Israel WT/TPR/S/272/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) MAJOR FEATURES OF THE ECONOMY  
1. Israel is a highly industrialized and diversifie d country.  Its economy is relatively open and 
export-oriented.  Rapid expansi on of high-technology activities over the past two decades has 
contributed significantly to high rates of GDP growth , which have averaged nearly 4% per year since 
1996.1  Israel's economic structure is dominated by  high-technology goods and services.  Aside from 
defence industries, the main high-tech activities ar e in computer component manufacturing, software 
engineering, medical technologies, and pharmaceuticals.   Outside these sectors, Israeli businesses play 
an important role in the world's diamond indu stry.  Diamonds accounted for around 30% of total 
merchandise exports in 2011 (Table AI.1).  The services sector is the leading economic activity in 
Israel, accounting for around three quarters of  GDP and employment.  Success in developing the 
country's relatively poor soils for agriculture was important to early economic development, but the sector now accounts for only around 2% of GDP.
2   
2. Israel is a high-income country with a per cap ita GDP of more than US$31,000 in 2011, up 
from US$17,700 ten years earlier (Table I.1).  Howeve r, high poverty levels and low labour-market 
participation rates among the rapidly growing Arab -Israeli and ultra-orthodox communities are of 
concern and may constitute a hindrance to further su stainable economic growth.  The Bank of Israel 
has managed to keep inflation under control; the an nual inflation rate has typically remained below 
5% since the late 1990s and further declined more recently to 2.7% in 2010 and 2.2% in 2011. 
3. Israel withstood relatively well the effects of th e global crisis, although heightened concerns 
are emerging more recently about the potential im pact of the worsening global outlook, geopolitical 
tensions, and internal socio-ec onomic developments.  Following a marked slowdown in 2009, real 
GDP grew by 4.8% in 2010, led by stronger cons umption and a recovery of exports.  GDP growth 
remained stable in 2011 at an estimated 4.7% .  The quick economic recovery helped reduce 
unemployment from 7.5% in 2009 to 5.6% in 2011.  There was no need for the Israeli Government to 
provide large fiscal stimulus during the period; this  helped avoid any substantial increase in public 
debt, which was below 80% of GDP.  The total government deficit declined to 3.1% of GDP in 2011 
down from 5.0% in 2009 (Table I.2). 
4. Israeli agriculture has developed over the y ears in terms of the quantity and quality of 
produce, as well as diversification and growth in plan t crops and livestock breeding.  There has been a 
considerable improvement in m odern methods of cultivation, in cluding irrigation techniques, 
greenhouses, and mechanical equipment for processing and harvesting crops. 
5. Israel is heavily dependent on international trade,  given the relatively small size of its internal 
market.  Trade (exports and imports) in goods and services represent the equivalent of around 75% of 
GDP.  Excluding diamonds, high-tech products are the leading export items. 
                                                      
1 After declining by 0.6% in 2002, GDP growth averaged 5.2% annually during 2004 to 2007 mainly as 
a result of a reduction of the fiscal deficit and the size of the government, as well as  increased activity in high-
tech sectors and relatively low real interest rates (State  of Israel Annual Report to the U.S. Securities and 
Exchange Commission for the fiscal year s ending 31 December 2009 and 2010). 
2 OECD (2010a). WT/TPR/S/272/Rev.1 Trade Policy Review 
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Table I.1 
Israel at a glance, 2005-11 
2005 2006 2007 2008 2009 2010 2011 
GDP per capita (US$) 19,245 20,520 23,151 27,434 26,042 28,575 31,318 
Population ('000) 6,961 7,088 7,219 7,351 7,482 7,622 7,763 
Growth of population (% change) 2.2 1.8 1.8 1.8 1.8 1.9 1.9 
Share of Net Domestic Product (NDP)   
Agriculture, forestry and fishing  2.1 2.0 1.9 2.0 2.3 2.0 1.9 
Industry 21.4 22.1 22.7 22.1 21.2 21.3 21.7 
     Manufacturing 15.1 15.3 16.0 15.2 14.3 14.2 14.0 
     Electricity and water 
     Construction 1.2 
5.2 1.1 
5.6 1.0 
5.7 1.0 
5.9 1.3 
5.6 1.1 
6.0 1.2 
6.4 
Services 76.5 75.9 75.4 75.9 76.5 76.7 76.4 
Share in employment (Israeli workers)   
Agriculture 2.0 1.8 1.8 2.0 1.9 1.9 1.7 
Industry 19.4 20.5 21.8 22.1 20.9 21.8 22.2 
    Manufacturing (excluding diamonds) 13.6 14.4 15.1 15.4 14.6 14.8 15.0 
    Electricity and water supply 0.7 0.7 0.7 0.7 0.7 0.7 0.7 
    Construction 5.1 5.4 6.0 6.0 5.7 6.3 6.5 
Services 78.6 77.7 76.4 76.0 77.2 76.3 76.1 
 
