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 
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¶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 
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¶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