Israel WT/TPR/S/58
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II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
(1) OVERVIEW
1. During the period under review (1994-99), Israel has continued the multilateral track of
liberalization;  trade policy has also been focused somewhat on entering into bilateral trade
partnerships.  The latter can be explained, to a large extent, by the fact that the Israeli domestic market
is relatively small and Israel's trade with its Arab neighbours has traditionally been minimal.  In thecontext of this review, the authorities noted that Israel's free-trade links are also aimed at offsetting the
negative impact on Israeli exports resulting from the preferential trade agreements between the
European Union (EU) and several central European countries and from the North American Free
Trade Agreement (NAFTA).  Since 1994, Israel has entered into trade agreements with Canada, the
Czech Republic, Hungary, Jordan, Poland, the Slovak Republic, Slovenia and Turkey;  prioragreements had been signed with its main trading partners - the EU and the United States - as well as
with the European Free Trade Association (EFTA)  and the Palestine Liberation Organization (PLO).
The vast majority of Israel's trade is now undertaken within the framework of preferential agreements;
countries with which Israel has such agreements account for 71% of Israel's exports and 74% of its
imports (1998).  In light of the risk of diverting resources to other than lowest cost suppliers, theauthorities have indicated that they are debating wh ether to extend their preferential rates on an MFN
basis.
2. Israel maintains a liberal and open foreign dire ct investment regime, with foreigners facing
very few legal restrictions.  The Government encourages foreign investment by offering generous
incentives to foreigners, for whom the schemes tend to be more generous than those for Israeli-owned
companies.  Investment incentives can be costly and may introduce distortions in the economy.  As a
result, there is an ongoing debate in Israel on the current incentive structure.
(2) T
HE INSTITUTIONAL FRAMEWORK
(i) General framework
3. Since Israel's previous review, the structure of the legislative and executive bodies has
remained unchanged.  Legislative authority in Israel rests with the Knesset, a unicameral parliament
with 120 members elected by universal suffrage for four years (subject to dissolution), on the basis ofproportional representation.  The Knesset's functions are to legislate, oversee government operations,
and approve the state budget.  The Knesset elects the State Comptroller, who audits and reports on the
assets, finances and obligations of the State (including the operations of Ministries, the Central Bank,
state-owned enterprises and institutions, local authorities and other agencies subject to inspection by
law).  The President, head of State, is elected by the Knesset for a term of five years.  Presidentialduties include calling on a Knesset member to initiate the process of forming a new government,
signing treaties and laws adopted by the Knesset, and appointing the Governor of the Central Bank.
4. Executive powers lie with the Government, led by a directly elected Prime Minister.  The
Government, which serves for four years, takes office after receiving a vote of confidence in the
Knesset.  Israel has no formal constitution, but the Knesset has introduced several constitution-likelaws - formulated in basic laws and a series of decisions by the Supreme Court - laying the
foundations for government and the rights of the individual.
1  The Supreme Court, on the basis of a
                                                     
1 The basic laws are:  The Knesset, State Lands, The President, The Government, The State Economy,
Israel Defense Forces, Jerusalem, The Judiciary, The State Comptroller, Human Dignity and Liberty, andFreedom of Occupation.WT/TPR/S/58 Trade Policy Review
Page 16
basic law, may overturn a law passed by the Knesset if it finds to be in direct contravention of the
basic law.
5. A bill must generally be passed in three readings of the Knesset for it to become law.  After
the first reading the bill is referred to the appropr iate committee for discussion;  in the second it is
reviewed in plenary session;  and in the third read ing a final vote is taken.  Thereafter the President,
the Prime Minister and the minister concerned sign the bill into law.  Bills may be initiated by theGovernment or individual members of the Knesset.
6. International agreements, duly put into effect, do not carry the force of law in Israel.  In the
case of conflict between an agreement and domestic law, the provisions of the domestic law prevail.
Therefore, several domestic laws have been or are to be amended to reflect Israel's international
commitments.
(ii) Economic and trade policy formulation
7. The main characteristics of Israeli institutions have remained the same as those described in
the GATT Secretariat report for the previous Trade Policy Review.
2  The Ministry of Industry and
Trade is the main government body in charge of the formulation and administration of trade policy
within the framework of intern ational and domestic laws, including conducting and coordinating
international trade negotiations, proposing tariff changes, establishing trade controls and rules of
origin, granting import licences and quotas for industrial and processed agricultural products, and
conducting anti-dumping, countervailing and safeguard investigations.  Depending on the subject,
other relevant ministries (such as the Ministry of Agriculture or the Ministry of Finance), as well as
specialized agencies, may become involved in trade policy formulation.  Trade policy formulation is
coordinated through the Committee for International Economic Affairs.  The Committee is chaired by
the Director-General of the Ministry of Finance, and is composed of the Directors-General of theMinistries of Industry and Trade, Foreign Affairs,  and Agriculture, and the Director-General of the
Central Bank.
