Jordan\'s QIZs and the FTA: What\'s the difference?

Published December 11th, 2000 - 02:00 GMT

Many business people and economists are concerned that the recently signed free trade agreement (FTA) between Jordan and the US means that Jordan has poured time, effort and resources into establishing qualifying industrial zones (QIZs), only to see them rendered obsolete. Some have gone further, accusing the government of being short on planning and biting off more than it can chew.  

 

The Al-Hassan Industrial Estate in Irbid was officially designated as the world's first QIZ in March 1998, almost three and a half years after Jordan signed a peace treaty with Israel, thereby securing duty- and quota-free access to US markets for products that met certain criteria. The new trade agreement, however, which was signed on October 24 and will take effect in mid-2001, seems to transform Jordan into one enormous QIZ, thereby stripping the original zones of their biggest advantage.  

 

Although many features differentiate the QIZ concept from the FTA, they share the same ultimate goal of providing Jordanian goods with duty- and quota-free access to the US market. Of the numerous differences, this paper will limit itself to those that are most relevant to understanding how doing business under the FTA differs from operating via the QIZs.  

 

Duty- and quota-free status: This point is regarded as a key difference between the QIZ and FTA concepts. It is important to note that products originating in the QIZs are not subject to any duties, customs or quota restrictions by the US. Moreover, FTA trade concessions in this regard will take effect only after both the Jordanian Parliament and the US Congress have ratified the agreement, which is not due until next year; the delay in the US presidential elections may push the ratification issue further down Congress' list of priorities. For businesses currently establishing operations in Jordan, this time lag provides an incentive to invest in the QIZs to benefit from their immediate advantages. Even after the FTA has been approved by both parties, some products will enjoy immediate elimination of duties, but it could take up to ten years for the customs on others to be dismantled. Certain products will require up to a decade to receive completely quota-free access to the US market. The only factor that currently could change this scenario is the possible enforcement of WTO provisions requiring that quota restrictions among member countries be brought down by the year 2005.  

 

Input requirements: According to the FTA, the minimum 35 percent value added for each product should be provided solely by Jordanians, while under QIZ prerequisites it must be shared among Jordanians, Israelis and sometimes Palestinians. Furthermore, within six months after the agreement takes effect, Jordan and the US are to meet once more “...to [decide] the extent to which the cost...of materials which are products of a territory [neighboring] to Jordan may be counted...[in] the 35 percent content requirement...” as stated in the FTA. This leaves ample space for potential investors to handle input requirements according to their own preferences. They can either choose to work under the QIZ concept, which requires a minimum 11.7 percent Jordanian value added, or they may wish to operate exclusively under FTA requirements. Clearly, most Arab investors who want to avoid possible opposition in their home countries would be more willing to wait for the FTA to take effect than to initiate commercial ties with Israel. Meanwhile, if complying with FTA or QIZ prerequisites proves equally costly, then non-Arab foreign investors are unlikely to be more attracted to one option than the other.  

 

Designated areas: QIZs are carefully selected areas within Jordan, and in order for goods to receive trade benefits, they must be produced within these designated zones. However, after the FTA takes effect, manufacturers will not be confined to any particular place and may set up shop anywhere in Jordan. Despite this freedom, it would be extremely convenient for start-ups to operate within the QIZs, since the government has promoted them based on proximity to water, electricity and labor supplies, as well as ease of access to raw materials. Thus, companies will probably be inclined to set up operations in already-established QIZs with existing Infrastructure, as opposed to spots where the investors themselves would have to supply their own factors of production.  

 

Attainment of minimum requirement: The primary requirement for a product to qualify for QIZ benefits is that at least 35 percent of the appraised value must be shared by Jordanians and Israelis, with possible input by the US or the Palestinians. There are three possible ways to calculate this figure:  

1) Of the 35 percent minimum content, at least one third—or 11.7 percent—must be provided by a manufacturer located within the QIZ. A minimum of 8 percent (7 percent for high-tech goods), must be provided by Israeli manufacturers and the remainder may be provided by Jordan, the US, Palestine or Israel.  

2) Jordanian and Israeli manufacturers may each shoulder at least 20 percent of the total production costs. However, calculating the minimum requirement in this way means that both direct and indirect costs may be contributed towards the cost determination. Indirect costs include general expenses of doing business that are not directly allocable to the specific article in question, such as administrative salaries, liability insurance, advertising, legal expenses, sales tax, etc.  

3) A mix and match of the two above scenarios is also allowed.  

Therefore, the minimum Jordanian value added under the QIZ provisions is 11.7 percent—this contrasts sharply with the strictly Jordanian 35 percent value added required of a local manufacturer who wants to qualify for FTA benefits. In this case, it is clearly much easier for local producers to meet the QIZ prerequisites than to comply with those of the FTA. This provides a further incentive for interested investors to operate under QIZ jurisdiction. Operating via the QIZs can be thought of as using more flexible rules of origin, which could help some exporters achieve the minimum 35 percent inputs that they would otherwise face difficulty in achieving under the FTA. Meanwhile, the FTA only applies to articles of which “the sum of (i) the cost of [their] materials...plus (ii) the direct costs of processing operations performed...[are] not less than 35 percent of the appraised value of [those] article[s]...” as stated in the FTA. This arrangement has no flexibility whatsoever in terms of allowing indirect costs to be included in calculations of the minimum requirements. On the other hand, producers operating under the QIZ scenario are allowed to include the indirect costs incurred. For example, companies with high interest and advertising expenses, administrative salaries, or liability insurance would prefer to see these expenses count towards their manufacturing costs. This opportunity is yet another incentive for would-be investors to establish their facilities within QIZs.  

 

Ultimately, doing business via the QIZs or the FTA cannot be boiled down to “one is better than the other,” because their respective strong points are applicable to specific and different investments. Timing, investor preference and certain industry-specific factors make generalizations irrelevant.  

 

In deciding which scheme to take advantage of, the investor should carefully scrutinize all the value drivers to obtain a clear and final picture of the most beneficial course of action. If competitors are putting the project under time constraints, operating within a QIZ could be the best way to pull ahead. The QIZ might also be the best value for investors in industries with high indirect production costs, since these expenses could be marked up to the appraised value of the goods. If establishing commercial ties with Israel is a central concern, however, manufacturers might wait for the FTA to take effect.  

 

Intentionally or not, the government has provided potential investors with various options so as to allow a margin of flexibility “tailor-made” to their own financial and personal preferences. At first glance, there does seem to be a lot of overlap between the fundamentals of the QIZs and the soon-to-be-adopted FTA. Nevertheless, as far as investors are concerned, there is no standard advantage that one has over the other.  

 

Even where they differ, the two schemes appear to offer advantages and disadvantages mainly in relation to several other factors governing the situation, such as the timeliness of the investment, the personal preferences and attitudes of the investors, and certain industry-specific issues. Investors who move quickly are more likely to have good opportunities to take advantage of. At a basic level, both the QIZs and the FTA are simply parallel aspects of the government's drive to revitalize Jordan's economy. — ( Jordan Times )

© 2000 Mena Report (www.menareport.com)

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