The EU and the State of Israel Reached an Agreement on the Treatment of Products Exported

The Dispute over the Treatment of Products Exported to the European Union from the Golan Heights, East Jerusalem, the West Bank and the Gaza Strip - The Limits of Power and the Limits of the Law Guy Harpaz*

I. Introduction

On the 5th of August, 2004 the European Union (EU) and the State of Israel reached a technical solution designed to bring an end to their long-lasting dispute over the legal treatment of products exported to the EU from the Golan Heights, East Jerusalem, the

West Bank and the Gaza Strip, which are under the control of the State of Israel (The

Territories).

The purpose of this article is to describe the dispute between the European Union and

Israel over the legal treatment of products exported from the Territories to the EU (the

Dispute), to place it in its wider context, that of European Union-Israel relations, and to appraise the solution to the dispute and its implications for the State of Israel and other countries dealing with economic superpowers.

The article is structured along the following lines: Chapter One, "Introduction", describes its own purposes, Chapter Two, "European Union-Israel Relations", depicts the evolution of the economic, legal and political relations between the parties, Chapter Three, "The dispute over the Legal Treatment of Goods Exported from the

Territories", introduces the reader to the dispute, Chapter Four, "The Solution of the

Dispute", maps out the basic parameters of the solution to the dispute, while Chapter

Five, "The Solution Reached - The Limits of Power and the Limits of the Law", concludes that the dispute manifests the limits of (Israeli) power and the limits of

(regional and international) trade law in our global, interdependent world.

II. European Union-Israel Relations

For obvious reasons, the relations of Israel and its citizens with Europe were always complex and charged.1 Yet, Israel and the then European Economic Community established diplomatic relations as early as in 1959, in 1975 they concluded their first free trade area agreement,2 and in 1994 the EU announced in Essen, Germany its willingness to establish special relations with Israel.3 Indeed, in the course of time,

1 For analysis, see Ephraim Ahiram and Alfred Tovias (eds.), Whither EU-Israeli Relations? Common and Divergent Interests (P. Lang: Frankfurt am Main, 1995); Moshe Hirsch, Eyal Inbar and Tal Sadeh, The Future Relations between Israel and the European Communities - Some Alternatives (Bursi: Tel Aviv, 1996); Ilan Greilsammer and Joseph H.H. Weiler (eds.), Europe and Israel: Troubled Neighbours (W. de Gruyter: Berlin, 1998).

2 For background, see Michael Rom, In the Path of Israel's International Commercial Policy: GSP and the European Common Market (Ramot: Tel Aviv, 1998) [Hebrew]; Avi Primor, "Israel and the EC", in Alfredo M. Rabello (ed.), European Legal Traditions and Israel: Essays on Legal History, Civil Law and Codification, European Law (Harry and Michael Sacher Institute for Legislative Research and Comparative Law: Jerusalem, 1994), 9; Chava Shachor-Landau, "Israel and the EC on the Eve of the Maastricht Agreement", in Alfredo M. Rabello, ibid., at 445; Daphna Kapeliuk (1993), A Legal Analysis of the Free Trade Agreement of 1975 between the European Community and the State of Israel, 27 Israel Law Review, 415; Talia Einhorn (1995), The Role of the Israeli Courts in Promoting Free Trade - A Critical Study in View of the EC-Israel FTA, 12 Bar-Ilan Law Studies, 165 [Hebrew]; Inon Dafni (2000), Israel and the European Union - The Current Picture and Expectations for the Future, 27(107) Israel Tax Quarterly, 49 [Hebrew].

3 See Commission of the European Union. "Extracts of the Conclusion of the Presidency of the Essen European Council, 9- 10 December, 1994", Bulletin of the European Union, Supplement 2/95: "The European Council considers that Israel, on account of its high level of economic development, should enjoy special status in its relations with the European Union, on the basis of reciprocity and common interest…".