Source :  Information provided by Israel's Central Bureau of Statistics;  Worl d Bank, World Development Indicators 
Database;  and IMF IFS Database. 
(2) RECENT ECONOMIC DEVELOPMENTS  
(i) Macroeconomic indicators 
6. Israel's economy remains strong, following rela tively high rates of growth until 2008.  A 
quick recovery from the effects of the global crisis  started in the third quarter of 2009, and economic 
activity continued to expand in 2010 and 2011.  Output grew by 4.8% in 2010, driven largely by a strong performance of exports of goods and ser vices, and rising domestic consumption.  The 
expansion of economic activity in 2010 was supported by expansionary monetary policy (low interest 
rates and purchases of foreign currency by the Bank of Israel) and slightly expansionary fiscal policy. 
7. Economic growth slowed down slightly towards th e end of 2011;  GDP grew at a rate of 3.7% 
during the third quarter and 3.2% in the fourth.  However, GDP growth for the whole year, at 4.7%, remained almost at the same level as the year before (Table I.2).
3  The economic performance in 2011 
was supported mainly by gross capital formation, wh ile private consumption grew at a moderate pace 
and exports of goods and services grew only slightly.  The slowdown in Is raeli exports is attributed to 
the European crisis and the slower growth worldwide.   
                                                      
3 Estimates based on information provided by Israel's Central Bureau of Statistics;  and Bank of Israel 
online information, "Main Israeli Economic Data".  Viewed at:  http://www.b ankisrael.gov.il/deptdata/ 
mehkar/indic/eng_b01.htm (16/02/2012). Israel WT/TPR/S/272/Rev.1 
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Table I.2 
Selected economic indicators, 2005-11 
2005 2006 2007 2008 2009 2010 2011 
GDP at current prices (NIS million) 601, 208 648,228 686,512 723,5 62 766,273 813,021 869,199 
GDP at current prices (US$ million) 133, 968 145,479 167,112 201,6 60 194,865 217,445 242,555 
Growth rate of GDP at constant 2005 market 
prices 4.9 5.6 5.5 4.0 0.8 4.8 4.7 
National accounts (% of GDP at current prices)  
   Private consumption 55.7 55.4 56.6 58.0 56.9 58.1 58.2 
   General government consumption 25.7 25.3 24.7 24.5 24.0 23.9 23.9 
   Gross domestic capital formation 18.8 19.0 20.1 18.8 16.7 16.0 18.7 
   Exports, goods and services 42.7 42.8 42.4 40.3 34.7 36.9 36.9 
   Imports, goods and services 43.1 42.5 43.9 41.6 32.3 34.9 37.8 
Prices and interest rates   
Consumer price inflation (end of period, 
% change) 2.4 -0.1 3.4 3.8 3.9 2.7 2.2 
Bank of Israel key interest rate 3.66 5.13 3.94 3.64 0.77 1.6 2.88 
Bank of Israel effective interest rate 3.73 5.26 4.02 3.69 0.77 1.62 2.92 
Real effective exchange ratea 2.3 0.4 -1.1 -10.7 1.8 -5.1 -1.4 
Savings (% of total income)b   
Gross national saving 21.2 22.0 22.0 19.2 20.0 18.7 18.6 
   Public sector 0.1 1.3 2.2 0.8 -2.1 -0.8 -0.6 
   Private sector 21.1 21.5 19.7 18.4 22.1 19.5 19.2 
Public finance (% of GDP)   
Total government deficit (-)c -2.4 -1.0 -0.2 -2.0 -5.0 -3.4 -3.1 
Indirect taxes on civilian imports  4.1 3.9 4.5 4. 2 3.9 4.1 4.2 
Gross public debt excluding Bank of Israeld 93.7 84.7 78.1 77.1 79.5 76.1 74.2 
External sector (% of GDP unless otherwise indicated ) 
Trade balance -0.3 0.3 -1.5 -1.3 2.4 1.9 -0.8 
Current account balance 3.1 4.8 2.7 0.9 3.6 2.9 0.1 
Financial account balance -7.4 -4.0 -1.6 -0.8 -5.7 -4.7 -1.6 
   Foreign direct investment, net 1.4 -0.1 0.1 1.8 1.4 -1.3 3.4 
   Portfolio investment, net -3.9 1.9 -0.9 -0.3 -3.0 0.1 -3.6 
Total external debt (NIS million),  net 93,578 129,157 155,725 154,5 08 203,055 195,250 216,460 
Total external debt (% of GDP),  net 15.6 19.9 22.7 21.4 26.5 24.0 24.9 
Total reserves excluding gold (US$ million) 28,059 29,153 28,519 42,513 60,611 70,907 74,874 
Services exports / Total exports (goods + 
services) 29.5 29.5 28.5 29.3 31.6 30.2 30 
Services imports / Total imports (goods + 
services) 24.0 23.8 23.8 23.5 27.1 23.7 21.6 
 
