re-energizing the u.s.-israel commercial relationship · 2 2. to advance u.s.-israel trade...

RE-ENERGIZING THE U.S.-ISRAEL COMMERCIAL RELATIONSHIP:

A Policy Framework for Trade, Investment, and Innovation

December 2015

Re-energizing the U.S.-IsraelEconomic and Commercial Relationship:

A Policy Framework for Trade, Investment, and Innovation

A Report by the United States Chamber of Commerce andThe Manufacturers Association of Israel

December 2015

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Executive Summary

Israel and the United States have built an extraordinary economic partnership based onhigh-impact commerce, innovation, and trade. This world-leading collaboration is theresult of the hard work and genius of U.S. and Israeli entrepreneurs and innovators—andhas been supported significantly by pioneering policy decisions made decades ago by thetwo governments, including the U.S.-Israel Free Trade Agreement (FTA), which this yearcelebrates its 30th anniversary.

Continued U.S.-Israeli leadership is not guaranteed, however, in an era whengovernments and regions worldwide are aggressively using new public policy tools tocollaborate in fostering trade, commerce, and innovation. There are particular risks thatthe United States and Israel could lose sight of the primacy of their economic partnership,especially as the United States pursues groundbreaking new trade agreements spanningthe Atlantic and Pacific, and Israel seeks to expand economic ties with key emergingmarkets.

Recent initiatives, like the landmark 2014 U.S.-Israel Strategic Partnership Act, will playvital roles in fostering greater bilateral cooperation in key economic sectors.1 To maintainand grow their global competitive edge and assure the continuing priority of their specialeconomic relationship, however, we believe that Israel and the United States mustundertake an additional round of smart, cooperative policy innovation and adopt modernmechanisms to strengthen their already close economic ties.

The following report recommends that the United States and Israel boost their jointglobal competitiveness through a new Trade, Investment, and Innovation Framework.The proposed Framework would address economic, innovation, and trade policychallenges in five key areas through 17 concrete policy recommendations.

As explained in detail in our report, we recommend:

1. To enhance institutional arrangements:

Establishing a U.S.-Israel High Level Economic Dialogue (HLED), to be led bysenior officials at the White House and Office of the Prime Minister and toinclude annual meetings hosted by the President and Prime Minister or theirdesignees.

Establishing special HLED tracks for addressing key crosscutting issues—such asregulatory policy—on a high-level, holistic, and coordinated basis.

Rationalizing and coordinating—under the HLED’s guidance—existing bilateraltrade and economic collaborations among expert groups, including the FTA JointCommittee and the Joint Economic Development Group (JEDG).

Establishing a Business Dialogue between Israelis and American companies,while launching an annual HLED Business Conference, a binational government-to-business forum which would take place in conjunction with the annual HLEDmeeting and would provide a structured opportunity for the U.S. and Israelibusiness sectors to provide detailed input to the HLED.

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2. To advance U.S.-Israel trade relations:

Negotiating new trade disciplines beginning with setting modern rules for digitaltrade and technical barriers to trade.

Requiring regular and equal consultations between U.S. and Israeli trade officialson their trade negotiations with other countries and on modern trade strategies topromote strong trade ties under changing global rules.

Eliminating current administrative, customs, and logistical barriers to trade, forexample, addressing necessary changes in Israel US certificates and rule oforigins documents in order to simplify bilateral trade.

Expanding joint efforts to foster trade in Israel’s region through, for example,expansion of the Qualifying Industrial Zone (QIZ) program.

3. To enhance the bilateral business environment:

Launching an initiative to improve the bilateral business environment, includingeliminating impediments in tax, investment, and bureaucracy.

Requiring a joint plan to make measurable improvements in obtaining visas forIsraeli business visitors to the United States.

Requiring a joint plan to make targeted improvements in bilateral access to U.S.and Israeli government procurements.

4. To promote regulatory cooperation:

Initiating an ongoing, HLED-level, crosscutting collaboration on U.S.-Israelregulatory cooperation.

Establishing a timetable for progressively reducing standards-related barriers totrade and commerce, beginning with the most commercially meaningful barriers.

Expanding the coverage of Mutual Recognition Agreements for commerciallyimportant products of bilateral interest.

5. To boost U.S.-Israeli entrepreneurship and innovation:

Requiring HLED consultations on the “innovation impact” of laws andregulations that could significantly affect the bilateral innovation ecosystem.

Committing the United States and Israel to increasing resources available tosupport joint commercial R&D.

Launching an annual U.S.-Israel Entrepreneurship and Innovation Conference, apublic-private collaboration aimed fostering high-impact entrepreneurship andbroadening joint commercial innovation, which, together with the HLEDBusiness Conference, would advise and submit an annual report to the HLED onentrepreneurship, innovation, and R&D.

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Building on a History of Innovation

For decades, innovation has been the hallmark of trade and commercial relations betweenIsrael and the United States.

There are countless examples. Top American technology companies—including Intel,HP, IBM, and Cisco—operate world-leading research and development centers in Israel,tapping the brainpower of tens of thousands of Israelis for cutting-edge research ininformation technology.2 And the game-changing discovery of Israel’s offshore naturalgas reserves has led to unprecedented collaboration with the highly innovative U.S. oiland gas sector, including leading companies like Noble Energy.

The U.S. and Israeli governments also have a long history of crafting innovative policiesto foster two-way trade and commerce. The U.S.-Israel Free Trade Area Agreement—which this year celebrates its 30th anniversary—kickstarted exponential growth inbilateral trade over the last three decades.3 And longstanding policy innovations like theBinational Industrial Research and Development (BIRD) Foundation and the QualifyingIndustrial Zone program have played critical roles in commercializing technology andsupporting regional trade and stability.4

Trade and commerce between Israel and the United States is robust, and has greatpotential to grow and deepen. But continued growth is also not guaranteed—especiallywhen countries and regions worldwide are aggressively pursuing innovation and buildingmodern policy structures to boost trade and commerce. To keep pace, the United Statesand Israel require a new round of policy innovation. In an increasingly competitive globaleconomy, standing still isn’t an option.

This report recommends that the United States and Israel transform their commercialpartnership for the coming decades through a new U.S.-Israel Trade, Investment, andInnovation Framework (the Framework).

The Framework would establish a modern policy structure for enhancing bilateral tradeand commerce, including a new High Level Economic Dialogue that would elevatecommercial discussions to the White House/Office of the Prime Minister level. TheFramework would guide the governments in updating their trade relationship; dealcomprehensively with “cross-cutting” issues like regulatory policy; address “beyondtrade” issues like business regulation, standards, innovation, and entrepreneurship; andenhance the ability of U.S. and Israeli businesses, entrepreneurs, and innovators toprovide advice and policy input.

Our report first reviews the great success of current U.S.-Israeli cooperation on trade,investment, and innovation and highlights the vital role that smart government policyplays—and must continue to play—in fostering this success. We then detail how amodern Framework could address current challenges through reforms in institutionalarrangements, trade policy, the business environment, regulatory policy, andentrepreneurship and innovation—and recommend 17 concrete policy initiatives tosupport Israelis and Americans in building a more vibrant economic relationship.

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A Productive Partnership

In the three decades since Israel and the United States launched their landmark FreeTrade Agreement, the two countries have built a thriving economic relationship based ona shared commitment to trade, investment, and innovation.

Growing Trade and Commerce

Bilateral trade has grown significantly since the FTA entered into force in 1985. Between1985 and 2014, two-way trade in goods expanded more than eight-fold—from $4.7B to$38.1B.5 At the same time, this trade has become increasingly concentrated in industrialand high tech products—including chemicals and pharmaceuticals, electronic products,and transportation equipment.6 Two-way services trade between Israel and the UnitedStates has grown notably, as well, expanding from about $2B in 1992 to almost $10B in2013.7

As a trade partner, Israel punches far above its weight. Israel is the 23rd largest exportmarket and its 21st largest source of imports for the United States, despite having apopulation of only eight million and the world’s 37th largest economy. The United Statesexports more goods to Israel than it does to Russia or Indonesia—even though Russia’seconomy is seven times larger and Indonesia has 31 times more people.8 Israel is theeighth largest U.S. export market for integrated circuits/parts and for aircraft parts, and isa top-five U.S. supplier of both pharmaceuticals and measurement equipment.9

Impactful Investment

The United States and Israel also make significant investments in each other’seconomies. In 2013, cumulative U.S. investment in Israel was $9.5B—the same value asIsrael’s cumulative investment in the United States.

U.S. investments in Israel are concentrated in manufacturing (especially computers andelectronics), and information and technical services. The Israeli operations U.S.-basedcompanies—including global leaders like Intel, HP, and IBM—employ some 72,000Israeli workers. Israel’s investments in America are also concentrated in manufacturing,especially chemicals and pharmaceuticals.

