In 2008, after kicking around the idea for a couple of years, the US formally proposed to create Reconstruction Opportunity Zones (ROZs) in remote parts of Pakistan (FATA, NWFP, earthquake affected areas of Kashmir, a part of Balochistan province) and all of Afghanistan. The idea was modeled on the Qualified Industrial Zones (QIZ) preferential free trade agreement set up to help forge a liberal-economic peace between Israel, the Palestinian Territories, and the neighboring Arab states.

QIZ

The 2004 Egyptian-Israeli QIZ agreement, which I researched extensively while I was teaching at the American University in Cairo, did spark some cooperative ventures, particularly in the textile industry. However, the agreement was riddled with problems and often the subject of bitter complaints particularly from Egyptian merchants who felt they were being overcharged for raw materials by their Israeli counterparts. The Egyptian general public was not highly supportive (and in some quarters there was active hostility) of the QIZ agreement; although there were a few protests by workers whose factories were excluded from the agreements to be allowed into the agreement.

The way these preferential free trade agreements (PFTAs) work is that a certain percentage of the specified goods produced in a designated area must include value added by country X and/or country Y before it will be granted duty free access to the United States. These are technically non-reciprocal agreements, so while country X and/or country Y can export duty free to the US, the US may not export items duty free to those countries. (It should be noted though that Congress added provisions to the ROZ bill such that participating countries must be moving toward a market economy, protecting intellectual property, and removing trade barriers against the US as certified by the US President.) Despite the label “preferential free trade agreement,” these are not free trade agreements strictly speaking, in fact they may create perverse and distortionary incentives to use inputs from parties to the agreement rather than searching for the cheapest global supplier of an input.

In the Egyptian-Israeli case, the agreement stipulated that goods needed to contain at least 11.7% Israeli components and 11.7% Egyptian components in order to gain duty free access to the US. A joint commission was set up to monitor compliance. While the QIZs did spark a modest boost in exports and help to partially break the taboo against doing business with Israel, the Egyptian government viewed the agreement primarily through an economic rather than a political lens. Hence, Egypt did not see the agreement as a mechanism to help thaw the Cold Peace as the Americans had hoped. Egypt resisted opportunities to allow the trade agreement to help foster greater social links between its citizens and Israel. And as Israel’s relations with Hamas and Hezbollah worsened, the opportunity for thawing the Cold Peace receded…

ROZ

Like the QIZ, the ROZ requires that 35% of the value of the final products produced in the ROZ must be from a SAARC (South Asian Association for Regional Cooperation) member country to be eligible for duty-free export status to the United States (until the year 2023). In other words, the ROZ cannot merely be used as a front by non-South Asian countries to pry open US markets. The agreement is mainly designed to assist manufacturers of textiles, leather, carpets, marble, furniture, etc. According to the Congressional Research Service, those manufacturers would see tariffs reduced from an average of 8% to 0%. Apparel manufacturers, who pay an average tariff of 15%, would generally not benefit from this agreement.

Unlike the QIZ agreement, however, there is no joint-production provision. So Pakistani manufacturers are not being asked to work with Afghan suppliers or vice versa.

The official stated aim of the ROZ is to spur economic development and create jobs in areas rife with Taliban insurgents. The logic is that economic opportunities might help to curb some of the financial lure of fighting for the Taliban and thus help the US military to hold territory it has cleared of insurgents. The agreement is feasible because neither Afghanistan nor Pakistan is a significant trade partner for the US (combined exports and imports from each country is less than 1% of US total trade).

Stalemate

Unfortunately for South Asian businessmen, the ROZ idea has been idling in the US Congress for over a year. The House passed a bill which included the ROZs last summer, but the Senate approved an aid bill for Pakistan (S. 1707) that did not include the ROZ language. The Republican party is opposed to the labor protection measures added to the bill by House Democrats. The fear among Republicans is that this piece of legislation may set a precedent for adding similar labor protection provisions in other preferential free trade agreements. Naturally, pro-labor Democrats do not see a reason to allow duty free imports that might compete with products produced by union workers in the US. Beneath the ideological rhetoric, there are also some remaining protectionist concerns for America’s dying textile (and apparel) industry. Although the ROZ concept was part of the Obama’s administration’s Af-Pak policy (March 2009), the White House has not apparently prioritized overcoming this deadlock in the Senate.

Of course, even if the ROZ provisions were passed by the Senate tomorrow, Afghanistan and the relevant parts of Pakistan are still active battlefields with a raging insurgency. Thus, one has to question the actual intention and design of the legislation. The notion that a reconstruction zone must be located in remote parts of Pakistan in order to generate employment within those regions is questionable since labor is mobile and sending home remittance income is a commonplace practice throughout South Asia. One could easily use Pakistan’s existing textile plants and encourage laborers from FATA and NWFP (now called Khyber-Pakhtunkhwa) to migrate to those areas. This would create jobs faster and thus make a greater impact on the lives of people in the border areas.

Locating ROZ’s in remote areas rather than port cities also hinders the ability of the manufacturers to rapidly export to the US market. Some of these problems, particularly for landlocked Afghanistan, may be made easier if the 2010 Afghanistan-Pakistan Tranist Trade Agreement (APTTA – see previous post) is actualized.

The addition of labor protection measures to the ROZ bill may be superfluous. American and European private firms have been quite willing in recent years to conduct their own inspections of labor conditions among contractors in order to avoid embarrassing publicity and activist campaigns. Similarly, the requirement that Afghanistan and Pakistan make good faith efforts to protect US intellectual property rights is a poor misallocation of priorities and resources when one is attempting to spur development in highly impoverished countries.

One must also question the narrow scope of the agreement. If the Congressional Research Service is correct, apparel manufacturers are all generally unlikely to benefit from the ROZ scheme. While the ROZ does extend the Generalized System of Preferences to include textiles, it does not go far enough to encourage some of the types of economic activity which South Asian manufacturers could capitalize upon. During the Cold War, the US prioritized its security over economic self-interest and extended generous access to its markets for allied economies in East Asia (Japan, South Korea, Taiwan). Certainly, if the US is interested in actually spurring economic development as a means to enhance its own national security, then it should be willing to sacrifice some domestic jobs in sunset industries for this purpose.

What the ROZ program seems to reveal is that American policymakers are mainly interested in creating the appearance of a comprehensive Af-Pak strategy that goes beyond the massive investment in the military occupation and counter-insurgency campaign. However, there is very little political will to make the sacrifices and compromises necessary to actually spur rapid economic development if it comes at the expense of American jobs. This may be an indication that despite the general rhetoric to the contrary, American lawmakers do not believe that an unstable and economically underdeveoped Af-Pak region poses a serious threat to US national security. Either that or they do believe that the region is “the most dangerous place on Earth” but they cannot overcome stale ideological debates and creatively design an ROZ scheme that would bring rapid and tangible economic benefits to Afghanistan and Pakistan.

[Cross-posted from my Afghan Notebook]