a Change, annual average compared with previous year's  average.  A negative figure indicates appreciation. 
b Total income is GNP at the representative exchange rate plus net transfers from abroad to individuals plus transfers from abr oad 
to the public sector minus in terest payments to abroad. 
c Excluding Bank of Israel. 
d At end-of-year GDP prices.  
Source : Bank of Israel (2012), Annual Report 2011 - Statistical Appendix ;  Central Bureau of Statistics;  and IMF IFS 
Database. 
8. During this period, in addition to a strong resumption of GDP growth, there were significant 
improvements in the labour market with a notable decrease in unemployment (estimated to be at 5.4% WT/TPR/S/272/Rev.1 Trade Policy Review 
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in the fourth quarter of 2011) and an increase in the participation rate.4  Fiscal discipline has been 
maintained with the actual budget deficit (3.7% of GDP in 2010, down from 5.1% in 2009) significantly below the limits set by the legislature.   Israel's current fiscal plan includes a scheduled 
decrease in the budget deficit to be implemented between 2011 and 2014.
5  In 2011, the overall deficit 
totalled 3.3% of GDP, mainly due to a shortfall in the collection of taxes.6 
9. The Israeli economy had a good starting point at the onset of the global crisis, with a strong 
financial system and no real-estate bubble.  Israel's relative robustness was illustrated by the faster and earlier recovery of its economy compared with other developed countries.
7  Several characteristics of 
Israel's economy and financial system served to m oderate the effects of the crisis.  Conservative 
lending by Israeli banks (particularly lending to  households and businesses) and relatively limited 
exposure to foreign "toxic" assets mitigated the impact  of the financial crisis.  Nevertheless, credit 
flows did contract severely, and the market for corporate bonds dried up completely at one point, 
reducing domestic demand at a time when external demand was hit by the wider global recession.  However, Israel had a current account surplus of 3.6% of GDP in 2009 and ample foreign currency 
reserves, which mitigated the impact on economic activ ity.  Nevertheless, GDP declined in the final 
quarter of 2008 and the first quarter of 2009 before recovering quickly thereafter.  For the full  year 
2009, real GDP growth decelerated to 0.8%.   
10. The policy response to the global crisis was prompt.  The Bank of Israel reduced its policy 
rate in several steps from 4% to 0.5%.  This was backed with purchases of government bonds in the 
secondary market in order to increase liquidity and enhance the impact of monetary policy changes on 
longer-interest-rate maturities.  Several steps were  also taken to support the non-financial business 
sector and help the unemployed.  Government spending measures comprised, notably, accelerated infrastructure investment and specific support for SMEs, innovation, and active labour-market 
policies.  However, the total expenditures to stim ulate the economy were modest (less than 0.5% of 
GDP in the 2009-10 budget).   
11. Government policies were tightened promptly once economic growth resumed in Israel.  On 
the fiscal side, the tightening largely reflected auto matic stabilizers, while on the monetary side, the 
Bank of Israel raised its policy rates from their floor of 0.5% to 2% in October 2010.
8  Policy rates 
were further raised to 3.25% by September 2011, before being reduced in two steps to reach 2.5% by 
January 2012 to protect Israel's economy from a gl obal slowdown, particularly in Europe, which is 
one of Israel's two largest trading partners, along with the United States.  
12. Since 2003, public debt has been on a consistent  downward trend, only interrupted by the 
circumstances surrounding the 2008-09 global crisis.  In 2011, gross public debt as a percentage of 
GDP was lower than pre-crisis levels (at 74. 2%, down from 93.7% in 2005) as the Government 
                                                      
