President-elect Donald Trump will be sworn in on Friday. His trade and manufacturing policy, at least according to his declarations, is clear and based on protectionism – protection and assistance for American industry to increase employment, and fewer exemptions for competing imports.
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For the Israeli manufacturing industry, which exports primarily to the United States, the direction seems to be clear: Anyone who wants to capture the American market may have to start a branch in the U.S. Despite the tremendous differences in size between Israel and the U.S., the Israeli government seems to be fighting the American trend head-on, and is working in exactly the opposite direction, trying to encourage the establishment of factories mainly in the Negev and Galilee.
The 2017-2018 State Budget Arrangements Law brings increased benefits in investment and tax grants, which are designed to attract large foreign companies to invest in Israel, including American firms, and to get Israeli companies to build their next production systems in Israel too. But everyone knows that as part of the globalization process, Israeli companies must also build manufacturing facilities outside Israel – near their customers or their raw materials.
“Trump’s government and Brexit in Great Britain attest to the direction,” said Ohad Cohen, head of the Foreign Trade Administration in the Economy and Industry Ministry at a recent meeting of commercial attachés with TheMarker. “Protectionism is back. There’s a decline in openness to imports in the large Israeli export markets. In the U.S. there’s ‘Buy American.’ If you want to be in the U.S. market you have to start an operation abroad.”
Military industries are familiar with the demand for local production not only from the U.S., and for years have been competing in U.S. Army tenders via their U.S. subsidiaries – including Rafael, IMI Systems (formerly Israel Military Industries), Israel Aerospace Industries, Elbit and Plasan Sasa.
The commercial attaché in Washington, Anat Katz, said that “in defense industries there’s regulation related to state security, which requires local production.”
She said that in the U.S. it’s still not clear what changes there will be in requirements, “but according to the declarations we can expect to see a stronger emphasis on a preference for American acquisitions. Trump recently tweeted that he will promote ‘Buy American’ and ‘Hire American’ programs for the benefit of local employment and manufacturing. The fact that he has repeated that in recent days indicates that it wasn’t only an election slogan but that he intends to focus on these issues.”
Although Trump talks a lot about changing the country’s bilateral trade agreements, the Israeli attaché has received no indications of an intention to change the agreement with Israel. “He spoke about his desire to build a trade council in the White House,” said Katz. “The entire issue will be closer to him. The secretary of commerce will be more important in discussions of domestic and foreign trade.”
“The government’s challenge in the coming years will be increasing the number of exporters of goods,” said Cohen.
Although Israeli exports increased in 2016, most of the exports were services, whereas the export of goods – an area where it is harder for Israel to compete with other countries – declined somewhat.
He said that part of the problem is concentration. “The major exporters are increasing their exports, while the small and medium-sized ones are maintaining a nominal amount of exports. There are 66 exporters of over $100 million, who export 66% of Israeli goods. The number of exporters of goods hasn’t increased in recent years, as opposed to an increase in exporters of services.”
Israeli exporters tend to prefer the American and European markets, despite the economic crisis suffered mainly by those markets since 2008. But the mix of Israeli exports has changed in the past 15 years.
“In 2000 the U.S. and European Union were the destination of over 70% of Israel’s exports, and exports to Asia were 12%,” said Cohen. “Today 25% of goods are exported to Asia, and about 60% to the EU and the United States. The government policy is to support companies that want to vary target markets.”
India, China and Japan
Because the dominant export markets were the U.S. and EU, a change was made in 2016, with the government promising double support for three destinations – India, China and Japan. Suddenly companies decided to take a chance and to enter them for the first time, with government support. Africa has also become a preferred export market, and the Economy and Industry Ministry plans to open two new commercial missions, in Kenya and in an undetermined country in West Africa.
While ties with China are accelerating, ties with India are stagnating. Although Israeli companies were eager to do business with India in the past decade, many of them returned quickly, angry after losing millions. Many reported that the local partners had deceived them, and that they couldn’t tolerate the demands for bribes and the red tape.
