Opinion

When the U.S. Economy Coughs, Israel Catches the Flu

A screen on the trading floor at the New York Stock Exchange displays news of stocks rallying after a statement by Trump regarding China trade deal in New York City, August 26, 2019.
Andrew Kelly/Reuters

The trade war between the United States and China is being waged far from us, but the waves it’s creating are likely to hit us too. In recent days the war has worsened. China announced that it would impose additional tariffs on U.S. imports, and Donald Trump responded immediately by raising tariffs on China.

The result: stock market declines all over the world. It’s clear to everyone that a trade war means fewer imports and exports, which leads to a decline in growth, a blow to living standards, an increase in unemployment and soaring inflation.

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Some people are automatically criticizing Trump’s steps against China, but what can you do when he’s right? For years, China’s Communist government broke all the rules of fair competition. This is a regime that makes it difficult for American companies to sell in China, artificially maintains a weak yuan and subsidizes exports.

All those activities are harming U.S. industry, which has a hard time coping with this unfair competition. The result: the closing of thousands of factories and the layoff of millions of workers in places like the Rust Belt, where many Trump voters are concentrated.

The trade war’s influence on the Israeli economy is likely to be dramatic. We’re an economy that relies on a high level of exports and imports, so it’s sensitive to the level of world trade. When the United States coughs, we catch the flu. And the timing is also especially bad.

The Israeli economy is suffering from a large budget deficit, which is approaching 4 percent of gross domestic product. Such a large deficit will force the next government to cut 20 billion shekels ($5.7 billion) from the 2020 state budget – and that will affect hospitals, education, social welfare and infrastructure; in other words, low-income people.

But what will happen if the trade war between the United States and China develops into a worldwide slowdown, with declines by the Tel Aviv Stock Exchange, layoffs, lower private consumption, the purchase of fewer cars and homes, and lower tax revenue?

In such a case, the deficit will suddenly jump to 6 or 7 percent and the credit rating companies will lower our rating. They’ll leave us with no choice but to slash the budget at the most unsuitable time, during a slowdown, which would toss the economy into an even deeper hole, into recession and unemployment.

What can that be compared to? To a family that has lived beyond its means for years. It earned a net 10,000 shekels a month but spent 11,000. At first the bank was understanding and gave it loans. But the family, due to pressure from the children, used the money for recreation.

And then one day the crisis arrived. The father was laid off, the family income fell and the bank realized that this was a dangerous customer who wouldn’t be able to pay back the money, so it halted the family’s credit. It found itself in a financial vortex and was forced to lower its standard of living all at once.

That’s exactly where Finance Minister Moshe Kahlon and Prime Minister Benjamin Netanyahu are leading us. They took out huge loans and increased spending substantially to mollify the public, and that’s how Israel finds itself suffering from a dangerous deficit.

And like the family debt, which gradually increased until it buried the family beneath it, the same is happening now to the public debt. Since 1985, every Israeli government made sure to lower the debt – until 2018, when everything turned upside down. Government spending increased by an unusual degree, the revenues failed to arrive, and the debt-to-GDP ratio rose to 61 percent. In 2019 the situation worsened and the debt increased to 62 percent. An additional increase is expected in 2020 as well.

Last week Netanyahu said he had dealt with larger deficits in the past, “when I was finance minister,” so there’s no need to get upset. That’s true of 2003, but now the situation is different. This time he’s responsible for the large deficit, the growing debt and declining growth, and it’s very hard for the person who caused the damage to admit the mistake, change direction and fix the situation. That’s not popular. And all this is before bringing into the equation the great danger of the world trade crisis.