4 The Bank of Israel considers that, based on the narrowing of the output gap and labour market data, 
the Israeli economy reached the vicinity of full employment during the fi rst half of 2011 (Bank of Israel Press 
Release "Recent Economic Developments: Septembe r to December 2011",  14 February 2012). 
5 According to the plan, the budget deficit is expected to be 3% in 2011, 2% in 2012, 1.5% in 2013, and 
1% in 2014.  Israel's first biennial budget was passed in July 2009, covering fiscal years 2009 and 2010;  the biennial nature of the budget process he lped stabilize expectations (IMF, 2011a). 
6 Bank of Israel Press Release "Recent Economic Developments: September to December 2011", 
14 February 2012. 
7 Ministry of Finance (2010a). 
8 I n  a n  e f f o r t  t o  s t r i k e  a  c o m p r o m i s e  b e t w e e n  d o mestic price pressures and concern for the export 
sector, the Bank of Israel combined policy-rate rises with direct interventions in the foreign exchange market 
(OECD, 2011b).   Israel WT/TPR/S/272/Rev.1 
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continued its debt-reduction policy (Table I.3).9  Israel's budget expenditure rule is set to keep public 
debt on track to decline to 60%.   
Table I.3 
Main components of general government receipts and expenditures, 2005-11  
(% of GDP) 
2005 2006 2007 2008 2009 2010 2011 
Total receipts, excluding Bank of Israel  42.8 43.7 43.3 40.7 37.7 38.9 38.9 
Receipts from property excluding Bank of Israel  1.2 1.1 1.1 1.0 0.9 0.7 0.7 
Total taxes  35.4 35.7 36.1 33.7 31.3 32.3 32.6 
  Indirect taxes on domestic production  12.9 12.4 12.4 12.3 12.2 12.6 12.5 
  Indirect taxes on civilian imports  4.1 3.9 4.5 4.2 3.9 4.1 4.2 
  Direct taxes, fees, and levies  12.6 13.8 13.7 11.6 9.8 10.0 10.3 
  National insurance surplus  5.8 5.6 5.5 5.6 5.4 5.6 5.6 
  Grants  2.4 3.0 2.3 2.1 1.8 1.9 1.8 
Othera 3.8 3.9 3.8 3.9 3.8 3.9 3.8 
Total expenditure  45.1 44.6 43.5 42.6 42.7 42.3 42.0 
Current expenditure  41.8 41.3 40.0 38.8 38.9 38.6 38.5 
  Domestic civilian consumption  18.4 17.9 17.4 17.5 17.4 17.5 17.6 
  Domestic defence consumption  5.8 5.8 5.6 5.6 5.4 5.2 5.1 
  Defence imports  1.7 1.7 1.5 1.2 1.0 1.0 1.0 
  Direct subsidies  0.7 1.1 0.8 0.8 0.8 0.7 0.7 
  Transfer payments on current account  10.7 10.5 10.1 10.1 10.6 10.6 10.5 
  Interest payments  5.0 4.7 4.6 3.6 3.7 3.6 3.6 
Transfer payments on the capital accountb 1.6 1.7 1.8 2.0 2.1 1.9 1.6 
Investments of the general government  1.7 1.6 1.7 1.8 1.7 1.9 1.9 
Total deficit of the general governmentc 2.4 1.0 0.2 2.0 5.0 3.4 3.1 
Current deficit of the general government  2.1 0.8 -0.1 1.4 4.1 3.0 2.8 
Public debt (net)d 83.8 74.8 69.2 69.1 70.8 69.2 67.3 
Gross public debt excluding Bank of Israele 93.7 84.7 78.1 77.1 79.5 76.1 74.2 
 
a Including transfer payments from the public on the current and capital accounts, imputed pensions, depreciation, capital tran sfers 
from abroad, and transfers from  abroad to national institutions  and non-profit organizations. 
b Including mortgage subsidy and tr ansfers to non-profit organizations and businesses on the capital account. 
c Excluding Bank of Israel. 
d At end-of-year GDP prices. 
e After deducting the local author ities' debts to the Government. 
 
Source : Bank of Israel, Annual Report 2011 , "Chapter 6, The General Government , its Services and Their Financing" 
(p. 233).  Viewed at: http://www.bankisrae l.gov.il/publeng/ publeslf.php ?misg_id=12.  
13. Appreciation of the exchange rate (US$/NIS) accel erated in 2010, in part due to a sharp rise 
in short-term capital inflows, and a continued surp lus in the current account.  It has been estimated 
that the real effective exchange rate appreciated by around 5% in 2010 and by 1.4% in 2011 (Table I.2).  However, the shekel has been fo llowing a depreciation trend since August 2011 possibly 
due to geopolitical tensions, which sl owed down in the beginning of 2012.   
14. After reaching almost 4% in 2009, the inflation rate is declining.  In 2010, it was at 2.7% 
(within the Government's target range of 1% to 3%), although inflation pressures increased during the 
                                                      
9 The IMF considers that public debt in Israel is high relative to stronger OECD and emerging market 
countries, and that, reflecting regional tensions, secu rity expenditures severely constrain room for fiscal 
manoeuvre (IMF 2012a). WT/TPR/S/272/Rev.1 Trade Policy Review 
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second half of the year.10  A major factor pushing the inflation rate in 2010 was the housing 
component, which primarily reflects rents, while price increases were moderated by the currency 
appreciation.11  The  2011 rate of inflation was 2.2%;  the contributing factors to the fall in the CPI 
were mainly lower prices of food, education, culture and entertainment, and transport and 
communication.  According to the IMF, inflation and inflation expectations  have both fallen back 
from slightly above to squarely inside the 1-3% targ et range, reflecting in part the timely tightening of 
monetary policy in the upswing.12  
(ii) Balance of payments  
15. The current account balance has been positive si nce 2003 partly due to a larger expansion of 
exports of goods and services compared with that of imports.  Another factor behind the current 
account surpluses is the increase of financial invest ments by Israeli residents abroad, which produced 
higher interest and dividend income.  The current  account surplus reached 4.8% of GDP in 2006 and 
2.7% in 2007.  In 2008, the surplus shrank to 0.9% of GDP, but recovered to 3.6% in 2009 due to a surplus in the trade balance which reflected a si gnificant reduction in imports of goods and services 
that exceeded the decline in exports that year.   
16. A current account surplus of US$6.3 billion (the  equivalent of 2.9% of GDP) was registered 
in 2010.  The continuous current acc ount surpluses were helped by the st ability of the trade surplus, as 
an increase in the deficit on the goods account (due to  higher fuel prices) was offset by a surplus on 
the services account.  The current account surplus stood at US$0.2 billion in 2011.  The fall in the surplus is due to an increase in the value of imports on the back ground of high utilization rates and 
rising oil prices.  Exports of commercial services  increased by 11% in 2010 after having plunged by 
10% in 2009, while import growth was more modest.
13 
17. Israel posted trade deficits in goods throughout  the period under review, except in 2009, while 
its services account registered increasing surpluses (Table  I.4).  Changes in the trade balance in recent 
years were due mainly to fluctuations in world fuel prices.  Excluding trade in fuels, the upward trend 
observed in the surplus was more stable, continuing  in 2010 despite real currency appreciation and the 
worsening of terms of trade.14   
18. Foreign currency reserves (excluding gold) in creased significantly in 2009 to reach US$60.6 
billion compared with US$42.5 billion in 2008.  Reserves stood at close to US$71 billion in 2010, and US$75 billion in 2011 (Table I.2).  
                                                      
