Trump’s tariffs pose destabilizing threat to Israeli economy

“World trade is going to go down a little bit, and it’s going to hurt the Israeli economy.”

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March 9, 2018 00:03
3 minute read.
Trump’s tariffs pose destabilizing threat to Israeli economy

U.S. President Donald Trump signs a presidential proclamation placing tariffs on steel and aluminum imports at the White House in Washington, U.S. March 8, 2018.. (photo credit: REUTERS/LEAH MILLIS)

 
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Israel could be in for a rude economic awakening after US President Donald Trump announced plans to enact tariffs on steel, aluminum and other yet-to-be-determined products.

Trump specified additional protectionist trade policies and tariffs on Thursday, exempting Mexico and Canada. In recent tweets, he mentioned China and referred to its intellectual property theft.

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Last week, the US president imposed 25% tariffs on steel imports and 10% tariffs on aluminum. He said Thursday that the tariffs would go into effect in 15 days.

Given that Israel is a steel and aluminum importer, the country is not directly affected. But if other countries respond and enact tariffs on American products, it could lead to spiraling metal costs – squeezing the global supply chain and raising prices for Israeli consumers.

“There are reasons to be worried,” Alex Zabezhinsky, chief economist at Meitav Dash investment house, told The Jerusalem Post. “At the end of the day, the prices of all kinds of [imported] commodities and foods will go up. And Israel, as an open economy that imports almost all kinds of rare materials, consumer goods and intermediate goods for industry, could be hurt because of increased import prices.”

A number of variables remain unknown, including how extensive the American tariffs will be; the responses of trading partners such as China and the European Union; and the time line for enacting all of the customs duties.

Amid a brewing trade war and the threat of protectionist policies, the dollar has already weakened. That could further appreciate the shekel, which has been trading at strong levels, with $1 costing NIS 3.46. A little more than a year ago, $1 fetched more than NIS 3.80.

The over-heated shekel is making Israeli exports less competitive, with hi-tech firms especially taking the bite as they sell services mainly in dollars but pay salaries in shekels.

“World trade is going to go down a little bit, and it’s going to hurt the Israeli economy,” Ori Greenfield, Psagot Investment House’s chief economist and strategist, told the Post. “Usually, countries like Israel – small economies with a large proportion of exports in the GDP – are the ones that get hurt first.”

Many Israeli hi-tech and bio-tech firms have set up subsidiaries in the US to take advantage of its tax incentives. Those US-based subsidiaries can use American trade agreements with countries that haven’t signed trade agreements with Israel, to trade under better conditions.


But if countries started penalizing the US – possibly in contravention of World Trade Organization rules – that could take away Israeli parent corporations’ trading benefits.

“It’s not good,” Zabezhinsky said. “Any decrease of the United States position as a leading economy, as a trading partner for the world – it’s bad for Israel, because we depend on the US economy very much. Many investments in Israel – their origin is from the United States. A big part of our exports is going to the United States.”

Yet because many local exports are in hi-tech, it is possible that Israel could get hurt less than other countries.

“Israeli exports have some kind of an advantage because our exports are mainly hi-tech and intellectual property,” Greenfeld said. “And the competition is not that high. It’s not like we export towels. It’s not the bigger proportion of Israeli exports... Compare us to countries like Chile and South Korea... I think we’re in a good position.”

Globally, the trade barriers are likely to create unrest and volatility in the financial markets, undermining business sentiment and consumer confidence.

Trump argues that enacting tariffs is necessary to reduce chronic US trade deficits with much of the world.

Israel currently has a trade surplus with the US, worth some $9.4 billion in 2017.

Most macro-economists, on both the right and the left of the political spectrum, agree that trade barriers and protectionist policies harm economic growth.

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