RESTRICTEDWORLD TRADE
ORGANIZATIONWT/TPR/G/58
13 August 1999
(99-3290)
Trade Policy Review Body
TRADE POLICY REVIEW
ISRAEL
Report by the Government
Pursuant to the Agreement Establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), the policy statement by the Government of Israel is attached.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Israel.Israel WT/TPR/G/58
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CONTENTS
Page
I. INTRODUCTION 4
II. TRADE AND ECONOMIC POLICY ENVIRONMENT 4III. TRADE-RELATED POLICY DEVELOPMENTS 1994-1998 6
IV. FUTURE POLICY DIRECTIONS 8WT/TPR/G/58 Trade Policy Review
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I. INTRODUCTION
1. Israel’s economy is trade dependent and has become increasingly globally integrated in the
world economy.  Eighty percent of Israel’s GDP depends on trade.
2. Accordingly, Israel’s economic policy has been aimed in this decade to facilitate and foster
the integration of the Israeli economy in the global market, by implementing a unilateral process of
trade liberalization, privatization and economic reforms to enhance competition in the domesticmarket and by actively participating in the international process of trade liberalization, both at the
multilateral, plurilateral and bilateral level.  Despite the current world wide economic uncertainty,
despite the slowdown in the domestic economy and th e increase in unemployment, Israel remains
committed to open trade and investment and to foreign currency liberalization.
3. Israel’s policy of enhanced import liberalization has been facilitated by the free trade
agreements concluded with its major trading partners, within the framework of Article XXIV of the
GATT 1994.  Indeed, exposure to foreign competition through bilateral agreements has paved the way
to the extension of greater liberalization and wider exposure also vis-à-vis the other WTO Member
countries.  Free trade agreements have therefore become for Israel a means to greater integration in
the global economy and a complementary tool to the multilateral trade system.
4. Israel will continue to promote internationa l trade, investment and economic cooperation,
including removal of trade barriers and distortions to global trade.  In this context, Israel views the
WTO as a cornerstone of its trade policy.
II. TRADE AND ECONOMIC POLICY ENVIRONMENT
Economic Development:
5. Israel’s economy is industrialized and divers ified with a GDP of US$97.9 billion and per
capita GDP of US$16,400 in 1998.  Since the beginning of the decade, Israel has achievedimprovements in most economic indicators.  From 1994 to 1998, Israel achieved average GDP growth
of 4.7% per year, a decline from the 1990 to 1994 period when average annual growth reached 5.7%.
Growth was based on the development of high value-added export-oriented industries, such as
telecommunication and high-technology medical eq uipment, and on increased domestic demand due
to the massive wave of immigration during the previous years.  The GDP growth rate in 1997-1998slowed to 2.7%-2% as a result of restrictive mone tary policies followed by tight fiscal policies, as
well as a result of a decrease in the number of immigrants, a slowdown in the peace process, and,
in 1998, a slowdown in world output.
Fiscal and Monetary Policy:
6. Since 1990, Israel’s fiscal and monetary policies have been formulated and coordinated with
the goals of reducing Israel’s high tax burden, narrowing the Government’s fiscal deficits, attaining
levels of inflation similar to those in other industrialized countries, and enhancing economic growth.
After periods of high inflation in the early 1980s, inflation had been stabilized.  The rate of inflation
decreased from an annual average of 13.5% in the years 1990-1994 to 9.7% in 1994-1998.  The
inflation rate in 1998 was 8.6%, at the midpoint of  the Government’s target range of 7-10% for the
year and is expected to decrease to 4% in 1999.  The total budget deficit (excluding credit) decreased
from 4.1% of GDP in 1996 to 2.8% in 1997 and 2.4% in 1998, in accordance with the budget deficit
reduction law.  The current account deficit decreased from US$5.3 billion in 1996 to US$3.4 billion
in 1997 and US$0.7 billion in 1998;  however an increase is expected in 1999.Israel WT/TPR/G/58
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Privatization:
7. Historically, the Government has had a substantial involvement in nearly all sectors of the
Israeli economy.  In the past decade, however, a central aim of the Government’s economic policy has
been to reduce its role in the economy and to promote private sector growth.  In order to advance
these goals, the Government has pursued a policy of  privatizing state-owned enterprises, including
banks.  Since privatization began in 1986, proceed s have amounted to some US$7.3 billion.  During
this period, the Government sold all or a portion of its share holdings in 77 companies and banks.
