According to Atradius ' latest economic research report, the normalisation of diplomatic and trade relations between Israel and the UAE will unlock mutual trade opportunities given the complementary nature of the two nations’ economies. Despite potential regional geopolitical tensions, cooperation between the two is likely to intensify in the long term.
With recessions in 2020 behind them, the report notes that the economic growth outlook for both is relatively strong. Their economies are complementary in that they both have a GDP of around USD 400 billion, and their relatively small populations enjoy high living standards. Both economies are well diversified, and the favourable business environment in each bodes well for developing an intimate trade relationship.
In the first five months since their historic peace treaty, the report notes that the two have conducted around USD 280 million in bilateral trade. Various sources estimate annual bilateral trade in the medium-term could range anywhere between USD 4.0 billion and 6.5 billion, equivalent to about 1.0%-1.5% of each country’s GDP.
Looking at each country’s relative comparative advantage, the UAE's opportunities include exports of perfumery, plastics, aluminium and cement & other construction materials. Israel has a strong comparative advantage in arms & ammunition, medical electro-diagnostic devices, chemical products and unfermented fruit and vegetable juices.
“The prospect of mutual benefit through a deepening trade relationship is evident,” noted Schuyler D’Souza, Managing Director Middle East, Atradius. “Due to pandemic-induced constraints on local and global demand, we expect to see a more immediate impact on some sectors like healthcare and agriculture, while other sectors, for example, leisure and hospitality, will take some time to see growth boosted by the peace deal. But, overall, the normalisation presents enormous opportunities for the business communities in the UAE, and we are fully prepared to help exporters explore trade opportunities.”
Other Key Findings Include:
* While the UAE sells mainly low/ medium-tech and resource-based manufactures, it is gradually trading up, buying more high-tech items worldwide. The UAE’s share of high-tech import products has increased from below 15% to almost 20% over the past 10 years, as it seeks to diversify its economy. As one of the world’s high-tech producers, Israel stands to benefit.
* Through either trade or investment, the UAE could benefit from Israeli expertise in healthcare and agri-technology. The UAE is making a great effort to attract foreign investors and is already one of the largest FDI recipients in the Gulf region. The Dubai World Expo later this year, where Israel will have its own pavilion, is a great opportunity for Israeli companies to showcase their innovations.
* Owing to Israel’s gas production expansion, Israel’s real effective exchange rate has already appreciated by almost 8% since 2016. With the UAE dirham depreciating simultaneously, Israeli goods became 20% more expensive in terms of UAE goods. The shekel will continue to strengthen gradually, which at some point could price Israeli companies out of the UAE’s market.
Geopolitical risks also persist the report notes. “Despite the risk of a temporary setback, the cooperation between the UAE and Israel that is currently being developed appears to be deep and broad-based,” noted Niels De Hoog, Senior Economist, Atradius. “It won’t be easily undone. Other Arab countries are following suit in reconciling with Israel, making individual backtracking more difficult, and the shared interest of maintaining a strategic partnership with the US is another political safeguard.”
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