Qualifying Industrial Zones (QIZs) in Jordan and Egypt: Background and Issues for Congress
Released: 2013-08-23T00:00:00

Introduction

The United States has a number of trade preference programs which offer unilateral/non-reciprocal duty-free treatment for certain products from designated countries meeting specific eligibility requirements. The motivation for these programs can be political and/or economic. The QIZ program, attached to the U.S.-Israel Free Trade Agreement (USIFTA), is one such program. It was designed to strengthen the Middle East peace process while stimulating the economies of Jordan and Egypt. The current ongoing wave of upheaval in the Middle East and North Africa that started in late 2011 raises the potential for simultaneous political and economic transitions. The QIZ program is one tool available to Congress for assisting on both counts.

This report briefly examines the evolution and economic effects of the QIZ program for Jordan and Egypt during the past 15 years and identifies some related issues for Congress. It does not address the current turmoil in Egypt. For a discussion of this issue, see CRS Report RL33003, Egypt: Background and U.S. Relations , by [author name scrubbed].

Overview

The Qualifying Industrial Zone (QIZ) program was created by the 1996 West Bank and Gaza Strip Free Trade Benefits Act, which amended the 1985 U.S.-Israel Free Trade Agreement (USIFTA). Under this law, certain goods may enter the United States duty-free if they are (a) wholly produced in the West Bank and/or the Gaza Strip; or (b) co-produced by Israel and Jordan or Israel and Egypt in export processing zones called QIZs and meet specific content requirements. Congress had two main motives for this legislation:

To help broaden political support for the Middle East peace process and end the Arab economic boycott of Israel. Jordan (in 1979) and Egypt (in 1994) were the only two Arab countries in the Middle East-North Africa (MENA) region that had signed peace treaties with Israel. (See Map, Figure 1 .) To produce tangible economic benefits for Jordan, Egypt, the West Bank, and the Gaza Strip by "stimulating their economies and increasing employment."

The QIZ program had a third, more concrete economic objective. As the reported brainchild of regional businesses in the Middle East, it was proposed as a way for joint production (between Israel and other countries) to be as lucrative as—or more lucrative than—that carried out by individual parties.

Leading up to congressional passage of the QIZ program, the primary focus was to provide benefits to selected countries to help promote the Arab-Israeli peace process. The events of September 11, 2001, expanded the U.S. focus on the Middle East, both geographically and politically. This led to broader and more comprehensive U.S.-Middle East trade initiatives to assist the region.

The first initiative, in 2003, under the Bush Administration, called for a Middle East Free Trade Areas (MEFTA), within 10 years, by 2013, and resulted in the negotiation of U.S. free trade agreements with Morocco, Bahrain, and Oman. The second initiative was the Middle-East/North Africa Trade and Investment Partnership Initiative (MENA-TIP), announced by President Barack Obama in 2011. It focused on helping countries in their efforts to undertake reforms that could lead to trade liberalization and transitions to democracy. In his speech announcing the initiative, President Obama noted that, excluding oil, the MENA region of over 400 million people exports roughly the same value of goods as Switzerland. For an oil-dominated region, building up non-oil export capacity takes time.

Most MENA countries are outside the QIZ program and do not have free trade agreements with the United States. For many of these countries, the Generalized System of Preferences (GSP) program is their only trade preference option. However, for MENA countries, the GSP program is more limited than the QIZ program in the following ways:

The GSP program generally excludes from duty-free eligibility most of the high-tariff products exported tariff-free under the QIZ program; GSP does not authorize eligible MENA countries to co-produce with other countries in order to meet the 35% QIZ content requirement; and U.S. content is not permitted to count for any of the 35% content requirement under GSP, whereas it can contribute 15% under the QIZ program.

In March, 2013, the USTR announced a QIZ expansion for Egypt, to include new zones in Beni Suef and Minya, upstream on the Nile River, and to declare all present and future producers in the zones eligible for QIZ tariff benefits. This raises the number of QIZs to six in Egypt. Some of the 13 QIZs in Jordan are not currently involved in QIZ export, but still produce for export to the United States (see Figure 1 notes).

