Israel WT/TPR/S/58
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IV. TRADE POLICIES AND PRACTICES BY SECTOR
(1) OVERVIEW
1. Services has continued to be the most dynamic sector of the Israeli economy.  The structure of
the economy has shifted slowly towards services, away from agriculture and manufacturing.  The
fastest growing industries within services are personal, finance and business services.  This
development reflects the recent deregulation and privatization, which has improved the private sectorenvironment.  Another factor explaining the performa nce of the services sector is Israel's high human
capital stock.
2. Barriers to foreign investors in the services sector are generally being removed.  Nevertheless,
some industries remain monopolized or largely controlled by government-owned corporations.  As a
result of privatization, modernization of the regulatory framework, and facilitation for new entrants,the telecommunications industry has in a short tim e-span been transformed from a monopolistic to a
more competitive structure.  Substantial progress has also been made recently in liberalizing the
Israeli financial sector.  Nevertheless, banking is marked by high degree of concentration and the
Government owns most of the assets.  The recent increase in foreign currency credit to total credit, in
tandem with the economic slowdown, may have e nhanced the banking sector risk exposure.
3. While services have prospered, manufacturing has contracted in recent years.  The
developments within the sector have been uneven, however, as the high-tech sectors (including
computers, communications and medical equipment)  have expanded while the traditional labour-
intensive industries have been faced with increased competition.  As trade barriers have been lowered
and foreign investors have entered the Israeli market, the traditional industries have been exposed to
increased competition.  Also the increased dema nd from the large influx of immigrants in the
early 1990s on products mainly from the traditional sectors has faded out.
4. Israel's main barriers to trade in industrial goods appear to be non-tariff barriers, rather than
tariffs.  As a result of the wide array of free-trade agreements concluded by Israel with foreign
countries, the large majority of manufacturing imports enter Israel under preferential (mostly duty
free) rates.  For manufacturing imports from other sources, the overall tariff protection is moderate
(simple average, including ad valorem  equivalents, of 6.6% for HS 25-97 and 8.2% for ISIC 3),
except for food, beverages, clothing and footwear industries, which face relatively high tariffs.  In this
context it is interesting to note that there seems to be a negative relationship between the degree of
tariff protection and the industries' performance.  The high performing high-tech industries tend to
have lower than average tariff protection, whereas the slow growing traditional industries tend to be
protected by higher than average tariffs.  Israel has a number of other measures affecting trade andproduction of manufactured products, including strict enforcement of technical regulations
(mandatory standards covering most imports of the ISIC industries food, beverages and tobacco, and
textiles, clothing and leather products), government procurement preferences (all industries), licensing
requirements (concentrated in transport equipment, leather products, and other food products and
animal feeds), price regulations (electricity, refrigerators and gas, oil and fuels for domestic use) and agenerous state-aid system (mainly benefiting the electronic and electrical industries).
5. The importance of agriculture in the Israeli economy has been declining in recent years.
Israel is self-sufficient in many agricultural produ cts, and competes successfully in export markets for
some items.  The sector is still subject to a high degree of government intervention and depends on
subsidies, cheap water and protected markets for products such as dairy, fruit and vegetables.  In some
cases, such as dairy (in particular milk and ch eese) and poultry meat production, domestic support
measures provided by the Israeli Government are compounded by the impact of relatively high levelsWT/TPR/S/58 Trade Policy Review
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of tariff protection and import quotas.  Export subsidies appear to have been reduced and were granted
only to one product in 1997/98.
(2) AGRICULTURE
(i) Overview of output and trade
6. The share of agriculture in the Israeli economy has declined steadily over the years;  it now
accounts for less than 2% of GDP (compared to 5% in the early 1990s) and employs around 3% of thelabour force.  After a strong expansion up to 1996, agricultural output declined by 1% in 1997 but
rose again by 1.4% in 1998 (Table IV.1).
1  Agricultural exports have performed well with an annual
average growth rate of more than 13% during the period 1994-97.2  Most agricultural exports are of
crops (such as flowers, fruit and cotton).
Table IV.1
Indicators of agricultural production, 1990-98
(Real annual change;  per cent)
Item1990-1993
average 1994 1995 1996 1997 1998
Total outputa3.0 2.9 9.8 5.0 -1.0 1.4
Inputsb0.9 3.5 5.7 0.5 -1.4 -0.4
Gross product 5.4 2.2 14.4 10.3 -0.4 3.8
Total farm incomec-2.6 12.2 -4.5 -4.8 -4.3 11.8
Factor input
Labour (man-hours) -6.9 4.8 5.5 -2.6 0.1 -0.4
Gross capital stockd-3.1 -1.4 -2.6 -0.1 0.1 -0.3
Capital-labour ratio 4.1 -5.9 -7.6 2.5 0.0 0.2
Product-labour ratio 13.3 -2.5 8.4 13.3 -0.5 4.3
Total productivitye11.4 -0.1 11.9 12.1 -0.5 4.2
Exportsf
Citrus -5.4 -1.4 36.4 -5.5 3.5 -13.6
Other 6.3 16.8 20.3 22.7 9.8 12.3
      Total 3.4 12.0 16.9 17.6 8.5 6.8
Prices
Output 7.4 10.1 1.2 7.3 5.6 5.8
Purchased inputs 9.6 5.6 8.2 17.1 4.7 0.3
Terms of tradeg-2.0 4.3 -6.5 -9.3 0.8 5.5
Note: Calendar years, except for citrus, avocado, bananas and flowers.  The output and income figures are calculated from data a t each
year's average prices.
a At producer prices;  intermediate output included.
b Intermediate output included.
c At fixed prices;  deflated by the CPI.d Stock at fixed prices at beginning of previous year.
e Product per unit of factor input (the average weight of labour is 59%).
f Based on data in U.S. dollars 1993;  excluding exports to the administered areas.g Change in the index of relative output/input prices.
Source : Bank of Israel (1999a), Annual Report 1998 , Jerusalem, March.
7. Israeli agriculture has benefited from high capital inputs and careful development, making use
of recent technology over a long period.  Specialization in certain competitive and profitable export
crops has, in turn, generated more funds for investment in agricultural production and processing.
                                                     
1 The expansion in agricultural output until the mid 1990s was caused by the increase in the standard of
living in Israel and a substantial increase in the population as a result of successive immigration waves.  Thisprocess decreased towards the end of 1996 and was further apparent in 1997.
2 Based on 1993 NIS (Bank of Israel, (1998b)).Israel WT/TPR/S/58
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Access to water, however, remains a crucial prob lem for the sector and a major constraint for
agricultural production and exports.
8. Major farm products include citrus and other fruit, vegetables and ornamental plants
(Chart IV.1).  This production tends to be strongly export oriented:  exports are largest in terms of
revenue for cotton (84% of revenue from cotton production is derived from exports), avocados (76%),
flowers (66%) and citrus (61%).  In contrast, animal products account for approximately half ofoutput value, with production consisting mostly of milk, but only 3% of exports. On average,
approximately one fifth of Israel's agricultural output is exported.
Per cent
Vegetables
21.5
Other fruit
14.6
Ornamental plants
7.7
Poultry
13.2Eggs and chicks
8.8Milk
15.2Sheep, goats & other livestock
1.7Field crops (inc. wheat & cotton)
                            7.0Chart IV.1
Value of farm produce by main branch of activity, 1998
Source :  Data provided by the Israeli authorities.Cattle for meat
1.7Fish  1.3
Citrus fruit
7.3
9. There has been a continuous decline in the share of agriculture in total merchandise exports.
The sector accounted for 6% of total exports in 1997, down from nearly 16% in 1980.  Agricultural
products have also declined as a share of total imports, accounting for 8.4% of total imports in 1997,
down from 13.2% in 1980.
(ii) Domestic support measures
10. Israel maintains a relatively large array of trade and trade-related measures intended to
support the domestic agricultural sector.  The sector has traditionally been regarded in Israel as mainly
fulfilling an important national role, although the past focus on attaining self-sufficiency and the
promotion of exports is no longer as pronounced.
11. Domestic support to agriculture, as measured by the current Total Aggregate Measure of
Support (AMS), reached US$524 million in 1997, amounting to approximately one fifth of the value
of agricultural output;  provisional data for 1998 suggests an AMS of US$422 million, about one fifth
of agricultural output.  As can be seen from Chart IV.2, although support increased between 1995
and 1997, but declined in 1998, it has remained below the ceiling set by Israel's total AMSWT/TPR/S/58 Trade Policy Review
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commitments.  Under these commitments, domestic suppo rt for the agricultural sector will be reduced
over a ten-year period beginning in 1995 by around 12%, from around US$646 million in 1995 to
close to US$569 million in 2004.
400450500550600650700
1995 1996 1997 1998 1999US$ million
Data on the current total AMS for the year 1998 is provisional and that for 1999 is not yet available.
WTO Secretariat.Current total AMS Total AMS commtimentsChart IV.2
Domestic support to agriculture, 1995-99
Note:
Source:
12. For calendar year 1997, almost one half of product-specific AMS (plus support within
"de minimis" levels – see below) was for milk production, followed by poultry meat (28.3% of the
total) and eggs (17.1%).  Support reached around two thirds of output value for milk and eggs, and53% in the case of poultry meat.  Support to all other products (vegetables, citrus fruit, flowers and
meat of bovine animals) was reported as "de minimis".
3
13. Market price support constitutes the main instrument of income support, accounting for 90%
of total product-specific AMS in 1997.  In particular, support to milk, egg and poultry meat
production involves production quotas and target pr ices.  In addition to price support, (non-exempt)
deficiency payments and investment programmes are operated by the Ministry of Agriculture in
support of horticulture, egg, poultry and bovine meat production (total direct payments under this item
amounted to US$51 million in 1997, down from US$63 million in 1996 and US$97 million in 1995).
14. "Green Box" expenditures, consisting of measures exempt from the reduction commitment,
amounted to US$338 million in calendar year 1997 compared with US$414 million in 1996 andUS$292 million in 1995.  The largest expenditure consists of specific assistance programmes for the
Kibbutzim and Moshavim (a smallholders' cooperative village) under the Rural Department
                                                     
3 In the case of developing countries, de minimis in terms of the AMS is defined as product-specific
support that does not exceed 10% of the value of production of the product concerned, and non-product-specificsupport that does not exceed 10% of the value of total agriculture production.Israel WT/TPR/S/58
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Agreement4, expenses of the Agriculture Research Centre, new settlement infrastructure, and general
SPS and other services provided to farmers.
15. In 1994, other domestic support measures included support price schemes for non-irrigated
crops (such as wheat and sunflowers), for which prices were fixed according to different regions;  and
an insurance fund for natural disasters.  As in 1994, fresh fruit and vegetables are exempt from
value-added tax.
16. Production and marketing boards still operate in certain agricultural sectors.  There are
six statutory boards covering citrus fruit, flowers, vegetables, groundnuts, poultry, and other fresh
fruit.  Their objectives are to finance marketing and research and development programmes, and
provide insurance in case of natural disasters.  The fruit and vegetable boards also deal with exports.
(iii) Export measures
17. Israel provides export subsidies to a number of agricultural products (cut flowers, vegetables,
citrus and other fruit, goose liver and cotton).  In calendar year 1997/98, export subsidies of around
US$1 million were granted only to cut flowers.  However, this does not mean that the export subsidy
system was eliminated for the other products;  Israel's current policy is aimed at reducing the
provision of such export subsidies to a minimum.
18. Israel has made export subsidy commitments regarding the six product-groups under the
WTO Agreement on Agriculture (Table IV.2). Over the 1995-2004 period, agricultural export
subsidies are to be reduced by 24% in value from a total of around US$56 million in the "base" period
to US$43 million in 2004.  Export subsidies actually granted by the Government were much lower
and have been declining significantly;  in 1997/98, they totalled less than US$1 million compared
with an outlay commitment of US$51 million for that  year.  As noted above, export subsidies were
granted only to cut flowers.
Table IV.2
Actual exports and export subsidies commitments, 1996-98a
Actual outlays on
subsidized exports
(US$ million)Outlay commitments
(US$ million)Actual subsidized
exports
('000 tonnes)Export
commitments
('000 tonnes)Total exports
('000 tonnes)
Product
(HS Code)1996-
971997-
981996-
971997-
981996-
971997-
981996-
971997-
981996-
971997-
98
Cut flowers
(0603.1000) 4.3 1.0 11.2 10.9 415b116b761b750b1,529b1,634b
Vegetables
(0701-09) 1.0 0.0 8.6 8.4 18 0 88 87 92 135
Citrus fruit
(0805) 0.6 0.0 16.8 16.4 20 0 412 406 337 332
Other fruit(0803, 04,06-10) 0.0 0.0 5.3 5.2 0 0 53 52 86 71
Goose liver 0.0 0.0 1.2 1.2 0 0 0.30 0.30 0.35 0.24
Cotton 0.0 0.0 8.9 8.7 0 0 46 45 43 41
T o t a l 5 . 9 1 . 05 2 . 05 0 . 8 . . . . . . . . . . . .
.. Not available.
a Marketing year beginning 1 October.
b Million units.
Source : Data supplied by the Israeli authorities.
                                                     