10 The 2010 Bank of Israel Law explicitly establishe s price stability as the primary policy objective and 
reflects best practice for inflation targeting (IMF 2011b).  The Law also established a new Monetary Policy 
Committee subject to increased public accountability. 
11 The 2010 inflation rate excluding the housing component was 1.9%. 
12 The IMF also considers that the shekel is broadly consistent with fundamentals and that international 
reserves are appropriate by most measures (IMF 2012a). 
13 WTO (2011), Appendix Table 2. 
14 The Bank of Israel estimates that the terms of trad e worsened by 4.4% in 2010, due mainly to a 25% 
increase in fuel prices (Bank of Israel, 2011). Israel WT/TPR/S/272/Rev.1 
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Table I.4 
Balance of payments, 2005-11 
(US$ million) 
2005 2006 2007 2008 2009 2010 2011 
Current account 4,101 7,395 4,882 1,830 6,976 6,336 190 
Trade in goods -3,512 -3,235 -5,177 -6,685 340 -1,947 -9,080 
        Exports of goods 40,376 43,920 50,793 57,713 46,333 56,095 62,853 
        Imports of goods 43,888 47,155 55,970 64,398 45,993 58,042 71,933 
Trade in services 3,047 3,602 2,741 4,148 4,323 6,173 7,019 
        Exports of services 16,876 18,342 20,262 23,920 21,415 24,231 26,863 
        Imports of services 13,829 14,740 17,521 19,773 17,092 18,059 19,844 
Net income  -1,436 -740 -260 -4,115 -5,089 -6,315 -6,442 
        Income (credit) 5,602 8,434 10,875 7,244 5,694 5,824 7,150 
        Income (debit) 7,039 9,174 11,135 11,359 10,783 12,139 13,592 
Net current transfers 6,002 7,442 7,257 8,481 7,402 8,426 8,694 
        Current transfers (credit) ... 8,559 8,528 9,424 8,395 9,481 9,919 
        Current transfers (debit) ... 1,117 1,271 943 993 1,056 1,226 
Capital balance 727 787 823 1,110 908 983 1,240 
Financial account -9,856 -5,833 -2,673 -1,554 -11,185 -10,177 -3,790 
        Direct investment 1,872 -166 194 3,665 2,743 -2,808 8,082 
           Direct investment in Israel 4,819 15,296 8,798 10,875 4,438 5,152 11,397 
           Direct investment abroad -2,946 -15,462 -8,604 -7,210 -1,695 -7,960 -3,316 
        Portfolio investment -5,220 2,737 -1,502 -639 -5,865 127 -8,492 
           Portfolio investment in Israel 2,755 9,084 1,636 996 2,389 9,028 -5,441 
           Portfolio investment abroad -7,975 -6,347 -3,138 -1,634 -8,254 -8,901 -3,051 
        Other investments -4,970 -7,961 -3,071 9,707 8,348 4,322 1,176 
           Assets -5,314 -10,719 -7,052 10,819 4,500 929 633 
           Liabilities 344 2, 757 3,981 -1,112 3,848 3,392  1,809 
        Financial derivatives 35 -89 29 -116 230 30 -17 
        Reserves assets -1,574 -353 1,678 -14,171 -16,642 -11,847 -4,439 
 Statistical discrepancies 5,028 -1,976 -2,711 -1,385 3,300 2,857 2,360 
 
Source : Information provided by Israel's  Central Bureau of Statistics. 
(3) DEVELOPMENTS IN TRADE  
19. Israel's economy is highly dependent on intern ational trade.  Export growth has played a 
significant role in Israel's overall economi c performance and demonstrates the growing 
competitiveness of the Israeli economy, in particular in the high-technology sectors.15  Exports grew 
from 2004 to 2008 by 8.5% on average, before declining by 12.5% in 2009 due to the effects of the global economic crisis.  In 2010, exports of goods and services rec overed strongly.  The value of 
imports also increased substantially, in part due to  increases in the price of imported oil.  In 2010, 
Israel was ranked the world's 26
th largest merchandise importer (e xcluding intra-EU27 trade).16 
                                                      
