The U.S.-Israel Free Trade Agreement: Israel Keeps Up Barriers, U.S. Companies Lose Sales

By Colin MacKinnon

As part of its annual review of foreign trade barriers, the U.S. Trade Representative (USTR) has issued a sharp report detailing Israeli reluctance to implement the U.S.-Israeli Free Trade Area Agreement. The FTAA, signed in 1985, was supposed to reduce trade barriers between the two countries. And, in fact, out-and-out tariffs on U.S. goods going to Israel have been eliminated, as have U.S. tariffs on Israeli goods.

But Israel maintains a slew of non-tariff barriers that treat U.S. goods differently from Israeli goods, and getting these barriers eliminated has been a glacially slow process. These barriers, says USTR, are costing American companies as much as $500 million a year in lost sales and unevenly applied fees. The worst area of loss is software, videos and CDs, where Israeli piracy coupled with lax Israeli law enforcement is costing U.S. companies up to $200 million a year.

Thanks partly to such Israeli trade practices, the U.S. trade balance with Israel is chronically in deficit, a deficit that is constantly growing. Last year it was $2.2 billion, up from $1.7 billion the year before. Total U.S. exports to Israel in 1999 were $7.7 billion, up 10.3 percent from 1998. The U.S. imported $9.9 billion worth of goods in 1999, up 14.4 percent from 1998.

What sorts of barriers do the Israelis use other than tariffs? The range is both wide and surprising.

Take product standards. According to the USTR, Israel enforces standards on domestic products in a “spotty” manner, but not on imports. That means that Israeli goods can elude standards enforcement, while foreign goods may face unfairly tough requirements. Sometimes simply the way standards are written gives a leg up to local manufacturers. In 1990 Israel promised to harmonize its standards treatment for all goods, but 10 years later still hasn’t done so. So far the Knesset has voted no new funds for a systematic effort to overhaul the system.

Then there is the matter of taxation. Israel throws various taxes on goods, foreign and domestic, but applies them unevenly. The most egregious example is the country’s system of purchase taxes. Israel puts a purchase tax ranging from 25 to 95 percent on some—not all—goods sold in the country. Automobiles, refrigerators, cigarettes and alcoholic beverages are typical items so taxed.

The U.S. trade balance with Israel is chronically in deficit.

To calculate the purchase tax, Israel uses a system known as “TAMA” to assign a value to an imported item for taxation. Theoretically TAMA is an attempt to approximate the local wholesale value. But how Israeli officials go about calculating TAMA is highly opaque and seems to vary from industry to industry and product to product. The net result, though, is often to put a higher valuation, and hence higher taxes, on imported goods than on those that are domestically produced.

And Israel can apply purchase taxes to foreign products even when no such products are produced locally. Result: an import duty under another name.

Yet another area of discrimination is wharfage and port fees. The Israelis put a percentage charge on goods going into and out of the country to pay for port costs. Fair enough. But it’s 1.5 percent for imports and 0.2 percent for exports. Which is to say, foreign goods subsidize Israeli exports. Israel promised to equalize these fees in 1995. It is now 2000 and Israel still has not done so.

International long distance fees are another problem area. The main Israeli telecommunications carrier, Bezeq, puts a discriminatory charge on calls to North America, higher than on traffic to any other part of the world. These fees are supposed to be phased out in two years. We’ll see.

The one area where official, direct tariffs and quotas remain is agricultural trade, which is covered by a separate agreement signed by the U.S. and Israel in 1995. Under this agreement the Israeli market is supposed to open up gradually to U.S. food and agricultural products. But there has been little progress here.

According to USTR, the Israelis maintain “extensive restrictions on food and agricultural imports”—import bans, quotas, prohibitive tariffs and the like—in order to protect the country’s politically powerful agricultural interests.

High Levies

To calculate the levies it puts on agricultural imports, the Israeli government—as it does with TAMA—estimates the domestic costs in Israel of what it would cost to produce the foreign food product and, on the basis of that estimate, throws a tax on the import. The taxes can be very high, and outsiders are clueless as to how the taxes are calculated. Curiously, despite a 28 percent decline in the shekel against the dollar that began in 1996, the imposed reference prices, dreamed up by bureaucrats, have gone up 20 percent since that year. How come?

Furthermore, some imports—processed foods, modified starches, pasta, dried fish and the like—are treated as agricultural goods and have levies put on them when under agreements with the U.S. they should not be. Israel taxes such goods in violation of the FTAA.

U.S. meat exports face especially stiff resistance since Israel’s “Meat and Meat Products Import Law” in effect forbids the import of any meat or meat product not carrying a kashrut certificate issued by Israel’s Chief Rabbinate. But Israel allows domestic production of non-kosher products like pork, shellfish and non-kosher beef. This, too, is a direct violation of the FTAA, since restrictions based on religion are supposed to be implemented in accord with national treatment.

Let us not forget the problem of government procurement. Government agencies and corporations “make extensive use of selective tendering procedures,” according to USTR. That is, they discriminate against foreign companies. The USTR singles out for particular criticism in this regard the Ministry of Defense, an entity that, shall we say, has gotten a bit of aid from the U.S.

Readers who want to see the full report, National Trade Estimate Report on Foreign Trade Barriers, can access it on the Internet at <http://www.ustr.gov/reports/>.

Colin MacKinnon is contributing editor to the Washington, DC-based Middle East Executive Reports.