Editors: Paul Rivlin and Yitzhak Gal, Assistant Editors: Teresa Harings, Gal Buyanover Vol.2 Edition No.

1, January 2012

Israeli Trade with Middle East Markets in 2011: healthy growth despite adverse political environment Yitzhak Gal
Over the last decade, the Middle East has been among the fastest growing regions in the world, second only to East and Southeast Asia in its pace of economic as well as international trade growth. In 2011, the combined Gross Domestic Product (GDP) of the Middle East and North Africa (MENA) countries is estimated at $3.5 trillion, equal to that of Germany, the fourth largest economy in the world; its international trade is also comparable to that of Germany, at about $ 2.8 trillion7 percent of total world trade.

While global imports of goods and services rose by nearly 130 percent between 2003 and 2011, those of MENA increased by 250 percent. Most of MENA's import growth has come from the regions two economic super-powers: the GCC bloc (the Gulf Cooperation Council, a quasicommon market of the six Arabian Gulf countries: Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain, and Oman) and Turkey. These two regional economic super-powers are among the twenty largest economies in the world. The GCC blocs combined GDP of about $1.4 trillion is the equivalent of Russias, the eleventh largest economy in the world; while Turkey, with a GDP of $750 billion, is the worlds seventeenth largest economy. MENA plays a leading role in global energy markets and has become an increasingly important player in global financial markets. The region is also a leading exporter of chemicals, and the largest import market, globally, for water desalination technologies.
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Chart 1: MENA Imports by Main Sub-Regions, 2003-2011 ($ billions)

Source: IMF Israel's trade in Middle Eastern markets is much larger than many imagine. Israeli exports to Middle Eastern markets in 2011 are estimated at above $6 billion, about 13 percent of overall Israeli exports (merchandise exports, excluding diamonds, including exports to the Palestinian Authority). In comparison to other regions, exports to the Middle East region in 2011 were larger than Israeli exports to Eastern Europe, South and Central America, Africa (excluding Egypt), and Oceania combined. In comparison to Israels non-MENA leading export markets, exports to MENA markets in 2011 were as large as total exports to China, India, Russia, Japan, and South Korea combined.

Chart 2 below presents Israeli exports to the various MENA markets, alongside Israels nonMENA leading export markets in 2011. The Palestinian Authority (PA) is the most important market for Israeli exports in the MENA region, second only to the United States. It is a larger export market, for Israel, than any West European market; as large as China and India markets, combined; and four times as large as exports to Russia or Japan. Turkey is the second largest Israeli export market in MENA, and the GCC bloc comes third. All exports to the GCC market are indirect, through third countries, and recorded in official external trade statistics as exports to these third countries. Some Israeli exports to the GCC are channeled through Jordan or Turkey, but most go through various European and other non-MENA countries. Based on our analysis of partial and indicative data, we estimate the volume of Israeli indirect exports to the GCC bloc at the magnitude of above $500 million a year. Exports to Jordan and Egypt, in 2011, amounted to about $200 million each.
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Chart 2: Israel's Exports to MENA Markets, compared to Other Main Export Markets 2011 ($ billions)

Note: Exports of goods, excluding diamonds; 2011 figures are preliminary. Source: Israel Central Bureau of Statistics (ICBS)

Chart 3 below presents the development of Israeli exports to MENA markets over the last decade. Total exports to MENA markets grew threefold, from around $2 billion in the early 2000s to above $6 billion in 2011; while overall Israeli exports (excluding diamonds, including exports to the PA) approximately doubled over this period. The developments in 2011 are of special interest. In spite of the deterioration of political relations between Israel and Turkey, and the turmoil in the Arab world, Israeli exports to MENA countries jumped by about 20 percent.

The sharp increase in Israeli exports to MENA countries, in 2011 and over the last decade, will be explored in more detail, in country by country analyses, in coming additions of Iqtisadi. The following is a brief overview of these developments.

