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FEATURE

a window of opportunity?

qualifying industrial zones offer israel's "peace partners" a back-door into the us market. jordan has jumped at the chance, but egypt is hesitant.

by andrew j. tabler

the americans are excited, the jordanians are excited, the israelis are excited... the egyptians are wary at best. an american-backed plan to set up duty free manufacturing zones around israel's borders aims to create a tangible peace dividend by extending the benefits of the us-israeli free trade agreement to neighboring arab countries - that is, if they are willing to build a visible trade relationship with their former enemy.

it was february 1995 when the united states, egypt, israel, jordan and the newly inaugurated palestinian authority met at blair house and decided to extend duty free status to designated "border areas" between israel and its peace partners egypt and jordan. the plan was brought to fruition in november 1996, when us president bill clinton issued a proclamation allowing goods produced in these border areas - referred to as qualifying industrial zones (qizs) - duty free entry into the american market.

now, more than four years later, jordan has five qizs that have attracted millions of dollars in investment, created thousands of jobs, and contributed to the more-than-doubling of the kingdom's exports to the united states. in contrast to jordan, egypt won't even touch the subject of the qizs.

but they may soon have to. as a founding member of the world trade organization (wto), egypt has committed it-self to a quota-free textile market by january 2005. textiles are egypt's number-one export to the us, but with the specter of ravenous competition from east and south asian textile-exporting powerhouses, the local industry will need all the help it can get in the $64 billion american textile market. qizs might be the best way to give egyptian textiles a head start on post-quota competition and help the country compete in the long term. nevertheless, it's clear that egyptian officials are more interested in a direct bilateral free trade relationship with the u.s. than in the sort of multilateral package with israel promoted by washington.

israel has a 15-year-old free trade agreement (fta) with the united states. a qiz essentially extends the benefits of that fta to industrial parks inside egypt and jordan. created by an act of us congress in 1996 to ensure the continued inclusion of the palestinian autonomous areas in israel's fta, qizs allow products with a combined 35-percent minimum of "appraised value" - the same percentage required of israel - duty free entry into the united states.

the process of setting up a qiz works something like this: first, a bilateral agreement between israel and a peace partner is concluded, stating proposed locations of qizs and mutually agreed percentages from each side concerning content contributions and production costs. second, that agreement is presented to the office of the united states trade representative (ustr), a wing of the executive branch dealing with trade issues. if the proposal is approved, businesses located in the zones and producing goods that meet the contribution requirements are eligible to ex-port tariff-free to the united states.

jordan wasted little time in signing on to the plan. at the november 1997 middle east north africa (mena) economic summit in qatar, jordan and israel concluded an agreement to form the first jordanian qiz at the hassan industrial estate in irbid, 80 kilometers north of amman. the agreement stipulated that each side would either contribute a minimum of 11.7 percent of content - one third of the 35 percent required for us duty free entry - or cover at least 20 percent of the total cost of production. (the parties can also pursue some combination of these two formulas.) the remaining third of the minimum content requirement can come from any combination of input from jordanian qizs, israel, or the west bank and gaza. other content and other production expenditures can originate from anywhere else in the world.

the lackluster ability of jordan's qizs to draw foreign investment, due in part to what the jordanians said were high prices for israeli inputs, caused the two countries to amend the agreement in november 1998. hence, a five-year period was established in which minimum israeli content was reduced to 7 percent for high-tech and 8 percent for all other goods. the reductions period, which begins on the day a business enters the qiz, was designed to allow more jordanian companies to benefit from the scheme during the start-up period.

"it is not a secret - israel is more expensive than south-east asia," says gabby bar, deputy director general of the middle east and north africa department at the israeli ministry of trade. "for israeli textile workers, the minimum salary is around $1000 a month; in jordan it's around $150. this means israel is largely no longer competitive in textiles - factories are closing down every day." but israeli companies can benefit from jordan's lower labor costs. "this is a relative advantage for companies locating in qizs."

perhaps the jordanian company that has benefited most from the qiz scheme is century investment group - a publicly traded company that specializes in establishing industrial joint ventures with multinational corporations in the zones. century founder and chairman omar salah sees the qiz concept as a key to maintaining a competitive edge - both now and after textile quotas are abandoned in 2005.