Key Provisions of the QIZ Program

The QIZ program extends U.S. tariff-free benefits to the West Bank and Gaza Strip, and to certain goods co-produced by Israel and Jordan, or Israel and Egypt in export processing zones that meet country of origin and local content requirements. (See Text Box 1 for the definition of QIZs.)

Production requirements mandate that the product must be grown, produced, or manufactured in, or a "new and different" article imported directly from, the West Bank, Gaza Strip, or a QIZ. Country input share requirements stem from the USIFTA, which requires that the sum of the cost or value of the materials or the total costs of production must be not less than 35% of the appraised value of the product at the time it enters the United States. Of this 35%, U.S. components may contribute up to approximately 15%, and inputs from Israel and Jordan, or Israel and Egypt, must total roughly 20% (see Text Box 2).

Under the QIZ law, once Jordan and/or Egypt decided to take advantage of the program, the parties met to determine (a) where QIZs would be located; and (b) how the approximate 20% minimum input requirement would be split up between Jordanian and Israeli or Egyptian and Israeli producers. For goods produced by Jordan and Israel, these shares were Jordan 11.7%, Israel 8% (7% for high tech products); and for goods produced by Egypt and Israel, they were 10.5% each. (See Text Box 2 .) The slight variations from the 10% each in the country sub-shares were adopted with the approval of the USTR.

The Jordan Experience11

After Congress passed the QIZ amendment to USIFTA in 1996, Jordan, which had previously engaged in little international trade, embraced the program, opening its first QIZ in 1997. The program grew rapidly, giving a huge boost to Jordan's economy, until the U.S.-Jordan free trade agreement was well into effect.

When Jordan joined the QIZ program, Jordan and Israel agreed to, and the United States approved, 13 zone locations in Jordan with coordinated plants in Israel along their joint border (see Map, Figure 1 ). The U.S. Trade Representative (USTR) officially designated the Jordan zones as QIZs.

Investment, Production, and Trade

Soon after the zones were established, investment flooded into Jordan from abroad. It came particularly from Asian investors looking to gain a competitive edge for their apparel exports to the United States. They saw the QIZ program as a way to compete more effectively against other low-cost foreign producers by benefitting from duty-free access to the U.S. market. Roughly 62% of foreign investment in Jordan's QIZs came from India (22%) and other Asian countries (40%). Other investment came from Jordan (17%) and the United States (3%). These four countries accounted for 82% of total investment in Jordan's QIZs.

Between 1996 and 2006, Jordan's QIZ exports and total exports to the United States grew exponentially. Jordan's position as a source of imports for the United States rose from 138 th to 70 th . Over that span of time, U.S. QIZ imports from Jordan rose from $0 to $1 billion, and total imports from Jordan rose from $26 million to nearly $1.5 billion ( Figure 2 ). During the years 2001-2004, Jordan's QIZ exports (totaling $927 million), accounted for more than 80% of its total exports to the United States (totaling $1,093 million, see Figure 3 ). (See Appendix B for data for all tables.) These exports, nearly all textile and apparel products ( Figure 4 ), gave a huge boost to Jordan's GDP (discussed later). At the same time, the United States exported to Jordan a wide variety of products, led by motor vehicles, machinery, and more recently mineral fuels ( Figure 5 ).

Despite the initial QIZ success, some economists predicted that Jordan's QIZ growth was not sustainable because it lacked a number of necessary components. Jordan did not (1) diversify its exports beyond apparel, jewelry, and a few other products; (2) transition from labor-intensive exports to higher and more complex value-added products; (3) absorb new technology; (4) create domestic linkages to production supplies; or (5) upgrade the skills of its workers. In addition, production was placing increasing demand on Jordan's scarce resources, such as energy and water, and on its limited social support services. Finally, because of large foreign ownership and the large number of foreign workers, profits produced from exports were mostly not transferred back to Jordan.

In 2001, soon after the QIZ program began to show exponential growth, the United States and Jordan negotiated a free trade agreement that went into effect that same year. This meant that Jordan no longer had to co-produce with Israel in order to achieve tariff elimination on its exports to the United States. However, Jordan would now have to meet the FTA's 35% content requirement instead of the QIZ's 11.7% requirement. In addition, full implementation of the FTA would take 10 years. As a result, Jordan's QIZ exports continued to climb until 2006 ($1,022 million), after which they declined rapidly. However, to this day, certain goods continue to enter the United States under the QIZ program. U.S. exports to Jordan have continued to increase consistently, reaching $1,712 million in 2012 ( Figure 2 ). They have also remained diversified, including cereals, motor vehicles, machinery, arms and ammunition, aircraft and parts, and military equipment ( Figure 5 ).

