Although we cannot even begin to compare the economies of both countries, it is still necessary to give a clear idea of what the Jordanian economy is up against and to reasonably foresee that Jordan may benefit from the depth of the American economy.

The US economy is in a league of its own; its GDP over the past decade soared by a staggering USD 2 trillion – a number greater than the GDP of most countries (except Japan). In 1982, there were about 13 billionaires in the US, as opposed to 189 billionaires in 1998 with a combined wealth of USD 738 billion. Even on the corporate level, America has advanced considerably. In 1990, there were only two US companies ranked among the largest ten companies in the world – now there are nine. American banks are now bigger than ever; nine out of the world’s fifteen largest banks are American, as opposed to none in the late 1980s.

All these facts indicate that the bullish American economy is still growing and is not expected to cool down anytime soon. It is believed, that had it not been for the mass market in the US to accommodate the world’s exports, then a global recession would have been inevitable in 1999.

US FTAs with other countries

The US is considered to be the key global importer and exporter. Its trade volume increased 80 per cent from 1992 until 1999 to reach USD 2.8 trillion, a figure 21 times that of 1970. One dollar allocated to trade yielded a return of 11.9 per cent in 1997; that return declined to three per cent in 1998 and then rebounded to 6.4 per cent in 1999.

Germany, the world’s second largest trader, lags behind the US in global trade by 60 per cent. The US is also considered to be the single largest service-exporting country in the world, and the second largest country to import foreign services after Germany. Atlas Investment Group attributes the sizeable growth of US exports to the following factors:

• The highly competitive nature of American goods due to superior quality and low costs.

• The recovery of the Mexican economy.

• Stability and improvement of Asian economies.

• Improvement of economic growth in several developed countries.

• Reduction of trade barriers between the US and many other countries through.

Bilateral and multilateral agreements

Israel established the first free trade agreement with the US in 1985. Ten years were allocated for dismantling customs barriers. Israel has benefited substantially from the agreement and successfully managed to market its manufactured products to the US. Israel was also granted the privilege of establishing several Qualifying Industrial Zones (QIZs) after the 1995 peace agreements. Israel’s annual per capita income has increased six-fold to USD 18,000 in 1999 since establishing the FTA with the US.

In 1994, the US, Canada and Mexico concluded the North American Free Trade Agreement (NAFTA) that called for the dismantling of customs and other obstacles in order to facilitate trade between the three countries. Since NAFTA was implemented, American exports to Canada and Mexico has increased by 78.2 per cent. In 1993 US exports to Mexico and Canada constituted 31 per cent of its total exports, as opposed 36 per cent in 1999. Canada’s economic growth rate in 1999 stood at approximately at 3.9 per cent, and American exports to Canada (America’s largest trading partner) increased by 83.5 per cent while its imports from Canada increased by 14.5 per cent, representing 19.3 per cent of all American imports.

Trade between the US and Mexico also grew significantly. American exports to Mexico in 1999 increased by 10.3 per cent to reach USD 86.9 billion – more than double their level in 1993. US imports from Mexico have tripled over the past seven years to reach USD 109.7 billion, making Mexico considerably dependent on the economic health of the US.

In light of the above, the FTAs between the US, Mexico, Canada and Israel appear to have been to the benefit of all sides through increased trade volumes. All of the countries benefited from the favorable treatment provided by the agreement, which facilitated the flow of goods amongst them without trade barriers or restrictions.

Prospects and challenges of Jordan’s participation in the FTA

The United States regards Jordan as a stable country that enjoys a unique geographical location. The US believes that it should reward Jordan for supporting the regional peace process and opening up its economy, through establishing an FTA that would stimulate growth and allow Jordan to compete, not just regionally, but globally as well.

Jordan’s aggregate exports in 1998 and 1999 were JOD 393 million and JOD 390 million, respectively. Jordan’s chief exports to the US are luggage, clothing, pharmaceuticals and gold, while there may be a potential for other products to be exported to the US such as potash, fertilizers, Dead Sea skin care products, carpets, handicrafts, embroidery, olive oil and other vegetable oils. On the other hand, Jordan mainly imports grain, wheat, cars, aircraft spare parts for the US.

Jordan’s domestic market is small and requires alternative markets to absorb its output. Jordan’s exports to the US in 1999 did not exceed USD 11 million. The FTA with the US would open the world’s largest market to Jordanian products and grant them duty-free status. On the other hand, US exports to Jordan stand at USD 276 million, creating a balance of trade in favor of the US. If the FTA is concluded successfully, Jordan will be the second free zone in the region after Israel. If investment opportunities are wide open, Jordan will possess a comparative advantage over Israel because of its cheaper labor and lower property prices. Moreover, Jordan is considered to be more stable than Israel, and most Arabs would rather invest in Jordan than in Israel.

