Israel: South Africa's Springboard to World Markets

By Jane Hunter

Israel has turned its unique preferential trade privileges with both the United States and the European Economic Community into a "springboard" into world markets for South African goods. Although Israel has long served as a conduit through which South African products reach the U.S., the Free Trade Act, which went into force in September 1985 and which provides Israeli goods duty free access, will greatly encourage this Israeli practice.

Since 1976, when they signed a series of agreements that laid the basis for their current high level of military, technological and economic cooperation, Tel Aviv and Pretoria have been cooperating to use Israel as an entreport, or "springboard" into the U.S. and the European Economic Community (EEC), into which Israel also has free trade access covering industrial products.

To "springboard" his products a South African industrialist need only establish a business in Israel or go into a partnership with an Israeli concern. The South African-Israeli business then imports raw materials or semi-finished goods from South Africa, where the apartheid system of racial segregation keeps wages among the lowest in the world. In Israel, in compliance with international trade laws, a required minimum of 35 percent local content is added to the South African goods and the final product is packaged, labeled and marketed as Israeli. Israel's status as the only nation in the world enjoying FTA privileges with both Europe and the United States then enables South African products to elude boycott barriers. There are many examples. Long before passage of the U.S. Free Trade agreement with Israel, in the late 1970s, the Financial Mail of Johannesburg reported that Transvaal Mattress Company was linked with Greenstein and Rosen in Israel, and Israel's Muenster Foods was incorporating into its own exports three South African brands—Honey Crunch, Epol and Vital.

Israel's powerful Elron group (traded on the over-the-counter New York exchange) joined with Control Logic, owned by Anglo-American, a private holding company of the South African Oppenheimer family. The offspring, Conlog, exported electronics products to the U.S. and Europe.

ISCOR, South Africa's state-owned steel company, is 49 percent owner of Iskoor, which has a number of steel plants in Israel. The other 51 percent is held by Koor, a giant company owned by Histadrut, Israel's labor federation. Iskoor brings iron and semi-finished steel from South Africa to Israel and then exports manufactured items such as heating units to the U.S. and the EEC. Koor is also among the leading Israeli investors in South Africa.

Over the years, the South African government has relaxed its normally stringent currency regulations to allow its nationals to invest in Israel. Israel, in turn, has offered South African investors liberal start-up concessions on loans, taxes and capital goods.

In 1977, a travelling seminar, "Israel: Crossroad of International Trade," was presented to South African audiences to promote investment in Israeli companies offering to "springboard" exports to Western markets. In 1978 chambers of commerce in both Israel and South Africa began a systematic examination of the prospects for such trade.

In June, 1985 an Israeli entrepreneur informed the South African press that he would act as a middle man in a plan "to add value to South African goods and re-export them duty-free to the European and American markets."

In November, 1985 the South African Department of Trade and Industry alerted readers of its Export Bulletin to the advantages of making "use of the new free trade agreement between Israel and the U.S." Business Day, an influential Johannesburg paper, reported that "senior Israeli officials" were encouraging local firms to channel exports to the U.S. via Israel. Also in November, 1985 South African President P.W. Botha said his government would open an office for "non-conventional trade," to be carried out through other countries.

Although a former director of the Israeli Foreign Ministry urged his countrymen last November in the Jerusalem Post that "we should resist the temptation to use our liaisons with the Common Market and the Free Trade Zone with the U.S. for channeling South African goods to the West," Israeli leaders are already committed to this way of increasing Israel's foreign currency earnings. Long before the passage of the FTA, they were pointing to the unique advantages of Israel's duty-free access to the U.S. and Europe that would be available to any U.S., European, and Asian firms willing to build branches in Israel.

For the South Africans, however, with their pariah status, the FTA has made a good thing even better. For those who had already invested in facilities in Israel, there was no longer the prospect of Israel's Most Favored Nation (MFN) status under the General System of Preferences (GSP) being phased out, as the Jewish state outgrew the category of "less developed country." Instead, new South African investors were assured of a stable long-term situation with all exporters anticipating lowering of U.S. barriers against even protected products after 10 years.

Legality of Israeli spring-boarding of South African goods is about the same under the FTA as it was under the GSP. The Rules of Origin, requiring 35 percent added value, are similar. Enforcement, however, may be less stringent under the FTA. According to an article in the Israeli Economist (Sept. 1985), it has not yet been determined whether the final arbiter of standards of local content will be a government agency or national chambers of commerce.

Whoever is charged with enforcement, however, can only judge whether the Israeli local content is really 35 percent or more. There will be no opportunity to comment on whether goods containing 65 percent South African content masquerading under a "Made in Israel" label are in accordance with the wishes of the American people or not.

Jane Hunter is the editor and publisher of Israeli Foreign Affairs, 5825 Telegraph Ave. No. 34, Oakland, California 94609.