Germany Is Now 2nd Only to U.S. in Israel Trade : Relations: Fifty years after the Holocaust, German goods have lost much of their stigma to many Israelis.

Fifty years after the end of World War II--and the Holocaust--Germany has evolved from being a pariah to Jews to become the second-largest industrial-goods trading partner of Israel, the Jewish state.

Israeli companies in 1994 sold $846 million worth of goods to Germany, from Teva Pharmaceuticals Ltd.’s generic drugs to ECI Telecommunications Ltd.’s equipment to phosphates mined from the Dead Sea by Israel Chemicals Ltd.

In return, Israelis imported $2.5 billion worth of cars, machines and chemicals from Daimler-Benz AG, Siemens AG and other German companies. Only the U.S. was a bigger trading partner.

For many in Israel, the benefits of buying German goods and courting German investment outweighs the shadow of the Holocaust. Others, however, have a lingering sense of unease about the Israel’s relationship with the modern German industrial giant.

This discomfort, and the magnitude of the changes in Israel-German relations, was underscored by a recent agreement that would have been unthinkable not long ago: Electric Fuel Ltd., an Israeli electric battery manufacturer, said in late June it will help German defense contractor STN Atlas Elektronik GmbH develop a torpedo for the German navy.

“Maybe it’s a fine line,” said Binyamin Koretz, director of strategic planning at Electric Fuel, “but not that many Jews were killed by torpedoes. The torpedo was associated with the war--but not with the Nazi extermination.”

German companies are relative newcomers to Israel--Daimler was the first to open an office, in 1992, after company officials met with Israeli Prime Minister Yitzhak Rabin--but are welcomed by Israeli officials.

“Relations aren’t normal,” said Avi Primor, the Israeli ambassador to Germany, “but I think Israelis want Germans to invest here. There is a relaxation toward the past. “

Matthias Kleinert, senior vice president at Daimler-Benz, said the German car maker “was convinced business can support the [Arab-Israeli] peace process, and has a responsibility, not only for profit, but for peace.”

German electronics firm Siemens AG followed, opening a one-person office in Tel Aviv in late November, 1994, to seek joint ventures with Israeli companies and possible production of X-ray technology.

No large German firm had ever made a significant investment in Israel until Volkswagen AG, Europe’s largest auto maker, agreed last month to invest $231 million in a magnesium plant.

Others are following.

Daimler, for example, which has annual sales of $285.7 million in Israel, has invested $3.5 million in a venture capital fund to develop Israeli high-technology industry. This includes research at Hebrew University in Jerusalem and the Weizmann Institute in Rehovot.

German companies decided to enter Israel largely because the Arab boycott has crumbled since the start of Arab-Israeli peace talks in the fall of 1991.

The boycott forbids companies that want to do business in Arab countries from investing in Israel, buying Israeli products or even working with companies that work with Israel.

“In the past, German industrialists weren’t interested in Israel,” said Primor, who accompanied Chancellor Helmut Kohl on his first visit to Israel in more than a decade in early June. “It wasn’t easy to work here. We were like a small island because of the Arab boycott and political instability.”

Peace has made Israel a more “comfortable” place to invest, the ambassador added, “and the Germans are much less afraid of the Arabs.”

In addition to courting German investment, Israelis are more open to buying German products, said Dani Singerman, a foreign-trade expert at the Israel Manufacturer’s Assn.

German products, particularly automobiles and electronics, once were widely boycotted in Israel, where German manufacturers were regarded as having benefited from the deaths of 6 million Jews in Nazi concentration camps during the war.

German products also were, for the hundreds of thousands of Holocaust survivors who had resettled in Israel, grim reminders of that history.

Germany and Israel did not have diplomatic relations until 1965, 17 years after Israel was founded. When the first German ambassador arrived in Tel Aviv, demonstrators stoned him.

In 1952, Germany agreed to pay $1 billion in reparations to Israel for losses suffered by Jews during the Holocaust. Germany also has paid some $66 billion directly to individual victims of the Nazis since the 1950s.

As Holocaust survivors shrink as a percentage of Israel’s population, so does the anti-German sentiment.

“As the last generation leaves this world and a new one comes along, the influence of the past is lessening,” Singerman said. “As more people buy German products, it becomes more socially acceptable.”

One government trade official went even further.

“It’s impossible to relate to Germany as anything but part of the European Union,” said Amnon Shai, director of the Ministry of Industry and Trade’s European department. “It’s business. Nobody’s doing us any favors because of the past--the connection isn’t there.”

Some Israelis will never forget.

Shmuel Vilozhny, a comedian and son of a Holocaust survivor, summed it up like this: “One side of my family insists that you can’t buy from those Nazis. On the other hand, they argue, German quality is so good!”

Vilozhny then holds up his arm and rubs it furiously in the spot where concentration camp survivors were tattooed by their Nazi tormentors. “Look,” he says, demonstrating the quality of German workmanship, “it doesn’t come off!”