False Resolution Looms in EU-Israeli Settlement Trade Dispute

by Peter Lagerquist | published May 3, 2004

George W. Bush's ever more one-sided interventions in the Israeli-Palestinian conflict, most recently his uncritical backing for Israeli Prime Minister Ariel Sharon's desired "disengagement" from the Gaza Strip, elicit thinly veiled declarations of dissent from the chanceries of the European Union. "No number of unilateral initiatives on their own can bring about a permanent peace in the Middle East. Everybody knows that," said Irish Foreign Minister Brian Cowen, speaking for the EU foreign ministers at a news conference on April 16. "In particular, the question of the borders cannot be prejudged and there must be a fair, just and realistic solution to the question of refugees."

With these words, Cowen rebuked Bush for his letter accepting Israeli retention of major West Bank settlement blocs and rejecting the right of return for Palestinians made refugees in 1948. Bush had given the letter to Sharon during the Israeli premier's April 14 visit to Washington, as part of the US endorsement of "unilateral withdrawal" from Gaza. Though Sharon failed to win the support of his own Likud Party for his plan in a May 2 referendum, he has vowed to press ahead with "disengagement," which he has described as a way to "halt the Palestinian dream of returning to the 1967 borders and flooding Israel with refugees."

Prejudicing the Outcome

Officially, opinion in the corridors of the EU's Brussels headquarters echoes the European street in regarding the Bush-Sharon deal as a shift away from the European vision of a comprehensive peace and the kind of Palestinian state that peace would produce. Dissenting optimists, most notably British Prime Minister Tony Blair, who has backed Sharon's "disengagement" plan and even suggested that Europe finance it, were promptly, if politely admonished by EU External Relations Commissioner Chris Patten in an April 21 address to the European Parliament. "What [the optimists] presumably have in mind is a Palestine which is genuinely viable," said Patten, "not a collection of isolated 'bantustans' divided by tanks and settlements and walls."

In practice, however, the EU is doing little to forestall realization of the latter, bleaker vision. In the spring of 2004, the EU joined to oppose the ongoing tribunal on the legality of Israel's "separation barrier" in the West Bank at the International Court of Justice in the Hague—though it continues to denounce the barrier as illegal. EU officials rationalized their seemingly contradictory position on the grounds that the final borders of Israel and Palestine are a "political issue" to be discussed by the parties to the conflict. Since the inception of the Oslo process in 1993, the EU has stuck to the position that the main bones of contention between Israel and the Palestinians—settlements, borders, refugees and the status of Jerusalem—should be resolved in bilateral negotiations, not according to the principles of international law to which the EU has nevertheless continued to pay lip service.

Parallel to this stance, the EU has pursued a policy of "constructive engagement" by which it strives to preserve and expand economic relations with Israel. The EU intends this policy to increase its diplomatic clout with Tel Aviv; indeed, commerce is an arena in which the Union, as Israel's largest trading partner, could exercise considerable leverage over the conflict. But the Union has remained reluctant to enforce its own laws prohibiting preferential trade with Israeli settlements in the West Bank and Gaza, ceding to Israeli requests that any decisions that thus "prejudged" Israeli sovereignty in the West Bank and Gaza would "prejudice" the outcome of eventual negotiations. New developments suggest that while Israel consolidates its hold on the West Bank with US approval, Europe is yet again poised to furnish Israel with an economic comfort zone.

No Tussle Over Technicalities

In late December 2003, Israeli Trade and Industry Minister Ehud Olmert floated a compromise in his government's simmering dispute with the EU over Israeli settlement exports to the Union. Under a series of trade agreements, the most recent signed in 1995, merchants in EU member countries can import goods from Israel at reduced duty. Since the EU does not recognize the settlements in the Occupied Territories as part of Israel, items manufactured there should not be covered under this treaty. Yet for years, Israeli manufacturers located in settlements have evaded the restrictions by stamping their goods, "Made in Israel," fostering a $200 million annual trade. Though the EU long preferred to overlook the problem, pressure from its parliament and the customs authorities of member countries, as well as the demise of the "peace process," have belatedly forced its hand. As Israel continued to refuse to certify the origin of its exports to the satisfaction of European customs, in 2003 a number of customs authorities began demanding duty deposits on Israeli products—some of which originated in settlements and some of which did not.

Complaints from Israel's coastal business belt poured in, prompting a midwinter communiqué from Olmert to the European Commission—the EU's executive body. The substance of Olmert's amicable, if vaguely defined proposal was that Israel would continue issuing so-called certificates of origin to settlement products, identifying them as "Made in Israel," but would agree to identify their precise geographical origin and thus allow European customs to pick out products ineligible for lower tariffs. Though the proposal was thin on details, Brussels replied on January 31 that it viewed Olmert's idea favorably and was requesting further clarification.