4 Specific measures include a debt-relief scheme for the Kibbutzim and the Moshavim.WT/TPR/S/58 Trade Policy Review
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19. Other measures benefiting agricultural exports include those available to all sectors such as
export promotion and marketing assistance (Chapter III(3)(iv)).
20. An export licensing system is maintained for some food products and fresh agricultural
products for sanitary and quality control.
(iv) Import regime
21. Despite considerable improvements since its last Trade Policy Review, Israel still maintains
relatively extensive import restrictions on some agricultural and food products.  A wide range of trade
measures shield domestic farmers from international competition.  The import regime for agricultural
products consists of high tariffs, seasonal tariffs, variable import levies, safeguard levies, tariff quotas
and quantitative restrictions.  Other measures affecting agricultural imports include sanitary and
phytosanitary controls.
22. Import quotas are maintained for animal products and certain fruit, vegetable, oilseed and
cereal products.  Quantitative restrictions also restrict imports of some product groups, including
sheep and goat meat, and milk and cream above 1.5% fat content, under the Special Treatment clause
provided for in Annex 5 of the WTO Agreement on Agriculture;  recently Israel tariffied restrictions
on all cheese types and no longer invokes Annex 5 for these products.
23. Tariff quotas have been established for 12 product groups, as described in Table IV.3.
However, for most of these products the in-quota rate is above the MFN 1999 applied rate, thus
rendering the quota redundant.  The main characteristic of these tariff quotas is therefore that they are
in general vastly overfilled:  imports of ten of the 12 product groups exceeded quota quantities.5  For
edible fats and oil there have been no in-quota imports at all during the period 1995 to 1998.
According to Israeli authorities, there are no specif ic laws or regulations governing the administration
and allocation of tariff quotas.
24. Israeli farmers also benefit from relatively high tariff protection.  The average MFN applied
tariff (including the ad valorem  equivalents of specific, compound and alternate duties) on
agricultural products is around 22% (Chart IV.3).  Above average rates are found in five subsectors:
dairy products (with an average tariff of 95.5%), meat products (41.5%), edible vegetables (36%),
edible fruit (36%), and beverages and spirits (23.3%).
25. As noted above, other measures affecting imports of some agricultural products are seasonal
tariffs and variable import levies and safeguard levies.  Seasonal tariffs have been in operation
since 1996, on certain goods during the product's high season;  products affected include most fruit
and some vegetables.  Variable levies, affecting a number of agricultural products (such as millet,
rapeseed, sunflower seed, sugar, pasta products, fruit and nuts, wine, powdered milk, milk, and frozenfish), are maintained to offset the difference between world prices and prices in the Israeli market for
these products.
6  Imports of 11 agricultural goods are also subject to safeguard levies (as they are
called in the Trade Levies Law of 1991).
                                                     
5 The main reason for the "overfill" of the tariff quotas is, according to the authorities, the wave of new
immigration from the former USSR, and Ethiopia.  The demographic changes from 1989 to 1994 bro ught about
new consumption patterns and caused mo st tariff quotas to be exceeded.
6 Concerns have been raised by some trading partners about the calculation of domestic costs of
production in Israel as the basis for high import levies imposed on imported food and agricultural goods.Israel WT/TPR/S/58
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Table IV.3
Tariff quotas applied to imports
WalnutsWheat and
meslin Edible fats and oils Sweet cornCitrus juice,
concentratesBovine, live
and meat
HS 0802.31 1001 1516.1110 2005.8000 2009.10-30 (1) 0102.10
0802.32 (2) 0102.9000
(3) 0201-02; 1601-03
(tonnes)
Consumption
1986-88100 700,000 15,000 6,000 3,000 44,000
Consumption
1996-982,640 817,000 0 280a7,550a88,000
Imports:  initial
quota quantity,base year100 450,000 450 200 100 37,250
1995 quota 107 450,000 480 215 106 37,250
1996 quota 114 450,000 510 230 112 37,250
1997 quota 121 450,000 540 245 118 37,250
1998 quota 128 450,000 570 260 124 37,250
2004 quota 170 450,000 750 350 160 37,250
Actual importsb
1995 2,509 (OS) 753,732 (OS) 0 217 (OS) 12,167 (OS) 47,502 (OS)
1996 2,674 (OS) 475,009 (OS) 0 156 (67.8%) 9,423 (OS) 123,953 (OS)
1997 2,437 (OS) 694,239 (OS) 0 371 (OS) 6,920 (OS) 66,411 (OS)
1998 2,731 (OS) 832,775 (OS) 0 300 (OS) 6,195 (OS) 57,535 (OS)
(%, US$ and NIS)
In-quota rate
Base year 22-24 100 US$ 0.8/kg >=12% 20 26 (1)15, (2)50, (3)120
2004 1-20 85 US$ 0.8/kg >=12% 20 26 (1)15, (2)50, (3)120
Preferential rate
(1998)21% 0% US$0.2/kg 0% (EU) 0% (U.S.) 0%-100%
Applied rate
(1998)22% 0%, 50% 8% 25%+1.1 NIS/kg 19% 0%-213%
Out-of-quota rate
Base year 102 150 100 150 142 (1)50, (2)150, (3)223
2004 87 128 85 128 120 (1)43, (2)128, (3)190
Sheep and Milk and Milk and Processed Other
goats, fresh cream < 1.5% cream > 1.5% cheese cheese Prunes
HS 0204 0402.1000 0402.2000 0406.3000 0406.9000 0813.2000
(tonnes)
Consumption
1986-88.. 1,200 .. 1,030 10,035 1,500
Consumption
1996-982,200 1,625 910 1,530 19,282 1,390
Imports:  initial
quota quantity,base year240 1,200 50 34 540 600
1995 quota 280 1,200 58 40 630 600
1996 quota 320 1,200 67 45 720 600
1997 quota 360 1,200 75 51 810 600
1998 quota 400 1,200 83 57 900 600
2004 quota 480 1,200 100 68 1,080 600
Actual imports
1995 621 (OS) 2,968 (OS) 108 (OS) 229 (OS) 216 (34.3%) 870 (OS)
1996 410 (OS) 423 (35.5%) 272 (OS) 111 (OS) 268 (37.2%) 1,109 (OS)
1997 425 (OS) 2,389 (OS) 350 (OS) 102 (OS) 543 (67.0%) 1,608 (OS)
1998 536 (OS) 2,064 (OS) 2,112 (OS) 97 (OS) 494 (54.9%) 1,450 (OS)
Table IV.3 (cont'd)WT/TPR/S/58 Trade Policy Review
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Sheep and Milk and Milk and Processed Other
goats, fresh cream < 1.5% cream > 1.5% cheese cheese Prunes
(%, US$ and NIS)
In-quota rate
Base year 100 100 215 150 250 10
2004 100 85 215 150 250 10
Preferential rate
(1998)0% (Jordan) 0% (Cz., Slovk.) 0% (Czech Rep.) 13 NIS/kg (EU) 13 NIS/kg (EU) 0% (U.S.)
Applied rate
(1998)50% 182% 215% 19NIS/kg -100% 19NIS/kg -100% 6 NIS/kg-20%
+1.8NIS/kg
Out-of-quota rate
Base year ..c190 ..c..c..c120
2004 ..c162 ..c19NIS/kg-50% 19NIS/kg-50% 102
.. Not available.
a Import data only.
b In brackets, fill-rate;  OS represents a fill-rate over 100%.
c Special treatment (see Annex 5).
Source :   WTO Secretariat.
(b) Dairy and meat products
26. Protection in the dairy and meat products subsectors appears to remain relatively high;
imports continue to be subject to high tariffs and quantitative restrictions.  As noted above, applied
MFN tariffs on meat (HS02) are on average 40%, while those on dairy products (HS04) reach nearly
100%.
Live bovine and meat products
27. Israel's tariff quota for live bovine and their products amounts to 37,250 tonnes annually.
However, in most cases, this measure appears to be redundant as the applied 1999 MFN rates are
lower than the in-quota rates.  In all three years since 1995, imports at bound in-quota rates, whichrange from 15% to 120%, have vastly exceeded the tariff quota volume.  Products can be divided into
four groups according to the import regime:
- "breeding bovine" may be imported freely at a bound in-quota rate of 15%;  however,
the applied MFN rate in 1999 is 0%;
- "other live bovine" are imported at a bound in-quota rate of 50%, with licences to
import up to 5,250 calves weighing not more than 295 kgs. allocated to cattle farmers
by the Ministry of Agriculture, and to other applicants for 1,250 calves weighing
more than 295 kgs.;  here again, the applied MFN rate for 1999 is 0%;
- the third group, consisting of fresh or chilled bovine meat (HS 0201) may be
imported under licence allocated on a first-come-first-served basis at the bound rate
of 120%, while the average MFN rate is 156%;  and
- frozen bovine meat and bovine meat preparations, which are restricted only by
in-quota duties of 120%;  however, the MFN rate is 0%.
28. A potentially more restrictive measure affects meat products.  It appears that Israel maintains
a complete ban on imports of non-kosher meat and meat products and very restrictive certification
requirements for foreign plants wishing to export their products to Israel.Israel WT/TPR/S/58
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Chart IV.3                                          
Average tariff rates on agricultural products by HS chapter, 1999
0102030405060708090100
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24Per cent
Source :  WTO Secretariat calculations, based on data provided by the Israeli authorities.Average rate (22.0%)
Chapter
01
02
03
04 05
06
0708
09
1011
12
13
14
1516
17
1819
20
2122
23
24Description
Live animals
Meat and edible meat offals
Fish and crustaceans, molluscs and other aquatic invertebrates
Dairy produce, birds eggs, natural honey, edible products of animal origin  Products of animal origin, n.e.s.
Live trees and other plants;  bulbs, roots and the like;  cut flowers
Edible vegetables and certain roots and tubersEdible fruit and nuts;  peel of citrus fruit or melons
Coffee, tea, mate and spices
CerealsProducts of the milling industry;  malt;  starches;  wheat gluten
Oil seeds and oleaginous fruits;  miscellaneous grains, seeds and fruit
Lacs;  gums, resins and other vegetable saps and extracts
Vegetable plaiting materials;  vegetable products n.e.s.
Animal or vegetable fats and oils and other cleavage products;  prepared edible fats; etc.Preparations of meat, or fish or of crustaceans, molluscs or other aquatic invertebrates
Sugars and sugar confectionery
Cocoa and cocoa preparationsPreparations of cereals, flour, starch or milk;  pastrycooks' products
Preparations of vegetables, fruit, nuts or other parts of plants
Miscellaneous edible preparationsBeverages, spirits and vinegar
Residues and waste from the food industries;  prepared animal fodder
Tobacco and manufactured tobacco substitutes
Note:      The tariff analysis includes ad valorem equivalents of specific, compound and alternate duties, as available.WT/TPR/S/58 Trade Policy Review
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Sheep and goat meat
29. Under the special treatment provisions of Annex 5 of the WTO Agreement on Agriculture,
Israel has not bound out-of-quota tariffs on sheep an d goat meat.  The quota for sheep and goat meat
was specified at 240 tonnes for the base year, rising to 480 tonnes by 2004.  Actual imports in the
period 1995-97 exceeded the quota volumes for the respective years.  The quota system appears to be
redundant as the bound in-quota rate of 100% is twice the applied MFN tariff of 50%.  Importlicences for these products are issued by the Ministry of Industry and Trade to all applicants on a
pro-rata basis.
Milk powder
30. Imports of milk powder are subject to relatively high tariffs;  applied MFN tariffs range
between 182% and 215%.  In addition, the milk sector is protected by a tariff-quota system.  Twodifferent tariff quotas have been established for milk and cream depending on whether the fat content
exceeds 1.5% (a volume of 50 tonnes in the base year, rising to 100 tonnes in 2004 with an in-quota
tariff duty of 215%) or not (a fixed volume of 1,200 tonnes).  However, both quotas have been
considerably over-filled in most years.  No out-of-quota tariff has been bound for milk and cream with
more than 1.5% fat content.
31. Import licences, issued by the Ministry of Industry and Trade are unrestricted to downstream
producers;  the remainder is allocated to other importers on a first-come-first-served basis.
Cheese
32. Imports of cheese, other than fresh, grated or blue cheese, are subject to relatively high tariff
rates and tariff quotas.  The tariff quota system for cheese (of around 900 tonnes, compared with a
domestic consumption volume of close to 20,000 tonnes) is reserved for a few countries:  the United
States (386 tonnes duty free), the European Union (240 tonnes with a specific tariff of NIS 13/kg.),
Hungary (100 tonnes duty free), and the Slovak  Republic (50 tonnes at a specific rate of
NIS 8.25/kg.).
33. Until recently, Israel invoked special treatment under Annex 5 of the Agreement on
Agriculture, on processed and other cheese.  While the quota for processed cheese had been
over-filled in all years since 1995, the quota on other cheese had registered low fill rates for the sameperiod.
7  The allocation of quotas was reserved to two categories of importers:  domestic industry
(based on market shares) and food brokers (a fixed quota).8  Recently, Israel has tariffied all cheese
types and the allocation is independent of the type of importer.
(c) Fruit, vegetables and their products
34. Relatively high tariff rates are levied on imports of these products.  Seasonal tariffs and
variable import levies also provide considerable protection to Israeli farmers against imports of some
items in these sectors.  Applied MFN tariffs for fruit and vegetables average 35% in 1999, ranging to
over 100% (a peak of 250% applies to potatoes).  Tariff preferences are granted to U.S. and EU
suppliers.
                                                     
