The Price of Free Trade

By John Haldane

A Free Trade Agreement (FTA) between the United States and Israel went into effect August 19, 1985. The purpose of this pact is to expand commerce between the two countries by lowering or eliminating customs duties and non-tariff barriers to trade. The first tariff reductions were made on September 7, with others to follow until all duties are eliminated by January 1, 1995.

In 1984, U.S. civilian goods exported to Israel totaled $2 billion, of which about half were subject to duties averaging 15 percent. Over the past several years American goods have been at a disadvantage vis-a-vis European Community (EC) products exported to Israel because of the tariff preference the EC countries receive under their FTA with Israel. Under the new U.S.-Israel FTA, Israeli duties on most industrial products which the United States exports to Israel will receive equal treatment with the EC goods until such duties on U.S. goods are eliminated entirely on January 1, 1989.

Israeli exports to the United States in 1984 totaled $1.8 billion, of which over 90 percent entered duty-free under either most-favored-nation status or the Generalized System of Preferences (GSP). Access to GSP, applicable to about 35 percent of Israeli exports to the U.S., however, is subject to restrictions including value ceilings beyond which duties must be paid, annual additions and deletions of products, and periodic Congressional review and modification. Upon full implementation, the FTA will give all Israeli products assured duty-free entry without restriction.

American and Israeli trade officials project an expansion of bilateral trade at a much faster rate than before the FTA agreement, with the current $3.8 billion in two-way trade possibly quadrupling within three years. They point out that since the FTA includes agricultural products, services, and investment, and also expands access to government procurement, American and Israeli suppliers will have an advantage over foreign competition in both markets.

AIPAC Blitzkrieg Crushes U.S. Business Opposition

The FTA signing ceremony was held at the annual meeting of the American Israel Public Affairs Committee (AIPAC), the major pro-Israel lobbying group in the United States, which worked hard to win congressional approval for the FTA.

The FTA sailed through both houses of Congress, despite strong protests by U.S. domestic farm, industry and labor groups, thanks to intensive lobbying by AIPAC. The pressure was so intense that even normally pro-Israel Congressmen warned against long-term erosion of Congressional support for the Jewish State. One representative stated: "There are some fellows who really are upset about the full-court press ... It could really have a backlash effect."

Richard Lawrence pointed out in his Journal of Commerce article: "No major U.S. business group—the U.S. Chamber of Commerce, the National Association of Manufacturers, the Emergency Committee for American Trade, for instance—testified in support of the U.S.-Israel free trade accord."

On the other hand, a number of concerned U.S. domestic organizations testified against the agreement. A representative of the California-Arizona Citrus League told the Senate Finance Committee that "it remains our position that Israel should not derive benefit of reduced or zero duty treatment of its citrus exports to the United States while it has usurped U.S. markets abroad ... Such duty-free access will jeopardize the U.S. industry home markets."

A representative of the American Textile Manufacturers Institute said his organization was dismayed by the proposed schedule of tariff concessions and "opposed the agreement in toto." Stanley Nehmer, a spokesman for the American Fiber, Textile and Apparel Coalition, called the agreement "an absolute disaster" for the industries he represents. Mr. Nehmer, a well-known international trade expert, wrote in a June 1984 issue of Jewish Week: "I believe that instead of strengthening economic ties between the U.S. and Israel, a U.S.-Israel free trade area may have just the opposite effect, because such an arrangement has the potential to harm import-sensitive U.S. industries such as textiles, apparel, footwear, and other leather-related products."

An important critic of the FTA was the AFL-CIO, which labeled the FTA lowering of tariff barriers a needless "give away" that would take jobs from American workers. Stephen Koplan, an AFL-CIO spokesman, argued that allowing Israeli goods into the U.S. duty-free would be particularly unfair to American competitors because Israeli industries are heavily subsidized, and in some cases owned, by the Israeli Government.

A Potential Pandora's Box

One positive result of the unusually strong opposition from American industry representatives was the drafting of a customs agreement separate from the basic FTA. Rules of origin have been carefully formulated to require that other places," he said. "We know that Israel has a free trade zone agreement with the EC on citrus. Somehow, more oranges arrived in the EC than you could possibly produce in Israel."

The FTA with Israel has serious implications for other Middle Eastern trading partners of the U.S. Saudi Arabia, for example, can be expected to look upon the FTA as especially unfair, since it imports far more from the U.S. than does Israel, yet the U.S. still has not offered the Saudis special trading privileges under the GSP, a benefit Israel has long enjoyed.

In his testimony to the Senate Finance Committee a representative of the National Association of Arab Americans urged that "steps be taken to insure that this agreement does not further perpetuate the fundamental imbalance in U.S. policy toward Israel and the Arab world. In 1984, the United States enjoyed a $3.7 billion trade surplus with the Arab world. The potential for U.S. exports to Arab markets is substantial—in 1982 the Arab world collectively imported well over $70 billion."

The American Arab Association for Commerce and Industry also informed U.S. government and congressional leaders that it opposed the FTA, stating: "The agreement will hurt the U.S. economy and further alienate our Arab friends who will perceive in it a blind commitment to Israel even at the expense of U.S. interests themselves."

Israel clearly has won its battle in Congress for a free trade agreement. How much it will benefit in the long run from arousing such strong opposition among American farmers and manufacturers remains to be seen. Lobbyists for the various domestic producers who spoke out against the FTA will be carefully monitoring U.S.-Israel trade flows over the coming months. If their predictions of seriously adverse effects on American producers are confirmed, Congressmen who supported the bill, and the campaign contributors and voters who support those Congressmen, can expect to hear more on the subject.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.