Turkey: Qualifying Industrial Zones (QIZs)-Issues and Economic Implications

Turkey: Qualifying Industrial Zones (QIZs)-Issues and Economic Implications

Order Code RS21458
March 12, 2003
CRS Report for Congress
Received through the CRS Web
Turkey: Qualifying Industrial Zones (QIZs)--
Issues and Economic Implications
Mary Jane Bolle
Specialist in International Trade
Foreign Affairs, Defense, and Trade Division
Summary
Before Turkey’s parliament blocked a measure allowing U.S. troops access to
Turkey’s military bases, Congress had been considering trade and aid proposals for
Turkey. One trade proposal, which was passed by the House in the 107th Congress,
would have brought Turkey under the Qualifying Industrial Zone (QIZ)1 tariff reduction
“program,” which was linked to the U.S.-Israel Free Trade Agreement (USIFTA). The
Turkey-QIZ program, while offering some new tariff benefits to Turkey, would have
excluded from tariff and quota benefits textile and apparel products, Turkey’s largest
exports to the United States. The issues may be addressed again in the 108th Congress.
In addition to the above proposal, other options include: (1) exploring other possible
textile and apparel tariff treatment, (2) a free trade agreement, and (3) a short-term
package of textile and apparel benefits for Turkey. This report will be updated as events
warrant.
Turkey is arguably a pivotal country at a pivotal time in history. Geographically, it
is both a land bridge between Europe and the Middle East, and Iraq’s northern neighbor.
(See map, figure 1.) It is a country connected culturally and religiously to the Middle
East, and politically and economically (as a Muslim secular democracy) to Europe and the
West. And it is a country the United States wants to engage to help anchor Western-style
economic stability in the Middle East.
Turkey is also a country beset with domestic challenges. Its coalition government
represents three different parties. It has a market economy with a large state-controlled
1 H.R. 5385, the Miscellaneous Trade and Technical Corrections Act of 2002 incorporated the
language of bipartisan bills S. 2663 (Breaux, Grassley, McCain et al), and H.R. 5002 (Crane
Wexler, Armey, Lantos, Sessions, et al). The Senate did not act on H.R. 5385 by the end of the
107th Congress. Similar legislation (no number yet) was marked up by the Senate Finance
Committee on February 26, 2003, with the Turkey-QIZ proposal omitted. These zones are
sometimes also referred to as qualified industrial zones.
Congressional Research Service ˜ The Library of Congress

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economic sector struggling to stabilize, and is heavily dependent on trade. Combined
exports ($35 billion) and imports ($45 billion) equal roughly half of Turkey’s 2001 GNP
of about $150 billion ( State Department figures). Turkey’s economy has suffered shocks
in recent years from the effects of the Persian-Gulf War of 1991, huge foreign debt, high
inflation, low foreign direct investment, depreciation of its currency, and severe
earthquakes.2
The Turkey-QIZ Legislation
Aims of the Legislation
Legislation to include Turkey in the QIZ tariff-reduction program (see footnote 1 for
details on the legislation, and text box 1 for QIZ definition) was passed by the House in
the 107th Congress. The Turkey-QIZ legislation had the strong support of the
Administration, which numbered among its objectives: (1) rewarding Turkey for its
support in the Afghanistan war (Turkey commanded the International Security Assistance
Force in Afghanistan) and any Figure 1. Map of Turkey, Israel, Jordan, and
potential war with Iraq; (2)
Iraq
enhancing trade between Turkey
and Israel; and (3) bolstering the
economy of Turkey by enabling it
to attract more foreign investment
and diversify its exports so it can
contribute to greater regional
stability.3 At the same time,
under continuing pressure from
the U.S. domestic textile, apparel,
and leather production industries,
the Administration excluded
Turkey from QIZ benefits in the
industries where Turkey could
likely benefit most in the short
run.
QIZ Proposals
The QIZ legislation would have done two things. First, it would have added Turkey
to the list of countries (Jordan and Egypt) eligible to establish QIZs with Israel. The QIZ
concept was a 1996 extension of the U.S.- Israel Free Trade Agreement (USIFTA) and
was designed to promote Middle-East peace, political stability, and economic
2 Turkey’s economy is still based largely on agriculture (40% of all workers), textiles, and
apparel (its two greatest exports). Its labor force is mostly literate (85%). Turkey’s population
has a standard of living about one-sixth that of the United States. Source: CIA: The world
Factbook 2002, DRI-WEFA Country Outlook, 2001, and OECD Economic Outlook 2001. For
background on Turkey, see Turkey: Issues for U.S. Policy, by Carol Migdalovitz, RL31429.
3 Remarks by Senator Breaux for himself, Sen. Grassley, and Sen. McCain introducing S. 2663,
in the Congressional Record, June 20, 2002, p. 5860 and 5861.

