The UK and Israel have launched negotiations towards a new free trade agreement (FTA) between the two countries, with the aim of improving on a strong trading relationship that is already worth around £5 billion a year.

Talks got underway on July 20th, with UK trade secretary Anne-Marie Trevelyan meeting Israeli ambassador Tzipi Hotovely in London to launch discussions. 

So what issues are at the heart of negotiations, and how could an agreement advance trade between the nations?

The path towards a free trade agreement

Israel is already a major trading partner for the UK, with around 6,600 British businesses exporting goods to Israel. Meanwhile, there are also around 325 Israeli-owned businesses operating in the country, while total exports to the UK are expected to double by 2035.

Therefore, both countries are keen to expand on this positive foundation. In a joint opinion piece for the Daily Telegraph last year, UK foreign secretary Liz Truss and Israeli foreign minister Yair Lapid highlighted the nations' long history as allies and their shared efforts in areas such as cyber, tech, and defense as among areas where they can build a closer trading relationship.

However, trade between the nations is still based on agreements that have been in place since 1995, so a modernized deal could pave the way for greater cooperation in technology, easier movement of people and services, and new opportunities for exporters of Scotch whisky, electric vehicles and construction materials, among others.

Ms Trevelyan said: "We want a deal that will play to British strengths, while stimulating innovation and increasing opportunities for small and medium-sized enterprises across the UK. Combining the power of our economies in a revamped trade deal will boost trade, support jobs and help take our economic relationship to the next level."    

What sectors could benefit from an FTA?

There is already substantial trade in key sectors such as aerospace and pharmaceuticals between the UK and Israel. For instance, Ms Truss and Mr Lapid identified the supply of Rolls-Royce jet engines to Israel and the fact that Israeli firm Teva provides one in six of the NHS' prescription medicines as examples of the strong bonds between the countries.

Although the existing UK-Israel Trade and Partnership Agreement means that 94 percent of UK goods exported to Israel already benefit from tariff-free access to this market - along with 93 percent of items heading in the other direction - the FTA will seek to remove any remaining barriers. 

Respondents to a UK government consultation highlighted agriculture, for example, as one area where tariffs remain high.

Elsewhere, respondents also observed that obtaining rules of origin certification from local customs authorities is currently burdensome, while continued use of paper-based processes for customs procedures also acts as a non-tariff barrier. These are also areas that could be addressed by a comprehensive FTA.

Expanding the role of services will be another major point of the talks. The UK government noted that both the UK and Israel are highly service-based economies - with this accounting for 80 percent and 78 percent of GDP respectively. However, at present, just 36 percent of trade between the countries involves services, which suggests there is major untapped potential in this area.

Commenting on the talks, trade strategy partner at EY Sally Jones welcomed the progress, adding: "This is an opportunity to put services, digital technology and innovation at the heart of the UK and Israel’s already-strong trading relationship. Both the UK and Israel are known for their vibrant tech and fintech sectors, which will both benefit from this new deal."

What obstacles may stand in the way?

While the UK and Israeli government focus on an "innovation-focused FTA", some groups have raised concerns that political and human rights issues must not be overlooked, especially when it comes to areas such as Palestine.

Amnesty International, for example, warned that any deal will need to be carefully drafted to avoid allowing Israel to consolidate claims on Palestinian land. The organization noted that this is a weakness of the existing Israel-EU FTA, which allows exporters to claim goods manufactured in occupied territories as Israeli.

"In their haste to agree a shiny new trade deal with Israel, there’s a distinct danger that UK negotiators will fail to ensure absolute clarity over the precise origins of goods destined for the UK market," commented Amnesty International UK's economic affairs director Peter Frankental.

The Palestine issue has long been a sticking point for Israeli trade relations, but the signing of a historic FTA between the country and the United Arab Emirates earlier this year - a first between Israel and an Arab nation - may suggest that trade diplomacy in the region is still achievable despite political tensions.