During the time when Jordan's participation in the QIZ program was phasing out and its total exports to the United States were leveling off, its exports to the rest of the world continued to grow, reaching $8 billion in 2011 ( Figure 6 ). Jordan accomplished this by expanding its use of the zones already in place to produce for export to other countries, and by focusing on making better trade use of its natural resources. Jordan's world trading partners are led by Iraq, followed by the United States, Saudi Arabia, India, and the United Arab Emirates. Jordan's exports to the world are more diversified than are those to the United States. Its top world exports are fertilizer (15% of its total exports, mined from potash); apparel (which goes almost exclusively to the United States); mined cement components; and pharmaceuticals.

The result of Jordan's expanded trade with the world was that between 2002 and 2011, Jordan's annual exports to the world averaged 31% of its GDP; while its exports to the United States averaged 6%, and its QIZ exports to the United States, which tapered off after 2006, averaged 3% ( Figure 6 ).

Figure 7 highlights the contribution of QIZ and total exports to GDP growth. It compares the changes in annual QIZ exports and total exports, respectively, to the growth in annual GDP for various years. Accordingly, it shows that:

Early on, the QIZ program became an engine of growth for both exports and GDP. During each of the QIZ "heyday" years of 2001-2004 ( Figure 7, red bars), QIZ exports to the United States contributed an amount equivalent to roughly 30% of Jordan's GDP growth. Total Jordanian exports to the United States contributed an amount equivalent to 43% of Jordanian GDP growth at their peak in 2003 ( Figure 7 , black line).

Employment and Labor Issues

Accompanying the flow of Asian investment to Jordan's QIZs was an influx of Asian workers, including from China, India, Bangladesh, and other countries. The influx of foreign workers allegedly resulted from several causes. Among these were a dearth of adequately trained domestic skilled laborers, and reluctance of Jordanian workers to enter into employment in this sector because of difficult working conditions and low wages. In addition, women generally in Jordan have not been in the labor force in large numbers. Jordan's tribal culture normally tends to be suspicious of women living away from home, inside QIZs.

The QIZs had difficult working conditions, low wages, and some labor problems. The labor problems were surprising to a number of observers, since, when the 2001 U.S.-Jordan FTA was under consideration by Congress, many argued that labor conditions in Jordan would not be an issue because Jordan had strong labor protections. It had ratified the eight major human and labor rights conventions in the International Labor Organization (ILO), and based its national labor law on ILO standards. To calm remaining congressional concerns, however, just before Congress considered U.S.-Jordan FTA implementing legislation, the U.S. and Jordanian governments exchanged letters agreeing to resolve any potential disputes without resorting to trade sanctions.

The labor issues came to light in a 2006 report published by a non-governmental organization, the National Labor Committee. One observer noted that the conditions in a number of QIZ factories allegedly fell below Jordan's own labor laws and the ILO standards to which they had signed on. The government, reportedly, had made some exceptions for conditions in QIZs in order to attract investment, likely contributing to sub-standard labor conditions in QIZs. As had been laid out by the two governments before Congress approved the U.S.-Jordan FTA, however, these labor issues were subsequently addressed through conversations between U.S. and Jordanian officials, rather than the agreement's dispute resolution procedures.

Since the labor problems were first uncovered, a team of representatives from the Jordanian government has worked with the ILO, the USTR, the State Department, and U.S. and Jordanian apparel companies to improve the monitoring of working conditions in the factories. In addition, among other efforts, the Jordanian government developed an Action Plan for labor based on ILO guidelines. Combined efforts ultimately led to a number of changes. More recently, initiatives have been shepherded by the 2006 U.S.-Jordan FTA Labor Subcommittee, created by the U.S.-Jordan FTA's Joint Committee. These initiatives include the joint U.S.-Jordanian funding of an ILO/World Bank "Better Work" program which began in 2009. In addition, in January 2013, the USTR announced a new initiative aimed at promoting labor rights and improving working conditions in Jordan. It was called the "Implementation Plan Related to Working and Living Conditions of Workers." It reaffirms Jordan's commitment to protect internationally recognized worker rights and to effectively enforce its labor laws.

