Jordan and the USA Free Trade Agreement - Essay Example

?Jordan-USA Free Trade Agreement Jude Bataneh 260402086 Econ 314 According to Hassanien reported that on the 24th of October 2000 the USA-Jordan Free Trade Agreement (FTA) was signed making it the first FTA to be signed between the Unites States of America and an Arab nation. Chomo (2006) found that the Qualifying Industrial Zones (QIZs) which was established in 1996 allowed manufactured products from Israel, Egypt, and Jordan to enter the U.S. duty free. Jordan is a developing nation and has a small market due to its small population. Moreover, its location amongst other developing nations further restricts its potential for growth (Chomo, 2006). These factors increase the need to sign trade agreements with more developed countries. Trade agreements may involve two countries reducing tariffs on each other’s goods or reducing bureaucracy by simplifying the procedures on import and exports (Miller, 2004). Relatively speaking, Jordan is small for a country that has undergone considerable processes aiming towards opening up the economy. This makes a good example of developing nations that have employed successful economic strategies. An example of a major process undergone by Jordan would be significantly lowering its trade barriers to entry by signing the Free trade Agreements (FTAs) with countries such the United States and the European Union (EU). This was also accomplished by its concurrence to the World Trade Organization (WTO) (Busse & Groning, 2012). Ultimately, the trade barriers are expected to result in an increase in trade flow as both production and consumption improve in efficiency. The benefits of signing the FTA with the U.S. does not stop at increasing trade flow, but it also attracts investment in the export sectors by improving domestic competition and productivity which could only result in substantial economic development. By a developing nation signing a trade agreement with an economy that is industrialized, it gains improved access to markets for those products that match the developing nation’s relative factor-abundance compared with the industrialized trading partner (Maria,2000). Supposedly, a small developing country should not loose its industrial base by signing a FTA with a nation that is industrialized. Both the U.S.-Jordan FTA and the North American Free Trade Agreement (NAFTA) gave concessions to developing country members like Mexico and Jordan. Chomo (2006) found out that it caused the developing nations to become reliant on the custom duties as the major source of tax revenue. The U.S.-Jordan FTA addressed the aforementioned issue by allowing special concession on the Jordanian tariffs on automobiles. Indeed, Jordan’s imports and exports have considerably increased since the commencement of the liberalization process. The expansion of the imported goods has been larger in as compared to the rise in exports leading to substantial increase in its trade deficits. According to Busse and Groning (2012) are of the opinion that whilst in 2007 Jordan has small deficits in its account of US $68 million, it had a surplus of US $ 2,779 in its current transfers and US $835 million in its income account. In 2007, the nation faced a deficit of US $2,776 in its current account. Irrespective of the growing importance of services, almost all of Jordan’s accession to the U.S.-Jordan FTA has majorly focused on trade liberalization in goods only. Jordan adopted the Investment Promotion Law in 1995 which offered non-discriminatory treatment to the foreign investors (Chomo, 2006). Additionally, certain locations such as the Aqaba Special Economic Zones were designated for investment. In 1997, it revived the 1981 Agreement for Facilitation and Promotion of Trade which was signed by the members of the Arab league which Jordan is member (Malkawi, 2008). When the agreement went into full force in 1998, it foresaw a yearly reduction in tariffs of 10 % thereafter in 2008 reducing the tariffs to zero. Moreover, this agreement allowed for Jordan to cooperate with the neighboring on both economic and political grounds in rather unstable region with major external shocks. Supposedly, it eliminated all the trade barriers among its members in January 2005 (Chomo, 2006). According to Miller (2004) found out that the U.S.-Jordan FTA resulted in net welfare gains for the United States and the Jordanian consumers from the phased reciprocal tariff elimination. Jordan gained from the tariff liberalization because its economic distortions from the import tariffs are higher than that of the US. The reduction in Jordanian import tariffs on the U.S. products, currently accounting for 10 % of the Jordanian imports, allows for the domestic resources to adjust to more optimal uses. Secondly, the United States international trade is overshadowed by the interregional trade which accounts for most of the U.S. national income. Jordan is an insignificant trading partner of the U.S. Impacts on the economy of the U.S. from the trade liberalization with the small Jordanian economy, will be negligible even at the sectoral level (Piro, 1998). According to Baier (2009) asserts that Jordan’s trade agreement with the U.S has led to an enormous increase in exports to the United States. Due to the elimination of tariffs, the US government lowered the local content needed for Jordanian and the apparel exports to the US. Consequently, the local as well as the foreign companies took advantage of the special preference and expanded exports to the United States. Chomo (2006) suggested that as a consequence, the apparel and exports to the United States increased by 26-fold from 2000-2006 amounting to almost 90 percent of the total exports in the year 2008. Considering the theory of comparative advantage, when a country reduces the barriers to any of their trading partner, the national resources will adjust through the specialization towards those areas of comparative advantage relative to trading partner. Jordan attains a higher level of welfare from specializing in those areas that are of comparative