As with trade, Israel plays an outsized role as an investor in the United States. Israel’s$9.5B in cumulative foreign direct investment in the United States (FDIUS) is more thatthe FDIUS of Brazil, China, Hong Kong, India, Russia, or all of Africa, and Israelaccounts for almost half of all U.S. investment from the Middle East.10

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Groundbreaking Innovation

The United States and Israel have also combined their knowledge, skills and resources inhigh technology to create a world-leading partnership on innovation.11

Israel is a global leader in research and development and is home to the most significanthigh-tech ecosystem outside of the United States.12 Among leading industrializedcountries, Israel spends the highest percentage on R&D (4.2% of GDP) and has thehighest percentage of scientists and technicians (17.2 per 1000 employees) in itsworkforce.13 Of the world’s 20 best universities for computer science, two are in Israel—second only to the United States, which has 16.14 Israel’s thousands of technologycompanies include the largest number of venture capital-funded startups outside of theUnited States and some of the most NASDAQ-traded companies outside of NorthAmerica.15

World-leading U.S. tech companies—including Intel, HP, IBM, Cisco, Motorola, andMicrosoft—have enthusiastically tapped into Israel’s innovation ecosystem, employingtens of thousands of Israeli researchers at R&D centers throughout Israel. For many ofthese U.S. firms, their Israeli R&D centers were their first outside of the United States.This active and growing collaboration has yielded an amazing array of innovativeproducts and technologies, including Intel’s Sandy Bridge and Centrino microprocessors,GE’s portable cardiac ultrasound system, Google technologies for digitizing texts, andmany others.16

Prospects for the Future

Economic collaboration between the United States and Israel is robust—and has verysignificant room to grow and deepen. There are exciting opportunities to intensifycooperative R&D in information technology; to expand cutting-edge collaboration inemerging priority areas; and to extend the benefits of bilateral commerce more broadly to

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people in both countries. The U.S. Congress, for example, recognized this verysignificant potential in the landmark 2014 U.S.-Israel Strategic Partnership Act, whichsets ambitious goals for future bilateral cooperation in sectors including agriculture,cyber, energy, and water resources.17

Innovations by Intel Israel

Since its establishment in 1974, Intel Israel has been responsible for many of Intel’s most significantinnovations. Intel design teams in Haifa developed the first PC processor (the 8088, used in IMB PCs), themost widely distributed processor of the 20th Century (the Pentium MMX), and the first laptop processorwith Wi-Fi. In 2012, Intel alone was reportedly responsible for an astounding 20 percent of Israel’s high-tech exports and 10 percent of Israel’s total exports. Intel has also been a leader in high-tech R&D andeducation in Israel, establishing the Computational Intelligence Institute to research human interaction withtechnology.18

Experts in Israel and California, for example, are engaged in a growing partnership onwater technologies—a sector in which Israel is a global leader. Innovations like advanceddrip irrigation, large-scale desalination, and pioneering water management enableIsraelis, on a per capita basis, to use less than a third of the water that Californians use.19

Collaborating on water innovation could provide significant benefits to drought-strickenU.S. communities, while increasing yields, boosting efficiency, and lowering costs for thevital U.S. farm and food sector.20

U.S.-Israeli cooperation in cyber security could also yield growing economic benefits.Israel is a world leader in cyber security, and has recently established an innovativeNational Cyber Directorate in the Prime Minister’s Office, which will bring a holisticapproach to bridging the security and civilian sectors and addressing cyber threats tocommerce. For its part, the U.S. Government is aggressively boosting funding for cyberresearch and is actively encouraging collaboration with Israel cyber firms and startups.21

There is also vast opportunity for collaboration on cyber technologies to protect theprivate sector from growing digital threats.22

Deepening and Diversifying Cutting-Edge Collaboration

Joint U.S.-Israel commercial innovation is rapidly diversifying far beyond the two countries’longstanding—and still vital—focus on information and communications technology. Ten jointdevelopment projects recently funded by the BIRD Foundation, for example, will commercializeinnovations in advanced manufacturing, high-tech materials, water resources, and digital health. Tel Aviv-based Life-Beam and Baltimore-based Under Armour are, for instance, partnering on smart fitness earbudswith bio-sensing technology.23 The 22 joint projects approved by BIRD in 2014 included eight in lifesciences, including advanced insulin production, cutting-edge diagnostics, and microbial-based insectcontrol products. Recent BIRD Energy projects include joint energy innovations on smart grid vehiclecharging stations and carbon composite membranes that conduct electricity.24

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The Role of Government Policy

The shared economic success of the United States and Israel is due primarily to theextraordinary collective efforts of businesses, entrepreneurs, and innovators in bothcountries. Future shared prosperity will similarly depend on the hard work and genius ofAmericans and Israelis—and their world-leading capabilities in commerce and research.However, as we explain below, the U.S. and Israeli governments have also played—andmust continue to play—a vital role in fostering a supportive environment for bilateralcommerce and innovation.

A History of Pioneering Policies

In 1985, the U.S.-Israel Free Trade Area Agreement—America’s very first FTA—was astate-of-the-art trade policy tool. Over ten years, the FTA phased out duties onmanufactured goods and boosted two-way goods trade from $4.7B to $11.3B. The FTAalso established a Joint Committee as a government-to-government forum for addressingtrade-related issues.25 Under the FTA, trade soon supplanted aid as the centerpiece ofbilateral economic relations, with the value of Israel’s U.S.-bound exports exceedingAmerican economic and military aid by 1990.26

The FTA built on earlier innovations by the two governments to foster technologycooperation. In the 1970s, the United States and Israel established three jointorganizations to promote and fund joint R&D: the Binational Science Foundation (BSF,1972), the Bilateral Industrial Research and Development Foundation (BIRD, 1977), andthe Binational Agricultural Research and Development Fund (BARD, 1979). Thesecollaborations placed a particular emphasis on commercializing technology. The BIRDFoundation, for example, funds joint industrial R&D projects that pair U.S. and Israelicompanies to develop, manufacture, and sell an innovative product.27

In 1996, the FTA served as the platform for launching the Qualifying Industrial Zone(QIZ) initiative. This pioneering program was designed to promote regional peace andstability by granting U.S. duty-free treatment for goods from designated factories inEgypt and Jordan that contain specified amounts of Israeli inputs.28

These longstanding government policy innovations have fostered enduring success.

In 2014, the two-way trade in goods and services kickstarted by the FTA approached $50billion. Trade has also far surpassed aid as the linchpin of the economic relationship—thevalue of Israel’s U.S.-bound goods and services is now over nine times that of currentU.S. aid, virtually all of which is military assistance.29 And the two governments havebuilt on the FTA by opening up significant portions of their agricultural trade throughunderstandings that supplement the FTA.

Policy collaboration in commercial innovation has also yielded notable results. Since1977, the BIRD Foundation has funded almost 900 U.S.-Israeli projects to develop andcommercialize cutting edge technologies, producing $10 billion in direct and indirectrevenues. BIRD has fostered breakthrough products like the ReWalk device—a roboticexoskeleton that enables paraplegics to stand, walk, and even climb stairs—and BIRD’s

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success has led to the establishment of BIRD Energy, which promotes bilateralcooperation in clean and renewable energy technologies.30

Regional Engagement Through the QIZ Program

Since the QIZ initiative was extended to Egypt in 2005, Israel’s exports to Egypt have grown significantly,as Egypt’s QIZ operations have expanded to include 15 designated industrial zones and nearly 700qualified companies.31 In 2014, Egypt exported $866 million in QIZ-eligible textile and apparel products tothe United States—accounting for over 60 percent of Egypt’s total U.S. exports—and the trilateral programappears poised for significant additional growth.32

Losing the Competitive Edge in Policy

Despite these successes, the pioneering policies that support U.S.-Israel commerce areincreasingly losing their competitive edge. The global economy has changed remarkablysince Israel and the United States entered into their groundbreaking FTA in 1985. Inresponse, countries and regions worldwide are implementing an array of modern andsophisticated policy initiatives to foster trade and innovation.

In 1985, there were fewer than 30 regional FTAs in force in the world economy. Todaythere are more than 400, with dozens more under negotiation.33 Pending pacts includeU.S-sponsored “mega-regional” agreements like the Trans-Pacific Partnership (TPP)34

and the Transatlantic Trade and Investment Partnership (TTIP)—agreements that,together, would establish detailed new rules for two-thirds of global trade.35

Modern FTAs also take a much more comprehensive approach to commercial relations.Unlike the 1985 FTA—which eliminated tariffs on manufactured goods—most currentFTAs also contain detailed disciplines on an extensive range of issues, includingtechnical trade barriers, services, and customs facilitation, and cover issues that gobeyond traditional conceptions of trade, like competition and regulatory policy.36 Pendingagreements like TPP and TTIP would also set up new, higher-standard rules for 21st

Century issues like digital commerce, and for key “cross-cutting” sectors like smallbusiness trade.37

Transformation of the Global Economy Since 1985

Since 1985, the real value of global trade has surged by five-fold,38 and emerging economies—especiallyChina—have been transformed from bit players to leading actors in global commerce.39 Lower transportcosts, improved logistics, and the proliferation of technology have driven rapid growth in far-flung, multi-country supply chains, and trade in services has expanded exponentially.40 And the digital economy—amere blip in 1985—is now an indispensible driver of global commerce, trade, and innovation.41

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Countries and regions have also created new structures to raise the level of theireconomic engagement, allowing them to address a wide array complex economic issuesin a more coordinated and holistic manner.