2 Israel succeeded in partially overcoming these difficulties, insofar as economic relations were concerned.

Regionally, current relations between the parties are governed by the Barcelona

Process, launched in 1995 in order to regulate and advance the economic, political and social relations between the EC and its Member States, on the one hand, and the twelve non-EC Mediterranean countries of that time (including at that time Cyprus and Malta), on the other hand.4

Bilaterally, relations are governed by the 1995 Association Agreement between the

EC and its Member States, on the one hand, and the State of Israel, on the other hand

(The Association Agreement).5 Under the Association Agreement, each party granted the other preferential economic, commercial, technological and research status. The core of the Association Agreement is the creation of a free trade area for industrial goods. Goods can thus be exported from the State of Israel to the EU and vice versa, exempt from custom duties and, in principle, free from quantitative

4 For the Barcelona Process and its implications for Israel, see Commission of the European Communities: Barcelona Declaration adopted at the Euro-Mediterranean Conference, November 27-28, 1995, Barcelona, November 28, 1995, final version. For comment, see Nellie Munin, The EU and Israel: State of the Play (Ministry of Finance: Jerusalem, 2004), 151- 161 [Hebrew].

5 Euro-Mediterranean Agreement establishing an association between the European Communities and their Member States, on the one part, and the State of Israel, of the other part, Official Journal L 147, June 21, 2000, p. 0003-0171. For analysis, see especially, Munin, ibid., at 145-226; Arie Reich (1997), The Juridicization of International Trade Relations, 17 Northwestern Journal of International Law and Business, 775; Eyal Inbar (1999), Improving Israel-EU Relations: the European Economic Area as a Possible Model, 5(1) Israel Affairs, 109; Tal Sadeh (1999), The European Union and Israel: The Customs Union Alternative, 5(1) Israel Affairs, 87; Alfred Tovias (2003), Mapping Israel's Policy Options regarding its Future Institutionalized Relations with the EU, CEPS (Centre for European Policy Studies); Moshe Hirsch (1996), The 1995 Trade Agreement between the European Communities and Israel: Three Unsolved Issues, 1(1) European Foreign Affairs Review, 87; Inon Dafni (2001), The Association Agreement between Israel and the European Union, 29(114) Israel Tax Quarterly, 7 [Hebrew]; Boaz Hirsch (2001), The Institutional Framework in Israeli-European Union Relations and its Contribution to the Trade Relations, 29(114) Israel Tax Quarterly, 11 (2001) [Hebrew].

3 restrictions. Liberalization of trade in agricultural goods, of services and of movement of capital is also regulated under the Association Agreement. The European Union is in fact the chief trading partner of Israel.6

The Association Agreement must not, however, be perceived merely as an economic instrument. It also sets out the basis for, inter alia, cultural, research and political cooperation between the parties.7 For example, the Association Agreement refers to the mutual objective of promoting peace, security and regional cooperation, and to the need to advance stability, prosperity, understanding and tolerance in the

Mediterranean.

The establishment of close ties with the EU was indeed considered one of Israel's greatest diplomatic achievements.8 Yet, the potential of the Essen Declaration, like the

Association Agreement itself, has not been fully realized.9 The same applies to the

6 For Israeli official statistics, see http://www.mof.gov.il/museum/hebrew/wider_europe.pdf.

7 See Commission Staff Working Paper, European Neighbourhood Policy, Country Report, Israel, [COM(2004)373 final], Brussels, 12.5.2004, SEC(2004) 568: The State of Israel participated in the 4th and 5th Framework Programme for Research and Technological Development. In June 2003 the agreement under which Israel joined the 6th Framework Programme was signed. Israel and the Commission initialed in March 2004 the agreement on Galileo, Europe’s satellite radio navigation programme.

8 Sasson Sofer (2004), Towards Distant Frontiers: The Course of Israeli Diplomacy, 10(1-2) Israel Affairs 1, 7.

9 For a thought-provoking analysis of Israel's failure to realize the economic potential in its relations with the EU, see Einhorn, supra note Error: Reference source not found.

