ISRAEL TRADE PROFILE
During 2007, despite daunting challenges, the Israeli economy enjoyed continued resilience
and growth. This impressive achievement was helped by the expansion of Israel’s global
trade, ongoing demand for high-tech products and the maintenance of a firm fiscal policy
and open monetary policy. The Bank of Israel’s State of the Economy index rose by 8.3%
during 2007, after rising 7.5% in 2006. In light of international developments, the Bank of Israel’s
growth forecast for 2008 stands at 4.1%, an assessment complemented by many international financial
bodies. It should be remembered that in 2006, the Bank of Israel found that the second Lebanon war
only cut Israel’s GDP growth by a mere 0.5% for the year. The war had no effect on Israel’s financial
stability, save for a drop in tourism revenues.
The IMF in February 2008 called Israel’s economic performance “exceptional.” They added that
notwithstanding the war in the north during 2006, real GDP growth averaged about 5% during 2006-07.
Buoyant world trade propelled exports and investment, fostering strong employment growth - which
was also supported by welfare reform - and private consumption. Fiscal outturns have been much
stronger than budgeted over the past couple of years because of higher-than-projected tax revenue and
public expenditure restraint. They foresaw that further improvements to the financial sector framework
would enhance the economy's resilience. Key drivers of the expansion included improving internal
security and productivity; buoyant external demand; exceptionally benign financial conditions and
sound macroeconomic policies.
The World Economic Forum (WEF) ranked Israel as the 17th (out of 131) most competitive economy in
its 2007 Global Competitive Index, ahead of Canada, France and Korea. Israel’s technological
readiness saw the greatest improvement, which leaped 20 places to rank 3rd in the world, while market
efficiency increased by 7 places. Israel ranked 1st for availability of scientists and engineers, an
improvement of 3 places, and ranked 2nd for venture capital availability. Israel ranked 7th in the world
for innovation. Additional improvements were noted in macroeconomic management, market
efficiency and various areas of infrastructure.
Lehman Brothers’ forecast for the Israeli economy is positive overall and gives much credence to the
Israeli market among other developing economies. According to the bank’s report, Israel’s economy
will continue to be fairly robust in 2008, though fiscal growth may drop in the upcoming year.
In February 2008, Fitch Ratings upgraded the State of Israel's foreign currency Issuer Default rating
("IDR") to 'A' from 'A-' (A minus) and the local currency IDR to 'A+' from 'A'. Following the upgrade,
the Outlooks on both ratings are now Stable. The Country Ceiling is also upgraded to 'AA-' (AA minus)
from 'A+'. Morgan Stanley recently commented that “From whatever direction you look at it, Israel’s
economic and financial performance has come out much better than expectations.”
Israel's unemployment rates continued to fall significantly in 2007, especially in the last quarter of the
year, when it sank to its lowest level since the 1990’s. In 2007, unemployment averaged 7.3%
(195,700), down from 8.4% (236,100) in 2006. The job creation impetuses put in place by then finance
minister Benjamin Netanyahu have certainly born fruit. Netanyahu's important fiscal and structural
reforms continue their crucial contribution to Israel's growth.
Israel currently enjoys an expanding national product, record international investment activity and a
flourishing hi-tech sector. This growth continues despite the ongoing Palestinian war against Israel.
For 2007, all key economic indicators prove that there has been an improvement in the economy,
auguring well for the future.
The international business community is taking advantage of the many opportunities offered by the
Israeli economy. Direct foreign investments in Israel reached a record high during 2006, amounting to
$23.7 billion, or 240% more than the $10.2 billion invested during 2005. Foreign direct investment in
Israel totaled $10.3 billion in 2007. Last year's foreign investment record of $13.2 billion included the
acquisition of 80% of Iscar by Berkshire Hathaway. Cumulative foreign investment in Israel totaled
$48.8 billion between 2003 and 2006.
Israel's foreign trade activity remained robust. The significant rise in the value of the Euro and the
falling dollar vis-à-vis the shekel has worked to refocus attention on the United States for the supply of
a growing number of products. Pricing is still a salient issue, but Israeli importers have expressed a
growing interest in American items from a vast array of industrial and agricultural sectors.
BASIC STATISTICS (2007)
Population: 7.242 million (+1.7% annual growth)
GDP: $195.3084 billion (PPP) (5.3% growth)
GDP per capita: $27,762 (PPP) (3.4% growth)
Business Product: +6.1% (6.5% in 2006)
Exports of Goods & Services: $71.4 billion (+13.4%)
Import of Goods & Services: $73.7 billion (+19.1%)
Imports from the United States: $13.019 billion*
Exports to the United States: $20.812 billion*
* US Census Bureau data
According to Israel's Central Bureau of Statistics, not including diamonds, Israel’s imports in 2007
amounted to $56.62 billion, while exports were worth $54.065 billion.
Israel ranks as the 21st largest export market for the US, with over $30 billion in bilateral trade for
2007. Without diamonds, this trade amounted to $16.892 billion. Israel is the US’ 2nd largest trading
partner in the Middle East, surpassed only by Saudi Arabia. The EU is the source of 33% of all Israeli
imports, followed by Asia with 22%. However, the US is the largest single country source for Israel,
with 14% of the import market. India is also a leading trade partner. The EU received some 35% of all
Israeli exports, followed by 27% by the US and 15% by Asia.