8. Israel has no independent formal body to provide public advice to the Government on general
economic policies, including trade.  Nor is there an independent statutory body with a formal mandate
to carry out public review and assessment of economic and trade policies.  Nevertheless, theGovernment consults with private-sector organizations (such as the Israeli Chamber of Commerce and
the Manufacturers' Association of Israel).  For consultative purposes, the Director-General of the
Ministry of Industry and Trade has established the Foreign Trade Forum, which meets on a
bi-monthly basis, and is composed of representatives of the Manufacturers' Association, the Chamber
of Commerce, the Israeli Export Institute, the Ministry of Finance, and the Ministry of ForeignAffairs.  The Israeli Export Institute also works closely with the Government on areas related to
export-promotion measures and activities.  Regarding consumer protection, the Ministry has
established a bi-monthly Consumer Forum which is composed of representatives of consumer
organizations, the Ministry of Justice, the Manu facturers' Association, the Chamber of Commerce,
and the Advertisers' Association.  Consultations with representatives of consumer organizations andmanufacturers and importers are carried out by the Standards Commissioner before introducing any
change in compulsory standards.
(iii) Main trade laws
9. Israel's main laws in the area of trade and related policies have not undergone significant
changes since 1994 (Table II.1).  The main legislation related to international trade is the Import and
                                                     
2 GATT (1995a).Israel WT/TPR/S/58
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Export Ordinance of 1979, which provides the legal basis for the regulation and development of
foreign trade.  Under the Licensing of Imports Order of 1939, all imports are subject to licensing.
However, most imports are now covered by the Free Import Order of 1978, permitting the free
importation of all commodities except those listed in its Annexes 1, 2 and 5;  these commodities are
subject to non-automatic licensing (Annex 1), prohib ition (Annex 5) or specified conditions (Annex
2) (Chapter III(2)(iii)).  The Customs Ordinanc e of 1957 regulates customs administration, control,
documentation, warehousing, valuation, payments of duties, drawback, and legal procedures.  The
Customs Order (Regulation of Imports) of 1986 regulates imports for a number of products;  its
Annex 1 establishes conditions for the importation of a list of products, mainly agricultural products
and dangerous chemicals, arms and munitions, whil e its Annex 2 lists goods that are prohibited from
entry into Israel.
Table II.1
Israel's main legislation related to trade, June 1999
Area Legislation
Main trade legislation Import and Export Ordinance of 1979 (the main law for the regulation of foreign trade)
Import regulations Free Import Order of 1978 (permits the free importation of products, except those listed in Annexes 1, 2
and 5), and Licensing of Imports Order of 1939 (goods subject to import licensing)
Export regulations Free Export Order of 1978 (permits the free expo rt of products with the exception of a list of products for
which an export permit is required)
Customs Customs Ordinance of 1957 (regulates customs administration, control, documentation, warehousing,
valuation, payments of duties, drawback, and legal procedures) and the Customs Order (Regulation ofImports) of 1986 (regulates imports for a list of products)
Anti-dumping and
countervailing duties
and safeguard measuresTrade Levies Law of 1991 (regulates anti-dumping and countervailing duties);  no legislation in place related
to safeguard measures within the meaning of Article XIX of the GATT and the Agreement on Safeguards
Taxation Purchase Tax (Goods and Services) Law of 1952
Free-trade zones Free Port Zone Law of 1969, Eilat Free Trade Zone Law of 1985, and Law for Free Production Zones in
Israel of 1994
State aid Encouragement of Capital Investments Law of 1959, Encouragement of Capital Investments Law
(Agriculture) of 1980, Encouragement of Investments (Capital Intensive Companies) Law of 1990,
Encouragement of Industrial Research and Development Law of 1984, Encouragement of Industry (Taxes)Law of 1969, Income Tax Law (Adjustments  for Inflation ) of 1985 (provides incentives to domestic andforeign investors)
Standards Standards Law of 1953
Sanitary andphytosanitary measuresAnimal Diseases (Transfer Arrangements for Cattle) Regulations of 1972;  Animal Diseases (Meat
Importation) Regulations of 1974;  Animal Diseases (Micro-organisms, Vaccines and Transmitters)
Regulations of 1975;  Animal Diseases (Import and Export of Animal Products) Regulations of 1988;
Animal Diseases (Feeding of Animals) Regulations of 1996;  Regulations for the Control of the Export ofAnimals and Animal Products (Fish, Ostriches, Honey and Milk and Products Produced Therefrom and Egg
Products) of 1998;  Plant Protection Law of 1956;  Plant Import Regulations of 1970;  Seed Law of 1956;
Seed Regulations )(Control of Imports) of 1975;  Regulations of Public Health (Food) (Pesticide Residues)of 1997   
Government
procurementMandatory Tenders Law of 1992 (also several regulations on preferences to domestic industries, certain
regions, and local sub-contracting)
Competition Restrictive Business Practices Law of 1988
Price control Law For the Supervision of Prices of Goods and Services of 1996
Intellectual propertyrightsCopyright Law of 1911;  Copyright Ordinance of 1924;  Copyright Order (Berne Convention) of 1953;
Copyright Order (Universal Copyright Convention) of 1955;  Performers' and Broadcasters' Rights Lawof 1984;  Trademarks Ordinance (New Version) of 1972;  Merchandise Marks Ordinance of 1929;Appellations of Origin (Protection) Law of 1967;  Plant Breeders' Rights Law of 1992
Foreign investment No single law governing foreign investors.  The laws related to state aid apply to foreign and domestic
investors
Source : Information provided by the Israeli authorities.WT/TPR/S/58 Trade Policy Review
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10. The few changes in trade legislation since 1994 have been related to Israel's implementation
of its WTO commitments.  In the area of customs valuation practices, Israel amended in 1998 its
Customs Ordinance (Regulation of Imports) of 1957 (Articles 129-133), switching from the Brussels
Definition of Value to the transaction value as the basis for customs valuation (Chapter III(2)(i)).  The
Standards Law of 1953 was also amended in 1998, so  that mandatory standards could be introduced
only under strict conditions, mainly for health  and safety reasons (Chapter III(4)(iii)).
