Ephraim Kleiman is Don Patinkin Professor of Economics at the Hebrew University of Jerusalem. He thanks the Morris Falk Institute for Economic Research in Israel for its financial assistance.

The subject of clandestine Israeli exports to Arab countries, other than the Palestinian territories, is the source of much speculation, optimism, and fear. Estimates of this trade vary greatly, with the most commonly cited figure being traceable to Forbes magazine, which in 1984 put it at $500 million1 and which a decade later popular imagination had raised to $1 billion. Israel's total exports of merchandise in those years was $6 and $17 billion, respectively, so these would be significant amounts of money.

The illegality of this trade notwithstanding, it has been an important source of hope for those who believe in a "new Middle East." Given that all Arab countries but Egypt banned all commerce with Israel until 1994, and that Egypt, the only exception, discouraged trade with the Jewish state, such impressive figures for the clandestine trade imply that if so much commerce existed under such extremely adverse conditions, it would really take off once barriers to trade had been removed. These figures were also taken as proof that when there is mutual advantage, Arabs will work with Israel, and that relations with Israel carry a great potential of hitherto foregone benefits to the Arab world.

Contrarily, rumors of a huge clandestine trade aroused fear among Arabs, for whom the specter of Israeli economic takeover looms large. This concern results from a widespread misunderstanding of the impact on the economy of international trade and viewing economic relations between countries as a zero-sum game, in which a gain to one side can only be attained at the cost of a loss to the other.2

For these various reasons, it is useful to investigate how much clandestine trade might exist between Israel and the Arab countries. This can be done through a systematic examination of trade data for, however secret, large-scale commerce leaves traces in the exporting or importing country, or in those that mediate between them. A close examination of the possible mechanisms of such a trade reveals that it amounts to nothing like the figures popularized in the media.

THE ESTIMATE

Quantitative estimates of clandestine trade are inherently murky. Reports do occasionally surface of shipments of specific products to destinations in the Arabian Peninsula, or of Israeli goods encountered on the markets of some far away Arab country. But such anecdotal evidence is often difficult to corroborate and certainly does not lend itself to quantification.

Forbes based its calculations on the figures of an Israeli business consultant, Ilan Barzel, whom the magazine quoted as placing "the upper limit on indirect Israeli sales to the Arab world at 5 percent." The article does not report the basis of this estimate, except to state that it originated in observations such as that the sales of some particular product to Holland "were out of all proportion." The Forbes article mentioned a long list of goods supposedly thus traded that included drip-irrigation equipment, oriental musical instruments, aphrodisiac lotions, and even chocolates "embossed with little Stars of David." Also, the Forbes journalist mistakenly put Israeli 1983 merchandise exports at "just under $10 billion," which was in fact double their level that year.3

DIRECT TRADE

How might this substantial trade take place? Given political realities, we can discount right off the possibility of Arab and Israeli customs authorities colluding to facilitate direct Israeli exports to any Arab country that does not recognize its existence, for example, by falsifying the registration of their provenance or destination. Such exports would have had to flow through a devious route.

Border running is the most obvious of these—traditional, stealthy bootlegging. But this is no easy task in Israel's case, with its sea and land borders closely guarded. Whatever smuggling across borders does exist tends to be into Israel and consists mainly of drugs as well as minuscule quantities of highly taxed goods such as cigarettes, liquor, and electronic appliances, usually from Lebanon.

Smuggling can also take the form of disguising the true value, character, or provenance of goods, thus enabling them to legally cross borders under false pretenses. This is the preferred route of smugglers trying to avoid import duties without having to resort to secret border crossings. Only one of Israel's land borders permits such deceit, the one with Jordan, where a gentleman's agreement between the two authorities allows exports from the West Bank to move across the Jordan River bridges. Israel permits this trade mainly to deflect Palestinian farm produce from its own highly protected agricultural markets; Jordan winks at it to maintain its standing with the inhabitants of the West Bank whom, until 1988, it claimed to represent and over whom it still hopes to wield influence.

