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French Version

Jordan : Built by an agreement

The QIZs have allowed Jordan to create a major export-focused textile industry in a few years. Thanks to a series of international agreements, Jordan has become home in the last few years to a major textile industry whose exports to the US are the envy of the region. While Jordan has always had a textile and garment industry, in the past two years it has gone from practically negligible to an exporter of over $500 million worth of garments to the US.

This is largely due to the establishment of Qualified Industrial Zones (QIZs) in Jordan, which allow products with a certain amount of Israeli and Jordanian content to be exported duty- and quota-free to the United States. This deal is now being supplement by the Euro-Med agreement with the EU and a broader Free Trade Agreement with the US. While QIZ activity remains very robust in Jordan, there are questions for the future: Namely, what happens when the Multilateral Fiber Agreement (MFA) of the WTO expires in 2005, after which everyone will be allowed to export to the US without coming up against quota restrictions? This underlines the question about how permanent some of these QIZ-based industries really are in light of the notorious mobility of the garment industry. Finally, the large factories of the QIZs bring into sharp relief certain problems with the developing Jordanian workforce and their lack of familiarity with modern industrial working conditions.

For now, however, business is booming and Jordan has created a major hard-currency earner and employer in only a few years. While the pace of new investments has slackened since its peak in 2001, due to regional turmoil, there are still some 52 factories in the QIZs employing 18,200 Jordanians (and 10,000 foreigners). Nearly 30 percent of the value of Jordan’s exports consists of garments. Jordan exports garments and textiles to some 40 countries, many of them in Europe. Currently, a number of firms have contracts with European manufacturers, for whom they produce products. These deals, which will no doubt grow as the sector itself develops, are dwarfed by the massive increase in exports to the US through the QIZ agreements.

The whole idea of QIZs, essentially an extension of Israel’s long-time free trade status with the US, grew out of the peace process. The idea hatched in 1995 was to unite Jordan, the Palestinian Autonomous Areas, Israel—and at one time Egypt—into one big mutually dependent and economically prosperous zone.

If the countries were willing to work together (particularly with Israel), they were rewarded with unfettered access to the massive rewards offered by the US market. The idea was based in part on former Israeli Foreign Minister Shimon Peres’ vision of a new Middle East that would involve combining Israeli know-how with inexpensive Arab labor. It didn’t quite work out that way. Still, nine years later, seven QIZs exist in Jordan and most produce clothes involving Israeli content. Egypt and the Palestinians are not involved and QIZs have become less about Israeli know-how and more about gateways for Asian textile firms to enter the US. In any case, Jordan is certainly benefiting from the deal.

The first QIZ was established near Irbid in 1997. The agreement between Israel and Jordan stipulated that there had to be 35 percent local value (which includes labor), with one side contributing at least 11 percent. As it turned out, the 11 percent Israeli content figure was difficult to achieve and it was eventually temporarily downgraded to 8 perecnt (and 7 percent for IT products).

Even so, the zone languished until 1999, when the formula for garment manufacturers was hit on. Word of mouth spread, and suddenly there was a rush of investors setting up companies that imported fabric and then assembled them in Jordan before exporting them to the US. The Israeli contribution consisted largely of accessories, such as buttons and zippers.

QIZ company owners say that more Israeli content is actually impractical - a bit of an issue since the 8 percent agreement expires in 2004 - since material in Israel is much more expensive than elsewhere. Thread imported from Israel, for instance, is 40 percent more expensive than if it comes all the way from UAE.

Companies in the QIZs come from all over the world, including China, Taiwan, South Korea, India, Pakistan, the Philippines and Sri Lanka. There are even about five Jordanian-owned companies operating in the zones. These often act as spokespersons for the rest of the sector, due to their greater familiarity with the Jordanian government. Total investment in the QIZs in 2003 was $540m.

Jordan also has a regular free trade agreement with the United States, as well as one with Europe through the Euro-Med Barcelona process. The European free trade deal, however, has not taken off in the same manner. Strict certificate of origin rules and high value-added percentages (up to 60 percent) mean that Jordan can only export its own products to Europe, not just assemble those from elsewhere. Since Jordan does in materials, such as cotton, for garments it is difficult for manufacturers to get the necessary local content percentages to qualify for the free trade zone.

There is talk, however, of allowing other members of the Mediterranean free trade zone to export raw materials to each other and still qualify for free trade. So Syria or Egypt could sell cotton yarn and fabric to Jordanian factories, which would stitch them together for export to Europe.

There are Jordanian textile and apparel companies which do sell to Europe and perform contract work for large garment companies. Some companies prefer to do business in this manner so that they do not have to deal with the Israelis through the QIZ framework. For some Jordanians, the necessity of the Israeli component in the QIZ system means they do not want to take advantage of it.

For the government, one of the greatest advantages of this new garment industry is that it employs so many workers. With an unemployment rate of nearly 15 percent, garment companies employing thousands of people are more than welcome. According to executives working in the zone, however, they are having trouble finding workers to fill their production lines.

One of the problems with the garment business, point out industry experts, is that it is extremely fluid and mobile. For many of the companies setting up in the QIZs, this is their third or fourth country in a short period of time. Unlike many other industries, garment assembly has very low overheads; it is only a matter of purchasing the sewing machines and putting them in a large, well-ventilated room. It is easy to pull up stakes if some other country is offering more advantageous terms. Most QIZ companies are just renting their factory space and are operating on 2-4 year visas.

It remains to be seen what will happen to the industry after the expiration of the Multilateral Fiber Agreement in 2005. At that point, quotas and tariff barriers to the US are supposed to come down, although last-minute compromises or extensions cannot be ruled out.

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