Export labels split Israel

"What we have done is in keeping with the desire to protect the Israeli economy,' he continued. "This can lead to a breakthrough in our relations with Europe."

He insisted that the decision had no implications for Israel's borders. Products made in Tel Aviv would say, "Made in Tel Aviv," while products made in Barkan would say, "Made in Barkan," he explained. "I repeated to the Europeans that for us every such place is a part of the state of Israel," he said.

Previously, Israel had blurred the distinction, saying the goods were "of Israeli origin" or "from territory under our jurisdiction." But over the past year or so, that policy increasingly incensed Israeli industrialists as EU countries responded by cracking down on firms inside Israel.

Dan Propper, group managing director of Osem, a large food exporter, said one of the company's French importers faced demands to pay customs, including retroactively, even though Osem has no operations across the old Green Line that was Israel's border before the 1967 Middle East war.

"France began taking steps to impose customs on all Israeli firms," he says. Other countries also took steps, according to some businessmen. "It was clear this was going to spread to all of Europe. This would have eliminated any possibility to compete in the European market," Mr. Propper says.

"I have no doubt that firms across the Green Line will be hurt, but they are a small part of the overall exports and I assume a solution will be found for them," Propper adds.

Akiva Eldar, a columnist for the daily newspaper Ha'aretz, commented: "This was a very clear case of being forced to choose between the settlers on the one hand and Israel's business community on the other. It should be a lesson to the Europeans and the Americans that Israel is vulnerable."

Olmert has said firms will be compensated, but Daniel Basch, an executive with Extal Ltd., says he has doubts this will ever materialize.

On the factory floor, within view of the expanding Maale Adumim settlement, Mr. Basch, Extal's managing director, proudly shows off the massive press installed two years ago to make aluminum extrusions for use in the construction, electronics, transport and engineering industries. The press has helped Extal to penetrate the European market and was a linchpin of its growth strategy.

"We are growing," Basch says, and then corrects himself. "We were growing until now."

The EU tariff would translate into a price increase of 7 percent, he says, making Extal uncompetitive in the European market.

"Maybe we will cut the big press back to just one or two days a week," he says."We will just have to view it as a sunk cost. We won't have any choice but to downsize."

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