The Ambassador, Head of Delegation

18 Pages·2016·0.95 MB·English

EUROPEAN UNION - Delegation to the State of Israel

לארשי תנידמל תחלשמה - יפוריאה דוחיאה

ليئارسإ ةلود ىلإ ةثعبلا – يبورولأا داحتلأا

Trade and Economic Section

EU-ISRAEL TRADE BRIEFING
SEPTEMBER 2016

Prepared by: Sàndor Szelekovszky – [email protected]
Eyal Inbar – [email protected]
Uri Fishelson – [email protected]

"Colors and Vitamins!" by Julien Lehuen is licensed under CC BY 2.0
Contents

GENERAL OVERVIEW .................................................................................................................. 3
TRADE & INVESTMENTS FLOW................................................................................................... 4
Trade in goods ........................................................................................................................ 4
Trade in services ..................................................................................................................... 5
Foreign Direct Investments .................................................................................................... 6
FRAMEWORK FOR EU TRADE RELATIONS WITH ISRAEL ............................................................ 7
Association Agreement (AA) .................................................................................................. 7
European Neighbourhood Policy (ENP) Action Plan .............................................................. 7
Agreement on Good Laboratory Practice (GLP) ..................................................................... 8
ACAA ....................................................................................................................................... 8
EU-Israel Open Skies Agreement ........................................................................................... 8
Agriculture .............................................................................................................................. 9
Customs and Trade Facilitation ............................................................................................ 11
OECD ..................................................................................................................................... 11
MARKET ACCESS & TRADE IRRITANTS ...................................................................................... 12
Imports of Kosher Meat ....................................................................................................... 12
Goose Liver and Furs ............................................................................................................ 12
Pharmaceutical Imports from Post 2004 MS ....................................................................... 13
Medical Devices Imports from Post 2004 MS ...................................................................... 13
Pharmaceuticals Pricing ....................................................................................................... 13
Veterinary Medicines ........................................................................................................... 14
Other Potential Irritants ....................................................................................................... 14
SETTLEMENT PRODUCTS .......................................................................................................... 15
Non-Preferential Treatment ................................................................................................ 15
Labelling ............................................................................................................................... 16
Certification of Agricultural Products ................................................................................... 17
Certification of Products of Animal Origin ........................................................................... 17

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GENERAL OVERVIEW
Israel is a small country with a population of 8.4 million inhabitants and a GDP per capita of
€30,000. The country has few natural resources and is highly dependent on Trade. Israel's
recent macroeconomic context represents a mix of good economic indicators, the
continuation of the economic slowdown and the growing economic and social disparities.
The 2.5% GDP growth, low unemployment rate, decrease of the budget deficit and the fact
that Israel managed to maintain its high credit rating, "A+/A" with a stable forecast in August
20161,2, signals Israel's stable economic fundamentals. At the same time the Israeli economy
faces several challenges; the slowdown in investments, a decrease in exports of goods and
services3 reflecting a deteriorating competitive economic environment, the lack of high-
skilled labour, the continued increase of housing prices, the high food prices4 and the
growing number of poor together with the high inequality in revenues. Besides the
weakening competitive position, the strong Shekel constitutes an additional problem for
Israel's exporters which the Bank of Israel (BOI) is attempting to combat by lowering the
principal interest rate as well as purchasing foreign currency (mainly US Dollars). Israel's
fiscal situation is overall stable.

In view of the above, the government has committed to performing a comprehensive reform
in order to liberalize the market and improve its competitiveness and curb prices but has so
far been slow in implementing this decision mainly due to strong vested interest mounting
resistance. However increasing public pressure against the high cost of living and recent
influential international recommendations on the economy seem to have reinforced the
government's determination to continue and even accelerate the reform process. For
instance the recent OECD country survey clearly noted Israel's falling competitiveness as one
of the main shortfalls of the economy also leading to deteriorating export performance.

The current Israeli Government has also made some attempts to diversify its trade from the
EU mainly to Asian and South American countries (partially reflecting political intentions to
be "less dependent on Europe"). However the EU is still and will for the foreseeable future
remain Israel's largest trading partner for both goods and services.

