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WEEKLY NEWSLETTER
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Israel
Index
In 1988 Israel had a quasi-open economy. Its chronic trade
imbalance reflected the country's military burden, its need to
import capital and raw materials, and its excess civilian
consumption. This trade deficit had long been covered by transfers
and loans of various sorts. Despite drops in the prices of oil and
other commodities (the effects of which were felt mainly in 1986)
and improvement in Israel's terms of trade because of the fall in
value of the United States dollar and the parallel strengthening of
European currencies, the balance of trade worsened in 1986. The
drop reflected a surge in inventory rebuilding after the 1984-85
recession.
Despite their high level, Israeli tariffs were not the major
trade barrier. In addition to the standard specific and ad valorem
tariffs, Israel also imposed a purchase tax, compulsory surcharges,
unlinked deposits, excise duties, stamp duties, and a value-added
tax on all imported products. These taxes were designed to regulate
domestic demand and to raise revenue. Lacking a mechanism by which
to deal with dumping and other unfair trade practices, the
government historically used the unilaterally imposed compulsory
surcharge as a convenient measure by which to protect domestic
products from foreign competition. Most of these charges, however,
were rebatable to exporters as part of the export subsidy program.
The brunt of these taxes, therefore, was borne by the nonexport
sector.
One potentially discriminatory nontariff barrier arose from the
administration of the purchasing tax. For purposes of the
purchasing tax, the taxable value of an imported product must
reflect its domestic wholesale price. The percentage difference
between the imputed wholesale price and the tariff-included import
price represents the markup, known by the Hebrew acronym Tama. As
long as the Tama reflects the true wholesale markup, there is no
increased protectionism. Only to the extent that the true markup is
less than the Tama, is there an implicit hidden tariff in Israel.
From 1970 to 1986, Israel's primary exports consisted of basic
manufactures, machines, and transportation equipment, chemicals,
and miscellaneous manufactures. Primary imports were basic
manufactures, machines, and transportation equipment. The United
States has been Israel's single largest trading partner, providing
a market for approximately 25 percent of Israel's exports and
supplying about 20 percent of its nonmilitary imports (see
table 10, Appendix A).
Although as of 1988 the United States was Israel's largest
individual trading partner, the majority of trade has been with the
European Economic Community (EEC). Since 1975 Israel-EEC trade has
been governed by the Israel-EEC Preferential Agreement. This
agreement eliminated tariff barriers on trade in manufactured goods
between the two entities. Under its terms, imports of Israeli
manufactured products were granted duty-free entry to the EEC in
July 1977, except for certain products (considered to be importsensitive by the EEC) on which full duty elimination was delayed
until December 1979. Because the EEC offered trade preferences to
other developing countries and because Greece, Spain, and Portugal
entered the EEC, Israel did not receive significant preferential
benefits from the EEC. Israel eliminated duties on about 60 percent
of its manufactured imports from the EEC in January 1980, and
complete duty-free treatment was to be phased in by January 1989.
The Israel-EEC Preferential Agreement also attempted to provide
for a substantial reduction in trade barriers for agricultural
products. Although the EEC agreed to make tariff reductions on
about 80 percent of its agricultural imports from Israel, Israeli
exporters still had to comply with the EEC's Common Agricultural
Policy nontariff requirements and often were faced with quotas and
voluntary export restraint agreements. As a result, reciprocal
Israeli agricultural tariff concessions to the EEC have been very
limited.
Israel-United States trade was far less distorted by tariff and
nontariff barriers, at least from the United States' side. The
overwhelming majority of Israeli exports entered the United States
market duty free. By contrast, a large share of United States
exports to Israel not only were subject to substantially higher
tariffs, but also were subject to a variety of nontariff barriers,
including a substantial "hidden tariff."
Total Israeli exports to the United States were about US$2.3
billion in 1986. Of this amount, only 2.4 percent (US$57.6 million)
was subject to duty. Duties collected on these products were US$5.4
million, an average rate of 9.6 percent. Because the ad valorem
equivalent tariff rate is calculated as the ratio of duties
collected to dutiable value, this figure overstates the average
tariff rate on Israeli exports to the United States.
The leading General System of Preferences (GSP) exports to the
United States from 1978 through 1986 consisted of jewelry, X-ray
equipment, gold necklaces, telephone equipment and parts,
electro-medical equipment and parts, office machines, and radiation
equipment. Apart from jewelry, all the other major GSP exports were
high-technology goods.
The product composition of dutiable exports helped explain the
low overall duty paid. The primary reason for the low duties paid
was that, between 1978 and 1980, the United States subjected
diamond imports (Israel's principal export), to a 1 to 2 percent
duty. As of 1981, these items entered at a zero most favored nation
(MFN) rate. The other major export items that entered the United
States at a zero MFN duty rate included potassium chloride,
airplanes, emeralds, aircraft parts, potassium nitrate, and
antiques. Major exports that remained dutiable in 1986 included
agricultural products, footwear, textiles, and apparel.
Informed sources claimed that an elimination of United States
duties under the United States-Israel Free Trade Area (FTA)
Agreement on these products would lead to an estimated increase of
approximately 1 percent of total Israeli exports to the United
States. The major categories affected will be agricultural products
such as cheeses, olives, and processed tomato products, and textile
and apparel items such as swimsuits, knitwear, undergarments, and
thread. Very few high-technology products will be affected by the
FTA agreement.
Data as of December 1988
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