The United States, for example, has established high-level economic dialogues withChina, the European Union, and Mexico,42 while China has similar dialogues with theEU, Indonesia, and Japan.43 These dialogues include regular (usually annual) meetingshosted by senior leaders, as well as ongoing collaboration by specialized working groups.Vice President Biden, for example, has hosted recent high-level economic talks with bothChina and Mexico.44 These dialogues also benefit from significant private sector inputthrough connected organizations like the APEC Business Advisory Council and the U.S.-Mexico High Level Economic Dialogue.45

In a world in which trading partners are increasingly using smart policies to advance theireconomic success, the United States and Israel can’t stand still. To compete and win inthe global economy—and to maintain the primacy of their special economicrelationship—the two countries must adopt new policy tools and modern mechanisms toregain their competitive edge in trade and innovation.

Cooperating on More than Trade

The scope of modern government-to-government economic dialogues extends far beyond traditional tradematters. The 21 member economies of Asia-Pacific Economic Cooperation (APEC), for instance, use thatforum to collaborate on cross-cutting issues like improving regulatory practices, increasing supply chainconnectivity, and making it easier to do business.46 China and Japan have discussed energy efficiency, foodsafety, and infrastructure.

A New U.S.-Israel Trade, Commerce, and Innovation Framework

To restore their leadership in trade and economic policy and to support strong bilateraleconomic ties, we recommend that the United States and Israel enter into a new U.S.-Israel Trade, Commerce, and Innovation Framework. This comprehensive arrangementfor updating and expanding bilateral economic relations would establish a holisticstructure for addressing key issues, while building on past policy innovations.

The Framework would enhance bilateral commercial relations in five key areas— (1)institutional arrangements, (2) trade policy, (3) the business environment, (4) regulatorypolicy, and (5) innovation and entrepreneurship. We discuss each of these areasseparately below—first highlighting the challenges that United States and Israel currentlyface, and then outlining a series of concrete policy recommendations designed to helpgrow and deepen bilateral prosperity.

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Institutional Arrangements

Current Challenges

The United States and Israel collaborate extensively on commerce and innovation. But,unlike many other trading partners, the two governments lack a permanent, high-levelbody charged with taking a holistic policy approach to key economic issues and drivingaccountable, inclusive, ongoing, transparent, and results-oriented collaborations on thesekey challenges.

Existing government-to-government dialogues do vital work, but don’t cover the fullspectrum of bilateral economic policy or include all the relevant government entities. TheJoint Committee established in the FTA, for instance, focuses primarily on the bilateraltrade relations.47 Throughout most of its 30-year history, Joint Economic DevelopmentGroup has primarily been a forum for the U.S. State and Treasury Department and theirIsraeli counterparts to review economic conditions and reforms in Israel and related U.S.economic aid.48 The U.S.-Israel Energy Dialogue focuses on energy-related issues.49

Other important collaborations—including joint R&D underwritten by the BIRDFoundation—implement policy rather direct it. And, although the governments havesought greater input from the American and Israeli business communities in recent years,there is no formalized, comprehensive arrangement for joint government-to-businesscollaboration on trade, economic, and innovation policy.50

These multiple and loosely coordinated arrangements make it difficult to realize the fullpotential of U.S.-Israel economic cooperation. This is especially true for complex, cross-cutting, economic challenges which require a high-level, and comprehensive approach toissues of commercial, regulatory, trade, and innovation policy, as well as closecoordination with the business sector.

Recommendations

To address these institutional challenges, we recommend that the Framework:

1. Establish a High-Level Economic Dialogue. The HLED would provide a flexible,government-to-government platform to deal comprehensively the full range of bilateraleconomic, trade and competitiveness issues. It would be led by senior officials at theWhite House and Office of the Prime Minister and would include annual meetings,alternating between Jerusalem and Washington, led by the President and Prime Ministeror their designees. By raising the level of bilateral economic cooperation, the HLEDwould broaden the scope of consultations and could help drive greater accountabilityamong government participants.

2. Establish HLED tracks for addressing key crosscutting issues. Certain complexeconomic policy issues cut across many government bureaus and are best addressed on ahigh-level, holistic, and coordinated basis. The Framework would establish specialHLED tracks for a limited number of key crosscutting issues—such as regulatorypolicy51—to assure that these multifaceted issues are addressed comprehensively. Annual

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HLED meetings would, on a rotating basis, identify a specific crosscutting issue forparticular discussion and focus.

3. Rationalize and coordinate—under the HLED’s guidance—existing bilateral trade andeconomic collaborations among expert groups, including the FTA Joint Committee, theJEDG. The HLED might request, for example, that the Joint Committee and the JEDGtake on additional issues beyond their current assigned responsibilities.

4. Launch an annual HLED Business Conference. The HLED would sponsor—togetherwith leading U.S. and Israeli business organizations—an annual HLED BusinessConference. This bilateral business-to-government conference would take place inconjunction with the HLED’s annual meeting and would provide a structured and directopportunity for business to provide detailed input and advice to the HLED on trade andcommercial policy.52 To enhance their ability to cooperate on these and other matters, theU.S. and Israeli business sectors would themselves create a separate U.S.-Israel BusinessDialogue, a new bilateral business-to-business collaboration.

5. Launch an annual U.S.-Israel Entrepreneurship and Innovation Conference. Asdetailed below, this broad public-private collaboration, to take place in conjunction withthe annual HLED meeting, would focus on fostering high-impact entrepreneurship andinnovation. It would include national and regional governments, leading businessorganizations, entrepreneurs, investors, SMEs, foundations, technical experts, academics,and educators.53

Trade Policy

Current Challenges

The United States and Israel are celebrating the 30th anniversary of the FTA—apioneering deal that drove significant trade expansion and is still a pillar of the countries’impressive economic ties.

But, after 30 years, the FTA is also showing its age.

As noted above, modern trade agreements are more comprehensive, covering the fullspectrum of economic policy issues.54 Countries are also increasingly moving to regional,multi-party trade deals like TPP, TTIP and RCEP55 to rationalize the “spaghetti bowl” ofdifferent bilateral FTA rules and to reduce red tape for global supply chains.56

The FTA’s relevance is also fading even in its prime area of focus—bilateral trade inmanufactured goods. In 2014, the FTA applied to just 13 percent of U.S. imports fromIsrael,57 in part because trade in high tech and sophisticated manufactured goods is nowlargely duty-free under agreements reached through the WTO in the 1990s.58

U.S. officials note that their trade negotiating resources are already stretched thin by anambitious trade agenda that includes global talks on services, information technology,and environmental goods—in addition to TPP and TTIP.

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U.S. officials are also sensitive to America’s longstanding trade deficit in goods withIsrael59 and they continue to insist that further opening of Israel’s agriculture sector mustbe a component of any broader U.S. trade negotiations with Israel.

For its part, Israel has ramped up engagement on trade with Canada, China, Japan, thePacific Alliance and others, and is actively participating in global talks on issuesincluding services.60 Israel’s Government also faces difficult decisions on how to link upwith emerging global trade architecture, including mega-regional pacts like TTIP. Israeliofficials understand that joining a completed TTIP61 would require major changes toIsrael’s trade, regulatory, and economic policies—while not joining could potentiallyimpact Israel’s global competitiveness.

Recommendations

To upgrade and enhance the bilateral trade relationship, we recommend that theFramework:

1. Commit both countries to negotiate new trade disciplines, beginning with modern rulesfor digital trade and technical barriers to trade62, for example, addressing necessarychanges in Israel-US certificates and rules of origins documents. As global leaders ininformation technology and the digital economy, the United States and Israel should beinternational leaders in adopting pro-competitive, cutting-edge rules to promote e-commerce and open digital trade—including strong rules to assure cross-border dataflows and to prohibit the “localization” of data storage and processing.63 The twocountries have an immediate opportunity to achieve these goals in the context of theTrade in Services Agreement (TiSA), a high-standard trade agreement covering servicesnow under negotiation in Geneva between the United States, Israel, and approximately 50other countries. Similarly, Israel and the United States should seek new opportunities tointroduce modern disciplines on technical barriers to trade.64—that require transparency,notice, and a meaningful opportunity to comment on new standards, and that mandateharmonization or the use of international standards whenever possible.65 Finally, pursuantto Article 16 of the FTA, the two countries should adopt a “declaration” committingthemselves to cooperate fully in seeking high-standard, modern rules for services in theTiSA negotiations.66

2. Require regular and equal consultations between U.S. and Israeli trade officials ontheir trade negotiations with other countries and on modern trade strategies to promotestrong trade ties under changing global rules. The Framework should require, pursuantto Article 18 of the FTA,67 that the Joint Committee hold regular consultations on thecountries’ third country trade negotiations—particularly on TTIP and TPP. The goal ofthese talks would be to minimize potential negative impacts on the U.S.-Israelrelationship,68 to maximize new opportunities, and to explore ways to align approaches tokey trade issues, especially in negotiations—such those on the TiSA and the expansion ofthe Information Technology Agreement—in which both countries currently participate.

