Analysis

Trump’s Trade War: Is There a Silver Lining for Israel?

While U.S., China and Europe duke it out, Israeli exporters could pick up customers

Leaders at the G7 summit in La Balbaie, Quebec stand near Donald Trump, June 9, 2018.
Jesco Denzel / German Federal Go

Is there an upside for Israel if a global trade war really does break out?

The issue took on new urgency after U.S. President Donald Trump on Friday threatened to impose a 20% tariff on all imports of European Union-assembled cars, a month after his administration launched an investigation into whether auto imports posed a national security threat.

That prompted EU Commission Vice President Jyrki Katainen to respond to any U.S. move to raise tariffs on cars made in the bloc.

Israeli trade experts expressed mild optimism over the weekend that Israel could survive a trade war – certainly a short one – and may even benefit as the world’s economic giants of the United States, Europe and China slug it out.

In fact, even though Trump is raising tariffs on China and Europe, a trade war between the U.S. and Europe is Israel’s main concern. Last year 24.3% of Israeli merchandise exports went to the U.S. and 34% to the EU. Although China is an important and growing market for Israel, it accounted for just 6.9% of Israeli exports.

Top markets
Israel's biggest merchandise export destinations in 2017*, $ billions,
and change from 2016

“In general, if the situation for American exports to Europe grows worse, our relative situation improves. The same holds vis a vis European exporters to America,” said Shaul Katznelson, the vice president for economics at the quasi-governmental Israel Export Institute.

“That works as a general rule, but you have to look carefully at which products are going to be hit by tariffs,” he said, but overall Katznelson was optimistic that Israel could gain from the situation. Ohad Cohen, who heads the trade division at the Economy and Industry Ministry, said Israel would only benefits if a trade war lasts long enough for supply chains to be altered.

“If it [a trade war] lasts just two or three months, it won’t be enough time for a change to take place in exports or company supply chains. But if it last eight months, companies will begin to change suppliers,” he said, adding, however, that for now the kinds of things that are being targeted by the warring trade partners are whiskey and soybeans, which offer no opportunities for Israel.

One area where Israel might benefit is the arms trade, said Katznelson.

“Our situation will improve in areas where we compete with European and American exports, which will become more expensive. For example, if Europe imposes tariffs on defense equipment from the U.S., our situation will get better,” he said.

Cohen said he was less confident. “Maybe there will opportunities here and there for companies. But a European company that has been working with an American supplier won’t rush to replace a reliable part of his supply chain.”

The risk, however, is that a trade war will slow global trade altogether, which would be a heavy blow to an economy like that of Israel whose exports exceeded $100 billion for the first time last year and which derives about 30% of its gross domestic product from exports.

The latest official to warn about the fallout of a trade war was the new head of the Bank for International Settlements, Agustin Carstens.

“We are entering into a dangerous dynamic where these type of [protectionist] issues start having side effects on currency markets and financial flows,” he told Reuters on Sunday. “We can start a very dangerous spiral that at some point can really affect the growth of the world economy and financial stability.”

Katznelson said that could reverberate even in areas were Israel could benefit like arms sales. Slower economic growth would likely force the government to cut defense expenditures and weapons purchases.

“In the first phase [of a trade war], it doesn’t seem like anything serious will happen to Israel, but there’s a danger of things deteriorating,” he said.

The Export Institute is forecasting 5% growth this year in Israel’s merchandise trade to about $107 billion-$108 billion. He said that estimate was only at risk if global trade growth sinks below 4% this year.

The World Trade Organization said in April it expected merchandise trade volume growth of 4.4% in 2018, roughly matching the 4.7% increase recorded for 2017. Growth is expected to moderate to 4% in 2019, but the WTO warned that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise its outlook.

One way Israel can fend off the worst impact is to more aggressively pursue its policies of bilateral trade agreements, said Cohen.

“We’re trying to put the pedal to the metal on trade pacts, In the last few months we’ve signed an upgraded agreement with Canada and a new free-trade area agreement with Panama,” he said. “We’ve also completed negotiations with Ukraine and we’re advancng with Vietnam, Korea and China and hope to revive talks with India.”