(3) EXTERNAL POLICY -MAKING
(i) Israel and the WTO
11. Israel, a contracting party to the General Ag reement on Tariffs and Trade (GATT) since 1962,
took an active part in the Uruguay Round, lead ing to the establishment of the World Trade
Organization (WTO).  The WTO Agreement was ratified by the Knesset on 15 January 1995.  TheWTO Agreement, like other international agreements, does not automatically have the force of law in
Israel.  Implementation is undertaken through the en actment of legislation in each area, rather than
through one single Act.  In the context of this review, Israel reiterated its commitment to amend its
legislation to bring it into conformity with the ob ligations it undertook in the Uruguay Round;  it has
already amended legislation on customs valuation and standards.  Israel has invoked developing-country status with respect to the WTO Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPs), which allows a transition period up to 1 January 2000 to bring its legislation into
conformity.
12. Israel's main commitments under the Uruguay Round in the area of trade in goods were:
(i) To bind 53% of all tariff lines, with all agricultural lines bound; at the end of the implementation
period, bound rates will vary between 0 and 560% fo r agricultural goods (Uruguay Round definition
of agriculture), and between 0 and 272% for manufactured goods.  (ii) To reduce tariffs by 24%overall over five to ten years from 1995 (as a devel oping country).  (iii) To replace most import quota
restrictions on agricultural commodities with tariff-rate quotas (though at very high above-quota
rates);  these will be reduced by 15% over the transition period.  At the end of this period, the rates
will be as high as 190% on products such as bovine animals.
3  (iv) To limit domestic support to
agriculture by 12% in value terms over a ten-year period, and cut agricultural export subsidies by 22%in value and 13% in volume.
13. Israel is also a signatory to the plurilateral WTO Government Procurement Agreement
(GPA), which offers mutual market access for government purchases to its members.  In the context
of the GPA, Israel has invoked developing-country  status, allowing Israel to implement off-set
arrangements in government procurement.  Israel made a number of commitments under the WTOGeneral Agreement on Trade in Services (GATS) (Chapter IV(4)(i)).  Israel essentially bound the
existing policy framework for market access in th e areas of business, communications, environment,
and financial services, rather than undertaking further liberalization.  Subsequently, Israel undertook
further commitments in the WTO Agreements on Basic Telecommunications (1997) and Trade in
Financial Services (1997), as well as in the Declaration on Trade in Information Technology Products(ITA) (1997).  In the context of the ITA, tariffs on most of the items covered by the ITA will be
eliminated by 2000 (286 items at the HS eight-digit level);  a few items will be duty free by 2003
(10 items), 2004 (11 items) and 2005 (53 items).  The ITA applies to trade in computers,
telecommunications equipment, semiconductors, semiconductor manufacturing equipment, software,
and scientific instruments.
                                                     
3 Under Annex 5 of the Agreement on Agriculture, import restrictions were maintained on sheep and
goats (live and meat), milk, cream and milk powder, processed cheese, and other cheeses.  By 1998, most ofthese restrictions were tariffied;  import restrictions we re maintained on sheep and goat meat and on milk and
cream.Israel WT/TPR/S/58
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14. The status of Israel's WTO notification obligati ons is shown in Table AII.1.  As of June 1999,
Israel had never invoked the dispute settlement provisions of the GATT or the WTO, nor had any
complaints been brought against it in these fora.  Moreover, Israel is not engaged in any trade disputes
outside the WTO fora.
(ii) Plurilateral agreements
(a) Relations with the European Union
15. Since its previous Trade Policy Review, Israel has signed a new trade treaty with the EU;  the
parameters of the existing free-trade agreement were expanded for industrial products and some
processed agricultural products by making the rules of origin more flexible, granting easier access to
public and government procurement markets (in the telecommunications market), and simplifying
trade conditions (Table II.2).  Under the 1975 agreement with the EC, all goods except agriculturalproducts, were traded duty free as of 1 January 1989.
4  The agreement was replaced by a new trade
accord signed on 20 November 1995.  The new accord is defined as a Treaty of Association,
establishing an association between Israel and the EU.  The agreement covers a number of agricultural
products (specified in a positive list).  It calls for greater liberalization and necessary measures to be
in place by 1 January 2001 (Article 7).  Also, the EU and Israel agreed to examine, at the latest threeyears after the entry into force of the agreement,  the possibility of granting mutual concessions in
trade in fisheries products (Article 11).
16. Beyond the traditional sphere of general trade,  the Israeli agreement with the EU includes,
inter alia , (i) the possibility of a phased freedom of movement in financial services (beyond
commitments undertaken in the WTO Agreement on Trade in Financial Services), (ii) a commitment
not to restrict the movement of capital, (iii) the extension of WTO provisions for government
procurement, (iv) outlawing the creation of cartels and other associations that prevent competition,(v) providing information in matters relating to public assistance, (vi) protection of intellectual
industrial and commercial property rights, and the enforcement of these protections, (vii) cooperation
in the promotion of culture, education and audio-visual production, and (viii) dialogue in the areas of
social issues.
