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Iran's Cheap Goods Stifle Iraq Economy

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NAHRWAN, Iraq -- Brick-factory owner Dhary al-Shimary is thinking of calling it quits after 30 years in business, even though Iraq's demand for bricks has never been higher.

"Iranian bricks are invading Iraq," says Mr. Shimary, whose soot-belching factory on the outskirts of this trash-strewn town employs 300 people. "And the government is doing nothing to help us."

From bricks to buses to rice, Iranian imports have poured into markets across war-torn Iraq. The goods are providing Iraqis with many cheap products they otherwise can't afford or make themselves. But they're also undermining local industries that are struggling to compete at a time when job creation is a top priority for both Baghdad and Washington.

Iranian Goods Flood Iraqi Markets

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Gina Chon/The Wall Street Journal

"What are these young men going to do when they lose their jobs here?" Mr. Shimary asks, pointing to a group of workers in their twenties, sitting on the ground at his factory. "If we close, these young people will have to do bad things to support their families."

Iraq's hopes for peace and growth increasingly depend on domestic manufacturers like Mr. Shimary. Until now, Iraqi agriculture and industry have been peripheral to the country's recovery efforts. That's because in recent years, Baghdad funded more than 90% of its state spending with oil revenues, capitalizing on high international prices to bankroll its reconstruction and provide state jobs for hundreds of thousands of Iraqis.

But with oil prices down sharply in the past nine months, Iraq's leaders have slashed the budget repeatedly. The government of Prime Minister Nouri al Maliki says one of its top priorities is to diversify the economy and create private-sector employment. Such new jobs would not only stoke the economy but also prevent a wave of joblessness that could threaten Iraq's fragile security.

U.S. Army Maj. Gen. Michael Oates, head of U.S. troops based in southern Iraq, says that jobs threatened by Iranian goods are a growing concern. "We've got to find a way to turn that around," he says.

Iraqi manufacturers' struggles are in part an unintended consequence of Washington's policies. In the days after the U.S. invaded Iraq in March 2003, the U.S. Coalition Provisional Authority suspended most tariffs and duties for imports, hoping to stoke demand and energize the country's long-closed economy. But with neighboring Iran supporting its domestic industries with generous subsidies and protective tariffs, Iraqi manufacturers say they were left to compete on an uneven playing field.

After international sanctions against Iran in 1979 prevented the country from trading with many overseas partners, Iran learned to make more goods from construction materials to cars cheaply at home. Now, Washington's concerns about Iranian influence over politics in Baghdad are joined by the worry that Iran's massive export machine could threaten entire sectors of the Iraqi economy.

A White House official said the Obama administration is conducting a broad policy review in regards to Tehran. "We're looking toward the future of our relations with Iran," the official said.

An Iranian embassy official said Iranian businesses are helping average Iraqis by providing goods that cost less than similar products on the market. He added that Iran wants to help Iraq in its reconstruction efforts.

Industry's Plight

The plight of Iraq's industries has been largely overshadowed until now. In 2007, Iraq ran a large trade surplus -- its exports amounted to $41.3 billion while its imports reached $5.6 billion. But once oil receipts are stripped out, Iraq's huge trade surplus turns into a deficit: Iraq exported less than $200 million in non-oil products and imported nearly $4 billion.

The imbalance is particularly stark with Iran. Addressing the situation will be a challenge, judging by the experience of the brick factories here.

Though brick-making in Iraq dates to the beginning of urban civilization, it wasn't until the late 1970s that it became a booming industry in Nahrwan, 40 miles east of Baghdad.

Under the regime of Saddam Hussein, entrepreneurs here turned a desolate tract of land outside of town into an expanse of factories where local sand was mixed into bricks and fired hard in cavernous kilns. The government provided a power substation that generated free electricity, built a water-treatment plant nearby and gave the factories free heavy fuel oil for the furnaces. Nahrwan provided the bricks for Saddam's sand-colored palaces and public projects.

Mr. Shimary, who came from a farming family, bought a factory in the mid-1980s. At the industry's height in the 1980s and 1990s, the area's 167 manufacturers each turned out about 60,000 bricks a day, according to the Brick Factory Association of Nahrwan. Iraq's relative isolation, and its closed borders with Iran during the Iran-Iraq war, gave Iraqi brick makers a monopoly.

The 2003 U.S. invasion, and the looting and violence that followed, forced Mr. Shimary and his fellow factory owners to shut down. Sunni insurgents gained sway in the surrounding Diyala province, and Nahrwan's factory complex, which once employed more than 50,000 workers, became a ghost town.

In 2006, local officials persuaded Mr. Shimary and other owners to return, promising stable supplies of fuel and electricity. Mr. Shimary reopened his factory and hired back part of his work force. Later that year, an al Qaeda mortar attack hit the substation that powers the brick factories and knocked out two of three transformers.