4 Barcelona Process.10 Even worse, the strategic-political relationship since the Six Day

War (1967) has largely been characterized by mutual suspicion and tension.11

III. The Dispute over the Legal Treatment of Goods Exported from the

Territories

Since 1998, the two parties have been in direct conflict over the legal treatment of products exported to the EU from the Territories which have been under Israel's control following the Six Days War (1967).

Israel argues that due to its de facto control of the Territories, these products are produced in Israel's customs territory, that they are therefore to be subjected to the

Association Agreement, and hence are entitled to preferential treatment in accordance with its provisions.

The EU, on the other hand, propounded that de jure the Territories do not belong to the State of Israel, that Israel's occupation of the Territories is illegal under public international law, and that products exported from them to the EU should not therefore benefit from the preferential treatment under the Association Agreement.12

10 See Country Report, Israel, supra note Error: Reference source not found, at 5: Due to its relatively high level of economic development, Israel does not benefit from bilateral financial support under MEDA. However, it is eligible for MEDA funds earmarked for regional co-operation. While initially Israel participated in a number of projects, following the outbreak of the second Intifada it has become increasingly difficult for the country to find partners in the Mediterranean area. Yet Israel participates in Euro-Med Youth (promoting people-to-people contacts and co-operation between actors of civil society and NGOs in the youth field), in the Euro-Med audiovisual and Euro-Med heritage programmes. Regarding higher education, Israel is eligible for participation in the Community programmes Erasmus and Tempus.

11 See Rosemary Hollis (1994), The Politics of Israeli-European Economic Relations, 1(1) Israel Affairs, 118; Emmanuel Navon (2003), EU and Israel: An Historical Perspective (1973-1993), in Guy Harpaz (ed.), 10 Newsletter of the Israeli Association for the Study of European Integration, 15; Bianca Kühnel (ed.), Troubled Waters: Europe and its Relations with the United States and Israel (The Institute for European Studies: Jerusalem, 2003).

12 For the trade implications of that dispute, see Moshe Hirsh (2003), Rules of Origin as Foreign Policy Instruments?, 26

5 The Association Agreement does not provide a territorial definition of the State of

Israel and hence neglects to provide a direct, legal resolution of the dispute.13

After futile diplomatic and technocratic negotiations, the EC Commission published an Avis in 2001, declaring that products exported from the Territories are not entitled to preferential treatment under the Association Agreement and are therefore to be subjected, retroactively, to tariff liability.14

Israel was infuriated with the European Union stance, claiming that it constitutes an illegitimate use of its economic might in order to influence a regional political dispute. The EU stance was perceived in Jerusalem and in broad circles of Israeli society as an illegitimate interference in the dispute over Israel's final borders, a dispute that should, accordingly, be settled directly by the Israelis and Palestinians under the aegis of the Israeli-Palestinian peace process.

In support of her view, Israel referenced the stance taken by the United States, which does not, in principle, recognize Israel's occupation of the Territories, but still admits, under her 1985 Free Trade Agreement with Israel, custom-free goods exported from the Territories. Israel also argued that the main victims of the EU stance are actually

Palestinian workers employed in Israel's factories in the Territories.15 Yet Israel, like

Fordham International Law Journal, 572; Christian Hauswaldt (2003), Problems under the EC-Israel Association Agreement: The Export of Goods Produced in the West Bank and the Gaza Strip under the EC-Israel Association Agreement, 14(3) European Journal of International Law, 591; Tal Sadeh (2002), Israel and a Euro-Mediterranean Internal Market - A Survey of Existing Barriers to Trade and Possible Remedies, in Peter Xuereb (ed.), Euro- Mediterranean Integration - The Mediterranean's European Challenge (Malta: European Documentation and Research Centre, 2002), 189ff.

13 See Article 83 of the Association Agreement.

14 Official Journal of the European Communities, 2001/C 328/04, 23 November, 2003.

15 See the words of Ehud Olmert, Minister of Trade and Industry and Deputy Prime Minister, in an address before the

6 the EU, attempted to ascribe a technical character to their dispute, defining it as a difference of opinion over rules of origin.

