Order Code RL33476
CRS Report for Congress
Received through the CRS Web
Israel: Background and Relations
with the United States
Updated November 14, 2006
Carol Migdalovitz
Specialist in Middle Eastern Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Israel: Background and Relations with the United States
Summary
On May 14, 1948, the State of Israel declared its independence and was
immediately engaged in a war with all of its neighbors. Armed conflict has marked
every decade of Israel’s existence. Despite its unstable regional environment, Israel
has developed a vibrant parliamentary democracy, albeit with relatively fragile
governments. The Kadima Party placed first in the March 28, 2006, Knesset
(parliament) election; Prime Minister Ehud Olmert formed a four-party coalition
government that has been enlarged to include one more. Israel has an advanced
industrial, market economy in which the government plays a substantial role.
Israel’s foreign policy is focused largely on its region, Europe, and the United
States. The government views Iran as an existential threat due to its nuclear
ambitions and support for anti-Israel terrorists. Israel concluded a peace treaty with
Egypt in 1979 and with Jordan in 1994 but never achieved accords with Syria and
Lebanon. It negotiated a series of agreements with the Palestinians in the 1990s, but
the Oslo peace process ended in 2000, with the intifadah or uprising against Israeli
occupation. Israeli and Palestinian officials have accepted but have not implemented
the “Roadmap,” the international framework for achieving a two-state solution to
their conflict. Israel unilaterally disengaged from Gaza in summer 2005 and is
constructing a security barrier in the West Bank to separate from the Palestinians.
The victory of the Hamas terrorist group in the January 2006 Palestinian
parliamentary elections has complicated Israeli-Palestinian relations. On June 25, the
Hamas military wing kidnaped an Israeli soldier, provoking an Israeli military
offensive to force his release. Israel unilaterally withdrew from southern Lebanon
in 2000, but Hezbollah occupied the area and continued to fire rockets from it into
northern Israel. Hezbollah sparked a war when it kidnaped two Israel soldiers on
July 12; a cease-fire took effect on August 14. European countries collectively are
Israel’s second largest trading partner, and the EU participates in the peace process.
Since 1948, the United States and Israel have developed a close friendship based
on common democratic values, religious affinities, and security interests. U.S.-Israeli
bilateral relations are multidimensional. The United States is the principal proponent
of the Arab-Israeli peace process, but U.S. and Israeli views have differed on various
issues, such as the fate of the Golan Heights, Jerusalem, and Israeli settlements. The
United States and Israel concluded a free-trade agreement in 1985, and the United
States is Israel’s largest trading partner. Israel has historically been the largest
recipient of U.S. foreign aid. The two countries also have close security relations.
Other issues in U.S.-Israeli relations include Israel’s military sales to China,
inadequate Israeli protection of U.S. intellectual property, and espionage-related
cases. This report replaces CRS Issue Brief IB82008, Israel: Background and
Relations with the United States, and will be updated as developments warrant. See
also CRS Report RL33530, Israeli-Arab Negotiations: Background, Conflicts, and
U.S. Policy, CRS Report RL33566, Lebanon: The Israel-Hamas-Hezbollah Conflict,
and CRS Report RL33222, U.S. Foreign Aid to Israel.

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Contents
Most Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Historical Overview of Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Government and Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Recent Political Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Current Government and Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Foreign Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Palestinian Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Jordan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Syria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Relations with the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Peace Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Trade and Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Security Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Military Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Espionage-Related Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Intellectual Property Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
U.S. Interest Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. Map of Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
List of Tables
Table 1. Parties in the Knesset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

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Israel: Background and Relations
with the United States
Most Recent Developments
Israel engaged in a two-front war against U.S.-designated terrorist groups in
response to the June 25 kidnaping of an Israeli soldier by Hamas and others near
Gaza and the July 12 abduction of two Israeli soldiers from northern Israel by
Hezbollah.1 The Israeli public and parliament supported the war in Lebanon as a
legitimate response to an attack on sovereign Israeli territory and a long overdue
reaction to Hezbollah rocket attacks on northern Israel. During the war, however, the
Israeli public and press increasingly questioned its prosecution. Charges levied
against the government and military leadership include hesitant decision-making;
poor intelligence concerning Hezbollah locations, arms, tactics, and capabilities;
deficient training and equipment for mobilized reservists; tactics unsuitable for
terrain and enemy; excessive reliance on air power; ill-prepared home front defense;
and inadequate presentation of the Israeli view to international audiences.
Israelis have been debating the war since it was concluded. Critics note that the
kidnaped soldiers are still in captivity and that Hezbollah retains its arms and has
been strengthened politically. The government claims success in forcing Hezbollah
from the border and in degrading its arms, particularly in destroying its long-range
rockets, and in pressuring the Lebanese government, aided by international forces,
to assert itself in south Lebanon. Israeli officials took Hezbollah leader Shaykh
Hassan Nasrallah’s admission that he would not have authorized the July 12 action
if he had known how strongly Israel would react as confirmation that the group had
been weakened and that Israel’s deterrence had been strengthened.2
Nonetheless, public opinion polls indicate little support for the government and
its main coalition partners, Prime Minister Ehud Olmert’s Kadima Party and
Defense Minister Amir Peretz’s Labor Party.3 Meanwhile, support for the rightist
1 For extensive coverage of these developments, see CRS Report RL33530, Israeli-Arab
Negotiations: Background, Conflicts, and U.S. Policy, by Carol Migdalovitz and CRS
Report RL33566, Lebanon: the Israel-Hamas-Hezbollah Conflict, coordinated by Jeremy
M. Sharp.
2 Nasrallah’s August 27, 2006 interview with Lebanon television, cited by Joshua Mitnick,
“Hezbollah Says Its War with Israel Was a Mistake,” Washington Times, August 28, 2006,
among others.
3 See for example, Israeli Poll Shows Likud Leading With 29 Seats; Qadima Down to 16
From 29, Ma’ariv, November 10, 2006, Open Source Center Document GMP20061110
746009.

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CRS-2
Likud and Yisrael Beiteinu parties and their leaders, Benjamin Netanyahu and
Avigdor Lieberman, has increased. However, elections are not imminent because
Members of the Knesset are unlikely to vote no confidence in the government
because many are likely to lose their seats in an early vote.
The incumbents have no plans to resign. Olmert is not challenged as leader of
his Kadima Party. Peretz’s hold on Labor’s helm may be more insecure as his
internecine foes include prominent personalities and appear to be increasing. They
include former Ben Gurion University President Avishay Braverman and former Shin
Bet (Israeli counterintelligence and internal security service) head Ami Ayalon, who
were high on the Labor list in the last election but failed to get cabinet posts. The
next Labor leadership primary is scheduled for May 2007 but may be postponed.
In October, Olmert broadened the coalition in order to stabilize it, bringing in
Yisrael Beiteinu and increasing the government’s strength in the Knesset to 78 out
of 120 seats. Yisrael Beiteinu leader Lieberman became Deputy Prime Minister and
Minister for Strategic Threats. Olmert claims to have sought Lieberman because
Peretz may be unable to enforce discipline on Labor Knesset members to enable
passage of the 2007 budget. Olmert agreed to support Lieberman’s proposal to
change the electoral system by providing for the direct election of the prime minister
and abolishing the president’s office, with the latter’s powers to be transferred to the
prime minister, and increasing the electoral threshold from 2.5% to 4%, among other
steps. The fate of the proposal is uncertain. (Labor) Minister of Culture and Sport
Ophir Pines-Paz resigned from the government to protest the inclusion of what he
labeled a party with “racist characteristics,” i.e., Yisrael Beiteinu. Pines-Paz now
intends to run for the Labor leadership.
As a result of the war, the government has shelved plans for unilateral
disengagement from the West Bank. Many Israelis believe that unilateral
disengagements from the south Lebanon and the Gaza Strip had enabled the
transformation of those regions into terrorist bases and led to war. Kadima, which
won election on a promise of disengagement, may need a new vision.
On November 1, Former Jewish Agency Chairman Sallai Meridor was
appointed as the next Israeli ambassador to the United States.
Historical Overview of Israel4
The quest for a modern Jewish homeland was launched with the publication of
Theodore Herzl’s The Jewish State in 1896. The following year, Herzl described his
vision at the first Zionist Congress, which encouraged Jewish settlement in Palestine,
a land that had been the Biblical home of the Jews and was later part of the Ottoman
Empire. In 1917, the British government issued the Balfour Declaration, supporting
the “establishment in Palestine (which had become a British mandate after World
War I) of a national home for the Jewish people.” Britain also made conflicting
4 For more, see Howard M. Sachar, A History of Israel: From the Rise of Zionism to Our
Time, New York, Knopf, 1996.