In 2007, as part of the surge strategy, the U.S. put a small base in Nahrwan. Aiming to help factory owners boost production, the U.S. military organized dozens of owners into the Brick Factory Association and arranged meetings with the Iraqi central government in Baghdad. The government promised fuel-oil deliveries -- 11 tankers to each factory per month, at government prices of $3,000 to $5,000 apiece.

But factory owners say they've been receiving half or less of their monthly fuel allotments. Their power substation remains a ruin of rusting equipment and cut or disconnected cables. The two transformers damaged in the al Qaeda attack, still missing parts and surrounded by pieces of shrapnel, remain idle. Mr. Shimary says that he and others spend $1,000 or so a day for fuel to run large generators.

Mr. Shimary, who currently employs about 200 workers, says he can make about 40,000 bricks on a good day. But he and other factory owners say erratic fuel and electricity supplies mean there are many bad days. Their bricks have to be baked for 24 hours, they say, and an unanticipated furnace shutdown can ruin a batch.

Proof of this can be seen in Karbala, some 120 miles to the southwest, where contractor Mohammed Baqir points to a pile of broken bricks. "Iraqi bricks used to be famous, and well known for their quality," Mr. Baqir said. "It's sad what has happened to the industry."

Stacks of Iranian Bricks

Nearby stood stacks of Iranian bricks that the contractor was using, along with Iranian marble and Iranian cement, to build a private home. Mr. Baqir said he would prefer to buy Iraqi products but had no incentive to do so. Iranian bricks cost about a third less than Iraqi bricks.

The Iranian government subsidizes its manufacturers' exports in several ways. Tehran offers reduced-price fuel and electricity to homes and enterprises across Iran. It gives tax breaks to Iranian manufacturers and pays its exporters 3% of the value of the goods they send out of the country. Iran also levies import tariffs of up to 150% on inbound goods.

"To export to Iraq is more profitable," says Hassan Sattahee, an Iranian brick-factory owner who has been making sales in Iraq for the past four years. He estimates Iraqi sales account for much of his business's 30% growth since 2003.

To the frustration of the brick-makers in Nahrwan, the Iraqi government, cities and their subcontractors continue to buy Iranian bricks. Earlier this year, the Basra Investment Commission announced a $1.5 billion housing and shopping complex that will be built by an Iranian company using Iranian-made materials. Most of the new schools and municipal buildings in Karbala are made of Iranian bricks.

Land Left Fallow

The experience is similar in industries across Iraq. The country's transportation ministry bought more than 400 buses and trucks from Iran in 2007 and 2008, drawing the ire Iraq's struggling State Company for Automotive Industry. Farmers in Iraq -- long considered the region's breadbasket -- are leaving land fallow as rice, watermelons and tomatoes stream in from Iran. In 2008, for the first time, Iraq became a net food importer, according to its Ministry of Agriculture.

Iraqi industries want subsidies and trade protections, but this will take time. Last year, Iraq's Finance Ministry drafted a customs tariff law, rules that are necessary for Iraq to join the World Trade Organization. But the draft law didn't contain the product-by-product tariff numbers normally included in such regulations, so the ministry had to go back to the drawing board. It could be a year or more before such a law is in place.

Some Iraqis, of course, have benefited since the borders with Iran opened after the 2003 invasion. Iranian pilgrims started flooding into holy Shiite sites in southern Iraq that had been closed to them for decades, boosting local hotels, restaurants, tour operators and other areas of local economies.

Those benefits haven't extended to Nahrwan. Electricity poles, minus the cables, line the road from the town's garbage-strewn market area to the industrial expanse on the outskirts. The sky darkens closer to the factories, and flecks of black ash swirl like a light snow.

Brickworkers earn about $10 a day at the factories here, which still account for more than 30,000 jobs in the area. Many of them house their families in makeshift shacks amid the factories.

Kadhim Hassan Hussein lives here with his five sons, age 7 to 17, who all work with him in a factory, he said. Mr. Hussein said he hasn't been paid in more than two months because his employer hasn't had enough fuel to operate. He said he is running out of savings to support his family. He blames cheap Iranian bricks.

"Iran could not control us militarily so now they are trying to control us by the economy and flooding us with their products," he said.

Joblessness is a mounting concern. Police here say reports of auto theft, robberies and burglaries are up in the past six months. Officials in Washington and Baghdad, meanwhile, fear that unemployed young men could be potential recruits for violent sectarian groups still active across Iraq. A January report by the United Nations and other nongovernmental organizations estimated that among Iraqi males between the ages of 15 and 29, the unemployment rate is 28% and rising.

A worker at another factory, who gave his name only as Riyad, said he used to work for Sunni insurgents. These people, he said, paid him a few hundred dollars per job to launch a mortar or place a roadside bomb to target American troops. But he didn't like the work, he said, and a year ago he jumped at a job at a brick factory. Now that the industry is working at reduced capacity, he is worried about how he will support himself.

"This isn't the greatest job, but at least it's an honest one," he said. "I can tell my family about this job."