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LETTER FROM THE EDITOR

JORDAN ENVY

On December 14, Egypt and Israel made what could be considered the most significant economic accord between the two countries since Camp David in 1978. The qualifying industrial zone (QIZ) agreement, which grants Egyptian exports duty- and quota-free access to US markets providing they contain 11.7 percent Israeli input, could be salvation for sickly Egyptian industries.

Political reservations aside, the decision was simply good business. In Jordan, which signed on to the QIZ ticket in 1998, the economy has experienced exponential growth. At times, the export growth figures are so dramatic they appear to be missing decimal points.

Back in early 1998, Jordan’s exports to the US were a paltry $26 million, less than the annual sales revenue of the average Wal-Mart outlet. Its 1,700 textile and clothing factories churned out nothing but low-grade apparel that was cheaper than Chinese counterparts – but only in terms of quality.

Today, Jordanian factories operating in 11 QIZs have raised exports to US markets to $950 million, a 3,500-percent increase in just seven years. The industrial parks have transformed Jordan’s $377 million trade deficit with the US into a $550 million trade surplus. QIZ production now accounts for 85 percent of all exports to the US, leading some to wonder if the 2001 US-Jordan FTA was worth all the fuss.

Can this same phenomenal growth be expected of Egypt? Probably not. Jordan was, after all, one of those flukes of economic fortune that occur when you cross a backward economy with a reform-minded government and toss in some resourceful Asian industrialists. From the onset, Jordan’s QIZs attracted Asian textile magnates seeking to exploit a loophole in international trade regulations. Export quotas and hefty tariffs limited their access to US markets, so they rushed instead to capitalize on the duty- and quota-free status of QIZs. Pumped with Asian FDI, Jordan’s embryonic textile and clothing sector had nowhere to go but up.

As of January 1, however, the WTO closed this loophole. Export quotas are no longer the issue, so Asian companies don’t need to set up shop in countries with unlimited duty-free access to US markets. Not that they won’t. Asian producers still face tariffs of up to 33 percent.

Nobody in Egypt is expecting a carbon copy of the Jordanian experience. After all, it’s far easier to achieve outlandish growth figures when starting from scratch. Egypt, on the other hand, already has an established textile and clothing industry that accounts for over 40 percent of its exports to the US.

Egypt’s strict labor laws make it unlikely that Asian investors would flood the market. Not that this would be a bad thing. Chinese, Indian and Philippine investors have not only brought capital and infrastructure to Jordan, their technical expertise is rubbing off. Homegrown labor now accounts for nearly 70 percent of the QIZ workforce, while local investment in the zones exceeds 20 percent (up from just one percent in 1998).

Labor is one area where Egypt has a distinct comparative advantage. Skilled labor is significantly cheaper here, making QIZs an attractive option for foreign investors seeking a better bottom line. Who knows, we might even pull a few investors from Amman.

In addition, Egypt’s textile and clothing industries are fully integrated. Jordan, on the other hand, must import nearly all of its raw materials from Asia, which cuts into production costs and requires creative solutions to the agreement’s “minimum 35-percent local content” clause.

Jordan’s experience with QIZs may be a one-off event, but even the Nazif government’s conservative projections of 300 to 400 percent growth within four years would do just fine with any local factory owner; especially given the alternative. Not signing the QIZ agreement could have been economic suicide.

In the globalized economy, geography is no longer a barrier to trade. US consumers are gluttonous for T-shirts, khakis and Loony Tunes underwear. Traders will seek out whichever producer can offer the lowest bottom line. Countries that let political differences supersede economic expediency will inevitably be left out in the cold.

CAM McGRATH

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