2012 2013 2014 2015 2016 H1
GDP Growth 3% 3.2% 2.8% 2.5% 3%
Business GDP Growth 2.9% 3.4% 2.7% 2.3% 2.3%
Private Consumption Growth 3.1% 3.3% 4% 4.9% 7.2%
Public Consumption Growth 3.6% 3.5% 4.2% 3.1% 3.7%
Inflation rate 1.6% 1.8% -0.2% -1% 0.1%
Unemployment rate 6.9% 5.8% 5.6% 5.3% 4.8%

1 "S&P maintains Israel rating" - http://www.globes.co.il/en/article-sp-maintains-israel-credit-rating-1001144508
2 "Moody's affirms Israel's A1 government rating" - https://www.moodys.com/research/Moodys-affirms-Israels-A1-government-rating-outlook- remains-
stable--PR_351769
3 Explained by the strong Shekel and the slowdown in Israel's main export markets
4 According to the Knesset Research Center, food prices in Israel are 25% higher than in the EU
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TRADE & INVESTMENTS FLOW

Trade in goods

Israeli trade in goods has overall decreased in 2015 by 9% but the Israeli trade deficit
continued its trend since 2010 and decreased by 40%. Israeli exports have decreased from
$50 billion in 2014 to $47 billion (4.7% decrease) in 2015 while Israeli imports have
decreased from $63 billion in 2014 to $55 billion in 2015 (12.4% decrease). The trade deficit
decreased from $14.6 billion in 2014 to $8.8 billion in 20155.

In the 1st half of 2016, Israeli exports continued to decrease by over 13%. Israeli imports on
the other hand have seen a continued increase of over 12%. Both results continue the trend
of 2015 further enlarging the trade deficit to ILS25.6 billion (€6 billion), more than double
that of the 1st half of 2015. It should be noted that ten Israeli companies account for 51% of
Israel's export. Changes in each of these company's exports has a substantial effect on
Israel's total exports. This is especially evident with the on-going upgrade of the Intel factory
which temporarily limits its exports capacity, and lower demand for pharmaceuticals in the
UK which hurts Teva's export.

Israel is one of the largest trading partners of the EU in the Southern Mediterranean area
with the most diversified bilateral structure of trade (Israel was the EU's 24th trade partner in
2015. It was ranked 27th among EU import partners and 21st among EU export partners)6.
The EU is Israel's first trading partner with total trade amounting to $34.3 billion in 2015,
7.5% less than in 2014 but maintaining its overall 33% share of Israeli foreign trade. In 2015,
Israeli exports to the EU remained stable while Israeli imports from the EU increaesed by
11.9%. This represents a large increase in Israel's trade deficit with the EU mainly due to
exchange rate and the EU's competitive environment. Exports to the US and Asia have both
increased but imports have decreased representing an improvement in Israel's trade deficit.

In 2015, import from the EU accounted for 29% of Israeli imports. Exports consisted mainly
of machinery and equipment, plastic and chemicals, motor vehicles, mineral fuels,
pharmaceuticals and medical instruments. In August 2016 the share of imports from the EU
was 29%.
Israeli exports to the EU accounted for 37% of Israeli exports. They were very diversified and
consisted mainly of pharmaceuticals, machinery and equipment, mineral fuels, plastics,
medical instruments and chemicals. In August 2016 the share of exports to the EU was 42%.

The Ministry of Economy has earlier forecasted that already in 2014 Asia would replace the
U.S. as Israel's second export market after the EU, but this has actually occurred only in
2015. Exports to the US accounted for 23.85% while exports to Asia reached 24.5%. The
recovery of the US market and slowdown in the growth rate of the Asian market might lead
to further changes in this order.

