the deal

The Jordan Compact: When Will the Deal Deliver?

When it was agreed back in 2016, the rules of origin offered exporters preferential access to lucrative European markets. So why have only a handful of companies in the Kingdom taken advantage of the deal so far?

By Dina al Wakeel

In 2012, shortly after the eruption of Syria’s civil war, Amer al Masri moved his plastics firms to Jordan from Syria.

Today, Al Feyha Company for Plastic firms is one of three (soon to be four) companies that are exporting to the EU via a relaxed rules of origin agreement that was part of the Jordan Compact signed in February 2016. The agreement allows manufacturers in the Kingdom to import up to 70 percent of the raw material used in their products instead of either sourcing them locally or from the EU markets.

Although before moving to Jordan, al Masri had already been exporting to some European markets for several years, including France, Spain, Sweden, and Cyprus, the deal has helped him retain these markets and boost the exports by around another 40 percent. Furthermore, the agreement made it easier for him to obtain staff. “It used to be difficult for us to obtain work pemits for our Syrian workers, but now this has changed,” he said, adding that his workforce was split 30-70 between Syrians and Jordanians.

The Compact was hailed as a breakthrough for Jordan’s private sector, which could finally penetrate the European market to make up for the markets they lost in the region due to wars and instability.

Yet the fact that only a handful of companies have managed to export to some European markets so far has attracted some criticism. The Jordan Labor Watch (JLW) issued a statement earlier this year calling for a review of the agreement that was unjust and failed to achieve the expected benefits for both Jordanian enterprises and their workers.

But counter arguments maintain that it is far too early to pass judgments as it has been less than two years since the agreement was ratified. Some even cited the FTA between Jordan and the United States, which took years before the benefits could be reaped.

Setting the Foundation

The Jordan compact was signed at the Supporting Syria Conference in February 2016. Between the signing date and end of July 2016 the EU member states and Jordan negotiated the actual details of the simplification of the rules of origin.

Under the agreement, the Kingdom pledged to create 200,000 jobs for Syrians in exchange for aid and more favorable export terms to the European Union. The agreement applies to 52 product categories, including textiles and garments, chemical, electrical, plastic, furniture and wood products (sectors where the Kingdom has a comparative advantage), on the condition that these businesses are made up of at least 15 percent Syrian labor, to be increased in two years to 25 percent, and are manufactured in one of 18 special economic zones. These flexible rules of origin are similar to those the EU currently applies while trading with countries with particularly underdeveloped economies.

The EU’s ambassador to Jordan, Andrea Matteo Fontana, believes it’s a highly significant development. “I think the compact is important for a country like Jordan but it’s also important for the rest of the world. It’s important for the international community to find ways to respond to surprises in a positive way,” he said. “I think the idea of the compact is that you have all those refugees in a country which are exerting pressure on the services and the infrastructure, and it’s a challenge, so how do you turn it into an opportunity?”

The Compact also acknowledged the difficulties facing the Jordanian economy, which is struggling to break the 2 percent growth mark and create jobs for the hundreds of thousands of new graduates every year. In fact, according to Jim Barnhart, acting deputy chief of mission and USAID mission director, the Compact was global in perspective and it set a successful model for other countries facing the same critical situation, starting with Lebanon. “It was the first time that we had a refugee crisis and the country hosting the refugees came up with an outline of what had to be done. The compact is not just about the rules of origin…If you tally up all of the compact’s clauses I think you will be pretty impressed by how much has been achieved,” he said.

However, sources familiar with the process said the easiest part was signing and negotiating the agreement, while the real work started afterwards, including identifying the Jordanian companies and their locations in the Kingdom that have the ability to enter the EU market.

The process is reminiscent of the FTA Jordan signed with the United States in 2000. “[At the start of our FTA,] Jordanian business leaders were very interested in both the QIZ and the FTA. However, while they were very eager to enter the US market, there was a considerable amount of work that needed to happen,” said Barnhart. “So we ramped up a number of programs through USAID where we worked with companies on quality control, the products they were producing, their marketing, while helping them create relationships with American importers or other types of companies.”

But most importantly, Barnhart stressed those programs took several years to get up and running and today the United States is the largest export market for Jordan. The volume of trade with the United States has increased by 600-fold, from less than $500 million a year to $3.2 billion in 2016.

The Stumbling Blocks

Fontana believes that having three companies export to the EU is a good start, adding that 11 more currently have the licenses, which means that more companies are going to start exporting soon. “This is picking up,” he said. “But at the same time we are also ready as a European Union to look if there are bottlenecks, if there are particular difficulties that exist and to amend the scheme.”