On the face of it, this arrangement would seem to provide considerable scope for Israeli exports, masquerading as West Bank goods, to enter Jordan and from there to further points. In the words of a former Israeli official quoted by Forbes, "it is very difficult to tell a Moslem tomato from a Jewish tomato." But the Jordanian authorities, to protect their own producers, restrict fruit and vegetable imports from the West Bank. With some exceptions such as citrus, at most, only half of a crop is allowed into Jordan, "on the assumption that the balance of output is to be consumed domestically" in the West Bank.4 Further, most fruit and vegetables (and their processed products) are sold in Israel for most of the year at prices greatly exceeding those in the West Bank or in the Arab countries; this makes it unprofitable to smuggle them out, either directly (across the river) or indirectly (substituting them for West Bank produce).

As for manufactured goods, only those goods produced by plants established before Israel's occupation of the West Bank in the 1967 Six Day's War were supposed to be allowed into Jordan before the signing of the peace treaty between the two countries in late 1994. It was probably more difficult to weed out manufactured goods containing Israeli made components. But as most of these exports consisted of processed farm produce, such as olive oil or soap, there was hardly any place for Israeli inputs, except perhaps for chemical fertilizers and the like.

The total volume of Palestinian trade with Jordan peaked at $125 million in 1982, when the total value of manufactured exports from the West Bank to Jordan did not exceed $60 million. These numbers shrunk considerably in later years, reflecting the dislocations caused by the intifada and the Jordanian policy of disengagement from the West Bank adopted in 1988. By the early 1990s, the total annual volume of all Palestinian exports to Jordan ran at about $40 million, limiting the potential for infiltration by Israeli goods to at most a figure of single digit millions.5

INDIRECT TRADE

With smuggling across land borders virtually excluded, the only significant alternative conduit for Israeli-Arab trade was through third-country intermediaries. Such indirect trade can take five main forms.

Offshore intermediaries. The simplest is rerouting, with goods relabeled, readdressed, and possibly repacked to conceal their real provenance. If rerouting is not to become unduly costly, it has to take place in a free enterprise zone, a bonded warehouse facility, or some other installation where such transactions are regarded as if they were conducted offshore. Were this to take place, the volume of Israeli exports to a country serving as an intermediary would exceed that reported by the same country as its imports from Israel. For the same reason, the volume of imports of the Arab countries from such potential intermediaries would exceed the volume of the exports of these intermediaries to them. Lack of correspondence between the trade figures of Israel, those of possible third party intermediaries, and of the Arab countries may thus provide a clue about the volume of Israel's clandestine trade and the routes through which it passes.

The trouble is, discrepancies in trade figures are very common in international trade statistics.6 In a period of expanding trade, the time lag between the consignment of the goods in one country and their arrival in another may skew the figures. Importers may undervalue imported goods to save on customs duties. Conversely, exporters may overvalue exports to win more export subsidies. The convention of recording exports at their pre-shipping, i.e., free-on-board (f.o.b), prices and of imports at prices including handling charges, insurance and freight (c.i.f) is a main source of discrepancies. Attempts to evade domestic taxation or foreign exchange controls lead to the under-invoicing of exports and the over-invoicing of imports. Proof of the rerouting of Israeli exports to Arab countries would require discrepancies to be consistently in a direction and of the magnitude that the above-mentioned factors cannot explain.

Rerouting almost invariably requires deviation from the shortest route between the original seller and the ultimate buyer. Hence, there is a great attraction to having such rerouting take place close to Israel and its Arab destinations. Three candidates present themselves: Cyprus, Egypt, and Turkey. Table 1 presents the figures on their imports of merchandise from Israel in the years 1981-83 and 1990-92,7 as reported by both Israel and each of the three countries. The data fail to show a telltale pattern of Israeli-reported exports exceeding imports reported by Cyprus, Egypt, and Turkey. In fact, the largest differences between the two sources show the reverse—imports reported by the receiving country exceed the exports reported by Israel!8 Even if we were to ignore all the "wrong" (i.e., in this case, negative) signs, the total excess of Israel-reported exports over the imports reported by these three countries amounts to a mere $21 million in the first period and $64 million in the second one.

