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Report on the Free Trade
Agreement Between Israel and the European
Union:
European Companies Expected to Use Israel for Duty Free Access to the
United States
August 2001
L. Marc Zell, Adv. of the law offices
of Zell & Co. reports
on Israel’s expansive free trade and cooperation agreement with the
European Union. Included in the report are brief comments on opportunities
to use the benefits of this new agreement in conjunction with those afforded
under Israel’s free trade agreement with the United States to form
the basis for a “free trade bridge,” permitting duty-free trade
between the United States and European Union members.
On November 20, 1995, Israel and the European Union (“EU”)
signed a long-awaited bilateral trade agreement in Brussels. Styled an
“Association Agreement,” the accord replaces the outdated and
minimalist Free Trade Area and Cooperation Agreement of 1975 (the “1975
Agreement”). The Association Agreement can be viewed in light of
the EU’s Mediterranean policy, introduced in 1990, to bolster its
relationship with the countries of the region, and in recognition of the
perceived strong link between economic stability and peace in the area.
That policy is now rapidly developing. Just one week after the signing
of the Association Agreement, EU ministers attending the European-Mediterranean
conference in Barcelona spoke of a 15-year plan for a free trade area
spanning European and Mediterranean states.
The upgrading of Israel’s free trade area with the EU and the EU’s
larger plans for a free trade area of European and Mediterranean countries
can be understood in light of Europe’s attempts to bolster its competitive
edge in a post-cold war world.
From Israel’s perspective, a modernized free trade area with the
EU completes an important phase in Israel’s attempt to reconfigure
and address its own balance of trade difficulties with Europe by providing
a more competitive environment for its exports. Moreover, having already
achieved a complete free trade area with the United States, Israel now
finds itself with unique advantages for companies in search of a trade
bridge between the United States and Europe.
HISTORICAL BACKGROUND TO EU-ISRAEL ACCORD
The European Union remains Israel’s main trading partner. Notwithstanding
certain political stumbling blocks to progress in its trade relations
with the EU, Israel holds the position as the only state outside of Europe
which has established a thorough free trade area with the EU grounded
on complete reciprocity.
In contrast with the more comprehensive Association Agreement, the scope
of the 1975 Agreement was limited to trade relations and commercial cooperation.
Following trade agreements with the European Community (“EC”)
in 1964 and in 1970, the 1975 Agreement created a closer relationship
with Israel than with any other Mediterranean country and granted Israel
a certain “preferential status,” the first of its kind with
the EC. The centerpiece of the 1975 Agreement sought the reciprocal abrogation
of all custom duties and other quantitative restraints on industrial goods
and the establishment of a framework of cooperation (with the aid of additional
protocols in 1977) in the areas of finance, agriculture and industry.
The EC in fact provided free access for Israeli industrial products beginning
in 1977, while Israel managed to abolish all of its customs duties on
comparable EC goods by 1989. As for agricultural products, the 1975 Agreement
and later 1988 protocols, entitled Israel to major concessions on approximately
70 percent of its exports to the EC, while the EC received duty free status
for a number of its own products, subject to limited tariff quotas in
effect during particular periods of the year.
In connection with its duty-free aspects, the 1975 Agreement included
provisions concerning “Rules of Origin,” delineating the circumstances
under which products are deemed to have originated in either Israel or
the EC, and hence entitled to preferential treatment.
U.S.-ISRAEL, EFTA-ISRAEL FREE TRADE AGREEMENTS
Signed on April 22, 1985, the Agreement on the Establishment of a Free
Trade Area between the Governments of Israel and the United States of
America provided for gradual elimination of all tariffs between Israel
and the U.S. beginning in 1985 and culminated in a completely tariff-free
area as of January 1, 1995.
The Israel-EFTA Free Trade Area Agreement (the four EFTA member countries
are Norway, Iceland, Switzerland and Liechtenstein.) was signed on September
17, 1992, and in contrast to the U.S.-Israel Agreement, provided for immediate
elimination of most tariffs and duties, effective January 1, 1993. All
tariffs and other trade restrictions were removed with regard to industrial
products, while most tariffs were abolished in connection with agricultural
products.
“Rules of Origin” obviously play an important role in free
trade agreements , defining whether a particular product “originates”
in one of the countries of the contracting parties and hence whether the
exporter is entitled to favorable treatment under the trade accords. A
careful review and understanding of these rules is important for determining
in any particular case whether Israel can be used as a possible trade
bridge between the U.S. and Europe. In summary, in order to qualify for
favorable treatment under the US-Israel Agreement, a product must either
be completely the growth, product or manufacture of the exporter, or,
if it is produced with imported materials, be a new or different product
that has been grown, produced or manufactured in the country of the exporter.