17. As an extension of the agreement, Israel and the EU have signed separate agreements under
which Israel became a full member of the EU's Fourth and Fifth Framework Programme for Research
and Development.  Israel was one of only four count ries that were not members of the EU, the others
being Norway, Liechtenstein and Iceland, which took part in the Fourth Framework EU research and
development projects.  Israel is the first non-EU member of the Fifth Framework programme.  The
agreement allows Israeli firms and academic inst itutions to participate in EU research and
development tenders.
5
18. The EU has become Israel's most important trading partner:  as much as 46% of Israel's
imports are sourced from the EU, while 31% of Israel 's exports are sent to the EU (1998) (Chart II.1
and Tables I.5 and I.6).  Some 98% of Israel's merchandise imports from the EU in 1998, and 94% of
its exports were covered by the free-trade agreement.
                                                     
4 The EC, however, abolished its tariffs and quotas on all industrial products by 1 July 1977 (GATT,
1991, p. 45).
5 Ministry of Foreign Affairs [online].  Available at: www.israel.org/mfa.WT/TPR/S/58 Trade Policy Review
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Table II.2
Israel's preferential trade agreements, June 1999
CountryDate of agreement
(entry into force)Major Israeli exports and imports covered by the
agreement aOther major areas of cooperation(excluding WTO commitments)
EuropeanUnion20 Nov. 1995
(1 Jan. 1996)
bDuty free on all industrial products and some
agricultural products since 1 Jan. 1989 with further
concessions in agricultural products since 1 Jan. 1996
Tariff rate quotas on some agricultural goodsCompetition, state monopolies,
intellectual property rights,
government procurement, and dispute
settlement
European
Free Trade
Association
(EFTA)d17 Sep. 1992
(1 Jan. 1993)Duty free on all industrial goods since 1 Jan. 1993c
Duty free on some fish, marine and processed
agricultural products (bilateral agreements covering
some agricultural products)Competition, state aid, state
monopolies, intellectual property
rights, government procurement,
services and investment
United States 22 Apr. 1985
(1 Sep. 1985)
4 Nov. 1996
(4 Dec. 1996)Duty free on all industrial products since 1 Jan. 1995
Tariff rate quotas on agricultural goods to be further
negotiated at the end of a period of five yearsInfant industry, balance of payments,
government procurement, and dispute
settlement
Jordan 25 Oct. 1995
(19 Apr. 1996)Reciprocal concessions for three years, extended for
an extra yearTrade co-operation, intellectual
property rights, safeguard measures
Canada 31 Jul. 1996
(1 Jan. 1997)With two exceptions, duty free on industrial products
since 1 Jan. 1997 e
Tariff concession for agriculture and fish products
covering about 80% of agri-food trade between the
partiesCompetition, safeguard measures and
dispute settlement
Turkey 14 Mar. 1997
(1 May 1997)Phased tariff reduction on industrial products
(complete elimination by 1 Jan. 2000)c
Tariff rate quotas on some agricultural productsCompetition, state aid, state
monopolies, intellectual property
rights, safeguard,  governmentprocurement, and dispute settlement
CzechRepublic20 May 1997
(1 Jan. 1997)Phased tariff reduction on industrial products
(complete elimination by 1 Sep. 2000)
f
Tariff rate quotas on some agricultural productsSimilar provisions to those in the
Turkey agreement
SlovakRepublic22 May 1997
(1 Jan. 1997)Phased tariff reduction on industrial products
(complete elimination by 1 Sep. 2000)
f
Tariff rate quotas on some agricultural productsSimilar provisions to those in the
Turkey agreement
Hungary 14 Oct. 1997
(1 Feb. 1998)Phased tariff reduction on industrial products
(complete elimination by 1 Jan. 2001)g
Tariff rate quotas on some agricultural productsSimilar provisions to those in the
Turkey agreement
Poland 21 July 1997
(1 Mar. 1998)Phased tariff reduction on industrial products
(complete elimination by 1 Jan. 2000)h
Tariff rate quotas on some agricultural productsSimilar provisions to those in the
Turkey agreement
Slovenia 13 May 1997
(1 Sep. 1998)Phased tariff reduction on industrial products
(complete elimination by 1 Sep. 2000)i
Tariff rate quotas on some agricultural productsSimilar provisions to those in the
Turkey agreement
Israel also has a Protocol on Economic Relations with the Palestine Liberation Organization (PLO), signed on 29 April 1994 (ent ered
into force 28 September 1995), allowing for free movement of goods between Israel and the Palestinians under one external custo ms
envelope.
a See Table III.6 for details on the coverage of the preferential margin.b The trade accord replaced a 1975 trade agreement, which in turn replaced a trade agreement signed in 1970.
c Products not included are those originally falling within Chapters 1-24 in the nomenclature preceding the Harmonized
Description and Coding System (HS), but which were transferred at the time of the introduction of the Harmonized System into
HS Chapters 25-97.
d Member countries are Iceland, Liechtenstein, Norway and Switzerland.e Duties on women's swimwear from Canada and certain Israeli cotton fabrics were to be phased out by 1 July 1999.
f The products excluded are those falling within HS Chapters 3501, 3502 and 3505.
g The products excluded are those falling within HS Chapters 330210, 3501, 3502, 350510 and 350520.h The products excluded are those falling into HS Chapters 3501 to 3505.
i The products excluded are those falling into HS Chapters 3501, 3502, and 3505.