7 According to the authorities, low fill rates were due to consumer taste (preference for soft cheese) and
to the fact that major retail chains may not be inclined to sell non-kosher food products.
8 The allocation system before then was more detailed.  For example, in 1996-97, importers were
classified into five groups:  retail chains, pizza chains, dairy, food brokers and other.Israel WT/TPR/S/58
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35. Only four fruit and vegetable products are subject to tariff quotas, in most cases considerably
exceeded by actual imports at in-quota conditions;  these are prunes, walnuts, sweet corn
and concentrated citrus fruit.  The 600-tonne tariff quota for prunes is allocated to U.S. suppliers
exclusively.
36. Very large amounts of concentrated citrus juice are imported at the bound in-quota rate of
26%, despite the existence of low quotas (in 1998, the quota was 124 tonnes compared with actualimports of around 6,200 tonnes).  However, the applied MFN rate is lower at 19%, while imports
from the U.S. are duty free.
(d) Cereals, oilseeds and their products
37. Imports of cereal and oilseed products are generally subject to relatively low MFN import
duties (average of less than 10%), with the exception of wheat (50%) and certain vegetable seeds(120%).  However, imports of oil are also subject to variable import levies and safeguard levies.  Two
categories of products - wheat and meslin (HS 10 01) and edible fats and oils (HS 1516.1110) - are
regulated by tariff quotas.
38. In the case of wheat, the tariff quota of 450,000 tonnes has been exceeded in all three years
since 1995.  With regard to non-feed wheat, an unspecified reserve has been made for "overlappingimports from countries having a Free Trade Agreement (FTA) with Israel".  The in-quota rate is
100%, declining to 85% by 2004.  According to the authorities, in practice, unlimited imports of feed
wheat enter Israel duty free, which explains why the tariff quota is over-filled.  In addition, the
Ministry of Industry and Trade issues duty-free licences for non-feed wheat to all importers who meet
domestic purchase requirements;  any additional quantity is subject to a duty of 50%, which according
to the authorities "in practice is not commercially attractive".
9
(3) MANUFACTURING
(i) Main features
39. During the period under review (1994-99), Israeli manufacturing has continued to account for
a diminishing share of the economy.  Annual averag e real growth of the manufacturing sector has
been below the average for the economy and its share in business sector GDP (i.e. excluding public
and housing services and non-profit organization s) has declined from 29% in 1994 to around 26%
in 1998.  However, the share of manufacturing in total exports of goods and services rose over the
same period from 49 to 54%.  The sector accounts for about one fifth of overall GDP and for some
20% of employment.
40. Israel's high-tech industries, such as com puters, communications and medical equipment,
have prospered during the period under review, while the traditional labour-intensive industries haveendured increased competition from developing countries, which benefit from relatively low-cost
labour force (Chart IV.4 and Table IV.4).  The share of the export-oriented high-tech industries in
manufacturing production (output) has risen from  25% in 1994 to about 30% in 1998, while that of
traditional industries has declined from about 37 to 35% over the same period.  There are two main
factors behind this development.
10  Between 1990 and 1995 the influx of immigrants increased
domestic demand for products of the traditional and mixed industries, dominated by basic products
needed by the immigrants at the initial stage of their absorption.  As the initial stage of absorption
came to an end, demand for the products of the traditional industries began to ease.  Another factor
                                                     
9 WTO document G/AG/R/7, 26 November 1996.
10 Bank of Israel (1998b).WT/TPR/S/58 Trade Policy Review
Page 92
explaining the evolution of the structure of the manufacturing sector in Israel was the process of
exposing the economy to competing imports through lowering trade barriers as well as allowing
foreign investors, which had an adverse effect primarily on the traditional industries.11  S e l e c t e d
indicators of the manufacturing sector are provided in Table AIV.1.
100105110115120125130135
JM MJ SNJM MJ SNJM MJ SNJM MJ SN1994 =100Chart IV.4
Industrial production index - selected industries, 1995-98
Low-tech industries  High-tech industries
Total
1995 1998 1997 1996
High-tech industries include chemicals, chemical products, and refined petroleum;  machinery and 
equipment;  electric motors, electronic components and equipment, and other equipment;  and transport 
equipment.  Low-tech industries include food and tobacco products, and beverages;  textiles and wearing 
apparel;  footwear, leather and leather products;  wood and wood products (excluding furniture);  paper 
and paper products;  publishing and printing;  and non-metallic mineral products.
Data provided b y the Israeli authorities.Note:
Source :
41. Overall, Israel's main barriers to trade in industrial goods appear to be non-tariff barriers,
rather than tariffs.  As noted in the previous chapte r, as a result of the free-trade agreements concluded
by Israel with the European Union, the United  States, the European Free Trade Association,
Palestinian Authority, Canada, and several other countries (Czech Republic, Hungary, Jordan, Poland,
Slovak Republic, Slovenia and Turkey), most manuf acturing imports enter Israel under preferential
(mostly duty free) rates.  For manufacturing imports from other sources, the overall tariff protection is
moderate (simple average, including AVEs, of 6.6% for HS 25-97 and 8.2% for ISIC 3), except for
the food, beverages, clothing and footwear industries, which are protected by relatively high tariffs(Chart IV.5 and Table AIV.2).
12  In this context it is interesting to note that there seems to be a
                                                     
11 Evidence presented in a recent empirical study indicates that slower productivity growth in
traditional sectors had led to relatively larger increases in  unit labour costs compared with high-tech sectors.  It
also suggests that the minimum wage has played a role in the relatively faster growth in unit labour costs
(Clifton, 1998).
12 Tariff averages by sector vary according to the defi nition used.  The International Standard Industrial
Classification (ISIC) categories, contained in Chart IV.5  and Table AIV.2, attempt to clarify the distinction
between agricultural/processed food, beverage and tob acco sectors (ISIC 1 and 31) and other manufactures.Israel WT/TPR/S/58
Page 93
negative relationship between the degree of tariff protection and the industries' performance.  The
high-performing high-tech industries tend to have lower than average tariff protection, whereas the
slow-growing traditional industries tend to be protected by higher than average tariffs.
Table IV.4
Composition of manufacturing industry
Classification A
Classification B High-tech Mixed Traditional
Export orientation
(over 40% exports in
total sale)Chemicals and oil products (9.8)
Electronic equipment (13.9)
Electric engines (2.2)Electronic communications
equipment (8.5)
Transport equipment (5.5)Jewellery and objects d'art (1.0)
Mining and quarrying (2.7)
Miscellaneous (0.8)
Intermediate
(20-40% exports in
total sale)Machinery and equipment (3.7) Metal products (11.1)
Plastic and rubber products (5.6)Textiles and clothing (4.8)
Domestic orientation
(less than 20% exports
in total sale)Basic metals (2.3) Printing and publishing (5.2)
Paper and its products (1.9)Food, drink, tobacco (12.3)
Non-metallic mineral products (4.0)
Wood and its products (4.0)Leather and its products (0.5)
Note: The high-tech (traditional) group comprises industries in which employees are characterized by a significantly above-avera ge
(below-average) level of human capital (engineers, other graduates, practical engineers, and technicians).  The industry's shar e in
manufacturing production in 1997 is given in parentheses.
Source : Bank of Israel (1998b), Annual Report 1997 , Jerusalem, March.
42. While tariffs generally do not constitute a significant barrier to trade, Israel has a number of
other measures affecting trade and production of manufactured products.  These include strict
enforcement of technical regulations (mandatory standards covering most imports of the ISIC
industries food, beverages and tobacco;  and textiles, clothing and leather products), government
procurement preferences (all industries), licensing requirements (concentrated in transport equipment;leather products;  and other food products and animal feeds), price regulations (electricity,
refrigerators and gas, oil and fuels for domestic use) and a generous state-aid system (mainly
benefiting the electronic and electrical industries).
43. Competition may also be hampered by the state ownership of companies in some
manufacturing industries.  A privatization programme has recently gained momentum and the
Histadrut has disposed of much of its holdings.
13  The private sector now accounts for around 76% of
industrial output, compared to 61% in 1990.  Nevertheless, state-economic enterprises have asignificant presence in basic and heavy industries.
                                                     
13 The Histadrut is a trade union organization, accounting for about 85% of employees.  It is also active
in social services, education and cultural activities, and economic development projects.WT/TPR/S/58 Trade Policy Review
Page 94
05101520253035
Source :  WTO Secretariat calculations, based on data provided by the Israeli authorities.Average tariff rates by ISIC categories (per cent)
Average rate (8.2%)
ISIC        Description
311-312   Food products
313          Beverages
314          Tobacco321          Textiles322          Clothing323          Leather products324          Footwear331          Wood products332          Furniture and                   fixturesISIC   Description
369      Other non-metallic mineral products
371      Iron and steel
372      Non-ferrous metal381      Fabricated metal products382      Non-electrical machinery including             computers 383      Electrical machinery384      Transport equipment385      Professional and scientific equipment 390      Other manufactured productsISIC   Description
341     Paper products
342     Printing and publishing
351     Industrial chemicals352     Other chemical products353     Petroleum refineries354     Petroleum and coal products355     Rubber products356     Plastic products361     Pottery and china362     Glass and glass productsChart IV.5
Tariffs on manufactured products, 1999
Note:      The tariff analysis includes ad valorem equivalents of specific, compound and alternate duties, as available.
44. As noted above, the Israeli manufacturing sector, as well as foreign investors, make extensive
use of Israel's state-aid system.  The total cost in 1996 (the most recent data available) is estimated at
8.4% of GDP, with the manufacturing industry being the main beneficiary.  Under Israel's main
state-aid scheme, the regional-aid programme, investors are eligible for tax incentives and grants up to
24% of the investment cost.  In 1998, 70% of total approved investment-incentive certificates weregranted to investors in the industrial sector.  Electricity and electronics (including software houses and
energy), followed by chemicals, were the main industry recipients, accounting for 37% and 19%,
respectively, of total approved industrial investments.  The manufacturing sector also benefits from
several research and development (R&D) programmes.  The standard R&D support is 50% (66% for
start-ups) of the cost;  total outlay in 1998 was NIS 3.6 billion.   As with the regional aid programme,
R&D support is concentrated in electronic and electrical industries (70% of total expenditure in theIsrael WT/TPR/S/58
Page 95
manufacturing sector) (Chapter III(4)(ii)).  Investment in R&D has facilitated improvement in the
competitiveness of Israeli firms, but, at the same  time, the alternative cost has not been evaluated.
45. Israel’s liberal and open foreign direct investment regime, in tandem with the generous
state-aid system, attracted gross foreign direct investment amounting to some US$3.4 billion in 1997,
albeit with large annual fluctuations.  Data on foreign direct investment by sector is not complete as
only transactions over US$0.1 million are recorded.  Nevertheless, these data indicate that in 1996
gross foreign direct investment in the manufacturing sector was concentrated in chemicals (47% of
total manufacturing investment) and electricity and electronics (30%).  In the following year,
electricity and electronics (accounting for 70% of total manufacturing gross investment) was the
major beneficiary industry (Chapter I(3)(ii)).
(ii) Expansion in high-tech industries
(a) Electric and electronic equipment
46. The electric and electronic equipment industry, the principal sector in Israel, accounting for
19% of industrial production in 1998, has outpaced the performance of the manufacturing sector as a
whole (Table IV.5).  The achievements of the industry can also be evaluated in terms of its value
added generated, i.e. its contribution of GDP.  Average company value added in the electronicindustries reached 68% in 1997 compared with a 42% manufacturing average.
14  Much of its growth
can be attributed to good export realization with more than half (59%) of gross output being exported
(1998).  The sector has traditionally been characterized by a high R&D content (the number of
employees in R&D as a percentage of the total employees is 12% compared with 2% for all
manufacturing).  The defence-related electronics sector has contributed to the industry's expansion
over the years with the Israel Aircraft Industries (I AI) being the main player in the industry.  Military
R&D achievements also produce important spin-offs for civilian applications.  In addition to militaryequipment, Israel's strength in electronics is centered around medical systems and
telecommunications.  The software industry has become highly competitive in a number of fields such
as database management software, educational software, anti-virus protection and computer security
systems.  Israel is a world leader in fibre-optics, electro-optic inspection systems for printed circuit
boards, thermal imaging night-vision systems and electro-optics-based automated manufacturingsystems.  Also, some small data communications manufacturers are acknowledged as world leaders in
specialized products.
15  The industry has greatly benefited from foreign direct investment inflows.
Data on investment inflows over US$0.1 million indicate that electricity and electronics industries
were the major beneficiaries within the manufacturing sector in 1997.  Total foreign direct investment
in manufacturing amounted to US$399 million, of which 70% went into electricity and electronics.
47. Tariff protection for the electrical machinery industry (ISIC 383) has declined and is now
lower than the average protection for the manufacturing sector.  The average MFN tariff rate
(excluding AVEs) for the industry in 1993 was 9.1% compared with 8.5% for the manufacturing
sector as a whole;  the corresponding numbers in 1999 are 5.7% and 7.1% (Table AIV.2).  Imports
from the EU and the United States enter the Israeli market duty free.  Other border measures includemandatory standards, applying to about half of the tariff lines in the electrical machinery section of
the 1999 customs tariff book (Table AIV.3).  On the other hand, only a few products (1% of the tariff
lines) are subject to import licensing.
                                                     
