Specifically, U.N. Security Council Resolution 446 states: “The policy and practices of Israel in establishing settlements in the Palestinian and other Arab territories occupied since 1967 have no legal validity and constitute a serious obstruction to achieving a comprehensive, just and lasting peace in the Middle East.”
The EU is now seeking to differentiate between its relations with Israel and with the settlements, fearing that a continued status quo would never push the Israeli government into changing its settlement policies and serve as an obstacle to peace negotiations with Palestinians.
An estimated 550,000 Israeli settlers currently live in more than 200 official settlements and unofficial outposts, which are unrecognized by the Israeli government. Palestinians say that the presence and expansion of these settlements make it impossible to establish a Palestinian state based on a two-state solution.
Once the labeling is implemented, European consumers will be able to read on the label of most products if a piece of merchandise or goods — mostly fruit and vegetables — was produced in the settlements. Israel fears the labels will serve as political stigma and bolster campaigns by activists united against the occupation to boycott certain Israeli goods.
EU Commission Vice-President Valdis Dombrovskis insisted the measure was "a technical issue, not a political stance."
He said the guidelines had to be taken after three member states — Britain, Belgium and Denmark — imposed special labeling on their own, forcing the EU to streamline measures throughout the 28 nations.
"The EU does not support in any form a boycott or sanctions against Israel," he said, insisting that Israeli products from within the internationally recognized borders still benefit from a EU preferential tariff treatment.
Israel insists the step was inspired by an international boycott movement and noted that it comes at a time when the country is confronting a "wave of terrorism" amid stepped-up Palestinian unrest against the occupation.
Palestinian President Mahmoud Abbas praised the EU decision.
"I highly appreciate what the EU countries did on the products of the Israeli colonial settlements," he said in Saudi Arabia, where he was attending a summit of Arab and Latin American countries. He urged other participants to also welcome the EU move.
Hugh Lovatt, project coordinator for the European Council on Foreign Relations, said in a statement that the move shows that the EU is capable of influencing a just and lasting peace between Israelis and Palestinians.
“Today’s move shows that the EU has at its disposal a legal tool that is designed to make occupation unsustainable and disincentivizes the illegal acquisition of territory, provided it is allowed to function effectively as intended,” Lovatt said. "The EU is more likely to achieve its foreign policy objectives if it retains these legal instruments within its toolkit while refraining from political horse trading to placate Israel.”
But the Israeli Foreign Ministry said it's "puzzling and even irritating that the EU chooses to apply a double standard concerning Israel," while other territorial disputes around the world are treated differently.
It added that the step "raises questions" about the EU's role in the region and could have implications on Israel's relations with Europe. It added that the measure would harden Palestinian positions and make it more difficult to resume peace talks, which collapsed in 2014.
After the decision was announced, the ministry summoned the EU ambassador to Israel.
Israel's deputy foreign minister later said the government would suspend a series of ongoing meetings with the EU to protest the decision. Tzipi Hotovely said Israel was sending a "very strong message" of displeasure.
"We say you can't be involved in what is going on in the Middle East while you are taking such an extreme step of labeling products... boycotting us," she told Channel 2 TV.
Ministry spokesman Emmanuel Nachshon said Israel would suspend a series of regular dialogues on political issues in the Middle East, human rights and international organizations. He said the suspension would likely be temporary.
The labeling will primarily cover fruit and vegetables and affect less than 1 percent of all trade between the EU and Israel, which stands at some $32 billion, including $14 billion in Israeli exports into the bloc.
EU officials have said that in Britain, where the labeling is already in place, it has had no negative economic effect. For over a decade now, the EU has excluded products from settlements from trade preferences.
Al Jazeera and wire services