Fontana and other officials that Venture spoke to agree the crisis that Jordan is currently facing requires immediate change, which is why the EU has engineered programs to further help the private sector grasp the terms of the agreement while also pledging to review some terms that could be hindering its acceleration. “I think that everyday that we spend here with 18 percent unemployment or 30 percent youth unemployment indicates that we don’t have the time,” Fontana stressed. “What is important is what we do. What is clear is that we have all of the friends of Jordan, the EU, the U.S., we all have to work on improving the capacity of the private sector and its development and for this there is no time to lose and no room for complacency.”

According to French Ambassador to Jordan David Bertolotti, there are a number of difficulties that have emerged in the past two years that should be addressed to guarantee better outcomes of the agreement. The first is that for almost two decades the Jordanian manufacturing companies have been quite knowledgeable about the US market, but know so little about the European market which has its specifications—both in terms of norms but also in terms of customers’ preferences. “If you take the textile industry [as an example], the Jordanian textile sector has worked under specific requirements for the US market, mainly sports items manufactured using synthetic fiber. But the European market is different,” said Bertolotti, explaining that the EU market is more oriented towards fashion using natural fibers.

A second set of difficulties, he said, is related to the actual availability of skills within the Syrian refugee population. “Many of them were farmers, not industry workers, so they were not necessarily very much attracted to industry jobs and they didn’t have the right skill sets.”

the dealFontana echoed these difficulties, adding that the contradicting policies in respect to Syrian workers have added complexity to the process. “There is uncertainty about the Syrian labor. And in Jordan there is a policy to decrease the number of foreign labor in the country, for reasons that we understand given the high rate of unemployment,” he said. “But we have been very clear from the beginning that this cannot be applied to the refugees. It would be contradictory if we had the scheme on the one side that creates this additional production activity and additional jobs for Jordanians and Syrians and then at the same time the government decided to reduce the number of foreigners including Syrians.”

However, he added that the government has been cooperating. To date, 100,000 work permits have been issued for Syrian workers, he stressed, but the current need is to clarify the aspect of how to make these two different policies compatible when dealing with the Syrian labor.

In order to help the private sector overcome these and other challenges, the EU has come up with a set of projects. One such project is JADE, which is the Jordanian Action for the Development of Enterprises. Through JADE, the EU is helping small-and-medium sized enterprises understand how the EU market works and how they can improve their products to access this vast market.

Under the program, a team works closely with business organizations like Oasis500, using their knowledge to help these companies step up their quality and their linkages with EU markets.

Not only that, but the EU is also helping these companies find the buyers in the member states through trade fairs and presentation of Jordanian products.

Furthermore, the EU hosts different delegations of potential trade partners, entrepreneurs, and businesspeople from different European countries including Finland and Belgium. It’s all part of efforts to increase the network of contacts between the Jordanian private sector and their European counterparts, stressed Fontana.

Last year, the Ministry of Industry, Trade and Supply launched a how-to guide for Jordanian manufacturers wanting to start exporting to the European Union.

Creating the right skill sets that will enable Jordanian youth to fill the jobs in the textile, IT, or tourism sectors is also a top priority for the EU. “Some Jordanian youth go to university and get a degree that doesn’t help them in the job market. That’s why we are working with the government on vocational training,” said Fontana.

What Lies Ahead

As the officials acknowledged the unsettling difficulties facing the private sector, Bertolotti believes it’s only a matter of time before they start grasping the ins and outs of European trade. “We have to acknowledge the fact that because the European Union is both a very sophisticated market and a very sophisticated trade environment, there are some barriers to entry in terms of quality, taste and marketing, but I really see no reason why Jordanian businesses will not succeed,” he said. “People here have entrepreneurial minds, they are inventive, they’ve been through all sorts of crises and they have tackled the US market successfully so there is no reason they can’t make it in the European market.”

Al Masri, who currently has around 12 customers in Europe, is a good example of this. It took him many years to understand the technical requirements, including a year of sending free samples to potential buyers until the user there was convinced in its quality and started placing orders. He also believes in the power of marketing, which is why they have a representative in several countries to follow up with potential clients, including an office in Spain.

But the rules of origin agreement was of particular importance to his company, which started losing its raw material exporters after they started relocating to other countries outside the EU.

“For us, the compact was an excellent deal that came just in the right time. Without it, our exports to Europe would have shrunk significantly because we wouldn’t have met their terms.