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UnfairJORDAN'S FTA WITH AMERICA
Jordan signed its Free Trade Agreement with the United States in October 2000. Almost thirteen years later, experts evaluate whether entering this FTA was a sound economic decision by the Jordanian government.
BY AYSHA AL-SHAMAYLEHPHOTOGRAPHY BY HAKEEM MUHAMMAD
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ver since joining the World Trade Organization (WTO) in April 2000, Jordan has been a firm proponent of free trade. Thus far, the
Kingdom has signed a total of eight Free Trade Agreements (FTA), most of which are bilateral trade pacts with large industrialized nations such as the United States and the European Union.
After all, free trade is hailed as an effective economic development policy, particularly for developing countries. Many experts cite the success of the “East Asian Tigers” as proof in support of this argument. In an interview with Venture, Director-General of the WTO Pascal Lamy cited China’s example, and said; “This is the reality in the last two to three decades; developing countries that have been growing most rapidly are the ones who have opened to trade.”
THE GRAVITY OF A SIGNATURE Free trade is a government policy that removes trade barriers, including tariffs, quotas, import licenses, embargoes, and restrictions, such that the country does not discriminate against imports or interfere with exports. Instead, our borders are open to foreign products while our exports enjoy free access to foreign markets.
A bilateral FTA, such as the Jordan-U.S. Free Trade Agreement (JUSFTA), is a trade pact that governs the free-trade relationship between two nations. Such an agreement is entered voluntarily, and involves a thorough negotiation process, where the rules and condi-tions of the FTA are agreed upon. “An agreement is not like signing a membership club, as in paying fees and entering. There are exchanges of commitments on both parties,” Talal Abu Ghazaleh, member of the WTO’s panel on Defining the Future of Trade, told Venture.
In fact, the odds begin to stack up against a developing country, like Jordan, during the negotiation process. “In general, it is true; when a poor country is in negotiation with a big, rich
country, it’s in a weak position,” Lamy said at the WTO Arab Consultation Forum last February. Industrialized nations, and specifically a superpower like the United States, have more lever-
age due to their economic and political might. In the end, such countries will only agree to conditions that are advantageous to them.
Officials cite the JUSFTA as an undeniable success story, yet a closer look at the numbers over the last decade shows that Jordan’s gains from this FTA have, so far, been limited.
Abu Ghazaleh, who commissioned
an ongoing study about the economic impacts of FTAs on the Jordanian economy at his organization, said, “Our assessment is that, unfortunately, these agreements [with industrialized
nations] did not serve the interests of Jordan. I think that when these agreements were signed, not enough attention was given to the nature of the trade between the two countries. [The agreements] were not based on a study; they were just done on, probably, a blueprint agreement.” Prior to the imple-mentation of the JUSFTA, the US government issued three research reports published by the US International Trade Commission, USAID, and the Congressional Research Service. All three reports concluded that the JUSTFA’s impacts on total US exports,
imports, production, and employment are negligible. Sadly, no studies were made on the official impact on Jordan by the Jordanian government.
AN IMBALANCED AGREEMENT Jordan’s enthusiasm about entering the JUSFTA was based on the hope that Jordanian exports would gain better access to the American market. “Many
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Pascal Lamy, Director-General of the World Trade Organization
OUR ASSESSMENT IS THAT, UNFORTUNATELY, THESE AGREEMENTS [wITH INDUSTRIALIzED NATIONS] DID NOT SERVE THE INTERESTS OF JORDAN
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developing countries have signed bi-lateral agreements with industrialized nations. The main goal was to open developed countries’ markets, [their] high purchasing power, and larger populations to developing countries’ industrial and agricultural products,” Ahmad Hindawi, former minister of industry and trade and current nomi-nee for the WTO’s director-general position, told Venture.