Israel had a $3.071 billion trade surplus with the US in 2007. Israel's trade surplus with Canada was
$194.8 million. This compares to a trade deficit of $4.22 billion, excluding diamonds, with the EU in
the same period, as well as a deficit of $4.313 billion with Asia. Israel has free trade accords with the
United States (1985), the EU, Canada, Mexico, Turkey and a number of economic bilateral agreements
internationally, including with Jordan, Egypt and India.
AMERICAN INDUSTRIAL EXPORT MARKETS IN ISRAEL
Electricity & Gas Equipment: Electrical generating, distribution, transmission and scrubbing
equipment have potential. Israel Electric Corporation, the country’s electricity monopoly, plans to
invest over $1 billion annually over the next few years to expand its generating system and to upgrade
its transmission and distribution equipment, and another $1 billion over ten years to reduce emissions.
Natural gas power plants have begun to operate in the country and are slated for expansion.
Military Applications: Israel’s defense spending accounts for approximately 8.6% of GDP. Around
20% of the $9 billion defense budget is spent on R&D and procurement. For FY 2007, the United
States provided $2.35 billion in military assistance, including $1.75 billion in Foreign Military
Financing (FMF) for Israel and another $609.7 million that is converted into shekels for local purchases.
The military field is fertile ground for American suppliers, but only if they first designate an exclusive
Israeli representative to approach the various Ministry of Defense acquisitions and purchasing
departments. American military assistance funds often stipulate the use of American products (i.e. via
offsets), an attractive incentive for Israeli importers to find US products. About 75% of U.S. military
aid was used for procurements from U.S. firms and cooperation contracts with U.S. industries. An
important prerequisite is deployment of a military application in the US armed forces, or sales to US
military projects, before the local authorities consider it for use in Israel. Industry certifications are also
essential. US exports to this sector were worth $2.7 billion in 2006, out of a market worth $3 billion.
Medical, Dental & Lab Equipment: Israel's high standard of medical services and health insurance
maintain strong demand for products in this sector. Israel presents opportunities in unique hi-tech
applications, diagnostic equipment, computerized healthcare systems, imaging systems, cardiology and
perhaps high quality disposable products. Over one third of Israel’s $800 million medical equipment
market originates from the United States. Some 75% of this market is imported. Hundreds of foreign
companies are represented in the local market within various sub-sectors, making competition stiff and
price a salient factor. FDA approval is required for all medical applications, though the CE mark is also
widely accepted. European products pose a particular competitive challenge to American lines.
Industrial Chemicals: A $17.4 billion sector, domestic sales were worth $8.6 billion in 2006. Israeli
imports of industrial chemicals in 2006 was somewhere around $5.1 billion. The U.S. share in 2005
was some $500 million. Industrial chemicals are used as intermediates and raw materials in Israel’s
leading industries, including the chemical, pharmaceutical, food, electronics, textiles and metalworking
Electronic Components: Israel is a major consumer of electronic components, imports surpassing $1
billion since 2004, with some $350 million imported from the USA. Local production is approaching
$2 billion. There is a vibrant market for active and passive components, power amplifiers, RF and
microwave components, aswell as in IT and telecommunications. Many larger American manufacturers
(e.g. Applied Materials, Intel, Microsoft, Vishay, National Semiconductor) have already established
local R&D and manufacturing facilities of their own.
Safety / Security Equipment and Services: Israel's $790 million security equipment and services
market is of interest to U.S. exporters. Though Israel is a recognized international leader in this field,
there is ample room for American products. The import market is estimated at $240 million, of which
70% is U.S. market share. U.S. products enjoy an excellent reputation due to their high reliability. Best
opportunities are in sophisticated detection systems, sensors, x-ray systems, non-lethal weapons, etc.
Other prospects exist for alarm systems for vehicles and buildings, fire alarm & fire fighting systems,
bullet proof vests, non-lethal weapons and armored vehicles. The work place safety gear market is
being helped by a growing awareness of safety requirements.
Pharmaceuticals & Non-Prescription Drugs: Importing 60% of its pharmaceutical needs, Israel
represents the most advanced pharmaceuticals sector in the Middle East. Its $179 annual per capita
pharmaceutical spending is the highest in the region. Growth in generics is likely to exceed the
prescription market and the sector will account for 18.6% of the market by 2010. The over the counter
(OTC) sector will also continue to develop, mainly due to gradual deregulation, rapidly reaching $324
million by 2010.
The non-prescription drugs (NPD) market was worth some $150 million by 2005 as recent regulations
permit the sale of NPD in supermarkets and convenience stores. Good opportunities include branded
and private labeled NPD, including cold, cough and indigestion syrups, pain relief medication, anti-
fungal creams, eye drops, throat lozenges, laxatives and all types of medication for babies. Currently,
drugs, including NPD, are available only in pharmacies and can only be sold by certified pharmacists.
For 2003, US imports were $35 million out of $60 million in total imports.
AMERICAN AGRICULTURAL EXPORT MARKETS IN ISRAEL
Food Products: Processed food remains attractive despite the proliferation of major and minor
American brand names and clones. Some importers prefer to deal with companies having a varied line,
so that they can bring in mixed product containers. The main competitors are European suppliers (50%
market share), although foods from the Far East also hold a significant share. Based on trend forecasts,
the U.S. share of the consumer-ready retail market for imported foods should reach 40% by 2007. The
recent favorable exchange rate between the Euro and the dollar can also help with the increase of U.S.
market share. There is a prerequisite for kosher certification for successful market penetration. Low
quality pet foods items are also an option. Israel has strict marking and labeling requirements for food
items that can differ from those demanded by other countries.
Seth J. Vogelman 04/2008