The overall impact of the QIZ program for Jordan is complex. Initially, it gave a significant boost to the Jordanian economy. While the QIZ program employed many foreign workers, and relatively few Jordanians, it brought some new employment opportunities to women, who made up most of the 20% Jordanian workers in the QIZs. The QIZ program also reportedly spawned some local services in the banking, insurance, construction, and transportation sectors supporting the QIZ export program. While the QIZ program decreased in importance after the implementation of Jordan's FTA with the United States, the continuing expansion of its zone system and its increase in trade with other countries suggests that an important outcome of the QIZ program for Jordan was trade capacity building.

The Egypt Experience34

Egypt's QIZ program started out slowly, and has grown considerably. Egypt already had a strong textile and apparel export program to the United States and a relatively large economy when the QIZ program began. Although it observed Jordan's rapid economic growth after it began its QIZ program, Egypt did not enter the QIZ program until 2004, seven years after the offer was formally extended by Congress. A key impetus for Egypt's participation was that the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC), which went into effect January 1, 1995, was due to expire on January 1, 2005. Once the ATC protection was gone, quota limits would be lifted, and apparel exports destined for the United States from countries such as China could crowd out those from Egypt and other countries. After Egypt entered the QIZ program, some of its apparel exports quickly shifted from non-QIZ tariff, to QIZ tariff-free status. In addition, new investment led to the creation of additional exports. In March 2013, nearly a decade after Egypt entered the QIZ program, the USTR announced an expansion of the QIZ program (a) to include two new QIZ areas (in Beni Suef and Minya, in Upper Egypt, in addition to existing areas in and around Cairo, Alexandria, the Suez Canal, and the Central Delta in Lower Egypt); and (b) to include all production facilities, present and future, located in the six QIZs. (See map, Figure 1 . )

Investment, Production, and Trade

Whereas Jordan's QIZ export growth was financed in large part by foreign investment, Egypt's textile sector is predominantly Egyptian-owned, with some investment from Turkey and India. Egypt's QIZ program may have benefited, and Jordan's may have suffered, when some investors shifted their focus from Jordan to Egypt. The World Bank Group found in 2008 that 22% of buyers and investors were leaving Jordan for a number of reasons, including heightened media attention to corporate social responsibility (CSR) issues; concerns that Jordan was becoming less economically competitive than its neighbors; and concerns about labor shortages, increased minimum wages, and a proliferation of audits.

When foreign investors producing apparel left Jordan's QIZs after the expiration of the ATC, according to the U.S. Agency for International Development (USAID), Egypt topped the list of locations investors were considering (along with Cambodia, Vietnam, Tunisia, and India). Egypt had the ability to attract new investment in its apparel sector because it was already a strong industrial country, and had longer experience in producing textiles and apparel. Moreover, in contrast to Jordan, it already had developed many aspects of vertical integration, including growing quality cotton, boosted by its resources of low-cost water and energy. It also had more firms, managers, and skilled, lower-wage workers to produce the exports.

Between 2005 and 2012, Egypt's rank among U.S. trading partners has improved slightly overall (54 th in 2005 and 53 rd in 2012). However, the unrest in Egypt and uncertain financial and political events have resulted in a dampening of demand by Egypt for U.S. exports. Overall, between 2005 and 2012, U.S. total imports from Egypt grew from $2 billion to $3 billion, while QIZ imports quadrupled from $255 million to about $1 billion. Over the same time, U.S. exports to Egypt increased from $3 billion in 2005 to nearly $7 billion in 2010, before dropping off to $5.5 billion in 2012 ( F i gure 8 ). By 2012, U.S. QIZ imports represented approximately half of total imports from Egypt ( Figure 9 ). (See Appendix B for data.)