The negotiated JUSFTA gradually eliminated tariffs on all trade between Jordan and the United States, with the exception of tobacco and alcohol, over a period of ten years. According to a report by the University of Michigan, “prior to the signing of the JUSFTA, Jordan had a mean un-weighted average tariff rate of 16 percent and the United States had a mean rate of 6 percent.” This means Jordan already had considerable access to US markets before the FTA. It also means that once all tariffs were removed, US exporters’ costs went down by 16 percent, while Jordanian exporters’ costs went down by a mere 6 percent.
Regardless of eliminated US tariffs on Jordanian exports, the report confirms that “the major constraint to entering the US market is approval by
the US Food and Drug Administration (FDA), as filing with the agency re-quires certification and a $300 million investment.” Only industry giants, such as Hikma Pharmaceuticals, have been able to obtain FDA approvals. Hence, the hope that signing the JUSFTA would give Jordanian exports access to a larger market was not exactly realistic.
A ROSY PICTURE OF FREE TRADEThe initial enthusiasm that sur-rounded the JUSFTA was justified, but only between the years 2001 and 2006. According to the International Monetary Fund, by 2007, Jordan’s GDP grew from about $8.5 billion in 2001 to $16 billion. Jordan’s exports to the United States also grew from about $229 million in 2001 to about $1.3 billion in 2007. According to the report by the University of Michigan, in 2006 “the IMF staff mission credited the JUSTFA for ‘assisting Jordan’s strong double digit export growth’ and ‘mitigating external sustainability risk‘ despite a growing current account deficit driven by rising fuel costs and import demand from Iraqi migrants.”
Although Jordan’s boosted eco-nomic performance between 2001 and 2007 is undeniable, it is difficult to solely attribute these developments to the JUSFTA, since other economic developments were happening concur-rently. In the early 2000’s Jordan continued to attract QIZ investments, which was another means to giving Jordanian-made goods tariff-free access to the United States. Jordan also became a member of the WTO in 2000 and committed to tariff liberalization clauses independent of the JUSFTA. Furthermore, the United States convinced the Paris Club to reschedule Jordan’s debt in July 2002, while the American invasion on Iraq in 2003 caused a large refugee influx into Jordan, increasing demand on goods and services and causing the local real estate industry to boom.
To take a sectoral look at the economic outcome of the JUSFTA, we must consider the case of Jordan’s apparel industry. Jordan’s apparel companies are considered the major beneficiaries of the JUSFTA, since they once represented the one major exporting sector. According to a study by Chemonics International, apparel exports accounted for about 87 percent of total Jordanian exports between 2001 and 2006, during which period trade with the United States was growing exponentially. However, the vast majority of apparel factories in Jordan have always been foreign-owned, and have always employed cheap Asian labor. Hence, the benefits of the rapid increase in apparel exports to the United States after 2001 weren’t captured by Jordanians, but mostly by foreign firms and foreign labor.
Furthermore, following the publica-tion of a report by the US National Labor Commission about labor abuses and sweatshops in apparel factories, Jordan became a stigmatized location for foreign apparel investors. Ever since then, the importance of the apparel industry to the Jordanian economy has been compromised.
Similarly, the pharmaceutical industry is heavily cited by officials as the second major beneficiary of the
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Ahmad Hindawi, Former Minister of Industry and Trade
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JUSFTA. Ahmad Hindawi describes it as a large Jordanian exporter that is “internationally recognized,” and which benefits from FTAs with industrialized nations. Yet pharma-ceutical exports are severely limited by the rigid American Food and Drug Administration approval system.
The numbers show that phar-maceutical companies’ gains from JUSFTA were modest. In 2006, although Jordanian pharmaceutical exports grew, they only represented 0.5 percent of Jordan’s total exports to the United States, according to the University of Michigan’s report. More recently, in 2012, Jordan-U.S. trade in pharmaceuticals accounted for 0.8 percent of total Jordanian exports. So Jordanian pharmaceutical exports to the United States grew by a negligible 0.3 percent since 2006.
GOING DOwNHILL Between 2001 and 2006 Jordan actually benefited from the JUSFTA as exports to the United States were growing, fulfilling Jordan’s aspiration to access larger foreign markets. Yet, 13 years later, the director-general of the WTO admits that “imports from the U.S. and EU have grown [more] rapidly than [Jordanian] exports.” After a streak of positive export growth percentages, in 2007, total exports to the United States decreased for the first time, falling by 6.2 percent.