Chart 3: Israels Exports to MENA, by Main Markets, 2000 2011 ($ billions)

Note: 2011 figures are preliminary Source: ICBS

The exceptionally large size of Israeli exports to the Palestinian Authority reflects the dominant role of Israel in the tiny Palestinian economy. Israel is the source of about three quarters of Palestinian imports, and the destination of 90 percent of Palestinian exports. Though almost half of Israeli exports to the Palestinian market are petroleum products and imported products with low Israeli added value, exports to the Palestinian economy are of primary importance to a wide range of industries as well as agricultural and service sectors. Exports to the PA fell sharply in the early years of the Second Intifada. However, as shown in Chart 3 above, since 2003 it has experienced marked recovery, in spite of the sharp decline in exports to Gaza as a result of severe Israeli restrictions after the take-over of Gaza by Hamas in 2007. As of 2011, Israeli exports to the West Bank and Gaza were almost 3.5 times their volume in 2002, the lowest point of the Intifada period.

Exports to Turkey grew more than fourfold over this period. Trade has shown continuous strong growth, widely spread among various industrial and other products, and reflecting the strong and

deep economic relations that have developed between the industrial and other sectors of the two countries.

Exports to Egypt jumped in the mid-2000s, from almost nil to above $100 million a year, as a result of the Qualified Industrial Zones (QIZ) agreement. This trilateral agreement, between the USA, Egypt, and Israel, provides significant incentives to Egyptian exports to the USA (mainly textiles and garments), conditioned on the incorporation of Israeli inputs in the production of these Egyptian products. The continuous growth of Israeli exports to Egypt since the mid-2000s mainly reflects Egyptian procurement of Israeli inputs under the QIZ agreement. This trend continued in 2011, as Israeli exports to Egypt grew to just below $200 million, double their volume in 2005. Israeli exports to Jordan grew strongly and continuously over most of the first decade of the 21st century; by 2008, at close to $300 million, its volume was seven times as large as in 2000. Most of this impressive growth was a result of the QIZ agreement between the USA, Israel, and Jordan, which was signed in 1997. In 2009-2010, Israeli exports to Jordan declined considerably. In 2011, however, a modest recovery was registered.

The volume of Israeli imports from the MENA region is half as large as exports to this region. At a total volume of about $3 billion in 2011, its share in overall Israeli imports (merchandise imports, excluding diamonds, including imports from the Palestinian Authority) was only 6 percent, compared to 13 percent share of exports. The main reason for this is the relatively very small magnitude of imports from the PA, as shown in Chart 4 below. In spite of some growth in recent years, Israeli imports from the PA were barely one sixth of exports to the PA, resulting in a 2011 trade surplus of almost $3 billion (in Israels favor), three times higher than the surplus in Israeli-Palestinian trade a decade earlier. A similarly huge trade surplus characterizes Israeli indirect trade with the GCC countries. The volume of Israeli indirect imports from these markets is small, although in recent years there have been indications of an increase.

Imports from Turkey have been greater than Israeli exports. Both imports and exports registered a significant increase in 2011, in spite of the political tensions mounting between Israel and
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Turkey. Imports from Egypt are smaller in volume, and significantly narrower in the range of products, in comparison to imports from Turkey and the PA. These fell by one half in 2011, after a jump in previous years, mirroring the rise and fall of gas imports from Egypt. After increasing sharply in the second half of the 2000s, imports from Jordan doubled in 2011; and for the first time since the start of trade relations between the two countries, Israeli imports from Jordan were approximately the same as exports.

Chart 4: Israel's Imports from MENA, 2000 - 2011 ($ billions)

Note: 2011 figures are preliminary Source: ICBS

In summary, Israels export volume to MENA markets is significant, and the figures presented above demonstrate the economic importance of the region to the Israeli economy. Furthermore, except for Turkey and the PA, Israeli exports to MENA countries represent a fraction of potential exports to these markets. In 2011, they accounted for no more than one thousandth (0.1 percent) of total imports into these markets. The gap between actual and potential trade volumes is even more striking if Israeli import figures are taken into account.

A more detailed analysis of Israeli trade with MENA markets, and some insights regarding the un-materialized trade potential, will be presented in country by country surveys in coming editions of Iqtisadi.