As the term of the present European Commission is due to end in the summer of 2004, the executive is under pressure to close a deal with Israel. Yet while both parties like to cast the dispute as a tussle over technicalities, the settlement trade issue increasingly poses awkward questions about Europe's policy of "constructive engagement" with Israel. Anger in Europe over the Bush-Sharon summit has made European emissaries talk tougher. "Up to now, we kept the strengthening of bilateral relations with Israel separate from the regional diplomatic process," said Giancarlo Chevallard, EU ambassador to Israel, on April 22. "From this point on, they will be part of one complex." Should the EU accept Olmert's proposal on settlement products, however, Europe's bark will once again be worse than its bite.

Olmert's "Painful Concession"

For his part, Olmert has dubbed his demarche a "painful concession" on the part of the Israeli government, one which has hitherto refused to contemplate any distinction between its authority within Israel proper and in the Occupied Territories. (Of course, successive Israeli governments have made numerous distinctions regarding Israel's obligations in the Occupied Territories, particularly with regard to human rights treaties.) For some members of Sharon's right-wing coalition, the "concession" was indeed too painful. Egged on by irate settler representatives, Foreign Minister Silvan Shalom dispatched lieutenants to the Israeli press to take Olmert to task. "If you place a label on a product saying it is made in the Golan or made in Barkan or the Jordan Valley, you are determining the borders of the state," a senior foreign ministry official told the Jerusalem Post. "You are saying these areas are not part of Israel." Notably backed by Sharon, Olmert has nevertheless stood his ground. He has good reasons for doing so.

Publicly, Olmert has cited the threat to Israeli business interests embodied in widening European customs claims on Israeli products. In 2003, French and Spanish customs took the lead in imposing higher duties because they could not ascertain whether consignments of Israeli products had originated in settlements. Alarm bells began to ring in Tel Aviv. Some $25 billion in goods and services passed between Europe and Israel in 2001, the last year for which figures are available. To Olmert and most Israeli businesspeople, it seemed unwise to endanger the whole of this trade to avoid duties on settlement products that likely do not exceed $20-30 million a year.

Customs exemptions do bolster the competitiveness of many Israeli settlement exports in European markets. Yet as Olmert has taken pains to explain, his "compromise" position is of very limited, symbolic significance. As he noted quietly to the Jerusalem Post: "Every one of these places—Tel Aviv, Safed, Ariel—is part of Israel. The stamp will say the town or city and then Israel...products would bear marks saying 'made in [this city] which is under the jurisdiction of the Israeli Customs Authority.'" In other words, far from renouncing Israel's jurisdiction in the Occupied Territories, Olmert's proposal would enshrine territorial control in bilateral treaties with the EU. According to Palestinian trade consultant Charles Shammas, whose organization Matin has long worked for stricter application of the EU-Israeli trade treaty, the EU could find itself in "constructive agreement" with Israel's interpretation of the territorial scope of the treaty should it accept Olmert's proposal. European customs might then find it difficult to defend the imposition of duties on any Israeli products, should importers choose to challenge them in European courts.

To placate Brussels, Shammas believes Olmert will offer the EU a gentlemen's agreement to the effect that Israel will dissuade importers from launching court challenges and refrain from supporting them if launched. However, since the Israeli customs authority would not, under Olmert's agreement, be required to adhere to the EU's interpretation of the agreement's territorial scope, it could meanwhile work with settlement industries to contain any damage to their interests. Many of these have already indicated that they will merely shift their business address into Israel proper while retaining production facilities in the Occupied Territories—subterfuges that EU customs will find difficult to unmask without assistance from Israeli authorities. Meanwhile, Olmert has promised that affected industries will be compensated by the government. Israel could also protect some estimated $2 billion of exports to Europe which incorporate a substantial share of value added in settlements. In the long run, these exports are much more vital to the viability of the settlement economy than goods manufactured entirely in the Occupied Territories. "He's sugar-coating a poison pill," concludes Shammas.

Embarrassing Contradictions

Olmert has adeptly gauged the mood in Brussels, which is eager for resolution of a dispute that has become a source of considerable political embarrassment. The settlement trade dispute has thrown the contradictions in EU policy into sharp relief. The EU's own laws and the diplomatic language of all its member states defer to international law, including the Fourth Geneva Convention that deems settlements illegal. Accelerating Israeli settlement construction in the Oslo years, and now the tank invasions and extrajudicial executions of the Sharon government, have led to increasingly pointed questioning in the European Parliament.

However, the European Commission's efforts to resolve the matter, beginning in 1998, ran into a wall of Israeli refusal to cooperate, buttressed by the unwillingness of Europe's executive tiers to put its full weight behind the Commission. Technically, Israel's systematic and deliberate violations of the "certificate of origin" clause are grounds for outright suspension of the 1995 trade agreement. Yet such an action would run counter to constructive engagement, and also endanger the EU's $5 billion trade surplus with Israel. To the Commission, "any agreement is better than no agreement," notes Shammas.

Accordingly, in 2001 European policymakers opted to classify the dispute, to Israel's satisfaction, as a "difference of interpretation" which requires resolution through technical consultations and, if necessary, arbitration. With Israel successfully stalling the former, and being able to vacillate indefinitely on the choice of an arbiter, the Commission has been placed in what Patten has called "an untenable position."

