refusal to 
represent Israeli businessmen.  In effect, this boycott means 
that Israeli businessmen cannot expect to enforce contracts 
in Jordan.  With the help of offshore companies and Jordanian 
partners, Israeli business interests are now learning to live 
with this problem. 
 
--------------------------------- 
Red Sea Partners: Jordanian Hopes 
and Israeli Reality 
--------------------------------- 
 
16. (SBU)  Various proposals have been floated to utilize 
Aqaba airport to serve both Eilat and Aqaba.  The Aqaba 
airport's close proximity to the border could be exploited to 
create dual immigration, customs and security control points. 
 
17. (C) As politically attractive as these ideas may sound, 
they have collided with the political and economic realities 
of the region.  Most importantly, Israel is worried about 
losing jobs to Jordan if Eilat airport is closed.  The plan 
has suffered from the deteriorated political environment 
caused by the Intifada, as well as from Israeli environmental 
concerns and Jordanian questions about sovereignty issues. 
Israeli officials say the airport idea is not yet dead, 
although they do admit that a proposal is being floated to 
build a new airport for Eilat on Israeli soil. 
 
18. (C) An agreement allowing several hundred Jordanian 
workers into Eilat to work at day jobs, mostly in 
construction, has been a success in the eyes of the GOI.  A 
further Israeli proposal to repeat the scheme farther north, 
in the Arava valley, reportedly found no support with the 
GOJ, which feared that Israel may have sought to replace 
Palestinian workers shut out of Israel by GOI security 
measures. 
 
19. (C) Opportunities in Iraq may be a further catalyst for 
intensifying economic ties across the Jordan River. 
Government officials, businessmen and NGOs have all 
approached Embassy Tel Aviv in recent weeks about selling 
Israeli products to Iraq via Jordanian intermediaries.  Post 
has alerted these parties to contact addresses for Iraq 
reconstruction, and has helped them network among themselves. 
 Post knows of at least one case where Jordanian and Israeli 
business interests are actively negotiating with Iraqis over 
the delivery of Israeli goods and services. 
 
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Tourism 
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20. (SBU) Should violence in the region recede, 
Israeli-Jordanian-Palestinian cooperation could help revive 
the flagging tourism sector.  A substantial increase in 
cross-border traffic between Aqaba-Eilat and East 
Bank-Jerusalem, which has dropped to the single digits when 
measured in terms of tourists per day, would energize the 
currently-depressed sector on both sides of the Jordan River. 
 Regional officials in Israel have suggested opening a new 
border crossing in the Arava valley that would dramatically 
reduce the travel time from Israel to Petra, and hence 
increase the number of tourists to Jordan's prime historical 
treasure.  The Jordanians reportedly balked, fearing that an 
increase in day tourists would have a negative impact on 
Jordanian hotels at Petra.  Palestinians are also 
enthusiastic about the joint marketing of regional tourism 
opportunities.  At the same time, Palestinian tourism 
operators often complain that Israel engages in unfair 
practices that serve to encourage tourists visiting Jerusalem 
to spend their money in (Israeli) West Jerusalem, rather than 
in (Arab) East Jerusalem or Palestinian tourist centers such 
as Bethlehem. 
 
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Read Dead Redux 
--------------- 
 
21. (SBU) An ambitious and controversial plan to save the 
Dead Sea by building a canal linking the Red Sea to the Dead 
Sea has been re-energized by efforts beginning at the 2002 
World Summit on Sustainable Development in Johannesburg, 
followed up by the recent trilateral panel session at the WEF 
(ref e), the first-ever public meeting of Israeli, Jordanian 
and Palestinian representatives to discuss the project.  The 
WEF panel did not directly address the $10-13 million cost of 
a comprehensive feasibility study.  Only the Jordanian 
Minister of Water and Irrigation hinted at the $1-2 billion 
needed for the initial phase of the expected $5-6 billion 
project, which, in its entirety, proposes recharging the 
evaporating Dead Sea, generating hydro-electric power, 
desalinating Red Sea water, and conveying potable water to 
urban centers.  The project is widely viewed as being more 
about water and regional cooperation than environmental 
protection, and environmentalists and hydrologists are still 
carefully examining the ecological consequences of mixing the 
seas.   The GOI is cautious about the project, only saying 
that it would greet a feasibility study while stressing that 
it will not help pay for it. 
 
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Comment 
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22. (C) The trade and technical cooperation opportunities 
outlined above could be a catalyst for progress both on the 
roadmap and on the President's METI agenda.  We will continue 
to support local efforts to boost multilateral trade in the 
region, and to promote joint marketing of tourism in the Holy 
Land.  Actions can include supporting the QIZ initiative, 
exploring, under Washington's guidance, the possibility of 
establishing cumulation agreements and an FTA, facilitating 
bilateral discussions to remove or soften trade barriers, and 
supporting US trade and investment delegations to the region 
and to future Fora like the WEF.  We also believe that a 
high-level USG visit aimed at explaining and promoting the 
METI would help us maintain the momentum and capitalize on 
the current mood of optimism.  We welcome Washington agency 
input on how we can contribute to strengthening the efforts 
that are currently underway in the region. 
GNEHM