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development through economic partnership with Israel. Specifically, the 1996 amendment
which created the QIZ program authorized the President to exempt from customs duty
those articles imported into the United States that are made in the West Bank, Gaza Strip,
or a QIZ, meeting specific “rules of origin” requirements (enumerated in text box 1
below). The amendment further defined QIZ as any area that: (1) encompasses portions
of Israel and Jordan or Israel and Egypt, and (2) has been so designated by both the local
(i.e., country) authority and the U.S. Trade Representative. 4
Text Box 1. What is a QIZ?
QIZs are a specific type of free trade zone. Other examples are maquiladoras in Mexico, and special
economic zones in China. Free trade zones, of which there are about 800 world-wide, employing more
than 24 million workers, are typically industrial parks housing manufacturing operations built with
foreign direct investment – typically by multinational corporations. Trade zones simplify cooperative
production between countries because they are fiscally outside the customs territory of a country. This
means that for raw materials flowing into and goods moving out of zones, customs procedures are
streamlined and tariffs do not apply until the goods formally enter a country as imports for consumption.

QIZs are distinguished from other trade zones as follows: Trade zones in general: (a) are stand-alone
entities (not directly connected to other countries); (b) produce for export to any country; and (c)
operate solely under the authority of and conditions determined by the host government. QIZs,
however: (a) are like a three-legged stool, with each leg representing a producing country: Israel, the
United States, and another Middle East country, linked together by the “seat” which is the United States;
(b) produce goods solely for export to the United States; and (c) operate under both the authority of the
host countries and the oversight authority of the United States, which determines conditions for and
authorizes tariff relief.
The mechanism of QIZ establishment, production, and export is as follows:
Establishment. Managers of publicly or privately owned industrial parks in an authorized country
apply to the U.S. Trade Representative (USTR) for QIZ status. The QIZ (tariff benefit) designation (plus
tax and other benefits typically offered by the host country) attracts manufacturers.
Production. These manufacturers must submit for approval, detailed production information to a
Committee composed of government officials from Israel and other QIZ partner governments. This
information is to demonstrate that the costs of materials and labor of goods produced meet U.S. “rules
of origin” requirements which are as follows: (1) The manufactured product must contain both Israeli
and Turkish content; (2) must be imported directly from Israel, the West Bank, the Gaza Strip, or a QIZ,
and (3) the appraised value (cost content plus direct cost of processing operations) must include 35%
“local value content” from Israel and Turkey; of this 35%, 15 percentage points (slightly less than one-
half) may be in U.S. imports.
Export. Once the product is completed, the shipper and/or importer may put an “N” before the
product Harmonized Tariff System (HTS) number on the customs invoice. This tells the U.S. Customs
Service that the imported goods come from a QIZ and are eligible for tariff-free and quota-free status.
Second, the QIZ bill would have added restrictions to participation by Turkey that
do not apply to participation by any other members. Specifically, the QIZ legislation
would have prohibited tariff reductions (and consequently quota removals from linkage
to USIFTA) on eight item groups made in Turkey-Israel QIZs: textiles, apparel, footwear,
handbags, luggage, flat goods (e.g., wallets), work gloves, leather wearing apparel, and
4 The QIZ concept was first authorized in a 1996 amendment (Sec. 9 of P.L. 104-234) to the
U.S.-Israel Free Trade Area Implementation Act of 1985 (USIFTA, P.L. 99-47). Rules of origin
are defined in P.L. 104-234 (19 U.S.C. 2112 note).

