Israel’s government is making significant efforts to establish closer ties with nations in Asia as well as with developing countries in Africa and Latin America. In July, Prime Minister Benyamin Netanyahu went on a well-publicized tour of sub-Saharan Africa. In a Knesset speech the same month, he boasted of increasingly close economic ties with China, India, and Japan: Israel is negotiating free trade agreements with China and India and is a founding member of the Asian Infrastructure Investment Bank (AIIB). Military cooperation with India has been increasing, and China now holds a significant direct investment portfolio of Israeli firms.
One reason Israel is reaching out to make new friends is the deterioration of its relations with traditional Western allies. This is particularly the case with the European Union, which has declared in principle its intention of imposing sanctions on entities that do business in Israeli settlements in the West Bank, and discriminating against Israeli products manufactured there. The common assessment in Israel is that the European Union is demanding that Israel adopt policies it cannot afford, namely unilateral territorial and security concessions to the Palestinians, and that economic relations with the bloc are therefore likely to get worse. Israel’s relations with the United States have also chilled significantly during the Obama Administration, though this has not yet affected economic ties.
Speeches like the one Netanyahu gave this past July can create the impression that Israel is making efforts to shift the pattern of its economic relations, reducing dependence upon Europe and expanding ties with other nations that may be more willing to embrace the advantages of trade and technology exchanges with Israel on Israel’s diplomatic terms. That Israel is making efforts to create closer economic relations with new partners is indisputable. But creating such opportunities is not the same thing as manipulating trade relations to reduce exposure to potentially problematic trading partners while increasing trade with diplomatically more congenial ones. We tried to examine whether the latter was indeed occurring and found no convincing evidence for it. Indeed, there is some evidence that in the future it may work the other way around: The autonomous development of trade patterns may shift Israel’s perception of the relative importance of its relations with other countries.
Figure 1 shows the development of Israeli trade by region since 2000. (All figures and tables are based on data from the Israel Central Statistics Bureau and the authors’ calculations.) These numbers refer to the sum of exports and imports in each year, and should be treated more as an index of involvement in international trade than a measure of tradable Israeli GDP. Since 2003, Israel has been one of the faster-growing developed economies, with trade acting as an engine of growth and developing rather faster than GDP (2009 being an understandable exception). Note, however, that there seem to be no sharp changes in the proportion of Israeli trade with the different regions.
Figure 2 allows a closer look at this phenomenon, and confirms it. It shows the percentage distribution of Israeli foreign trade (imports plus exports) among the different regions up to the last year for which this data series has complete figures (2014). Trade with Europe has consistently equaled or exceeded 40 percent of Israel’s trade. There has been some shift within the figures for Europe: Trade with the European Union has declined somewhat in percentage terms, from 38.5 percent to 33.5 percent. However, this hardly indicates a declaration of trade independence from the European Union. Trade with non-EU Europe has picked up the slack, but still constitutes no more than about 10 percent of Israeli trade. All in all, Europe remains Israel’s main trading partner because Israel and Europe both largely produce what the other party needs: Capital goods, machinery, and consumer durables and electronics in the case of Europe, and high-value-added specialty manufactures and software in Israel’s case. Economic specialty and demand, whether for consumer or producer goods, rule Israeli trade rather than politics. Similarly, Europe and the United States together continue to account for the lion’s share of Israeli trade—75 percent in 2000 and about 64 percent today. This is change at the margins rather than wholesale change, and does not indicate a significant shift in the degree of Israel’s engagement with its traditional trade partners.
If there is a change to be noted, it lies in Israel’s trade with the Americas. The lion’s share of this trade is with the United States, and it has been declining steadily as a proportion of Israeli trade, from just under 30 percent in 2000 to somewhat over 20 percent in 2014. In its place has come trade with Asia, expanding from just over 15 percent of Israeli trade in 2000 to just over 20 percent in 2014, and with “others,” about which more in a moment. There is nothing exceptional in Israel’s expanding trade with China and the rest of Asia; most countries in the world would show a similar pattern, often more sharply than in Israel’s case. It is conceivable that over the next decade trade with Asia may overtake trade with North America in Israel’s portfolio, but this would be a case of autonomous economic change, not the consequence of deliberate policy. In any case, no more than half of Israel’s trade with Asia is trade with China. Nonetheless, Israel may become more willing to accommodate Chinese interests, particularly economic interests, even at the expense of U.S. interests. Israel’s decision to join AIIB is a case in point.