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CRS-3
promises to the Arabs concerning the fate of Palestine, which had an overwhelmingly
Arab populace. Nonetheless, Jews immigrated to Palestine in ever greater numbers
and, following World War II, the plight of Jewish survivors of the Nazi holocaust
gave the demand for a Jewish home greater poignancy and urgency.
In 1947, the U.N. developed a partition plan to divide Palestine into Jewish and
Arab states, with Jerusalem under U.N. administration. The Arab states rejected the
plan. On May 14, 1948, the State of Israel proclaimed its independence and was
immediately invaded by Arab armies. The conflict ended with armistice agreements
between Israel and its neighbors: Egypt, Jordan, Lebanon, and Syria. Israel engaged
in armed conflict with some or all of these countries in 1948, 1956, 1967, 1973, and
1982. Since the late 1960s, Israel also has dealt with the threat of Palestinian
terrorism. In 1979, Israel concluded a peace treaty with Egypt, thus making another
multi-front war unlikely. Israel’s current relations with its neighbors are discussed
in “Foreign Policy” below.
Government and Politics
Overview
Israel is a parliamentary democracy in which the President is head of state and
the Prime Minister is head of government. The unicameral parliament (the Knesset)
elects a president for a seven-year term. The Prime Minister is the leader of the party
with the most seats in parliament. The political spectrum is highly fragmented, with
small parties exercising disproportionate power due to the low vote threshold for
entry into parliament and the need for their numbers to form coalition governments.
In the March 2006, election, the threshold to enter parliament was raised from 1% to
2% — an action intended to bar some smaller parties from parliament but that
spurred some parties to join together simply to overcome the threshold. National
elections must be held at least every four years, but are often held earlier due to
difficulties in holding coalitions together. The average life span of an Israeli
government is 22 months. The peace process, the role of religion in the state, and
political scandals have caused coalitions to break apart or produced early elections.

Israel does not have a constitution. Instead, 11 Basic Laws lay down the rules
of government and enumerate fundamental rights; two new Basic Laws are under
consideration.5 On February 2, 2006, the Knesset’s Constitution, Law, and Justice
Committee approved a draft constitution encompassing existing Basic Laws and a
chapter of human rights and basic principles. However, the coalition agreement of
the government that took power in April promised the ultra-orthodox Shas Party that
Basic Laws would not be changed (i.e., transformed into a Constitution) without its
approval. Israel has an independent judiciary, with a system of magistrates courts
and district courts topped by a Supreme Court.
There is an active civil society. Some political pressure groups are especially
concerned with the peace process, including the Council of Judea, Samaria, and Gaza
5 For Basic Laws, see [http://www.mfa.gov.il/mfa/government/law/basic%20laws/].

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CRS-4
(Yesha Council), which represents local settler councils and opposes any withdrawal
from occupied Arab territories, and Peace Now, which opposes settlements, the
security barrier in the West Bank, and seeks territorial compromise. Both groups
have U.S. supporters.
Recent Political Developments
Israel’s domestic politics have been troubled in recent years. Prime Minister
Ariel Sharon’s plan to disengage from the Gaza Strip and four small West Bank
settlements split his Likud Party. In November 2005, Histadrut labor federation head
Amir Peretz defeated acting party leader Shimon Peres and former Infrastructure
Minister Benjamin Ben Eliezer in a Labor Party leadership primary. Peretz
emphasized the party’s need to champion socioeconomic goals, which it had
subordinated for the sake of joining Sharon’s coalition. On November 20, Labor
voted to withdraw from the coalition government, depriving Sharon of his
parliamentary majority.
On November 21, Sharon said that he was no longer willing to deal with Likud
rebels, resigned from the party, and founded a new “centrist” party, Kadima
(Forward). He asked President Katzav to dissolve parliament and schedule an early
election. Some 18 Likud Members of the Knesset (parliament) (MKs), including
several ministers, the chairman of the Likud Central Committee, several Labor
Knesset members, players in other political parties, and prominent personalities
joined Kadima. Former Labor leader Peres supported Sharon. Kadima’s platform
or Action Plan stated that, in order to secure a Jewish majority in a democratic Jewish
State of Israel, part of the Land of Israel (defined by some Israelis as the area between
the Jordan River and the Mediterranean Sea) would have to be ceded. It affirmed a
commitment to the Road Map, the international framework for achieving a two-state
solution to the Israeli-Palestinian conflict. Israel would keep settlement blocs, the
security barrier, and a united Jerusalem, while demarcating permanent borders.6
Former Prime Minister and Finance Minister Benjamin Netanyahu won a Likud
primary to replace Sharon as leader of Likud on December 19. Netanyahu called for
“defensible walls” against Hamas and borders that would include the Jordan Valley,
the Golan Heights, an undivided Jerusalem, settlement blocs, and hilltops, and for
moving the security barrier eastward.
On January 4, 2006, Sharon suffered an incapacitating stroke. In a peaceful
transition under the terms of Basic Law Article 16 (b), Deputy Prime Minister Olmert
became Acting Prime Minister. On January 16, Olmert became acting chairman of
Kadima.
The Hamas victory in the January 25 Palestinian parliamentary elections rapidly
became an Israeli election issue, even though all parties agreed that Israel should not
negotiate with Hamas. On March 8, Olmert revealed plans for further unilateral
withdrawals from the West Bank and said that he would reallocate funds from
settlements to the Negev, the Galilee, and Jerusalem. Although Olmert declared that
6 For Kadima’s Action Plan, see [http://kadimasharon.co.il/15-en/Kadima.aspx].

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CRS-5
he prefers negotiations, if they do not develop in a “reasonable time,” then he would
proceed with what he called “convergence,” or merging of settlements east of the
security barrier with large settlement blocs that will be west of the barrier.7
Netanyahu charged that the unreciprocated, unilateral withdrawal from Gaza had
rewarded terrorists and contributed to the Hamas win. He criticized Olmert’s plan
as another unilateral concession that would endanger Israel. Peretz proposed that
Israel continue a dialogue with moderate Palestinians, not Hamas.
The March 28, 2006, Knesset election results were surprising in many respects.
The voter turnout of 63.2% was the lowest ever. The contest was widely viewed as
a referendum on Kadima’s plans to disengage from the West Bank, but it also proved
to be a vote on economic policies that many believed had harmed the disadvantaged.
Kadima came in first, but by a smaller margin than polls had predicted. Labor,
emphasizing socioeconomic issues, came in a respectable second. Kadima drained
off supporters from Likud, which lost 75% of its votes from 2003. Likud’s decline
also was attributed personally to Netanyahu, whose policies as Finance Minister were
blamed for social distress and whose opposition to unilateral disengagement proved
to be unpopular with an increasingly pragmatic, non-ideological electorate.
The Shas campaign specifically aimed at restoring child allowances for the large
families of its constituents. Although it opposes disengagements, the party’s spiritual
leader has made rulings in the past that may allow Shas to accommodate Kadima’s
plans for the territories. Yisrael Beiteinu (Israel Our Home), a secular party appealing
to Russian-speakers, wants borders that exclude Israeli Arabs and their land and
include settlements; it opposes unilateral disengagement and the Road Map. The
rightist NU/NRP drew support from settlers; it opposes all withdrawals from the
West Bank, where it believes Jews have a biblical right to settle. The new Pension-
ers’ Party (GIL) drew single-issue voters harmed by Netanyahu’s policies as well as
young protest voters. It did not elaborate its positions on other issues. The ultra-
orthodox United Torah Judaism was part of the last Sharon government; it seeks
increased child allowances and deferments for religious school students from the
military and, despite protracted negotiations, has not struck a deal to join the
government. United Arab List, Hadash, and Balad — Israeli Arab parties — are not
part of a new government but are expected to passively support any future
disengagements.
7 During his May 2006 meeting with President Bush at the White House, Olmert used
“realignment” and not “convergence” as the English translation for his plan.

