Recent Developments

• Prudent risk management in Israel's banking sector has saved the country from faltering in the current financial turmoil. Liquidity is relatively abundant and it was reported that some Israeli banks have received more inflows of capital as they are perceived to be robust.
• With a small population and limited geographical area, the government encourages Israeli companies to develop high-tech industries for the international market to achieve economic growth. Information and communication technology (ICT), homeland security, aircraft, electronics, and environmental technologies are areas which Israel excels.
• Israel is Hong Kong's second largest export market in the Middle East after the UAE. In 2008, Hong Kong's total exports to Israel increased by 15.5% year-on-year (YoY), following an increase of 13% for 2006.
  

Current Economic Situation

Israel's economic growth in recent years has been impressive, averaging above 4% with inflation remaining at manageable levels, at 2.1% in 2007 and an expected 4.8% in 2008, despite rapid rises in commodity prices in early 2008.

Particularly noteworthy is the drop in unemployment. The figure has fallen from 9% in 2005 to 7.3% in 2007, and declined further to an expected 6% in 2008. The Israeli government has engaged in programmes to encourage employment, and with these measures proving successful, private consumption is expected to grow further.

GDP per capita is estimated to have risen by 25.5% from 2006 to 2008, after allowing for a 4.4% increase in population over this period. Combined with a low to moderate inflation rate from 2006 to 2008, Israelis' real disposable income has risen considerably.

Prudent risk management in Israel's banking sector has saved the country from faltering in the current financial turmoil. Liquidity is relatively abundant, and it was reported that some Israeli banks have received more inflows of capital as they are perceived to be robust. Overall, Israel has so far seen limited effects from the international financial troubles, although a weaker external environment is likely to dent Israel's economic growth in the coming year.

Israel is considered one of the most advanced countries in the Middle East in economic and industrial development. In the past two decades, the Israeli economy has changed radically from agricultural and low-tech industries to a high-tech powerhouse. In 2008, exports of high-tech products¹ amounted to US$17,170 million, or 28% of Israel's exports.

Intel and Microsoft built their research and development centres in Israel and other high-tech corporations such as IBM, Cisco Systems and Motorola have opened facilities in the country as well. Israel is a global leader in water conservation and geo-thermal energy, and its development of cutting-edge technologies in software, communications and life science have evoked comparisons with the US's Silicon Valley.

The diamond industry is another important part of Israel's economy. The country has one of the world's largest diamond exchanges in volume terms, situated in Ramat Gan, at the border of Tel Aviv. Diamonds, precious stones and semi-precious stones are also the largest trade between Israel and Hong Kong. In 2008, Israel exported US$19,886 million-worth of diamonds and other precious and semi-precious stones, which accounted for 33% of its total exports.

Agriculture, once important in the State of Israel's earlier days, has declined in its share of GDP to about 1.7% as of 2008.

Trade Policy

Most goods can be freely imported, though licences are required for defence-related items. When applying for an import licence, the importer must either be a resident of Israel, a corporation registered in Israel, or a non-profit organisation registered in Israel.

Israel's import tariffs are classified under the Harmonised System codes (HS). Ad valorem duties are imposed on imports transaction value (declared by importers). On top of custom duties, a value-added tax (VAT) of 15.5% is applied to almost all imported and domestically produced goods and services. For imports, VAT is levied based on the CIF value plus custom duties.

Israel maintains strict regulations on product labelling and country of origin marking. All imports into Israel must bear a label showing the country of origin, the name and address of the manufacturer, the name and address of the Israeli importer and the contents, weight and volume in metric units. All labels must be in Hebrew. English language may be added and the printed letters are not larger than those in Hebrew.

Under the US-Israel Free Trade Area Implementation Act (IFTA ACT), products from Qualifying Industrial Zones (QIZs), which encompass border areas between Israel and Jordan and areas between Israel and Egypt, where no less than 35% of the contents are QIZs-produced (including a minimum of 8-10.5% Israeli inputs), are eligible to receive duty-free treatment when entering the US.

As a WTO member, Israel has moved to replace non-tariff barriers with import duties. In early 1996, Israel removed administrative barriers on imports of processed food to meet WTO rules. Since September 2000, the most-favoured-nation (MFN) duty rates for imports have been set at the range of 0%-12%.

In pursuit of higher export growth, the Israeli government has been active in negotiating FTAs internationally. Israel has signed FTAs with a number of countries and regional bodies, including: the US, the European Free Trade Association (EFTA), Jordan (Agreement on Trade and Economic Cooperation, which includes significant tariff reductions in bilateral trade), Turkey, Canada, Mexico, Romania, Bulgaria, and the European Union (EU, both parties signed an Association Agreement which includes tariff-free treatment for industrial goods and most agricultural products). More recently, Israel has signed an FTA with Mercosur countries. The Israeli government is also pursuing an FTA with India.

Hong Kong's Trade with Israel ^

Israel is Hong Kong's second largest export market in the Middle East after the UAE. In 2008, Hong Kong's total exports to Israel increased by 15.5% year-on-year (YoY) to US$1,719 million, following an increase of 13% to US$1,488 million for 2007.

Major export items included pearls, precious and semi-precious stones (US$1,202 million, or 69% of the total), telecommunication equipment and parts (US$64 million, 3.8%) and electrical apparatus for electrical circuits (US$42 million, 2.4%).

On the other hand, Hong Kong's imports from Israel increased by 12% to US$2,058 million in 2008, after rising by 5% to US$1,837 million in 2007. Major import items included pearls, precious and semi-precious stones (US$1,729 million, 84%), electrical machinery and apparatus (US$80 million, 3.9%), and semi-conductors, electronic valves and tubes, etc (US$47 million, 2.3%).

There are some 80 Israeli companies in various sectors, according to the Consulate General of Israel in Hong Kong as of October 2008. Over half are in the diamond business. The rest are engaged in industries including telecom, high-tech, transportation, finance and cosmetics.

According to the Census & Statistics Department of Hong Kong, as at 1 June 2008, there were 8 Israeli companies with regional headquarters in Hong Kong, while another 11 had regional offices in the territory.

There are an estimated 500 Israelis in Hong Kong as of end-December 2008.

¹ According to the Central Bureau of Statistics of Israel, high-tech products include: office and computing equipment, electronic components, aircraft, electronic communication equipment, equipment for control and supervision, and pharmaceutical products.