Saudis Offer Deal on Israel Boycott : Mideast: Kingdom supports end to ban on firms doing business with Jewish state if it will stop building settlements in occupied areas. Baker expresses delight.

In a change of policy aimed at increasing the pressure on Israel to come to a Middle East peace conference, Saudi Arabia agreed Saturday to end its economic boycott of Israel if Israel stops building its settlements in the occupied territories.

The Saudi action was announced here Saturday night after a meeting between Secretary of State James A. Baker III and King Fahd. In a written statement, the Saudi government said it supports a proposal for an end to the Arab boycott in exchange for a halt to Israeli settlements that was made Friday by Egyptian President Hosni Mubarak.

King Fahd’s move is of far greater significance than that of Mubarak because Egypt, the only Arab nation having a peace treaty with Israel, does not take part in the Arab boycott of trade with Israel and of companies that do business with Israel. Saudi Arabia, on the other hand, is probably the most important backer of the boycott, now four decades old.

Baker, clearly pleased to have obtained the Saudis’ public commitment on the eve of his planned visit to Israel today, told reporters that the action “indicates, I think, a willingness (by Saudi Arabia) to take concrete steps toward Israel if Israel is willing to reciprocate. . . . (It) would signal, for me, a (Saudi) willingness to reconcile with Israel.”

Even before Baker sat down with King Fahd, however, Israeli Defense Minister Moshe Arens had rejected Mubarak’s call for a halt to settlements in the West Bank and the Gaza Strip in exchange for an end to the boycott, according to news reports from Jerusalem.

In an interview broadcast Saturday, Arens said: “A country cannot give up, even temporarily, on its fundamental rights. The right of Jews to settle in the land of Israel is the basis for the foundation of the state . . . and the Zionist movement.”

Yet Arens also hinted that Israel could show more flexibility in its position on the Middle East peace process, the Associated Press reported.

“The impression has been created here as if there is a shift in the Syrian position from its previous one,” Arens said. “In light of this shift, there is also room to change positions we have taken.”

Syria announced last week its acceptance of an American plan for a Middle East peace conference, and that acceptance launched Baker on his fifth journey in quest of a solution to the Arab-Israeli conflict since the end of the Persian Gulf War. Baker will visit Israel today in an effort to overcome resistance by Prime Minister Yitzhak Shamir’s government to taking part in a conference.

President Bush, at a news conference in Ankara, Turkey, continued to express optimism about Baker’s mission.

“I believe in my heart of hearts that when (the Middle East plan) is explained in Israel, that all countries will see that it is in their interests to come forward and talk peace,” he said.

“I’m very happy that certain countries now see the merits in these ideas, and I hope that all of them will,” he added.

Earlier Saturday, before leaving Egypt for Saudi Arabia, Baker met in Cairo with Lebanese Foreign Minister Faris Bouez, who announced that his country, following Syria’s lead, has agreed to the American proposal for a Middle East peace conference.

“Lebanon is supporting the American propositions based on (the U.N. resolutions requiring Israel to return occupied land and enter into peace talks),” Bouez said.

He added that a separate U.N. resolution requiring Israel to return land it occupied in southern Lebanon would not be up for negotiation at a peace conference. This separate U.N. resolution “just needs to be executed without preconditions,” Bouez said.

If Saudi Arabia were to end its participation in the boycott against Israel, it would mean that companies from around the world which do business in the Saudi kingdom would also, for the first time, be able to trade with Israel without fear of losing their Saudi contracts and clients. That change could be of considerable economic benefit to Israel.

Baker had suggested the idea of an end to the Arab boycott in exchange for a halt in Israeli settlements during his four earlier trips to the region this spring. He argued that such so-called “confidence-building measures” would help bring about a peace settlement.

But until now, the Saudis were unwilling to embrace the idea. It appeared that Saturday’s announcement was made in order to increase the momentum toward a peace conference.

“The timing is right . . . ,” a senior Saudi government official said of the decision to make the announcement now.

“There was no disagreement (by the government of Saudi Arabia) from the beginning,” said the Saudi official, who briefed American reporters on condition that he not be identified. “The problem was who should do what first.”

Baker said he thought the two reciprocal moves--a halt in Israeli settlements and an end to the Arab boycott--”should, if possible, be simultaneous.”

The senior Saudi official said his government would probably go along with that suggestion and thus would not require Israel to act first by stopping the settlements before it decides whether to end the boycott.

He said his government believes the requirement for an end to Israeli settlements applies to all occupied territories, including not only the West Bank and the Gaza Strip, but also East Jerusalem.

“These settlements are one of the major factors that are hurting the Palestinian people,” the senior Saudi official said. “If we can stop them, that will help the peace process.”

Baker noted that the United States has long opposed both the Arab boycott and the building of new Israeli settlements. He said the reciprocal actions he is seeking “have got to improve the climate for peace.”

A senior U.S. official, who briefed reporters traveling with Baker on condition that he not be identified, said the Saudi announcement is “an indicator of change.”

“Yes, it is conditioned,” the U.S. official conceded of the Saudi offer to end the Arab boycott. However, he went on, the condition Saudi Arabia is seeking--an end to the Israeli settlements--stops short of a challenge to Israel’s right to exist.

“The boycott symbolizes . . . the rejection of Israel, the isolation of Israel in this region,” the U.S. official said.

The U.S. official said he believes the Saudis made their announcement now because of “a sense that the (peace) process is coming closer to fruition. . . . It would be illogical to assume that the Syrian move (the acceptance of the American proposal for a peace conference) hasn’t had some effect. . . .”

Baker said he has not yet heard officially from Israeli leaders about their reaction to the Egyptian and Saudi overtures for an end to the boycott. He is scheduled to meet in Israel today with Prime Minister Shamir, Defense Minister Arens and Foreign Minister David Levy.

There were some hints Saturday that the secretary of state may offer to come back to the Middle East within a few days to talk to the Israeli officials once again.

Baker was originally scheduled to travel on Monday from Israel to Malaysia and from there back to Washington. But the Bush Administration announced Saturday that he will remain overseas until after President Bush’s summit meeting with Soviet President Mikhail S. Gorbachev in Moscow July 30 and 31.

Times staff writer James Gerstenzang contributed to this report from Ankara, Turkey.

BACKGROUND

The Arab world’s 40-year effort to strangle the Israeli economy through a boycott of companies that trade with the Jewish state has met with only limited success. In 1976, the United States passed a law banning compliance with the boycott by American firms at the risk of heavy fines. While the ban has cost American firms millions, perhaps billions, in Arab business, Japanese firms are reported to be the most compliant with the boycott. For Israel, lifting of the boycott would be more of a symbolic gain, signifying a lessening of Arab hostility, than an economic boon. The Jewish state has managed to chip away at the boycott over the years and made adjustments to compensate for the lost trade.