Note: Negotiations on free-trade agreements are on-going with Bulgaria, Mexico and Romania.Source : WTO Secretariat based on information provided by the Israeli authorities.Israel WT/TPR/S/58
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020406080100
Exports Imports
The category "other FTA" partners includes Canada, the Czech Republic, Hungary, Jordan, Poland, 
the Slovak Republic and Turkey.
Data provided by the Israeli authorities.Per cent of Israel's total merchandise exports and imports, respectivelyChart II.1
Israel's trade with free-trade a greement partners, 1998
Note:
Source :EU15 (30.9, 45.7)United States
(35.5, 20.0)EFTA (1.8, 4.7)Other FTA partners
(3.2, 3.5)Other (28.6, 26.1)
(b) Relations with EFTA member countries
19. The Israeli agreement with members of the European Free Trade Association (EFTA)
- Iceland, Liechtenstein, Norway, and Switzerland - took effect in 1993.6  The agreement calls for
reciprocal free trade in most industrial goods (HS chapters 25 to 97), and some fish, marine, and
processed agricultural products (Table II.2).7  Apart from the application by Israel of export duties on
a limited number of products (mainly metal waste and scrap), which have since 1993 been eliminated,
products covered have been traded free of duty since the entry into force of the agreement.8  T h e
agreement also deals with, inter alia , competition, government aid, state monopolies, intellectual
property rights, public procurement, services, and in vestment.  In addition, it contains evolutionary
clauses providing the basis for the future development of the agreement and allowing its extension to
cover new sectors.  Israel also has bilateral trade agreements with individual EFTA member states;
these improve Israel's access to the respective markets either by eliminating or reducing tariffs on
some agricultural products.  Around 98% of Israel's merchandise imports from EFTA in 1997 and thesame share of its exports were covered by the free-trade agreement.
                                                     
6 Applied by Iceland as of 1 August 1993, by Liechtenstein and Switzerland as of 1 July 1993 (WTO
document WT/REG12/2, 13 September 1996).
7 Excluded from the agreement are products originally falling within Chapters 1-24 in the nomenclature
preceding the Harmonized Description and Coding System (HS), but which were transferred at the time ofthe introduction of the Harmonized System into HS Chapters 25-97 (WTO document WT/REG12/2,13 September 1996).
8 WTO document WT/REG12/2, 13 September 1996.WT/TPR/S/58 Trade Policy Review
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(iii) Other agreements
20. Since 1994, Israel has expanded its array of bilateral free-trade agreements (with Canada, the
Czech Republic, Hungary, Jordan, Poland, the Slovak Republic, Slovenia and Turkey), while
continuing liberalization within the framework of the 1985 free-trade agreement concluded with the
United States.  Most of the recent agreements provide for either immediate (Canada) or phased
reduction (the Czech Republic, Hungary, Poland, the Slovak Republic, Slovenia and Turkey) of tariffduties on industrial products, while one agreement (Jordan) provides for reciprocal concessions on a
limited number of products (such as vegetable oils, chocolate, pharmaceuticals, paints, yarns, marble
tiles, kitchen and tableware, television sets, and toys ) for a period of up to four years.  All of the
agreements (except with Jordan) also provide for tariff concessions on agricultural products.
Moreover, the majority of the agreements include provisions on several trade-related areas, such ascompetition, state aid, intellectual property rights , and government procurement.  Table II.2 provides
an overview of the key features of Israel's bilateral preferential trade agreements.
The United States
21. The free-trade agreement with the United States, signed in 1985, was fully implemented on
1 January 1995.  Duties on trade between the two countries had been lowered incrementally over theprevious ten years.
9  As part of the final stage, tariffs on 2,000 items considered particularly sensitive
to Israeli producers (list C including items such as garlic, dates, figs, grapes, apples, apricots, tobacco,
various milk products, refrigerators and cold-storage equipment, paper, radios, medicines and
petrochemicals) were abolished, effective 1 January 1995.  In November 1996, the United States and
Israel entered into a five-year programme of gradual and steady improvement of agricultural market
access within the framework of the 1985 free-trade agreement.  The agreement covers all agricultural
products and provides for increased access each year by reducing non-tariff barriers and loweringtariffs.  In this context, it is interesting to note that the United States offers Israeli products, together
with Canadian products, the lowest overall average tariff (of 0.8% in 1998) among all its trading
partners.
10
Protocol on Economic Relations between Israel and the PLO
22. In April 1994, Israel and the Palestine Liberation Organization (PLO) signed a protocol
providing for the free movement of goods between Israel and the areas under economic jurisdiction of
the Palestinian Authority (PA), as well as a cu stoms and standards union between the two parties.