“We have yet to decipher India,” said Cohen. “India is misleading. It’s a democratic country with nice people, and therefore you’re less careful. They speak English, and you think you know the place – but it’s a complicated country. Companies went to work there independently and made mistakes and were put off. Yet exports to India total $1 billion annually, excluding military exports and diamonds. One problem was finding a suitable local partner. We opened two commercial missions that created a network of ties. They don’t readily cheat the government. A senior businessman won’t recommend someone unreliable. I’m inviting Israeli companies to let us help them.”
In 2016 Israel supported about 140 companies with about 60 million shekels in funds for international marketing. In 2017-2018 the budget is supposed to increase by 20%, with a preference for China, India and Japan.
The ministry is also conducting negotiations for free-trade agreements with eight countries: China, Vietnam, South Korea and the Eurasian Economic Union of Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan. Negotiations with Ukraine should be concluded by 2017. There are also negotiations for multilateral trade agreements for trade in services and environmentally friendly products.
Like Trump’s election, Britain’s planned disengagement from the EU, which has yet to begin, creates uncertainty in international trade and Israel’s exports. Israel has no separate trade agreement with Britain – trade is part of the trade agreement with the EU. The U.K. is Israel’s second largest trading partner after the U.S., with exports of about $4 billion annually and imports of about $1.5 billion.
Cohen says that he assumes that the British will choose one of two alternatives: “Either they will copy the EU trade agreements with each country, including Israel, in order not to harm business, followed by bilateral agreements; or they will begin to establish new parallel free-trade zones with all the countries. But it will take a long time.”
The commercial attaché in the U.K., Nathan Tsror, said that “there are over 50 agreements, and that’s a real challenge. The British have established two new ministries – one to handle Brexit and one for international trade. They’re trying to decide between a ‘hard Brexit,’ a total exit from the EU, and a ‘soft Brexit,’ an exit from the EU but not from the customs agreements, which will make them similar to Norway and Switzerland. We’re waiting.”
Gauging the boycott
A sensitive subject in Israel’s trade relations with the U.K. are calls by pro-Palestinian organizations to boycott Israeli exports from the territories (BDS). The EU decided to mark products from the territories separately, so they can’t say “Made in Israel” and won’t receive tax exemptions. But sometimes Israelis try to “bypass” the problem – for example, dates are said to originate in the Jordan Valley, without any mention of settlements or the territories.
Gal Mor, the attaché for EU institutions in Belgium and Luxembourg, said: “In the EU countries the boycott makes headlines, but there are no clear signs of significant harm to Israeli exports. But we assume that there is great indirect damage. Chain stores have reduced their orders for agricultural produce from Israel, because they didn’t want to bother with marking the origin. We also assume that the media coverage will harm exports over time.”
Cohen says that the problem is decisions made as part of the “quiet boycott.” He says that boards of directors can decide not to deal with imports from Israel, not for political reasons but for risk management. There’s a lot of uncertainty regarding the extent of the damage.
Not all the EU countries implement the decision to mark products. Those that do include France, Holland, the U.K. and Denmark. Cohen says that there is considerable consumer pressure on the chains. Israel is trying to convince the EU not to enforce the boycott.
The Chinese are also interested in transportation, especially green transportation such as electrical vehicles (bicycles, scooters and cars), whose local use and export China wants to encourage. “The calls for a boycott don’t influence China,” says Ofir Gur, the commercial attaché in Beijing, as demonstrated by the acquisition of the Ahava cosmetics company (whose factory is in the territories).
Gur says that although Trump talks about protective tariffs against China, the Chinese aren’t worried. But if the U.S. becomes less attractive for Chinese investments, Israel’s relative attractiveness will increase. He says that the Chinese preference for technological investments is Silicon Valley, followed by Israel.
But Beijing’s interest is not limited to high-tech. “The Chinese have invested $6-7 billion in Israel, including in Adama and Tnuva – most in the past five years,” said Gur.
There is one area of investment that the Chinese will continue to support: agriculture. “The Chinese have to feed 1.3 billion people, and food security there is an issue on the level of state security,” said Gur. “That’s why their five-year plan emphasizes agriculture. China gives tens of billions of dollars in direct support to farmers for growing grains and introducing new seeds and fertilizers. Israeli agro-technology exports are welcomed all over China.”