Prima facie, the dispute is not particularly significant for the State of Israel. Israel's industrial base in the Territories is limited in scope. Industrial exports from the

Territories to the EU are estimated at merely €100 million per annum (customs liability for such exports is estimated at merely €7 million per annum), a small fraction of Israel's overall exports to the European Union (over €6 billion per annum).

Yet the dispute clouded economic as well as political relations between the two parties, adversely affecting Israel's ability to realize the significant trade potential of the Association Agreement. The dispute furthermore created tariff uncertainty in relation to the whole corpus of Israel's exports to the EU, raising fears that those exports would either be banned or subjected to tariff liability. The dispute, furthermore, led for calls for the suspension of the Association Agreement and for private embargoes imposed on Israeli products. It also constituted a stumbling block to the possibility of Israel's enjoyment of pan-European cumulation of rules of origin, perceived as beneficial to Israel's textile industry.

Moreover, the dispute contributed to the prejudices, ignorance and mutual mistrust that are growing between the parties.16 It is indeed difficult for a body such as the EU

Annual Meeting of the Israeli Association for the Study of European Integration, Hebrew University, 15 April, 2004.

16 See Ambassador Giancarlo Chevallard, The European Union's Relations to Israel, in Kühnel, supra note Error: Reference source not found, 13, at 14. For further analysis, see A. Timm, Germany – USA – Israel: Current Attitudes and the Historical Legacy, in Kühnel, ibid., at 77.

7 to accept Israel's national stance.17 After all, Europe is in the midst of dismantling internal national borders while Israel is in the process of establishing them.18

IV. The Solution of the Dispute

On the 5th of August, 2004, the parties reached a technical agreement to the dispute.

This agreement is subject to the approval of the EC Commission which is unlikely to withhold it.

Under that solution, Israel would specify in the certificate of origin that she issues for goods exported to the EU, the geographic location of their production (e.g., Israel,

Barkan [Barkan is in the West bank – G.H.]). She will not, however, specify, as such, whether the goods originated from the Territories or not.

17 See Hedva Ben-Israel, Summing Up, in Kühnel, supra note Error: Reference source not found, at 93. Ben-Israel links some of Europe's negative attitudes towards Israel with Europe's perception of nationalism, see ibid., at 102-104: "Interested parties have presented Israel's defensive policies as actually being an extreme expression of nationalism, militarism, and chauvinism – all these facts together have created a climate of opinion in which it is often said that Israel embodies the concept of nationalism, epitomises particularism, xenophobia and hatred of the others, at the time when the rest of the world is shaking off all remnants of nationalism, becoming global' living in friendship and peace with neighbours, eliminating national territorial borders and forgetting old rivalries…The Jews, in conclusion, have always had a close if uneasy relationship with nationalism. Ancient Israel is regarded as the cradle of nationalism. Subsequently, for 2000 years Jewish national identity became disembodied and theologised. After their emancipation in the nineteen century, when some Jews tried to integrate into the nations among which they lived, it was nationalism in the exclusive kind which caused their rejection. When they despaired of integration and assimilation and chose to describe themselves as cosmopolitan, universalist, citizens of the world, harbingers of world brotherhood, they drew fire to themselves as rootless as disloyal, as seditious wanderers who change identities as others change clothes. When they chose to be a real nation striving for self-government, it was doubted, if they were fit for it. When they succeeded in this last project and now try to defend it, they are decried, by supposedly post-nationalist Europeans, as cultivating an outdated principle of nationalism which the rest of the world has shaken off...".

18 But see Amnon Rubenstein (2004), A Shared Vision, 16 Azure, 47.

8 The solution to the dispute allows the State of Israel to meet the demands of the EU, while not having to admit, in an official document (i.e. certificate of origin), that goods exported from the Territories are not Israeli products and hence, by implication that the Territories are not part of Israel. In fact, it allows Israel, by stating for example, "Israel-Barkan", to continue to maintain at least a customs link between the

Territories and herself.