In light of this history, the decision by some individual European customs authorities to impose duties on Israeli products in 2003 is not an act of strength, but a last resort. The EU has chosen to ignore the importation of settlement products under cover of the agreement for so long that they would be hard pressed to defend duties in court, where importers could argue that customs authorities are ignoring established past practice. Both European customs authorities and the European press have kept mum about numerous instances in which Tel Aviv quietly persuaded them to drop their tariff demands.

Toward Integration

The most notable, if least noted, reason for Olmert's departure from past Israeli intransigence is found in his assertion that "this can lead to a breakthrough in our relations with Europe." The settlement trade dispute has temporarily blocked the expansion of the 1995 trade agreement, part of the EU scheme for pan-Mediterranean economic integration known as the Barcelona process, and will likely also complicate Israel's eventual access to the EU's Wider Europe initiative. Israel's anxiety is shared by Brussels, which is eager both to enhance its leverage in the Israeli-Palestinian conflict and to forge ahead with its regional trade agenda.

The EU has, in principle, already agreed to expansion of its existing trade agreement with Tel Aviv, which would allow Israeli exports to incorporate value added by workers in other EU trade partner countries and Jordan. This is particularly important for Israel's declining textile industry, which has begun to rely on cheaper labor in Jordan and Eastern Europe. However, Patten has clearly indicated that expansion cannot proceed until the current dispute has been settled, to the frustration of some of his colleagues, including Gunter Verheugen, the EU trade commissioner.

Backed by the German government, Verheugen is keen to delink the trajectory of Israel's integration into Europe from the Barcelona process, something Tel Aviv has long advocated. At present, no one is pushing for Israeli membership in the EU, but those who favor deeper integration argue that, if fellow Mediterranean countries Cyprus and Turkey were eventually to accede to the Union, then Israel would be stranded alone among hostile Arab neighbors. Perhaps most importantly, Verheugen is also strongly supportive of Israel's eventual participation in the Wider Europe project, which in addition to offering lower duties on manufactured products offers free trade in services and agriculture, as well participation in the Union's research and development programs. On a much publicized visit to Israel in 2003, Verheugen went on record as saying that Israel could enjoy benefits similar to closely integrated non-EU states like Norway.

"For a very long time, at least ten years, Israel has said that it wanted different treatment from other Mediterranean countries," says Hebrew University professor of political science Alfred Tobias. "Then came along the idea of Wider Europe, which is preaching a different kind of approach. 'Every country on its own merits'… That was not the kind of discourse we had been hearing before, and there was no talk of political conditionality." Indeed, participation in the Wider Europe initiative would not require Israel to adhere to EU laws or political decisions.

Joining the New Neighborhood?

While Verheugen's views may be in a minority among EU policymakers, they are lent strategic depth by the preferences of long-standing Union supporters of Israel, including Great Britain and the Netherlands, as well as Silvio Berlusconi's Italy. The May 2004 accession of ten new states to the EU, many with growing economic and military ties to Israel and the US, is likely to further strengthen their hand. Ironically, still more openings may come from soul-searching among European policymakers concerned about their inability to influence the Israeli-Palestinian conflict, the stakes of which have grown so drastically since the September 11, 2001 attacks. In late January 2004, the liberal Israeli daily Haaretz gave prominent play to an interview with Rosemary Hollis, head of the Middle East wing at London's Royal Institute of International Affairs, in which she argued that Europe should consider offering a special relationship to Israel, built around closer economic and, if necessary, military cooperation, in order to assuage Israeli fears about withdrawal from the Occupied Territories.

Central to the Hollis argument, as portrayed in Haaretz, is an abandonment of Europe's insistence to date that Israel's economic integration into Europe be accompanied by a parallel economic and political rapprochement with its Arab neighbors. Either Hollis or Haaretz failed to mention that, in fact, she sees Israel's integration into Europe as contingent upon the rectification of Israeli policies vis-à-vis the Palestinians. Yet for Israeli audiences, this stipulation may have been beside the point. In Tel Aviv, it would be sufficient if her core premise is further disseminated in Brussels; should Olmert's proposal on settlement trade be accepted, Israel could consolidate its hold on those parts of the Occupied Territories it wishes to retain, and continue to quash any remaining Palestinian resistance, without worrying about access to its largest regional market. It is perhaps not coincidental that Olmert borrowed his rhetoric of "painful concessions" from Sharon's widely quoted speech before the Knesset in May 2003, in which he first sketched out his long-term strategic vision of "unilateral separation." Shammas sums up the new consensus: "Build the fence and join the new neighborhood!"

Somewhat hopefully, Israeli papers are predicting an early housewarming. "Bureaucrats in the EU and Israel now consider the [settlement trade] matter all but complete," the Jerusalem Report noted in December. The EU has rejected an overture from Olmert, by which Israel would only specify the origins of exports when specifically queried by European customs. Yet as long as the core principle of his proposal is allowed to stand, Olmert is unlikely to be fazed. Brussels might expect more sugar-coating on the poison pill soon. Despite the sharpening contradictions of "constructive engagement," Israel can likely look forward to a comfortable new neighborhood in Wider Europe, even if the Palestinians will not be so lucky.

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