Israel's foreign trade policy: The benefits of its reform

Abstract

We use an empirical estimation procedure to examine the effect of macroeconomic variables of Israel's trading partners on the country's exports. The main goal of our study is to use the estimation results to point to the optimal trade policy for Israel, and compare it with the current policy.Using disaggregated panel data on Israel's exports to its 22 main trading partners we were able to implement a unique estimation procedure, which enables a new and closer look at the effectiveness of the country's foreign trade policy. Our model estimates Israel's total export elasticities as well as specific elasticities of exports to each trading-partner. The model produces positive export elasticities with respect to a partner country's total imports and the real exchange rate. Free trade agreements (FTAs) were also examined, and were found to have a considerable positive effect on exports. A higher level of corruption in the destination country was found to be associated with a lower level of Israeli exports.Using our estimated results, and taking into account the array of Israel's foreign trade policy tools, we formulated recommendations for policy reform, highlighting the potential benefits of this reform on Israel's predicted exports. If no new foreign trade policy is introduced, a total growth of 74% in Israel's exports is expected over the course of 2012–2020; however, if reform recommendations are implemented, the expected growth rate nearly doubles, as Israeli exports are predicted to grow by a total of 135%.^p