The relatively small magnitude of shipping costs (some 6 to 14 percent of pre-shipping prices)9 means that those do not materially affect this conclusion. The same also seems to be true of over- and under-invoicing of trade; such practices are not unknown in Israel and presumably not in the other three countries, but they could hardly account for discrepancies of the order of magnitude observed in table 1.10

The other end of the trail also fails to provide evidence of offshore rerouting. The countries where such rerouting takes place usually do not count the goods in question among their exports, whereas their ultimate importers do include them in their import figures. But the total imports recorded by the Arab Middle East countries (i.e., not including North Africa, Sudan, or the Horn of Africa) originating in Cyprus, Egypt and Turkey fall short, on the whole, of the exports recorded in these three countries as destined for the Arab Middle East. For all these reasons, Cyprus, Egypt and Turkey seem not to have provided large scale offshore type facilities for the rerouting of Israeli exports to the Arab countries officially disallowing trade with Israel.

Onshore intermediaries. Rerouting might take a different course: it could occur after goods clear through customs. This has several problems. At least in the first period under consideration, Israeli goods entering the three countries were liable to customs duties, further reducing the profitability of such an operation (added shipping costs and customs fees leave little margin). Table 1 shows that total Israeli exports to this trio averaged no more than $60 to $90 million in 1981-1983 and $125 to $135 million in 1990-1992, depending on whether the data are those reported by Israel or by the importing countries. Even were practically all of these goods smuggled to an Arab boycott country, not a likely occurrence, the total figure would be a far cry from $1 billion.

Maghrib. The Maghrib countries, in particular Morocco and Tunisia, are sometimes singled out as a main conduit of illegal trade, being somewhat removed from the focus of the Israeli-Arab conflict. (Tunisia once did actually record imports of Israel, to the tune of $46 in 1992.) As can be seen in the bottom panel of table 2, imports reported by the Maghrib countries do exceed the exports to them reported by the rest of the world. But this difference is, however, at most 10 percent or less of the values of exports, all of which could be accounted for by differences in f.o.b and c.i.f. valuations.11

Distant entrepôts. Large but more distant entrepôts of international transit such as Rotterdam or Singapore could also serve as intermediaries. But transshipping via such farther away placed venues inflates costs by twice the freight charges of hauling goods there from the Middle East. This reduces the utility of distant trade centers and renders them unlikely to serve as a channel for large-scale clandestine Israeli exports. Nonetheless, if this did occur, the rerouted Israeli exports would be recorded (under some fictitious provenance) in the imports of the Arab countries, but not in the exports to them reported by the rest of the world. This being the case, imports reported by Arab countries should exceed the exports to them reported by the rest of the world.

The relevant figures are summarized in the top panel of table 2. Wide variations in the figures for the Arab Middle East countries—from a surplus of $2.7 billion to a shortfall of $11.6 billion—suggest other factors at work. That the Arab Middle East countries reported fewer imports in 1991-93 than the rest of the world reported exporting to them indicates that offshore rerouting could not be a significant channel for Israeli exports to these markets.

Other potential conduits. The import data of most countries include a component of unspecified provenance. The total of such imports from unidentified sources of all Middle East Arab countries varied between $0.5 and $1.8 billion in 1981-83 and between $2.0 and $2.5 billion in 1991-93.12 Had offshore rerouted Israeli exports to these countries amounted, indeed, to $1 billion, they would have accounted for about one half of all their imports of unidentified provenance in the early 1990s.

Again, fluctuations over time in the observed figure suggest that it is the outcome of a large number of different causes and make it highly improbable that anything like one half of it emanated from a single source. The provenance of imports may remain unspecified because, among other reasons, the origin of the goods cannot be ascertained, or because it does not really matter. Thus, for example, because oil purchased on the international spot market may originate from a number of different sources, some countries, among them Israel, do not specify the provenance of oil imports. Some oil producers, on the other hand, do not include in their export figures oil sales by foreign owned companies, treating them, in effect, as offshore operations.13

Failure to specify provenance may also be due to importing governments finding it politically inconvenient to do so. But unlike individual Arab business firms, Arab governments had no interest in importing from Israel. It is, therefore, most improbable that the customs authorities of any Arab country would connive at hiding the true identity of Israeli products.

Mid-sea intermediaries. A final, more outlandish possibility remains to be considered.

Goods can be transshipped in mid-sea or on an unpopulated island, a number of which exist in the Aegean Sea. But these methods, which are profitable in the case of high-value bulk goods such as cigarettes, alcohol, drugs, and other classic contraband, are much less adaptable to farm produce, drip irrigation piping, or sophisticated medical equipment.