"the removal of quotas will enable countries with huge utilized production capacity - most notably india and china - the ability to compete to such a degree that other countries will have diminished opportunities," salah says. "labor costs in these countries are so low, and unemployment so high, that they might be able to produce products that arrive in the us at a far lower cost than from the rest of the world. even with duties, their product will be competitive."

while egypt is currently subject to us quotas on some textile items, jordan - through its qizs - offers manufacturers the ability to skirt all us quotas. this opportunity has been especially attractive to companies from south and east asia.

besides joint-venture investor century, jordanian authorities have approved five other companies to operate in qizs. these include hong kong-based luggage manufacturer boscan international and garment producers al masira, crystal, south asia garments and sari international. according to the jordanian ministry of trade, 12 applications representing 5 different companies are now in the approval process.

more zones continue to be approved as well. the government-owned kerak industrial estate was the first after the irbid site to be added to the qiz list. private sector industrial parks - al dulayl, al tujamuat and gateway (the only qiz that actually straddles the israeli-jordanian border) - soon followed. a sixth qiz is expected to be approved in aqaba in the near future.

the largest qiz investments to date are in factories producing ready-made clothing destined for major us retail chains, including walmart and gap sportswear. american jeans producer jordache is now setting up its own plant on the irbid estate. century recently launched a $180 million joint venture with indonesia's texmaco group and european fiber industries to manufacture yarns, fabric and finished garments.

and jordan is beating down doors to get more. hussain al-dabbas, deputy director-general of the jordanian in-vestment board (jib), led a delegation to pakistan last month in an effort to promote the qiz concept. the delegates emphasized not only the zones' quota and duty free benefits, but the fact that with a $70,000-minimum investment, the jordanian government allows 100-percent foreign ownership of qiz businesses.

but the effort to pull in foreign-owned qiz investors has earned the scorn of the zones' first tenants. century's salah, who claims to lead jordan's largest private sector employer, says that allowing 100-percent foreign ownership has let "some fly-by-night operations" come to jordan to exploit the qiz advantage "without any deference to adding value to the country."

the jordan industrial estates corporation (jiec) estimates that the qizs have so far created about 6,000 new jobs, expected to reach 15,000 by 2002. along with creating jobs in a country with 25-percent unemployment, the zones foster direct economic ties with jordan's former enemy, israel - a prospect which could be at the heart of egypt's reluctance to deal with the qiz scheme. jordan's former minister of industry and trade mohammed asfour says that despite opposition from an array of islamist, leftist and environmental groups, jordan's qiz experience has been a model of cooperation.

"what we pay attention to are the facts on the ground and what is tangible to us," asfour says. "we do not feel the israelis are intervening through the qizs at all and have no hesitation to recommend this approach to anyone, provided the main purpose is established - to enhance the peace process."

in the egyptian case, this has yet to be decided. despite numerous inquiries, officials of the ministries of foreign trade and foreign affairs - the bodies responsible for handling qiz matters in egypt - would not comment as to the status of qiz proposals.

foreign minister amr moussa has consistently fought off inquires about possible egyptian qizs. last october, he resisted us secretary of commerce william daley's tag-team efforts with israeli businessmen to push the issue, saying egypt was "sticking to" its stance that enhanced cooperation with israel will only come with real progress in the peace process. asked about qizs again when cairo hosted the mediterranean development forum (mdf) last march, moussa would only say that "all proposals are being handled on a case-by-case basis."

such cases are formally being addressed, however, by the us-egypt council on trade and investment, which represents both governments and is chaired by the ustr and the egyptian ministry of trade and supply. established last july as part of the us-egypt trade and investment framework agreement, the council has established four task groups to investigate how to foster greater investment and freer trade between the two countries. issues currently under examination include electronic commerce, military procurement, export promotion and qizs.

us officials have proposed several scenarios to help free egyptian textiles from quotas, even before the five-year limit permitted by the wto. all the plans involve egyptian qizs, and egyptian coordination with businesses in israel or the palestinian authority. the economic rationale is simple: qizs are a way to prepare egyptian products for the tough competition on the trade horizon.

