Jordan-US QIZ could be better

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The Jordanian economy has done pretty well recently,boasting high growth rates, attracting attention fromregional investors, and enjoying increasing exports.Regarding the latter, the kingdom chalked up close to $4.1billion in national merchandise exports last year, up byalmost 13% on 2005. Traditional Jordanian production such asfertilizers (the country’s second most important good soldabroad) still accounted for almost 8% of exports in 2006,with potash, another mainstay of the old Jordan economy,constituting over 6%. However, other products with a highervalue added have become more prominent in the past fewyears. These include pharmaceuticals, currently thecountry’s third most important export, with a share of over7% last year, and most notably clothing, which has beennumber one for much of the present decade. Growing steadilyfrom a very modest share in the late 90s, the clothingindustry was responsible in 2006 for just over 30% of totalJordanian merchandise exports, a proportion roughlymaintained since 2003, with the value of Jordanian clothingexported last year expanding by 18% compared to a rise ofjust over 5% in 2005.

So where are all these clothes sold? You’d think thatshoppers in Lebanon, Iraq, or the GCC countries, traditionaloutlets for Jordan’s products, would see Jordanian garmentsin their local stores, but that is rarely the case.Actually, you would have to go to New York or LA to findmost of these clothes. Is that a bizarre situation? Not atall, if you consider the importance of Middle East diplomacyto Jordan’s economy. In fact, Jordan’s success in thisbusiness rests on a break it got over a decade ago from itsfavorite uncle, a person with a red, white and blue top hatcalled Sam, with so-called Qualifying Industrial Zones(QIZs).

In the Zone

Under the QIZ—blatantly designed to reward Jordan for itspro-American stance and nudge the kingdom even closer toIsrael—a product with 11.7% added value from Jordanian, 7-8%from Israeli, and the balance of 35% from either country,the US or Palestine, enjoys duty-free entry into theAmerican market. For example, if a skirt costing $10 isimported into Jordan from India and dyed in Amman to raiseits value to $11.17, it cannot by such a transformationalone enter the US market free of duty under currentJordanian-American trade rules. However, if that samegarment also gets, for example, Israeli zippers worth $0.80and American trim costing $1.53, then the finished producthas added the necessary amount of value (in this casestipulated at a minimum of 35%) in the correct proportionsto qualify for duty- free entry into the US market.

The roaring success of this arrangement has left the US asthe main importer of Jordanian products last year, buyingmore than 31% of the kingdom’s exports, up from a derisoryamount in the mid-90s. For various reasons, clothing hasturned out to be the major exported QIZ item, with garments(most of which are produced in QIZs) amounting to almost 91%of Jordanian sales to the US in 2006.

Not that the QIZ deal has done that much for Jordan’seconomy: for a start, most of the capital and many of theworkers at QIZ factories are not Jordanian—as a lot ofprofits and wages are sent home outside the kingdom, Jordangets that much less benefit. The other problem is that UncleSam in December 2004 also “rewarded” Egypt with a QIZ deal;as the Egyptians can more cost-effectively produce garments(and for that matter, other products) wanted by USconsumers, Jordan QIZs had better watch out. Under theAmerican policy of “competitive liberalization” grantingQIZs to both neighbors seeks to make them more competitive,which is probably a good thing—if the Jordanians are up toit.

QIZ helps plug trade gap

Meanwhile, QIZ has helped Jordan to strengthen what wouldotherwise be anemic exports of goods, partially plugging amassive trade gap. In 2005, exports of Jordanian goodscovered a mere 41% of the kingdom’s merchandise imports, buthigher sales abroad from Jordan’s QIZs last year helpedbring up the coverage to a little over 45%. The shortfall ispartly made up by better figures in Jordan’s services tradebalance, but in the end the kingdom regularly consumes morefrom abroad than it sells to the outside world, with the gapbeing made up by foreign largesse.

Riad Al-Khouri is Middle East director of GeoEconomica GmbH