15 Exports of high-tech indu stries account for more than 40% of th e total, excluding diamonds (State of 
Israel Annual Reports to the U.S. Securities and Exchange Commission for the fiscal years ending on 
31 December 2009 and 31 December 2010). 
16 WTO (2011), Appendix Table 4. WT/TPR/S/272/Rev.1 Trade Policy Review 
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20. According to the Bank of Israel, exports of goods and services expanded by 13.4% in 2010.  
Israel's export performance was aided by the economic  recovery of its trading partners during that 
year.  Imports also grew substantially as a result of  a sharp increase in import-intensive uses, such as 
investment in equipment and the purchase of durab le goods.  In 2011, export growth decelerated to 
4.5%, while the rate of import growth remained strong, at 9.5%. 
21. Over the review period, the share of cut di amonds in total merchandise exports declined 
regularly, while that of chemicals almost doubled (Table AI.1).  On the import side, the relative 
importance of fuels (in particular crude oil due to persistent high fuel prices) and food products 
increased during the same period, while that of uncut diamonds declined. 
22. The share of services in Israel's total trad e remained broadly stable during 2005-11 
(Table I.2).  Continued higher growth in exports than of imports of commercial services has led to 
increasing surpluses in the services balance;  this tr end was already noted at the time of the last 
Review of Israel.  The services account registered a surplus of more than US$7 billion in 2011, up 
from US$3 billion in 2005 (Table I.4).  Israel was ranked as the world's 20th largest exporter of 
commercial services in 2010, and the world's 27th largest importer.17 
(i) Composition of trade 
23. The composition of Israel's merchandise trade reflects the industrialized nature of the 
economy.  Exports consist mainly of manufactured  goods, in particular high-tech products, which 
accounted for more than 90% of total merchandise e xports since 2008 (Table AI.1).  Raw materials 
(including energy and raw diamonds) and inv estment goods comprise around 80% of total 
merchandise imports. 
24. The composition of Israel's merchandise trade, in particular that of exports, changed slightly 
over the review period.  The share of agriculture rema ined constant at slightly above 3%, while that of 
manufactures increased from around 83% in 2005 to 93% in 2011 (Chart I.1).18  The share of 
diamonds in the total value of merchandise exports d eclined from 37% in 2005 to 30% in 2011 (after 
having increased significantly during the previous  review period), while that of pharmaceuticals 
almost doubled (Table AI.1).  Nevertheless, polished diamonds remain the leading export item 
followed by chemicals, and office machines and telecommunication equipment. 
25. The share of agriculture in total merchandise im ports, in particular food products, increased 
slightly between 2005 and 2011 (Chart I.1 and Table AI .2), while the share of manufactures declined.  
The main imported items in 2011 were fuels,  raw diamonds, chemicals, office machines and 
telecommunications equipment, and non-electrical machinery. 
                                                      
17 WTO (2011), Appendix Table 6. 
18 During the period under review, there was a shar p decline in the share of  the category "Other" in 
total merchandise exports, which dropped from close to 13% in 2005 to around 0.9% in 2011.  In particular, the 
item that registered the most drastic decline was "Speci al transactions and commodities not classified according 
to kind". Israel WT/TPR/S/272/Rev.1 
 Page 9 
 
 
Chart I.1
Composition of merchandise trade, 2005 and 2011
2005 2011
(a)    Exports (f.o.b.)
Manufactures
82.7
Diamonds 30.4Transport 
equipment
3.3
Other electrical 
machines
5.5
Other semi-
manufactures
3.6Chemicals
27.6
Total:   US$42.8 billion Total:  US$67.8 billion  
(b)    Imports (c.i.f.)
Chemicals
10.2Automotive 
products
5.3
Manufactures
75.9Office machines 
& other telecom 
equipment
9.6Other electrical 
machines 5.0Other mining
1.9Fuels
15.0
Diamonds 21.3Other 0.6
Non-electrical
machinery
8.7
Diamonds 14.6Automotive 
products
6.4Other transport 
equipment
1.3Other
0.5
Office machines & 
other telecom 
equipment
8.8Agriculture
6.5
Other semi-
manufactures
4.9Chemicals
10.7Manufactures
71.0
Total:   US$45.0 billion Total:   US$73.5 billion Per cent
Manufactures
93.0 Non-electrical 
machines 4.4Chemicals
14.8
Other 
manufactures
12.0Other transport 
equipment 
1.7Mining 1.1
Other electrical 
machines
3.6Mining
2.4Agriculture
3.6
Non-electrical 
machinery
5.9
Source :  UNSD, Comtrade database (SITC Rev.3).Other 
manufactures
11.8
Mining
20.2Other  
manufactures
9.1
Other semi-
manufactures
3.6
Other semi-
manufactures
5.0Other manufactures
8.7
Non-electrical 
machinery
4.1
Mining
16.9Agriculture
8.3Other
12.9Other
0.9
Other mining
1.6Fuels
18.5Diamonds 37.4Agriculture
3.2
Office machines & 
other telecom equipment
9.0 Other electrical 
machines
3.8
Office machines & 
other telecom 
equipment
7.5Transport 
equipment 
2.8
 WT/TPR/S/272/Rev.1 Trade Policy Review 
Page 10 
  