3. Eliminate current administrative, customs, and logistical barriers to trade. Forexample, modernizing outdated customs rules—such as requirements for commercially

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printed hard copies of FTA Origin Certificates—could facilitate trade, especially forsmall U.S. and Israeli traders.69

4. Expand joint efforts to foster trade in Israel’s region. The Joint Committee—in closecollaboration with the U.S. and Israeli business communities and other governmententities—should develop concrete plans for increasing the utilization of the QIZ programin Israel’s region. Such plans could include expanding the program in Egypt and Jordan,extending similar initiatives to additional countries, such as Turkey, and encouraging newmanufacturing sectors to utilize QIZs.70

Business and Investment Climate

Current Challenges

The success of economic cooperation between the United States and Israel is due, insubstantial part, to a shared approach to business.71 Both countries are largely open toforeign investment, place a high premium on flexibility and entrepreneurship, andstrongly support private sector innovation.72 At the same time, however, the businessenvironments in both Israel and the United States do pose current and potentialchallenges to continued economic success.

For U.S. firms, Israel’s business environment challenges include:

Bureaucracy. Israel’s “light-touch” approach to its innovation economy oftendoesn’t extend to firms operating in other sectors. U.S. and Israeli companiesalike face a range of bureaucratic and administrative challenges that impedeeconomic growth. According to the World Bank’s latest “Doing Business” index,Israel ranks 109th for speed of getting electrical connections, 111th for enforcingcontracts, and 121st for dealing with construction permits.73 This impactsbusinesses in wide range of sectors and slows economic growth in Israel.

Investment Environment. U.S. companies have raised a variety of recent concernsabout the predictability and stability of Israel’s investment climate.74

Boycott, Sanctions and Divestment Movement. There are growing efforts todelegitimize Israel through economic means, including boycott, sanctions, anddivestment. The U.S. and Israeli business communities encourage ourgovernments to promote legislation that discourages direct or indirect prejudiceagainst commercial activity between the United States and Israel, and we supportefforts to eliminate politically-motivated nontariff barriers on Israeli goods,services, or investment.

Government Procurement. U.S. officials note, among other issues, that Israel’sgovernment procurement process often lacks transparency, discouraging U.S.companies from participating in major projects and disadvantaging those thatdo.75

Taxation. U.S. business has serious concerns about proposed changes in Israel’stax rules. One such example lies in a recent draft proposal on the taxation ofservices provided by foreign businesses via the Internet.76 The U.S. Chamber hasnoted, among other concerns, that this proposal would negatively impact Israel’senvironment for U.S. investment, particularly in Israel’s tech sector.77

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For Israeli firms, U.S. business environment challenges include:

Government Procurement. Israeli firms—including companies in Israel’s highlyadvanced water technologies sector—are often precluded from bidding on stateand local contracts by rules that require U.S. content for certain federally-fundedprojects.

New World Trade Order. As the United States engages in multilateral tradeagreements such as the Transatlantic Trade and Investment Partnership, the Israelibusiness community has found that there could be potential negative impacts onthe U.S.-Israel trade volume. The Israeli and U.S. business community shouldmaintain close ties and find additional avenues to enhance the U.S.-Israelcommercial relationship.

Visas. Israeli companies with large U.S. investments note that it is often arduousand exceedingly time consuming to obtain visas for key company officials whoare Israeli citizens to work in the United States. Israel’s foreign direct investmentinjects billions of dollars annually into the American economy. Effective visaprocedures enhance the ability of Israel’s investors and businesses to expand andgrow this investment and the business and jobs it supports.

Recommendations

To address these challenges, we recommend that the Framework:

1. Commit the two countries to an ongoing initiative to improve the bilateral businessenvironment. This initiative would, among other things, examine the feasibility ofpro-business updates to the countries’ 1990-era double taxation treaty78 and theimpact of recent tax proposals, consider concrete steps to enhance the businessenvironment for investors, and explore bureaucracy-busting initiatives, such as singleregulatory windows.

2. Require a joint plan to make measurable improvements in obtaining visas for Israelibusiness visitors to the United States. Major improvements can be made by addingIsrael to the list of countries that participate in the Visa Waiver program. Theprogram encourages inbound trade to the United States by facilitating travel frompartner countries into the United States. It is also crucial that the United StatesCongress reauthorizes the EB-5 Regional Center Program to enable high-capitalforeign investors to obtain permanent residency.

3. Require a joint plan to make targeted improvements in bilateral access to U.S. andIsraeli government procurements. Elements of this plan could include opposingefforts to politicize and otherwise undermine the integrity of the governmentcompetitive contracting process, opposing implementation of barriers to competitionthat add costly and unnecessary acquisition requirements, and opposing U.S.domestic content mandates for federal infrastructure projects includingwater/wastewater projects.

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Regulatory Policy

Current Challenges

After decades of global tariff reductions, regulatory differences between economies arenow often the most significant impediments to trade, especially for small- and medium-sized firms.79 Eliminating regulatory barriers is a major focus of many modern tradeagreements—and is, indeed, the central focus of the TTIP.

Regulatory Cooperation in the TTIP

In the TTIP, the EU and U.S. negotiators are pursuing cutting-edge, binding disciplines to removeregulatory barriers. This important work encompasses technical barriers to trade (TBT), sanitary andphytosanitary (SPS) rules (e.g. food safety), sector-specific arrangements (e.g. autos, medical devices, andcosmetics), regulatory cooperation, and regulatory coherence (e.g. good domestic regulatory practices, suchas transparency and consistency). Progress on these vital issues could break down significant trade barriersand open up important new opportunities for EU and U.S. traders, especially for SMEs.80

Regulations and standards—which were not addressed in the 1985 FTA—also posesignificant barriers to U.S.-Israel trade and economic cooperation.

Israel, for example, has historically aligned its technical standards with EUrequirements,81 which can complicate trade in goods based on U.S.-oriented internationalstandards developed in U.S.–domiciled development organizations.82

Israel readily recognizes the need for greater coherence, transparency and stakeholderparticipation in its regulatory system, and has recently taken ambitious steps to reduceregulatory burdens, require conformance with international standards, and mandateadvance notice of regulatory plans.83 But more is required to assure that the benefits ofthese and other regulatory reforms are extended fully to U.S.-Israel trade and commerce.

Recommendations

As noted above, the Framework would mandate negotiation of a modern andcomprehensive technical trade barriers supplement to the FTA. Additionally, to addressbilateral regulatory challenges, we recommend that the Framework:

1. Initiate, under the HLED track on regulatory policy, a high-level crosscuttingcollaboration on U.S.-Israel regulatory cooperation. This effort would be led byregulatory policy experts from the Office of the Prime Minister and the White House(e.g., the Office of Information and Regulatory Affairs (OIRA)), and would includeexperts from relevant Departments and Ministries. It would support Israel’s ongoingregulatory reform process, share best practices (e.g., OIRA’s experience in coordinatingthe U.S. regulatory process), share current information on other regulatory cooperationand coherence efforts (e.g., in the TTIP), and assure that regulatory reform efforts fullysupport the bilateral economic relationship. Like similar U.S. regulatory cooperationinitiatives with other trade partners, this effort would also target an agenda of specific

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regulatory challenges in both countries,84 and would offer high-level input and advice onkey proposed rules of bilateral interest.

2. Boost cooperation on standards. The Framework would commit the United States andIsrael to a timetable for progressively reducing standards-related trade barriers, beginningwith the most commercially meaningful standards barriers. The two countries would alsoexplore avenues to apply the results of U.S.-EU private sector standards cooperation inthe TTIP context for the benefit of U.S.-Israel trade.85

3. Expand the coverage of Mutual Recognition Agreements. The Framework would buildon the landmark 2012 U.S.-Israel Mutual Recognition Agreement (requiring the mutualrecognition of telecommunications testing laboratories and the mutual acceptance of testresults) by encouraging additional MRAs (or other cooperative mechanisms) for othercommercially important products of bilateral interest.86

Innovation and Entrepreneurship

Current Challenges

As highlighted throughout this report, Israel and the United States have jointly built anextraordinary, world-leading innovation ecosystem that supports the rapid and effectivecommercialization of cutting-edge technologies. To maintain their technology leadershipand expand economic opportunities, the two governments must advance new approachesto supporting entrepreneurs and innovators. In doing so, they must address two sets ofchallenges.

