Still On Hold

Israel's free trade agreement with the United States, a major_ key
economic stability, has not resulted in the expected bonanza.

Eighteen months after Israel and the
United States signed a landmark free-
trade agreement, the anticipated
economic bonanza has yet to be felt in
Jerusalem.
The agreement — the result of two
years of tough negotiations — is never-
theless still regarded by Israel as an
essential precondition for economic
growth and stability.
Instead of waiting with outstretched
hands for congressional aid (which is, in
any case, expected to fall from around
$3.4 billion in 1986 to around $1 billion
this year), Israel's plan is to trade its
way towards self-sufficiency and, not in-
cidentally for many Israelis, to
self-respect.
The U.S. administration, under pres-
sure to cut back on foreign aid, would
welcome a decrease in Israel's economic
dependence.
It also sees the U.Sdsrael Free Trade
Agreement (FTA), under which mutual
import tariffs will be gradually phased
out by 1995, as a possible model for
future American trade relations with
other developing countries.
There is also the factor of strong
political support in Washington for a
special trading relationship with a
small, embattled democracy that is bar-
red from trading with almost all of its
"natural" trading partners — its
neighbors in the Middle East.
When Israeli negotiators sat down
with their American counterparts to
hammer out the agreement, they quick-
ly found that there was precious little
sentiment in the determination of the
American officials to cut the best possi-
ble deal for their own exports.
"The Americans feel they have been
badly burned by international. trade
agreements that open up American
markets but do not offer real reciproci-
ty," said a Trade Ministry official in
Jerusalem.
Negotiations were, therefore, begun on
the basis of full reciprocity and were fur-
ther complicated by vigorous lobbying
from American special interest groups,
particularly from the textile industry,
which, while not regarding Israeli tex-
tiles as a threat, were feeling a cold wind
blowing from low-cost, Far East
markets. (Indeed, the final agreement
leaves room for Israeli textile quotas).
The Americans also insisted on a

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clause in the agreement which commits
both countries to work towards a
liberalization in services, which will have
the effect of giving American banks, in-
surance companies and other service
organizations eventual access to the
Israeli market.
Israel, on the other hand, felt it had
an advantage in that -it already has a
free-trade agreement with the European
community.
Since 1977, Israeli exports have
entered Europe duty free, with the tariff
on European imports to Israel gradual-
ly reducing to zero by 1989.
"Our first job was to explain to the
Americans just how a free-trade agree-
ment works," said an Israeli official.
"They still don't understand that they
can't unilaterally change the terms of
the agreement, but they're learning."
Prior to the free-trade agreement with
America, Israel already had, under the
Generalized System of Preferences
Agreements between developed and
developing countries, duty free access to
the United States for some 300 items —
notably diamonds, gold jewelry, civilian
aircraft and aviation components, high-
tech medical equipment, metal products
and chemicals.
Largely because of this, and the
strengthening of the dollar at the time,
trade between Israel and the United
States increased dramatically between
1980 and 1985 when, for the first time,
Israeli exports to America, at $2.1
billion, exceeded the value of American
by $400 million.
In 1986, the first year of the FTA,
however, there was no great increase in
trade — in the first ten months of 1986,
Israel exported $1.65 billion worth of
goods to the U.S. while importing $1.33
worth of goods from America.
This disappointing start, say trade of-
ficials in Jerusalem, was due partly to
the weaker dollar, partly to Israeli
manufacturers, who have yet to adapt
to a new, demanding market.
"What we aim for is a steady 10 to 11
percent annual growth in trade with the
United States," said an Israeli official.
"But, more important than the trade
figures during the next few years is the
long-term pattern.
"Without' the agreement, it would
have been difficult to develop the
economy in the right direction, par-

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titularly in hightech fields, where we feel
Israel has the mobility, inventiveness
and skilled manpower to find a niche in
the American market?'
Israel's commercial attaches in the
United States are constantly on the
lookout for potential markets, including
the lucrative American government pro-
curement tenders which are now open to
Israeli bidders. And Israel's Trade
Ministry is encouraging small exporters
to get together to create marketing
companies.
The Israeli government also hopes
that the number of American companies
involved in joint ventures with Israeli
companies will increase from the present
150-odd. Eventually, it would like to see
joint Israeli-U.S:European consortiums
take advantage of Israel's high-quality,
low-cost research and development
potential.
Israeli trade experts are also seeking
ways to exploit Israel's unique position
of low-tariff trade relations with both
Europe and the United States. It is
hoped that Israel might become a
"bridge" between these two vast mar-
kets by importing partly finished goods
and finishing them for re-export.
An American expert on international
trade, Dr. Howard Rosen, of the Insti-
tute for International Economics in
Washington, recently warned Israelis
that while the formalization of trade
relations with the U.S. was indeed an
achievement, there could still be dif-
ficult days ahead.
There was, he said, "considerable op-
position to this [FTA] agreement in the
United States and it was heard loud and
clear by policymakers in Washington."
Israeli businessmen and politicians,
he said, should not assume that
. their
country's unique relationship with
America will exempt them from Ameri-
can moves to protect its domestic in-
dustry and the three million jobs
threatened by the U.S. trade deficit.
"Congressmen may have unswerving
support for Israel when it comes to
financial aid and military assistance,"
said Dr. Rosen, "but when forced to
choose between saving jobs in Israel at
the expense of local jobs, they will
almost always opt for the latter — and
certainly when their own jobs are at
risk.
HELEN DAVIS