Israel's open-secret trade

Israel's open-secret trade Lorenzo Rotunno 1 Pierre-Louis Vézina 2 1 University of Oxford 2 University of Birmingham June 12, 2015

Motivation Bilateral trade between Israel and Muslim countries that have no formal ties with Israel amounts to hundreds of millions of dollars annually." Israel Export and International Cooperation Institute (Rotunno & Vézina) Punchinello's Secret June 12, 2015 2 / 31

Motivation Why are Israel exports sometimes illicit imports? Israel has diplomatic ties only with 157 out of 192 UN member states (2011) The Arab League (22 Middle Eastern and African countries) has maintained a boycott of Israeli companies and goods since the founding of Israel in 1948 Other countries have cut trade ties due to violent events, e.g. strikes on Gaza. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 3 / 31

Motivation Khalid Al Subai, the deputy head of the Consumer Protection Society, was quoted by the Kuwaiti daily as saying that Israeli potatoes had been sold in several cooperative societies and that he held the commerce and industry ministry and the country's customs responsible. Israeli potatoes have Kuwaitis boiling The Times of Israel (Rotunno & Vézina) Punchinello's Secret June 12, 2015 4 / 31

Source: Wikipedia. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 5 / 31

Motivation Our paper aims to identify and quantify these illicit imports It also provides a case study to complement our understanding of the role of politics in international trade (Rotunno & Vézina) Punchinello's Secret June 12, 2015 6 / 31

Motivation What do economists know about politics and trade? Political distance, i.e. the correlation of votes at the UN General Assembly, has a negative impact on bilateral trade (Umana Dajud, 2013) When France and the US disagree at the UN, their trade falls (Michaels and Zhi, 2010) Japanese companies with high China exposure suer during Senkaku islands teasing (Fisman et al., 2014) (Rotunno & Vézina) Punchinello's Secret June 12, 2015 7 / 31

Motivation What do economists know about asymmetric trade barriers? Illicit trade appears in the trade gap between imports and exports (e.g. Fisman and Wei (2004), Mishra et al. (2008)) And corruption makes it worse (e.g. (Fisman and Wei, 2009), (DellaVigna and Ferrara, 2010)) (Rotunno & Vézina) Punchinello's Secret June 12, 2015 8 / 31

Motivation So, how big is this illicit trade? (Rotunno & Vézina) Punchinello's Secret June 12, 2015 9 / 31

Timeline 0 200 400 600 800 1000 Israel trade with boycott countries ($100,000) Total of $6.4 billion missing from 1962 2012 Intel chips to Malaysia ($714 million) Intel chips to Malaysia ($778 million) 1960 1970 1980 1990 2000 2010 Exports from Israel Imports from Israel (Rotunno & Vézina) Punchinello's Secret June 12, 2015 10 / 31

Exports to boycott countries: 2001-2012 Products Exports ($1,000) Products Exports ($1,000) Electrical machinery, apparatus 2,862,997 Sanitary, plumbing, heating 975 Special transact. Not class. 599,219 Paper, paperboard and manufactures 796 Non metallic mineral manufactures 185,490 Petroleum and petroleum products 701 Chemical elements and compounds 178,799 Furniture 669 Machinery, other than electric 126,000 Pulp and paper 383 Manufactures of metal, n.e.s 92,163 Beverages 354 Chemical materials and products 73,026 Travel goods, handbags and similar 247 Miscellaneous manufactured articles 40,395 Footwear 237 Fertilizers, manufactured 39,325 Sugar, sugar preparations and honey 233 Fruit and vegetables 38,826 Oil seeds, oil nuts and oil kernels 206 Plastic materials, etc. 36,393 Textile bres, not manufactured 117 Transport equipment 15,262 Crude rubber including synthetic 102 Scientif & control instrum, photographic 14,389 Animal and vegetable oils and fats 86 Medicinal and pharmaceutical 11,445 Fish and sh preparations 55 Dyeing, tanning and colouring 10,012 Tobacco and tobacco manufactures 46 Crude animal and vegetable material 7,754 Cereals and cereal preparations 43 Non ferrous metals 7,423 Fixed vegetable oils and fats 43 Rubber manufactures, n.e.s. 6,670 Feed. Stu for animals excl. Unmilled 43 Perfume materials, toilet & cleansing 5,443 Animals, n.e.s., incl. Zoo animals 38 Wood and cork manufactures 4,989 Meat and meat preparations 25 Miscellaneous food preparations 4,357 Coal, coke and briquettes 16 Metalliferous ores and metal scrap 3,306 Coee, tea, cocoa, spices 11 Iron and steel 2,797 Leather, lthr. Manufs., n.e.s 5 Textile yarn, fabrics, made up articles 2,500 Wood, lumber and cork 2 Firearms of war and ammunition 2,391 Animal oils and fats 1 Clothing 2,128 Dairy products and eggs 0 Crude fertilizers and crude mineral 1,513 Live animals 0 (Rotunno & Vézina) Punchinello's Secret June 12, 2015 11 / 31

