Israel - business outlook abroad

Business America, Sept 25, 1989

Demand is Strong for Both High- and Low-Tech Items; |There is Scarcely an Area That Does Not Hold Promise'

A number of factors make Israel an increasingly attractive market for U.S. products despite the current slowdown in the Israeli economy. The U.S.-Israel Free Trade Area Agreement is reducing customs duties for both countries and the number of items requiring import licenses; the more competitive dollar has supported interest in a broader range of U.S. products; and Israelis have a favorable orientation toward the United States and U.S. products. In this environment, both standard high-tech exports and less sophisticated industrial and consumer items should do well in the foreseeable future, reports the U.S. Embassy in Tel Aviv.

Following the introduction of Israel's 1985 Economic Stabilization Program, inflation fell and economic growth accelerated. But beginning in the latter half of 1987, the pace of economic activity in Israel slackened. This slowdown continued and deepened in 1988, with economic growth registering its lowest level since 1982 and industrial production declining by 3 percent.

Economic activity has continued to decelerate in 1989, with unemployment in the first quarter reaching its highest levels since 1967. Since December 1987, the slowdown in economic activity has been compounded by the Palestinian uprising in the Occupied Territories; Israeli observers estimate the uprising cost Israel about 2 percentage points of GDP growth in 1988. The negative economic consequences of the uprising on Israel appear to have continued relatively unabated into 1989.

At the start of 1989, the Israeli Government introduced a series of measures designed to encourage investment and to pull the economy out of the slowdown. These measures have had little positive effect and the government is considering additional measures. In the longer term, the establishment of stable economic growth in Israel is dependent upon the implementation of those aspects of the 1985 Stabilization Program which were aimed at reducing government intervention in the economy: privatization of government corporations, reform of the capital market to reduce government dominance and free funds for the private sector, tax reform, and a reduction in the size of the public sector workforce. Some progress has been made in these areas, but the overall pace of reform has remained relatively slow.

U.S. exports 1988--$3.2 billion

U.S. imports 1988--$3.0 billion

As a policy, the government supports private investment in the economy and provides a range of benefits to investors. Licensing and joint ventures are welcomed by the government and local firms. Investment incentives are provided for export-oriented industries and for job creation in development areas. There are generally no restrictions for foreign investors regarding the forms of doing business in Israel. Except for certain sectors of the defense industry, there are no restrictions on foreign investment in the private sector. Investments in regulated bodies (e.g., banking or insurance) require prior approval. Government assistance is not given if the sector is saturated. A number of problems arise, however, affecting investors, which can be attributed to inefficiency in the bureaucracy, capriciousness, or non-transparency in the application of regulations. There is also retroactive application of taxes. Intellectual property laws are favorable, but there have been some complaints of a lack of enforcement.

The still competitive dollar, together with the U.S.-Israeli Free Trade Agreement, Israel's high level of industrial sophistication, and a general Israeli orientation toward the United States, makes Israel an attractive market for U.S. exporters.

Nevertheless, Israel applies taxes and licensing restrictions that can be a barrier to U.S. exports and which are not affected by the FTA. These can include such charges as a purchase tax, ranging from 5 to 220 percent, which is based on an estimated value at wholesale level, or variable levies on agriculture and food items which are designed to equalize the cost of imports with the price of domestic foods. Actual invoice prices are often "uplifted" by Customs before duties are calculated. These practices are the subject of talks between the United States and Israel.

The FTA has generally put U.S. goods back on a competitive par with the European Community. The Embassy continues to hear stories of Israeli firms turning to U.S. suppliers to replace European and Japanese companies. A cost advantage for many U.S. products does exist--American companies should be aware and act. The Embassy has received inquiries by U.S. companies concerning restrictions on country of origin certificates. Those firms export via Europe, warehousing their products there for general distribution to Europe, the Middle East, and Africa. Unfortunately, such handling generally cancels the FTA's benefits for such goods, unless the goods remain under the control of the Customs Authority of the intermediate country. U.S. exporters interested in learning more about the FTA should contact their nearest U.S. Department of Commerce district office.