First—to paraphrase Hippocrates—it is vital that policymakers “do no harm” to thebilateral innovation ecosystem.87 The U.S.-Israel technology ecosystem succeeds insignificant part because of government policies that strongly support commercial R&D,while also taking a “low-touch” approach to regulation. The two governments mustmaintain this supportive philosophy—and expand it to other sectors88—while workingdiligently to assure that regulatory, tax, and other policies not create impediments tocommercial innovation.89

Second, to maintain their technological leadership—in a world where countlesscompetitors are seeking to create the next Silicon Valley—the United States and Israelmust intensify their collaboration on innovation.90 Among other things, this will requireexpanding collaboration in new and emerging technical fields, and deepeningrelationships among the array of players—including entrepreneurs, business, innovators,government, and academia—that are vital for successful commercial innovation.91

Recommendations

To support continued U.S.-Israel leadership on innovation and entrepreneurship, werecommend that the Framework:

1. Require bilateral consultations on the “innovation impact” of laws and regulations.The HLED process should specifically include regular consultations, including from the

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Israel-US Business Dialogue on proposed or current policies, laws, or regulations ineither country that could have a significant impact on the bilateral innovation ecosystem.

2. Commit the United States and Israel to increasing resources available to support jointcommercial R&D. This commitment should include efforts to better leverage existinggovernment resources to support U.S.-Israel commercial R&D by, for example, utilizingthe results of the U.S.-Israel Science and Technology Foundation’s “mapping” of U.S.Government R&D programs (and including State and regional resources), andprioritizing and expediting MOUs between U.S. agencies and Israel’s Office of the ChiefScientist under the pending bilateral Science and Technology Agreement. It could alsoinclude increased funding for successful collaborations like the BIRD Foundation.

3. Launch—as previously recommended—an annual U.S.-Israel Entrepreneurship andInnovation Conference. This broadly representative public-private collaboration would beheld in conjunction with the HELD annual meeting and would include representativesfrom national and regional governments, leading foundations, leading businessorganizations, entrepreneurs, investors, SMEs, technical experts, universities and othereducators. The Conference would collaborate on a wide range of ideas [see box] aimedfostering high-impact entrepreneurship and broadening joint commercial innovation92.Together with the HLED Business Conference, it would advise and prepare an annualreport for the HLED on entrepreneurship, innovation, and R&D.

Ideas for Advancing Innovation

Collaborations fostered by the Entrepreneurship and Innovation Conference could include—among manyothers—linking export-ready U.S. SMEs with Israel’s “born global” exporters, assisting Israel indeveloping local technical expertise for its natural gas sector, sharing information on regional governmentand private sector resources for commercial R&D, fostering cooperation between U.S. and Israelibusinesses and technology clusters, aligning joint R&D with global supply chains, and promotingrelationships between innovative U.S. and Israeli universities to pursue technological breakthroughs andpolicy ideas for solving broader economic challenges.93

Leading in the Decades Ahead

Israel and the United States have vast opportunities to trade, innovate and prospertogether. Avi Hasson, Israel’s Chief Scientist, has noted that the two countries are only“scratching the surface” on joint commercial innovation. And, as noted, in the 2014 U.S.-Israel Strategic Partnership Act, the U.S. Congress has set ambitious targets for excitingnew cooperative research on agriculture, cyber, energy, and water resources.94

The United States and Israel are global pacesetters in high-impact commerce, andinnovation because—decades ago—their leaders in business, government, andtechnology were willing to collaborate, take risks, meet new challenges, championinnovation, and pursue pioneering public policies. Maintaining this leadership—and thetwo countries’ special economic relationship—in the coming decades will requirerenewed effort by all and a new round of smart policy innovation. We hope that the

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policy recommendations detailed in this report will help both governments as theywork—together with businesses and innovators—to advance and deepen an extraordinaryeconomic partnership.

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1 United States-Israel Strategic Partnership Act of 2014, Pub. L. No. 113-296:https://www.congress.gov/bill/113th-congress/senate-bill/2673/text.

2 State of Israel, Ministry of Industry, Trade & Labor, Investment Promotion Center, “Invest in Israel: WhereBreakthroughs Happen,” 2012: http://www.investinisrael.gov.il/NR/rdonlyres/D8B76E12-BC96-436A-9CA5-B53D9B8060E1/0/IsraelWhereBreakthroughsHappen.pdf.

3 United States-Israel Free Trade Area Agreement, entered into force Sept. 1, 1985:https://ustr.gov/archive/Trade_Agreements/Bilateral/Israel/Section_Index.html. U.S. Department of Commerce,U.S. Census Bureau, “Trade in Goods with Israel,” May 2015: https://www.census.gov/foreign-trade/balance/c5081.html.

4 BIRD Foundation, “What is BIRD?” http://www.birdf.com/?CategoryID=317&ArticleID=374. U.S.Department of Commerce, International Trade Administration, Office of Textiles and Apparel, “QualifyingIndustrial Zones (QIZ):”http://web.ita.doc.gov/tacgi/fta.nsf/7a9d3143265673ee85257a0700667a6f/196ed79f4f79ac0085257a070066961d

5 U.S. Department of Commerce, U.S. Census, “Trade in Goods with Israel,” May 2015:https://www.census.gov/foreign-trade/balance/c5081.html.

6 U.S. International Trade Commission, Dataweb, “U.S. Domestic Exports (to Israel)” and “U.S. Imports forConsumption (from Israel),” 2014: http://dataweb.usitc.gov/scripts/user_set.asp.

7 U.S. Department of Commerce, Bureau of Economic Analysis, “International Data: Table 2.3, Trade inServices, by Country of Affiliation and by Type of Service (Israel),” 2014:http://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=7&isuri=1&6210=4&6200=172&6211=203.

8 U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Census, “U.S. International Trade inGoods and Services–March 2015,” Exhibit 4a, May 5, 2015: https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf. World Bank, “Data: Population-Total,” 2013:http://data.worldbank.org/indicator/SP.POP.TOTL. World Bank, “Data: GDP (current US$),” 2013:http://data.worldbank.org/indicator/NY.GDP.MKTP.CD.

9 U.S. International Trade Commission, Dataweb, “U.S. Domestic Exports (to Israel)” for HTSUS 8542 and 8803and “U.S. Imports for Consumption (from Israel),” for HTS 30 and 9031, 2014:http://dataweb.usitc.gov/scripts/user_set.asp.

10 Organization for International Investment, “Foreign Direct Investment in the United States – 2014 Report:”http://www.ofii.org/sites/default/files/FDIUS2014.pdf.

11 When the U.S-Israel innovation relationship is benchmarked against America’s relationship with Israel’s peercountries, the Israel relationship is #1 in such key categories as trade in knowledge-intensive industries, cross-listed knowledge-intensive companies, and combined patent applications. U.S.-Israel Science and TechnologyFoundation, “The U.S.-Israel Innovation Index, Data Annex,” pp. 22-23, 26, 34-35, Dec. 2013:http://www.usistf.org/us-israel-innovation-index/.

12 Microsoft, Israel R&D Center, “Building Israel’s Software Crown Jewel,” May 2011. The 2015 BloombergInnovation Index ranked Israel as the world’s fourth-best country for innovation overall, #2 for R&D and #4 foreducation and research personnel. The Index also noted that Israel—a country of only 8 million people—was #11globally in total number of hi-tech companies. Bloomberg, “The Bloomberg Innovation Index – 2015:”http://www.bloomberg.com/graphics/2015-innovative-countries/.

13 OECD, “Data: Research and Development (R&D) - Gross Domestic Spending on R&D:”https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm. OECD, “Data: Research and Development (R&D)– Researchers:” https://data.oecd.org/rd/researchers.htm.

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14 Shanghai Ranking Consultancy, “Academic Ranking of World Universities in Computer Science – 2014:”http://www.shanghairanking.com/SubjectCS2014.html.

15 Microsoft, Israel R&D Center, “Building Israel’s Software Crown Jewel,” May 2011.

16 State of Israel, Ministry of Industry, Trade & Labor, Investment Promotion Center, “Invest in Israel: WhereBreakthroughs Happen,” 2012: http://www.investinisrael.gov.il/NR/rdonlyres/D8B76E12-BC96-436A-9CA5-B53D9B8060E1/0/IsraelWhereBreakthroughsHappen.pdf. David Shamah, “65 Years on, Israel is top choice fortech by multinationals,” The Times of Israel, Apr. 16, 2013: http://www.timesofisrael.com/65-years-on-israel-is-top-choice-for-tech-by-multinationals/.


18 David Shamah, “65 Years on, Israel is top choice for tech by multinationals,” The Times of Israel, Apr. 16,2013: http://www.timesofisrael.com/65-years-on-israel-is-top-choice-for-tech-by-multinationals/. Intel, “IntelIsrael: Innovation as a Leadership Strategy:” http://www.intel.com/cd/corporate/europe/emea/heb/290083.htm.

