Trade and Finance: The U.S.-Israel Free Trade Agreement; Aid Instead of Trade?

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Trade and Finance: The U.S.-Israel Free Trade Agreement; Aid Instead of Trade?

Much ballyhooed when it was under negotiation in the early 1980s, the U.S.-Israel Free Trade Area Agreement is showing its defects after eight years of operation. How the agreement is working--or not working--raises real questions about whether an economy like Israel's, which is small, troubled and has a persistent state component, can be linked up in a genuine free trade area with the largest economy on earth.

A friendly Reagan administration negotiated the agreement, supposedly as a way of weaning Israel away from reliance on U.S. financial support. That notion was backed up with wishful studies from conservative think tanks such as the consistently pro-Israel Heritage Foundation, which made "trade instead of aid" the slogan of the campaign.

Some slogan. The agreement, which went into effect on Sept. 1, 1985, has had no discernable effect on the level of American aid to Israel. In fact, by eliminating U.S. tariffs while permitting a whole range of Israeli non-tariff barriers, the treaty is turning out to be just another form of U.S. aid to Israel.

And not a very honest one. Its effects are hard to see and, because they occur in the private sector, they don't show up on government books. But they're there.

The idea behind free trade agreements is that they increase international commerce by dropping administrative barriers like tariffs between the countries that sign them.* Typically, too, these agreements contain "national origin" requirements. That is, for goods to get the benefits of the treaty, they have to meet complicated tests showing they really and truly are from a signing country, not just transshipped through it.

The U.S.-Israel FTA is reasonably typical. It does, for example, phase out tariffs--they're to be gone by mid-1995--and has reasonable and enforceable rules of origin.

But it allows other restrictive devices, of which Israel makes use, and doesn't address Israel's own domestic practices, which have the effect of favoring Israeli over American producers.

Loophole--or Barn Door--in the Agreement

The main loophole in the agreement is an article covering agricultural products that allows each party to set up a whole range of bans, quotas, licensing restrictions and other barriers to the flow of agricultural trade. Israel takes full advantage of the loophole; the U.S. does not.

Thus, Israel maintains a complete ban on poultry, dairy products, eggs, most fresh and prepared vegetables, most fresh fruit, and prepared products like olive oil, apple juice, and grape juice. Israel also maintains quotas that keep out large quantities of items ranging from lamb, sheep, and fish to raisins and prunes.

To be sure, the U.S. also bans or limits some imports, for example, sugar, dairy products and peanuts. But none of these are important Israeli exports and banning them doesn't disrupt, at least not in a major way, Israeli sales to the U.S.

The agreement establishes a Joint Committee of Israelis and Americans who meet twice a year to thrash out problems. The agriculture loophole is a continual hassle. One involved U.S. official says negotiators "are having a terrible time" with the Israelis over the issue.

The Real Problem: Israeli Domestic Practices

The real problem, though, is not so much loopholes in the agreement as Israeli domestic practices that the agreement doesn't touch on and that favor Israeli producers. Here are some examples and how they work.

* TAMA. The Israelis evaluate the cost of an import in order to put a later purchase tax on it. The practice is called TAMA, an acronym for a Hebrew phrase meaning "additional rate of increase."

The price Israeli officials use, however, is not the price at the dock but a wholesale price they simply dream up. They can, and often do, set the assumed wholesale price at double the dock price. Since the purchase tax is typically 100 percent of wholesale, the markup on imported goods can be extraordinary. …