Density of missing imports 20 10 0 10 20 boycott countries All other countries Israel exports are more likely to be missing in the importer's customs statistics if the latter is a boycott country. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 12 / 31

Estimated equation Missing Imports i = β 1 Boycott i + β 2 Controls i + ɛ i (1) Missing Imports i = ln(1+israel Exports i ) ln(1+imports from Israel i ) Boycott i is a dummy equal to one if the country boycotts Israel Controls i is a set of control variables (Rotunno & Vézina) Punchinello's Secret June 12, 2015 13 / 31

Cross section 2006 (1) (2) (3) (4) (5) (6) (7) No diplomatic relations 7.866*** 4.341* 6.558*** 7.553*** 7.136*** 12.43*** 12.50*** (1.595) (2.212) (1.795) (1.700) (1.643) (1.433) (1.428) Muslim 4.476*** (1.645) ln GDPPC -0.711** -0.476 (0.302) (0.433) control of corruption -1.244*** 0.454 (0.378) (0.372) Trade Restrictiveness -0.0121 0.00145 (0.0175) (0.0156) Observations 198 168 44 178 168 86 86 R-squared 0.133 0.256 0.244 0.207 0.233 0.765 0.77 Note: Left-hand side variable is missing imports from Israel, robust s.e. in parenthesis. Column 3 sample is restricted to Muslim countries. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 14 / 31

Cross section 2006 (1) (2) (3) (4) (5) (6) (7) No recognition of Israel 9.726*** 5.913*** 5.601*** 9.883*** 8.819*** 11.47*** 11.62*** (1.353) (1.661) (1.831) (1.474) (1.484) (2.068) (2.092) Muslim 4.807*** (1.253) ln GDPPC -0.865*** -0.282 (0.293) (0.477) control of corruption -1.257*** 0.563 (0.373) (0.501) Trade Restrictiveness -0.024-0.0284 (0.0227) (0.033) Observations 198 168 44 178 168 86 86 R-squared 0.125 0.272 0.154 0.212 0.225 0.466 0.471 Note: Left-hand side variable is missing imports from Israel, robust s.e. in parenthesis. Column 3 sample is restricted to Muslim countries. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 15 / 31

Cross section 2006 The lower bound estimate suggests the export-to-import ratio is 75 times bigger in boycott countries (Rotunno & Vézina) Punchinello's Secret June 12, 2015 16 / 31

