Israel Worried That U.K. Pressure Will Harm Exports to Europe

Sources close to the talks say London is accusing some Israeli companies of fraudulent labeling of goods.

The old disagreement between Israel and the European Union over exports from the "territories" - areas beyond Israel's pre-1967 borders - has resurfaced, this time courtesy of Britain.

The hope in the U.K. is that economic pressure will persuade Israel to reach agreement with the Palestinians and stop building in the settlements. Sources near the talks say London is accusing some Israeli companies of fraud: Their labeling indicates that they manufacture in Israel, but their plants are in the territories.

The British are pressing the European Commission to take action against Israel, but the EC has demanded evidence of the alleged fraud. The British are working on finding proof, and have also complained to Israeli customs about certain companies.

Another old spat to resurface is between Israel and the EU over recognition of the Palestinian-European trade pact. Europe wants Israel to recognize the agreement, but Israel says recognition would acknowledge the Palestinian Authority as a state.

Since the territories are included in the joint customs agreement, Israel argues, Palestinian exports to the European Union should be included in the trade agreement between the EU and Israel. The EC has rejected Israel's position in the past, and signed a separate agreement with the Palestinian Authority.

British consumers are also protesting against labels indicating that products were made in the West Bank. That is misleading, say the British: Consumers assume that the product is manufactured by Palestinians. The matter is currently under joint British-Israeli review.

Small numbersExports from the territories to the EU total just $120 million a year. Under agreements between Israel and the EU, these exports are not eligible for customs benefits available to other Israeli exports, because the products are manufactured in areas that the EU does not recognize as part of Israel.

Based on experience, there are concerns in Israel that the discussion on exports from the territories will affect all Israeli exports to Europe. Roughly that happened four years ago, after Israel rejected European demands to specifically label products produced outside the pre-1967 war borders.

Israel's stance is that such a move should be reciprocal, i.e., include formal recognition of Israel's right to exist by the Palestinians. It also thinks the move should be part of political, rather than commercial negotiations with the EC.

To avoid impairing exports, Israel sought a solution acceptable to the EU: Exports from the territories would be labeled by the location of the manufacturer. EU tax authorities would prepare a list of areas outside the 1967 borders, and products would be taxed accordingly.

Livni protestsIt appears to be the fruits of long efforts by a strong pro-Palestinian lobby that now spur the British into action. Nevertheless, the British insist that at British consumers want to know the source of the products that they purchase.

Israeli exports to Britain totaled about $1.42 billion in the first nine months of the year. These may come under pressures that include bureaucratic delays or levying of customs until the source of production can be identified. But the biggest fear in Israel is that the issue will spill beyond manufacturers in the territories, affecting all local exporters and all exports to the EU - as was the case the last time that the issue boiled to the surface. Israeli exports to the EU total $10-15 billion annually.

Meanwhile, the issue is being addressed at the most senior political level, by Foreign Minister Tzipi Livni. The Ministry of Industry, Trade and Labor is also being kept updated on developments. In a meeting this week in Israel, Livni tried to persuade British Foreign Minister David Miliband that the UK's stance in the matter is overly extreme, but such declarations are not expected to advance a solution.