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The Effect of the Israel-Hamas War on Israeli Trade

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The Effect of the Israel-Hamas War on Israeli Trade

This article considers the potential effects of the recent Israel-Hamas fighting on trade between other countries and Israel.

This article considers the potential effects of the recent Israel-Hamas fighting on trade between other countries and Israel; another assessment shall follow regarding the Palestinian trade. Trade is important because it has been a crucial part of Israeli economic growth, which in turn has been oriented toward exports.

Any considerations at this stage must be tempered in light of the recent onset of conflict and the uncertainty of what the future may hold.

Background

Following the surprise Hamas incursion on Israeli territory on Saturday, 7 October 2023, Israelis and Palestinians, mainly those in the Gaza Strip, find themselves in a grave situation. The ground action has mainly played out on the lands adjacent to and east of the Gaza Strip. Rockets have fallen further afield from the north of the strip, some exploding near Tel Aviv, the commercial centre of Israel. Hundreds have died on both sides.

The attack occurred nearly five decades to the day after the Yom Kippur War and approaches two decades since the end of the second intifada in 2005 and the establishment of Hamas rule in the Gaza Strip in 2006. Israel imposed a blockade on the strip in 2007 and thereafter launched multiple military assaults on the territory, “protracted”[1] and “major”[2] ones taking place in 2008, 2012, 2014, and 2021. The confrontation in 2014 generated the most deaths and injuries to Palestinians and Israelis.[3] Violence has escalated, and 2022 was the year (up to that point) with the highest casualties since 2005.[4]

Israeli Economy

Israel, with a GDP of over $522 billion, is the third largest economy in the Middle East and North Africa region, following Saudi Arabia and Turkey and edging out the United Arab Emirates.[5] 

A developed country of 9.71 million people, it experienced resilient economic growth in 2021 and 2022 with GDP growth rates of 8.6% and 6.4%[6]; the rate was projected to fall to 2.9% this year prior to the present war. Before the Covid-19 pandemic, GDP grew every year starting in 2004.[7]

As for trade, Israel has a strong tech sector that makes up a significant portion of its goods and services exports: Its “largest goods exports [in 2021 were] in high complexity products, Machinery and Chemicals”[8] and the largest export overall was in ICT services, a moderately complex product that contributed most to export growth in the same year. In fact, out of all Israeli sectors measured by their share of the global market in 2020, services had the largest share (1.27%).[9] “Exports [driven by services] have grown by an annual average of 6.7% over the past five years, which has outpaced overall economic growth, as exports represent a growing segment of the economy.”[10] Israel also has had a current account balance every year since 2003, reaching a high of $22.57 billion in 2020.[11]

The country has a capable workforce such that domestic value added in gross exports (as opposed to import content of exports) grew every year from 2013 to 2020, besides 2018.[12] Additionally, the complexity of its economy is such that it has the capability and opportunity to expand into new markets and products.

Expansion has for example taken place in the form of trade with its Muslim neighbors and more distant Arab countries. This economic interaction is crucial for Israel in its quest for stability and legitimacy as a country. It also has generated returns, primarily through the 2020 Abraham Accords: “Total trade between Israel and the Abraham Accords countries increased from $593 million in 2019 to $3.47 billion in 2022. Israel imported $2.57 billion worth of goods and services from these countries last year, up from $378.3 [million] three years earlier, and exported $903.9 million in goods and services, up from $224.8 million.”[13] Trade ties with the United Arab Emirates (UAE), the only Arab country to have implemented a free trade agreement with Israel, have grown the most. 

However, the Organization for Economic Cooperation and Development (OECD) had noted even before the recent combat between Israel and Hamas that “exports will be held back by moderate demand growth in trading partners.”[14] The Israeli economy has been affected by higher levels of inflation, less investment into its tech sector,[15] and domestic unrest because of attempts by its government to change the national judicial system.

Potential Conflict Effects on Israeli Trade

One must take account into previous occurrences while acknowledging the present circumstances.

