International Business : BRIEFING BOOK : A Boom in Israel Might Well Be Felt All the Way to California

ISSUE: With the recent breakthrough in relations between Israel and the Palestine Liberation Organization, Israel’s next major battle will be on the economic front-- perhaps even with old Middle Eastern enemies as allies.

California businesses, historical suppliers of Israel’s defense system, are well positioned to take advantage of a new era of peaceful economic development.

BACKGROUND: California companies have sold aircraft to Israel since its founding, and especially since 1967, when the Southland aerospace industry moved to fill a gap created by a French embargo. Most of California’s export trade to Israel is military or military-related equipment, part of the $1.8 billion in annual U.S. military aid to Israel.

The remaining $500 million in exports is mostly transportation equipment and industrial, commercial and electronic machinery.

Israel signed a free-trade agreement with the United States in 1985, and the last barriers will be eliminated in 1995. Meanwhile, Israel’s free-trade agreement with the European Community took effect in 1989, which means that an American subsidiary based in Israel can trade freely with Europe.

Israel itself has developed rapidly into an industrial mini-power, with manufactured goods accounting for more than 90% of its commodity exports, and more than 2% of gross national product devoted to research and development.

Israel’s defense needs have historically commanded a large portion of its developmental resources. The nation has also lost an estimated $1 billion in annual investment because of the Arab boycott. The movement toward peace should relieve these pressures, providing hope of an even brighter economic future for Israel and the territories.

OUTLOOK: Israeli officials compare the small country to a mini-Silicon Valley (although California’s industry dwarfs Israel’s). High-tech companies in the United States apparently think likewise.

For instance, Santa Clara, Calif.-based Intel employs 400 people in its Jerusalem subsidiary, where the 486 microchip was developed. According to Israeli sources, the company plans to invest another $1 billion in the unit.

The government of California is also interested in creating investment opportunities in Israel. Israeli Foreign Minister Shimon Peres and Gov. Pete Wilson were scheduled last week to announce the establishment of a California trade representative’s office in Tel Aviv. However, the announcement was postponed because of the signing of the Israeli-PLO peace initiative.

The trade office will specifically target trade in agricultural technology, biotechnology and other medical technologies, tourism and telecommunications.

Israeli may also be ripe for trade in energy fields.

Jerusalem’s Electric Fuel Ltd. has created a zinc-air battery system that may be useful in an industry increasingly important in California: electric vehicles.

The battery is being considered for adoption by Deutsche Bundespost, the national German postal system, which hopes to convert 30,000 gasoline vehicles to electricity.

California businesses may also find more opportunities to develop joint ventures with Israel in the agricultural section.

Sun World Inc., a California-based grower of fruits and vegetables, is now generating about $30 million annually from a sweet red pepper called La Rouge Royale, developed by two Israeli companies and now grown in the Coachella Valley.

STRATEGY: Any sustained Israeli-Palestinian peace depends on maintaining a strong economy in the West Bank, an area without a technological infrastructure. (Only 80 of 400 villages have telephone service.)

Even at this early stage, the development of the Palestinian areas will resemble that of the planned communities in which California builders have specialized for decades.

Israel’s most logical markets for trade are its neighbors in the Middle East. If progress in establishing peace opens these markets closed to Israel for all of its history, Israeli companies will be eager for American capital to help them export to and import from those markets.

Israeli businessmen are beginning to dream of purchasing oil from Saudi Arabia rather than Venezuela, of sending avocados and cheese in trucks to Amman rather than in jets to Europe.

Says Israeli Consul for Economic Affairs Gerry Stoch: “I believe that to talk to people’s stomachs is the fastest way to develop peaceful relations. When your good food is on their table, it’s very hard for them to go on hating you.”