For Egypt, as for Jordan, its most important QIZ export to the United States is apparel, while, among total Egyptian exports, mineral fuels, chemicals, and fertilizers are also prominent ( Figure 10 ). Among Egypt's exports to the world ( Figure 12 ), totaling $32 billion in 2012, apparel is its eighth-most important export, after oil, jewelry (mostly gold), plastics, fertilizers, machinery (mostly wire cables), nuts and fruits, vegetables, and iron and steel. U.S. exports to Egypt ( Figure 1 1 ) are highly diversified, led by cereals, mineral fuels, machinery, aircraft, iron and steel, and motor vehicles.

The result of Egypt's expanded trade with the world is that between 2005 and 2011, Egypt's annual exports to the world averaged 13% of its GDP; while its exports to the United States averaged 1%; and its QIZ exports averaged 0.5% ( Figure 12 ).

Figure 13 is used here as a proxy for the contribution of QIZ and total exports to GDP growth. It compares the changes in annual QIZ exports and total exports, respectively, to the growth in annual GDP for various years. Accordingly, it estimates that the overall economic impact of the QIZ program for Egypt is that:

During 2005 and 2006, the first two years of Egypt's QIZ program, its QIZ exports to the United States accounted for an amount equivalent to 2% of its GDP growth ( Fi gure 13, red bars). (This compares with 30% for four years for Jordan.) During that same first year (2005), Egypt's total exports to the United States accounted for an amount equivalent to 7% of its GDP growth (compared with 43% for Jordan at its peak) ( Figure 13, black line).

Employment and Labor Issues

Egypt has not had the high visibility labor problems associated with QIZs that Jordan has. Among other reasons, Egypt does not have many foreign guest workers, since its workers are typically skilled and accustomed to producing throughout the many stages of the vertically integrated industries. For example, in the apparel sector, the Egyptian workforce grows cotton, weaves the fabric, and makes the finished items. While, according to the ILO, nearly 80% of the workers in Jordan's garment export factories are foreign guest workers, Egypt's Labor Law requires, for the most part, that foreign workers account for no more than 10% of the total workforce of a firm. In 2011, the Ministry of Manpower and Migration enacted regulations to restrict access for foreigners to Egyptian worker visas. Only jobs for which it is not possible for Egyptians to acquire the requisite skills will remain open to foreign workers.

The overall impact of the QIZ program on Egypt's economy has been relatively small so far. Egypt's QIZ exports to the United States represent less than 3.5% of Egypt's total exports, and less than 1% of Egypt's GDP. As a result, the QIZ's impact on Egypt's employment has also been small.

Issues for Congress44

Current congressional interest in and possible oversight of the QIZ program could address a number of issues, including:

Is the QIZ program an effective tool for economic development, and should it be given a broader role under the MENA-TIP initiative? Should the QIZ program be expanded or contracted? Should, for example, the conditions for country eligibility, scope of coverage, or other criteria under the QIZ program be changed? Should there be a co-production arrangement between U.S. FTA partner and non-partner countries? That is, should there be a new program that permits and encourages non-FTA countries to co-produce with FTA countries in order to meet a minimum content requirement? Should a regional MENA trade preference program be established similar to what the United States has established for other regions, such as the Caribbean or sub-Saharan Africa? Or, is GSP an effective program for the region?

Appendix A. The West Bank/Gaza Strip Experience

The West Bank and Gaza Strip (WB/GS) have a very small export program under the QIZ amendment, and a history of imports from the United States characterized by wide inconsistency in products. This inconsistency in trading is primarily due to political conditions in these two territories which interfere with the ability of trade to flow freely. West Bank and Gaza Strip exports to the United States must contain 11.7% materials originating in the territory (like requirements for Jordan, Text Box 2, under the QIZ program).

West Bank/Gaza Strip exports to the United States reached a peak of $8 million in 2008 and U.S. exports to the territories reached a peak of $18 million in 2007 ( Figure A-1 ). West Bank/Gaza Strip exports under the QIZ program started out primarily as textiles and apparel, and have evolved into a more diversified mix of products ( Figure A-2 ). The composition of U.S. exports to the West Bank and Gaza Strip has varied considerably from year to year, depending on what products are needed in the territory. In 1999 they were led by tobacco and jewelry; in 2001, motor vehicles; in 2007, grains; in 2010, electrical machinery; and in 2011, both mechanical and electrical machinery ( Figure A-3 ).

Appendix B. Data for Figures 2-13, and A-1-A-3