(ii) Direction of trade 
26. Israel's trade continues to be affected by the geo political situation that prevails in the Middle 
East, and that seriously impedes trade between Israel  and its neighbours.  As a result, the European 
Union and the United States remain Israel's main trading partners.  They accounted for almost 28% 
and 29% of total merchandise exports in 2011, respectively (Table AI.4).  The European Union and 
the United States are also the main sources of Isr ael's imports accounting for a combined share of 
close to 46% of total merchandise imports in 2011 (C hart I.2 and Table AI.3).  This trade is conducted 
mostly under preferential agreements. 
27. Nevertheless, Israel's trade with Asia continue d to increase over the review period;  the share 
of Asian countries in total merchandise exports incr eased from 18.3% to 24.4%.  Asia's share in total 
merchandise imports also rose during the same peri od, from 18.1% to 22.1%.  According to the Bank 
of Israel, the increase in the share of Asian mark ets as destinations for Israeli exports in 2010 
surpassed the growth of these markets' share in intern ational trade.  The structural change in export 
destinations seems to have been facilitated by the global crisis and developmen ts in its aftermath:  
rapid recovery in Asia against sluggish recove ry of demand in western countries, as well as 
expectations of another crisis in Europe.19 
28. Since 2008, China has become the second largest origin of Israel's merchandise imports, 
displacing Germany to the third place.  China's sh are in total merchandise imports almost doubled 
during the review period.  The United States remains the main origin for Israel's imports, although its 
share is declining.  The United States is also by far the main destination for Israel's exports, 
accounting for almost 29% of total merchandise exports  in 2011, although, again,  its share is on a 
downward path.  Other key markets for Israel's e xports are Hong Kong, China; Belgium; and India. 
  
                                                      
19 Bank of Israel (2011). Israel WT/TPR/S/272/Rev.1 
 Page 11 
 
 
Chart I.2
Direction of merchandise trade, 2005 and 2011
2005 2011
(a)    Exports (f.o.b.)
Asia  
18.3America
33.5
Total:   US$42.8 billion Total:  US$67.8 billion
(b)    Imports (c.i.f.)
Japan 2.7
EU(27)
39.1Europe  
47.5Other America
2.9Other 
15.1
America
16.4
Switzerland
5.5EU(27)
34.6Europe
43.1Asia
22.1Other America 
2.0
India 2.9
Japan 3.3America
13.8
Switzerland
5.4United States 11.8
Total:   US$45.0 billion Total:   US$73.5 billionPer cent
Other Asia
8.1
CIS 1.8United States
36.2
Other Europe
4.5
Other Asia  
8.5United States 28.7
Source :  UNSD, Comtrade database (SITC Rev.3).Other Europe
3.2EU(27)
27.9
Asia
18.1
Other Europe
2.9EU(27)
29.3Other Europe 
5.1Other America
4.8Africa 1.8
Hong Kong, China 
7.9
India 2.8China 4.0
Other
19.2
China 4.2CIS 2.1
Other America
4.2
CIS 2.9Other   
4.2Other 
3.9
Africa 2.7
Other Asia 
8.4
China 7.4United States 13.5India 2.9
Europe
33.8Hong Kong, China
5.5
CIS 1.7Other Asia 8.2
China 1.7
Europe
33.0India 4.5
Asia   
24.4America
40.5
 WT/TPR/S/272/Rev.1 Trade Policy Review 
Page 12 
  
(4) FOREIGN INVESTMENT  
29. In recent years, foreign investment in Israel  has been primarily in the form of direct 
investment (FDI).  FDI inflows, mainly in the form of mergers and acquisitions, increased 
significantly between 2004 and 2008, from US$2.9 billion to US$10.9 billion.  Following world 
patterns, FDI inflows declined sharply, by almost  60%, in 2009 and recovered marginally in 2010, to 
US$5.5 billion;  inflows more than doubled in 2011,  reaching US$11.4 billion.  Inflows of portfolio 
investment declined sharply between 2004 and 200 8, from US$7.1 billion to US$1 billion.  In 2009 
and mainly in 2010, portfolio investments increased to US$2.4 billion and US$9 billion, respectively, but in 2011 a net outflow of US$5.4 billion was recorded. 
30. The stock of FDI in Israel was almost US$56 b illion at the end of 2010.  FDI in Israel is 
determined primarily by the attractiveness of its hi gh-technology industries and its growth prospects.  
Other main recipients of FDI are the chemicals and metals industries.   A significant share of FDI in 
Israel is made in start-up companies, real estate, and reinvestment of accumulated profits in Israeli companies. 
31. Direct investment abroad by Israeli residents declined sharply between 2006 and 2009 (from 
US$15.4 billion to US$1.8 billion), and recovered in 2010 (to around US$8 billion).  The stock of 
outward FDI was around US$66 billion at the end of 20 10.  In 2011, investment abroad by Israeli 
residents declined. 
(5) O
UTLOOK  
32. A slowdown in economic growth has been observed more recently, reflecting renewed 
concerns about the status of the global economy.  The outlook for the Israeli economy is very much 
dependent on global developments .  Even if the Israeli economy passed through the 2008-09 global 
crisis in relatively good shape, it remains vulnera ble to the continuing effects of the renewed global 
economic uncertainties and geopolitical tensions.  As a small, relatively open economy, highly 
integrated with international trade and world financ ial markets, Israel's economic growth is heavily 
affected by external factors.  With exports  representing around 40% of GDP, foreign demand will 
remain a critical determinant of overall growth.  In  particular, Israeli exports are highly sensitive to 
the macroeconomic performance of its large trad ing partners, mainly the United States and the 
European Union.  However, newer mark ets in Asia may provide some offset. 
33. Israel's economy is expected to grow by appr oximately 3% in 2012, in the absence of an 
external crisis or contagion from within the corporate bond market.20  The Israeli Government 
forecasts a budget deficit of 3.4% of GDP, due to a sh ortfall in tax income.  The recent discoveries of 
offshore natural gas could further strengthen the fiscal position and decrease dependence on imported 
fuels.  Inflation seems to be on track and is expect ed to remain within the Bank of Israel's inflation 
target range.  On the one hand, domestic demand and the housing market are softening, but on the 
other, energy and commodity prices are generating so me inflationary pressure.  Taking all this into 
account, the Bank of Israel expects inflation to be around 2.5%. 
34. The main challenges for the Israeli economy are to continue to mitigate the impact of the 
renewed global economic difficulties, which risk furt her weakening external demand, and to address 
internal vulnerabilities such as a relatively high publ ic debt, which is compounded by fiscal rigidities 
due to security-related expenditures.  Heightened geopolitical tensions pose additional risks to the 
Israeli economy.  
                                                      