the eligibility of goods produced in an egyptian qiz for quota exemption would depend on how us customs determine the origin of the product. us customs officials must refer to two existing sets of laws concerning rules of origin - for israeli goods on one hand, and for products from egypt and the palestinian authority on the other.

following the implementation of the wto uruguay round agreements in july 1996, a textile or apparel item's "country of origin" should be where the product has been wholly assembled. an exception is israel, specifically exempted from the rule by the us-israel fta. instead of assembly, us customs determines the origin of israeli goods based on where the item was last "substantially transformed."

just how these confusing requirements would be implemented depends largely on the goods being produced and the area where the "substantial transformation" takes place. it also depends on details of the agreement between israel and each qiz partner. in the case of jordan's deal, the israelis and jordanians agree that us customs would apply the uruguay agreements to determine the country of origin.

egypt's qiz potential remains largely academic. accor-ding to israeli officials, egypt has yet to take the first step and approach israel about negotiating a qiz agreement. yet if egypt misses its current window of opportunity with textiles, the country will have to scramble to protect its export markets after 2005, when countries with huge textile-producing capacities flood the us market.

"it is vital at this time for developing countries in the world to be aware of this looming danger," says century chairman salah. "certainly the qizs will maintain the duty advantage - and for products with high duties, this advantage will stand."

galal zorba, chairman of egypt's nile clothing company, dismisses the viability of qizs. "access is granted by the us and can be eliminated by the us - or egypt or is-rael," he says.

salah agrees that the qiz concept might not be as useful to egypt as it has been to jordan. "to qualify for duty free status, companies have to use israeli content," he notes. "this content often comes from utilizing israeli ports and co-production with israel - which for logistical reasons would be impractical in egypt, given the distances." more-over, salah adds, "given that egypt is also producing excellent raw material, the need to import material from third countries is mitigated."

"working with the israelis would increase costs in textiles by 10 percent," says zorba, who adds that he doubts the zones are working as well as the jordanians claim.

jordanian officials acknowledge that their country may need the qiz arrangement more than egypt does. with a comparatively tiny population (4.5 million), jordan's 1998 exports to the us for the same year totaled only $16 million, compared with $650 million for egypt.

and in terms of popular political sentiment, the scenario is much more volatile on the egyptian side. "normalization seems to be a little more sensitive in egypt than in jordan," salah says.

meanwhile, despite egypt's consistent reluctance, other regional export leaders seem eager to utilize qizs to turn swords into t-shirts. turkey, whose annual volume of trade with the us is around $5.5 billion, announced last march its desire to establish qizs in impoverished, strife-torn southeastern anatolia, in order to foster peace and economic development through improved market access to the us.

israeli doves continue to sing the praises of the zones as a way of cementing peace. "we are building a new industrial park, and we suggested that it should be a joint park with egypt and the palestinians," israeli minister of regional cooperation shimon peres told business monthly. "we are willing to do so because, for us, a successful egypt is a successful neighbor. and the better our neighbors are, the better neighbors we shall have."

for egypt, as for jordan, export-led growth is the chosen model for economic development. both countries are surely aware of one troubling statistic: israeli exports to the us continue to grow by leaps and bounds, increasing $3 billion over the last five years to total nearly $9 billion. and in 1999, this total was equivalent to 66 percent of all arab trade with the united states - including petroleum.

egypt has long held off on establishing much of an official economic relationship with israel until the regional political situation sorted itself out. when the policies of former prime minister benjamin netanyahu were threatening to scuttle the peace process, egypt led the arab boycott on the us-backed 1997 mena economic summit in qatar. jordan was one of the few arab countries which attended, and concluded its agreement for its first joint qiz. now, several years after the doha boycott, trade continues to trickle both ways across the egyptian-israeli border, but the official relationship has remained distinctly cold.

soon, however, with us economic assistance to egypt scheduled to be halved over the next decade, egypt may find itself forced into warming up the cold peace. qualify-ing industrial zones may be a profitable and not overly humiliating option for the country to pursue. still, some members of the egyptian business community fear that establishing qizs - and hence free trade, but only in conjunction with israel - might impede the establishment of the proposed us-egypt fta, which is clearly where egypt's long-term interests lie.

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