Dressed for success: Trade deals make the garment segment a key contributor to exports

Clothing manufacturers in the kingdom experienced strong growth in 2011. As the country’s most economically important export, they contributed JD708m ($994.9m) to the year’s total national exports, 14.8% of the total. The main driver behind this growth is the US market, which received 93% of Jordanian clothes exports in the first 11 months of 2011. Clothes exporters had preferential access to the US after the full implementation of a bilateral free trade agreement (FTA) at the start of 2010. The FTA came as a much-needed boost to the sector following difficult years in 2008 and 2009, in which clothes exports decreased year-on-year by 15% and 17.8%, respectively. By contrast, with the benefit of the FTA – which allows a wide range of Jordanian goods to enter the US tax-free – exports began to increase again, by 5.7% in 2010 and then 13.8% in 2011.

GATEWAY: The advantages of the FTA have made Jordan more attractive to foreign investors. In 2011 Indian manufacturer Tusker Apparel expanded its operations from Bahrain to Jordan, setting up a new factory in the Duleil Industrial Park. “The company was encouraged by US buyers to take advantage of our tax-free export regime to the US,” Mohammad Khourma, the chairman of the Jordan Garments, Accessories and Textiles Exporters’ Association (JGATE), told OBG.

The US is not the only country to be breaking down trade barriers with Jordan. An FTA between Turkey and Jordan has been effective since March 2011. “Some industries in Jordan, such as producers of food and dairy products, see this FTA as a threat,” Khourma said. “They think it will expose them to competition from a well-developed Turkish market. The garments industry sees it as an opportunity.” Turkish clothes manufacturers are strong performers, but without the benefits of an FTA with the US, some Turkish investors have started to use Jordan as a gateway to the US, Khourma said.

An FTA with Canada is also expected, though it is currently pending ratification by the Canadian parliament. Canada could provide a profitable outlet for clothes, among other goods. “We believe that Jordanian manufacturers can capitalise on the fact that Canadian imports are in many respects a replica of US imports,” said Loay Sehwail, the director of industrial development at the Ministry of Industry and Trade (MIT).

OFF LIMITS: The EU, on the other hand, is unavailable to Jordanian clothes manufacturers. “We would love to have an opening in Europe, but the continent’s rules of origin remain an obstacle,” Khourma said. The EU only imports clothes from manufacturers which conform to the rule of double transformation, under which a manufacturer first transforms fibres into fabric and then creates clothes out of that fabric. With a few exceptions, Jordan cannot support the production of fabric, due to prohibitive costs and the limited availability of water for dyeing. The vast majority are single transformers, importing ready-made fabric which they then fashion into clothes for export. An EU initiative similar to the US-backed Qualifying Investment Zones (QIZs) never got off the ground, Khourma added. QIZs permit tax-free entry into the US by Jordanian goods – mostly garments – provided that 8% of the content is sourced from Israel, but are becoming less important now that the FTA is fully implemented (see analysis).

VALUE ADDED: The economic importance of Jordanian garments is also manifest in the value added to the local economy. A November 2011 study conducted by Better Work Jordan (BWJ) – an internationally backed non-profit initiative which aims to improve labour standards and create decent work opportunities in the Jordanian garments sector – calculated that the total domestic value added is 36.9% of the apparel industry’s output, or $369m of the roughly $1bn worth of clothes exports in 2011. This added value equates to 13% of Jordanian GDP in 2011.

The clothing sector employs some 16,000 Jordanians, although the large number of foreign workers from Bangladesh, India, Sri Lanka and elsewhere – estimated at 27,000 in 2012 – is seen as cause for concern. “There are fewer Jordanians in the industry today than a decade ago,” said Khourma, adding that the number of nationals employed in the QIZs had fallen from around 11,000 to approximately 8000.