In 1998 alone, privatization receipts to the Government totaled US$1.37 billion.
Foreign Investment:
8. Since the beginning of the 1990s Israel has wi tnessed an ever growing inflow of foreign
investments, both foreign direct investment and por tfolio investment.  Although the Arab boycott has
never been repealed and still affects, to a certain extent, the development of economic relations of
Israeli companies, an increasing number of foreign companies have recognized the importance of the
Israeli market and the advanced technology develope d in Israel. The growing involvement of foreign
investors in the Israeli market has been an important factor in Israel’s economic development since
the beginning of the 1990’s.  The volume of overall investment has risen sharply from the level ofUS$537 million in 1992 to a peak of US$3,611 million in 1997.  The rise in investment in previous
years came in the wake of the influx of immigrants, structural changes in the economy (including
reforms and liberalization), geopolitical development in the region, and as part of the general increase
of foreign investment in emerging economies since the beginning of the 1990s.  In 1998 non-
residents’ capital inflow to Israel fell by more than 40% from its 1997 level. This reflects a decline of
about 80% in financial investment, a rise of 30% in direct investment, and an increase in non-
residents’ use of NIS sources for investment in Israel.  The reduction in the flow of financial
investment was related to the financial crisis, which struck the global economy in the second half of
1997 and which erupted again in the third quarter of 1998.
Labor Market:
9. After peaking at 11.2% at the end of 1992, Israel’s unemployment rate decreased substantially
during the period from 1994 through 1996, as the creation of  jobs outpaced the growth of the civilianwork force.  In 1997, due to the economic slowdown, the unemployment rate increased to an average
of 7.7% from 6.7% in 1996.  The unemployment rate increased further in 1998 to 8.6%.
10. Since 1990 the Israeli economy has absorbed about 880,000 immigrants, increasing Israel’s
population by approximately 19.5% and leading to significant growth in the labor force.  In 1998,
Israel’s civilian labor force averaged a total of 2.3 million compared to an average of 1.7 millionduring 1992.  The new immigrants are generally highly educated and include a high percentage of
scientific, academic, technical and other professional workers.  Although this wave of immigration
initially placed strains on the economy, raising the budget and trade deficits and contributing to a
relatively high level of unemployment,  almost all immigrants have been successfully integrated into
the economy.  Today, the employment rate of immigran ts who came to Israel in the first half of the
decade equals that of native-born Israelis.
Foreign Trade:
11. As a small country with a relatively limited domestic market, Israel is highly dependent on
foreign trade.  International trade (exports plus imports) in goods and services amounted toWT/TPR/G/58 Trade Policy Review
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approximately 80% of GDP during the past three year s. In recent years, Israel has made substantial
progress in opening its economy.
12. Total trade  in services has experienced a substantial increase, in current US dollars, of 32.2%
since 1994, following an increase of 50.5% between 1990-1994.  Export has risen by 37.5%
since 1994, reaching US$9 billion in 1998. At the same time, import has risen by 27.6% reaching
US$9.8 billion in 1998.  Israel’s main tradable services (both in export and import) are travel andtourism (29% of exports and 24.2% of imports in  1998) and freight and transport (23.1% of exports
and 40.1% of imports).
13. Total trade in goods, in balance of payments terms, increased by 23.1% in current U.S. dollars
between 1994 and 1998, following an increase of 42.6% between 1990-1994.  Export has risen by
33.6% since 1994, reaching US$23 billion in 1998.  At the same time, import has risen by 15.1%reaching  US$26.2 billion in 1998.
14. Israel is highly dependent on imports for production inputs and investment goods;  which
account for 86% of total imports, although the share of consumer goods is constantly rising.  The
composition of Israel’s merchandise exports increasingly reflects the industrialized nature of the
economy, agriculture and foodstuff accounting for only 6% of total exports.  High-tech industrieshave shown the most dynamic performance: expo rts of machinery, telecommunication, medical and
scientific equipment and other electronic equipment and components increased by 57% in 1994-1998
reaching US$6.6 billion in 1998.  During the same period, their share of total industrial exports
(excluding diamonds) increased from 37.1% to 42.1%.