The protocol, which became effective on signature, was annexed (Annex 5) to the Interim Agreement
on the West Bank and Gaza Strip signed in September 1995 (also known as the Oslo B Agreement).11
It recognizes the PA as an economic entity that can establish its own monetary institutions, provided
that Israeli currency will also legally serve as means of payment for all purposes. In the area of
taxation, the PA conducts its own direct tax policy (including income tax on individuals, and
corporations, property taxes and municipal taxes and fees), and Israel transfers to the PA 75% of the
                                                     
9 Duties on airplanes and motor parts, electrical products, processed and raw diamonds, soyabeans and
corn were eliminated upon the entry into force of the Agreement.  Duties on products specified in list A
(including paper, cigarettes, thread, heavy mechanical equipment, computer parts, leather and shoes, cars and
parts, and certain textile items) were eliminated by January 1989.  Duties on products specified in list B
(including textiles, and clothing, chemicals and certain high-technology products) were lowered in January 1990
and January 1992 and eliminated by January 1995 (GATT (1995a)).
10 WTO (1999).
11 The agreement was to remain valid initially until 1999 or until permanent status arrangements have
been agreed.Israel WT/TPR/S/58
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revenues from the income taxes collected from Pale stinians employed in Israel.  The following
summarizes the trade aspects of the agreement:
- trade between Israel and PA:   all merchandise trade between Israel and PA is free of
customs duties (quotas on some agricultural products were phased out in 1998).
Clearance of customs revenues and fees levied on imports is conducted between
Israel and PA on the basis of the place of final destination;
- PA's import regime:   the PA has the right to independently determine the rates of
customs and other charges on imports of specified quantities of commodities referred
to in lists A1 (30 items at the HS four-digit level) and A2 (23 items) with no
restrictions on quantities of goods referred to in list B (various specified tools and
equipments).12  The quantities PA may import from lists A1 and A2 are determined
according to Palestinian "market needs",  and for any quantities exceeding the agreed
quotas (currently cement and sheep meat) the duties are the Israeli tariffs.  All other
PA imports are subject, as a minimum, to the same level of customs taxes and other
charges that apply to Israeli imports.  The PA customs rates may not be lower than
the Israeli rates, in order to prevent leakage of imports from one area to the other.Regarding standards (including sanitary and phytosanitary measures) and licensing,
Israeli import policy applies to all PA imports, except for the quantities agreed to per
lists A1 and A2
13;  and
- PA's export regime:  the PA can (with the exception of rules of origin) determine its
own export regime.14
23. The agreement allows for labour movement, through a system of employment permits.  It also
covers tourism and insurance issues.  A PA tourist administration has been set up, managing issuesrelated to tourism in the areas under the Palestinia n Authority.  Tourists move freely between Israel
and the autonomous area.
15  However, since 1996, due to political and security considerations, the
implementation of the agreement has been subject to difficulties, and disruptions in the flow of goods
and labour have become frequent (but temporary).
(iv) Generalized System of Preferences (GSP)
24. Israeli exports receive preferential treatment under the Generalized System of Preferences
scheme (GSP) of Japan.  In 1998, Israel expo rted GSP-eligible goods to the amount of
US$672 million, equivalent to some 96% of Israel's  exports to Japan.  Although Israel has a GSP
option for its exports to Canada and the United States, all its exports are conducted under the free-
trade area agreements.
                                                     
12 List A1 includes 30 goods whose source (or the source of at least 30% of its value added) is an Arab
State, and for 13 of these items, they have to come from either Egypt or Jordan (indicated in the Agreement asoriginating in JE): live sheep, dried yoghurt, dried legumes, rye, barley, maize (corn), rice, palm kernel oil,
sugar, cacao, silica and quartz sands, cement (JE), phosphatic fertilizers (JE) , potassic fertilizers (JE),
phosphatic and potassic mixed fertilizers (JE), cotton, carpets (JE), unwrought aluminium, aluminium waste andscrap, aluminium powder and flakes, bars and rods of iron or non-alloy steel (JE), other bars and rods, gas andfuel stoves (JE), air conditioners (JE), household refrigerators and freezers (JE), dish washers (JE), washingmachines (JE), electric space heaters (JE), and televisi ons sets (JE).  List A2 includes a number of goods
repeated from list A1 as well as additional goods: live sh eep, beef, frozen beef, dried legumes, coffee, tea, wheat
and meslin, rye, barley, maize (corn), rice, wheat and meslin flour, sesame seeds, palm kernel oil, sugar, cacao,
silica and quartz sands, cotton, cigarettes, alcohol, iron, and cement.
13 Kanafani (1996).
14 Tschäni (1996).
15 GATT (1995a).WT/TPR/S/58 Trade Policy Review
Page 24
(4) FOREIGN INVESTMENT POLICIES
(i) Domestic regime and incentives
25. During the period under review, foreign investment into Israel has steadily increased.16
Between 1993 and 1998, net investment by foreign residents in Israeli assets (including Israeli assets
traded abroad) rose from US$2.4 billion to US$3.4 billion.  In 1998, 38% of the foreign direct
investment (FDI) went into electricity and electronics, while in the previous year financial serviceswas the largest recipient (49% of total foreign direct investment) (Chapter I(4)(ii)).
26. Israel has a long standing policy of encouraging inward FDI.  Most sectors open to national
investors are open to foreign investors (see below).  As in many other countries, liberalization of FDI
policies has been accompanied by a generous incentive system.  Although no estimates are available
of the total cost of the Israeli incentive system, it is likely to be substantial.  In 1996, the total cost ofthe state-aid system (i.e. covering both national and foreign investors) was estimated to be 8.4% of
GDP, and a large share of these incentives were provided to foreign investors (Chapter III(4)(ii)).  As
has been noted by analysts, there is a need to review the effects of subsidies offered to foreign
investors in Israel.