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CRS-6
Current Government and Politics
On May 4, 2006, the Knesset (parliament) approved a new four-party coalition
government of Prime Minister Ehud Olmert’s Kadima Party, the Labor Party, the
Pensioners’ Party, and the ultra-orthodox Shas Party. It controlled 67 out of 120
seats in the Knesset, with 25 cabinet ministers, and Dalia Itzik of Kadima as the first
woman Speaker of the Knesset. The government’s guidelines call for shaping
permanent borders for a democratic state with a Jewish majority.8 The government
will strive to negotiate with the Palestinians, but it will act in the absence of
negotiations. The guidelines also promise to narrow the social gap. Labor wants
Olmert to negotiate with Palestinian President Mahmud Abbas before deciding on
a unilateral move. Shas joined the coalition without agreeing to evacuate West Bank
settlements as specified in the guidelines and will decide on the issue when it is on
the government agenda.
Table 1. Parties in the Knesset
Seats
Party
Orientation
29
Kadima
Centrist, Pro-disengagement
19
Labor
Leftist, Social-democrat
12
Likud
Rightist, Anti-disengagement
12
Shas
Sephardi Ultra-orthodox
11
Yisrael Beiteinu
Russian-speakers, Nationalist, Secular, Against unilat-
(Our Home Israel)
eral withdrawals, but for exchange of populations and
territories to create 2 homogenous states
9
National Union (NU)/
Nationalist, Ashkenazi Orthodox, Seeks to annex the
National Religious Party
West Bank (Land of Israel) and transfer Palestinians to
(NRP)
Jordan
7
Pensioners’ (GIL)
Single-issue: guaranteed pensions for all; Supports
unilateral withdrawal from West Bank
6
United Torah Judaism (UTJ)
Ashkenazi Orthodox, Anti-withdrawals
5
Meretz/Yahad
Leftist, Anti-occupation, Civil libertarian
4
United Arab List/Ta’al
Israeli-Arab, Islamist
3
Hadash
Israeli-Arab, Communist
3
Balad
Israeli-Arab
8 For the entire text of the government guidelines, see [http://www.mfa.gov.il/MFA/
Government/Current+Government+of+Israel/Basic%20Guidelines%20of%20the%2031s
t%20Government%20of%20Israel].

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CRS-7
There are currently
several unresolved scan-
Key Cabinet Officers
dals involving prominent
politicians. Justice Min-
Ehud Olmert
Prime Minister; Minister of
Kadima
Social Welfare
ister Haim Ramon re-
signed after being in-
Tzipi Livni
Vice Prime Minister;
Kadima
Minister of Foreign Affairs
dicted for indecent as-
sault on a female soldier
Shimon Peres
Vice Prime Minister; Negev Kadima
and Galilee Development
and is on trial. The
Amir Peretz
Deputy Prime Minister;
Labor
Chairman of the Knesset
Minister of Defense
Foreign Affairs and De-
Avigdor Lieberman
Deputy Prime Minister;
Yisrael
f e n s e C o m m i t t e e ,
Minister of Strategic Threats Beiteinu
Kadima Knesset member
Meir Shitrit
(Acting) Minister of Justice; Kadima
Tsahi Hanegbi, also has
Housing
been indicted for illegal
Avi Dichter
Public Security
Kadima
conduct during his ten-
Shaul Mofaz
Deputy Prime Minister;
Kadima
ure as Environment Min-
Minister of Transportation*
ister from 2001-2003.
Roni Bar-On
Interior
Kadima
Then, on October 15,
police recommended that
Yuli Tamir
Education
Labor
the Attorney General
Eli Yishai
Deputy Prime Minister;
Shas
indict President Moshe
Minister of Industry, Trade,
and Labor
Katzav for rape, sexual
assault, and fraud. The
*Also in charge of strategic dialogue with the United States.
Attorney General has not
yet made a decision. The
President is immune
from trial while holding
office but could be tried if he resigns or is impeached. Impeachment requires 90
votes in the 120-seat Knesset. Katzav’s lawyer has said that the President will resign
if charged. Finally, the State Comptroller has accused Prime Minister Olmert of
corruption for appointments of cronies when he was Minister of Industry and turned
the case file over to the Attorney General. Other ongoing investigations concern
Olmert’s sale of his Jerusalem home significantly above market prices and
accusations that, while Finance Minister, he had accepted bribes from U.S.
businessmen during the sale of a government-bank controlled bank.
Economy
Overview
Israel has an advanced industrial, market economy in which the government
plays a substantial role. Most people enjoy a middle class standard of living. Per
capita income is on par with some European Union members. Despite limited natural
resources, the agricultural and industrial sectors are well developed. An advanced
high tech sector includes aviation, communications, computer-aided design and
manufactures, medical electronics, and fiber optics. Israel greatly depends on foreign
aid and loans and contributions from the Jewish diaspora. After economic declines

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CRS-8
in 2001 and 2002 due to the effects of the Palestinian intifadah (uprising) on tourism
and to the bursting of the global high-tech bubble, Israel’s economy recovered.
Before the 2006 war in Lebanon, most economic indicators were positive: inflation
low, employment and wages rising, and the standard of living rising.
Under Former Finance Minister Netanyahu, the government attempted to
liberalize the economy by controlling government spending, reducing taxes, and
resuming privatization of state enterprises. The chronic budget deficit decreased,
while the country’s international credit rating was raised, enabling a drop in interest
rates. However, Netanyahu’s critics suggested that cuts in social spending widened
the national income gap and increased the underclass. According to Israel’s National
Insurance Institute, 20% of all Israelis and 30% of Israeli children live below the
poverty line.
Israel has a budget deficit target of 3% of gross domestic product, and the
government is allowed by law to raise the annual budget by only 1.7%. Olmert
vowed not to increase the deficit while lessening the social gap. The coalition
agreement calls for raising the minimum wage to $1,000 a month by the end of the
Knesset session, canceling a 1.5% pension cut of the Netanyahu era, guaranteeing a
pension for all workers, and increasing spending on heath care, child allowances,
daycare, and other socioeconomic programs.
Current Issues
Basic Facts
The 2006 budget was not
Population
6,276,883 (2005.)
approved before the dissolution
Population
of the last parliament; therefore
1.2% (2005 est.)
Growth Rate
spending remained at 2005
— Jewish 80.1% (1996)
levels from January through
Ethnic
Groups
— non-Jewish (mostly Arab)
May and a budget surplus
19.9% (1996)*
accrued due to the low
GDP Growth
5.2 (2005 est.)
expenditures and higher than
Rate
expected tax revenues. The
GDP Per Capita $22,200 (2005 est.)
surplus was expected to enable
Inflation Rate
1.3% (2005 est.)
the new government to spend
Unemploy-
8.9% (2005 est.)
more on social programs.
ment Rate
Finance Minister Hirschson
Ratio of debt to 101% (2005 est.)
GDP
proposed a budget cut of 1
billion New Israeli Shekels
Foreign Debt
$74.46 billion (2004 est.)
(NIS) (U.S.$224 million) for
crude oil, grains, raw materials,
Imports
military equipment
2006, of which NIS 510 million
cut diamonds, high-technology
(U.S.$114 million) was to be
Exports
equipment, fruits and vegetables
taken from defense and none
Main Trading
United States, Belgium, Germany,
from social programs. The
Partners
United Kingdom
Knesset passed the budget on
Sources: CIA, The World Factbook, January 2006; and
June 7, 2006, by a vote of 53 to
the Israeli government.
22, with 45 abstentions. Some
Labor Knesset members
*Within 1967 borders.
objected to cuts in bread
subsidies, failure to address the