What might be considered a dramatic shift in Israeli trade patterns? In the case of the United States, it was rightly considered an epochal event when trade with nations across the Pacific overtook trade with Europe. Nothing like that has happened in the Israeli case. Trade with Europe is still twice as large as trade with all of Asia. If trade with both regions should ever equalize, it would be a significant event. But barring unforeseen diplomatic changes, that day—if it is to come— is far off.
The other group with which trade has expanded is the category of “others.” Israel’s Central Statistics Bureau explains the classification of this group thus: “For reasons of censorship and statistical secrecy, it is not possible to publicize which countries goods have been delivered to or from which [countries they have been] received.” Eighty percent of trade in this category consists of petroleum products. Refer back to Figure 1, and one will see that this trade category is not new; its volume is roughly the product of the growth of Israel’s economy since 2000 and the changes in the price of oil. Another statistical series from the Central Statistics Bureau, which we did not use in creating the figures for this article, shows that the dollar value of merchandise imports from this category of unnamed countries halved from 2014 to 2015. This may be partly due to Israel’s own offshore natural gas fields coming online, but generally speaking Israel’s experience has not been different from that of other oil-importing countries. Merchandise exports to this group of countries trebled in dollar terms between 2000 and 2014, and may perhaps contribute to Netanyahu’s expressions of satisfaction with shifts in the larger Arab world’s relations with Israel. But even today these exports consist of no more than 1.2 percent of Israel’s GDP—hardly the making of a revolution in Israel’s trade patterns.
Figure 3 takes a summary look at trade balances. Since 2000 Israel has moved from having a worrisome trade deficit to a substantial overall trade surplus. The improvement in Israel’s trade position is chiefly due to two changes: Israel’s large trade surplus with the United States, and the achievement of near-balance with Europe (including the European Union). Against this must be offset the large deficit for oil importation. Israel’s trade with Europe may be more in balance, but its importance to Israel’s economy has not diminished one whit.
Even if Israel’s overall trade patterns have not changed dramatically, are there particular nations with which Israel’s diplomatic relations have changed significantly, and can one see a reflection of these changes in trade? Table 1 lists Israel’s merchandise trade with eight countries and regions (this is not the same series as that on which the figures were based). Both the total volume of trade (imports plus exports) and the trade balance (exports minus imports) are shown for the years 2008-14.
$ in millions, current. Source: Israel Central Statistics Bureau and authors’ calculations.
Germany and Switzerland are countries with which Israel’s trade and diplomatic relations show little change. They are perhaps Israel’s most important sources of capital goods, and the data show that the volume of trade with each has not changed markedly over the long run. Israel runs a regular trade deficit with each. The table also shows Israel’s merchandise trade surplus with the United States; it is substantial but less than it was at its peak.
For comparison’s sake we show Israel’s trade with three countries and two regions whose relations with Israel have undergone significant change in the past few years. The Mavi Marmara incident put Turkish-Israeli diplomatic relations in deep freeze for six years, but neither Turkey nor Israel suspended economic relations. Though Israeli tourism to Turkey all but disappeared, Israeli-Turkish trade was larger every year subsequent to 2010, when the incident occurred. Israel has improved its relations with India, but Israeli-Indian trade has fluctuated around a fairly stable mean for the past eight years. Israel’s trade with Russia exhibits the same pattern. Meanwhile, its trade with Africa, so recently the subject of journalistic boosterism, has declined steadily since 2011. Trade with “others” has been discussed above.
It is hard to point to a single fact that indicates that Israel’s trade patterns have been affected by Israel’s changing foreign relations, and there is only limited evidence that causality runs in the opposite direction, with trade determining political relations. This is not beyond comprehension. Israel’s economic performance over the past decade and a half has been a solid if not a stellar success, better than most developed economies’ records. This success is one of Israel’s most important diplomatic assets: Israel’s economy is solid, stable, growing, and features brilliant technical achievements based on its comparative advantage—a highly educated and innovative workforce. Israel is a major beneficiary of the open global economy, and its trade is determined by domestic demand and production, not by the government picking winners, whether for economic or diplomatic purposes. The actions of other governments may, of course, force Israel to change this pattern. So far, however, the lack of Israeli diplomacy’s influence on its trade has made a quieter, more consistent, and more substantial contribution to the country’s success than any diplomatic photo opportunity.