Impact of World Financial Crisis:
15. As a result of the world financial crisis in Asia, Russia and South America Israel lost
approximately 0.5% of GDP in 1998 and a similar impact is expected in 1999.  In the financialdomain, substantial decline in non-residents’ capital inflow started after the outbreak of the crisis in
South East Asia in the fourth quarter of 1997, as occurred in other emerging markets.
III. TRADE-RELATED POLICY DEVELOPMENTS 1994-1998
Globalization Policy:
16. Over the past four years, Israel continued to pursue policies aimed at improving access to
foreign markets through bilateral and multilateral agreements;  facilitating participation of Israeli
companies in the globalization process of the world economy through foreign currency liberalization,
as well as bilateral R&D, trade and economic relations agreements and organization of seminars and
trade missions;  enhancing international competitiveness of Israeli industries by further opening the
domestic market to foreign competition and by active enforcement of anti-trust legislation.
Trade Liberalization:
17. The unilateral import liberalization program of industrial products, initiated in 1991, was fully
implemented by September 1998, with the exception of textile products for which the scheduled target
rate will be reached in September 2000.  The liberalization program effectively opened the Israeli
market to imports from all countries and has also led to a simplification of the tariff structure.  Theimplementation of the liberalization program during the past continued to be pursued, despite a
slowdown in the economy and increase in the une mployment rate during the past two years.Israel WT/TPR/G/58
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18. As part of the overall liberalization of the Israeli economy, the agriculture sector has had to
adjust itself in accordance with market conditions as well as with its Uruguay Round commitments.
The Israeli market is becoming increasingly exposed to food and agricultural imports, and the export
system has restructured to cope with the changes in international markets.  Water constraints have
obliged farmers to modify production.  Since one fourth of agricultural production is export oriented,
Israel has had to invest in R&D and logistical systems to maintain competitiveness and efficiency.
Competition:
19. Although anti-trust activity was first covered by law in 1958, and reinforced through a
revamping of the law in 1988, increased enforcement only began in 1992.  Since then, anti-trust law
has become an integral part of the legal environment in Israel,  additional revisions have been made to
the law, and competition policy has been significantly strengthened in recent years through a strongeranti-trust agency with very extensive anti-trust activities.
Foreign Currency Liberalization:
20. In April 1998, the Ministry of Finance and the Bank of Israel announced a change in the
foreign exchange control regime, which completes the process, started at the end of the 1980s, of
removing foreign currency restrictions.  The additional liberalization measures abolished all foreigncurrency restrictions on households and on the business sector, except for those applicable to
institutional investors and derivative transactions of non residents.  These measures enabled residents
to enjoy complete freedom to engage in transacti ons with non-residents in both foreign and local
currency.  The change in the control regime, which makes the New Israeli Shekel (NIS) fully
convertible, is an important factor in Israel’s integration into the global economy.
WTO:
21. Israel’s external trade policy is dedicated to its integration into the global economy through
both multilateral and bilateral initiatives.  In the WTO, the implementation of its Uruguay Round
obligations has been a major feature of Israeli activity during the period since the last trade policy
review.  In accordance with its commitments, Is rael fully implemented the Customs Valuation
Agreement on 1.1.98 and will fully implement the TRIPS Agreement as of 1.1.2000.
22. With regard to further liberalization in the WTO framework, Israel took active part in the
negotiations on basic telecommunications and financial services;  its commitments in these areas
reflect an open and liberal policy, as well as a willingness to achieve even greater liberalization.
Israel, as a technology driven economy, joined the ITA and is taking an active part in ITA-II
negotiations.
Government Procurement:23. Israel has enhanced transparency in government procurement as part of its policy objective of
promoting competition in this key market.  In this  context, Israel joined the GPA.  Indeed, GPA
members have had considerable success in winning tenders in the Israel market in recent years.
