Israel and the established diplomatic relations as early as 1959. A first free trade area agreement was signed in 1975. In the Essen Council in 1994, the EU signaled its willingness to establish special relations with Israel.
Multilaterally, Israel takes part in the 1995 Barcelona process (Euro-Mediterranean Partnership), and the subsequent 2008 Union for the Mediterranean, and since 2003 in the European Neighbourhood Policy (ENP).
Bilaterally, after a Cooperation Agreement in 1975, an Association Agreement came into force in 2000, providing for preferential economic, commercial, technological and research status between the parties. It included measures for the creation of a free trade area in industrial goods, and the liberalisation of trade in agricultural goods, of services, and of capital movements. The agreement also set the basis for cultural, research and political cooperation.
The EU–Israel Association Agreement (2000)
The EU–Israel Association Agreement forms the legal basis governing relations between Israel and the European Union, modeled on the network of Euro-Mediterranean Agreements between the Union and its partners in the southern flank of the Mediterranean Sea.
The agreement with Israel incorporates free trade arrangements for industrial goods and concessionary arrangements for trade in agricultural products (a new agreement here entered into force in 2004), and opens up the prospect for greater liberalisation of trade in services and farm goods from 2005. The Association Agreement was signed in Brussels on 20 November 1995, and entered into force on 1 June 2000, following ratification by the 15 Member States’ Parliaments, the European Parliament and the Knesset. It replaces the earlier Co-operation Agreement of 1975.
The Association Agreement established two main bodies for the EU–Israel dialogue. The
EU–Israel Association Council (held at ministerial level) and the
EU–Israel Association Committee (held at the level of senior officials) meet at regular intervals to discuss political and economic issues, as well as bilateral and regional co-operation.
Article 2 of the Association Agreement states:
Relations between the Parties, as well as all the provisions of the Agreement itself, shall be based on respect for human rights and democratic principles, which guides their internal and international policy and constitutes an essential element of this Agreement.
Dispute on preferential treatment for Israeli products originating in Palestinian territories
Goods from Israeli settlements in the occupied Palestinian territories are not subject to the free trade agreement, as they are not considered Israeli.
Since 1998, Israel and the EU have been in dispute over the legal treatment of products exported to the EU from the occupied Palestinian territories. Israel argues that these are produced in its customs territory and should thus be subject to the Association Agreement and benefit from preferential treatment. The EU maintains that the Territories are not part of Israel, and are illegal under international law, and such products do not therefore benefit from preferential treatment.
A 2001 avis by the European Commission confirmed the lack of preferential status for such products, inducing infuriated reactions from Israel, though the economic significance of the Territories-based Israeli products is very limited (€100 mln/year over a total of €6 bln/year). Differently from the EU, the United States admit custom-free goods exported from the Territories under their 1985 free trade agreement.
A solution was negotiated in 2004, whereby the Israeli authorities would specify on the certificate of origin the geographic location of the production site (e.g., Israel, Barkan), without having to specify whether the goods originated in the Territories. The EU customs authorities are then able to discern the exact origin and provide preferential treatment only to goods from Israel proper, giving de facto meaning to the EU policy of non-recognition of the Territories as part of the State of Israel
The 2010 ruling of the European Court of Justice in the Brita case confirmed that products originating in the West Bank do not qualify for preferential customs treatment under the EC–Israel Agreement, and that contrary assertions by Israeli authorities are not binding upon EU customs authorities. In its reasoning, the ECJ relied on the presence of two, distinct and equal Association agreements, one with Israel, applying to the "territory of the State of Israel", and one with the PLO, applying to the territory of the West Bank and the Gaza Strip, and on the general principle of customary international law that an obligation cannot be imposed on a third party without its consent. The Court concluded that the EC–Israel Agreement may not be interpreted in such a way as to compel the Palestinian authorities to waive their right to exercise the competence conferred upon them by virtue of the EC–PLO Agreement and, in particular, to refrain from exercising the right to issue customs documents providing proof of origin for goods manufactured in the West Bank and the Gaza Strip. It follows that products originating in the West Bank do not fall within the territorial scope of the EC–Israel Agreement and, therefore, do not qualify for preferential treatment under that agreement.
In 2015, the Israeli Foreign Ministry announced that "Israel is suspending its diplomatic dialogue with the EU in various forums" due to a policy passed by the EU to label products from the West Bank. Israel expressed displeasure that "the EU has chosen, for political reasons, to take such an exceptional and discriminatory step, inspired by the boycott movement, particularly at this time, when Israel is confronting a wave of terrorism targeting any and all of its citizens", adding that the labelling decision would "have implications for Israel–EU relations." The Prime Minister of Israel, Benjamin Netanyahu, reiterated that the decision was "hypocritical and [set] a double standard", adding that the EU "should be ashamed" of its actions. The United States said it did not regard the EU move as a boycott.
ACAA free trade agreement in pharmaceuticals (2012)
Upgrading the Association Agreement has long been on hold following a vote in the European Parliament to postpone the issue in December 2008, due to continuing settlement building and the blockade of the Gaza Strip.
The Agreements on Conformity Assessment and Acceptance of Industrial Products (ACAA)  which focus on pharmaceutical products were adopted by the European Parliament on 23 October 2012, following a debate that had lasted for more than two years. Ratification of the ACAA will make it easier to export Israeli pharmaceuticals and other goods to the 27 EU member countries, and vice versa. Following a controversial debate, 379 members of the European Parliament voted in favor and 230 against ratification. The ACAA are in conformity with the Brita ruling on the non-preferential access of goods produced in the Israeli settlements.
Open skies agreement
In June 2013, Israel and the EU signed an open skies agreement, which is expected to come into effect in 2018.