5 Trade data presented exclude trade in diamonds which are imported and exported from Israel mainly for processing and entail little economic benefit to the
Israeli economy.
6 Israel is the EU's 2nd largest trade partner among the Mediterranean countries with Algeria being the 19th largest trade partner in the Med region and Egypt,
behind Israel, is the EU's 28th largest trade partner.
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($7 millions, 2015) Export Import Trade Deficit
EU 13483.8 20877.9 -7394.1
USA 11052.2 7479.1 3573.1
Asia 11353.1 13003.4 -1650.3
Rest of the world 10459 13783.3 -3324.3
Total (excl. diamonds) 46348 55143.7 -8795.6

As to the general framework conditions for trade in goods with Israel, an important recent
development with a view to encouraging competition and lowering the cost of living in Israel
was that the Government plans to adopt a market surveillance system with post market
entry supervision. Furthermore the government approved the recomendations of an
interministerial committee for further opening the domestic market by adopting
international, mainly EU, best practices in the field of standards and import procedures.
While the advantages for Israel's economy are clear, the new system would over time also
provide new opportunities for exporters. The EU is therefore actively involved in supporting
this process through granting technical assistance to share best practices with the Israeli
government in the form of TAIEX seminars and in the future a possible TWINNING project.

As to the trade figues it should be noted that large discrepancies continue to occur between
trade data provided by the Israeli Central Bureau of Statistics and EUROSTAT. During the
latest trade and service sub-committee meeting of December 2015, this issue has been
brought up and it was agreed that the problem should be discussed and if need be
addressed by experts on both sides.

Trade in services

In 20148 EU exports of services to Israel amounted to €6.1 billion and EU imports of services
from Israel amounted to €4 billion. Total service exports were 13% higher than in 20139 with
the Israeli deficit leaping from €173 million to €2.1 billion. The main sectors include
transportation, travel, financial and ICT services.

On transportation and travel services, the EU and Israel signed in June 2013 a
comprehensive aviation agreement, which started being implemented as of the summer
season of 2014. Since its implementation, the "Open Skies" agreement had substantial
success in greatly improving the number of destinations, passengers, flight frequencies and
lowered substantially flight prices. In June 2016, after several long years of negotiations,
Israel joined Eurocontrol, the European civil aviation control body, in order to better
coordinate the increased traffic and other related issues related to civil aviation security.

7 Figures in USD as in the original Israeli data, conversion to € is inaccurate due to exchange rate differences
8 Data on trade in services is delayed both on EU and Israeli levels, 2014 is the latest data available
9 DG Trade data
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Foreign Direct Investments

The complete situation of foreign direct investments (FDI) in Israel is hard to determine as
methodological differentiation exist between information sources. Despite this fact, a
general trend can be identified where the EU is the lead target for Israeli stock investments
abroad and is one of the major sources of FDI in Israel. However the position of EU FDI in
Israel and investments through other mechanisms, such as venture capital (VC) or mergers &
acquisitions (M&A), is lagging behind other partners notably the US which is particularly
striking in the high-tech/start up part of the Israeli economy.

FDI Flows10
On FDI flows there is no consistent image in either volume or partner country. EUROSTAT
IMF figures show fluctuations every year and no trend can be identified. Despite the lack of
consistency, it can be seen that FDI flows between the US and Israel clearly exceed those
between the EU and Israel. This can be explained by the substantial presence of American
Multi National Corporations (MNC) and VCs in Israel and their high stake in Israeli companies
through direct investments.

(€ millions) 2010 2011 2012 2013 2014

FDI Inflow 631 570 757 4612 1582

FDI Outflow 4402 926 2559 1576 2761

Balance -3771 -356 -1802 3036 -1179

FDI Stocks11
FDI in stock flows in and out of Israel have been growing continuously since 2001 through
2014. According to EUROSTAT and IMF data, the EU accounts for a substantial 40% of all
outgoing Israeli investments followed by the US with 20%. For incoming investments into
Israel, the share of the EU is 20%, similar to that of the US. The Israeli deficit with the EU has
increased greatly in 2014 after being stable in 2010-13.

(€ millions) 2010 2011 2012 2013 2014

FDI Inward 7117 8408 10749 11073 13580

FDI Outward 25782 26809 27982 29595 39034

Balance -18665 -18401 -17233 -18522 -25454

10 EUROSTAT data
11 EUROSTAT data
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FRAMEWORK FOR EU TRADE RELATIONS WITH ISRAEL

A
Association Agreement (AA)

The legal basis for the bilateral relations is the EU-Israel Association Agreement (AA), which
entered into force in June 2000. The AA aims to provide an appropriate framework for
political dialogue, allowing the development of close political relations and others forms of
cooperation between the Parties. The AA also contains a comprehensive FTA.