However, experience shows that Israel, being a small country with small to medium size companies,
is still facing difficulties in participating in other GPA member countries’ tenders.WT/TPR/G/58 Trade Policy Review
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Bilateral Trade Agreements:
24. Bilateral agreements enhance and complement the multilateral system. Israel has had free
trade agreements with its major trading partners for many years - with the European Union
since 1975, with the United States since 1985, as well as with the EFTA States since 1993.  In
November 1995, Israel and the European Union concluded a more comprehensive agreement to cover
wide aspects of economic relations beyond trade in goods, enabling Israel’s participation in theEuropean Union’s Research and Development Framework Programs.
25. The political changes in Eastern and Central Europe have had a marked impact on trade
relations and have led Israel to conclude MFN agreements for some non-WTO members and free
trade agreements with some WTO members.  Since the last trade policy review, Israel has signed free
trade agreements with several additional countries.  The purpose of these agreements is to furtheropen markets and offset possible negative impact on the competitiveness of Israeli exports resulting
from the preferential agreements between the European Union and central European countries and
from the creation of North American Free Trade Agr eement (NAFTA).  In keeping with this strategy,
free trade agreements have since been signed with Canada, the Czech Republic, the Slovak Republic
and Turkey, which entered into force in 1997;  and with Hungary, Poland, and Slovenia, whichentered into force during 1998.
26. Israel continues to work towards expanding its market access to other countries through
preferential agreements.  Free trade negotiations with Mexico, Bulgaria and Romania are presently
underway.
27. Economic relations with its neighbours in the Middle East are of particular importance to
Israel.  As part of the peace efforts in the region, a preferential agreement with Jordan is in place
since 1995, giving substantial access to the Israeli market for Jordanian suppliers.  This is a first steptowards a free trade area agreement with Jordan.  Israel is confident that regional economic
cooperation will contribute to the peace process and to well-being of all  peoples in the region.
Technical Regulations:
28. One of the key features of Israel’s internal trade policy in recent years has been a reform in
mandatory standard policy.  In 1998, a major revision was made on the Standards Law.  The numberof mandatory standards were substantially reduced or aligned with international standards.
Trade Facilitation:
29. In accordance with its trade facilitation policy, Israel has developed an integrated electronic
foreign trade system to facilitate and simplify all stages of customs clearance procedures, from
shipment to payment.
IV. FUTURE POLICY DIRECTIONS
30. Israel sees the WTO as an essential tool for the promotion of trade liberalization and
economic development worldwide.  Israel believes that these goals can only be achieved if member
countries continue to respect the basic rules and core principles of non-discrimination, transparency,
and consensus-based decision-making.Israel WT/TPR/G/58
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31. Israel welcomes the accession of new countries to the WTO and would like to recall that
acceding countries must undertake to comply with the fundamental WTO rules of  non-discrimination
and market access upon their accession.
32. Looking forward, Israel is conducting consultations with interested public and private sector
groups  in preparations for the Seattle Ministerial conference and hopes this conference will mark the
beginning of a new round of trade liberalization, which will include in addition to the built-in agenda,additional industrial tariff elimination, a transparency agreement on government procurement and
further commitments on market access.  Regarding services in particular, Israel supports the further
liberalization of all sectors across the board.
33. Israel recognizes the growing importance of the link between investment and trade in the
international economy.  Israel’s inward and outward investment regime is open, stable and liberal, and
in recent years, has served as an engine for economic growth.  Israel supports the work of the WTO in
this regard.
34. Israel will continue to support the expa nsion of the WTO Government Procurement
Agreement in membership and coverage.  In parall el, the rules of the WTO should be extended to
transparency in government procurement.
35. With a view to responding to the fast paced changes occurring in the global market and as a
leader in the field of information technology, Isr ael welcomes and supports the ongoing work being
done on electronic commerce in the WTO.
36. Israel is committed to maintain an open market and will continue to pursue its policy of trade
promotion and trade liberalization.  In this context, Israel will continue to seek bilateral and regional
agreements to complement multilateral efforts towards trade liberalization.
37. Israel will continue to pursue a policy aimed at facilitating trade and economic cooperation in
the region.  Israel believes that only through open trade and economic cooperation it will be possible
to achieve economic and political stability and sustainable growth.
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