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27.09.2010
 
Summary of an issue discussed in Economic Developments in Recent Months , to appear shortly:
The Composition of Israel's Goods Exports, by Geographical Destination
 
To the summary in Hebrew - Click here
 
  The share of Israel's exports to Europe has fallen recently, while the share to Asian countries and other emerging countries has increased. At the same time, the share of Israel's exports to Asia in Asia's total imports increased faster in the last few months than did the share of Asia's imports in total world imports.
  In world trade in the last few years there has been a rapidly rising trend in Asia's share of world imports, while Europe's and the US's share have fallen.
  A study shows that if the imports of Israel's trading partners increase by 10 percent, Israel's exports would increase at a similar rate, 9.5 percent.
  Under a scenario of an unbalanced increase in world trade (as occurred in the last few years), with imports into the US and Europe increasing by 7.5 percent while those into Asia and the rest of the world grow by 12.5 percent, Israel's exports would also grow at a similar rate to that shown above, i.e., 9.3 percent.
The composition of Israel's exports by trading area destination has changed recently. In the last few years Israel's main export destinations have been the EU (33 percent), the US (28 percent), and Asia (15 percent) (henceforth, the main trading areas). Since the beginning of 2008 a downward trend has been evident in Europe's share of Israel's exports. Thereafter, from the second quarter of 2009, the share of Israel's exports destined for Asia began an upward trend, after many years when that share had remained steady at about 15 percent. These developments occurred at a time when the composition of world trade changed: the share of Asia and the emerging market economies (East Europe, South and Central America, and others) increased at the expense of the share of imports into Europe and the US.
To measure Israel's exposure to the world's various trading areas an index of relative exposure was calculated, as the ratio of the share of a trading area in Israel's exports to that area's share of world imports. A value higher than unity signifies a bias or over-exposure of Israel's exports to that area, and vice versa. Israel's exports were found to be over-exposed to Europe, and under-exposed to Asian countries. in addition, an examination of the indices over time shows a marked increase in the exposure of Israel's exports to the US as a result of the very rapid growth of exports of pharmaceuticals and computer processors to the US.
To neutralize the effect of these two industries on the development of Israel's exposure to the trading areas, the exports of these items were excluded from the index. The figure below shows that the index without pharmaceuticals and computer processors was relatively stable over time. This means that the composition of Israel's exports adjusted successfully to the change in the composition of world trade. This reflects the relative flexibility of Israel's exporters to world developments. Recently Israel's exposure to Asia and the other markets has risen, expressed in a rise in the relative exposure index. In other words, the share of Asia in Israel's exports has risen faster than has the share of Asia's imports in total world imports.
We think it is too early to determine whether the increase in the relative share of Asia in Israel's exports really reflects a diversion of trade; time will tell whether the increase is a permanent one. If the above trends continue, it will apparently signify that trade has been diverted, deriving from a structural change in Israel's export target destinations. This structural change was made possible recently due to the global crisis and the resulting developments. The rapid recovery in Asia compared with the moderate recovery of demand in the advanced economies and expectations of another crisis in Europe made it worthwhile to penetrate into the markets in the East. This contrasts with the situation in the last few years when although demand from Asia increased faster than that from Europe and the US, the composition of Israel's exports changed in line with the geographical composition of world imports. The global crisis in 2008 and concern over another crisis in Europe cast doubts over the growth of the advanced economies, and against this background, the situation in the last few months may in fact reflect a switch in trade from Europe to Asia.
Israel's exposure to Europe and the under-exposure to Asia vis-?-vis the falling share of Europe and the US in world trade and Asia's growing share give rise to the question of how the changes in world trade and its composition will affect Israel's exports. To assess that, we estimated the elasticity of Israel's goods exports by trading area to those areas' total imports. This showed that Israel's exports were more elastic to changes in demand from Asia (1.15) and less elastic to demand from the EU (0.77) and from the US (0.92). Hence, assuming that imports into the main trading areas increases by 10 percent, Israel's exports would grow by 9.5 percent. If world trade develops in an unbalanced manner, with a 7.5 percent increase in imports into Europe and the US and a 12.5 percent increase in imports into Asia and the other countries, Israel's exports would increase at a similar rate to that above, i.e., 9.3 percent. This means that whether global growth is balanced or whether it is biased in favor of Asia and the emerging market economies, the resultant increase in Israel's exports would be similar.
 
FIGURE