European Neighbourhood Policy (ENP) Action Plan

In 2005, the EU and Israel signed an Action Plan in the ENP framework. The ENP's objective is
to gradually integrate Israel into EU policies and programmes. Each step taken is determined
by both sides and the Action Plan reflects the priorities and interests of the Parties.

In 2009 the EU suspended the decision of upgrading relations (i.e. negotiating a more
ambitious Action Plan) following operation Cast Lead in Gaza and the stalemate of the peace
process12. As a result, the validity of the EU-Israel Action Plan, which technically expired in
2008, has been extended regularly ever since (lastly, until end-2016). In the context of the
“non-upgrade”, bilateral relations continue on the basis of the 2000 Association Agreement
and the 2005 Action Plan which, in the EU view, still has unexplored potential. At the 2012
Association Committee the parties agreed on further work on over 60 specific cooperation
initiatives, some of which in trade and internal market related areas, that were included in
the 2005 ENP Action Plan but were not implemented. Launching over 20 new potential areas
for future cooperation remains conditioned on progress in Middle East Peace Process.

According to the FAC conclusions on the Middle East Peace Process (MEPP) of 16 December
2013 which were reaffirmed on 18 January 2016, the EU will provide an unprecedented
package of European political, economic and security support to both parties in the context
of a final status agreement. In the event of a final peace agreement the European Union will
offer Israel and the future state of Palestine a Special Privileged Partnership including
increased access to the European markets, closer cultural and scientific links, facilitation of
trade and investments as well as promotion of business to business relations. Enhanced
political dialogue and security cooperation will also be offered to both states. The exact
features of this Special Privileged Partnership are still to be defined. The reaction by Israel to
this offer so far was rather reserved as they are reluctant to accept the direct link between
the development of bilateral relations and progress in the MEPP.

The recently (November 2015) completed ENP review has opened the process of setting new
priorities for cooperation between the EU and Southern Neighbourhood Countries including
Israel. These priorities are to be discussed first at the highest level, in Israel's case, at the yet
unschedualed next EU-Israel Association Council meeting.

12 A statement of the Association Council of 2009 referring to the FAC conclusions of 2008 reads as follows: “That upgrade must be based on the shared values
of both parties, and particularly on democracy and respect for human rights, the rule of law and fundamental freedoms, good governance and international
humanitarian law. The upgrade needs also to be, and to be seen, in the context of the broad range of our common interests and objectives. These notably
include the resolution of the Israel-Palestinian conflict through the implementation of the two-state solution, the promotion of peace, prosperity and stability
in the Middle East and the search for joint answers to challenges which could threaten these goals”.
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Agreement on Good Laboratory Practice (GLP)

The EU and Israel have signed an Agreement on Good Laboratory Practices (GLP) which
came into force on 5 May 2000. The agreement aims to ensure the high quality, validity and
reliability of health and environmental data generated during the testing of cosmetics,
industrial chemicals, pharmaceuticals, food additives, animal feed additives, pesticides by
means of mutual recognition of OECD principles of good laboratory practice(GLP) and
compliance monitoring programmes.

ACAA

On free movement of goods and technical regulations, the EU and Israel signed in
December 2009 an Agreement on Conformity Assessment and Acceptance of Industrial
Products in Good Manufacturing Practice (GMP) for pharmaceuticals, which was one of the
priority sectors defined by Israel in the Action Plan. The Agreement, which entered into
force in January 2013, constitutes an important step towards Israel's integration in the
Single Market by allowing pharmaceutical products attested as compliant with EU
procedures to be placed on the Israeli market without any further approvals, and vice versa.
This was the first ACAA in the Euromed region and can hopefully serve as an example on
how this opportunity can be used by our trading partners in the Neighbourhood.

During the Trade and Services sub-committee meeting on 8 December 2015, the Ministry of
Economy expressed its interest in expanding the GMP annex by adding medicinal products
derived from human blood and plasma. Israel was advised to bring up this topic again once
the Israeli legislation has been updated to match the EU one. In addition, Israel expressed
interest in a new ACAA agreement on cosmetics. Further discussions on this issue clarified
that there is no need to instate such an annex as cosmetics can freely enter the EU market
but we will further engage at experts level to see how to facilitate trade in this sector. Israel
also expressed interest to continue the process of negotiation in two additional sectors:
pressure equipment and medical devices. While the ACCA on pharmacuticals did not
necessitate adopting the horizontal quality infrastructure and market surveillance system,
further sectors will need deeper reforms. An official request on these sectors is pending
internal regulatory processes.