17  Not only are these subsidies costly from a fiscal point of view, they may create
significant unintended distortions in the economy (Box II.1).
(a) Basic framework
27. Foreign firms are accorded national treatment in terms of taxation and labour relations, and
are eligible for incentives for designated "appro ved" investments in priority development zones.
Profits, dividends and rents can generally be repatriated without difficulty through  licensed bank.
28. Foreign investors do not need government approval to invest in Israel.  However, to facilitate
foreign investment in Israel, the Government ha s set up the Investment Promotion Center, Israel's
investment marketing agency designed to be a "one-stop shop" for foreigners.  The Center's tasksinclude:
- identifying potential foreign investors, provid ing them with customized pre-visit briefing
material, and arranging visits of interested companies to the country with personalized
service during the visits;
- locating strategic partners for local companies;  and
- providing a wide range of services to the foreign entrepreneur including arranging
meetings with relevant parties, providing detailed information on various production
costs, assessing site location, and resolving potential technical/management problems
with local authorities and the like.
18
29. There are very few restrictions for foreign investors wanting to establish in Israel.  The
defence industry is closed to foreign investors for reasons of national security.  In
telecommunications, restrictions apply to international telecommunications services (up to 74%
foreign equity participation is allowed) and wireless telecommunications services (up to 80% foreign
equity participation).  In tourism, ownership of hotels, travel agencies and tour operators is restricted
                                                     
16 Direct investment is defined as negotiable shar es and negotiable convertible securities amounting to
more than 10% of the company's equity, non-negotiable secu rities, shareholders' loans, and real estate.  Portfolio
investment is defined as financial assets which are negotiable securities.
17 Kreinin (1996).
18 Ministry of Industry and Trade (1998a).Israel WT/TPR/S/58
Page 25
to Israeli-registered companies, while tourist guide services are restricted to Israeli residents or
citizens.  In addition, travel agencies are required to employ at least one Israeli-licensed travel expert.
Box II.1:  Do foreign direct in vestment incentives make sense?
Many countries have in place a generous incentive system in order to attract foreign direct
investors.   These incentives generally take the form of financial or fiscal incentives, subsidized services or
market privileges.  The economic rationale for incentives  is generally based on the need to correct market
failures through taxes and subsidies.  In the case of FDI, the "market failure" is the difference between socialand private returns that arises from the positive externalities that accrue to the host country and that is notautomatically accounted for by foreign investors.  The host country may benefit from, among other things,technology transfers, training of local managers and workers, and infrastructure investments associated with
foreign investment.  But, since these "social" dimensions may not translate into higher returns for the private
investor, investment projects that would make sense fr om a social perspective are not always carried out.
The purpose of granting incentives is to translate the social externalities into private returns, thereby
mitigating the tendency for under-investment in projects with social externalities.
However, as pointed out in a recent survey article  by the WTO Secretariat, investment incentives
do not always make good sense in reality.
Not always the first-best solution.   Investment incentives are typically not the first-best solution.
While investment incentives can in principle be justified as a means to bridge the gap between social and
private returns, alternative polices may do the same job in a more sensible way.  For example, if the hostauthorities use incentives to address high unemployment, a more direct policy option would be to addressthe underlying causes of unemployment, such as rigid labour market laws and high labour taxes.  Or ifinvestors request a "risk premium" to compensate for the risk associated with macroeconomic instability, the
most rational policy response would be to address these underlying problems, rather than to compensate
investors for the poor investment climate.
Difficulty in estimating  social externalities.   A second caveat is that social externalities are
extremely difficult to measure.  Some countries may not have the necessary expertise to undertake cost-benefit analyses, but may rather base their incentives on crude rules-of-thumb.  In this regard, vestedinterests may also distort incentives away from the social optimum.
Financing has distortionary effects.   Incentives must be financed, and taxes have their own
distortionary costs, a fact that is often forgotten in the debate.  For example, providing selective subsidiesand tax breaks to some firms and industries is in effect a tax on all others.  Incentives in the form of marketprivileges are no better.  For example, monopolistic pricing supported by import protection or entryrestrictions imposed by Governments erodes the bene fits to consumers.  Likewise, preferential access to
government contracts makes investment more expensive than under free tendering.
Local versus global efficiency.   Finally, from a global point of view, the social benefits in
different locations must be weighed against each other.  If one country offers incentives and another countrydoes not, investments may be diverted from locations with higher social benefits to locations with lowersocial benefits to the detriment of global welfare.   A related problem is that countries may undertake
overbidding for FDI when they are in competition with other governments to obtain the investment that in
the end does not deliver the expected social benefits.  This risk of exaggerated incentives is particularly
serious if countries engage in bidding contests for the same investment project.  What makes sense for anindividual country does not automatically make sense for the world as a whole.
Source :  WTO document WT/WGTI/W/56, 30 September 1998, and UNCTAD (1996), Incentives and
Foreign Direct Investment , New York and Geneva, January.