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CRS-9
pension issue, and defense cuts, but voted for the budget to sustain the coalition.
Likud, Meretz, and the Arab parties voted against the bill. UTJ, Israeli Beiteinu, and
NU-NRP abstained after the government pledged to support organizations they
champion.
In the end, the defense budget was not cut due to military expenditures for the
war in Lebanon. On August 31, the Knesset Finance Committee passed a 6% across-
the-board cut (totaling about $450 million) for all ministries, except defense and
social welfare. Finance Minister Hirchson estimates the cost of the war to be about
$3.5 billion, and the Israeli Bureau of Statistics projects a 4.5% GDP growth rate for
2006 (compared to 5.2% in 2005) due economic losses resulting from the closure of
industrial plants in northern Israel, inability to work on agriculture in that region,
attendant business, property, and tax losses, and the loss of tourism revenues.
On September 12, the cabinet approved the 2007 budget. Only Shas voted
against it. Labor Leader Peretz abstained over a minimum wage issue, but other
Labor ministers disagreed with his assessment and voted for the budget.
Foreign Policy
Middle East
Iran. Israeli officials state that Iran will pose an existential threat to Israel if it
achieves nuclear capability. Ayatollah Khomeini, founder of Iran’s Islamic
revolution, decreed that the elimination of Israel is a religious duty. President
Mahmud Ahmadinejad quoted Khomeini when he called for Israel to be “wiped off
the map,” has described the Holocaust as a “myth” used as a pretext to create an
“artificial Zionist regime,” and suggested that Europe, the United States, or Canada
donate land for a Jewish state. He repeatedly makes virulently anti-Israel statements.
The Iranian Shahab-3 missile is capable of delivering a warhead to Israel. Israeli
officials have called on the international community to thwart Iran’s nuclear
ambitions in order to avert the need for Israel to act as it did against Iraq’s reactor at
Osirak in 1981.
When U.S. Vice President Dick Cheney warned in early 2005 that Israel might
act pre-emptively against Iran, Israel’s then Defense Minister Shaul Mofaz countered,
urging a U.S. pre-emptive strike. Israel has nuclear weapons, and the prospect of a
counterattack is seen by many as a deterrent against an Iranian attack. On January
17, 2006, then Acting Prime Minister Olmert said, “Under no circumstances ... will
Israel permit anyone who harbors evil intentions against us to possess destructive
weapons that can threaten our existence.” He added, “Israel acted, and will continue
to act, in cooperation and consultation with ... international elements.”9 On April 23,
he told the cabinet, “our position has always been that it would not be correct to focus
on us as the spearhead of the global struggle as if it were our local, individual
problem and not a problem for the entire international community. The international
9 “PM Olmert, President Qatzav Discuss Iran, Peace Process During News Conference,”
Open Source Center Document FEA20060117017385, January 17, 2006.

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CRS-10
struggle must be led and managed by — first and foremost — the US, Europe, and
the UN institutions. We are not ignoring our need to take ... steps in order to be
prepared for any eventuality.”10
On May 23, 2006, Israeli Chief of Staff Dan Halutz said that, according to
intelligence estimates, Iran would be in possession of nuclear weapons by 2008-
2010. He also noted that U.S. assessments predicted that Iran would not develop the
bomb before 2010-2015, but that Israel must prepare for the possibility of a more
imminent threat.11 On November 13, Prime Minister Olmert told the U.S. “Today
Show” that he would find acceptable any compromise that President Bush does to
stop Iran from acquiring nuclear capabilities.
Iran also provides financial, political, and/or military support to the Lebanese
Hezbollah as well as to Hamas, Palestinian Islamic Jihad (PIJ), the Al Aqsa Martyrs’
Brigades, and the Popular Front for the Liberation of Palestine-General Command
— Palestinian terrorist groups seeking to obstruct the peace process and destroy
Israel. In January 2006, then Defense Minister Mofaz charged that Iran had financed
a PIJ suicide bombing in Tel Aviv and Israeli officials blamed Iran for Hezbollah’s
attack on northern Israel in July 2006.
Palestinian Authority. During the Oslo peace process of the 1990’s, Israelis
and Palestinians negotiated a series of agreements that resulted in the creation of a
Palestinian Authority (PA) with territorial control over parts of the West Bank and
the Gaza Strip. Israel refused to deal with the late Palestinian leader Yasir Arafat
after Sharon came to power and during the intifadah or Palestinian uprising against
Israeli occupation. Israel’s relations with the PA and its leaders improved somewhat
after Arafat’s death in November 2004 and the election of Mahmud Abbas as
President of the PA in January 2005. Sharon and Abbas met at a summit in Sharm
al-Shaykh, Egypt, in February, and promised to end violence and to take other
measures. Israel made some goodwill gestures toward the PA, and President Abbas
and 13 Palestinian factions agreed to an informal truce. However, Sharon and Abbas
did not meet after June 2005. Although Israeli officials described the disengagement
from the Gaza Strip as unilateral, they met with Palestinian counterparts to
coordinate security and disposition of assets.
Israel still has 242 settlements, other civilian land use sites, and 124
unauthorized settlement outposts in the West Bank and 29 settlements in East
Jerusalem — all areas that the Palestinians view as part of their future state. Israel
retains military control over the West Bank and is building a security barrier on West
Bank territory to separate Israelis and Palestinians and prevent terrorists from
entering Israel. Palestinians object to the barrier being built on their territory. The
barrier is taking the form of a future border between Israel and Palestine and will cut
Palestinians off from East Jerusalem.
10 “23 Apr Cabinet Session; Daily Says Olmert Readying for ‘Swift’ Convergence,” Open
Source Center, Document GMP20060424621005, Jerusalem Government Press Office,
April 23, 2006.
11 Ha’aretz report, May 24, 2006.

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CRS-11
The Israeli government accepted the Roadmap, the framework for a peace
process leading to a two-state solution developed by the United States, European
Union, U.N., and Russia, reluctantly and with many conditions. Sharon contended
that the Roadmap requires that the PA first fight terror, by which he meant disarm
militants and dismantle their infrastructure. Abbas preferred to include terrorist
groups such as Hamas in the political system and refused to disarm them prior to
January 2006 parliamentary elections. Hamas’s victory in those elections created
policy dilemmas for Israel and the international community. Israel demanded that
Hamas abrogate its Covenant that calls for the destruction of Israel, disarm and
disavow terrorism, and accept all prior agreements with Israel as preconditions for
relations with a Hamas-led PA.
Israel officially refuses to negotiate with Hamas for the return of the Israeli
soldier kidnaped from a post at Kerem Shalom, Israel, near the Gaza Strip on June
25, 2006. Since the kidnaping, Israel has arrested many members of the Hamas-led
PA government and legislature for participating in a terrorist group, and Israeli forces
have been conducting military operations against Hamas and other militant groups
in the Gaza Strip as well as in the West Bank. Egyptian officials are attempting to
mediate a resolution that would involve a prisoner exchange. Analysts believe that
this effort may be complicated by the need to have a deal acceptable to Hamas
political bureau head Khalid Mish’al, who is based in Damascus and subject to
influence by the Syrian and Iranian governments.
Egypt. After fighting four wars in as many decades, Israel and Egypt signed
a peace treaty in 1979. In 1982, Israel withdrew from the Sinai Peninsula, which it
had taken in the 1967 war. Egypt and Israel established diplomatic relations,
although Egypt withdrew its ambassador during the four years of the second
intifadah, 2001-2005, because it objected to Israel’s “excessive” use of force against
the Palestinians. Some Israelis refer to their ties with Egypt as a “cold peace”
because full normalization of relations, such as enhanced trade, bilateral tourism, and
educational exchanges, has not materialized. Egyptian President Hosni Mubarak has
visited Israel only once — for the funeral of former Israeli Prime Minister Yitzhak
Rabin. Outreach is often one way, from Israel to Egypt. Egyptians say that they are
reluctant to engage because of Israel’s continuing occupation of Arab lands. Israelis
are upset by some Egyptian media and religious figures’ anti-Israeli and occasionally
anti-Semitic rhetoric. Nonetheless, the Egyptian government often plays a
constructive role in the Arab-Israeli peace process, hosting meetings and acting as a
liaison. In March 2005, it helped secure an informal Palestinian truce and later helped
prevent it from breaking down due to violence between Palestinian factions and
Israel and between Palestinian security forces and factions. As noted above,
Egyptians have been trying to secure the release of a kidnaped Israeli soldier being
held by Hamas militants.
Since the January 2006 Hamas election victory, Egyptian officials have
unsuccessfully urged the group to accept a 2002 Arab League declaration that offers
Israel recognition within its 1967 borders. On June 4, President Mubarak and Prime
Minister Olmert had a very cordial meeting. Mubarak praised Olmert as a man of
“vision and credibility,” while Olmert reciprocated with compliments and pledged
to work closely with Mubarak to advance the peace process.