EU-Israel Open Skies Agreement

The EU and Israel have signed on 10 June 2013 a Euro-Mediterranean Aviation Agreement.
The agreement allows all EU airlines to operate direct flights to Israel from anywhere in the
EU and Israeli carriers will be able to operate flights to all airports throughout the EU. The
EU-Israel air transport market will be opened gradually so that by 2018, the market will be
fully open with no restrictions on the number of flights.
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A report by the Israeli Civil Aviation Authority for the first two years of implementation of
the agreement noted a significant improvement as a result. Fares have decreased by 15% on
average with some destinations seeing a 30% decrease. The growth rate of flights to the EU
was over 9.5% yearly in 2013-15. Impressive increases were also registrered in the number
of passengers (a million increase annually) and the numbers of destinations served in Europe
(going up from 9 to 21).
It should be noted that initial fears by El-Al, Israel's national airline, that it will lose market
share once the agreement came into force did not materialize. Recent information from the
Israeli Civil Aviation Authority (ICAA) indicates that actually the opposite has occurred and El-
Al strengthened its position by both improving efficiency and introducing a low-cost brand to
compete with the new actors on the market.
As noted above in June 2016 Israel has joined EUROCONTROL the European body for the
coordination and and security of civil aviation in order to better integrate into the European
aviation system and to ensure the efficient management of this increased traffic.

Agriculture

Since the entry into force of the EU-Israel Association Agreement in 2000, the parties signed
two agreements which have further liberalized trade in agricultural products, notably
processed agricultural products and fish and fishery products. The last agreement entered
into force in 2010. The Agreement contains a review clause for the end of 2012, however,
during the 8th EU-Israel subcommittee meeting on Agriculture and Fisheries of November
2013, Israel expressed its preference to further open up the markets for a very limited
number of products rather than go for full liberalisation. This position was reaffirmed at the
last subcommittee meeting of December 2015. The EU clarified that such a pick-and-choose
approach is not possible and the launch of further negotiations will be only possible on a
comprehensive basis involving products of interest for both sides.

As part of the wider efforts to combat the high cost of living, in February 2016, the
Government announced its intention to reform the agriculture market. The measures
announced include the increase of import quotas of fresh and frozen vegetables, fish, hard
cheeses and fresh meat; substantially decreasing customs duties on imports; the abolition of
production quotas mainly in the dairy, eggs and fruit and vegetable sectors and moving the
current system of protecting the farmers through higher external tarrifs to a system of direct
support to farmers (similar to the EU's CAP reform). Israel is taking part in the European
neighbourhood programme for agriculture and rural development (ENPARD), with the aim of
benefiting from the EU's experience in reforming the agricultural market. As could be
expected, the agricultural sector expressed its objection to the government plan and has
exerted heavy pressures on the government and on the Knesset to backtrack. At the
moment of writing this report, negotiations between the Government and the farmers are in
a deadlock due to disagreements but the Government is determined to push forward with
the reforms and to deliver on its promise to curb food prices.
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The Ministry of Agriculture has benefited from Twinning projects in the phyto-sanitary and
rural development fields. A third project, aiming at the "Improvement of the capabilities of
the Israeli Veterinary Diagnostic and Research Authority" for animal health and livestock
production systems began in March 2015 and is expected to be completed by the end of
2016.

Israel can export all fruits and vegetables to the EU, as well as composite foods (pizza,
pastries) that contain ingredients of animal origin. Israel is also listed for exports to the EU
for several products of animal origin13. (See pages 15-18 on "settlements products")

13 Semen and embryos- meat preparations, meat products, but no fresh meat- Poultry meat and –meat products, rabbit meat,
live poultry and hatching eggs (regionalisation applies) dairy products (heat treated)- fishery products (but not live bivalve
molluscs)- All kinds of animal by-products. Israel is not listed for live mammalian animals and their fresh meat.

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