In either event, it must be imported directly from one party’s country
to the other, and at least 35 percent of the local content (but not the
value) of the product must have been added in the country of export. This
“direct import” requirement permits shipment through an intermediate
country, although the product may not enter into the commerce of the third
country, as evidenced by the shipping documents, which must reflect one
of the parties of the Agreement as the final destination.
The test for determining the country of origin of a product made up
or combined with imported components is a “substantial transformation”
test, providing that the final assembled product must have become a “new
or different article.” Substantial transformation will have occurred
where such a product underwent substantial manufacturing or processing,
or where the distinctiveness of the imported component is lost in the
processing or manufacturing and the final article has a new name and use.
A different approach is used under the rules of origin of the Israel-EFTA
Agreement. These rules of origin are based essentially on the principles
employed under the 1975 agreement between Israel and the EC. Under the
Israel-EFTA trade pact, a product is considered to have been manufactured
within the country of origin if it is either: (1) “wholly obtained”
in one of the signatory countries to the trade Agreement or; (2) not “wholly
obtained” from the exporter’s country but produced with imported
raw materials which have been “substantially worked or processed”
so that, when combined into a new product, the customs classification
in fact changes. The Israel-EFTA agreement provides an exemplary list
of the processing that must be performed on imported raw materials for
the final product to be determined a product of the contracting parties,
as well as a list of products that are considered to have been “wholly
obtained” in one of the countries of the contracting parties.
THE DECLINE OF THE 1975 AGREEMENT
During the first five years under the 1975 agreement, Israel’s
exporters thrived in doing business in the EC. Israeli exports into the
EC increased during this period at an average annual rate of 26 percent.
However, in the 1980’s, Israeli exporters began to encounter some
difficulties in competing effectively in European markets. While European
imports continued to flood into Israel, Israel’s average yearly growth
rate in exports declined, resulting in an escalating trade deficit with
the EC. Several economic factors have been identified as eroding the effectiveness
of the 1975 Agreement:
¨ The expansion of the EC with the accession of Spain and Portugal
in 1986 exacerbated Israel’s ability to compete in the European market,
especially in the processed agricultural products market. Although the
EC granted Israel and other Mediterranean countries certain tariff and
quota concessions in 1986 to ease the adjustment to the EC’s expansion,
these concessions to Israel were never appropriately updated.
¨ While other non-EC member countries obtained new trade preferences
and negotiated changes to trade agreements in response to changing international
and industrial market conditions, Israel remained subject to an increasingly
obsolete trade agreement.
¨ The primary benefit of the 1975 Agreement -- duty free trade --
was devaluated by the general reduction in customs levels among developed
countries by virtue of the multilateral agreements under the General Agreement
on Tariffs and Trade, as well as by the expansion in non-tariff methods
of protecting local markets.
¨ Outmoded rules of origin placed Israel’s new leading industry
-- the high tech field -- at a competitive disadvantage.
¨ The evolution of Israel’s agricultural exports saw the introduction
of new Israeli products, such as fish, tomatoes, and plants, not covered
by the 1975 Agreement or its supplementary protocols.
¨ Certain tariff quotas and periods of applicability proved unreasonable
and unrealistic.
THE ASSOCIATION AGREEMENT
Rules of Origin. One of the primary advances of the Association
Agreement over the 1975 Agreement is the amendments to the rules of origin,
which now reflect the true stage of development of the Israeli high tech
industry. Also, in general, the new rules of origin have been made more
flexible:
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regarding products manufactured with “non-originating materials”
(“NOMs”), which, if sufficiently “worked or processed”
(in Israel or the EU) obtain “originating status” and thus
are worthy of preferential customs treatment.
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by permitting NOMs to be used in the manufacture of originating products,
so long as the value of the NOM does not exceed 10 percent of the value
of the final product
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by permitting the processing of local (originating) materials in
a country other than Israel or an EU member on the condition that the
value of the processing does not exceed 10 percent of the value of the
final product, and that the product is returned to the local Israeli
or EU manufacturer for export.
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by an EU Declaration attached to the Association Agreement, committing
the EU to implement “cumulation of origin” principles (effectively
expanding the territory in which a product may originate in order to
receive preferential treatment) in its trade arrangements with other
Mediterranean countries in the event Israel concludes a free trade agreement
with such state(s).
Free Movement of Goods.
Industrial products. The prohibition against customs duties
on imports and exports between the parties has been maintained.