19 Ariel Rejwan and Yossi Yaacoby, “Israel: Innovations overcoming water scarcity,” OECD Observer, No. 302,Apr. 2015:http://www.oecdobserver.org/news/fullstory.php/aid/4819/Israel:_Innovations_overcoming_water_scarcity.html.Ilana Curiel, “Israel, a water superpower, is helping California fight drought,” YnetNews.com, Jul. 23, 2015:http://www.ynetnews.com/articles/0,7340,L-4683198,00.html.

20 Israeli water technology delegations have, for example, recently met with leading U.S. food companies,including Coca-Cola, Costco, and Leprino Foods, about potential collaboration. Ilana Curiel, “Israel, a watersuperpower, is helping California fight drought,” YnetNews.com, Jul. 23, 2015:http://www.ynetnews.com/articles/0,7340,L-4683198,00.html.

21 Barbara Opall-Rome, “U.S.-Israel to Integrate Cyber Test Beds,” Defense News, Mar. 24, 2015:http://www.defensenews.com/story/defense/policy-budget/cyber/2015/03/24/israel-us-integrate-cyber-security-test-beds/70390764/.

22 A recent cyber tech delegation from Israel, for example, included firms seeking to collaborate on innovativetechnologies to reduce on-line fraud and protect enterprise data. See BIRD Foundation, “Accelerating U.S.-IsraelCyber Security Collaborations, Sept. 8-12, 2014: http://www.birdf.com/?CategoryID=87&ArticleID=93. Seealso Peter Coy, “An Israeli Cyber Warrior Puts a Scare Into CEOs at Davos,” Bloomberg Businessweek, Jan. 22,2015: http://www.bloomberg.com/news/articles/2015-01-22/an-israeli-cyber-warrior-puts-a-scare-into-ceos-at-davos.

23 BIRD Foundation, “BIRD-Israel-U.S. Binational Industrial R&D Foundation to invest $8 million in 10 newprojects,” Jun. 2015: http://www.birdf.com/_Uploads/dbsAttachedFiles/BIRDBOGJune2015.pdf.

24 BIRD Foundation, “2014 BIRD Foundation Annual Report:”http://www.birdf.com/_Uploads/dbsAttachedFiles/BIRDWebAnnualReport14.pdf.

25 Embassy of Israel, Commercial Mission, “The Next 25 Years of Israel-United States Free Trade:”http://www.aiccse.org/wp-content/uploads/2012/06/2011_Israel-US_FTA.pdf. U.S. Department of Commerce,U.S. Census, “Trade in Goods with Israel,” May 2015: https://www.census.gov/foreign-trade/balance/c5081.html.

26 Edward Gresser, “Update Israel Free Trade Agreement,” Democratic Leadership Council, Apr. 2010:http://www.offnews.info/downloads/IsraelFTA.pdf.

27 U.S.-Israel Binational Science Foundation, Website: http://www.bsf.org.il/BSFPublic/Default.aspx.U.S.-Israel Binational Industrial Research and Development Foundation, Website: http://www.birdf.com. U.S.-Israel Binational Agricultural Research and Development Fund, Website: http://www.bard-isus.com.

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28 U.S. Department of Commerce, International Trade Administration, Office of Textiles and Apparel,“Qualifying Industrial Zones (QIZ):”http://web.ita.doc.gov/tacgi/fta.nsf/7a9d3143265673ee85257a0700667a6f/196ed79f4f79ac0085257a070066961d. Embassy of Israel, Commercial Mission, “The Next 25 Years of Israel-United States Free Trade:”http://www.aiccse.org/wp-content/uploads/2012/06/2011_Israel-US_FTA.pdf.

29 U.S. Department of Commerce, U.S. Census, “Trade in Goods with Israel,” May 2015:https://www.census.gov/foreign-trade/balance/c5081.html. U.S. Department of Commerce, Bureau of EconomicAnalysis, “International Data: Table 2.3, Trade in Services, by Country of Affiliation and by Type of Service(Israel),” 2014:http://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=7&isuri=1&6210=4&6200=172&6211=203. Jeremy M. Sharp, “U.S. Foreign Aid to Israel,” Congressional Research Service, Appendix B, Jun. 10,2015: http://fas.org:8080/sgp/crs/mideast/RL33222.pdf.

30 U.S.-Israel Binational Industrial Research and Development Foundation, Website: http://www.birdf.com.

31 U.S. Department of Commerce, International Trade Administration, Office of Textiles and Apparel,“Qualifying Industrial Zones (QIZ):”http://web.ita.doc.gov/tacgi/fta.nsf/7a9d3143265673ee85257a0700667a6f/196ed79f4f79ac0085257a070066961d. QIZ Egypt, Qualifying Industrial Zones, “About QIZ:” http://www.qizegypt.gov.eg/About_QIZ.aspx.

32 U.S. Department of Commerce, International Trade Administration, Office of Textiles and Apparel, “U.S.Imports Under Qualified Industrial Zones (QIZs), by Group, 4/2015 Data:” http://otexa.trade.gov/QIZ/catv0.htm.Tara Donaldson, “Can Sourcing in Egypt Diffuse Political Turmoil in the Middle East,” Sourcing Journal, Sept.18, 2014: https://www.sourcingjournalonline.com/can-sourcing-egypt-diffuse-political-turmoil-middle-east-td/.

33 World Trade Organization, “Regional Trade Agreements: Facts and Figures:”https://www.wto.org/english/tratop_e/region_e/regfac_e.htm.

34 For a detailed summary of the negotiated text of the TPP, see Office of the U.S. Trade Representative,“Summary of the Trans-Pacific Partnership Agreement,” Oct. 2015: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/october/summary-trans-pacific-partnership. The TPP is awaitingratification by its 12 member countries.

35 Office of the U.S. Trade Representative, “Trade Promotion Authority:” https://ustr.gov/trade-topics/trade-promotion-authority.

36 The U.S.-Israel FTA was less than 20 pages and dealt primarily with eliminating tariffs on industrial goods.America’s most recent free trade deal— the 2012 agreement with Korea—spans hundreds of pages and includesdetailed chapters on issues like technical barriers, services, and investment. U.S.-Israel Free Trade Agreement,entered into force Aug. 19, 1985: http://tcc.export.gov/trade_agreements/all_trade_agreements/exp_005439.asp.U.S.-Korea Free Trade Agreement, entered into force Mar. 15, 2015: https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text.

37 Ed Gerwin, “The Digital Opportunity: Democratizing Trade for the 99Percent,” Progressive Policy Institute,May 2015: http://www.progressivepolicy.org/issues/economy/the-digital-opportunity-democratizing-trade-for-the-99-percent/. The rapid growth in regional FTAs also builds on the significant work of the World TradeOrganization. Since its founding in 1995, the WTO has facilitated significant global reductions on tariffs onindustrial and high technology goods, established vital new disciplines on a wide range on non-tariff tradebarriers, and fostered broad-based negotiations, including those on a new Trade in Services Agreement (TiSA).World Trade Organization, “Understanding the WTO:”https://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm.

38 The White House, “Economic Report of the President,” p. 294, Feb. 2015:https://www.whitehouse.gov/sites/default/files/docs/cea_2015_erp_complete.pdf.

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39 China accounted for 12 percent of global exports in 2013, up from only one percent in 1983. World TradeOrganization, “International Trade Statistics 2015:”https://www.wto.org/english/res_e/statis_e/its2014_e/its2014_e.pdf.

40 The White House, “Economic Report of the President,” pp. 294-97, Feb. 2015:https://www.whitehouse.gov/sites/default/files/docs/cea_2015_erp_complete.pdf.

41 The number of worldwide Internet users has surged from only 21,000 in 1985 to almost 2.9 billion today.ETForecasts, “Internet User Forecast by Country, Table 1.1:”http://www.etforecasts.com/products/ES_intusersv2.htm. Andrea Chang and Tracey Lien, “Outages at NYSE,United Airlines, WSJ.com expose digital vulnerabilities,” Los Angeles Times, July 8, 2015:http://www.latimes.com/business/technology/la-fi-tn-technical-problems-united-nyse-20150708-story.html.

42 U.S. Department of the Treasury, “U.S.-China Strategic and Economic Dialogue:”http://www.treasury.gov/initiatives/Pages/china.aspx. U.S. Department of State, “About the TransatlanticEconomic Council:” http://www.state.gov/p/eur/rt/eu/tec/c33255.htm. U.S. Department of Commerce,International Trade Administration, “High Level Economic Dialogue” (Mexico): http://trade.gov/hled/.

43 European Commission, “Fourth meeting of the EU-China High Level Economic and Trade Dialogue (HED) inBrussels,” Memo, Oct. 25, 2013: http://europa.eu/rapid/press-release_MEMO-13-934_en.htm. People’s Republicof China, Ministry of Commerce, “China-Japan High-level Economic Dialogue:”http://english.mofcom.gov.cn/article/zt_cjed/. Ministry of Foreign Affairs of the People’s Republic of China,“The First Meeting of the China-Indonesia High-level Economic Dialogue Held,” Jan. 27, 2015:http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1232140.shtml.

