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AMERICAN ISRAEL PUBLIC AFFAIRS COMMITTEE
444 NORTH CAPITOL STREET’. NW • SUITE 412 • WASHINGTON. D.C. 20001 • (202) 638.2256


MEMORANDUM April 30, 1984

A U.S..-ISRAEL FREE TRADE AREA
On November 29, 1983, President Reagan and Prime Minister Shamir agreed to initiate formal negotiations on a Free trade Area (FTA) between the United States and Israel. An FTA is defined as an agreement between two or more trading partners whereby tariffs are eliminated on substantially all of the two-way trade between them. In the case of a U.S. -Israel FTA, non-tariff barriers to trade would be addressed as well.

Such a reciprocal, two-way arrangement would benefit the American economy by expanding trade and maintaining the position of U.S. exporters in the Israeli market vis-a-vis their European competitors. An FTA would also strengthen the Israeli economy by increasing its export potential and by stabilizing commercial relations with the United States, its largest trading partner.

The commitment to an FTA by the two heads of state has given important impetus to the bilateral negotiations. Representatives from both governments have been meeting regularly to discuss the general parameters of such an agreement, and how it would be implemented. But Congressional action is required to provide the authorizing and implementing legislation necessary to conclude the agreement. The U.S. International Trade Commission (ITC) must also complete a product-by-product investigation. However, it is important to remember that in order to comply with the General Agreement on tariffs and Trade (GATT), which specifically sanctions such arrangements, an FTA must cover "substantially all the trade” between the two territories.

TRADE EXPANSION

The permanent, stable trading framework that an PTA would provide should lead to a substantial expansion of trade between the U.S. and Israel.  Already, the U.S. is Israel’s largest trading partner. Twenty-three percent of Israel’s exports go to the U.S.  Israel is also one of the three largest markets for American products in the Middle East. About 20% of Israel’s imports are from the U.S., although this share has been gradually declining, largely as a result of the Free Trade Agreement Israel has signed with the European Community.

Exports are vital to Israel’s continued growth and self-reliance. By strengthening the economy of America's only reliable and democratic ally in the volatile Middle East, an FTA, between the, U.S. and Israel would provide important national security--as well as economic--benefits for the U.S.

BENEFITS TO THE U.S. -

*Prevent loss of U.S. market share in Israel. Israel currently imports about $8 billion worth of goods, and $6 billion worth of services excluding defense imports. The European Community, which is increasingly benefiting from duty-free access as the final stages of the EC-Israel FTA are being implemented, is enjoying a competitive advantage over U.S. exports in the israeli market. That competitive advantage will improve even further as tariffs are completely eliminated on EC products by 1989. Currently, about 40-45% of U.S. exports to Israel are affected by duties averaging approximatel)
10.3%. -

*Expand U.S. exports. The U.S. has always had a favorable balance of trade with Israel. in 1983, the U.S. posted a surplus of over $400 million in its merchandise trade with Israel. An FTA with Israel would enlarge the potential for the U.S. to increase its already substantial exports to Israel of products such as computers and data processing equipment; paper products; automobiles, aircraft and other transportation equipment; specialized industrial machinery; electronic equipment; telecommunications systems; power generating machinery and equipment; chemicals; textiles; tobacco; and various consumer items such as home appliances The U.S. also has a six-to-one surplus in agriculture products and textiles in its trade with Israel.

*Strengthen reciprocity. There is a mounting concern in Congress that the U.S. is at a disadvantage in international trade and that U.S. exports do not receive the same treatment that the U.S. provides to exports of other countries.   A U.S.-Israel PTA would work against that trend by providing the U.S. with an open market in Israel and reciprocal duty-free trade relations.  In fact, U.S. exporters would immediately benefit more than Israel's under an FTA since over 90% of Israeli exports to the U.S. already enter duty-free, while only 55-60% of U.S. exports now enter Israel without tariffs.

*Cause few problems to domestic industries. Israel already receives duty free benefits on 90% of its imports to the United States; despite that, Israeli exports account for only one-half of 1% of total American imports. In areas such as textiles and apparel, for example, Israel’s share of total U.S. imports is less than 0.2% and about 0.02% of total U.S. consumption in 198l. In addition, unlike other developing countries that receive duty-free benefits such as the GSP, Israel is not an enclave of inexpensive labor. It would not be able to flood U.S. markets with cheap, labor-intensive products. In agriculture, Israel’s ability to increase exports is restricted by its limited amounts of land and water and the expensive costs of shipping perishable products long distances.

BENEFITS TO ISRAEL

*Provide a stable and dependable market for Israel’s exports, particulary high-tech products, free from the uncertainties at the present GSP. Israel's fragile economy and lack of neighboring trading partners flake it particularly vulnerable to changes in the import duties and policies of its principal markets.

*Make Israel more self-reliant and strengthen its economy through increase trade. The alternative to increasing exports through an FTA would be increased borrowing and foreign aid to finance the balance of payments gap; adding to Israel’s growing debt which is already the highest per-capita in the world.

*Strengthen bilateral ties between the U.S. and Israel, As the only such arrangement the U.S. would have with any country in the world, an FTA with Israel would strengthen and reinforce the special political as well as economic bonds shared by the two democracies.