Background

From 1967, France ceased to be the key supplier of arms to Israel and the US began to fill the gap. This continued as the Camp David Accords of 1977-78 were underwritten by US pledges of annual military and civil aid to Israel. By the 1980s, this had risen to an average of $3,2 billion per annum as Israel became a strategic ally of the US against the USSR. Meanwhile, European pronouncements on the Arab-Israeli conflict and its resolution were greeted with hostility or dismissal in Israel.

The European Single Market

In 1986, the EC signed the Single European Act, setting a deadline of December 1992 for the establishment of a single market throughout the Community. In 1989, future Likud leader Benjamin Netanyahu wrote that:

"Israel has always been so pressured by unpredictable events that it has found little time to prepare for predictable ones. The 1992 economic union of the European Community is eminently predictable. It is an historic change, the preparation for which we can neglect only to our severe detriment."

An assessment of the implications for Israel of the single market appeared in the Jerusalem Post in September 1989:

"The Israeli economy is based on protection and everything that represents the absolute opposite of free competition. Only firms that are capable of adapting to a competitive environment are able to develop export markets - many Israeli firms have shown that they can succeed handsomely abroad. Nevertheless, the domestic economy will be severely traumatised if its is opened up to foreign competition. That is why local manufacturers are fighting desperately to preserve their privileges and stall any moves in the direction of opening up."

The Israelis began to realise:

(a) The need for adaptation at home to compete in the new Europe.

(b) The importance of a new trading agreement with Europe.

(c) The value of lobbying in Europe as well as in the US.

EC-Israeli trade relations are based on the Trade and Cooperation Agreement signed in 1975 and subsequently up-dated by protocols of, on average, 5 years duration. By the 1990s, Israel began to lobby for a totally new agreement in response to the fundamental changes in the EC. The main issue was the $4.5 billion Israeli trade deficit with the Community, with Israel attacking the EU for discriminatory trade practices. In January 1993, then Prime Minister Yitzhak Rabin stated that:

In 1991, our purchases in Europe stood at $9 billion, and our sales stood at $4,5 billion. An addition of a mere billion (dollars) in exports means 15,000 to 20,000 jobs. It is high time Europe changed its attitude, because Israel too has an option of buying elsewhere, and $9 billion a year is not a trifle to Europe either.

The EU, meanwhile, criticised Israel for not presenting an open market, noting that the Israeli government purchasing law, for example, gives preference to Israeli firms over foreign competitors, while foreign currency controls have impeded a free market in the service sector.

The EU tied progress on the new trade agreement with Israel to developments in the peace process. The Israelis, for their part, while exhorting the EU not to mix trade and politics, demanded economic rewards for the Oslo Accord of 1993. Since Oslo, the terms of a new "Partnership Agreement" have been worked out, and persistent Israeli lobbying, has won entry to the EU scientific-technology research forum. On its side, the EU has confronted Israel on issues relating to direct trade relations with the Palestinians.

The EU-Mediterranean Partnership Programme

In the meantime, the EU has developed a Partnership Programme for the whole Mediterranean, which provides the context for the deal with Israel - albeit that deal reflects a level of technological sophistication in the Israeli market not matched in Arab countries. Initial trade relationships with the Mediterranean states were made as a series of bilateral agreements or protocols not linked into a comprehensive plan. With the advent of the Single European Market, the notion of a Mediterranean free trade area arose. The programme is evidence of the evolution of European thinking on economic and security dimensions to trade relations with states across the Mediterranean.