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any other articles the President determines to be “import sensitive.” For these categories,
Turkey would have retained its existing duty rates (normal or preferential) under the
Generalized System of Preferences (GSP) and its quota limits under the Agreement on
Textiles and Clothing, explained below. In addition, the President could have excluded
from tariff reductions any items he determined to be “import sensitive.”
Implications
Turkey’s Reaction to the Proposal
The QIZ proposal was not as favorable as Turkey had hoped. Turkey has reportedly
pressed for more market access for textiles, (reduction of tariffs and elimination or
expansion of quotas) and movement toward a free trade agreement. Commenting on the
QIZ proposal, a Turkish economic source indicated that benefits to Turkey from the zone
program would be “not very much.”5 This may have played a role in Turkey’s subsequent
request for additional aid in return for allowing the United States to station more military
troops in Turkish bases, in order to open a northern front against Iraq.6
How Useful Would the QIZ Legislation Have Been for Turkey?
The short-term usefulness of any QIZ legislation for Turkey would have depended
largely on the treatment of textiles and apparel. Framers of the QIZ legislation argued that
the program would have helped Turkey in the long run, by promoting development of its
high tech industry and wean itself from its traditional (textile and apparel) exports.
Supporters of the Turkey QIZ legislation also pointed to Jordan’s success in expanding
its exports under the QIZ program. Jordan’s QIZ exports to the United States began only
in late 1999 (at $159,000) and three years later, totaled $369.5 million. Jordan’s QIZ
exports are concentrated in two out of the 10 categories of apparel, and accounted for
90% of its total exports to the United States of $412 million in 2002.
To benefit in the short run from expanded investment and exports, Turkey would
have had to overcome three key obstacles. First, it would have had to overcome the fact
that 49% of its exports, (with tariffs averaging 13.7%) are ineligible for tariff reduction
and quota removal (see table 1).7 Second, Turkey would have had to expand the
remaining 51% of its eligible exports, (with tariffs averaging 3.5%). “High tech” products
for which the United States seeks to encourage expansion are included in this group. If
“high tech” is defined as “electronics,” it accounted for only 1.3% of Turkey’s exports in
2002 (with tariffs averaging 3%). Third, potential investors in eligible industries in
5 Administration Backs Bill to Create Free Trade Zones for Turkey, Inside U.S. Trade, July 5,
2002.
6 The State Department Congressional Budget Justifications for Foreign Operations for FY 2003
estimates $20.9 million in aid to Turkey. The Administration has also reportedly offered Turkey
a “generous” package of economic and military aid, totaling several billion dollars, in return for
its cooperation against Iraq.
7 Calculation: duties on all goods imported from Turkey for which QIZ tariff reductions would
apply were divided by the total dutiable value. In 2002, U.S. exports to Turkey were $3.1 billion
(unchanged from 2001); imports from Turkey were $3.5 billion (up 15%).