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CRS-12
Egypt deployed 750 border guards to secure the Gaza-Egyptian border (Rafah)
after Israel’s disengagement from Gaza. After one year, the two sides will jointly
evaluate the mission. Israel refused an Egyptian request to deploy military border
guards, instead of police, for greater control of smuggling along the entire border in
Sinai, which some Israelis argue would require a change in the military appendix of
the 1979 peace treaty. In fall 2006, Israeli officials repeatedly expressed frustration
with Egyptian failure to control arms-smuggling into Gaza.
In December 2004, Egypt and Israel signed a Qualified Industrial Zone (QIZ)
Agreement under which jointly produced goods enter the U.S. market duty free as
part of the U.S.-Israeli Free Trade Agreement (FTA). As a result of the QIZ, Israeli
exports to Egypt grew 110% in 2005. On June 30, 2005, Israel signed a
memorandum of understanding to buy 1.7 billion cubic feet of Egyptian natural gas
for an estimated U.S.$2.5 billion over 15 years, fulfilling a commitment made in an
addendum to the 1979 peace treaty. The deal includes cooperation in construction
of the infrastructure and may expand to other energy areas. Gas is not expected to
flow before 2007.12
Jordan. Israel and Jordan signed a peace treaty in October 1994 and
exchanged ambassadors, although Jordan did not have an ambassador in Israel during
most of the intifadah. Relations have developed with trade, cultural exchanges, and
water-sharing agreements. Since 1997, Jordan and Israel have collaborated in
creating 13 qualified industrial zones (QIZs) to export jointly produced goods to the
United States duty-free under the U.S.-Israel Free Trade Agreement (FTA), although
Jordanian companies are now said to prefer arrangements under the U.S.-Jordan FTA
over the QIZ. Normalization of ties is not popular with the Jordanian people, over
half of whom are of Palestinian origin, although King Abdullah II has attempted to
control media and organizations opposed to normalization. Believing that a two-state
solution to the Israeli-Palestinian conflict would contribute to regional stability, the
King is very supportive of the peace process, wants the Roadmap to be implemented,
and has hosted meetings between Israeli and Palestinian leaders.13 He opposes
unilateral Israeli steps in the West Bank, fearing that they would strengthen
Palestinian radicals who could destabilize the region and undermine his regime.
Abdullah met Olmert in Jordan on June 8, 2006.
Syria. Israel and Syria have fought several wars but, except for rare breaches,
have maintained a military truce along their border for many years. Yet, they failed
to reach a peace agreement in negotiations that ended in 2000. Since 1967, Israel has
occupied Syria’s Golan Heights and, in December 1981, effectively annexed it by
applying Israeli law there. There are 42 Israeli settlements on the Golan. Syrian
President Bashar al-Asad has said that he wants to hold peace talks with Israel, but
Israeli officials demand that he first cease supporting the Lebanese Hezbollah militia,
which attacks Israeli forces in the disputed Shib’a Farms area of Lebanon and
12 See also CRS Report RL33003, Egypt: Background and U.S. Relations, by Jeremy Sharp.
13 See also CRS Report RL33546, Jordan: U.S. Relations and Bilateral Issues, by Alfred
Prados and Jeremy M. Sharp; and CRS Report RS22002, Qualifying Industrial Zones in
Jordan: A Model for Promoting Peace and Development in the Middle East? by Mary Jane
Bolle, et al.

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CRS-13
communities in northern Israel and aids Palestinian terrorist groups. They also want
Asad to expel Palestinian rejectionist groups (i.e., those who do not agree with the
Israeli-Palestinian peace process). Sharon said that the Golan is essential for Israel’s
security and discussion of withdrawal would be a mistake.14
After Syria was implicated in the February 2005 assassination of former
Lebanese Prime Minister Rafiq Hariri, international pressure on the Asad regime
mounted. Israeli officials have said that Israel is not interested in the fall of the
regime, only in changing its policies. Some reportedly fear that anarchy or extreme
Islamist elements might follow Asad and prefer him to stay in power in a weakened
state. On December 1, 2005, Sharon said that nothing should be done to ease U.S.
and French pressure on Syria, implying that Syrian-Israeli peace talks would do that.
His successor, Olmert has indicated that talks with Syria are not on his agenda and
has blamed Damascus for Palestinian terror attacks in Israel.
Syria hosts Hamas political bureau chief Khalid Mish’al and supplies Hezbollah
with Syrian and Iranian weapons. After the June 25, 2006, Palestinian attack on
Israeli forces and kidnaping of an Israeli soldier, Israeli officials specifically
requested the United States to exert pressure on President Asad to induce him to
expel Mish’al, whom they believed was responsible for the operation. After
Hezbollah abducted two Israeli soldiers from northern Israel on July 12, sparking a
major Israeli military campaign against Hezbollah in Lebanon, some rightwing Israeli
politicians demanded that it be expanded to include Syria. However, the government
and military did want to open a third front. U.S. officials demanded that Syria exert
its influence on Hezbollah to end the conflict, but Syrian officials unsuccessfully
sought a broader resolution that would include a revival of a peace process to
produce the return of the Golan Heights.
Lebanon.15 Israeli forces invaded Lebanon in 1982 to prevent Palestinian
attacks on northern Israel. The forces gradually withdrew to a self-declared nine-
mile “security zone,” north of the Israeli border. Peace talks in the 1990’s failed to
produce a peace treaty, mainly because of Syria’s insistence that it reach an accord
with Israel first. Israel unilaterally withdrew from southern Lebanon on May 25,
2000. Lebanon insists that the Israeli withdrawal is incomplete because of the
continuing presence of Israeli forces in the Shib’a Farms area, in the region where
Lebanon, Syria, and Israel meet. The U.N. said that Israel’s withdrawal from Lebanon
was complete and treats the Shib’a Farms as part of Syria’s Golan Heights occupied
by Israel. Syria verbally recognizes that Shib’a is part of Lebanon, but will not
demarcate the border officially as long the Israeli occupation continues. Hezbollah
took control of the former “security zone” after Israeli forces left and attacked Israeli
forces in Shib’a and northern Israeli communities. The Lebanese government
considers Hezbollah to be a legitimate resistance group and a political party
represented in parliament. Israel views it as a terrorist group.
14 See also CRS Report RL33487, Syria: U.S. Relations and Bilateral Issues, by Alfred
Prados.
15 See also CRS Report RL33509, Lebanon; and CRS Report RL31078, The Shib’a Farms
Dispute and Its Implications, both by Alfred Prados.

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CRS-14
Hezbollah’s kidnaping of two Israeli soldiers on July 12, 2006, provoked Israel
to launch a major military campaign against Hezbollah in Lebanon. In a July 17
speech to the Knesset, Prime Minister Olmert said that military operations would end
with the return of the kidnaped soldiers, the end to Hezbollah rocket attacks into
northern Israel, and the deployment of the Lebanese army along the Israeli-Lebanese
border to replace Hezbollah units. Hezbollah demands a prisoner swap, i.e., that the
Israeli soldiers be exchanged for Lebanese and other Arab prisoners in Israel. The
war ended with a cessation of hostilities on August 14. Israeli forces withdrew as
their positions were assumed by the Lebanese army and an enlarged U.N. Interim
Forces in Lebanon (UNIFIL). Hezbollah has maintained the cease-fire, but it also has
not released the abducted soldiers. U.N. Secretary General Kofi Annan has
appointed a “secret” mediator to facilitate a prisoner exchange.
Other. Aside from Egypt and Jordan, Israel has diplomatic relations with the
majority-Muslim governments of Mauritania and Turkey and has had interest or trade
offices in Morocco, Tunisia, Oman, and Qatar. The latter four suspended relations
with Israel during the intifadah. Former Foreign Minister Silvan Shalom had
predicted that relations with Arab and Muslim countries would improve due to
Israel’s disengagement from Gaza. The first diplomatic breakthrough was his
September 1, 2005, meeting in Istanbul with the Pakistani foreign minister, although
Pakistani officials asserted that they would not recognize Israel until an independent
Palestinian state is established. On September 14, Pakistan’s President Pervez
Musharraf shook Prime Minister Sharon’s hand in a “chance” meeting at the U.N.
General Assembly opening session in New York. In October, Pakistan agreed to
accept Israeli humanitarian aid after a devastating earthquake. Shalom also met the
Indonesian, Qatari, Algerian, Moroccan, and Tunisian foreign ministers at the U.N.
In September 2006, Foreign Minister Livni was said to have similar meetings with
10 Arab and Muslim foreign ministers, including the Omani foreign minister.
Also in September 2005, Bahrain ended its economic boycott of Israel, a move
required by the World Trade Organization and the Bahrain-U.S. Free Trade
Agreement, but it has vowed not to normalize relations. Tunisian President Zine El
Abidine Ben Ali sent a personal letter to Sharon, praising his “courageous”
withdrawal from Gaza. Shalom attended the World Summit on the Information
Society in Tunisia in November.
Israel also has developed good relations with the predominantly Muslim former
Soviet republic of Azerbaijan, which supplies about one-sixth of Israel’s oil needs.
European Union
Israel has complex relations with the European Union (EU). Many Europeans
believe that the Israeli-Palestinian conflict is a root cause of terrorism and Islamist
extremism among their own Muslim populations and want it addressed urgently. The
EU has ambitions to exert greater influence in the Middle East peace process. The
EU is a member of the “Quartet,” with the United States, U.N., and Russia, which
developed the Roadmap. EU officials appeared to share Palestinian suspicions that
Sharon’s disengagement plan meant “Gaza first, Gaza only” and would not lead to
the Roadmap process. They observed with concern Israel’s ongoing settlement