14 Ministry of Industry and Trade (1997).
15 EIU (1997).WT/TPR/S/58 Trade Policy Review
Page 96
Table IV.5
Evolution of the electrical and electronic equipment industries, 1992-98
(Per cent)
1992 1993 1994 1995 1996 1997 1998
Industrial production (real annual rate of change):
    Electronic communications equipment 18.3 13.8 9.2 9.3 18.8 12.5 10.5
    Electronic equipment 4.0 6.1 7.8 9.2 7.1 5.9 3.9
    Electronic motors 7.3 8.6 -1.0 8.1 -2.3 -1.0 10.4
    Memo: total non-diamond industry 8.2 6.8 7.4 8.4 5.4 1.7 2.8
Exports (annual rate of change of value):
    Electrical and electronic equipment industry (ISIC 383) 16.6 22.0 22.5 32.2 12.8 16.2 14.4
    Memo: total manufacturing (ISIC 3) 12.0 15.3 11.9 11.5 6.9 10.0 8.0
Source : Data provided by the Israeli authorities;  and UNSD, Comtrade database, (SITC Rev.3) (exports).
48. The Government promotes R&D in the industry through a system of grants.  As noted earlier,
the share of government participation in total R&D expenditure in the electronic communications
equipment and component industry is the highest in the economy (48.9% in 1996).  Between 1994
and 1996, annual R&D grants to the electronic communications and component industries rose from
NIS 205 million to NIS 286 million.  The Government also supports the expansion of the industry
through tax and grant incentives.  The industry accounted for a relatively large share (24% of
investments in 1998) of investment incentive certificates issued under the regional aid programme
(Chapter III(4)(ii)).
(b) Chemicals and oil products
49. The chemicals and oil products industries, which are largely state owned, are among Israel's
main industries;  in 1998 they accounted for about 13% of manufacturing output and 20% of
industrial exports.  These subsectors are also export oriented;  around 38% of domestic production
was exported (the latest available data) (Table AIV.1).  The chemicals industry consists of chemical
products, pesticides, detergents, paints, scents and pharmaceuticals.  Imports of chemical products are
quite substantial (US$2.7 billion equivalent to 12% of manufacturing imports in 1997), and imports of
crude petroleum and partly refined petroleum also contribute to the import bill (US$1.5 billionin 1997).  Israel exports a small amount of surplus refined products.
50. Tariff protection for chemicals and oil products is below the average for the manufacturing
sector.  The simple average MFN tariff (excluding AVEs) on industrial chemicals (ISIC 351) has
declined from 3.6% in 1993 to 2.7% in 1999, while for other chemicals, including pharmaceuticals
(ISIC 352), the corresponding numbers are 6.0% and 4.8% (Table AIV.2).  Imports of petroleumrefineries products (ISIC 353) face an average tariff of 3.0% (down from 3.5% in 1993), while tariff
protection for manufacturing of miscellaneous petr oleum and coal products (ISIC 354) is only 1.8%,
the same as in 1993.  Most basic industrial chemicals enter Israel duty free.  Apart from a few
chemical products (e.g. certain albuminoidal substances, modified starches and glues) duties are not
collected on EU products, while all chemicals and oil products of U.S. origin enter the Israeli marketduty free.  Imports are also subject to strict standards and health regulations.  Almost 90% of the tariff
lines in the rubber products sector and one third of chemicals (other than industrial) are subject to
mandatory standards (Table AIV.3).
51. There are some restrictions in the domestic pharmaceutical sector, including rules on the
establishment and location of pharmacies, and price controls.  In the oil products market, theGovernment determines the maximum prices for refined oil products and gas.Israel WT/TPR/S/58
Page 97
52. As in the electrical and electronic equipment industry, Israel's exports of chemicals and oil
products may have benefited from extensive R&D assistance from the Government.  The Government
financed about 20% of the total amount of NIS 348 million spent in 1996 on R&D in refined
petroleum, chemical and chemical products.  Chem icals and medicine accounted for 10% of approved
investment certificates issued in 1998 under th e regional aid programme (Chapter III(4)(ii)).
(c) Transport equipment, including motor vehicles
53. The transport equipment sector is highly export oriented.  While the industry accounted for
4.1% of industrial output in 1998, 61% of output was exported. The main sub-industries are the
manufacture and repair of maritime vessels and aircraft;  the major export items are aircraft and their
equipment.  Apart from the construction of some hundred utility vehicles a year, there is no motor
industry established in Israel;  imports are the basic source of supply.  It appears that the relaxation ofthe enforcement of the Arab boycott against Israel has led to the entry of the major Japanese and
Korean automobiles into the Israeli market.  By 1995, all major Japanese and Korean manufactures
were active in the Israeli market and a year later all European and American automobile manufactures
were also selling their products in Israel.
16
54. As imports are the major source of motor vehicles, most of these products enjoy lower than
average manufacturing tariffs (Tables IV.6 and AIV.2).  Imports from Israel's free-trade area partners
enter Israel duty free.
55. Other border measures include an import licensing system and mandatory standards.  More
than 40% of the transport equipment tariff lines ar e subject to safety requirements, and within the
motor vehicles industry almost all goods require an approval for safety compliance and assurance of
supply of spare parts.  Imports of transport equipmen t also have to comply with standards;  mandatory
standards apply to almost 40% of the tariff lines.  Transport equipment manufacturers are not granted
any sector-specific incentives;  however, as for all investors, they have access to those offered within
the framework of Israel's many stat e-aid programmes (Chapter III(4)(ii)).
56. In addition to customs duties, motor vehicles sold on the domestic market are subject to high
domestic taxes.  Motor vehicles are subject to a 95% flat-rate purchase tax (down from 240% in 1993)
as well as a 17% value-added tax (also applied to imports from free-trade agreement partners, such asthe EU and the United States).
(iii) Adjustments in traditional industries
(a) Food, beverages and tobacco
57. The food, beverages and tobacco industries, which accounted for 17% of industrial
production in 1998, are the second largest employers in the industrial sector (after the electric andelectronic equipment industry).  These industries are principally oriented towards the domestic
market;  a large share (about 95% in 1998) of their output is sold in the domestic market.  However, in
the segment of fresh and processed foods, Israel is a major exporter of fruit and canned vegetables.
The export success may be explained by Israel's proximity to most of its major markets in Western
Europe.  Almost half of the industries' exports ar e destined to the European Union (1997).  Another
factor explaining the sector's export performance is Israel's favourable climate enabling it to produce
vegetables, fruit and flowers during the winter off-season, particularly for export markets in Europe.
Also, the quality controls of Israeli products are noted to be of a high level.  The food industry
benefits from the domestic availability of most of its raw materials.
                                                     
16 Fershtman and Gandal (1998).WT/TPR/S/58 Trade Policy Review
Page 98
Table IV.6
Selected average MFN tariffs in the transport equipment industry, 1993 and 1999
(Per cent)
Item 1993 (excl. AVEs) 1999 (excl. AVEs)
Cars and vehicles
  Motor vehicles for transport of ten or more persons  (HS 8702) 6.5  (1.7) 6.5  (1.7)
  Other motor vehicles for transport of goods  (HS 8703) 4.6  (3.3) 4.6  (3.3)
  Motor vehicles fitted for transport of goods  (HS 8704) 2.5  (3.4) 2.3  (3.3)
  Chassis fitted for engine  (HS 8706) 1.8  (3.5) 2.8  (3.8)
  Bodies  (HS 8707) 9.1  (6.1) 7.0  (4.5)
  Parts and accessories  (HS 8708) 4.4  (3.6) 4.4  (3.3)
Ships
  Yachts and other vessels for pleasure or sports (HS 8903) 6.0  (6.4) 6.0  (6.4)
  Vessels, including warships and lifeboats (HS 8906) 4.0  (6.9) 4.0  (6.9)
Aircrafts
  Aircraft and spacecraft (HS 8802) 0.0  (0.0) 0.0  (0.0)
  Aircraft launching gear  (HS 8805) 0.0  (0.0) 0.0  (0.0)
Memo:
  Average transport equipment (ISIC 384) 4.2  (6.6) 3.9  (6.2)
  Average industry (ISIC 3) 8.5  (10.9) 7.1  (12.1)
Note: Standard deviation is provided in parenthesis.  Specific rates have been excluded from the analysis and the averages for
combined and alternate rates have been calculated on the basis of the ad valorem  component of such rates.
Source : WTO Secretariat, based on information provided by the Israeli authorities;  and GATT (1995a),  Trade Policy Review – Israel ,
Geneva.
58. As a result of the tariffication process under the Uruguay Round, the simple average MFN
tariff (excluding AVEs) on food, beverages and tobacco (ISIC 31) has increased two and half fold
since 1993 to 18.7% (Tables IV.7 and AIV.2).  Tariffs vary widely within the industries, with food
imports being affected by rates of up to 215%.  In addition, a surcharge (so-called safeguard levy) is
imposed on 11 agricultural goods (Table AIII.5).  Tariff preferences for imports of food products from
the EU and the United States are comparatively low, while the margin of preferences with respect to
the MFN tariff is higher for imports of beverages and tobacco products (Table IV.7).
59. During the tariffication process under the Uruguay Round Agreement, Israel replaced its
non-tariff restrictions, by tariff quotas.  As noted in section 2, tariff quotas apply to imports of animal
products and certain fruit, vegetable, oilseed and cereal products (Table III.5).  However, for almost
all products the in-quota rate is above the MFN 1999 rate, thus rendering the quota redundant
(Chapter III(2)(ii)(g)).
Table IV.7
Selected average tariffs for the food, beverages and tobacco industries, 1993 and 1999
(Per cent)
1993 19991999 preferential
(exc. AVEs)
Item (excl. AVEs) (excl. AVEs) (incl. AVEs) EU US
Food, beverages and tobacco (ISIC 31) 7.4 18.7 20.5 14.3 11.6
     Food manufacturing (ISIC 311) 7.1 20.7 22.1 16.6 14.0
     Other food and prepared animal feeds (ISIC312) 8.0 7.5 9.7 4.6 1.1
     Beverages industries (ISIC 313) 10.9 15.3 22.1 7.2 1.3
     Tobacco products (ISIC 314) 7.6 8.2 9.6 0.0 0.0
Note: For 1993 and 1999 (excluding AVEs) specific rates have been excluded from the analysis and the averages for combined and
alternate rates have been calculated on the basis of the ad valorem  component of such rates.   AVEs of specific, combined and
alternate rates were calculated by the authorities as the value of customs duty actually paid on the MFN rate in 1997 divided b y
the import value of these shipments.
Source : WTO Secretariat, based on information provided by the Israeli authorities.
60. Other measures affecting trade and production of food, beverages and tobacco include import
and export licences, import quotas, seasonal tariffs, variable levies, export monopoly by the State andstandards.  As in 1994, certain food items are included in the list of items for which import licencesIsrael WT/TPR/S/58
Page 99
are granted only when there are shortages in domestic production.   About 28% of the food, beverages
and leather products may only be imported against an import licence;  licensing is most frequent
among food products (31% of the tariff lines).  Seasonal tariffs apply to 24 agricultural products
(Table AIII.3), while variable import levies apply to some products.  Some agricultural items (ground
nuts, ornamental plants, fruit, vegetables, egg a nd poultry) are exported only by, or on behalf of, the
Israeli Government (Chapter III(3)(v)).  Almost all imports of food, beverages and leather productsare subject to mandatory standards (96% of the tariff lines) (Table AIV.3).
61. Producers of food, beverages and tobacco do not appear to be granted any sector-specific
incentives.  However, as for all investors, they  have access to incentives, mainly grant and tax
incentives, offered within the framework of Israel's  wide array of state-aid programmes.  Under the
main programme, the regional-aid programme, food, drinks and chilling accounted for 8% ofapproved investment certificates issued in 1998.  In the area of R&D support, the Government
financed 8% of the industries total outlay of NIS 19 million on R&D in 1996 (Chapter III(4)(ii)).
(b) Textiles and clothing
62. The textiles, clothing and leather industries in Israel, which accounted in 1998 for 6% of
industrial output, are among the major employers in the industrial sector, (11.2% of industrialemployment in 1998) (Table AIV.1).  The textile items branch (mainly woven fabrics and synthetic
yarns) is more export oriented (41%  of gross output was exported in 1998) than other parts of the
industry.  Exports are based on high-quality and well-designed products using new technologies.  The
sector is heavily dependent on imports of raw material.  Israel's textiles and clothing exports enter
duty free into the important markets of the EU and the United States.  Moreover, Israel's textile and
clothing exports are not faced with quota restrictions.
63. Imports from Israel's major trading partners, the EU and the United States (accounting for
71% of imports in 1997) also enter the Israeli market duty free.  Protection against imports from MFN
sources is, however, relatively high in the sector.  The simple average MFN tariff on textiles
(ISIC 321) is 9.2% and imports of manufacture of wearing apparel (ISIC 322) are faced with an
average MFN tariff of 15.5% (Table AIV.2).  Tariff escalation in textiles is significant, thereby
maintaining higher levels of effective protection to the manufacturing sector than that reflected by thenominal rates.  The average tariff on raw materials is 0.6%, on intermediate goods 7.8%, and on
processed goods 20.6%.
64. While one third of leather products may be imported only against an import licence, other
textiles and clothing products can be imported wit hout a licence (Table AIV.3).  Mandatory standards
are concentrated in clothing (87% of the tariff lines) and footwear (74%), but they are also frequentfor textiles (62%).  Producers of textile and clothing products are not granted any sector-specific
incentives.  The incentives provided through Israel's state-aid programmes are described in
Chapter III(4)(ii).
65. Israel does not maintain quotas on textile and clothing products under the WTO Agreement
on Textiles and Clothing (ATC).  However, Israel retains the right to use the safeguard provision of
Article 6, but has not made use of this provision.
17  Under the ATC Agreement, Israel has submitted
the list of products included in the first and second stage phases of integration into GATT 1994.  For
the first stage, Israel integrated 18% of 1990 imports (by volume).18  For the second stage of
integration, the list of items also comprise some 18% of 1990 imports (by volume).19
                                                     