44 U.S. Department of the Treasury, “U.S.-China Strategic and Economic Dialogue:”http://www.treasury.gov/initiatives/Pages/china.aspx. The White House, “U.S.-Mexico High Level EconomicDialogue,” Fact Sheet, Jan. 6, 2015: https://www.whitehouse.gov/the-press-office/2015/01/06/fact-sheet-us-mexico-high-level-economic-dialogue.

45 Asia-Pacific Economic Cooperation, “APEC Business Advisory Council:” http://www.apec.org/Groups/Other-Groups/APEC-Business-Advisory-Council.aspx. The White House, “U.S.-Mexico High Level EconomicDialogue,” Fact Sheet, Jan. 6, 2015: https://www.whitehouse.gov/the-press-office/2015/01/06/fact-sheet-us-mexico-high-level-economic-dialogue.

46 Asia-Pacific Economic Cooperation, “Achievements and Benefits:” http://www.apec.org/About-Us/About-APEC/Achievements%20and%20Benefits.aspx.

47 U.S.-Israel Free Trade Agreement, Art. 17, entered into force Aug. 19, 1985:http://tcc.export.gov/trade_agreements/all_trade_agreements/exp_005439.asp.

48 U.S. Department of the Treasury, “2010 U.S.-Israel Joint Economic Development Group Statement,” Oct. 21,2010: http://www.treasury.gov/press-center/press-releases/Pages/tg917.aspx.

49 U.S. Department of Energy, “Joint Statement on United States-Israel Energy Dialogue,” Oct. 20, 2015:http://www.energy.gov/articles/joint-statement-united-states-israel-energy-dialogue.

50 In recent years, JEDG consultations have included a broader array of issues of interest to business. At the2014 JEDG meeting, for example, U.S. and Israeli officials discussed an expanded list of economic issues,included some 80 experts, and incorporated perspectives from the business community. See U.S. Department ofthe Treasury, “Remarks of Secretary Lew at the U.S.-Israel Joint Economic Development Group Meeting inJerusalem,” Jun. 18, 2014: http://www.treasury.gov/press-center/press-releases/Pages/jl2433.aspx. The October2015 JEDG consultations reportedly included issues like innovation, digital commerce, ICT technology, andsmall business.

51 A coordinated, high-level approach to bilateral concerns on these issues is particularly appropriate becausecyber/digital and energy policy both involve an extensive array of economic policymakers—on issues ranging

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from competition, investment, regulation, and trade—as well as critical defense, security, and geopoliticalconcerns.

52 The United States and Mexico have a similar private sector forum—the U.S.-Mexico CEO Dialogue—toprovide business sector advice and recommendations to the two governments and their HLED. U.S. Chamber ofCommerce, “Fourth U.S.-Mexico CEO Dialogue Advances Economic Relationship,” Jun. 12, 2015:https://www.uschamber.com/press-release/fourth-us-mexico-ceo-dialogue-advances-economic-relationship.

53 The United States and Mexico have a similar, ongoing public-private collaboration. U.S. Department of State,“Mexico-U.S. Entrepreneurship and Innovation Council:”http://www.state.gov/e/eb/cba/entrepreneurship/museic/.

54 See, for example, the U.S.-Korea Free Trade Agreement, entered into force Mar. 15, 2015:https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text. The proposed TPP is even moreexpansive. See Office of the U.S. Trade Representative, “Summary of the Trans-Pacific PartnershipAgreement,” Oct. 2015: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/october/summary-trans-pacific-partnership.

55 New Zealand Ministry of Foreign Affairs and Trade, “Regional Comprehensive Economic Partnership(RCEP):” http://www.mfat.govt.nz/Trade-and-Economic-Relations/2-Trade-Relationships-and-Agreements/RCEP/. RCEP is a regional agreement that encompasses 16 Asia-Pacific countries: the ten membersof ASEAN plus Australia, China, India, Japan, South Korea, and New Zealand.

56 Razeen Sally, “The Red-Tape ‘Spaghetti Bowl’ Hurts Trade,” Wall Street Journal, May 28, 2013:http://www.wsj.com/articles/SB10001424127887324310104578509103306337848?mg=id-wsj.

57 This deficit has averaged almost $9B over the past five years. U.S. International Trade Commission, Dataweb,“U.S. Imports for Consumption (Under Israel FTA),” 2014: http://dataweb.usitc.gov/scripts/user_set.asp.

58 Edward Gresser, “Update Israel Free Trade Agreement,” Democratic Leadership Council, pp. 3-4, Apr. 2010:http://www.offnews.info/downloads/IsraelFTA.pdf.

59 U.S. Department of Commerce, U.S. Census, “Trade in Goods with Israel,” May 2015:https://www.census.gov/foreign-trade/balance/c5081.html.

60 Government of Canada, Foreign Affairs, Trade, and Development Canada, “Canada-Israel Modernized FreeTrade Agreement:” http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/israel/canada-israel.aspx?lang=eng. Ben Blanchard, “China to begin free trade negotiations with Israel in2015,” Haaretz, Dec. 31, 2014: http://www.haaretz.com/business/1.634428. State of Israel, Prime Minister’sOffice, “At the Weekly Cabinet Meeting 18.01.2015”:http://www.pmo.gov.il/English/MediaCenter/SecretaryAnnouncements/Pages/govmes180115.aspx. State ofIsrael, Prime Minister’s Office, “Cabinet Approves Prime Minister Benjamin Netanyahu’s and Foreign MinisterAvigdor Liberman’s Plan to Strengthen Economic Ties with the Pacific Alliance and Latin America,” May 18,2014: http://www.diplomacy.co.il/current-events/2251-cabinet-approves-prime-minister-benjamin-netanyahu-s-and-foreign-minister-avigdor-liberman-s-plan-to-strengthen-economic-ties-with-the-pacific-alliance-and-latin-america.

61 The United States and EU have repeated emphasized that they are not opening up the current TTIP talks toadditional countries; interested countries will have to wait until completion of the TTIP. Countries includingCanada, Mexico, and Turkey, have expressed significant interest in possibly joining a completed TTIP.

62 Israel and Canada recently updated their FTA by adding new disciplines on e-commerce and technical tradebarriers, as well as new commitments to protect intellectual property, expand access for farm products, andfacilitate customs procedures. Government of Canada, Foreign Affairs, Trade, and Development Canada,“Canada-Israel Modernized Free Trade Agreement:” http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/israel/canada-israel.aspx?lang=eng.

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63 Ed Gerwin, “The Digital Opportunity: Democratizing Trade for the 99 Percent,” Progressive Policy Institute,May 2015: http://www.progressivepolicy.org/issues/economy/the-digital-opportunity-democratizing-trade-for-the-99-percent/. U.S. business officials are notably concerned with recent Israeli Government statements that“safe harbor” protections would no longer be available for the transfer of personal data from Israel to the UnitedStates. State of Israel, Ministry of Justice, Israeli Law, Information and Technology Administration, LegalDepartment, “Pursuant to the European Decision It Is No Longer Permissible to Rely on the Safe Harbor as aBasis for Transfers of Personal Data from Israel to the US:”https://iapp.org/media/pdf/resource_center/ILITA_SH_Statement.pdf.

64 See, for example, the detailed technical standards rules in Chapter 9 of the U.S.-Korea FTA. U.S.-Korea FreeTrade Agreement, entered into force Mar. 15, 2015: https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text. See also Edward Gresser, “Update Israel Free Trade Agreement,” DemocraticLeadership Council, Apr. 2010: http://www.offnews.info/downloads/IsraelFTA.pdf.

65 An October 2014 government resolution requires Israel’s Ministry of Economy to bring Israel’s officialstandards in line with international standards. See State of Israel, Prime Minister’s Office, GovernmentResolution No. 2118 of October 22, 2014:http://www.pmo.gov.il/policyplanning/Regulation/Documents/Reducing%20the%20Regulatory%20Burden.pdf.

66 Article 16 of the FTA provides for the joint issuance of a “declaration” outlining bilateral services cooperation.United States-Israel Free Trade Area Agreement, Art. 16, entered into force Sept. 1, 1985:https://ustr.gov/archive/Trade_Agreements/Bilateral/Israel/Section_Index.html. U.S. goals in global servicesnegotiations are set forth in detail in the Bipartisan Congressional Trade Priorities and Accountability Act of2015, Pub. L. No. 114-26: https://www.congress.gov/bill/114th-congress/house-bill/2146/text.

67 Article 18 of the FTA provides that a party negotiating trade pacts with third countries must provide notice tothe other party of proposed trade measures and empowers the other party to request consultation on the proposedmeasures. United States-Israel Free Trade Area Agreement, Art. 18, entered into force Sept. 1, 1985:https://ustr.gov/archive/Trade_Agreements/Bilateral/Israel/Section_Index.html.