20 This figure is based on IMF projections (IMF, 2012a).  The Bank of Israel estimates a GDP growth 
rate of 2.8%, and the Ministry of Finance a rate of around 3.2%. Israel WT/TPR/S/272/Rev.1 
 Page 13 
 
 
35. Low rates of labour-market participati on and high rates of poverty among certain 
communities will remain a key challenge to the long-te rm sustainability of the Israeli economy.  Other 
important concerns are related to the high cost-o f-living (Box I.1), the level of competition in the 
economy, and the role of Israel's large family-run business groups.21  At the end of February 2012, a 
special Committee on Increasing Competitiveness in the Economy presented recommendations that 
cover three areas: selling government assets, separa ting the ownership of fi nancial and non-financial 
companies, and dealing with "pyramid" ownership stru ctures.  The Bank of Israel is of the view that 
the removal of import barriers is a very importa nt factor related to increased competitiveness.22 
Box I.1:  Unilateral trade liberalization in Israel  
In the summer of 2011, Israel experienced a wave of popular discontent over the high cost of food in general, 
and dairy products in particular (the "cottage cheese uprising"), which grew into unprecedented protests 
against the high cost of living (e.g. housing) in Israel.  In response to the protests, in August 2011, the Prime 
Minister appointed a professional Committee on Socio-economic Change, chaired by Professor Manuel 
Trajtenberg.  Within six weeks, the Trajtenberg Committee submitted recommendations regarding its broad 
mandate.  The report recommended, amongst others, removing customs duties to stimulate import competition;  providing tax relief to low-income earners and increasing the progressivity of the tax system;  
improving access to public housing;  and expandin g access to key social and educational services. 
In December 2011, following the Trajtenberg Comm ittee recommendations, the Knesset passed a first 
instalment of reforms, cancelling planned reductions in corporate income taxes, providing additional tax 
breaks for families, and other measures.  The reforms also included unilateral tariff elimination for close to 
400 tariff lines (HS 8-digit level) of non-food consumer goods, on which customs duties had been in the range of 6-12%. 
Meanwhile, a committee headed by the Director-Gener al of MOITAL (Kedmi Committee) was reviewing, 
inter alia , the matter of why some food prices seem to be  high in Israel.  The Committee's focus was on 
processed food products and the issue of concentration in production and distribution.  It did not deal with 
fresh agricultural products.  In July 2012, the Government adopted the final recommendations of the Kedmi 
Committee, which include eliminating or reducing import duties on several categories of goods where it concluded that tariffs limit imports or hinder competition among traders.  As a result,  Israel eliminated, with 
immediate effect, tariffs on certain electrical app liances. According to the implementing instruments 
published on 15 July 2012, further reductions for products , such as textiles and apparel, are to be implemented 
in 2013, while tariff reductions on certain food items  will be implemented in stages until 2015.  Some 
government officials have raised doubts whether tariff reductions in food (as well as in other areas) would be passed on to consumers because of  oligopolistic mark et structures. 
Source : WTO Secretariat;  IMF (2012), Israel:  2012 Article IV Consultation Staff Report .  Viewed at:  
 http://www.imf.org/external/p ubs/ft/scr/2012/ cr1270.pdf. 
 
 
                                                      
21 OECD (2011b). 
22 Bank of Israel Press release, "Comments by the Gove rnor of the Bank of Israel on the presentation of 
the report of the Committee on Increasing Compe titiveness in the Economy", 22 February 2012.