McDonald's Wages A French-Fry Battle

TIRING of its fight against Israeli trade restrictions, fast-food giant McDonald's has taken the war into enemy territory to challenge a kibbutz-owned monopoly on frozen french fries.

The local McDonald's franchisee announced last week that the company has struck a deal with local entrepreneurs to build a new factory that will produce french fries just the way the Golden Arches likes them.

The surprise decision caps several months of noisy controversy here over McDonald's application for a government permit to import company-approved french fries for its first restaurant in Israel, due to open in the last quarter of this year in a Tel Aviv suburb.

The application ran into fierce opposition from Tapud, the only Israeli manufacturer of french fries, the 13 kibbutzes that own and supply the factory, and their allies in the Agriculture Ministry. Their demands for protection from foreign competition were successful at a recent Cabinet committee meeting.

That such an apparently mundane issue as supplying french fries to a hamburger chain should have been raised in the Israeli Cabinet illustrates the virulence of the local debate over Israeli trade policy, as the Labor Party government, led by Yitzhak Rabin, takes its first tentative steps toward economic liberalization.

"We have lots of discussion in the government, but I believe that there will be a change in the structure of our economy when we finish our plan" for trade liberalization, says Finance Minister Avraham Shohat.

The plan was launched nine months ago, when the authorities abolished the old system of licenses for industrial imports from areas outside the United States, the European Community, and the European Free Trade Association, with which Israel has signed trade deals in the past.

If the effects have yet to be felt in Israeli shops, explains Zoar Perry, deputy director-general of the Trade and Industry Ministry, it is because "initially we have imposed tariffs of up to or more than 100 percent, which is equivalent to the previous restrictions."

But those tariffs will be cut over the next five years to a maximum of 10 percent, he says, obliging local industrial producers to compete on an almost equal footing with foreign suppliers.

No such challenge is in store, however, for the farmers on Israel's collectivist kibbutzes or its cooperatives, which dominate agricultural output in a country where no farmland is privately owned.

In Israel's agricultural sector, protectionism is as rife as it is in the US or Europe. Growers say much of this is because the high cost of water, even when it is subsidized by the government, makes open competition with farmers in more temperate climates impossible.

It is this protectionism that has led to the great french-fry debate. While McDonald's has abandoned the import battle, another locally owned hamburger chain, Burger Ranch, has taken its fight to the Supreme Court, and Pizza Hut is considering a legal challenge to the government's refusal to let it import mozzarella for half the price it has to pay locally.

"You look at the business, and you say ... this is a big chunk of my costs, and I could pass the savings on to my customers," says Pizza Hut spokesman Gadi Granot.

The opposing view, expressed by Tapud managing director Aaron Niv, rests on the social concerns that have long driven Israeli economic policy. "If the government were to grant the permit to import french fries, it would not end with McDonald's," he warns.

"It would be a precedent. It could even lead us to close the factory, and 100 jobs in a poor development town would be lost," he says.

With the new competing factory not expected to come on line for another year, McDonald's faces a fries shortfall for a few months once its restaurant has opened. The company is still petitioning the government to permit imports to cover that period.

The Cabinet's decision will indicate which way the government is going as it "wavers between policies," says Zeev Golan, an economist at the Institute for Advanced Strategic and Political Studies, a pro-free enterprise Jerusalem think tank. "On the one hand, it is afraid to break free from its old socialist bonds, and on the other, it is fully aware that it has to open up."

"It is inevitable that they are on the road to a free market," Mr. Golan adds. "But sometimes it is a case of one step forward and two backwards."