ISRAELI EXPORT DATA

Israel's own export statistics record substantial exports to unidentified destinations; these averaged somewhat less than $1 billion in 1981-83, and slightly more than that in 1991-93 (see table 3). In 1983 and 1992—the two years on the data for which the rumored figures for the two corresponding periods seem to be based—they amounted to about $713 million and to $1 billion, respectively. These transactions, which truly are clandestine, seem to provide the basis for the notion of massive Israeli exports to Arab markets. At last, it seems we have verified the existence of this large-scale trade.

But no. The nature of the exports refutes such a conclusion. The great bulk of them consist of metal, machinery, and electronics products.14 The character of these exports and the secrecy of their destinations leads to the conclusion that they are exports of military and military-related equipment, sold to buyers who prefer to remain anonymous. Disaggregation of these goods further strengthens this hunch. As can be seen from table 3, nearly a fifth of all Israeli exports to undisclosed destinations in 1981-83 consisted of aircraft, aircraft parts, electronics, and communications equipment. In 1991-93, this proportion reached nearly one third. The great majority of the Arab countries have been at war with Israel throughout the entire existence of the Jewish state; this makes it difficult to imagine Israel selling a significant volume of matériel to the Arab world.

Israel did on occasion supply matériel to the Kurds in Iraq and Maronites in Lebanon that did not pass through regular trade channels. But, such transactions not being primarily motivated by economic considerations, they cannot serve as an indicator of trade volume expected under normal conditions.

ISRAELI COMPONENTS

Have Israeli products found their way to Arab markets as components incorporated in goods produced elsewhere? Indeed, increased international specialization in production makes it ever more difficult to identify goods by the national provenance of their individual parts (as opposed to the last stage of fabrication or assemblage).15

In the main, Israel's access to Arab markets results less from ruse than from the globalization of trade. The markets for many components in such items as computer chips, printed circuits, or even oil and chemicals are global, with items produced in different countries easily substituted for each other in the manufacturing of the final product. Once a firm purchases Israeli-made components, it is virtually impossible to ensure that they will not be carried by products sold to Arab countries. It is not even possible to spot such component parts without dismantling the final good in question and, often, not even then.

Nonetheless, non-Israeli firms have long avoided incorporating Israeli components into their products for fear that doing so would trigger the secondary Arab boycott (against firms doing business with Israel) and exclude them from the Arab world. But the secondary boycott has been weakening for many years, as demonstrated by the entry of Japanese car manufacturers into the Israeli market already in the 1980s. Insofar as globalization takes Israeli products to Arab countries in the form of components, it has little political significance. The identity of the actual purveyors in global markets is of practically no consequence, for not only are they anonymous but they can at any moment be replaced by others.

The same is largely true of out-sourcing: a shirt or a pair of jeans can be produced almost anywhere around the globe before a label is attached that carries the logo of the firm under whose name they are marketed. If any such goods produced in Israel find their way to the Arab countries, this attests to Israel's share in world markets as a whole rather than to the importance of Arab markets for Israel.

THE FUTURE

Trade data fails to support the existence of a substantial clandestine trade by Israel with the Arab countries. The rumors may have originated from a misreading of Israeli trade statistics.

The easiest route would be through Palestinian exports across the Jordan river. But the total traffic here was never large and shrank to a mere $40 million by the early 1990s. Israel's nearest trade partners provided the next best alternative, but total annual Israeli exports to these countries never reached $150 million; further, imports from Israel, as reported by them, on the whole exceeded Israeli-reported exports to them, rather than the other way round. A comparison of imports to the Arab countries from the whole world with the total volume of reported exports to them shows no unexplained excess. The trade data of many Arab Middle East countries (like those around the world) do contain some imports of unspecified provenance that are, on average, about twice the magnitude of the rumored Israeli clandestine exports; but large year-to-year fluctuations suggest other causes for their anonymity. Examination of Israeli trade data reveals a considerable volume of exports to undisclosed destinations, most of them of a military character, and so very unlikely to be destined for Arab countries.

The insignificance of past clandestine Israeli exports to Arab countries is no indicator of future trade, of course; what was unprofitable, if not unfeasible, so long as an official state of hostilities was in force, could become advantageous following normalization. All studies so far,16 however, fail to come up with high estimates of potential Israeli-Arab trade, for their economies are largely incompatible. Individual Israeli firms could make deals in the Arab world, selling goods or services, but the total output is bound to remain small. The supposed $1 billion of annual Israeli exports may well remain barely attainable long after relationships between Israel and the Arab countries have been fully normalized.