17 WTO document G/TMB/N/100, May 1995.
18 WTO document G/TMB/N/135/Rev.1/Add.1, January 1998.
19 WTO document G/TMB/N/309, January 1998.WT/TPR/S/58 Trade Policy Review
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(4) SERVICES
(i) Overview
66. Services (including transport, communications, trade and services) account for about 61% of
Israel's GDP (1997), up from 54% in 1994, a nd employ about 43% of the labour force.20  The fastest
growing subsector has been communications, which increased by 11% in 1998.  Israel is net-importer
of services (Chapter I(3)(i)).  All of the largest services components on net external receipts (travel,and freight and transportation) are in deficit.  The single largest foreign exchange earner in the
services sector is tourism.
67. Barriers to foreign firms wishing to provide services in Israel are generally being removed.
The telecommunications industry has in a few years moved from a monopolistic to a more
competitive structure.  This has been achieved by privatization, modernization of the regulatoryframework, and facilitation for new entrants.  As a result, Israeli consumers have enjoyed a surge in
the supply of services as well as a drop in prices of international telephone and cellular services.
Substantial headway has recently been made to liberalize the financial sector.  Nevertheless, Israeli
banking is characterized by a high degree of concentration;  the Government owns most of the assets,
but does not exercise management control.  The recent increase in the share of foreign currency creditto total credit, in combination with the economic  slowdown, may have enhanced the banking sector
risk exposure.
68. While, Israel, like most WTO Members, did not in general commit to further liberalization in
the WTO services negotiations under the General Agreement on Trade in Services (GATS), its
commitments provide legal security for market acces s in the form of assurances not to increase the
level of restrictions covered by the GATS Schedules.  Israel participated actively in the Uruguay
Round services negotiations and its Schedule provides for specific commitments in 49 activities(compared with an average of 23 for developing and 93 for developed countries) out of a total
of 161.
21  Since the conclusion of the Round, Israel has become a Party to the 1997 Agreement on
Telecommunications Services (the Fourth Protocol), the 1997 Information Technology Agreement
(ITA), and the 1997 Agreement on Financial Services (the Fifth Protocol).  Overall, the depth of its
commitments are quite extensive in the financial services area.  Table AIV.4 contains a summary ofIsrael's specific services commitments (excluding the commitments to reduce tariffs on a wide range
of  information technology products).
69. Israel has listed most favourable nation (MFN) exemptions under Article II of the GATS,
reserving the right to offer MFN treatment to some  WTO Members in the areas of (i) film, video and
television programme co-production and distribution, and (ii) banking.  In the former, differentialtreatment is granted to persons of countries with which Israel may have co-production arrangements,
as well as persons engaged in film and video distribution.  In banking, Israel retains the right to grant
licences to suppliers from a country that grants Israeli suppliers similar access.
(ii) Financial services
70. The Israeli capital market is dominated by provident, pension, and mutual funds and
insurance companies, whose assets amounted to about two thirds of the entire capital market in 1997
(Table IV.8).  The value of the capital market - including (mainly government) bonds, shares, and
other assets held by institutions - amounted to NIS 437 million (equivalent to US$124 million) at the
                                                     
20 Data correspond to the GDP of the business sector, i.e. GDP excluding products originating in public
services, non-profit organizations and housing services.
21 GATT (1995b).Israel WT/TPR/S/58
Page 101
end of 1997.  The Israeli banking sector, which has been relatively profitable in recent years, is
characterized by a high degree of concentration.  The three largest banks account for more than 80%
of total banking business.  Foreign banks are allowed, but their presence remains small.  Moreover,
although privatization in the banking sector has begun, the Government still owns the majority share
in Israel's leading banks, but does not exercise management control.  In recent years, successive
Governments have undertaken the divestment of the banking groups' main non-financial holdings, buthave done little to reduce the banks' dominant role in the capital market.  The insurance sector,
similarly to the banking industry, is dominated by a few large firms.  Various regulations concerning
the portfolio allocations of institutional investors are in place and the capital market is characterized
by a degree of government intervention and subsidization, including guaranteed-rate bonds and tax
benefits.
Table IV.8
Overview of the Israeli capital market, end of 1997(NIS million and number of institutions, end of period)
Number of
institutionsTotal
assets Shares
aNegotiable
bondsb cIndexed
earmarked
bondsTreasury
billsbOther assets
held by
institutions
Institutions
    Provident funds 229 128.2 14.9 59.5 7.9 3.3 42.6
    Established pension funds 17 85.7 81.4 4.3
    New pension funds 17 1.9 0.4 1.3 0.2
    Life insurance 23 48.4 1.3 6.9 28.3 11.9
    Mutual fundsd329 20.4 7.5 8.3 2.6 2.0
Households and firms 79.2 38.7 32.1 8.4
Non-residents 30.1 29.2 0.8 0.1
Banks 23 42.8 35.7 7.1
  TOTAL 436.7 91.6 143.7 118.9 21.5 61.0
a Excluding market value of quoted companies derived from their holdings in other quoted companies and  government-owned
companies.
b Excluding securities held by the Bank of Israel.
c Government and corporate bonds, including Gilon and Shahar bonds.
d Adjusted for provident funds' and non-residents' holdings in mutual funds.
Source : Information provided by the Israeli authorities (Bank of Israel, Research and Monetary Department).
(b) Banking
Key features of the banking sector
71. The Israeli banking sector is characterized by a high share of government ownership.
Between 1977 and 1983, banks experienced problems in raising capital because of crowding-out by
government securities.  In response, banks supported their share prices on the stock exchange, to
ensure a satisfactory rate of return for stockholders.  However, by the middle of 1993 the market
opinion held that the shares were overvalued and that the Israeli currency, the shekel, might
depreciate.  Accordingly, they sold off domestic currency assets, including bank shares, and inOctober 1983 the bank shares fell sharply.  To support the banking system, the Government
intervened and exchanged bank shares for state-guaranteed bonds (the Bank Shares Agreement);  the
Government became the majority owner of shares of Israel's leading banks.  However, public
ownership of the banking system has not implied government control.
72. A second important characteristic of the Israeli banking sector is its high degree of
concentration.  The three largest banks (Bank Hapoali m, Bank Leumi, and Israel Discount Bank), and
their subsidiaries, dominate Israel's capital market, controlling well over 80% of industry assets.WT/TPR/S/58 Trade Policy Review
Page 102
Hence, although there are 23 licensed commercial ba nks, one investment bank, eight mortgage banks
and various other specialized financial institutions, the Israeli banking sector lacks a certain
competitiveness.
73. Another feature of the banking sector is that the commercial banks have traditionally
dominated investment banking, the mutual and provident fund sectors, and the brokerage business.
The structure of the banking industry is based on the European model of "universal banking",whereby banks are allowed to operate as retail, wholesale and investment banks, as well as being
active in all the main areas of capital market activity, brokerage, underwriting, and mutual and
provident fund management.
74. Until 1996, there was wide cross-ownership between the banking sector and Israel's economic
activity.  Israeli banks held major stakes in companies in the real economy, potentially a barrier tonew competition.
22  However, measures were taken in 1996 to limit the bank's involvement in the real
economy by amendment to the Banking (Licensing) Law of 1981, requiring each bank to reduce its
non-bank holdings (see below).
Regulatory structure
75. The regulatory structure of the Israeli financial sector is somewhat fragmented with no overall
supervisory body for the sector as a whole.  The authorities are debating whether to establish a single
agency or to go ahead by increasing cooperation and coordination between the existing agencies. The
operations of the banks are overseen by the Supervisor of Banks at the Central Bank.  The  insurance
sector and long-term saving instruments (including pensions) are regulated by the supervisor of the
capital market and insurance, who has no independent statutory authority, while the Israel Securities
Authority is the legislator and implementor of laws and regulations pertaining to the securities
markets (section (c) below).
76. Banks only carry out banking and financial services activities, but not insurance (section 10 of
the Banking (Licensing) Law).  Banks are not allowed to manage or to hold control of pension funds.
However, each bank is allowed to hold up to 20% of its equity in a pension fund.  Banks are allowed
to hold, control and manage provident funds.  They may offer certain banking and financial services
(including financial leasing, but not insurance) through subsidiary companies (section 11 of theBanking Law).  However, banking corporations may not engage in commercial activities, nor may
they control "real bodies corporate" such as comme rcial and industrial companies (section 23A of the
Banking Law).
77. The establishment of a bank, or the opening of a branch, in Israel requires a licence issued by
the Governor of the Central Bank (Chapter 2 of the Banking Law).  All banking corporations arerequired to comply with regulations issued by th e Supervisor of Banks.  Banking corporations may
control subsidiary companies (Chapter 3), while a banking subsidiary abroad may control a foreign
corporation only under a permit from the Governor.  Israel does not have barriers to international
trade in banking services.
78. Foreign-based banks may offer banking services directly (not through local agencies) to
Israeli residents, subject, as noted, to licence, for establishment of a branch, from the Central Bank.  A
local subsidiary of a foreign-based bank requires a licence as any other Israeli corporation.  No
minimum domestic equity participation is required.  Israeli branches of foreign banks have full access
to central-bank credit, local financial markets and settlement and clearing facilities.
                                                     
