“Let’s stick to the facts,” says Eran Nitzan, Israel’s economic attache in Washington, at the start of an interview with TheMarker — just after he was asked about the risks posed to Israel by the trade wars being waged by U.S. President Donald Trump.
The question didn’t come out of nowhere; many economists who are keeping an eye on Israeli economic growth say the biggest threats in the coming years are from outside. They say that if the tension between the United States and its main trading partners leads to a slowdown in world trade or to market drops, Israel could suffer a serious blow.
Trump continues to fan the flames. In July he called both China and the European Union economic enemies and has threatened to double, to $400 million, the value of annual imports from China that are subject to tariffs as high as 25%.
Nitzan isn’t spooked yet. The facts on the ground, he says, “reflect a booming economy. Trade between the United States and Israel is breaking records. There are 400 Israeli startups operating in New York alone. Ninety Israeli companies are trading on the Nasdaq. As for the future, what they are saying is just speculation. It’s clear we have an interest in a flourishing global environment and in broadening our trade eastward, to Asia, and southward, to Africa, and that depends on having strong international institutions. No one really knows if the recent actions in Washington will undermine this.”
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But the tariffs the United States has already imposed on certain products are facts on the ground.
“The tariffs were imposed in the context of U.S. relations with China, Europe, Canada and Mexico; they don’t have a direct impact on Israel. They are not significantly hurting Israeli industry and they don’t pose a threat. There are factories that might be hurt by tariffs on steel and aluminum, but only a few.”
Even if the tariffs are expanded to other areas, as Trump is threatening, Nitzan thinks Israel has a solution.
Israel’s good fortune
“Israel has no advantage in manufacturing,” he explains. “That requires us to turn to services and high-tech. Israel will never build cars and ship them on boats at high cost, but we can build the car’s computer and we can, together with American firms, develop the digital health services the United States needs. It is the Israeli economy’s good fortune that we live in a digital age — and we must continue training people who will be able to join it over the next 10 or 20 years. We must connect other sectors of the population — from the periphery, from the Arab community and ultra-Orthodox society — to the digital potential. That will determine whether Israel flourishes or sinks.”
Won’t Trump’s tax reform hurt investment in Israel by U.S. tech firms?
“Talk of the reform focused on cutting the corporate tax rate from 35% to 21%, but the impact on Israel is relatively limited, because here the tax rate of companies that benefit from the Investment Encouragement Law is 6% to 12%. We are still better in terms of taxes.
“The more significant possible impact is that the tax reform imposes a ‘penalty’ on registering intellectual property outside the United States. This could make it more difficult for the Finance Ministry to help Israeli startups grow into companies employing hundreds or thousands of workers. The National Economic Council, the office of the chief economist and other relevant agencies are examining how to increase incentives for companies to establish themselves in Israel.”
There’s no fear that American companies will return to the United States in the meantime?
“Tax considerations aren’t everything,” Nitzan says. “400 American multinationals have established research and development centers in Israel mainly because they understand there’s a unique combination here of knowledge and research. Sometimes there are other reasons for investing in Israel, like the Jewish connection. In R&D, taxes are less important that the quality of the R&D and the salary levels. We offer salaries that are not too high, certainly not when compared to the United States, and experience in developing some of the world’s leading products.”
Nitzan is cautious when asked about needed changes to the tax code, but about one thing he is insistent: changing the Israel-U.S. tax treaty, which was signed in 1975 but did not go into effect until the 1990s. “The treaty is antiquated,” he says. “It obligates companies to pay taxes on dividends, interest and royalties at rates that were set 40 years ago, and are among the highest in the world.”
The rates of tax withholding stipulated in the treaty are 12.5% to 25% on dividends, 10% to 17.5% on interest and 10% to 15% on royalties. “These tax rates were set during a period when the state’s attitude was, ‘let’s try to suck up as much money as we can,’” Nitzan says. “That’s absurd; the treaty has become an obstacle instead of aiding American entrepreneurs working in Israel and Israeli companies working in the United States.”
One of the most tangible expressions of the strategic relationship between America and Israel is the financial aid provided to Israel by U.S. taxpayers. The aid agreement for the coming decade (2019-28) was signed in 2016. It is meant to guarantee Israel $3.3 billion dollars annually in military aid and an additional $500 million a year for anti-missile defense. Nitzan says legislation to implement the agreement is being drawn up.
The agreement currently in effect allows Israel to convert nearly a quarter of the aid into shekels, for defense purchases from Israeli firms. The new agreement reduces this option gradually, until by 2028 the aid can be used only for procurement in the United States, to promote the American economy. “That’s one of the compromises that were made,” Nitzan says.
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Reopening aid terms
Is it still open to discussion?
“During discussions between the Finance Ministry and the defense establishment the issue is certainly on the table — how to prepare for the future when we will have to buy everything solely from the United States. Could we still reopen this with the Americans? That’s a weighty political-diplomatic decision and I am not aware that there’s been any change in Israeli policy that seeks to reopen this.”
According to Nitzan, the treasury and the defense establishment is examining how many Israeli companies benefit from the U.S. aid and how they might be harmed if Israeli purchases from them stop. “We are looking at how the government can provide support that will allow such plants in the periphery to survive,” Nitzan said.
Nitzan speaks proudly of the admiration that American companies and individuals have for the Israeli economy — “working with Israeli companies is considered a real privilege,” he says — as well as the regard accorded Israel by his counterparts from other countries who work in Washington.
“As someone who deals with economic issues and not political ones, I have the opportunity to present a huge success story,” he says. “All over the world they are eager to know how Israel does it, and are interested in increasing cooperation with it.” American public opinion presents a somewhat different picture. In the most recent Pew Research Center survey on the issue, published half a year ago, only 27% of Democrats sympathize more with Israel than with the Palestinians, compared to 79% of Republicans.
Have you encountered the boycott, divestment and sanctions movement? Are there calls to boycott Israel because of the occupation?
“In the business arena — no: on the contrary. In the United States, economics wins. If an Israeli company has a product that suits an American company, it will be integrated into its activity. Perhaps in academic circles it’s more prominent, but I wouldn’t list this among our chief worries.”
Do we still need American guarantees to sell bonds?
“We don’t use them to raise new money, but they have to be on the table. Security uncertainty can affect the economy and our ability to raise funds, so it’s good that we have this option. Only 15 years ago buses in Israel were blowing up, and after airlines discharged their passengers at Ben-Gurion Airport, the flight attendants refused to stay overnight in Tel Aviv.”
What about Israel Bonds, those special bonds that Israel sells in Jewish communities. Do we need them?
“Yes,” Nitzan says firmly. “Along with the guarantees, it’s important to preserve the ability to raise funds from the Jewish community in a decentralized fashion in times of emergency. That’s a strategic asset that I feel is critical to preserve.”
Even though relatively high interest is paid on them?
“That’s why today we raise insignificant sums [through them]. We could raise more, but we keep the fundraising on a back burner. If Israel, God forbid, ever faces a crisis, it will turn there.”