1 See Hesh Kestin, "Israel's Best-Kept Secret," Forbes, Oct. 22, 1984, pp. 50-63.
2 See, for example, Atif Kurbusi, The Economic Consequences of the Camp David Agreements (Beirut: The Institute for Palestinian Studies and the Kuwait Chamber of Commerce and Industry, 1981), ch. 7; ‘Abdallah Ramadan, "Inha' al-Muqata‘a al-‘Arabiya li-Isra'il: Al-Afaq al-Iqtisadiya li-‘Amaliyat at-Taswiya," Qira'at Siyasiya, Spring 1992, pp. 131-155. Many articles along these lines appeared in the Egyptian press on the eve of the Middle East and North Africa Economic Summit in Cairo in November 1996.
3 Israeli merchandise exports alone (exclusive of sales to the West Bank and Gaza) amounted to just over $5 billion in 1983. See Statistical Abstract of Israel, 1985, Israel Central Bureau of Statistics (C.B.S.), table VIII/1. The $10 billion figure also includes exports of services, such as tourism and transportation ( Ibid., table VII/1).
4 Palestinian external trade under Israeli occupation (New York: United Nations Conference on Trade and Development (UNCTAD), 1989), UNCTAD/RDP/SEU/1, pp. 91-92.
5 Statistical Abstract, 1985, Israel C.B.S., table XXVII/11, and Statistical Abstract of Israel 1996, table 27.10. For separate series of dollar data of Palestinian agricultural and manufactured exports to Jordan, see Mahmoud El-Jafari, Main Features of Domestic and External Merchandise Trade of the West Bank and Gaza Strip (Geneva: UNCTAD, 1994) (UNCTAD/ECDC/SEU/5), Tables 2-3 and 2-5.
6 See Alexander J. Yates, "Are Partner Statistics Useful for Estimating ‘Missing' Trade Data," Policy Research Working Paper 1501 (Washington, D.C.: The World Bank, International Trade Division, 1995).
7 The cutoff point for the latter period was dictated by availability of data.
8 Foreign Trade Statistics: Exports, vols. XV (1983) and XXV (1993), Israel Central Bureau of Statistics. The minor discrepancies between Israeli-reported exports presented by the International Monetary Fund (IMF) and those taken straight from Israeli statistical publications result from differences in accounting procedures and updatings and do not materially affect this conclusion.
9 See International Financial Statistics Yearbook, 1993, International Monetary Fund.
10 In 1983, the over-invoicing of Israeli exports was estimated to have amounted to 1 percent and the under-invoicing of imports to 4 percent. See Yaakov Kondor, Mesheq Be'Mahteret B'Israel ve Ba'Olam, (Tel-Aviv: Tcherikover, 1992), Table 4.
11 The excess of c.i.f over f.o.b values for the Maghrib countries varied between a low of 6 percent in the case of Tunisia in 1981 and 1982, to a high of 15 percent in the case of Morocco in 1981. See note 9 above.
12 Derived by deducting from the "country/area not specified" figure for imports of the whole Middle East (row 898 in the DOT tables), of the corresponding figure for Israel in the IMF's Direction of Trade Statistics.
13 Among them, Egypt. See Yates, "Are Partner Statistics Useful," p. 33.
14 For the classification of goods, which follows the Customs Cooperation Council's "Harmonized System," see Israel Central Bureau of Statistics, "Classification of Export Commodities, 1988," Foreign Trade Statistics, Exports, 1989.
15 Free trade area agreements, such as the North American Free Trade Agreement (NAFTA), require verification of the national content of products traded, but the "rules of origin" regulations entail only the quantification of third-party inputs, not the identification of their suppliers; and, except for Tunisia, no Arab country was party to such an agreement in the time periods considered here.
16 See Meier Ben Chaim, Trade Potential between Israel and the Arab Countries (Tel Aviv: The Armand Hammer Fund of Economic Cooperation in the Middle East, Tel Aviv University, 1993); Arie Arvon and Jimmy Weinblatt, "The Trade Potential between Israel, the Palestinians and Jordan," discussion paper 94.10 (Jerusalem: Bank of Israel Research Department, 1994).