The US is Israel’s most important trading partner. It is the main source of knowledge and investment flow to Israel, and this has only strengthened over the years. US-Israeli bilateral trade is $38 billion, of which $23 billion is in exports of goods, services, and knowledge from Israel to the US. The US has become the most important destination of Israeli exports; unexpectedly, however, Israel’s knowledge industry has become economically important for the US - Israel is ranked among the 25 countries important for US exports.
Nonetheless, the impressive numbers above do not tell the whole story. Understanding the economic-strategic link between the two countries necessitates understanding the flows that are harder to quantify, which shape the longstanding economic dialogue between Israel and the US.
The broadest connection that has shaped the economic-commercial relations between the two countries is the special relationship of the common values of democracy and liberty. On the basis of this ideological platform, the US has become a political ally, essentially Israel’s greatest and most important friend, whose diplomatic and defense support is Israel’s vital strategic assets.
The American Jewish community the largest in the world after Israel, which possesses great economic power had a critical role in opening doors to Israeli exports and piqued the interest of Wall Street in Israel, followed by that of venture and technology capitalists. The US-Israeli alliance of diplomacy and values had a major influence on the economic process that burst forth in the 1980s to change the face of the Israeli economy from a closed, socialist, centralized economy to a free market economy built on the principles of capitalism of the US capital market.
The US administration was involved in shaping the 1985 economic plan, which created the modern Israeli economy, helping with bridge loans that made it possible. The change in Israel was dramatic. One of the main reasons for this was Israel’s switch to an export-oriented economy. During Israel’s first 50 years, Israel imported more than it exported, resulting in a constant relatively high trade deficit. In the early 1980s, Israel’s debt/GDP ratio exceeded 280%, a dangerous level that made it difficult to obtain foreign credit.
The change that began 30 years ago
The opening of the Israeli economy to competition, the lowering of quotas, the development of information-based industry, and a conservative fiscal policy reduced the budget deficit and the foreign debt to create the modern Israeli economy that we are familiar with today. In the past few years, Israel’s debt/GDP ratio has been a healthy 67%, resulting in a good international credit rating (A+, compared with its first rating of BBB). Israeli goods and services are now sold in more than 100 countries on all continents. Israel’s sources of imports are also many and diverse.
Back in 1977, US-Israeli relations resulted in the establishment of Israel-US Binational Research and Development Foundation (BIRD-F), which supports joint R&D projects by US and Israeli companies. The relationship was further strengthened with the signing of a free-trade agreement in 1985. Israeli high-tech companies utilized well the benefits provided by BIRD-F and the free-trade agreement, making the US the largest and most important target for Israeli high tech across a range of fields, from semiconductors and software, through telecommunications, medical devices, biotechnology, and financial technology (fintech), to cyber security.
The US counterparts of Israeli R&D institutions and academe have become their main partners in the exchange of knowledge. US industry has discovered Israel and more than 300 multinational R&D centers, two-thirds of them American, now operate in the country.
Small and young Israel has realized that the source of US economic power is the combination of stable politics, a sound legal system, skilled workforce, and top-notch educational and research infrastructures.
The initiative to establish Yozma Group in the early 1990s laid the groundwork for collaboration between the government and the high-tech industry of the time. I had the privilege of being one of the founders of the venture capital program, which jump-started Israel’s high-tech industry that put the country on the path to becoming the High-Tech Nation. The program was largely based on American knowhow and investors, and led to the founding of ten venture capital funds, which were the foundation for the development of start-ups.
The exchange challenges small exporters
At an event in New York, Bank Hapoalim (TASE: POLI) is currently marking the 40th anniversary of its US operations. The US is the first business target of our international strategy. Bank Hapoalim, as Israel’s largest and leading bank, attributes the highest importance to Israel’s foreign trade with the US and positions itself as the gateway to the Israeli economy.
We provide all the banking and financial services for Israeli companies operating in the US or which seek to enter the American market. In addition to advising our clients across the Atlantic, we function as the address for American companies operating, or wishing to operate, in Israel. At the same time, the bank provides services for American companies, especially middle market companies, and private clients.
As the largest shekel-dollar exchange rate market maker, Bank Hapoalim is also an important player in the foreign currency market, providing sophisticated instruments and hedges for Israeli exporters seeking to mitigate the strong risk of foreign currency exposure.
The strong shekel is a major challenge for the Israeli exporter, a challenge which has become even harder in recent years because of the slow growth in global demand. The strengthening of the shekel is due to the current account surplus in the balance of payments, and in the test of results - Israeli exports have so far met the challenge. The Bank of Israel has fully exploited the interest rate tool to halt the strengthening of the shekel. Over time, Israeli exports will be affected by the strengthening of global growth, an improvement in the cost structure, and emphasizing specific industries to specialize in complex and special products. We are in an era of a currency war between the different currency blocs, with the result that, throughout the y ear, a company will have to build a system of currency hedges. Building a dispersed set of products for target markets with different currencies will partly help, and, to date, it has greatly helped companies which export to both Europe and the US.
Finally, it is very important to develop and diversify Israel’s foreign trade markets. The share of emerging markets - China, India, Brazil, and so forth - in the global economy is steadily growing, and it is both economically and diplomatically important to expand trade with them and other countries. However, in the foreseeable future, the US will remain the most important country for Israel’s foreign trade.
Yair Seroussi is the chairman of Bank Hapoalim
Published by Globes [online], Israel business news - www.globes-online.com - on May 3, 2015
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