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International Trade Report: US & Israel

Introduction

This report will be focusing on many areas of Israel’s growth, their potential for economic growth and a little bit of their past history along with how they are involved with the U.S.

Population

Israel’s population is overwhelmingly urban and although about 82% Jewish, contains a remarkable racial, cultural, and ethnic diversity.  More than 50% of Jews in Israel are Israeli-born, but their parents or grandparents came from more than 100 different countries and spoke, among them about 85 different languages or major dialects.  Major grouping include the Ashkenazim, Sepharhim and other persons who moved to Israel from North Africa and the Middle East.  Large number of Jewish immigrants arrived from the former Soviet republics in the early 1990s.  About 17% of Israelis are Arabs.
The population of Israel was 6 million in 1999, up from 4.8 million in 1990 . The overall population density, including Jerusalem and the Golan Heights is about 644 people per square mile.
Of the non-Jewish population, Muslims formed a majority; Christians and Druzes composed more of the remainder.  About 80% of Israel’s Arabs are Muslim and most of the rest are Christian.
Israel is divided into six administrative districts: Central District, Haifa, Jerusalem, the Northern District, the Southern District, and Tel Aviv.  Each is administered by a commissioner appointed by the minister of the interior.  In practice the influence of the central government is directly evident in every part of the country.  Local government is carried out through municipal, local, and regional councils.

Economic Statistics

In recent history the Israeli economy has been hit by a very high annual rate of inflation and by a chronic foreign trade imbalance.  High expenditures were devoted to arms and to the continuing task of absorbing large number of immigrants.  Living standards are generally high, with an annual GNP estimated at $13,600 per capita in the late 1990’s.  At that time the annual national budget included revenue of about $33.9 billion and expenditure of about $36.8 billion.
In June of 2000, the GDP growth rate reached an annualized level of 5.6%.  The Israeli economy has a high potential growth rate.  The major factor behind this is the economic stabilization programme, which was launched in July 1985 and succeeded in putting an end to triple digit inflation, high budget deficit, and a net external debt that had reached 80% of GDP.  The disinflation process was notable for several stages.  Initially inflation fell to an average level of 18% from 1986 to 1991.  In 1992, inflation fell to a high single-digit level.  During recent years, the level of inflation is Israel has been similar to that of the U.S.  The stabilization programme led to an improvement in almost every other economic parameter.
The United States had a great economic relationship.  The U.S. is the most profound foreign investor in Israel. Major U.S. companies such as Microsoft, Intel, AOL, Coca Cola, and McDonald’s are a few American companies that are already active in Israel.  Israel’s economy is one of the hottest and fastest growing in the world.  Israel has attracted the attention of the U.S. by transforming its economy from an agrarian to an industrial base in a very short period of time.  Business opportunities are present in every sector of Israel economy.  Many major project are planned or underway in the power, telecom, construction, and transportation sectors, creating opportunities for U.S. suppliers.  Israel is also looking to the U.S. companies in the medical, agricultural, and biotechnology fields.
The leading element behind the end of the recession was the export of goods and services, expected to grow by 19% in real terms in the year of 2000.  A major contribution coming from the rapid expansion of high-tech exports, which doubled within five years to $9 billion in 1999.

International Trade Statistics

Each year Israel usually spends much more on imports than it earns from exports; in the 1990’s annual imports costs about $18.3 billion, and exports earned about $13.3 billion.  The principal imports are rough diamonds, military equipment, crude petroleum, machinery, chemicals, iron and steel, transportation equipment, and foodstuffs.  The leading exports are processed diamonds, machinery, chemicals, citrus fruit, textiles and clothing, fabricated metal, and sophisticated electronic equipment.  Israel’s main trade partners are the U.S., Germany, Great Britain, Switzerland, the Netherlands, Belgium and Luxembourg, Japan, Italy, and France.  Much foreign exchange is derived from expenditures by foreign tourists in Israel as well as from the donations of Jews living in other countries, especially the U.S.  Israel is the principal beneficiary of U.S. foreign aid, receiving about $3 billion annually, of which 60% was military assistance.
Since the FTAA was signed in 1985, U.S. imports and exports to Israel have grown dramatically grown.  The U.S. is Israel’s single largest trading partner.   The U.S. also gets 21.5% of Israel’s total chemicals, used for a variety of reasons.
Israel has a flourishing banking industry.  The central bank, the Bank of Israel issues currency and handles government banking transactions.  The Israeli sheqel, currently around 4.3550 to the US dollar, is projected to change little, as recent developments offset a previous depreciation trajectory.  A foreign resident or company may hold a bank account in Israel with freely transferable currency, either foreign or Israeli.  Foreign currency can be converted into New Israeli Shekels for investing in Israeli assets, and the investment can be reconverted into foreign currency and transferred abroad.  Specifically, Israel’s rapid transformation into a high-tech economy is accelerating its growth, reducing it current 7% unemployment, and reducing its merchandise trade deficit; in fact, the $98-billion economy now provides a near-European per capita GDP of $17,000.  Other positive signs are a corresponding reduction in Israel’s current account deficit, which also is helped by unilateral transfers such as US grants, contributions from world Jewry, and German restitution, an unexpected drop in inflation, due to the 4% interest level, and a stabilization at around 80,000 per year.