From the EU perspective, the solution to the dispute may allow the EU to instruct the twenty five national customs authorities of its Member States, on the basis of the geographic location specified in the certificate of origin, to provide preferential treatment to goods exported from Israel proper (defined by the territorial borders on the eve of the Six Days War (6.6.1967)), but to impose tariffs on goods exported from the Territories. Put differently, the solution allows the EU to give de facto meaning to its non-recognition of the Territories as part of the State of Israel.

The solution reached is expected to improve EU-Israel trade, as well as economic and political relations. Such an improvement may manifest itself in the framework of the

European Neighbourhood Policy via-à-vis Israel.19 It may also pave the way for an agreement over Israel's enjoyment of pan-European cumulation of rules of origin. As such it should be welcomed in Israel.

19 For an earlier comment, see Guy Harpaz (2004), Enhanced Relations between the European Union and the State of Israel under the European Neighbourhood Policy: some Legal and Economic Implications, Legal Issues of Economic Integration (forthcoming); Guy Harpaz and Rachel Frid (2004), The Wider Europe Initiative, 9(1) International Trade Law and Regulation, N-6-7; See also Nellie Munin (2003), Wider Europe Neighbourhood – A New Model for EU-Israel Relations?, 31(122) Israel Tax Quarterly, 29 [Hebrew]; Guy Harpaz, An Opportunity for Wonderful Relations, Haaretz, October 12, 2003, p. B-2 [Hebrew].

9 Some questions still remain open: Considering that the solution reached advances

Israel's overall interests, why did it take so long to conclude? Will the solution be applied in good faith? Will it raise practical disputes at the level of European Union borders? Will Israel grant exporters from the Territories a WTO-compatible compensation for the tariff liability to be imposed upon them as a result of the solution?

It is also noteworthy that the solution created a rift within the Israeli administration.

Israel's deputy Prime Minister and Minister of Trade and Industry Ehud Olmert contended that the solution has no political implications, but that it is a technical solution that would benefit all of Israel's exporters. The Minister of Foreign Affairs,

Silvan Shalom, argued on the other hand, that the solution has wider political implications, amounting in fact to an indirect acceptance by Israel of the political stance of the European Union over the status of the Territories.

V. The Solution Reached - The Limits of Power and the Limits of the Law

The solution manifests Israel's recognition of the ever-increasing importance of the

European Union, both economically and politically, and the resultant limits on her own powers in our global, interdependent world.

Israel decided, as of the early 1970s, to place its strategic trust almost exclusively in

Washington. This can be attributed to the strong Jewish American lobby, U.S. military and financial might and the United States' willingness to employ it for Israel's benefit, as compared with Europe's lack of coherent foreign and security policy and

10 military capabilities. Moreover, Europe was perceived by many Israelis as biased against Israel. Furthermore, the European integration programme was at first perceived as a modest economic plan and the EEC (and later the EC/EU) was treated as neither a payer nor a player.

Armed with the United States' military and financial backing, coupled with a demonstrated willingness to use American veto power in the Security Council in matters relating to Israel, Israel felt that it could pursue independent political policies vis-à-vis the EU.

However, over the course of the years it became clear, both in Israel and elsewhere, that in the EC/EU there was developing a unique, fascinating and successful attempt on the part of numerous nations with a long history of armed conflicts and diverse cultural, linguistic, legal and economic traditions, to be integrated under a separate and superior legal order. The latter formed, in turn, the basis of advanced economic, political and social integration.20

20 See Joseph H.H. Weiler, The Constitution of Europe: “Do The New Clothes Have an Emperor?” and other Essays on European Integration, 273 (Cambridge University Press: New-York, 1999), at 10. The EC is an avant garde international organisation introducing a new model for trans-national discourse. For a general survey of EC law, see Stephen Weatherill and Paul Beaumont, EU Law (3rd ed., Penguin Books: London, 1999). For in-depth analysis, see Federico G. Mancini (1989), The Making of a Constitution for Europe, 26 Common Market Law Review, 595; Joseph H.H. Weiler (1991), The Transformation of Europe, 100 Yale Law Journal, 2403; Federico G. Mancini and David T. Keeling (1994), Democracy and the European Court of Justice, 57(2) Modern Law Review, 175; Anthony Arnull, The European Union and its Court of Justice (Oxford University Press: Oxford: 1999); Philip Allott (2002), European Government and the Re-branding of Democracy, 27 European Law Review, 60. For the EC and political science theory, see Markus Jachtenfuchs (2001), The Governance Approach to European Integration, 39(2) Journal of Common Market Studies, 245. For the EC and international relations theory, see Mark A. Pollack (2001), International Relations Theory and European Integration, 39(5) Journal of Common Market Studies, 829.

