In 1988 Israel had a quasi-open economy. Its chronic trade imbalance reflected the country's military burden, its need to import capital and raw materials, and its excess civilian consumption. This trade deficit had long been covered by transfers and loans of various sorts. Despite drops in the prices of oil and other commodities (the effects of which were felt mainly in 1986) and improvement in Israel's terms of trade because of the fall in value of the United States dollar and the parallel strengthening of European currencies, the balance of trade worsened in 1986. The drop reflected a surge in inventory rebuilding after the 1984-85 recession.

Despite their high level, Israeli tariffs were not the major trade barrier. In addition to the standard specific and ad valorem tariffs, Israel also imposed a purchase tax, compulsory surcharges, unlinked deposits, excise duties, stamp duties, and a value-added tax on all imported products. These taxes were designed to regulate domestic demand and to raise revenue. Lacking a mechanism by which to deal with dumping and other unfair trade practices, the government historically used the unilaterally imposed compulsory surcharge as a convenient measure by which to protect domestic products from foreign competition. Most of these charges, however, were rebatable to exporters as part of the export subsidy program. The brunt of these taxes, therefore, was borne by the nonexport sector.

One potentially discriminatory nontariff barrier arose from the administration of the purchasing tax. For purposes of the purchasing tax, the taxable value of an imported product must reflect its domestic wholesale price. The percentage difference between the imputed wholesale price and the tariff-included import price represents the markup, known by the Hebrew acronym Tama. As long as the Tama reflects the true wholesale markup, there is no increased protectionism. Only to the extent that the true markup is less than the Tama, is there an implicit hidden tariff in Israel.

From 1970 to 1986, Israel's primary exports consisted of basic manufactures, machines, and transportation equipment, chemicals, and miscellaneous manufactures. Primary imports were basic manufactures, machines, and transportation equipment. The United States has been Israel's single largest trading partner, providing a market for approximately 25 percent of Israel's exports and supplying about 20 percent of its nonmilitary imports (see table 10, Appendix A).

Although as of 1988 the United States was Israel's largest individual trading partner, the majority of trade has been with the European Economic Community (EEC). Since 1975 Israel-EEC trade has been governed by the Israel-EEC Preferential Agreement. This agreement eliminated tariff barriers on trade in manufactured goods between the two entities. Under its terms, imports of Israeli manufactured products were granted duty-free entry to the EEC in July 1977, except for certain products (considered to be importsensitive by the EEC) on which full duty elimination was delayed until 1078 l December 1979. Because the EEC offered trade preferences to other developing countries and because Greece, Spain, and Portugal entered the EEC, Israel did not receive significant preferential benefits from the EEC. Israel eliminated duties on about 60 percent of its manufactured imports from the EEC in January 1980, and complete duty-free treatment was to be phased in by January 1989.

The Israel-EEC Preferential Agreement also attempted to provide for a substantial reduction in trade barriers for agricultural products. Although the EEC agreed to make tariff reductions on about 80 percent of its agricultural imports from Israel, Israeli exporters still had to comply with the EEC's Common Agricultural Policy nontariff requirements and often were faced with quotas and voluntary export restraint agreements. As a result, reciprocal Israeli agricultural tariff concessions to the EEC have been very limited.

Israel-United States trade was far less distorted by tariff and nontariff barriers, at least from the United States' side. The overwhelming majority of Israeli exports entered the United States market duty free. By contrast, a large share of United States exports to Israel not only were subject to substantially higher tariffs, but also were subject to a variety of nontariff barriers, including a substantial "hidden tariff."

Total Israeli exports to the United States were about US$2.3 billion in 1986. Of this amount, only 2.4 percent (US$57.6 million) was subject to duty. Duties collected on these products were US$5.4 million, an average rate of 9.6 percent. Because the ad valorem equivalent tariff rate is calculated as the ratio of duties collected to dutiable value, this figure overstates the average tariff rate on Israeli exports to the United States.

The leading General System of Preferences (GSP) exports to the United States from 1978 through 1986 consisted of jewelry, X-ray equipment, gold necklaces, telephone equipment and parts, electro-medical equipment and parts, office machines, and radiation equipment. Apart from jewelry, all the other major GSP exports were high-technology goods.

The product composition of dutiable exports helped explain the low overall duty paid. The primary reason for the low duties paid was that, between 1978 and 1980, the United States subjected diamond imports (Israel's principal export), to a 1 to 2 percent duty. As of 1981, these items entered at a zero most favored nation (MFN) rate. The other major export items that entered the United States at a zero MFN duty rate included potassium chloride, airplanes, emeralds, aircraft parts, potassium nitrate, and antiques. Major exports that remained dutiable in 1986 included agricultural products, footwear, textiles, and apparel.

Informed sources claimed that an elimination of United States duties under the United States-Israel Free Trade Area (FTA) Agreement on these products would lead to an estimated increase of approximately 1 percent of total Israeli exports to the United States. The major categories affected will be agricultural products such as cheeses, olives, and processed tomato products, and textile and apparel items such as swimsuits, knitwear, undergarments, and thread. Very few high-technology products will be affected by the FTA agreement.

Data as of December 1988