Jordan’s access to this agreement provides foreign investors with positive indicators that the country offers a great opportunity and a favorable investment environment. Despite all the obstacles that confront the negotiators, the potential agreement represents a great deal of confidence placed in the Jordanian economy by US policy makers and foreign investors.

Atlas Investment Group has learned that Jordan’s negotiating delegation has agreed to the following points, on the following terms:

• Customs tariffs. Any privileges granted to Jordan under the Generalized System of Preferences (GSP) in the WTO will remain valid under this agreement. This offers Jordanian goods an opportunity to enter the US market duty-free.

• Dismantling of customs barriers. Any goods subject to a five per cent customs duty will be duty free within two years. Goods subject to a 10 per cent duty will be duty free within four years and those subject to 15 and 20 per cent duty will be duty free within five years. Any goods that are subject to a duty of 30 per cent or more will be duty free within 10 years.

• Services. The US believes that Jordan still lacks sufficient commitment to the provisions of the WTO concerning the service sector. Certain laws and legislation must be amended, particularly those pertaining to the protection of intellectual property. Jordan will be given a three-year grace period to amend such laws. The American side wants about 77 service sectors to be liberalized. US requests related to the service sectors have emphasized the following:

  • Raising the ceiling on foreign investment in Jordan

  • Allowing non-Jordanian majority representation on the Board of Directors in several sectors such as commercial dealerships and agents

  • Eliminating the government’s right to support Jordanian service companies

• Environment. No agreement has yet been reached in this respect. While the Americans believe that Jordan’s environmental laws and regulations are already very good, they would like to tackle these issues in terms of how they relate to trade. The environmental principles within the FTA would be structured around those incorporated into NAFTA, which include promoting sustainable development, maintaining high environmental standards, not compromising them to promote trade, and effectively enforcing such laws.

Other American demands are removing restrictions on foreign investments in several fields, namely research and development, ship-leasing, advertising, fishing, energy distribution, printing and publishing, education, health, tourism, sea-transportation, aircraft maintenance and restaurants.

Despite several local economists’ optimism regarding the establishment of the FTA with the US, others regard it as the single greatest challenge facing the domestic market. This is because US exports to Jordan will be regarded as a direct threat to locally manufactured products; some predict that their appearance on the Jordanian market will drive out the goods of several local industries.

In discussing the FTA, Atlas Investment Group believes that three main points ought to be taken into consideration:

1. Qualifying Industrial Zones (QIZs). The establishment of a free zone with the US would create direct competition between the QIZs and the free zones in attracting foreign investments. Since the free zones provide a greater opportunity for investors and cover a wider scope of industrial activities, this may be a threat to the QIZs’ success. In 1996, the Jordanian government campaigned for the formation of QIZs, wooing investors and providing them with exemptions and incentives. Consequently, many entrepreneurs raced to back these QIZs, and invested a great deal of time and money in providing the necessary infrastructure. Today, the government is presenting the idea of the FTA to attract investors and put Jordan in the limelight once again. The establishment of an FTA with the US, we believe, represents a new leap for the Jordanian economy. However, we also believe that in order to scrutinize how the FTA would affect the QIZs we ought to consider the following:

2. Jordan’s Economy. The other countries that have made similar agreements with the US are comparable, to some extent, in both the size and the nature of their economies, to that of the US. The size and nature of Jordan’s economy is substantially different from that of the US.

3. Jordan’s Economic Rush. Jordan’s economy is suffering from low rates of growth, therefore, every effort for economic recovery is being directed by the public and private sectors. However, Atlas Investment Group believes that any structural change within the economy ought to be gradual in order for analysts and policy makers to properly evaluate the results. For instance, Jordan’s agreement with the EU, its accession to the Common Arab Market and the WTO, the launching of QIZ and its negotiations with the US to sign an FTA are all major milestones in Jordan’s development. Detailed analysis and follow up are needed in order to evaluate whether or not the economic consequences have been in line with the proposed aims.

Worth noting is the analysis that was recently published in the Wall Street Journal (WSJ) explaining the impact that the upcoming American elections would have upon the probability of establishing an FTA with Jordan. According to the WSJ, if Gore were elected as president with the Democratic Party dominating Congress, then the FTA with the US is somewhat at risk. While if Gore wins the elections but the Republican Party (who believe that political and economic policies should be kept separate) gains a majority control in Congress, then this means dispersion of power within the US, again jeopardizing the FTA agreement. On the other hand, if Bush is elected president, then chances are that the FTA agreement will be reached, because Bush is perceived as an avid supporter of the free market economy.

Finally, we believe that the Jordanian delegation negotiating the FTA will forge ahead regardless. We also believe that the basis upon which the FTA builds is economic as much as it is political. However, a final agreement is not expected to be signed before the first half of next year as America shifts its focus to its presidential elections, although an initialing is expected by the middle of this month (October).

Economics Department
Atlas Investment Group