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Turkey could be discouraged by both economic interruptions of a war with Iraq and its
aftermath, and the challenges of transporting components between the non-contiguous
QIZ partner states (Israel and Turkey) in order to adhere to QIZ rules of origin
requirements.8
Table 1. U.S. Average Tariff Rates on Key Eligible and Non-Eligible
(for Tariff Relief) Imports from Turkey, 2002
Import
Share of Total
Effective
HTSUS
Value
U.S. Imports from
Tariff
Number
Item
$(millions)
Turkey %
Rate %
Ineligible Imports
61
Apparel -knitted/crocheted
684
19
15.7
62
Apparel - not knitted
505
14
15.9
63
Textile articles
278
8
9.2
52
Cotton yarns
73
2
7.6
54
Manmade yarns
58
2
13.3
Other
128
4
Sub-Total /Average
1,726
49
13.7
Eligible Imports
72
Iron/steel
281
8
2.4
71
Pearls/ semi- and precious stones
199
6
5.5
27
Mineral fuels
185
5
1.1
24
Tobacco goods
157
4
10.9
84
Nuclear reactor parts
147
4
3.3
Other
825
23
Sub-Total/Average
1,794
51
3.5
Grand Total
3,520
100*
10.5
Data Source: CRS Calculations on U.S. International Trade Administration data.
*Numbers may not total 100% due to rounding.
Status of the U.S. Textile and Apparel Industry
As noted above, the QIZ legislation would not apply to textiles, apparel and leather,
or other goods the President determines to be “import sensitive.” Thus, those industries
in the United States are not likely to be adversely impacted in the short run. The impact
on other U.S. industries, however, is unclear.9
What would have been the impact on the U.S. economy if Turkey’s textile, apparel
and leather industries were given greater access to it? In these three industries combined,
U.S. employment has suffered large declines of about 38%, or 680,000 jobs (declining
from about 1.8 million to 1.1 million jobs) between 1993 and 2001. Much of this job loss
(23 of the 38 percentage points, or roughly 157,000 jobs)10 can be attributed to increased
imports from or plant relocations to Mexico or Canada since the North American Free
Trade Agreement (NAFTA) went into effect. The probable impact of lowering tariffs and
8 The stock of U.S. foreign direct investment in Turkey was $1.2 billion in 2001, compared with
$4.1 billion for Israel and only $14 million in Jordan.
9 Also, the U.S. Customs collected less that $28 million in revenues from Turkey on goods that
were eligible, as compared with $234 million on goods that were ineligible for tariff reduction.
10 These figures update p. 8 of NAFTA: Estimates of Job Effects and Industry Trade Trends After
5 ½ Years, by Mary Jane Bolle, CRS Report 98-783.

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quotas for Turkey even on these ineligible items could be significant, but still small
relative to other U.S. imports. This is because Turkey, with a 2001 U.S. textile, apparel,
and leather export total of $1.5 billion, ranked as the U.S.’s 17th supplier of these goods,
compared to China, the first supplier with $19 billion and Mexico, the second supplier
with $10 billion. Any trade increase from Turkey in these industries could represent a
trade diversion from other countries.
A potentially greater impact on U.S. textile and apparel industries than relaxing QIZ
requirements on Turkey is expected to come in January 1, 2005. This is when the
Agreement on Textiles and Clothing (the 1995 agreement negotiated through the WTO
as a successor to the 1974 Multifiber Arrangement) which regulates quotas, is scheduled
to expire. At that point, a flood of new textile, apparel, and leather imports from WTO
countries could enter the United States quota-free from nations throughout the world.
Other Alternatives
At least two other trade proposals have been mentioned as alternatives or
supplements to the QIZ program for Turkey. First, is a possible free trade agreement
(FTA) with Turkey, (referred to earlier) which was broached by envoys from Turkey
seeking to upgrade their economic relationship, enhance trade and investment ties, and
gain support for Turkey’s economic reform program (see footnote 5). At least three
considerations would affect the “if” and “when” of such negotiations: the political and
economic merits of such a proposal, the already full schedule of U.S. Trade
Representative (USTR) Zoellick, and concerns of U.S. states.
Second, in February, 2003 the USTR reportedly floated an additional congressional
“package” of textile and apparel trade benefits, separate from the QIZ proposal, to reward
Turkey for stationing U.S. military personnel during a likely war with Iraq.11 This
package would, among other things: (1) offer Turkey duty-free and quota-free access to
the United States for apparel made with U.S. fabric and yarn; and (2) allow the U.S.
military to purchase certain textile products from Turkey for a year, during which the
Berry Amendment would be waived and Turkey would be exempt from the “Buy
American” Act (providing preference for American goods in government purchases).12
This proposal might have been more attractive for Turkey and shown U.S. concern for the
domestic textile and apparel industry; however, it might also have encroached on the
Administration’s commitment to minimize trade effects on the U.S. textile industry.13
11 USTR Approaches Congress for Support on Turkey Textile Benefits. Inside U.S. Trade,
February 21, 2003. This proposal is not currently available on the USTR website.
12 41 U.S.C. Sec. 10a-10d. See The Buy American Act: Requiring Government Procurements to
Come from Domestic Sources, by John Luckey, CRS Report 97-765.
13 “Fast-track” refers to renewed presidential authority granted in P.L. 107-210, Aug. 6, 2002,
to negotiate trade agreements on a “fast-track” basis – without amendment and with limited
debate.