It is a clear winter's day in the Judean hills, but clouds are gathering around dozens of Israeli firms in the occupied territories that export to the European Union.
Last week, during talks with the EU, Israeli Trade and Industry Minister Ehud Olmert agreed that Israel will begin specifying the place of origin of its exports. The decision could threaten the well-being of Israeli West Bank firms producing everything from humus to skin-care products.
The agreement will enable the EU, Israel's largest trade partner, to distinguish between exports coming from Israel - entitled to customs exemptions under a free trade agreement - and those from the occupied territories.
Supporters of the decision said there was no choice because the EU, unsure where the products originated, had started to assess tariffs from exporters inside Israel's pre-1967 borders also. The estimated $7 billion in Israeli exports to Europe were thus being endangered by the nonlabeling of the $120 million in exports from the West Bank and Gaza, they argued.
The issue has political as well as economic implications, reflecting deep-seated differences between Israel and the EU over Israel's borders and its construction of settlements on land the EU envisions as the heartland of a future Palestinian state.
In this instance, analysts say, the EU forced Israel into a choice between the well-being of its export industry as a whole, and that of the small number of Israeli exporters in the West Bank and Gaza Strip. This sets a precedent, showing Israel is vulnerable to pressure on the settlements issue, they say.
"This definitely sets a border and the government has made a big mistake here," says Ron Nachman, the mayor of Ariel, the second-largest settlement.
"The European Union is putting a yellow star of David on products from Barkan," he adds, referring to the wine exporting industrial zone near his settlement.
An EU spokesman said: "The EU's position has always been that this is a technical issue based on international law, which does not recognize settlements over the Green Line as being part of Israel."
The Green Line refers to Israel's borders before the 1967 Middle East War, when it captured the West Bank, Gaza Strip, Golan Heights, and Sinai Peninsula.While the EU and almost all of the international community consider the West Bank and Gaza Strip "occupied territories," Israel says they are "disputed territories" where it has claims.
Settler leaders say they are incensed that a hard-line Likud government, known for its sponsorship of the settlements, gave in to the EU. But the agreement's defenders cite the economic welfare of Israel as a whole.
"Whoever is playing politics with this is endangering all of Israel's exports to Europe," Mr. Olmert, the Israeli trade minister, said during an interview with Israel Television.
"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."