11 The EU has indeed deepened its fields of activity, while continuously tempering the sovereignty of its Member States. Today the EU maintains a pan-European policy in various economic areas, a common currency, and a common catalogue of human rights.21 Its heart has been and remains its Internal Market. In that market, with its population of over 450 million, the free movement of goods, services, capital and people is, in principle, secured.

Moreover, the European integration campaign has been going through a continuous constitutionalization process, whereby the Community's legal order has transformed from a set of legal arrangements binding upon sovereign states into a vertically integrated legal regime conferring judicially enforceable rights and obligations on all legal persons and entities.22

Parallel to these developments, the EU has followed the path of enlargement. The six founding nations (Germany, France, Italy, the Netherlands, Belgium and Luxembourg

- 1951/1957) were joined by Britain, Ireland and Denmark (1973), Greece (1981),

Spain and Portugal (1986), Austria, Finland and Sweden (1995), and Cyprus, Malta,

Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia, Latvia, and

Lithuania (1 May, 2004). Romania, Bulgaria and probably Turkey and the Western

Balkan countries are also likely to join the Union.23

21 See Tal Sadeh (2004), Some Trade Effects of the EMU Process on Israel, 10(1-2) Israel Affairs, 156.

22 Ulrich Haltern (2003), Pathos and Patina: The Failure and Promise of Constitutionalism in the European Imagination, 9 European Law Journal, 14, at 15.

23 For the impact of enlargement on Israel, see Alfred Tovias (2003), Israeli Policy Perspective, 8 Mediterranean Politics, 213, 221; Alfred Tovias and Inon Dafni "From 15 to 21: The Impact of the Next EU Enlargement on Mediterranean non- Member Countries", Femise paper, [http://www.femise.org/PDF/Tovias_A_0301.pdf] (last visited – March 22, 2004) (2001); Nellie Munin (2003), Wider Europe Neighbourhood – A New Model for EU-Israel Relations?, 31(122) Israel Tax Quarterly, 29, at 33ff.; Alfred Tovias (2004), "Exploring the "Pros" and "Cons" of Switzerland's and Norway's Model for Relations with the EU: What Can be Learned from these Countries' Experience by Israel", in an address before the Israeli

12 Israel has gradually understood that to due the EU's ever-increasing size, economic and political weight and importance, a dichotomy between her collaborative policies towards the United States and non-cooperative, inconsiderate policies towards Europe no longer can be maintained.

It is indeed nowadays very difficult for a small country to thrive in economic terms without joining a regional economic block. This applies a fortiori to Israel, due to its small economy and population, scarce resources and unique geo-political landscape.

The possibility that Israel "shall dwell alone and shall not be reckoned among the nations" does not represent a viable option. Israel needs regional economic backing and understands that the EU in general and the Association Agreement and the

European Neighbourhood Policy in particular may in fact partially satisfy that need.

The European Neighbourhood Policy may increase Israel's dependence on the EU.

Under it, the EU intends to develop closer and more coherent economic, political and social relations between the EU, its twenty five Member States, those countries whose future accession to the Union has been agreed and others whose potential for entry has not yet been determined, on the one hand, and all of the Union's other neighbours, including the State of Israel, that currently have no prospect of membership in the EU, on the other hand.24

The European Neighbourhood Policy is indeed very ambitious. In return for proving concrete progress, demonstrating shared values and effective implementation of

Association for the Study of European Integration, 15 January, 2004.