Foreign Investment

Israel is a big attraction to investors for many reasons.  One reason is foreign investment in Israel surpassed $3 billion in 1998, up from $26 million in 1994.  Over 50% of that money is in high technology, including data communications, semiconductors and telecommunications.  There has been a cash influx from the U.S. over the past few years.  American investment in Israeli high-tech industries jumped 48% from 1997 to 1998.  A reason for this maybe that the Israeli government temporarily suspended capital gains tax levied against foreign investors in Israel-based venture capital funds.
Foreign investors may take advantage of double taxation treaties to withdraw profits earned in Israel under favorable tax treatment.  Where a taxpayer is taxable both in Israel and abroad in respect of the some income, double taxation relief may be available either in accordance with a bilateral tax treaty or, in certain cases, unilaterally.  Overall, double taxation relief may take the form of a credit for overseas taxes.
The new proposed tax reform will create major changes in Israel’s economy.  It will affect both Israeli taxpayers and foreign investors.  With income of foreign investors from time deposits of foreign exchange remaining tax-free, Israel is till an attractive business arena for foreign investors.

Trade Restrictions

Companies in Israel are generally subject to company tax on their profits at the rate of 36% on taxable income.  Distributed profits after company tax are subject to dividend withholding tax at rates up to 25% in the case of individual and non-resident shareholders.  Interest and royalties are also generally liable to withholding tax of 25% unless reduced by a tax treaty.
Personal taxation in Israel is much higher then here in the U.S.  Individuals are taxable at rates up to 50% of their income.  The Israeli tax system is a very confusing and complex system.

Opportunities and Threats

Economic performance in the 1990’s has been outrageous.  Immigration, stabilization policies, and the peace policies helped to raise the average Israeli’s income by 40% during the 90’s.  Imports grew from $24 billion to well over $43 billion.  Israel’s population grew from a nation of 650,000 people living in an area of less than 8,000 square miles to a population if close to 6 million living in contemporary cities and modern suburbs surrounded by high-tech industry, comparable to Silicon Valley in Northern California.
Israel is well positioned to compete in modern world industries of the 21st century, and its economy has the growth potential of 4-5% a year.  American companies should be taking advantage of this great opportunity.  The principal growth sectors offering sales and investment opportunities for the U.S. are telecommunication, computer software development, processed foods, computers, electric power equipment, and electronic components.  Further opportunities are anticipated in pollution control, airport ground equipment, medical equipment and insurance.
In 1985 there was a 10-year free trade agreement between the US and Israel called FTAA, Free Trade Area Agreement.  This has helped further trade and relationships between the governments and this is consistent with GATT, General Agreement on Tariffs and Trade, established many years before.  The FTAA serves as a model and precedent for the US-Canada Free Trade Agreement.
The main threat in Israel is its political stability and its war stricken history.  America finds it hard to distance itself from the events in Israel (I can think of 3 billion reasons why).  The main reason is not just Israel itself but the Palestinians.  The State Department is currently fretting that the Palestine Authority might collapse, taking Yasser Arafat’s declining authority with it, and leaving Hamas guerrillas in control.  This would provoke new violence in Israel, and even greater anti-Israeli and anti-American popular sentiment in the region.

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International Trade Report: US & Israel

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