Agricultural products. Except with respect to certain products
whose duties and quotas the parties have agreed to liberalize, as identified
in the first two protocols of the Association Agreement, the parties have
effectively agreed to negotiate in the future a reciprocal liberalization
of trade on a product-by-product basis, with measures to be in place by
January 1, 2001. Certain agreements were reached, however, regarding important
Israeli exports.
Public Procurement Markets. By a Joint Declaration attached
to the Association Agreement, the parties have agreed to commence formal
negotiations to increase access to each other’s government procurement
markets in the telecommunications and urban transport sectors (with the
exception of buses), as well as to open the government and public sector
procurement markets beyond the scope of the World Trade Organization framework.
Scientific and Technical Cooperation. On October 31, 1995,
the parties initialed a separate Research and Development Agreement, providing
for Israel’s acceptance as a full member of the EU’s Fourth
Framework Research and Development Program (the “FFRDP”), making
Israel only one of two non-EU member states (the other, Switzerland) entitled
to participate in the FFRDP. Based on complete reciprocity, the FFRDP
permits each party to participate in its respective research and development
tenders (except those concerning nuclear energy) through 1998. Israel,
moreover, will be entitled to participate in the EU’s research and
development committees, albeit as a non-voting member.
Right of Establishment of Companies and Supply of Services.
Completely new to the trade relations between the parties is the agreement
to agree in the future (within the framework of an “Association Council”)
on the reciprocal right to establish firms, including national companies,
in the other’s territory, and on the liberalization of the supply
of services (e.g., financial, transport and tourism) by one party’s
firms to customers of the other party.
Free Movement of Capital and Payments. Also new to the
parties’ trade relations is an agreement that there will be no restrictions
on the movement of capital, no discrimination on the basis of nationality,
place of residence, or the place where the funds are to be invested. Moreover,
current payments in connection with the movement of goods, services, capital,
or persons within the framework of the Association Agreement will be free
of all restrictions.
Competition. The measures in force under the 1975 Agreement
will remain in force; however, the parties have agreed to forbid the creation
of cartels and other anti-competitive associations. In addition, each
party has agreed to ensure accountability in the area of public aid by
providing annual reports in respect thereof.
Intellectual, Industrial and Commercial Property Rights.
The parties have agreed on appropriate means of protection and enforcement
of these rights. In turn, Israel has agreed to accede to the following
multilateral conventions within three years from the effective date of
the Association Agreement: Berne Convention for the Protection of Literary
and Artistic Works (Paris Act, 1971), Madrid Agreement concerning the
International Registration of Marks (Stockholm Act, 1967, amended 1979),
Protocol relating to the Madrid Agreement concerning the International
Registration of Marks (Madrid, 1989), Budapest Treaty of the International
Recognition of the Deposit of Microorganisms for the Purposes of Patent
Procedure (1977, modified in 1980), and Patent Cooperation Treaty (Washington,
DC, 1970, amended 1979, and modified 1984). Within two years from the
effective date of the treaty, Israel will ratify the International Convention
for the Protection of Performers, Producers of Phonograms and Broadcasting
Organizations (Rome, 1961).
Cooperation. The Association Agreement provides for a
comprehensive cooperation scheme, achieved through regular dialogue within
the following spheres: industry, agriculture, standardization, financial
services, duties/customs, environment, energy, information, infrastructure,
tourism, correlation of laws, transportation, war on drugs and money laundering,
immigration, as well as new areas of cooperation in the promotion of culture,
education and audio-visual production.
ISRAEL AS A FREE TRADE BRIDGE BETWEEN U.S., EUROPE AND BEYOND
Israel is unrivaled in its position of maintaining expansive Free Trade
Agreements with the EU, the United States and the EFTA countries. Israel
has also signed a Free Trade Agreement with Canada in July 1996, effective
January 1, 1997, and is negotiating free trade agreements with Turkey,
Jordan, Egypt and other countries. This uniqueness presents international
business with exciting opportunities to utilize Israel as a base of assembly,
manufacturing, or finishing operations for duty free or other preferential
access to the world’s primary markets.
Numerous additional incentives exist for investment or operations in
Israel. For example, Israel offers one of the world’s most highly
educated and cost-effective work forces -- over 30 percent of workers
have over 13 years of education, 17 percent hold academic degrees, nearly
twice as many people work on R&D on a per capita basis than in the
United States or Japan, and wage rates are less than two-thirds of those
of developed countries with comparable education and skill levels. Further,
the Israeli Government offers various generous investment incentives to
foreign investors, including grants, loan guarantees, accelerated depreciation,
tax holidays or reductions, and subsidized wages, premises and infrastructure.
Israel’s Free Trade Agreement with the European Union is therefore
simply another exciting factor for international businesses to consider
when weighing the numerous benefits of doing business in Israel.
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