Turnover of male employees has been particularly high in recent years, as such work is not considered by many Jordanian men to be a respectable long-term career choice. The men use the work to gain key skills for a couple of years, but then drop out to find better-paid industrial jobs. In fact, 65% of the workforce is female, and the trend definitely seems to be moving away from male employment. Such a gender shift is not in itself bad news, of course, insofar as it allows women to play a more important role in the economy.

The public and private sectors are taking a number of steps to increase the number of Jordanian employees in the sector. In December 2011 16 garment manufacturers affiliated with JGATE signed an agreement with the Ministry of Labour, whereby the ministry will partially subsidise the salaries of newly recruited Jordanians for one year and the company will guarantee employment for a further two years. The scheme will benefit 1683 Jordanians, according to Khourma.

PARTNERSHIPS: This latest initiative comes on the back of another public-private partnership aimed at boosting employment opportunities for Jordanians. Manufacturers operating in an industrial estate will be encouraged to set up satellite factories in impoverished pockets of the country. “Rather than expecting lower-income groups to shell out considerable expense on travelling to industrial zones to find employment, we have brought the industry to them,” Khourma said. Under the agreement, the government provides the premises for a new factory and subsidies for the salaries of new recruits, while the private sector brings the assets, technology and know-how. With the first satellite established in 2009, there are now five factories providing employment to some 2000 Jordanian nationals, around 80% of whom are women.

The country has also brought improvement in the working conditions of local and foreign nationals in the garments sector. A March 2011 report by BWJ praised the amendment made to the labour law in July 2010, which eliminated language that forbids foreign workers from joining trade unions.

Working conditions in the factories also appear to be showing signs of improvement. While health, safety and excessive working hours remain a real concern, BWJ’s March 2012 report found that 14 of the 16 factories that have been assessed more than once over the past three years have shown “measurable improvement in their overall compliance effort”.

COST INCREASES: Perhaps the greatest obstacle for the sector is that of increased production costs and, in particular, employee wages. The government’s proposal in 2011 to increase the national minimum wage to JD190 ($267) per month was seen by many as a threat to the sector. Following considerable debate, JGATE managed to obtain a partial exemption for the garment sector. “We had already made contracts up to September 2012 based on a minimum wage of JD150 ($211), so it would have been impossible for many manufacturers to absorb the costs of such a large increase,” Khourma said. The General Trade Union for workers in the industry argued, however, that an exemption would discourage Jordanians from working in the sector.

In any case, the compromise solution has only postponed the higher costs to employers: the minimum wage for workers in the sector will be JD170 ($239) for 2012, to be raised to the full JD190 ($267) in 2013. Wage increases come at the same time as rising costs of energy and living expenses for migrant workers, as well as limited lending from banks.

“The banks run a profitable business; they need to reduce their interest rates in order to encourage SME growth,” said Khourma. On the other hand, a 2011 World Bank publication found that Jordan has offered cheaper labour wages in the garments sector than many of its competitors, including Mexico, Honduras, the Dominican Republic, Turkey, Morocco and Tunisia.

BUREAUCRATIC OBSTACLES: Investors in the sector may also be deterred by occasional complaints of unnecessary red tape. In early 2010, for example, Sanal Kumar, the owner of the largest clothes exporter in the country, Classic Fashion Apparel Industry Company, said that the Ministry of Labour could make it easier for investors to obtain Jordanian and foreign labour, claiming that the ministry took too long to approve permits for workers. Kumar said that ability to acquire work permits “all depends on the government’s approach toward the industry”. According to Khourma, however, the ministry is generally understanding of the fact that local manpower is difficult to secure and tends to allow prospective investors to recruit around 70% of their required workforce from overseas.

In the face of such difficulties, however, Jordan’s garment sector continues to perform well. “In spite of all the challenges, I feel fairly optimistic towards the coming years,” said Khourma. With new FTAs coming into effect and higher levels of trade with the US on the horizon, clothing exports should continue to contribute significantly to GDP and clothing manufacturers are expected to enjoy continued growth in the medium term.

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The Report: Jordan 2012

Industry and Retail chapter from The Report: Jordan 2012