68 With respect to the TTIP, principal negotiating objectives of the United States include discouraging tradepartners from prejudicing U.S.-Israel commerce and discouraging politically motivated boycotts or sanctions ofIsrael. Bipartisan Congressional Trade Priorities and Accountability Act of 2015, Sec. 102(b)(20), Pub. L. No.114-26: https://www.congress.gov/bill/114th-congress/house-bill/2146/text.

69 U.S. Commercial Service, “Doing Business in Israel: 2014 Country Commercial Guide for U.S. Companies”Chapt. 5: http://www.export.gov/israel/build/groups/public/@eg_il/documents/webcontent/eg_il_076544.pdf.

70 Extending the QIZ program to Turkey could, for example, expand economic cooperation between Israel andTurkey and help in their ongoing reconciliation process. See Barak Ravid, “In secret meeting, Israel and Turkeyrenew reconciliation talks,” Haaretz, Jun. 22, 2015: http://www.haaretz.com/news/diplomacy-defense/.premium-1.662476.

71 The two economies are also highly complementary—as illustrated by countless tech sector collaborationsbetween world-leading and resource-rich U.S. multinationals and the nimble and risk-taking members of Israel’sStart-Up Nation. See Microsoft, Israel R&D Center, “Building Israel’s Software Crown Jewel,” May 2011.

72 See U.S. Department of State, Bureau of Economic and Business Affairs, “2015 Investment ClimateStatement—Israel,” p.1: http://www.state.gov/e/eb/rls/othr/ics/2015/241604.htm.

73 World Bank Group, “Doing Business: Economy Rankings:” http://www.doingbusiness.org/rankings. WilliamA. Galston, “How Bureaucracy Bogs Down Israel's Economy,” The Wall Street Journal, Jun. 2, 2015:http://www.wsj.com/articles/how-bureaucracy-bogs-down-israels-economy-1433285288.

74 See U.S. Department of State, Bureau of Economic and Business Affairs, “2015 Investment ClimateStatement- Israel,” p.2: http://www.state.gov/e/eb/rls/othr/ics/2015/241604.htm.

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75 Additionally, Israel’s state-owned companies make extensive use of selective tendering rules. U.S. Departmentof State, Bureau of Economic and Business Affairs, “2015 Investment Climate Statement—Israel,” p.2:http://www.state.gov/e/eb/rls/othr/ics/2015/241604.htm. Israel also requires foreign firms to offset governmentcontracts with investments or purchases in Israel. U.S. Trade Representative, “2015 National Trade EstimateReport on Foreign Trade Barriers,” p. 206: https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2015/2015-national-trade-estimate. Israel notes that it is phasing out procurement-related offsetrequirements. Israel’s local content requirements reportedly also pose problems in the energy sector, where thereare few Israeli suppliers.

76 Israel Tax Authority, “Draft Circular on Foreign Companies’ Activity in Israel by Means of the Internet,” Apr.2, 2015.

77 The U.S. Chamber has also urged Israel to undertake any such change in tax policy through a transparentlegislative process—rather than through administrative action as proposed by the ITA—and to avoid tax policiesthat single out the digital economy. Letter to Moshe Asher, Commissioner, Israel Tax Authority from KhushChoksy, Vice President Turkey and Middle East Affairs, U.S. Chamber of Commerce, May 28, 2015.

78 Israel has updated its double taxation treaties with countries including Germany, Panama, the United Kingdom,and Vietnam. State of Israel, Ministry of Finance, “International Agreements—Double Taxation Agreements:”http://www.financeisrael.mof.gov.il/financeisrael/pages/en/EconomicData/InternationalAgreements.aspx.

79 See U.S. International Trade Commission, “Trade Barriers that U.S. Small and Medium-sized EnterprisesPerceive as Affecting Exports to the European Union,” Inv. No. 332-541, USITC Pub. 4455, Mar. 2014:http://www.usitc.gov/publications/332/pub4455.pdf.

80 United States Chamber of Commerce, “Regulatory Coherence & Cooperation in the Transatlantic Trade andInvestment Partnership (TTIP),” Feb. 27, 2015:https://www.uschamber.com/sites/default/files/regulatory_coherence_regulatory_cooperation_-chamber_ttip_paper_-_final_3-02.pdf. Office of the U.S. Trade Representative, “U.S. Objectives, U.S. Benefitsin the Transatlantic Trade and Investment Partnership: A Detailed View,” Mar. 2014: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2014/March/US-Objectives-US-Benefits-In-the-TTIP-a-Detailed-View.

81 A 2011 OECD study noted, for example, that Israel had harmonized 342 standards with the EuropeanCommittee for Standardization (CEN) but only 30 with Underwriters Laboratory (UL) and the American Societyfor Testing and Materials (ATSM). OECD, “Enhancing Market Openness, Intellectual Property Rights, andCompliance Through Regulatory Reform in Israel,” p. 34, 2011: http://www.oecd.org/israel/48262991.pdf.

82 U.S. Commercial Service, “Doing Business in Israel: 2014 Country Commercial Guide for U.S. Companies”Chapt. 5: http://www.export.gov/israel/build/groups/public/@eg_il/documents/webcontent/eg_il_076544.pdf.U.S. Trade Representative, “2015 National Trade Estimate Report on Foreign Trade Barriers,” p. 205:https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2015/2015-national-trade-estimate.

83 A 2014 Government Resolution requires, among other things, that Ministries develop five-year plans to reduceregulatory burdens and publish annual notices of expected regulatory actions, and that regulators conductregulatory impact assessments with broad stakeholder dialogues. State of Israel, Prime Minister’s Office,Government Resolution No. 2118 of October 22, 2014:http://www.pmo.gov.il/policyplanning/Regulation/Documents/Reducing%20the%20Regulatory%20Burden.pdf.

84 “United States-Mexico High-Level Regulatory Cooperation Council: Work Plan,” Feb. 28, 2012:https://www.whitehouse.gov/sites/default/files/omb/oira/irc/united-states-mexico-high-level-regulatory-cooperation-council-work-plan.pdf. U.S. Department of Commerce, International Trade Administration, “U.S.–Canada Regulatory Cooperation Council:” http://www.trade.gov/rcc/.

85 The Framework would also recommend that the governments encourage and co-sponsor forums to educateregulators and businesses on U.S-oriented international standards. See, for example, the workshops and seminarssponsored by the National Institute of Standards and Technology under its Standards in Trade program. U.S.

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Department of Commerce, National Institute of Standards and Technology, “Global Standards Information—Standards in Trade Program:” http://gsi.nist.gov/global/index.cfm/L1-4/L2-14.

86 U.S. Department of Commerce, National Institute of Standards and Technology, “Global StandardsInformation—U.S. Israel MRA,” Revised Jun. 5, 2015: http://gsi.nist.gov/global/index.cfm/L1-4/L2-16/L3-265.

87 Johns Hopkins University, Sheridan Libraries, “Bioethics—Hippocratic Oath:”http://guides.library.jhu.edu/c.php?g=202502&p=1335752.

88 The OECD has noted, for example, the importance of expanding innovation beyond hi-tech to Israel’s broaderindustrial and services sectors. Ilan Moss, “Start-up nation: An innovation story,” OECD Observer, No. 285,2011: http://www.oecd.org/cfe/leed/50540391.pdf.

89 Experts note that government’s most helpful role is in “setting the table” for innovation—assuring that laws donot penalize entrepreneurs and innovators, keeping taxes low, and devoting significant resources to R&D. SeeAntonio Regalado, “In Innovation Quest, Regions Seek Critical Mass,” MIT Technology Review, Jul. 1, 2013:http://www.technologyreview.com/news/516501/in-innovation-quest-regions-seek-critical-mass/.

90 Antonio Regalado, “In Innovation Quest, Regions Seek Critical Mass,” MIT Technology Review, Jul. 1, 2013:http://www.technologyreview.com/news/516501/in-innovation-quest-regions-seek-critical-mass/.

91 Avi Hasson, Israel’s Chief Scientist notes that deepening collaboration on innovation is especially important asthe broader economy—in sectors including autos and healthcare—converges around digital technology. The2014 Strategic Partnership Act also stresses the importance of deepening U.S.-Israel cooperation in fieldsincluding cyber, energy, homeland security, and water resources. United States-Israel Strategic Partnership Actof 2014, Pub. L. No. 113-296: https://www.congress.gov/bill/113th-congress/senate-bill/2673/text.

92 See U.S. Department of State, “Mexico-U.S. Entrepreneurship and Innovation Council:”http://www.state.gov/e/eb/cba/entrepreneurship/museic/.

93 See OECD, “Entrepreneurship, SMEs and Local Development: Clean-Tech Clustering as an Engine for LocalDevelopment: the Negev Region, Israel,” 2012: http://www.oecd.org/cfe/leed/50540391.pdf.


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