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Cablegate: Jordan Fta: Accelerate Tariff Reductions While

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 AMMAN 008359

SIPDIS

SENSITIVE

STATE FOR NEA/ARN - A. SCHEDLBAUER
STATE FOR EB/TPP/BTA/ANA - E. P. WHITAKER
PASS TO USTR FOR E. SAUMS

E.O. 12958: N/A
TAGS: ETRD ECON PREL IS JO
SUBJECT: JORDAN FTA: ACCELERATE TARIFF REDUCTIONS WHILE
SEEKING ISRAELI CUMULATION IN CONTENT

REF: A. TPSC DRAFT DOCUMENT 2003-442 (12/17/03)

B. AMMAN 7292

SENSITIVE BUT UNCLASSIFIED. FOR USG USE ONLY. HANDLE
ACCORDINGLY.

SUMMARY
-------

1. (SBU) Embassy notes that the Trade Policy Staff
Committee is reviewing (REF A) a proposal by the Government
of Jordan (GOJ) to accelerate tariff elimination for certain
apparel products under the U.S.-Jordan Free Trade Agreement
(FTA). Jordan currently already exports most of these
products (over $500 million worth this year) under the QIZ
arrangement, which requires at least 8% Israeli content for
duty-free status. Phase out of the FTA tariffs now would
benefit Jordan's economy by attracting more investors in the
garment industry (particularly in view of the 2005 end of
quotas under the Multifiber Agreement) and bolster
perceptions of the FTA as a U.S. supported engine of
export-led growth. For these reasons, we favor the immediate
phase-out of all 31 apparel product category tariffs as
requested by Jordan.

2. (SBU) This move will mean the accelerated demise of the
QIZ concept before 2010, the date by which many high-value
garment tariffs were to be zeroed out under the original
terms of the FTA. The QIZs have benefited Israeli-Jordanian
relations and economic ties and kept the two-way trade afloat
during the worst days of the Intifadah. If the QIZs go,
there could be negative consequences for the growing
Israeli-Jordanian trade relationship and its ancillary
political benefits. To address these concerns, we propose
that the USG pursue cumulation of content in Jordanian goods
with Israeli inputs, as provisionally foreseen in the FTA.
While these issues should be examined together, they should
not be linked given the potential political and technical
complexity of the cumulation issue.

QIZs: Both Economic and Political Benefits
------------------------------------------

3. (SBU) A TSPC decision to allow no-tariff garment exports
from Jordan (which has no quotas) under the FTA in all of the
major revenue-producing tariff lines will eliminate the need
for manufacturers to locate in special Qualifying Industrial
Zones (QIZs) while meeting a requirement that eight percent
of the 35 percent total value-added come from Israel. Over
the past five years, garment exports to the U.S. from QIZs
have been a tremendous boost to the Jordanian economy: with
the U.S. now being Jordan's number one trade partner and
absorbing almost 30 percent of its exports. At the end of
October, total exports had reached about $525 million for the
year. QIZ exports will likely top out at over $500 million
for 2003, of which over 95 percent are garments. Changing
the FTA tariff schedule will merely shift these benefits to
the FTA. Indeed, investors would likely find exporting under
the FTA more attractive than the QIZs, especially as they
look at the potential effects of the MFA-mandated end of
garment quotas in 2005. With the benefits of FTA more
readily apparent to the remainder of the Arab world, U.S.
efforts to negotiate FTAs in the region could also be
enhanced.

4. (SBU) However, the benefits of the QIZs are not
exclusively in the realm of trade. The QIZ law of 1996 arose
from many considerations, including a desire to promote
economic integration in the region that would foster peaceful
relations. The QIZs provided an economic incentive for such
interaction that resulted in a constant flow into Jordan of
Israeli cloth, unfinished apparel, and accessories. Jordan's
exports to Israel in the last few years grew strongly,
breaking the $100 million mark in 2002, even as the Intifadah
tore people apart. Because of the QIZs, Israeli and
Jordanian businessmen made deals and worked together to
develop strategies to lobby their respective governments on
key issues of importance -- such as cross-border land
transportation and customs procedures. The QIZ benefits also
make the GOJ think twice before taking precipitate action as
problems arise elsewhere in the relationship with Israel,
which is often strained by the more aggressive anti-Israel
elements in Jordan.

5. (SBU) If we go ahead with the GOJ's requested tariff
eliminations, the trade in QIZ garments with Israeli content
would not disappear overnight. A knowledgeable GOJ Ministry
of Trade analyst who has been following QIZs since their
inception suggests that at least half of the QIZ trade with
Israel would continue for a number of reasons, including
well-established Israeli-Jordanian business relationships and
the habits of some U.S. garment buyers who insist on the QIZ
label with Israeli content. The analyst is quick to add that
there is as yet no firm basis for determining the size of the
reduction. However, over time the QIZ business with Israel,
even if it held steady at half the current market, would
diminish as a share of Jordan's growing trade with the U.S.


Explore Other Forms of Content Cumulation with Israel
--------------------------------------------- --------

6. (SBU) In order to maximize the economic benefit of the
FTA while at the same time preserving the political gains of
the QIZ arrangement, we suggest that Washington take a new
look at paragraph 13 of Annex 2.2 of the FTA, which states
that the United States and Jordan will discuss the extent to
which products of a "territory contiguous to Jordan" may be
cumulated with Jordanian products to meet the value added
criterion of the FTA rules of origin. Cumulation with Israel
within the FTA would not only have benefits for Jordan, but
could serve as a model for cumulation with new FTA partners
such as Morocco or Bahrain, and within the future MEFTA.

7. (SBU) Embassy is aware that cumulation presents its own
potentially difficult technical problems. The agreements
with Israel and Jordan use different origin regimes. Because
the U.S., Jordan, and Israel are not members of the same FTA,
and given that Israel and Jordan do not have any FTA between
themselves, some trading partners could claim that cumulation
is inconsistent with the WTO Agreement. While the issues are
difficult, both parties would have an economic incentive to
join us in seeking a solution.

COMMENT
-------

8. (SBU) Given the importance of preserving the political
gains from the QIZs, Embassy recommends that the USG pursue
cumulation of content in Jordanian goods with Israeli inputs.
While we urge that the issues be examined together, we do
not think it would be feasible to make accelerated tariff
elimination contingent on accepting cumulation given the
technical problems and the fact that the issue could be
politically charged for the GOJ domestically -- although the
problems should be less severe than they were last year at
this time. We think that, properly prepared, cumulation
would be an excellent subject for discussion at the Joint
Committee meeting planned for early next year.
GNEHM
GNEHM

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