22 EIU (1998b) .Israel WT/TPR/S/58
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79. A reciprocity provision is in force with respect to the issuance of licence to a foreign bank,
allowing the Supervisor of Banks to grant licences to banks from a foreign country that grants similar
treatment to Israeli banks (section 6 (6) of th e Banking Law).  According to the authorities,  the
reciprocity provision has not been invoked in recent years.
80. The Supervisor of Banks' policy for licensing and supervising Israeli branches or subsidiaries
of foreign banks is, according to the authorities, essentially based on the "Concordat and MinimumStandards" agreed by the Basle Committee on Banking Supervision.  The criteria for foreign bank
entry are the following:  (i) the parent bank is supervised by a lead regulator, who maintains high
standards of supervision on a consolidated basis;  (ii) the parent bank is highly rated by size, stability
(such as capital ratio), management, and reputation;  (iii) a local subsidiary is preferred, but a branch
would also be considered if it does not exceed a maximum size;  and (iv) the home country of theforeign bank allows Israeli banks to establish a branch in that country.  The primary prudential
requirements for foreign banks are the same as those applying to domestic banks.  There are no
national ownership requirements but there are limitations regarding national management
requirements;  at least two thirds of the board of directors of a banking corporation must have
permanent resident status in Israel.  A foreign resident may not be chairperson of the board ofdirectors of a banking corporation, unless (s)he participates regularly in meetings of the board.  The
chief executive officer and the compliance officer should be permanent Israeli residents.
Recent developments
81. The Government is undertaking comprehensive bank reform, to enhance competition and
improve regulation of the banking industry.  In response to the concerns about high concentration in
the banking sector, the Government appointed a committee in late 1995 (the Brodet Committee),
chaired by the Treasury Director-General, to look into the matter.  The main provisions of theCommittee's report, which proposed far-reaching changes in the ownership and management
structures of the major conglomerates, were passed into law in 1997 (Box IV.1).  The amendment to
the Banking (Licensing) Law provided, inter alia , that:
- each bank be required to reduce its non-bank holdings to 25% of its equity by the end
of 2001;  and to 20% of the equity of each non-bank corporation by the end of 1999;
- the total non-financial holding of each bank be restricted to 15% of the bank's equity
after 2001;  the share of such holding could be augmented by 5% of the bank's capital
provided that the holding in each non-financial corporation was no more than 5% of the
company's equity  and further 5% of the bank's capital in non-financial corporations
abroad;  and
- each be authorized to hold a controlling interest in only one non-banking corporation in
which its capital exceeds NIS 1.25 billion after 1997.
23
82. As a result of the legislation passed in early 1996, the major banks initiated a disinvestment
programme.24  Another reform measure to enhance competition was the divestiture by some of the
major banking groups of their smaller units, which could be expected to survive as independent banks.However, progress has been slow in this area.  In addition, the licences of some existing financial
institutions were upgraded so that they could compete as commercial banks.
                                                     
23 IMF (1997).
24 Bank Hapoalim has sold its controlling stakes in Hapoalim Investments and Ampal (a U.S.-registered
investment company), and has reduced its stake in the Cl al Israel conglomerate from over 40% to below 30%.
Later in the same year Leumi sold control of its primary non-financial holding, the Africa-Israel InvestmentCompany, to an Israeli investor (the Database of the Economist Intelligence Unit [Online], available at:www.EIU.com).WT/TPR/S/58 Trade Policy Review
Page 104
Box IV.1:  Main recommendations of the Brod et Committee on Capital Market Reform
           The Brodet Committee, which presented its report in September 1996, identified the following main
problems in Israel's capital market:  (i) absence of long-term institutional investors;  (ii) a high level ofcentralization;  (iii) discrimination in taxation of investors and savings instruments;  (iv) under-regulation of
financial players; and (v) a relatively limited supply of stocks.  The main proposals were:
       -   Tax policy.   The Committee divided saving instruments into three groups and proposed different tax
policies depending on the type of instrument: savings for retirement  age be taxed at the lowest rates,
savings for long-term savings  (ten years or more) be taxed at a "medium" rate, and middle- and
short-term savings  be taxed most heavily.  Specific tax proposals for each type of saving instrument
were made.
       -   Investments in foreign securities.   The amount institutional investors should be allowed to invest in
foreign securities to be increased from 2% of total assets to 5% over three years.
       -    Mortgage market.   Promote the establishment of a secondary mortgage à la Fannie Mae and Freddie
Mac in the United States.
       -   Securities trading.   Reinforce and strengthen control elements in securities trading and set up an
accounting standards board.
       -   Privatization.   The privatization of government corporations and banks should be expedited and the
previous proposal to distribute share options to the public should be reintroduced.  Also, the legislationof the Companies Law should be expedited.
       -   Bank of Israel money market operations.   Abolish short-term (Makam) debt instruments and instead
allow the Bank of Israel to operate in the money market in the same way as in other industrialized
countries.
       -    Economic affairs court.   The Ministry of Justice and the Supreme Court Chief Justice should explore
the possibility of setting up an economic affairs court to judge economic cases involving securities,banking, insurance and antitrust .
       -    Ownership and manageme nt structure of the Israeli conglomerates.    The Brodet Committee did
not address this issue.  Instead, it suggested that the Minister of Finance should appoint a committee to
consider the structure of the financial system, including the issues related to its current structure and
the dominance of the banks and the institutional investors affiliated with them (provident and mutualfunds) in the capital market.
Source : The Israeli Ministry of Finance [Online].  Available at:  www.mof.gov.il/beinle/brodet.htm; and
IMF (1997), "Israel – Selected Issues and Statistical Appendix", IMF Staff Country Report No. 97/2 ,
February, Tables 6a and 6b.
83. The process of bank privatization was initiated in the early 1990s.  Since 1993, two small
banks have been privatized while the four largest banks are undergoing rapid privatization;  in 1997
the controlling interest in Bank Hapoalim (the largest bank in Israel) was sold to an Israeli-US
investor group.  In 1998 and 1999 the Government was to sell controlling interest in Discount Bankand Bank Leumi.
25  The divestment of the major banks from government control is expected to be
completed by 1999 concerning Discount Bank and 2000 concerning Bank Leumi.
84. Israeli banks have in the past been insulate d from foreign competition.  Although foreign
banks have been allowed to operate in Israel, they have not yet established much of a presence.  The
only foreign banks present in Israel are a small Polish subsidiary (to the Polish PKO bank), a smallbranch of an Australian bank (ANZ Banking Group)  and some representative offices of investment
banks.  One of the reasons for the lack of interest in establishing banks in Israel by foreign banks may
                                                     
25 Bank of Israel (1998a).Israel WT/TPR/S/58
Page 105
be that there is no room for more retail banking serv ices in Israel.  Another reason may be that foreign
banks do not need a banking presence to provide wholesale banking services.
85. Directed credit was a feature of the Israeli banking structure in the early 1990s but the role of
such credit has fallen sharply in recent years (Chart IV.6).  Directed bank credits amounted to 4% of
total Israeli currency credit in 1997 (excluding pr eferential mortgage loans), down from 68% in the
mid 1980s.  Since 1987, the Bank of Israel has gradually phased out the directed banking credit aspart of the financial reforms and deregulation measures.  The directed credit was aimed at assisting
some sectors of the economy, mainly exporters, and it was given under subsidized terms.  The current
amount of directed credit is a credit against government approved earmarked deposits given (in
subsidized terms) to its employees and for investments of the business sector.
Chart IV.6
Directed Israeli currency credit, 1990-97
Source :  Central Bureau of Statistics (1998), Statistical Abstract of Israel , No. 49, Jerusalem.020406080100
1990 91 92 93 94 95 96 199705101520253035
1990 91 92 93 94 95 96 1997(Per cent of foreign currency credit to total credit)(b)  Rise in forei gn-currenc y credit (a)  Fallin g importance of directed credit
(Per cent of total Israeli currency credit)
Non-directed credits
Earmarked deposits
86. Israel has no formal deposit insurance scheme.  In all cases of bank failures over the past
30 years, the Bank of Israel compensated the depositors, regardless of the size of the deposits or theidentity of their holders (except if they were the owners of the failed bank).  Since 1990, there have
been no such payments as no bank failures have occurred.
87. As a result of the widening interest-rate differentials between the shekel and major foreign
currencies during the period late 1994 to mid 1997, Israeli firms substituted their financing from
domestic currency to the seemingly less expensive foreign currency (Chart IV.6).  Hence, bankexposure to exchange-rate risk has grown steadily over the years.  The sharp depreciation of the
currency in the second half of 1998, in combina tion with the Israeli economic slowdown, may have
increased the risk exposure of the banking sector.  However, some of these firms are not exposed to
exchange-rate risk because their income is in foreig n currency (exporters), or partly indexed to the
exchange rate (like firms in the trade and construction sectors).  Moreover, banks have taken measuresto limit their risk emanating from credit in foreign currency by requiring improvements in collaterals
and adopting more prudential credit-risk management.WT/TPR/S/58 Trade Policy Review
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(c) Insurance
88. Insurance coverage in Israel is provided by domestic and foreign insurance companies and by
authorized Lloyd's underwriters.  Approximately 98% of the premium volume is for business placed
with Israeli insurance companies.   The insurance industry, similarly to the banking industry, is
dominated by a few large firms.  The five major groups control 93% of the life insurance premium
market and 80% of the general insurance market.  However, the cartel-like conditions that haveprevailed in the sector for many years are beginning to loosen up and new direct insurance companies
are gaining market share.  Foreign presence, however, remains low in the sector.  The U.S.-based AIG
group has established two companies in Israel:  one is a direct provider of personal insurance and the
other markets mortgage guarantee insurance (AIG Golden Insurance Company and EMI
-Ezer
Mortgage Insurance Company).  The Italian Assicurazioni Generali has bought a controlling interestin Migdal (Israel's largest insurance company).
89. The insurance sector is regulated by the Commissioner of Insurance, who is a Treasury
official and is also empowered with certain statutory authority.  Israel's Insurance Law of 1981
permits foreign ownership of insurance companie s.  As with Israeli-owned companies, these
companies are required to invest their capital in Israel.  All new entrants have to submit a businessplan, undergo policy and rate approvals as needed, reports on the structure and ownership of the new
company, and copies or cover notes of their proposed reinsurance.  Foreign-based brokers can sell
reinsurance via brokers directly in Israel;   however, individual policies can only be sold by licensed
insurance companies.  In the case of Lloyd's authorized underwriters, the agents can place business
with Lloyds.
90. Companies can be licensed by the Commissioner to sell both life and non-life policies.  Direct
insurance is a relatively new phenomena in Israel.  The Commissioner granted the first licencein 1994 and by the end of 1997, three direct-insurer companies were in operation in Israel.  The
introduction of the three direct sellers, which focus on private lines of insurance (automobile and
homeowners), has resulted in a 20-30% drop in prices.
91. The automobile liability line of insurance has some monopoly characteristics;  all such
insurance companies are required to coinsure 50% of the compulsory automobile insurance businesswith Avner (a company owned jointly by all the in surance companies authorized to write automobile
liability insurance).  The premium rate is fixed by the Parliament for each class of vehicle.  This line
of business is going through a reform process, so that by 2000 it is expected that the companies will
set their own rates for this coverage, which will be approved by the Insurance Commissioner.  The
Commissioner will set the rates for the assigned risk  drivers pool, while the current agreement dealing
with coinsurance will be eliminated.  Except for th e compulsory part of car insurance, which has to be
written in Israel, all other private insurance can be bought anywhere in the world.
92. The former mandatory requirement that insura nce companies hold the majority of their
portfolio in government bonds has been relaxed in recent years.  With the introduction of participating
life insurance policies in 1991, the insurance companies are required to invest at least 50% of thereserves in Israeli government bonds.  There are also restrictions on the investment by insurance
companies in stocks and real estate, on loans covering specific investment in one entity, and on the
total amount that can be invested in one entity;  insurance companies are not allowed to purchase
foreign securities.  As a further restriction, funds related to non-life insurance cannot be put into
stocks or real estate.  Also, the investment by insurance companies in long-term mortgage loans is
limited to 20% of their reserves for liability coverage.  Investment in subsidiaries must be from the
companies' surplus.  Any investments in insurance- related subsidiaries require prior approval by the
Insurance Commissioner.Israel WT/TPR/S/58
Page 107
93. The Insurance Transactions (Minimum Equity of Insurer) Regulations of 1998 raised the
capital requirements of insurance companies in order to enhance stability.  Minimum capital adequacy
was raised to NIS 35 million in life insurance, NIS 40 million in general insurance, and
NIS 60 million in life and general insurance combined.  The maximum capital adequacy requirement
was raised to NIS 85 million.26
94. Insurance companies do not receive any government support except on subsidized bonds
relating to life insurance policies issued before 1991.  Prior to 1990, companies were required to
invest 85% of their life insurance reserves (less policy loans, cash and premium due) in special
government bonds at preferential interest rates (i.e. above market rates).  The yearly government
outlay for the scheme is about NIS 2 billion.
(d) Other financial services
95. At the end of 1998, there were 331 mutual funds, 35 pension funds (of which 18 were
established before the 1995 reform and are closed to new investors), 300 provident funds,
120 portfolio managers and seven investment advisors companies employing more than
3,000 licensed investment advisors, active in Israel.  Various regulations concerning the portfolio
allocations of institutional investors are in place and the capital market is characterized by a largedegree of government intervention and subsidization, including guaranteed-rate bonds and a complex
system of tax benefits.
27
96. The Israel Securities Authority (ISA) is the enforcer of laws and regulations pertaining to the
securities market.  The ISA, an independent statutory regulatory agency, was established in 1968 to
administer the Securities Law of 1968.  The declared function of the ISA, as stated by the law, is "the
protection of the interest of the public investing in securities", and its principal objectives are to
ensure that Israel's securities market operates in a fair and orderly manner and that corporations makepublic all information about themselves.
97. Under the Securities Law, the ISA supervises the operation of the Tel Aviv Stock Exchange
(TASE), which began operations in 1953.  Securities may be traded on the TASE after the issuing
company has applied for a listing and met the requirements of the Securities Law and the TASE
listing standards.  In 1993, the TASE launched an op tions market.  Trading includes futures, call and
put options with various maturities, and exercise prices on the TA-25 index, which is composed of
25 high-valued stocks, as well as currency option trading (NIS/US$).  The number of firms listed on
the TASE more than doubled in the last seven years, to about 675 (of which one foreign corporation)
at end 1998;  over 1,300 securities are traded (including common stock, warrants, convertible
securities, government and corporate bonds, index options, index futures and currency options).  Thetotal market capitalization in 1998 was NIS 170 billion, without adjustments to eliminate
cross-ownership, which is considerable, and government holdings.  Foreign investment in the market
increased from 3% of total equity value listed in the TASE in 1992 to almost 4% in 1998.
98. Foreign brokers wishing to operate in Israel must do so via subsidiaries incorporated under
Israeli law and must be licensed under Israeli law, in the same way as an Israeli company.  As ofJune 1999 (according to the amendment of the Mutual Fund Law), mutual funds not registered in
Israel that offer investment units to investors in Israel should operate according to the Mutual Funds
Law, which includes the need to publish a prospectus.  The ISA has the authority to exempt those
funds from some or all of the requirements, if it is convinced that the law of the State where they are
registered fully protect investors in Israel.
                                                     