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CRS-15
activity and construction of the security barrier in the West Bank, which, according
to the Europeans, contravene the Roadmap and prejudge negotiations on borders.
Israel has been cool to EU overtures because it views many Europeans as biased
in favor of the Palestinians and hears some Europeans increasingly question the
legitimacy of the State of Israel. Some Israelis contend that the basis of such views
is an underlying European anti-Semitism. Nonetheless, in November 2005, Israel
agreed to allow the EU to maintain a Border Assistance Mission (EU-BAM) to
monitor the reopened Rafah crossing between the Gaza Strip and Egypt. In
November 2006, the mission was extended for another six months despite European
complaints about Israeli restrictions. After the war in Lebanon, Israel also urged and
welcomed the strong participation of European countries in the peacekeeping force
there.
To Israel’s dismay, some EU representatives met local Hamas leaders elected
in December 2004 in order to oversee EU-funded local projects. The EU also
authorized its monitoring mission for the January 2006 Palestinian parliamentary
elections to contact the full range of candidates, including Hamas, in order to carry
out its task. EU officials have said, however, that Hamas will remain on the EU
terror list until it commits to using nonviolent means to solve the Israeli-Palestinian
conflict. The EU agrees with the Quartet’s preconditions for relations with the
Hamas-led government: disavowal of violence, recognition of Israel, and acceptance
of prior Israeli-Palestinian accords. The EU has developed, at the Quartet’s request,
a temporary international mechanism to aid the Palestinian people directly while
bypassing the government.
Israel also demands that the EU include Hezbollah on its list of terrorist
organizations and has protested meetings between European ambassadors and the
Hezbollah ministers in the Lebanese cabinet.
Israel participates in the EU’s Euro-Mediterranean Partnership Initiative,
otherwise known as the Barcelona Process, and in the European Neighborhood Policy
(ENP). And EU countries combined are Israel’s second trading partner, but the EU
bans imports from Israeli settlements in the occupied territories.16
Relations with the United States
Overview
On May 14, 1948, the United States became the first country to extend de facto
recognition to the State of Israel. Over the years, the United States and Israel have
developed a close friendship based on common democratic values, religious
affinities, and security interests. Relations have evolved through legislation;
memorandums of understanding; economic, scientific, military agreements; and
trade.
16 See CRS Report RL31956, European Views and Policies Toward the Middle East, by
Kristin Archick.

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CRS-16
Issues
Peace Process. The United States has been the principal international
proponent of the Arab-Israeli peace process. President Jimmy Carter mediated the
Israeli-Egyptian talks at Camp David which resulted in the 1979 peace treaty.
President George H.W. Bush together with Soviet President Mikhail Gorbachev
convened the peace conference in Madrid in 1990 that inaugurated a decade of
unprecedented negotiations between Israel, Jordan, Syria, Lebanon, and the
Palestinians. President Clinton continued U.S. activism throughout his tenure in
office, facilitated a series of agreements between Israel and the Palestinians as well
as the Israeli-Jordanian peace treaty in 1994, hosted the Israeli-Palestinian summit
at Camp David in 2000 that failed to reach a peace settlement, and sought
unsuccessfully to mediate between Israel and Syria during the same year.
In June 2002, President George Bush outlined his vision of a democratic
Palestine to be created alongside Israel in a three-year process.17 U.S., European
Union, Russian, and U.N. representatives built on this vision to develop the
international Roadmap to a Permanent Two-State Solution to the Israeli Palestinian
Conflict. The Administration remains committed to the Roadmap process despite the
parties’ failure to implement it.18
Secretary of State Condoleezza Rice has not named a Special Middle East
Envoy and said that she would not get involved in direct Israeli-Palestinian
negotiations of issues and preferred to have the Israelis and Palestinians work
together. However, she has traveled to the region several times and personally
mediated an accord to secure the reopening of the Rafah crossing between Gaza and
Egypt in November 2005. The Administration had supported Israel’s disengagement
from Gaza mainly as a way to return to the Road Map. Some Israelis criticized U.S.
insistence that the Palestinian elections proceed in January 2006, with Hamas
participating, which produced a Hamas-led government. The Administration agrees
with Israel’s preconditions for dealing with that government.
All recent U.S. Administrations have disapproved of Israel’s settlement activity
as prejudging final status issues and possibly preventing the emergence of a
contiguous Palestinian state. On April 14, 2004, however President Bush noted the
need to take into account changed “realities on the ground, including already existing
major Israeli population centers” (i.e., settlements), asserting “it is unrealistic to
expect that the outcome of final status negotiations will be full and complete return
to the armistice lines of 1949.”19 He later emphasized that it was a subject for
negotiations between the parties.
17 See [http://www.whitehouse.gov/news/releases/2002/06/20020624-3.html] for text of
President’s speech.
18 See [http://www.state.gov/r/pa/prs/ps/2003/20062.htm]for text of Roadmap.
19 For text of Bush letter to Sharon, see [http://www.whitehouse.gov].

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CRS-17
The Administration has insisted that U.N. Security Council resolutions be
“balanced,” by criticizing Palestinian as well as Israeli violence and has vetoed
resolutions which do not meet that standard.
Since taking East Jerusalem in the 1967 war, Israel has maintained that
Jerusalem is its indivisible, eternal capital. Few countries agree with this position.
The U.N.’s 1947 partition plan called for the internationalization of Jerusalem, while
the Declaration of Principles signed by Israel and the Palestine Liberation
Organization in September 1993 says that it is a subject for permanent status
negotiations. U.S. Administrations have recognized that Jerusalem’s status is
unresolved by keeping the U.S. Embassy in Tel Aviv. However, in 1995, Congress
mandated that the embassy be moved to Jerusalem,20 and a series of presidential
waivers of penalties for non-compliance have delayed the move. U.S. legislation has
granted Jerusalem status as a capital in particular instances and sought to prevent
U.S. official recognition of Palestinian claims to the city. The failure of the State
Department to follow congressional guidance on Jerusalem prompted a response in
H.R. 2601, the Foreign Relations Authorization bill, passed in the House on July 20,
2005.21 The Senate did not pass an authorization bill, and it did not become law.22
The United States has never recognized Israel’s annexation of the Golan
Heights, which it views as a violation of international law. However, the current
administration has not attempted to revive Israeli-Syrian peace talks.
Some Israeli officials have questioned possible unintended consequences of the
U.S. democratization policy in the Middle East, believing that it is aiding extremist
organizations to gain power positions and to be legitimized. Alarmed, they cite the
examples of Hezbollah in Lebanon, Hamas in the Palestinian Authority, and the
Muslim Brotherhood in Egypt.23
Trade and Investment. Israel and the United States concluded a Free Trade
Agreement in 1985, and all customs duties between the two trading partners have
since been eliminated. The FTA includes provisions that protect both countries’
more sensitive agricultural sub-sectors with non-tariff barriers, including import
bans, quotas, and fees. Israeli exports to the United States have grown 200% since
20 P.L. 109-102, November 14, 2005.
21 H.R. 2601 (d) requires that “accurate entries be made on request of citizen.” Specifically,
for the purpose of the issuance of a passport to a U.S. citizen born in Jerusalem, the
Secretary of State shall upon the request of the citizen or the citizen’s legal guardian, record
the place of birth as Israel. See also CRS Report RL33530, Israeli-Arab Negotiations:
Background, Conflicts, and U.S. Policy , by Carol Migdalovitz; and CRS Report RL33000,
Foreign Relations Authorization, FY2006 and FY2007: An Overview, coordinated by Susan
Epstein.
22 In August 2006, El Salvador notified the Israeli Foreign Ministry that it was moving its
embassy from Jerusalem to Tel Aviv. When that happens, no country that has diplomatic
relations with Israel will have an embassy in Jerusalem.
23 For example, head of military intelligence, Maj. Gen. Amos Yadlin, in Ahiya Raved,
“Intelligence Chief: Strategic Threats on Israeli Rising,” Ynetnews, June 20, 2006, Open
Source Center Document GMP20060621746004.