In three of the four abovementioned years (not 2014) in which Israel launched protracted assaults on the Gaza Strip the monetary value of the current account balance dropped.[16] The annual growth rate of imports of goods and services fell in 2008 and 2012 (but were both positive), while like exports fell into the negative range those same years, in addition to falling in 2014.[17] Perhaps more tellingly, the monthly percentage change of exports and imports in goods decreased within all four periods of fighting. The quarterly value of exports of services only saw reductions in 2008 and 2014 and that of imports of services only fell in 2008 and 2012.[18]

This data shows an impact mostly on exports, with particular sensitivity of goods within that category. Nonetheless, these observations may not reveal any causality because of the near month-to-month fluctuations (from positive to negative territories and back again) that marked monthly trade in goods from 2008 to this year and the less dramatic but palpable rise and fall of quarterly trade in services from 2008 to 2022.[19]

Something that has been noted (in 2021) is this: “Israeli-Palestinian conflicts rarely cause lasting damage to Israel’s markets, history shows, because investors both direct and indirect appear more interested in a resilient economy – and one currently bulging with tech money…[The Tel Aviv stock market (.TA125)] did fall during the previous flare-ups, but only did significantly worse than other markets during the 2014 ground war in Gaza.”[20]

The situation in 2021 does not align with current conditions, mentioned above. For example, even though the shekel has depreciated, which in the short term could encourage more foreign demand, such demand is not strong. Moreover, the currency has been sliding over the past months and the Bank of Israel on 9 October announced it would sell tens of billions of foreign currency to shore up the shekel following a plunge due to the Israel-Hamas confrontation.[21] (The bank is able to do so given the aforementioned years of current account surplus. Greater contribution to foreign exchange holdings came from a measure to “keep the shekel from strengthening too much and harm[ing] exporters as foreign inflows to the country’s tech sector soared [post-2008].”[22] (The previous sentence also reveals a relationship between trade and markets.))

Nor do other previous flareups and conflicts shed a large quantity of meaningful light about how the current war could unfold and impact trade given their smaller scale and the absence in the past of a government as pro-Israeli as it is now. 

As for the former, Hezbollah, a pro-Palestinian group based in Lebanon, has fired upon Israeli military facilities since the outbreak of bloodshed on 7 October. The UAE also warned Syria against joining the conflict. Concerning the immensely pro-Israeli government that currently holds power, relations between Israel and Arab countries with which it has formal diplomatic recognition have cooled to an extent: “Egypt and Jordan…have sharply increased their criticism of Israeli policies.”[23]

In the weeks leading up to the current war, Israel had engaged with Bahrain on establishing a free trade agreement and had been in negotiations over a possible deal with Saudi Arabia. These efforts may face greater scrutiny by Arab publics that are overwhelmingly supportive of the Palestinian cause. Thus, technical and trade cooperation may falter.

Israel has three main ports from which it exports and imports products, which in order of amount of cargo handled are Haifa, Ashdod, and Eilat. The former is in the north, less than 25 miles (40 kilometers) from Lebanon; the port of Ashdod is closer to the Gaza Strip than that. The third port is found in the southern tip of Israel, on the Gulf of Aqaba (and prior to the Suez Canal). 

There has already been commentary on the prospects of fulfilling the India-Middle East-Europe Economic Corridor (IMEC) because of the Israel-Hamas conflict.[24][25] The corridor has been envisioned as a pathway to boost trade flows via land and sea routes in conjunction with digital connectivity. The plan involves railways connecting the UAE, Saudi Arabia, Jordan, and Israel, where they would end on one side at the port of Haifa, which the Indian Adani group bought in early 2023. “The IMEC offers huge potential, not least because it would reduce shipping times by as much as 40%…But the real prize for New Delhi would be to forge a stronger relationship with Europe, its third largest trading partner.”[26]

What to Watch

The Tel Aviv stock market (.TA125) has made gains after experiencing a sharp decline in the aftermath of the Hamas incursion and Israeli response. Businesses and other stakeholders should ensure that they are aware of any spread of the conflict, such as by Hezbollah in the north. Effects on trade may become graver with the prolongation of the fighting. Statements and actions by Israel’s largest trading partners, the U.S. and China, as well as Arab countries, must also be acknowledged.

REFERENCES

 [1] Al Jazeera Staff. “What’s the Israel-Palestine Conflict about? A Simple Guide.” aljazeera.com, October 9, 2023. https://www.aljazeera.com/news/2023/10/9/whats-the-israel-palestine-conflict-about-a-simple-guide#:~:text=In%202014%2C%20over%20a%20span,half%20a%20million%20people%20displaced%20.

[2] OCHA. “Data on Casualties.” United Nations Office for the Coordination of Humanitarian Affairs – occupied Palestinian territory, 2023. https://www.ochaopt.org/data/casualties.

[3] Ibid.

[4] UN Press Release. “With 2022 Deadliest Year in Israel-Palestine Conflict, Reversing Violent Trends Must Be International Priority, Middle East Coordinator Tells Security Council – Press Release (SC/15179) – Question of Palestine.” United Nations, January 18, 2023. https://www.un.org/unispal/document/with-2022-deadliest-year-in-israel-palestine-conflict-reversing-violent-trends-must-be-international-priority-middle-east-coordinator-tells-security-council-press-release-sc-15179/.

