The Israeli settlement known as Maale Adumim sits fortress-like atop a red stone plateau. In the Bible, the road to the plateau was known as the "steep red road."

As the largest Israeli settlement in the Palestinian-administered areas of the West Bank, Maale Adumim is home to 40,000 people. Bulldozers are clearing lots for new houses on its outskirts. Its population is growing by the week and, in recent years, it has grown faster than any other settlement.

On the edge of the settlement's industrial zone, there is a factory operated by a company called Soda-Club. The steel gate is painted blue and green to match the company's curvy, modern-looking logo. A camera records the movements of anyone approaching the gate. The plant produces tabletop devices that add carbonation to flat water, like the ones used in many German kitchens. And for those who prefer a sweeter taste, there's also syrup coming out of Maale Adumim.

Journalists are not welcome to visit Soda-Club. As marketing director Asaf Snear claims on the telephone, it's to protect against industrial espionage.

But there's another reason behind this aversion to media attention: Soda-Club's products are at the center of a legal dispute with Germany that could significantly intensify the already heated debate over Israel's settlement policy.

The Hamburg Finance Court must now decide whether Soda-Club devices made in Maale Adumim can be imported into the European Union duty-free, like all other Israeli industrial products. Brussels doesn't want the company's products to fall into this category because they are manufactured in Israeli settlements located in the occupied territories.

The real question revolves around whether Maale Adumim is part of Israel. The EU has not formally recognized Israel's claim to Maale Adumim and other settlements. But, in practice, it has done little to stand in the way of Israeli settlement activities.

But that could now change. The Hamburg court has consulted with the European Court of Justice about obtaining a "preliminary ruling" that would settle the issue in a binding manner for all 27 EU member states. The decision is expected to come down in the coming months. If the court decides that a customs duty can be levied, it will be tantamount to handing down a decision against Israel's settlement policy. The delicate question at hand is whether Germany and the EU should accept how Israel handles the occupied territories or if they should wield their sharpest sword -- economic sanctions.

A 'Highly Explosive Case'

In formal terms, the judges are merely being asked to reach a decision about €19,155.46. Brita GmbH, a German company, had imported Soda-Club water-carbonating machines and syrup from Maale Adumim. The company also labeled the products as being "Made in Israel" and claimed that they should consequently be exempt from customs duties.

But the main customs office in Hamburg's harbor refused to allow this policy to continue. German customs agents contacted their Israeli counterparts to find out where exactly the products were made. When the response came, it said that they had been made in an area "under Israeli customs administration." When the Hamburg agents wrote back, asking whether the products had actually been manufactured in Israeli settlements, they received no response. So the Germans slapped a duty on the products.

Then Brita filed a lawsuit against this decision. The matter quickly made its way to the European Commission, which wants to use the legal dispute over Soda-Club to make an example of Israel. In an internal memo, it has asked EU member states for "support." The German Foreign Ministry is monitoring the "highly explosive case" with some interest -- and a certain amount of sympathy.

The EU is already prepared for confrontation when it comes to Israel's new nationalist, right-wing government. The 27 EU foreign ministers have temporarily put a planned diplomatic "upgrading" of relations with Israel on hold.

Now Europe hopes to use the customs dispute to apply additional pressure on Israel. The EU is the second-largest market for Israeli goods, after the United States. In 2008, for example, Israeli companies exported €12 billion ($16.8 billion) in goods to Europe. An estimated one-third of these goods are either fully or partially made in the occupied territories. Most apparently reach Europe duty-free, and an Israeli reimbursement fund for exports subject to duties was hardly used at all last year.

In response to EU pressure, Jerusalem signed an agreement in 2005 that requires every Israeli exporter to provide the customs agency with the location and postal code of the factory where any given product was produced. But when Israeli importers deliberately declare an incorrect place of origin, customs agents are powerless to react.

The situation has prompted the British government to urge the other 26 EU member states to agree on a procedure that would allow consumers to see exactly where Israeli goods come from. The proposal makes many Israelis uneasy. Could this mean, they worry, that European governments will soon be telling consumers: "Don't buy from Jews"?

Given the country's history, this is understandably a very sensitive issue in Germany. This makes it all the more surprising that the German government has been willing to openly comment on the Soda-Club affair. In response to a parliamentary question from the opposition Green Party, the government has said that there can be no exemption from customs duty for "goods from the occupied territories."

Meanwhile, the Soda-Club company is doing exactly what many Israelis do when it comes to the Palestinian conflict -- ignoring the problem. When asked for Soda-Club's reaction to people criticizing it for manufacturing its products in a settlement, marketing director Snear says: "Soda-Club is an apolitical company."