30. Non-residents may purchase any security traded on the Israeli stock exchange and purchase
certificates of participation in mutual funds.  Non- residents may also invest in provident funds and in
domestic savings plans (since May 1998).  Non-residents may not, however, carry out futures
transactions of any kind with residents or domestic banking corporations, in which one of the base
assets in the transaction is Israeli currency and where the transaction includes a payment or receipt in
foreign currency (except in the case of forward transactions at a predetermined price for a term notexceeding 30 days).WT/TPR/S/58 Trade Policy Review
Page 26
31. Outward direct investment from Israel is restricted to active, incorporated Israeli companies
and to Israeli households;  they are allowed to undertake direct investment abroad (e.g. in subsidiaries
and real estate) without any quantitative limit on the size of the investment.  Until April 1995, direct
investment abroad by an Israeli company was limite d to 40% of the investing company's capital.  All
restrictions on household direct investment abroad were lifted in May 1998.
32. The regulations on outward portfolio investments have recently been liberalized and there are
currently limitations only on capital outflows for institutional investors.  Provident funds are allowed
to invest up to 5% (up from 2% in February 1998) of their assets in recognized and/or approved
securities and to make forward transactions and other futures transactions that individual residents are
allowed to perform.  Pension funds and insurance companies are allowed to invest in foreign
securities issued by a resident company or the Government of Israel;  these securities have to be listedfor trade on a stock exchange, or traded over the counter.  Restrictions on investments undertaken by
mutual funds were lifted in January 1998.  Other residents - such as partnerships and unincorporated
non-profit organizations - are since May 1998 allowed to invest in foreign securities without limit and
to hold deposits abroad.
(b) Incentives
33. Israel has a number of laws to encourage foreign investment (Table II.1).  The incentives
include, inter alia , investment grants, tax breaks (rebate on profit tax), research and development
support, wage financing, and training support.
19  The incentives offered depend on the location of the
company as well as on the type of industry (preference is given to industrial, tourism and agricultural
projects).  All benefits available to Israelis are available to foreign investors.  However, the
Government provides foreign-owned companies wi th enhanced incentives, thereby discriminating
against Israeli-owned companies.  The remainder of this section summarizes key features of theincentives provided solely to foreign investors.  Details of the wide array of state aid available to both
national and foreign investors are provided in Chapter III(4)(ii).
34. Foreign investors are accorded enhanced benefits within the framework of Israel's main
state-aid programme, the regional aid programme.  Such investors must apply for status as an
"approved" enterprise.
20  According to the Encouragement of Capital Investment Law of 1959,
investors may be granted a capital incentive package in the form of (i) a grant equivalent of up to 24%
of the investments in fixed assets or tax holidays of up to ten years, and (ii) an enhanced tax-incentive
package.  While the benefits of the former component depend on the amount of the investment, the
type of investment (hotel industry receiving the highest remuneration), and the geographical location,
they do not depend on the nationality of the company's ownership.  On the other hand, the enhancedtax-incentive package component depends on the foreign investor's share of ownership (Table II.3).
For example, while the company tax rate is 25% for an "approved" company owned by a local
investor, the rate for foreign investors varies between 10% and 20%, depending on the percentage of
foreign ownership.  A company that is not an "approved" investor pays a company tax of 36%.  The
tax benefits for an "approved" enterprise are granted over a period of seven consecutive years, startingin the first year that the company earned taxable income, provided that 14 years have not passed since
the enterprise began operating.
                                                     
19 Government-guaranteed loans were eliminated in January 1997.
20 Before incentives are accorded, the project is firs t examined by the Israeli Investment Centre (IIC),
which determines the admissibility of applications.  To  receive the status of "approved" investment a project
must consist exclusively of fixed assets, the company must finance at least 30% of the approved project withcapital equity paid in cash, the project must be completed within three years of the grant's approval, and at least25% of the work must be completed within one year.Israel WT/TPR/S/58
Page 27
Table II.3
Rates of taxation applicable to approved foreign investors, 1994 and 1999
(Per cent)
Percentage of foreign ownership
0-49
(local investor) 49-74 74-90 90-100
Company tax rate
Income tax
Dividend tax (15% of balance)
Total effective tax on distributed income25
0
11.2536.2520
0
123215
0
12.7527.7510
0
13.523.5
Note: The tax benefits for an "approved" enterprise are granted over a period of seven consecutive years, starting in the first year  that
the company earned taxable income, provided that 14 years have not passed since the enterprise began operating.
Source : Ministry of Industry and Trade (1998a), The Israeli Economy at a Glance 1997 , Jerusalem, May;  and GATT (1995a), Trade
Policy Review - Israel,  Geneva.
(ii) International initiatives and agreements
35. In order to protect and promote investment, Isr ael has signed bilateral investment agreements
with a number of countries (Albania, Argentina, Bulgaria, Estonia, Georgia, Germany, Hungary,
India, Kazakhstan, Latvia, Lithuania, Moldavia, Poland, Romania, Turkey, Ukraine and Uzbekistan,
while the following have not yet been ratified China, Cyprus, Czech Republic, Slovenia,
Turkmenistan, and Uruguay).
36. Israel is a party to a number of double taxation treaties, most of which are drafted in
accordance with the OECD model treaty, covering most  topics in the international aspects of income
and capital gains tax.  Treaties in force cover the following countries:  Austria, Belgium, China,
Czech Republic, Canada, Denmark, Finland, France, Great Britain, Germany, Greece, Hungary, India,
Ireland, Italy, Jamaica, Japan, the Netherlands, Norway, the Philippines, Poland, the Republic ofKorea, Romania, Singapore, South Africa, Sweden, Thailand, Turkey and the United States.