[5] World Bank Data. “GDP (Current US$).” World Bank Open Data, 2023. https://data.worldbank.org/indicator/Ny.Gdp.Mktp.Cd?most_recent_value_desc=true.

[6] IMF. “Real GDP Growth: Annual Percent Change.” IMF, 2023. https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/ISR?zoom=ISR&highlight=ISR.

[7] OECD (2023), Gross domestic product (GDP) (indicator). doi: 10.1787/dc2f7aec-en (Accessed on 10 October 2023)

[8] The Atlas of Economic Complexity. “The Atlas of Economic Complexity by @harvardgrwthlab.” The Atlas of Economic Complexity, 2023. https://atlas.cid.harvard.edu/countries/110/export-basket.

[9] The Atlas of Economic Complexity. “The Atlas of Economic Complexity by @harvardgrwthlab.” The Atlas of Economic Complexity, 2023. https://atlas.cid.harvard.edu/countries/110/market-share.

[10] The Atlas of Economic Complexity. “The Atlas of Economic Complexity by @harvardgrwthlab.” The Atlas of Economic Complexity, 2023. https://atlas.cid.harvard.edu/countries/110/export-basket.

[11] IMF. “Current account balance U.S. dollars: Billions of U.S. dollars.” IMF, 2023. https://www.imf.org/external/datamapper/BCA@WEO/ISR?zoom=ISR&highlight=ISR

[12] OECD (2023), Domestic value added in gross exports (indicator). doi: 10.1787/3959a0c6-en (Accessed on 10 October 2023)

[13] Postal, Steve. “Trade and Tourism on the Rise among Abraham Accords States.” AA Peace Institute, February 19, 2023. https://www.aapeaceinstitute.org/latest/trade-and-tourism-on-the-rise-among-abraham-accords-states.

[14] OECD. “Israel Economic Snapshot – OECD.” OECD, 2023. https://www.oecd.org/economy/israel-economic-snapshot/.

[15] Scheer, Steven, and Emily Rose. “Israeli Tech Startups Flock to Us amid Uncertainty at Home.” Reuters, August 16, 2023. https://www.reuters.com/technology/israeli-tech-startups-flock-us-amid-uncertainty-home-2023-08-16/.

[16] IMF. “Current account balance U.S. dollars: Billions of U.S. dollars.” IMF, 2023. https://www.imf.org/external/datamapper/BCA@WEO/ISR?zoom=ISR&highlight=ISR

[17] OECD (2023), Trade in goods and services (indicator). doi: 10.1787/0fe445d9-en (Accessed on 10 October 2023)

[18] OECD (2023), Trade in services (indicator). doi: 10.1787/3796b5f0-en (Accessed on 10 October 2023)

[19] (The possible connection between conflict and diminishment of trade, along with the continual fluctuations, may reflect the cyclicality of violence and response. This is an area for further investigation.)

[20] Jones, Marc, and Steven Scheer. “Analysis: Conflicts with Palestinians Rarely Leave a Scratch on Israel’s Markets.” Reuters, May 18, 2021. https://www.reuters.com/world/middle-east/conflicts-with-palestinians-rarely-leave-scratch-israels-markets-2021-05-18/.

[21] Scheer, Steven, and Ari Rabinovitch. “Bank of Israel to Sell $30 Billion of Forex to Stabilize Shekel amid Gaza War.” Reuters, October 9, 2023. https://www.reuters.com/markets/currencies/bank-israel-sell-30-bln-forex-moderate-shekels-volatility-2023-10-09/.

[22] Ibid.

[23] Aftandilian, Gregory. “Israel’s Normalization with Arab States Slows as Repression of Palestinians Rises.” Arab Center DC, April 19, 2023. https://arabcenterdc.org/resource/israels-normalization-with-arab-states-slows-as-repression-of-palestinians-rises/.

[24] Rai, Vinod. “The India-Middle East-Europe Economic Corridor: Will Recent Challenges Create a Setback?” ISAS.NUS.EDU.SG, October 10, 2023. https://www.isas.nus.edu.sg/papers/the-india-middle-east-europe-economic-corridor-will-recent-challenges-create-a-setback/.

[25] Alias, Afiq. “Breakingviews – Israel Highlights Fragility of New Trade Corridors.” Reuters, October 10, 2023. https://www.reuters.com/breakingviews/israel-highlights-fragility-new-trade-corridors-2023-10-10/.

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