Crédito y Caución expects trade between the UAE and Israel to strengthen
The United Arab Emirates (UAE) and Israel signed an historic peace agreement in August 2020 that marked the normalisation of their diplomatic and economic relations. The subsequent five months have seen agreements between their export credit agencies and chambers of commerce, the opening of embassies, the operation of regular commercial flights and some $280 million in mutual trade. According to various sources, in the medium term, bilateral trade could reach between 4 and 6.5 billion dollars, or between 1% and 1.5% of each country's GDP.
In terms of economic size and level of development, the UAE and Israel are much alike. They both have a gross domestic product (GDP) of around USD 400 billion and their relatively small populations enjoy a high living standard measured in per capita income. Furthermore, Israel and the UAE are open economies. The import and export ratios of Israel are close to 30% of GDP. For the UAE those ratios are even higher, because of its large re-export volumes. Although the global pandemic will continue to form a drag on private consumption and external demand in the near term, Israel and the UAE are the two leading examples of fast coronavirus vaccination rollout, which affects their prospects for recovery. Both economies are well-diversified, which will not only help the economic recovery, but also means that they potentially have a lot to offer each other in terms of product choice. To really boost trade, the countries agreed to look into reducing import tariffs and non-tariff measures in strategic sectors. A more fully-fledged free trade agreement may be negotiated in the medium term.
Around one-third of Israel’s total exports can be labelled high-tech and this share goes up to almost a half when resource-based exports are excluded. The UAE’s share of high-tech import products has increased from below 15% to almost 20% over the past 10 years, coinciding with its accelerating economic diversification. Emirati companies can meet Israeli demand for aluminium, ceramics and other construction materials, while Israeli companies can help the UAE advance in the high-tech field.
Israel's strengthening currency, driven by gas revenues, is a potential international competitiveness issue in other export sectors such as manufacturing. Since 2016, Israeli goods have become 20% more expensive than Emirati goods. The shekel will continue to strengthen gradually, which at some point could drive Israeli companies out of the Emirati market. Another risk is that the new relationship between the UAE and Israel will not last. This risk seems to be low for now, but shouldn’t be entirely discounted. Moreover, the interest that the governments of both countries have in their relationship is not perfectly aligned. A main motivation for Israel’s engagement is expansion of trade and investment. With access to UAE’s regional trade hub Israel gains an essential foothold in the Middle East and North-Africa market. While to some extent the UAE would be able to use Israel as a gateway to the Mediterranean and the rest of Europe, this is less crucial. In view of the above, the UAE would be the one most likely to renege on some of the new cooperation agreements with Israel in case geopolitical tensions rise. Nonetheless, Crédito y Caución expects cooperation to intensify in the long term. The path is being followed by other Arab countries, such as Bahrain, Morocco and Sudan, making individual backsliding more difficult.
