The U.S.-Israel Free Trade Agreement: Hold the Celebration

By Colin MacKinnon

September 1, 1995 is the 10th anniversary of the U.S.-Israel Free Trade Agreement. The agreement was hailed in 1985 as a great step forward in U.S.-Israeli trade relations that would eliminate trade barriers, snare a bigger chunk of the Israeli market for U.S. companies, and—don't laugh—help wean Israel away from its reliance on U.S. taxpayer aid.

When last we looked at the FTA ("The U.S.-Israel Free Trade Agreement: Aid Instead of Trade?", WRMEA September/October 1993), none of this had happened. How about today, on its tenth anniversary? Should anybody celebrate?

Well, no. There have been one or two pieces of good news: flat out import duties on U.S. goods entering Israel are gone and that's fine. And regulations that discriminate against U.S. automobiles (Israel puts a duty on engine size rather than value of the vehicle) are to be eliminated next year.

But the FTA still is tilted in Israel's favor and will stay that way indefinitely unless either the Clinton administration or Congress lights a fire under the Israeli government. Neither eventuality is likely with U.S. elections in the offing.

Meanwhile, here's how the FTA with Israel discriminates against the U.S.:

For starters, duties aren't the only way to discourage imports. Israel also has plenty of so-called non-tariff barriers, and all of those the U.S. was complaining about two years ago still are in effect. Here's a sampling:

* TAMA. TAMA (a Hebrew acronym for "additional rate of increase") is an artificial price increase that Israeli officials, by methods known only to themselves, apply to foreign goods. When an item—say an American washing machine—comes into Israel, customs officials are supposed to guess at the price it will fetch in downtown Tel Aviv and use that guess to slap on a local purchase tax.

Nobody knows how the guessing works, but it often seems to result in a price tag on the showroom floor that's higher than that of a comparable Israeli product. Both U.S. manufacturers and Israeli consumers are hurt by this.

Israelis claim that TAMA puts the same taxes (not tariffs, mind you) on Israeli goods and hence is neither discriminatory nor illegal under the FTA. But U.S. officials don't think so. In any case, when U.S. officials try to nail down how TAMA works, Israeli officials stonewall.

* Copyright inadequacies. Israel's copyright law is based on UK legislation dating from 1911. The law needs modernizing. It doesn't explicitly protect computer software, for example, except as "literary works," a pretty strange category into which to put a spreadsheet program, but there is no other. The law doesn't recognize rental rights for sound or video recordings, either. U.S. officials also say that policing and enforcement are poor.

Such inadequate copyright protection hits the U.S. where it hurts. Software, pharmaceuticals, and sound and video recordings, all products that require strong copyright protection, are major U.S. exports.

* Standards. Israel insists on strict metric packaging, not just labeling. If you're selling corn flakes, your package must not only say how much the corn flakes weigh in centigrams (American packages do), the package itself must be in a standard metric size—250 or 500 grams or whatever.

Supersol, a leading Israeli supermarket chain, put on an "American Food Festival" recently during which it promoted U.S. products, apparently with great success. But the chain had to get special permission to import American packaged goods, and after the festival, when it tried to import some of the more popular items on a regular basis, it could not. Israeli officialdom would not allow the English-sized packaging. Score another for the Europeans.

What all these barriers do—TAMA, the copyright laws, standard requirements—is make it hard to import U.S. goods into Israel.

Israel Must Start Observing GATT

September 1 is a red-letter trade day for another reason. Israel is to start abiding by GATT rules. GATT, short for General Agreement on Tariffs and Trade, is an international trade agreement that more than 100 countries have been negotiating since the late l940s. The idea behind GATT is to reduce or eliminate trade barriers of all kinds, tariff and non-tariff, and thereby ease world trade. Fine.

But GATT, while forbidding things like import quotas and fees, allows countries to convert them into tariffs. Here's where a problem may crop up with Israel. Israeli politicians will be sorely tempted to put the old fees and quotas into new guises, especially in sensitive sectors like agriculture.

For ideological as well as economic reasons, Israeli governments over the years have favored the county's agricultural sector with vast protection—subsidies of various kinds, tariffs, import quotas, and the like. Most of these are still in place, and just getting rid of even the oldest subsidies will be tough for any Israeli government, Likud or Labor.

The U.S. has a chronic trade deficit with Israel.

An Israeli delegation was in the U.S. in late July and early August to discuss FTA agriculture issues. It was led by Zvi Alon, deputy director general of the Ministry of Agriculture. "Nothing quantifiable was accomplished," says a U.S. Trade Representative (USTR) official. Look for more Israeli temporizing here, possibly with TAMA-like stratagems to keep Israeli agriculture protected.

"Nobody put a gun to their heads to make them sign the Uruguay Round [another name for GATT] or the Free Trade Agreements," says another USTR negotiator. "We can't act as though we're willing to cave in."

One reason the U.S. can't cave in to the Israelis on the FTA is the U.S.'s separate FTA with Canada and Mexico, who also are signatories to GATT. Canada is the U.S.'s largest trading partner, and how we behave with the Israeli FTA matters in our relationship with Canada.

"We have a $1 billion-a-day trade with Canada," says another USTR negotiator. "We can't afford to sell out to the Israelis and then have the Canadians come to us and say, 'Well, you're easy on the Israelis, you should be easy on us.'"

The U.S. contends that the only way to fulfill both agreements, GATT and the FTA, is simply to eliminate all barriers, tariff and non-tariff. Let's see how negotiations proceed, but let's not hold our breath.

U.S. Finances European Sales

FTA or no FTA, the U.S. has a chronic trade deficit with Israel. Last year it came close to $1 billion—Israel sold $5.25 billion worth of goods to the U.S. and bought $4.25 billion of American goods. The U.S. trade deficit with Israel will be at least as bad this year.

For its part, Israel has a chronic deficit with America's competitors in Europe. In 1994, Israel bought $7.5 billion more goods from the Europeans than it sold them. Israel's deficit with Europe will be of the same magnitude this year.

And, lest we forget: the U.S. continues to give, not lend, Israel more than $3 billion a year, not to mention tax breaks on private charity, loan guarantees, and all the other paraphernalia of support.

What this means is that the U.S., with its AID largess and its trade deficit, is financing Israel's purchases from U.S. competitors in Europe while those same competitors get breaks in Israel, like the metric packaging requirement and other barriers in areas where the U.S. should compete well, like agriculture, software, and entertainment.

Yet we persist in doling out more than a third of our total worldwide foreign aid to Israel, a dole that seems set to continue till the end of time.

It's not that the Israeli economy is small and weak or that Israelis are starving in the streets. This year the Israeli GDP will approach $100 billion. Per capita Israeli GDP will be something like $17,800. (For comparison, Saudi GDP will be $118 billion this year, $6,315 per capita.)

Should we then celebrate our ten-year-old FTA with Israel? Under the circumstances, let's not. Let's keep the champagne corked for a while, and leave the balloons and whistles in their boxes.

Colin MacKinnon is chief editor of the Washington, DC-based Middle East Executive Reports.