Economic Impact

Israel’s growing Arab world trade reflects regional transformation - experts

February 17, 2022

A free trade agreement with the UAE is in the works.

The intricate web of trade connecting Middle Eastern nations has never been more fruitful. For Israel, which was largely isolated for decades, the evolution has been astounding.

“Israel is at a new period in its relations with neighboring countries,” said Dan Catarivas, director general for foreign trade and international relations at the Manufacturers Association of Israel. “There is a dramatic and tectonic change.”

There has been a massive increase in trade between Israel and its neighbors, especially since the signing of the Abraham Accords two years ago, according to data from Israel’s Central Bureau of Statistics and Foreign Ministry.

The agreements provided a major boost for this change by normalizing relations between Israel and the United Arab Emirates, Bahrain, Morocco, and Sudan.

“Financial interests are one of the cornerstones of our relations with the Arab countries,” said Sawsan Natur-Hasson, director of the Middle East Economic Relations Department in the Foreign Ministry “Financial diplomacy is very important in our daily diplomatic efforts.”

Catarivas added that before the accords, “Israel was perceived as a foreign element in the region, an island economy which focused its efforts on the American, European and Asian markets. It was an anomaly in the global economy and can now become much more integrated and involved in economic relations with the region.”

Israel’s first peace agreement with an Arab state was signed with Egypt in 1979, more than three decades after the Jewish state was established. The peace between the former bitter adversaries has held but economic relations have not flourished.

In 1994, Israel signed an accord with Jordan. For Israel, the Hashemite Kingdom was a gateway to countries previously inaccessible. Israeli exports to Jordan are minimal.

“Trade and economic relations were not a high priority in the relations with these countries,” Catarivas told The Media Line.

Egypt and Jordan both have Qualifying Industrial Zones (QIZ), established to stimulate cooperation with Israel. Goods produced there containing a small portion of Israeli input can be exported to the US with no restriction.

“Trade and economic relations were not a high priority in the relations with these countries,” Catarivas told The Media Line.

Egypt and Jordan both have Qualifying Industrial Zones (QIZ), established to stimulate cooperation with Israel. Goods produced there containing a small portion of Israeli input can be exported to the US with no restriction.

According to Israel’s Foreign Ministry, the QIZs have made a great contribution to the countries’ relations. They have also generated $1 billion of income for the Egyptian economy each year, a figure which is only expected to rise.

Still, Israel and Egypt have had a rocky relationship for decades, with tensions often peaking.

“During the whole period, the QIZs maintained the same output,” said Natur-Hasson. “The financial aspect of the relations proved itself as very solid and strong, detached from political fluctuations.”

Today, the horizon looks promising.

“We are at the beginning of a major change between Israel and Egypt,” said Yitzhak Gal, an expert on Middle Eastern economies at Mitvim − The Israeli Institute for Regional Foreign Policies.

In 2020, Israel began exporting natural gas to Egypt for its domestic market. Currently, the agreement has Israel exporting more than 80 billion cubic meters of gas to Egypt over 15 years.

“This is expected to expand not only to the local Egyptian market but also to be exported further,” Gal added. “Israel does not have the ability to directly export to certain markets due to technical limitations.”

Egypt has facilities to produce liquefied natural gas, which can then be transported by ship rather than through pipelines, allowing Israel to export its gas to third parties.

“The internal reforms Egypt is going through will enable Israel to widen and diversify the relations,” said Catarivas. “This will allow Israel to increase import of raw materials from Egypt and export products in the fields of agritech, medicine and IT.”

Trade between Israel and Jordan was also low in the past. But the kingdom allowed Israel to import goods from countries it does not have official relations with.

This is also expected to undergo drastic change. In November, Jordan and Israel signed a deal in which Israel will provide desalinated water to Jordan in exchange for solar power. The deal was brokered by the UAE and served as a sign of the new era in the region. An Emirati firm will build the plants in Jordan that are to supply the electricity to Israel.

“This is by far the most important deal ever signed between Israel and Jordan,” said Gal. “It is a breakthrough in terms of the economic relations, by creating deep cooperation in essential infrastructure between the countries. It is also a signal for similar agreements we can expect in the future.”

Trade between Jordan and Israel is expected to rise significantly as a result of the agreement, to a value of millions of dollars a year, perhaps more. Gas exports to Jordan are also expected to increase in the coming years.

“Both sides are showing a willingness to increase cooperation,” said Catarivas. “With Israel’s new relations with the Gulf, Jordan’s role as a corridor will only increase.”

The new relationship with the UAE has already seen massive investment, with deep ties being forged from the get-go. Large investment funds have been established and are expected to finance bilateral and regional projects. A $100 million joint R&D foundation has already been created.

According to Natur-Hasson, a free trade agreement between Israel and the UAE is expected to be signed in the near future. Negotiations on the FTA are underway.

Other fundamental taxation and investment protection accords between the two countries have already been signed and ratified.

“These will be the cornerstone agreements of the economic and financial relations,” she said.

Morocco is also expected to offer Israel a wide range of opportunities in FinTech, textiles, aluminum, the automobile industry, water, and renewable energy.

“Morocco will also open African markets for Israel as it serves as a gateway to the continent,” said Catarivas.

“All these relations are young,” said Natur-Hasson. “We are encouraged by the growing trade volume numbers with all our partners in the MENA [Middle East and North Africa] region, and where we identify a regulatory block, we aim to remove it.”

The region is undergoing massive change which will make it unrecognizable in the coming decades.

Gal explained, “The process by which the region is becoming one financial unit is in continuous progress … that is creating great connectivity.

“It is happening despite and throughout hostilities, wars and political tensions. This will have an accumulative impact and it is only natural for Israel to be part of this process,” he said.

For now, Israel’s largest trading partners are the US, EU and China. The volume of trade with Arab countries is not yet close to these levels, but the potential exists.

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