The Century Foundation (USA)
“Trade for Peace with Israel” Falls Short
Madeleine Wells, The Century Foundation, 3/28/2007
The next time your Wal-Mart sweatpants read “Made in Jordan QIZ” on the label, consider the relationship between economic integration and peace. The truth might not be what you expect. Columbia University’s Middle East Institute recently hosted an event titled “Trade for Peace with Israel: A retrospective of Jordan and Egypt’s Qualifying Free Trade Zones.” Desiree Baron, the U.S. foreign service officer who negotiated the Qualified Industrial Zone (QIZ) deal with Egypt in 2004, was supposed to talk at the session about the political benefits of the program and its potential peace-making role. But as it turns out, while QIZs may be functioning economically, their “peace dividends” have been somewhat lacking.
The QIZs between Israel and Jordan and between Israel and Egypt were set up at the behest of President Clinton, who never shied away from creating ideas to integrate Israelis and Palestinians. Unfortunately, in the absence of a bilateral Israeli-Palestinian peace agreement, or even serious negotiations, QIZs have not become the economic step toward political cooperation they were intended to be.
The Jordanian-Israeli agreement establishes that goods produced in a QIZ must reflect “substantial economic cooperation” between the two countries. These products can enter the U.S. duty-free and quota-free, provided that they meet certain standards. Jordan must contribute a minimum of 35 percent of the value of the materials used in the production; 11.7 percent of the content must come from a Jordanian QIZ, 8 percent from Israel, and the remainder can be fulfilled from the Jordan QIZ or Israeli, American, or Palestinian factories. Alternatively, Jordan and Israel must each contribute 20 percent of the production cost.
The Jordanian QIZ project came online in 1998 and had immediate effects. Foreign direct investment increased and resulted in Jordan’s transition into an export-driven economy. Results from a few years back seemed promising: investment in QIZs increased from $693 million by the end of 2003 to $1.06 billion in 2004 and is still growing. The project has had a major impact on the ready-made garment industry, accounting for $1.08 billion in exports to the United States in 2005 (up from $30 million in 2000), fully 96 percent of all Jordanian QIZ exports. Last year exports grew to $1.27 billion and began to attract Chinese and Pakistani foreign direct investment as well.
In total, the agreement has created about 60,000 new jobs. However, it is estimated that only 18,000 to 23,000 of these positions are filled by Jordanians. The majority of workers are South Asian immigrants, particularly women, to whom Jordanian labor law does not apply. This has raised many issues about standards and has kept the jobs from gaining popularity among most locals. An even bigger obstacle to success is the competition from the Jordan-U.S. Free Trade Agreement, signed in 2000, which provides access to duty-free, quota-free trade with cheaper components than Israel can offer.
The situation in Egypt is different. For various reasons, QIZs were not deemed attractive when initially offered in 1996, but, seeing Jordan’s success, the Egyptians initiated their own program in 2004. For Egypt the economic impact of job maintenance is more important than job creation. QIZs have allowed for this. QIZs are now expanding and most factories are vertically integrated. Their QIZ export market has grown 141.6 percent, and with the country’s ample labor supply (99 percent of workers are actually Egyptian), foreign direct investment is rising and Egypt is now better able to compete in the global marketplace. In the past several years, QIZs have been the most valuable gateway to U.S. markets for Egypt in the absence of a free trade agreement.
This progress shows that, on a certain level, the QIZs have yielded macro results and allowed Israeli-Jordanian and Israeli-Egyptian government-business cooperation. But while the growth figures of the QIZ project are impressive, ultimately the initial aim of “regional economic integration” has sadly fallen short. Baron noted that there is a dual impediment to this goal: the ongoing Israeli-Palestinian conflict makes it “hard for governments to promote the program because Israel is involved.” In other words, official peace terms between Egypt, Jordan, and Israel mean nothing if their respective populations won’t support the inclusion of Israeli products in their exports. This obstruction was evident in Jordan after the second Intifadah. The second impediment is that the profit motive is independent from security and political motives. Bilateral trade agreements are a cheaper alternative for Jordan than QIZs, and Egypt’s QIZs have essentially become more about access to U.S. and European markets than about cooperating with Israel.
The QIZ program is a reminder that engagement on an economic level alone does not deliver the kind of substantial, multilateral cooperation needed to bring security and peace to the Middle East. Moreover, this original goal for QIZs has long been forgotten. With U.S. diplomacy aimed at a political horizon-a Palestinian unity government with whom the United States eventually can negotiate-and the renewed interest in the Arab peace plan, there is new hope that this goal still can be achieved. But building political cooperation between countries in the region will require more of a foundation than “Trade for Peace with Israel.”
Madeleine Wells writes on Middle Eastern affairs for the Prospects for Peace Initiative at The Century Foundation.