False Resolution Looms in EU-Israeli Settlement Trade Dispute

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.”


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.


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.

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


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.

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.


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.

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.


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

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.

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.


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.