26 Unofficial translation of the Bank of Israel (1998e).
27 IMF (1997).WT/TPR/S/58 Trade Policy Review
Page 108
99. TASE members must comply with minimum capital requirements (NIS 9.5 million) and
maintain liquid assets in an amount equal to 50% of the minimum capital requirement.  Portfolio
managers have minimum capital requirements of NIS 325,000 and must be insured in the amount
of 5% of their managed portfolio, while mutual funds have a minimum capital requirement of
NIS 0.5 million and must be insured to a minimum of NIS 1.5 million or up to half of the their asset
value to a maximum of NIS 10 million.
100. Provident and pension funds were previously constrained by high mandatory requirements to
hold a large share of their portfolio in government bonds.  This requirement has recently been relaxed ;
provident funds are no longer required to hold their portfolio in government paper, while pension
funds established before 1995 are obliged to hold 92% of their portfolio in government papers and
newly established pension funds are obliged to hold a minimum of 70% of their portfolio ingovernment papers.  While pension funds are not allowed to invest in foreign securities, a regulation
regarding mutual funds' investments in foreign securities was introduced in 1997, to provide mangers
with increased freedom of action in investing th eir funds' assets abroad: funds were permitted to
invest up to 50% of their assets in foreign securities and options abroad (up from 10%, except for
mutual funds specializing in overseas investments which were entitled to invest up to 50% of theirassets abroad).  Under the new regulation, mutual funds are also permitted to conduct foreign
currency transactions directly with a broker abroad.  In addition, the regulation restricting each
mutual-fund management organization to manage only two funds for foreign residents was lifted.  As
part of the liberalization of foreign currency controls, it was decided in January 1998 to lift the
restriction applying to mutual funds investing abroad.  These funds are now permitted to purchase
foreign currency for making deposits in the banking system in Israel.  The funds are also allowed to
conduct new shekels–foreign currency future transactions.
28
101. Contributions to pension, provident, and life insurance funds are tax deductible, accumulated
profits are free of tax, and some withdrawals tend to be tax exempted.  Subsidized government bonds
are issued to the pension funds and insurance companies, while provident funds no longer have access
to such earmarked funds.  In addition to the special tax benefits applied to these institutions, various
instruments also enjoy certain tax breaks (e.g. short- and medium-term investments such as Treasurybills and deposits and savings plans are tax exempt).
29
(iii) Transportation
(a) Air transport
102. El Al Israel Airlines Ltd. ("El Al") is the designated air carrier of Israel.  The majority of the
international routes to and from Israel are operated by El Al and by one foreign scheduled carrier.The Government has authorized two carriers (A rkia and Israair) to operate on scheduled domestic
flights on some routes.
30  In addition to Arkia and El Al, two carriers (Aroel and Israair) have operated
international charter flights since 1998.  A decision taken in 1997 to open up scheduled flights on
some regional routes to Israeli companies, ot her than El Al, is yet to be implemented.31  Twenty-four
private carriers operate domestic or general aviation flights with fleets of light aircraft.  In addition toEl Al, three foreign carriers provide capacity on all scheduled cargo flights, and by December 1999 a
second Israeli carrier is expected to start operating all cargo flights.
                                                     
28 Bank of Israel (1998c).
29 IMF (1997).
30 These routes are Eilat-Tel Aviv, Eilat-Jerusalem, and Eilat-Haifa and on the northern domestic route
between Rosh Pina-Tel Aviv and  Qiryat Shmone-Tel Aviv.
31 Regional routes include routes to/from Cyprus, Egypt, Greece, Jordan and Turkey.Israel WT/TPR/S/58
Page 109
103. An integral component of the Government's ongoing liberalization strategy is the planned
privatization of El Al. Important elements of this plan  will be the restructuring of El Al's capital base,
the formulation of a plan to finance El Al’s expenses for security measures (at least a portion of which
is expected to continue to be financed by the Government), and flights on the Jewish Sabbath and
holidays (days on which El Al currently does not fly due to government regulations).32
104. Under the Pilot's Law of 1927 and the Law of Aviation Services of 1963, the Minister of
Transport is in charge of air transport services.  The Civil Aviation Administration (CAA)
(a department of the Ministry of Transport) is in charge of air transport, including capacity and tariff
approval, safety regulations, route licensing, approval for operation of new carriers and supervision of
existing carriers.  The criteria for approving domestic carriers include, inter alia , national ownership
(a minimum of 66% of equity), a minimum aircraft fleet (owned or leased by a financial long-termarrangement), insurance coverage, access to suff icient financial resources, and compliance with
International Civil Aviation Organization (ICAO) safety standards.  The CAA is also in charge of
bilateral negotiations and it represents Israel in the ICAO.  The Israeli Airports Authority - a public
corporation established under the Airports Authority Act and whose Board of Directors report to the
Minister - operates eight airports/airfields in Israel handling civilian traffic.  A few small airfields areoperated by regional authorities or by the private sector.
105. International scheduled flights are regulated by bilateral agreements.  While the agreements
with the United States and the United Kingdom allow the airlines to decide on capacity, the
other bilateral agreements are more restrictive, including provisions on single destinations,
predetermination of capacity by the aeronautical authorities, constraints on fifth freedom rights
(i.e. the right to carry traffic between two countries outside its own country of registry as long as the
flight originates or terminates in its own country of registry), and double approval system of tariffs.Foreign airline carriers have yet to express their interest in cabotage rights;  if a foreign carrier were to
request such a right, the authorities have indicated that they would consider the request.
106. The transport of cargo on scheduled flights is also regulated under bilateral agreements.  The
capacity of cargo is approved by the CAA in accordance with such agreements.  However, the CAA
does not enforce filing of cargo fares.  When the demand is not satisfied by scheduled services theCAA allows cargo charter flights.  Foreign airlines do not have cargo cabotage rights.  In this regard,
it should be noted that domestic freight traffic is insignificant.
107. Slots allocation at Israel's main airports is on the basis of the following criteria in descending
order of importance:   (i) slots for seasonal scheduled flights have preference over slots for other
seasonal flights;   (ii) preference is given to the operator who has used the same slot during the
previous season;   (iii) requests for the same consecutive slot for several days within a week have
preference over requests for single or twice-weekly slots.  In cases where these situations are not
applicable, the basis for allocation is first-come, first-served.  Moreover, requests for whole-season
slots have preference over requests for partial-season slots, and requests for a series of flights have
preferences over single flights.
108. An exemption from the Israeli antitrust law is granted to agreements between carriers
regarding international air transport.  These in clude a cooperation agreement between El Al and
Arkia, code sharing agreements (e.g. common flight numbers) between El Al and some foreign
carriers, and other commercial agreements between El Al and other foreign carriers.
                                                     
32 Data on government transfers to El Al asso ciated with its security costs are confidential.WT/TPR/S/58 Trade Policy Review
Page 110
109. No special privileges are granted to the govern ment-owned air company, except that, as in a
number of other countries, Israeli civil servants give preference, but are not obliged, to use the
national airline for official travel.
(b) Maritime
110. Maritime transport is important for Israel's domestic and international trade, with almost all of
its exports (99.4%) and imports (98.8%) passing through one of Israel's three main ports: Ashdod,Eilat, and Haifa (including Kishon).  In addition, a considerable number of cruise passengers are
transiting Israeli ports.  However, only about one fifth of the annual revenue from Israeli shipping
companies' service activity is derived from import and export cargo transportation to and from Israel,
while the rest is derived from activity between foreign ports.  All merchant-shipping lines in Israel are
owned and operated by private local and foreign ship ping entities;  the Government owns about 48%
of a company controlled and owned by the private sector (Zim Navigation Co. Ltd.).
111. The maritime sector is regulated by the Ministry of Transport through the Shipping and Ports
Administration.  The main legislation is the Ports Ordinance (New Text) of 1971, the Shipping Law
(Vessels) of 1960, the Shipping Law (Seaman) of 1973, and the Shipping Law (Limit of Liabilities for
Vessels) of 1965.  The powers granted to the Shipping and Ports Administration include responsibilityfor policy regarding the merchant shipping industry, covering subjects of safety, maritime manpower,
small craft, international maritime conventions, and regional, bilateral and plurilateral agreements.
International conventions pertaining to the maritime sector are also serviced by the Shipping and Ports
Administration for ratification and necessary incorporation into domestic law.
112. The Government recently implemented reforms to reduce the mandatory minimum number of
national crew members along with the provision of direct financial assistance to attain this reform.
The Shippings Regulations (Seaman-Israeli Crew) of 1998 require a certain number of the crew to beof Israeli citizenship;  the captain, master and nine officers and ratings must be Israelis.  The first
phase of the reform programme reduced the number of mandatory Israeli crew from 22 to 10.  This
phase was implemented during a three-year period starting in 1996, with a total subsidy of
US$25 million.  A second phase is under discussion but has not yet been regulated.  It is to be
implemented between 1999 and 2003, reducing the manda tory Israeli crew to between four and eight,
including the captain, and supported with an annual state subsidy of some US$6-7 million.  Hence, the
total cost of the two phases is estimated at about US$50 million.
113. There are no limitations on foreign direct investment in the Israeli maritime sector.  To fly the
Israeli flag, a vessel is required to be owned by an Israeli entity, having more than 50% ownership.
Israel has no restrictions on maritime cabotage.  However, the authorities are considering theintroduction of cabotage measures based on the principle of reciprocity with third countries.
114. Conference agreements operative in Israel require an exemption from antitrust law (the
Restrictive Business Practices Law of 1988), which may be withdrawn if cartel-like usage results.
115. The Ports and Railways Authority (PRA) is responsible for the implementation of the Ports
and Railways Authority Law of 1961.  Under the Law, the PRA is responsible for planning, building,developing, managing, maintaining and operating Is rael's three state-owned ports (Haifa, Ashdod, and
Eilat).  There has been some discussion regarding port privatization, but strong labour opposition is
likely to delay progress, according to the authorities.  Under the Ports and Railways Authority Law,
there are no restrictions on who can supply auxiliary services;  the supply of auxiliary services is open
to Israeli and foreign companies.  Currently, fo reign companies are present in the supply of most
auxiliary shipping services, including maritime agency services and maritime freight forwardingIsrael WT/TPR/S/58
Page 111
services.  All services are available to users on an equal basis.  The three main commercial Israeli
ports operate under the Ports Authority so that there is no competition to supply port services.
Propositions to bring more competition to the system are under review.
116. Imports are subject to a wharfage fee of 1.1% of their c.i.f. value and exports to a fee of 0.2%
of the c.i.f. value of containers;  the fee for imports was recently reduced from 1.5%, thus decreasing
the "basis" in favour of exports, and the authorities intend to gradually equalize the fees.  Imports aresubsidizing exports for the use of ports.  In addition, the fees do not appear to reflect the real costs of
the service, as they are only linked to the value of the traded goods.  The reduction in the fee has
heavily affected the Port and Railways Authority's financial position as the fee is an important
revenue component (presently accounting for about 45% of the Authority's income).
117. Under the Free Port Zone Law of 1969, enterprises operating in ports  may qualify for an
exemption from income taxes for seven years, and thereafter are subject to a maximum rate of 30%;
there is a tax of 15% on dividends paid out of the above income, with no stipulated time limit;  there
is no capital gains tax on inflationary gains, or on foreign shareholders on the sale of their share in an
enterprise, if the shares were purchased in foreign currency;  and there is exemption from property
tax.  The port of Eilat is currently the sole established free-port zone (Chapter III(4)(viii)).
(iv) Telecommunications
118. Israel's telecommunications sector has in a short time moved from a monopolistic to a more
competitive structure.  The authorities' three-pronged strategy addresses privatization, competition
and regulation.  The majority government-owned company, Bezeq, was initially put up for
privatization in 1995, and successive Governments have sold about 46% of the company's shares.
Starting in 1994, arrangements have been implemented to increase competition by allowing new
operators to enter the market (Chart IV.7).  The first move was to terminate Bezeq's legal right toexclusivity in supplying international telephone services.  Foreign companies also became active
through joint ventures to provide cellular services  and facility-based long-distance international
services, while domestic phone services will be opened to foreign and domestic competition by
mid 1999.  Moreover, the multi-channel systems regulation has been revised to enable increased
competition, and a licence for a DBS satellite broadcast has been issued;  a licence for a secondcompany is currently under review.  Israel is now connected to the world's major commercial,
financial and academic data networks, and is fully integrated into international communications
systems by underwater cables and satellites.
33  The reforms have led to increased efficiency in the
sector, such as lower prices34, and a surge in the supply of services.
(b) Regulatory framework
119. Regulatory functions are the exclusive purview of the Ministry of Communications.  The
Telecommunications Law No. 5742 of 1982 empowers th e Minister of Communications to establish
secondary legislation concerning enactment of all telecommunications aspects, inter alia , technical
specifications for telecommunications equipment and type approvals. Article 53 A(b) of the
Telecommunications Law requires the Minster to consult with industry sources before issuingspecifications.  The Law also authorizes the Minister to order one operator to allow interconnection of
its network to the facilities of another operator;  the operators negotiate the proper system of
reimbursement.
                                                     
