China Desk Update | March 2016
China Israel Free Trade Agreement – Are We Ready For It?
Israeli Prime Minister Benjamin Netanyahu and Chinese Vice Premier Liu Yandong announced yesterday that the two countries are committed to begin a free trade agreement negotiations.
As early as July 2013, Naftali Bennet, the Minister of Economy at the time, announced during his official visit to China that the two countries are making progress in the negotiations towards a free trade agreement. After Bennett’s visit the countries conducted a joint feasibility study on an FTA between China and Israel. There were also reports last year that an FTA was discussed by Chinese Ambassador Zhan Yongxin and the Israeli Ministry of Economy last year.
Is it possible that this time the two countries will reach a fruitful result? While it is, as always, difficult to tell, there are some positive indications that the discussions are gaining traction and that a China-Israel FTA may be on the horizon. At the beginning of this month, the Chinese Prime Minister announced that the negotiations towards establishing a free trade zone with Israel and the GCC (Gulf Cooperation Council) will continue. Although it is a known fact that the negotiations tend to take a long time and therefore are not a promise to the formation of an actual agreement, such as the GCC negotiations that have already began during 2004, it appears that during the past year the promotion of free trade agreements was accelerated and implemented by MOFCOM, China’s Ministry of Commerce. During 2015 China signed an FTA with South Korea, after two years of negotiations, and with Australia, after 10 years of negotiations. In addition, MOFCOM promoted substantial progress on the RCEP negotiations which would create the largest free trade zone in Asia, covering almost half the world’s population and nearly 30 percent of the world’s trade.
A free trade agreement breaks down trade barriers between nations and eases restrictions on exporting and importing goods and services such as tariffs, taxes and import quotas. As a result, goods and services flow more easily within the free trade zone.
A China-Israel FTA would promote trade between the countries in goods and services by resolving issues such as: implementation of regulations and the removal of existing trade barriers for imports and exports, in addition to bilateral economic and technological cooperation. The agreement is expected to potentially double bilateral trade to $16 billion, increase investment and increase the GDP in both countries.
Is such free flow necessarily a positive thing? It can create efficiency in pricing goods and services and, at first sight, it may seem that cheaper goods and services are good for consumers. But China has a strong production capacity and a great low cost advantage which Israeli companies cannot reach. A great increase in the entrance of Chinese giants to the Israeli market may lead to greater dependence on Chinese companies and create a reality where local businesses are unable to compete and therefore, cannot survive.
However, as recent years already show, there is great synergy between China’s growing demand for the types of products and services that Israel excels at. The Chinese market is in constant search of quality and Israel has a good reputation for providing high value added products worldwide and specifically among Chinese consumers. Israeli companies can answer the demand for high-end products and services that Chinese consumers and are so eagerly seeking.
China’s population is growing older and even though the one child policy was amended, it will take time for the change to take effect. China is in great demand for products and devices which will improve the quality of life for China’s growing population of senior citizens. A China-Israel FTA will help many Israeli healthcare technology companies access a market estimated to include 500 million new potential customers.
With a population of just over 8 million people, the Israeli market is small and is heavily dependent on exports for future growth. Lifting barriers on exports to China opens up a huge potential market to the Israeli companies and may create an incentive for them to produce and export more. This in turn will cause a growing demand to working hands and create more jobs in the local market.
An FTA agreement can be mutually beneficial to both countries. It can enhance the framework conditions of economic exchange and cooperation and strengthen the bilateral trade and economic relationship between the two countries as well as the overall export capacity and competitiveness of both economies. However, ultimately, whether the benefits of the agreement will overcome its risks, will depend on the specific terms of the agreement that will be concluded after, what is expected to be, a very long negotiation process.
David Hodak heads the Tel Aviv law firm Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. and the firm’s Asia Practice.
Eli Barasch heads the firm’s China Desk. His practice has focused primarily on China-Israel cross border transactions since 2004.
Adi Weitzhandler, Adv., an associate at the firm’s China Desk, has extensive experience in the Chinese market. She is conversationally fluent in Chinese and studied at the Beijing Language and Culture University, Beijing, China.