24 These include Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Morocco, Palestinian Authority, Syria, Tunisia, Ukraine, Moldova, Belarus and Russia. The Initiative does not apply to the EU's relations with the remaining candidate countries (Turkey, Romania and Bulgaria), or to the countries of the Western Balkans. Later the Council decided to include Armenia, Azerbaijan and Georgia in the ENP: see Council of the European Union, 2590th Council Meeting, General Affairs and External Relations – General Affairs, Luxembourg, 14 June, 2004, 10189/04 (Press 195), Provisional Version, Press Release, 12.

13 political, economic and institutional reforms on the part of the EU's neighbours, including aligning their legislation with the EC's acquis communautaire, the

Commission promises its close neighbours a significant measure of economic and political integration,25 enhanced political stability, security, sustainable economic development, and the reduction of poverty and social divisions. The beneficiaries of the European Neighbourhood Policy are offered everything but institutions, i.e., they have the possibility of adopting, in principle, the entire substantive regime of the EU, to the exclusion of full membership and of resultant participation in the institutional framework of the EU.

Put differently, the European Neighbourhood Policy may be seen as an offer made by

Brussels to Jerusalem of full or partial integration into the European Internal Market.

Under it, the State of Israel may enjoy greater accessibility to what is gradually becoming the largest economic market in the world, thereby establishing herself as a genuine European state in economic terms.

The European Neighbourhood Policy stipulates, however, that the EU is willing to open its economic gates to Israel in return for Israel's adoption of large parts of the

EU's economic, financial and trade laws, thereby limiting Israel's economic independence. Moreover, reaping the benefits of the European Neighbourhood Policy will require Israel to share the EU's basic values and principles (e.g., democracy, good governance, rule of law, as well as the protection of human rights).26

25 Ibid.

26 For a theoretical analysis of the attempts of the West to "export" Western values, see Marcello Pera, Israel, Europe and Islam, in Kühnel, supra note Error: Reference source not found, at 53.

14 A clear quid pro quo is thus being created. Demonstrated progress in the political front on the part of Israel is an essential precondition for her to be able to reap the economic benefits of the European Neighbourhood Policy.27 As a matter of fact, the

EU intends to use the European Neighbourhood Policy as a social engineering instrument, one that promotes democracy, good governance, rule of law, as well as civil, political, economic, social and cultural human rights in the Middle East. The EU also hopes that the European Neighbourhood Policy will reinforce its involvement in the Middle East peace process.28 In that respect the European Neighbourhood Policy should be seen not merely as an economic instrument but rather as an assertion by the

EU of its intention to promote the aforesaid values and objectives as part of its overall strategic approach in external relations, in general, and in the Middle East, in particular.29

Israel is gradually coming to terms with these developments. In that respect her willingness to adopt an EU-sponsored solution relating to the legal treatment of goods

27 See Speech 04/141, Commissioner G. Verheugen, Prime Ministerial Conference of the Vilnius and Visegrad Democracies: "Towards a Wider Europe: The New Agenda", Bratislava, 19 March, 2004: The closer we move together in our political dialogue, the more we shall be able to do in economic areas as well.

28 See Dr. Yossi Beilin, former Israeli Minister of Justice in Israel and Wider Europe, Conference held in the Herzlia Interdisciplinary Center, 17 February, 2004. Beilin was of the opinion that enlargement of the EU renders it more and more difficult for the EU to contribute to peace in the Middle East. The European Neighbourhood Policy remains one of the chief means by which the EU can contribute to that process. See also Ambassador Ron Curiel Deputy Director-General of the Israeli Ministry of Foreign Affairs, in charge of European Affairs, in the said Conference. For the EU's difficulties in maintaining a balanced approach, see Rory Miller (2004), The PLO Factor in the Euro-Israeli Relations, 1964-1992, 10(1-2) Israel Affairs, 123, at 147ff. As to the ability of the EU to contribute to peace settlements, see, by analogy, Katerin Yennari (2003), Building Bridges in Cyprus - The Role of the European Union in the Reconstruction of the Two Communities, 15/2 The Cyprus Review, 81.