advantage with the U.S. Through trade and specialization and trade, Jordan achieved increased consumption and attained higher net welfare. Competitiveness, size of the market, and disadvantageous structures on exports hinders a country from reaping the potential full benefits of trade liberalization (Malkawi, 2008). On the contrary, if agreements that are put in place are those that enhance imports but the exports, they might have an impact on the other sectors like technology spillovers (Nina, Beschorner, & Huschelrath, 2011). Accordingly, developing nations have the potential for gains in the welfare and more efficiency by implementing the FTA than their partners who are industrialized due to their high level of trade interventions and the resulting inefficiencies that are observed in the developing nations (Malkawi, 2008). Jordan produces and exports resource oriented manufactured products like the phosphate fertilizers and potash typical of many developing nations. The production units of these products are located near the source, as result of the high costs incurred in the transportation of raw materials. This prevents the products from having comparative advantage in the United States market. On the contrary, they are competitive in the regional market. According to Nina, Beschorner, and Huschelrath (2011) found out that the Jordan-U.S. FTA opened the doors for outstanding business opportunities and acknowledged an increasingly attractive market for investment and global trade in the manufacturing and services sector of both economies. The strategic location of Jordan in the Middle East; its human resources, good infrastructure, the regulatory environment, and the beneficial trade agreements with the United States, Europe and the Arab World positions Jordan as a leading regional hub for America – Middle East trade and investment activity. The gains from trade liberalization include enhanced efficiency in the sectors that were previously held by the trade barriers and also transparency in doing business. Today, Jordan is an attractive location for investments in information technology, securities and education, financial services, healthcare services, religious tourism, automobile design and manufacturing industries, jewelry and precious stones, furniture and cosmetics industries (Baier, 2009). As result of the competitive manufacturing costs and the flexible industrial policies, Jordan is expectedly to be enjoying the competitive advantage in consumer products manufacturing under the Jordan-US FTA up until 2015, when the global elimination of tariff on non agricultural products is realized for example a total of five (5) years, three (3) years after the completion of the U.S.A.-Jordan FTA and two (2) years after the implementation of the proposed Middle East Free Trade (Chomo, 2006). Conversely, the US imports light manufactured products the nation of Jordan especially the textiles and apparel. These are produced with a mix of input that represents the relatively abundant labor as compared with the scarce capital in Jordan. The US imports are the second highest value import sector from Jordan. The large differences that accrue in the factor endowments prior to trade liberalization seem to suggest the huge production and trade effects from liberalization. According to Hassanien (2010) asserts that the Jordanian per capita Gross Domestic Product (GDP) was 5 % of the United States per capita GDP. As a consequence, Jordan experienced efficiency and the welfare gains from the resource adjustments under the measures of trade liberalization of the FTA. The industry share of Jordanian GDP was 24.8 % with the manufacturing industry contributing only 15.6 %. This share has been on a steady increase from 12.7 % in 1980. The services make the majority share of the Jordanian GDP, about 73 % in the year 2000. This is an increase from 64.1 in the 1980. The agriculture share of the Jordanian GDP decreased from 7.9% to 2.2 % from 1980 to 200 respectively (Baier, 2009). The economy of Jordanian is dominated by the service accounting for 65% of its GDP, and by the industry 30 %, whereas the agricultural sector is represented by only a small part of the economy accounting to 4.5 % of the Jordan economy (Malkawi, 2008). Therefore, the largest exporting industries in Jordan are the pharmaceutical industry and the potash and phosphate extraction industries. According to Hassanien (2010) 75 percent of the Jordan’s pharmaceutical production is actually exported. Ultimately, the Jordanian balance is positive and since 2009 in has steadily been improving. Baier (2009) found out that whilst the Jordan’s exports are dominated by services in the travel sector, the imports of services are dominated by the transport sector. Domestic and economic regulatory reforms are vital in the move to ensure that Jordan moved away from the previous import substitution policies towards trade liberalization and export promotion fiscal reforms, commercial policies, and monetary policies are in place to enhance Jordanian domestic producers’ competitiveness through the market forces (Baier, 2009). Many of the aforementioned theories have been implemented for example trade liberalization, WTO, and the U.S.A.