The US’s Misplaced Tariffs on Israel  

The news on Wednesday that Israel was included in the list of countries targeted by the US for the President’s tariff attack shocked most people here.

As is well known, there is a long standing, 40-year-old, free trade agreement between the US and Israel which covers 98% of the goods that pass between the two countries. Most of the remaining 2% is made up of agricultural products and, in a good will gesture, Israel cancelled all remaining tariffs on imports from the US a day before the Rose Garden ceremony this week where the new tariffs were announced.

It would appear, therefore, that the 33% tariff that the President claims Israel levies on US imports is a gross exaggeration. Perhaps there is a product or two where this applies but certainly not to the 98% of US products that enter Israel from the US every day duty-free.

The Times of Israel reported that an unnamed administration official in Washington remarked that the 17% tariff on Israel was because the US believes that Israel steals a lot of intellectual property from America. My guess is that this person was referring to some old news on this subject. Yes, the US Office of the Trade Representative did add Israel to its Priority Watch List on this subject in 2008.

At the time the US claimed that Israel lacked sufficient protection against internet privacy and that there were also some issues related to the terms of pharmaceutical patent protection as well. However, these issues were successfully addressed through bilateral discussion and Israel was removed from the list four years later, in 2012. Today the list contains just 7 countries (i.e. Argentina, Chile, China, India, Indonesia, Russia and Venezuela). It is 13 years since Israel appeared on the list although it is interesting that Russia was one of the countries omitted from the new tariff schedule.

One might ask where did the 17% figure come from? My guess is that this number reflects Israel’s Value Added Tax (VAT) which is levied on every product and service we buy here regardless of its origin, domestic or imported. Of course, that has nothing to do with imports per se. While VAT is now 18% in Israel it was 17% for many years until the 1^st of this year. The people in Washington feeding the White House information didn’t do their homework very well if they thought our VAT was still 17%.

As for the source of the confusion, it has been widely reported that the US President sees VAT, which is common in most countries in the world although not in the United States, as equivalent to a tariff and has complained about it often in that vein.

On March 31^st CNBC reported: “President Donald Trump is planning to unveil reciprocal tariffs on Wednesday to retaliate against trade practices his administration deems unfair or discriminatory. Among the grievances is the ‘value-added tax,’ or VAT, which Trump called “far more punitive” than tariffs in a Feb. 15 post on Truth Social.

Many economists, however, disagree with that characterization. ‘It would be complete nonsense’ to levy a tariff on US trading partners in response to a value added tax, said Erica York, an economist and vice president of federal tax policy at the Tax Foundation.  ‘A value-added tax does not distort trade,’ York said. ‘It’s not a protectionist measure, so it makes no sense to retaliate against a VAT.’ The White House didn’t respond to a request from CNBC for comment.

The bottom line seems to be that a lot of mistaken information about the trade relationship between Israel and the US, which is clearly governed by an existing FTA has been the cause of this error on the part of the White House. Israel is neither on the US Trade Representative’s Priority Watch List nor is its VAT policy a restraint of trade.

Given the relative enormity of the misinformation, one wonders how many other countries might be affected by the same shoddy administrative research. My guess is that there will be a lot of correction made to these tariff decisions in the weeks ahead.