33 EIU (1998a).
34 Gandal (1994).WT/TPR/S/58 Trade Policy Review
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1994 1998 1999 & onwards
- Pelephone
(Bezeq)- Pelephone (Bezeq)
- Cellcom
- Partner/Orange- Pelephone (Bezeq)- Cellcom
- Partner/Orange- PCS operatorsMobile Services
- Bezeq - Bezeq- Bezeq
- Competing Operators:
      - Wireline
      - WirelessFixed Services 
(Infrastructure, 
Transmission & 
Telephony)
- Bezeq- Bezeq International- Barak
- Golden Lines- Bezeq International- Barak
- Golden Lines
- Additional Operators (from 2002)International Long 
Distance ServicesChart IV.7
Evolution of telecommunication services in Israel
Source : Ministr y of Communication (1998 ), Telecommunications Liberalization Polic y, Jerusalem.
120. The Telecommunications Law states that any licence and change thereof must contribute to
competition in the field of telecommunications.  The Ministry has no common regulation concerning
antitrust policy and acquisitions by other companies.  However, the Law provides that a licensee
(i.e. a telecommunications operator) must fulfil certain prerequisites in order to obtain a licence.
These prerequisites are continuous requirements and vary for each licensee.  The granting of licences
can be removed if the operator becomes, inter alia , anti-competitive, or not fit to handle
telecommunication services.35  In areas not open to competition, should Bezeq wish to offer a
particular service, it is obliged to transfer this to a subsidiary, in order to allow fairer competition.
121. The Government sets the tariffs of the state operator Bezeq.  There is no control on the tariffs
of private suppliers except those suppliers who received their licences subsequent to the public tender
and whose tariffs were part of their commitment within that framework.   Cross-subsidies from
monopolized services to competitive services are not allowed.
(c) Basic services
122. The state-owned company Bezeq has a monopoly in local telephone service.  A decision was
taken in 1994 to open up the long-distance service market to competition.  In July 1997 actual
competition started with two new operators, Barak (partially owned by the Global One Partnership of
Sprint, Deutsche Telekom and France Telecom) a nd Golden Lines (partially owned by Southwestern
Bell and Italy's STET), competing with Bezeq International, which is a fully subsidiary of Bezeq.Foreign companies are limited to 74% ownership in international services providers.  The joint-
venture companies have exclusivity rights until 1 January 2002.  Equal access was implemented
immediately, enabling subscribers to select the use of a service offered by any international operator.
The benefit to consumers has been substantial.  For example, since July 1997, the number of calls has
more than doubled and the cost for a call to the United Sates has dropped from over US$1 to about16 cents per minute.
                                                     
35 WTO document S/NGBT/W/3/Add.32, 29 September 1995.Israel WT/TPR/S/58
Page 113
123. Competition is not permitted in telegraph services (defined as a basic service in Israel).  These
services are under the monopoly of the Israel Postal Authority.
(d) Value added services
124. Bezeq's monopoly was first removed in the supply of cellular phone services in 1987 and
Israel currently records one of the most intensive use-per-head figures of cellular phones in the world
(37%).  Currently, three companies provide services to some 2.2 million customers (late 1998):Pelephone (a joint venture of Bezeq and Motorola Israel), Cellcom (a joint venture partially owned by
Bell South) and Partner/Orange (a joint venture of Hutcheson Telecom, Matav, Tapuz and Elbeit).  As
a ratio of cellular subscribers to the number of main lines, Israel has a penetration rate of over 60%.
Foreign companies are limited to 80% ownership in wireless service providers.
125. There are three  cable TV operators in Israel, each with a monopoly in specific
geographic regions.  In August 1997, the Israeli legislature approved a series of regulations covering
transmission and operation of satellite direct broa dcasting services (DBSs), introducing competition in
satellite services.  As noted above, one DBS licence has been issued, providing an alternative to
cable TV, and another company is currently under review for a second licence.  Rather than
submitting competitive bids, firms had to comply with certain universal requirements to obtain alicence (such as a shareholder equity total of at least US$40 million, and Israeli ownership of at
least 26%).
36  Moreover, a second commercial terrestrial television channel has been allowed
to operate.  In the telecommunications sector, suppliers are subject to local-content requirements.  The
Telecommunications Law of 1998 ensures that broa dcasters reserve at least 2-10% (depending on
their share of the market) of their transmission time for Hebrew works.
126. Competition is not permitted in private leased circuits voice services, while it is permitted in
the following value-added services:
- packet switched data transmission (licence is required and the operator is required to
utilize circuits leased from Bezeq);
- telex (but since the service is becoming obsolete, only Bezeq is offering the service);
- facsimile (licence is required);
- private leased circuit (except for the provision of voice telephone and telegraph, and
licence is required);  and
- paging (limited competition, due to shortage of spectrum frequencies).
(e) Forthcoming changes
127. Israel will open its local telecommunications market to full competition in 1999, two years
earlier than the date scheduled by Israel under GATS.   On the international long-distance market, the
exclusivity of the current operators - two joint-ventures as well as the fully subsidiary of Bezeq - will
expire in 2002, when licences to new operators may be granted.  In the field of mobile
telecommunications, it is expected that the number of cellular lines will supersede the number of fixed
lines by the end of 1999 or early 2000.  Regarding the privatization of Bezeq, the Government intends
to completely withdraw its position.  As part of this move, it is expected that another 14% of thecompany will be sold on the Israeli stock exchan ge, thereby reducing the Government's holding to
40%.  Local multipoint distribution services (LMDS) licences will be issued in the near future for a
variety of applications as well as additional cellular licences.
                                                     
36 EIU (1998b).WT/TPR/S/58 Trade Policy Review
Page 114
128. In the field of telecommunications, the authorities foresee a continued need for regulation.  In
order to further this objective, the Government is considering establishing an independent regulatory
authority, which would replace the Ministry of Communications as the regulating authority for
telecommunications, thus reducing direct government involvement in the communications sector and
enabling market restructuring and competition enforcement.
(v) Tourism
129. Tourism, particularly religious tourism, plays a significant role in the Israeli economy (4.8%
of GDP in 1997);  major tourist a nd pilgrimage centers are located in Jerusalem and other significant
religious sites, and holidays sites such as Eilat, the Dead Sea, Tiberias and the Mediterranean coast
(Table IV.9).  The sector, which is an important source of employment and foreign exchange earnings
(equivalent to 2.9% of GDP in 1997), is, however, vulnerable to regional political and securityconditions.  Between 1990 and 1995, the number of tourists visiting Israel rose rapidly, partly as a
result of the progress being made in the peace process.  Since then, there has been a certain decline
reflecting political developments.  In 1997, the number of tourist arrivals was 10% lower compared
with the record high in 1995.  Receipts from foreign tourism were approximately US$2.7 billion or
2.8% of GDP in 1998.  The share of hotel nights spent by foreigners has steadily declined since 1995and hotels have benefited from a buoyant local market, which outweighed the lower number of
foreigners.  International tourism is expected to boom in 2000, to celebrate the millennium.
Table IV.9
Overview of the tourism sector, 1985-98
1985 1990 1994 1995 1996 1997 1998
Share of GDP (%) 7.9 4.5 5.6 5.8 5.3 4.8 4.8
Foreign exchange earnings (US$ million) 1,101 1,396 1,911 2,942 2,942 2,800 2,671
     (% of GDP) (4.8) (2.7) (3.3) (3.4) (3.1) (2.9) (2.8)
Foreign tourist arrivals to Israel ('000) 1,264 1,063 1,839 2,216 2,1001 2,010 1,941
Average length of stay per foreign tourist (days)a20.7 21.5 17.2 16.2 15.7 15.4 14.7
Share of hotel guest-nights spent by foreigners (%) 63 50 59 59 55 50 46
Revenue per guest-night (US$)b35 58 63 72 75 74 72
a Average stay less than one year.
b Including Israeli and business people.
Source : Data provided by the Israeli authorities;  Central Bureau of Statistics (various issues),  Statistical Abstract of Israel , Jerusalem;
World Tourism Organization (1997), Yearbook of Tourism Statistics , Madrid; and World Tourism Organization (1998),  Tourism
Market Trends - Middle East , Madrid.
130. According to the Tourism Services Law of 1976, the Ministry of Tourism is responsible for
supervising the tourism sector, encompassing hotels, travel agencies, camping sites, touring bus
companies and listed tourist shops.  A licence, issued by the Ministry, is required to operate a travel
agency.  Moreover, an agency must employ a licensed "travel expert" and employees dealing directlywith clients must hold a government-approved "authorized clerk" certificate.  Tour guides are also
licensed by the Ministry.  All of these requirements are to be abolished in 2000.
131. There are few restrictions on foreign investment in  the tourism sector.  As detailed in Israel's
GATS Schedule, ownership of hotels, travel agencies and tour operators is restricted to
Israeli-registered companies, while tourist guide serv ices are restricted to Israeli residents or citizens.
In addition, travel agencies are required to employ at least one Israeli-licensed travel expert.  Foreign
investors control some 20 hotels, accounting for nearly 5% of the total number of hotels, with aIsrael WT/TPR/S/58
Page 115
preference for the luxury and upscale market.  The share of total assets owned by foreigners is
estimated to be between 20% and 25% of the entire hotel industry.
132. The Government has played an active role in the tourism sector.  Investors in tourism are
eligible for government incentives under the framework of the Encouragement of Capital Investments
Law of 1959.  An approved investor may choose between a capital incentive package in the form of a
grant equivalent of up to 24% of the investments in fixed assets, tax exemption and tax deduction, oran enhanced tax-incentive package;  the benefits are contingent on the location and the size of the
investment (Chapter III(4)(ii)).  The total cost of the scheme in 1998, excluding forgone revenue, was
NIS 243 million.
133. Additional government support to tourism includes the financing and the running of the
Tadmor Hotel School, which provides training in various hotel positions.  The school isa privatization candidate.  Also, the Ministry of Tourism's Marketing Administration, via the
Government Tourism Offices abroad, performs numerous marketing operations in cooperation with
local tourism establishments, in order to increase the tourist traffic to Israel, while focusing on the
preferred market segments.  Finally, tourism services are one of the few industries exempt from the
flat value-added tax of 17%.  In 1998, the Government's direct cost associated with these activitieswas estimated at about NIS 380 million.WT/TPR/S/58 Trade Policy Review
Page 116
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