-Jordan FTA trade agreements. The multilateral Agreement on Textile and Clothing (ATC) implemented in 2005 removed any diverting welfare gains to apparel exporters from the special access to the United States market. According to Baier (2009) reported that given the long tariff phase-ins that were negotiated under the U.S.A-Jordan FTA, the welfare gains were spread out over a long time and thus difficult to measure. According to The American companies like Wal-Mart and Target established their so that they could cut on costs by eliminating tariffs. In the first year of the signing the FTA, Jordan had increased its export earnings exports by 213 percent and created approximately 30,000 jobs. By the year 2002, the nation had enjoyed a marginal trade surplus with the US. Furthermore, 5 years after the FTA came into effect, the exports of Jordan to United States had increased twenty fold. Consequently, Jordan’s apparel exports to the US in 2005 amounted to $1.2 billion (Baier, 2009). Foreign direct investment is encouraged in the government of Jordan through regulatory economic reforms and the investments agreements with the US and other trade partners (Malkawi, 2008). By Jordan taking commitments for protection of intellectual property in accordance with its obligations under the Jordan-U.S. FTA, more investment is encouraged in the country (Chomo, 2006). The domestic reforms which include, reduction of the huge GDP consumed by the government, must be continued if Jordan is to obtain potential welfare gains from specialization and the trade under the United States-Jordan FTA. This is because most of the Middle East nations have drastically suffered from the lower than the average foreign direct investment. Under the U.S.-Jordan FTA, Jordan has the obligation of adopting stronger protection and enforcement provisions for patents, trade marks, trade secrets, and copy rights. The FTA opened up the Jordanian services market to the United States companies (Maria, 2000). However, these changes have provided the United States and the Jordanian businesses with a market base that is more accessible and easily navigated. As a consequence, trade in the agricultural and industrial goods between the two countries were liberalized fully through the gradual reduction of the custom duties and the charges having an equivalent effect over a transitional period of ten (10) years from the date of entry into force of the FTA agreement (Busse & Groning, 2012). The rate of the custom duty being charged Iti Its period of abolishment Itt The reduction rate More than 0 percent and less or equal to 5 % 2 years 2 equal installments More than 5 percent and less or equal to 10% 4 years 4 equal installments More than 10 percent and less or equal 20 % 5 years 5 equal installments More than 20 %. 10 years 10 equal installments However, the goods were subject to the customers’ elimination of tariffs over the periods of transition to World Trade Organization for Jordan and the United States. Additionally, it also included goods of Jordan origin imported by the U.S. to also be exempted from custom duties on the date of entry into force of the US-Jordan FTA (Nina, Beschorner, & Huschelrath, 2011). Some sensitive goods of both the US and Jordan will be subject to customs tariff dismantling. Goods of originating from Jordan imported by the United States; custom duties to be dismantled for a certain group of products over 2 years from the date of entry into force of the agreement (Malkawi, 2008). They include tomato paste, building stones, paints, glitters, and olives. The customs to be eliminated from at the commencement of the 10th year from the date of entry into force of the FTA for goods produced in the QIZ. In the FTA, Jordan has gone ahead and provided for further liberalizations in number of its service sectors, with the view of encouraging greater American investment in the Jordanian nation. On the contrary, the United States agreed to provide to provide eligible Jordanian nationals with treaty-investor (E-2) and treaty trader (E-1) visas which were subject to the applicable provisions of the US immigration and the related laws (Malkawi, 2008).Summarily, the US-Jordan trade liberalization improved economic development of Jordan by removing the tariff distortions that have led to allocation of resources in inefficient sectors, and the opening up of the American markets. There is improved competitiveness which benefits the exports of Jordan to the United States market and other world markets. The economic factors that have slowed down the economy of Jordan include lack of investment capital and small domestic market. The small domestic market of Jordan is a hindrance to economic growth particularly when the government consumes a large amount of the GDP (Maria, 2000). The external economies of scale have been stimulated the policies of the government to promote industrial agglomeration through the establishment of the industrial estates. However, regional integration and the international markets is the most probable engine for growth for small and developing nations like Jordan and Mexico. The trade policy objectives of Jordan have significantly changed from protectionism to export promotion so as to attain economic development (Piro, 1998). Reference List Baier, B. (2009). Do Free Trade Actually Increase Members' International Trade. Journal of International Economics , 71 (1), 7295. Busse, M., & Groning, S. (2012). Assessing the Impact of Trade Liberalization: The Case of Jordan. Journal of Economic Intergration , 3 (1), 136-150. Chomo, G. (2006). Free Trade Agreements between Developing and Industrialised Countries: Comparing the US-Jordan FTA and Mexico's NAFTA. New York: US International Trade Commision. Nina, L., Beschorner, P., & Huschelrath, K. (2011). The effects of the Block Exemption Regulation reform on the Swiss car market. AH Alphen Rijn: Kluwer Law International. Hassanien, M. R. (2010). United States Bilateral Free Trade Agreements:Consistencies Or Conflicts With Norms in the Middle East. AH Alphen aan den Rija: Kluwer Law International. Malkawi, B. H. (2008). Jordan and the World Trading System: A Case Study for Arab Countries. American University: ProQuest. Maria, M. (2000). Business Economics. Middlesex: Cengage Learning. Miller, A. S. (2004). Free Trade:Current Issues and Prospects. New York: Nova Publishers. Piro, T. (1998). The political economy of market reform in Jordan. Boston Way: Rowman and Littlefield. The growth of Jordan as a result of the Jordan-US Free Trade Agreement (Busse & Groning, 2012) Figure 1: Showing the growth of Jordan’s economy. Jordan US-Free Trade Agreement (Millions of US Dollars) Year Jordan ? US US ? Jordan 1999 30.7 275.7 2000 73.3 316.9 2001 229.2 339.0 2002 412.4 404.4 2003 673.4 491.9 Figure 2: Showing the revenue generated from the Jordan-US FTA (Piro, 1998). Figure 3: Showing exports and imports between Jordan and United States of America. Read More