29 See the Commission's Communication of 8 May, 2001 on the European Union's Role in Promoting Human Rights and Democratisation in Third Countries – Com(2001) 252 final; The Commission's Communications to prepare the 4th and 5th euro-Mediterranean Conferences of Ministers in Marseilles (November 2000 – 6/09/00, Com(2000) 497) and Valencia (April 2002 – Sec(2002) 159 final; The EU Policy towards Third Countries on the Death Penalty, General Affairs Council, Luxembourg, 29 June, 1998; Guidelines to EU Policy towards Third Countries on Torture and other Cruel, Inhuman or Degrading Treatment or Punishment, General Affairs Council, Luxembourg, 9 April 2001; EU Guidelines on Human Rights Dialogues, Council of the EU, 13 December, 2001.

15 exported from the Territories manifests her growing recognition of the aforesaid dynamic regional reality and her willingness to accept that the gradual increase of powers by the EU, and Israel's resultant growing dependence on the EU, would require Israel to be more attuned to Brussels political demands.

Not all elements in Israeli society are willing, however, to accept that changing reality. The solution may reinforce deep-seated, widespread, negative sentiments about the EU that are prevalent in Israel, especially in nationalistic circles.30

Another lesson to be learned from the dispute and its settlement pertains to the limits of international and regional law. Israel could have, in principle, brought the dispute before the dispute settlement mechanism provided under the Association Agreement.

Israel was actually backed by some legal opinions holding that the EU approach to the dispute was incompatible with WTO law as well as with the provisions of the

Association Agreement.

Thus, prima facie, the option of bringing the dispute before an international dispute settlement mechanism was a viable one. The dispute settlement mechanism under the

Association Agreement is much more juridical and effective than that provided under the previous 1975 free trade agreement between the parties.31

The improvement in the dispute settlement mechanism must be seen in its wider context, namely the move from power-based diplomacy to rule-based diplomacy, as

30 For example, Ron Nachman, Mayor of the city of Ariel in the West Bank was quick to link in a radio interview with Reshet B (6 August, 2004) the EU stance with the practice of discriminating against Jews in the Holocaust.

31 See Article 75 of the Association Agreement, as analyzed by Reich, supra note Error: Reference source not found, at 401-403.

16 Jackson coins it,32 and the gradual juridification of international and regional trade law, as Reich terms it.33

For a small country like Israel, the move from power-based diplomacy to rule-based diplomacy and the juridification of international and regional trade law are to be welcomed. Such developments could have provided Israel with an objective, legal immunity from strong, subjective, economic and political pressures exerted on her by the EU.

Israel nevertheless has refrained from activating the dispute settlement procedure. She has feared international legal intervention on the issue of her borders. She was also reluctant to use adversarial legal tools that could further adversely affect her economic and political relations with the EU. Instead she adopted an EU-led solution to the dispute. The dispute was thus settled in accordance with the respective, unbalanced economic and political powers of the parties, as opposed to the rule of (international and regional trade) law. Power-based diplomacy is thus still alive and kicking.

Hence the solution reached over the long-lasting dispute over the legal treatment of products exported to the EU from the Golan Heights, East Jerusalem, the West Bank, and the Gaza Strip, which are under the control of the State of Israel, vividly manifests the limits of (Israeli) power and the limits of (regional and international) trade law in our global, interdependent world. These conclusions are not only relevant to the State of Israel, but to any small country having to face, in trade contexts, an economic and/or political superpower.

32 See the introductory parts of John. J. Jackson, The World Trading System, Law and Policy of International Economic Relations (MIT: Cambridge, Massachusetts, 1997).

33 Reich, supra note Error: Reference source not found.

17 *Ph.D. (Cantab.). Lecturer, Law Faculty and Department of International Relations, Hebrew University, Jerusalem. For an earlier, shorter comment, see Guy Harpaz and Rachel Frid, An Agreement Reached over the Treatment of Products Exported to the European Union from the Golan Heights, East Jerusalem, the West Bank and the Gaza Strip, International Trade Law and Regulation (forthcoming). I would like to express my gratitude for the generous support of the EC under the aegis of the Jean Monnet Action.