Unfortunately, exports to the United States continue to fall to this day; between 2007 and 2012, they contracted by about 10 percent from $1.3 billion to $1.1 billion, according to data by the Department of Statistics. During the same period, imports from the United States continued to increase exponentially, growing by a jarring 119 percent, from $629 million to $1.4 billion. The surge in US imports represents a major threat to local industries that struggle to compete against foreign products.
“[The agreement] did not take into concern the advantages of Jordan; it did not focus on how Jordan can be, and should be, put in a favorable position for facilitating its exports.
Similarly, while opening its markets, [there was not] enough care or protec-tion of the country’s products and services,” Abu Ghazaleh said.
He shares the opinions expressed
by the current minister of industry and trade Hatem Halawani at the WTO Arab Consultation Forum. According to Halawani, the major challenges Jordan faces while engaging in free
trade include that local industries’ readiness for free trade, the overbear-ing conditions that trade agreements impose, and the fact that the country’s economic growth policies contradict
the conditions outlined in its FTAs. Experts agree that the burden is
on Jordan to make sure it secures gains from agreements like the JUSFTA. “FTAs simply open doors to large foreign markets. For us to cross to a better future, we have to prepare ourselves and develop our industries so we can benefit from these trade agree-ments. So the main challenge is on us,” Hindawi said.
The subject of free trade with industrialized countries is not black or white; it’s definitely gray.
“It’s the game of comparative advantage. All countries have an interest in open trade, provided that they export their comparative advantage...True, some manu-facturing and farming capacities have been harmed, but there have
been gains on the other side; it’s not an either/or, but a question of having the proper domestic policies in order to grow your comparative advantage,” Lamy said.
THE FTA DID NOT TAKE INTO CONCERN THE ADVANTAGES OF JORDAN; IT DID NOT FOCUS ON HOw JORDAN CAN BE AND SHOULD BE PUT IN A FAVORABLE DECISION FOR FACILITATING ITS ExPORTS
Talal Abu Ghazaleh, member of the WTO’s panel on Defining the Future of Trade
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wHAT THE GOVERNMENT SHOULD DOThe process of reaping benefits from FTAs with industrialized countries does not end with the signing of an agreement; it simply begins there. “[An FTA] remains a country deci-sion. It can be coherent with what the country does in its trade policy, indus-trial policy, services modernization policy, education policy, innovation policy, or intellectual property policy. It’s up to the country to establish the
necessary coherence,” Lamy asserted. According to Abu Ghazaleh, the
government should focus on certain sectors of the economy, where our export potential and comparative advantage are high. “We should realize that the potential for export by [developing] countries, particu-larly Jordan, is in services and not in products. Especially now that we are in the knowledge age, I believe we need to look at the digital economy,” he said.
Regional trade is also important; “We need to improve our trade with our neighbors; in most regions of the world neighbors are the best trade partners. Consider the United States and Asia,” economist Jawad Anani said. He also believes that Jordan should focus on customized goods and services; for example, in the apparel sector, we should focus on high-quality fashion, and follow Lebanon’s example.
More broadly, Jordan must recon-sider the entire concept of free trade, given the global recession; other
countries are certainly less interested in free-trade now. “I think we need to be a little more protectionist. The whole world right now is going in the direction of protectionism, although everyone is talking about the liberalization of trade. European and Western countries, in particular, are leading this process, while the developing countries have been open-ing their markets, according to reports by the World Bank and the WTO,” Abu Ghazaleh said.
Trade trends are changing; coun-tries are focusing on building and supporting their own local econo-mies by protecting their national industries against foreign products and services. Shouldn’t Jordan be more careful?
wE NEED TO IMPROVE OUR TRADE wITH OUR NEIGHBORS; IN MOST REGIONS OF THE wORLD NEIGHBORS ARE THE BEST TRADE PARTNERS
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