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CRS-18
the FTA became effective. As noted above, qualified industrial zones in Jordan and
Egypt are considered to be part of the U.S.-Israeli free trade area. The United States
is Israel’s main trading partner, while Israel ranks about 20th among U.S. trading
partners. In 2005, the United States imported $23.8 million in goods from Israel and
exported $27.1 million in goods to Israel.
U.S. companies have made large investments in Israel. In July 2005, the U.S.
microchip manufacturer Intel announced that it would invest $4.6 billion in its Israeli
branch; Israel provided a grant of 15% of an investment of up to $3.5 billion or $525
million to secure the deal. In May 2006, prominent U.S. investor Warren Buffet
announced that he was buying 80% of Iscar, a major Israeli metalworks, for $4
billion.
On July 26, the House passed H.R. 2730, the United States-Israel Energy
Cooperation Act. It would authorize a grant program of $20 million for each of fiscal
years 2006 through 2012 to fund joint ventures between U.S. and Israeli businesses
and academics for research, development, or commercialization of alternative energy,
improved energy efficiency, or renewable energy sources. S. 1862, the Senate
version of the bill, was referred to the Senate Foreign Relations Committee on
October 7, 2005.
Aid. Israel has been the largest recipient of U.S. foreign aid since 1976. In
1998, Israeli, congressional, and Administration officials agreed to reduce U.S. $1.2
billion in Economic Support Funds (ESF) to zero over ten years, while increasing
Foreign Military Financing (FMF) from $1.8 billion to $2.4 billion. The process
began in FY1999, with P.L. 105-277, October 21, 1998. Separately from the
scheduled ESF cuts, Israeli has received an extra $1.2 billion to fund implementation
of the Wye agreement (part of the Israeli-Palestinian peace process) in FY2000, $200
million in anti-terror assistance in FY2002, and $1 billion in FMF in the
supplemental appropriations bill for FY2003. P.L. 109-102, November 14, 2005, the
Foreign Operations Appropriations Act, 2006, provided $240 million in ESF, $2.28
billion in FMF, and $40 million for the settlement of migrants to Israel. H.R. 5522,
the Foreign Operations Appropriations bill, FY2007, passed in the House on June 9,
2006, appropriates $120 million in ESF, $40 million for migration and refugee
assistance, and $2.34 billion in FMF (of which $610 million may be spent for defense
acquisitions in Israel), for Israel. The Senate has not yet passed a bill.
On July 14, 2006, during Israel’s war against Hezbollah in Lebanon, the
Pentagon notified Congress that it planned to sell up to $210 million in jet fuel to
Israel. On July 22, it was reported that the Administration is expediting the delivery
of precision-guided bombs that had been ordered by Israel in 2005.
Congress has legislated other special provisions regarding aid to Israel. Since
the 1980s, ESF and FMF have been provided as all grant cash transfers, not
designated for particular projects, and have been transferred as a lump sum in the first
month of the fiscal year, instead of in periodic increments. Israel is allowed to spend
about one-quarter of the military aid for the procurement in Israel of defense articles
and services, including research and development, rather than in the United States.
Finally, to help Israel out of its economic slump, P.L. 108-11, April 16, 2003,
provided $9 billion in loan guarantees over three years, use of which has since been

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CRS-19
extended to 2008 and may be extended further. As of September 2006, $4.5 billion
of the guarantees remain unexpended.24
Security Cooperation. Although Israel is frequently referred to as an ally of
the United States, the two countries do not have a mutual defense agreement. Even
though there is no treaty obligation, on February 1, 2006, President Bush stated that
the United States would defend Israel militarily.25 In May, the President told Prime
Minister Olmert, “In the event of any attack on Israel, the United States will come to
Israel’s aid.”26
On November 30, 1981, U.S. Secretary of Defense Caspar Weinberger and
Israeli Minister of Defense Ariel Sharon signed a memorandum of understanding
(MOU), establishing a framework for continued consultation and cooperation to
enhance the national security of both countries. In November 1983, the two sides
formed a Joint Political Military Group, (JPMG) which meets twice a year, to
implement most provisions of the MOU. Joint air and sea military exercises began
in June 1984, and the United States has constructed facilities to stockpile military
equipment in Israel. In 2001, an annual interagency strategic dialogue, including
representatives of diplomatic, defense, and intelligence establishments, was created
to discuss long-term issues. In 2003, reportedly at the U.S. initiative due to bilateral
tensions related to Israeli arms sales to China, the talks were suspended. (See
Military Sales, below.) After the issue was resolved, the talks resumed at the State
Department on November 28, 2005, and reportedly focused on Syria and
democratization in the Arab world. On January 11, 2006, the JPMG convened in Tel
Aviv also for the first time since 2003.
On May 6, 1986, Israel and the United States signed an agreement (the contents
of which are secret) for Israeli participation in the Strategic Defense Initiative
(SDI/”Star Wars”). Under SDI, Israel is developing the “Arrow” anti-ballistic
missile with a total U.S. financial contribution so far of more than $1 billion,
increasing annually. The system became operational in 2000 in Israel and has been
tested successfully, most recently on December 2, 2005, when it shot down a missile
simulating an Iranian Shahab-3 that can be armed with nuclear warheads and reach
Israel. The Defense Appropriations Act for FY2007, P.L. 109-289, September 29,
2006 appropriates $137,894,000 for the Arrow program. Of this amount,
$53,000,000 is for producing missile components in the United States and missile
components and missiles in Israel to meet Israel’s defense requirements, and
$20,400,000 is for a joint feasibility study of the Short Range Ballistic Missile
Defense (SRBMD) initiative, a missile interceptor designed to thwart missiles and
rockets from 40 to 200 kilometers that is not expected to be operational before 2011.
24 See also CRS Report RL33222, U.S. Foreign Aid to Israel, by Jeremy Sharp.
25 Interview with Reuters, cited in Glenn Kessler, “Bush Says U.S. Would Defend Israel
Militarily,” Washington Post, February 2, 2006.
26 See [http://www.whitehouse.gov/news/releases/2006/05/20060523-9.html] for text of joint
news conference.

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CRS-20
In 1988, under the terms of Sec. 517 of the Foreign Assistance Act of 1961, as
amended, Israel was designated a “major non-NATO ally,” affording it preferential
treatment in bidding for U.S. defense contracts and access to expanded weapons
systems at lower prices. Israel participates in NATO’s Mediterranean Dialogue, its
Istanbul Cooperative Initiative, and in Operation Active Endeavor monitoring the
Mediterranean Sea to thwart terrorism. On October 16, 2006, Israel signed an
Individual Cooperation Program (ICP) with NATO, providing for cooperation in
such fields as counter-terrorism, intelligence sharing, disaster preparedness, etc.
After the war in Lebanon ended in August 2006, the State department Office of
Defense Trade Controls began to investigate whether Israel’s use of U.S.-made
cluster bombs violated agreements that restrict use of the weapons to military targets.
Other Current Issues
Military Sales. Israel accounts for about 10% of the world’s defense exports,
totaling $3.5 billion in 2004. The United States and Israel have regularly discussed
Israel’s sale of sensitive security equipment and technology to various countries,
especially China. Israel reportedly is China’s second major arms supplier, after
Russia.27 U.S. administrations believe that such sales are potentially harmful to the
security of U.S. forces in Asia. In 2000, the United States persuaded Israel to cancel
the sale of the Phalcon, an advanced, airborne early-warning system, to China. More
recently, Israel’s agreement to upgrade Harpy Killer unmanned aerial vehicles
(UAVs) that it sold to China in 1999 angered the Department of Defense (DOD).
China tested the weapon over the Taiwan Strait in 2004. DOD suspended
technological cooperation with the Israel Air Force on the future F-35 Joint Strike
Fighter (JSF) aircraft as well as several other cooperative programs, held up
shipments of some military equipment, and refused to communicate with the Israeli
Defense Ministry Director General, whom Pentagon officials believed had misled
them about the Harpy deal.
On August 17, 2005, the U.S. DOD and the Israeli Ministry of Defense issued
a joint press statement reporting that they had signed an understanding “designed to
remedy problems of the past that seriously affected the technology security
relationship and to restore confidence in the technology security area. In the coming
months additional steps will be taken to restore confidence fully.”28 According to the
Israeli newspaper Ha’aretz, Israel will continue to voluntarily adhere to the
Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use
Goods and Technologies, without actually being a party to it. On November 4, in
Washington, Defense Minister Mofaz announced that Israel would again participate
in the F-35 JSF project and that the crisis in relations was over. In March 2006, the
new Defense Ministry Director General Jacob Toren said that an interagency process
27 Ron Kampeas, “Israel-U.S. Dispute on Arms Sales to China Threatens to Snowball,”
Jewish Telegraphic Agency, June 8, 2005, citing a U.S.-China Economic and Security
Review 2004 report.
28 “U.S. Israel Agree to Consult on Future Israeli Weapons Sales - Nations Affirm Joint
Commitment to Address Global Security Challenges,” U.S. State Department Press Release,
August 17, 2005.

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CRS-21
had begun approving marketing licenses for Israeli firms to sell selected dual-use
items and services to China, primarily for the 2008 Olympic Games, on a case-by-
case basis.
On October 21, 2005, it was reported that Israel would freeze or cancel a deal
to upgrade 22 Venezuelan Air Force F-16 fighter jets, with some U.S. parts and
technology. The Israeli government had requested U.S. permission to proceed, but
it was not granted.
Espionage-Related Cases. In November 1985, Jonathan Pollard, a civilian
U.S. naval intelligence employee, and his wife were charged with selling classified
documents to Israel. Four Israeli officials also were indicted. The Israeli government
claimed that it was a rogue operation. Pollard was sentenced to life in prison and his
wife to two consecutive five-year terms. She was released in 1990, moved to Israel,
and divorced Pollard. Israelis complain that Pollard received an excessively harsh
sentence. Israel granted him citizenship in 1996, and he remains a cause celebre in
Israel. Israeli officials repeatedly raise the Pollard case with U.S. counterparts, but
no formal request for clemency is pending.29 Pollard’s Mossad handler Rafi Eitan,
now 79 years old, is head of the Pensioners’ Party and a member of the current
government. On June 8, 2006, the Israeli High Court of Justice refused to intervene
in efforts to obtain Pollard release.
On June 13, 2005, U.S. Department of Defense analyst Lawrence Franklin was
indicted for the unauthorized disclosure of classified information (about Iran) to a
foreign diplomat. Press reports named Na’or Gil’on, a political counselor at the
Israeli Embassy in Washington, as the diplomat. Gil’on has not been accused of
wrongdoing and returned to Israel. Then Foreign Minister Silvan Shalom strongly
denied that Israel was involved in any activity that could harm the United States, and
Israel’s Ambassador to the United States declared that “Israel does not spy on the
United States.” Franklin had been charged earlier on related counts of conspiracy to
communicate and disclose national defense information to “persons” not entitled to
receive it. On August 4, 2005, two former officials of the American Israel Political
Action Committee (AIPAC), Steven J. Rosen and Keith Weissman, whom AIPAC
fired in April 2005, were identified as the “persons” and indicted for their parts in the
conspiracy. Both denied wrongdoing. On October 24, their attorneys asked the court
to summon Israeli diplomats to Washington for testimony. On January 20, 2006,
Franklin was sentenced to 12 years, 7 months in prison.
Rosen and Weissman are the first nongovernment employees ever to be indicted
under the 1917 Espionage Act for receiving classified information orally; they argue
that they were exercising protected free speech and the law was designed to punish
government officials. In August, a judge ruled that “the rights protected by the First
Amendment must at times yield to the need for national security.” However, he
required the government to establish that national security is genuinely at risk and
that those who wrongly disclosed the information knew that disclosure could harm
the nation.
29 See CRS Report RS20001, Jonathan Pollard: Background and Considerations for
Presidential Clemency, by Richard Best and Clyde Mark.

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CRS-22
Intellectual Property Protection. The “Special 301” provisions of the
Trade Act of 1974, as amended, require the U.S. Trade Representative (USTR) to
identify countries which deny adequate and effective protection of intellectual
property rights. In April 2005, the USTR elevated Israel from its “Watch List” to the
“Priority Watch List” because it had an “inadequate data protection regime” and
intended to pass legislation to reduce patent term extensions. The USTR singled out
for concern U.S. biotechnology firms’ problems in Israel and a persistent piracy
affecting the U.S. copyright industry. In November 2005, U.S. Ambassador to Israel
Richard H. Jones urged the Knesset to put Israel in line with Organizations for
Economic Cooperation and Development (OECD) countries with copyright law.
(Joining the OECD is an important Israeli foreign policy goal.) On December 15,
then-Minister of Industry Olmert and then-USTR Rob Portman agreed to
negotiations on the issue. On April 28, 2006, however, the USTR decided to keep
Israel on the Priority Watch List due to continuing concern about copyright matters
and about legislation Israel passed in December 2005 that weakened protections for
U.S. pharmaceutical companies.30 As they had in 2005, Israeli officials criticized the
USTR decision as discriminatory.
U.S. Interest Groups
An array of interest groups has varying views regarding Israel and the peace
process. Some are noted below with links to their websites for information on their
policy positions.
American Israel Public Affairs Committee: [http://www.aipac.org/]
American Jewish Committee:
[http://www.ajc.org/site/c.ijITI2PHKoG/b.685761/k.CB97/Home.htm]
American Jewish Congress: [http://www.ajcongress.org/]
Americans for Peace Now: [http://www.peacenow.org/]
Anti-Defamation League: [http://www.adl.org/]
Conference of Presidents of Major Jewish Organizations:
[http://www.conferenceofpresidents.org/]
The Israel Project:
[http://www.theisraelproject.org/site/c.hsJPK0PIJpH/b.672581/k.CB99/Home.htm]
Israel Policy Forum: [http://www.israelpolicyforum.org/]
New Israel Fund: [http://www.nif.org/]
Zionist Organization of America: [http://www.zoa.org/]
30 For U.S. government explanation of Israel’s listing on the Priority Watch List, see Full
Version of the 2006 Special 301 Report, 04/28/2006, accessible at [http://www.ustr.gov]

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CRS-23
Figure 1. Map of Israel
UNDOF
LEBANON
Zone
Israel
International Boundary
GOLAN
Armistice Line, 1949
HEIGHTS
S Y R I A
District Boundary
(Israeli
National Capital
occupied)
Haifa
Major Cities
Nazareth
Israeli occupied with current status
* subject to Israeli-Palestininian
Interim Agreement.
1967
0
50 Km
Ceas e - Fire J
0
50 Miles
Line
orda
Tel-Aviv Yafo
n
WEST BANK* Rive
M e d i t e r r a n e a n
r
S e a
Ashdod
Jerusalem
Ashqelon
1949
D e a d
Gaza
Armistic e
S e a
GAZA STRIP
Line
Beersheba
1950
Armistic e
Dimona
J O R D A N
Line
I S R A E L
E G Y P T
G u l f o f
SAUDI
A qa b a
ARABIA
Source: Map Resources. Adapted by CRS. (K.Yancey 6/15/06).

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