US placebo - Cross section 2006 (1) (2) (3) (4) (5) (6) (7) No diplomatic relations 1.599 0.974 1.034 1.706 2.042-0.405-0.348 (1.674) (1.991) (2.440) (1.771) (1.639) (0.390) (0.362) Muslim 2.765* (1.571) ln GDPPC -1.010*** -0.432 (0.355) (0.459) control of corruption -2.224*** 0.302 (0.490) (0.392) Trade Restrictiveness -0.0188-0.00204 (0.0174) (0.00599) Observations 226 176 49 188 176 86 86 R-squared 0.005 0.050 0.004 0.066 0.138 0.032 0.057 (1) (2) (3) (4) (5) (6) (7) No recognition of Israel 3.115 2.713 2.406 3.414 3.221-0.480-0.455 (2.298) (2.523) (2.764) (2.529) (2.313) (0.375) (0.380) Muslim 2.359* (1.397) ln GDPPC -1.048*** -0.436 (0.345) (0.463) control of corruption -2.186*** 0.291 (0.490) (0.388) Trade Restrictiveness -0.0186-0.00121 (0.0171) (0.00581) Observations 226 176 49 188 176 86 86 R-squared 0.011 0.060 0.018 0.077 0.146 0.032 0.057 Note: Left-hand side variable is missing imports from the US, robust s.e. in parenthesis. *** p<0.01, ** p<0.05, * p<0.1.column (Rotunno 3 sample & Vézina) is restricted to Muslim Punchinello's countries. Secret June 12, 2015 17 / 31

Coecient on No diplomatic relations" by year MFX of boycott on missing imports 20 10 0 10 20 1960 1970 1980 1990 2000 2010 What changed in 2001? Morocco, Tunisia, Oman, Bahrain broke their ties. Yet these are not these driving the results, and neither are exports to Malaysia. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 18 / 31

A possible mechanism Mortimer (2005): Some Israeli factories remove any Hebrew or 'Made in Israel' marks from products Israeli origin hidden by counterfeit Lebanese certicates of origin Do boycott countries import too much from Lebanon? (Rotunno & Vézina) Punchinello's Secret June 12, 2015 19 / 31

Cross section 2006 - Lebanese trade gap (1) (2) (3) (4) (5) (6) (7) No recognition of Israel 0.451*** 0.430* 0.430* 0.459*** 0.465*** 0.526** 0.480** (0.158) (0.225) (0.229) (0.159) (0.162) (0.202) (0.218) Muslim 0.00944 (0.210) ln GDPPC 0.0364 0.104 (0.0502) (0.160) control of corruption 0.0574-0.197 (0.0792) (0.220) Trade Restrictiveness 0.00111 0.00242 (0.00537) (0.0105) Observations 128 120 31 123 120 79 79 R-squared 0.014 0.016 0.064 0.018 0.020 0.022 0.035 Note: Left-hand side variable is missing exports from Lebanon, robust s.e. in parenthesis. *** p<0.01, ** p<0.05, * p<0.1. Column 3 sample is restricted to Muslim countries. The lower bound suggests that the import-to-export ratio from Lebanon is 50% higher in boycott countries. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 20 / 31

Panel data analysis What happens when countries break ties or make amend? (Rotunno & Vézina) Punchinello's Secret June 12, 2015 21 / 31

Oman 100 0 100 200 300 400 500 600 Oman puts an end to diplomatic relations 1996 1998 2000 2002 2004 2006 2008 2010 2012 Oman imports from Israel Israel exports to Oman (Rotunno & Vézina) Punchinello's Secret June 12, 2015 22 / 31

Iran 0 50000 100000 150000 1960 1970 1980 1990 2000 2010 Iran imports Israel exports (Rotunno & Vézina) Punchinello's Secret June 12, 2015 23 / 31

Introduction Descriptive statistics Regression analysis References Boycott status 1970 (Rotunno & Vézina) Punchinello's Secret June 12, 2015 24 / 31

Introduction Descriptive statistics Regression analysis References Boycott status 2012 (Rotunno & Vézina) Punchinello's Secret June 12, 2015 25 / 31

1962-2012 panel (1) (2) No Diplomatic relations 2.965*** 3.761*** (1.141) (0.979) ln GDPPC -0.288 (0.442) Observations 7,206 6,104 R-squared 0.504 0.438 Note: Left-hand side variables is missing imports from Israel. Country and year xed eects are included. Country-clustered s.e. in parentheses. *** p<0.01, ** p<0.05, * p<0.1. The lower bound suggests that breaking ties increases the export-to-import ratio 18 times. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 26 / 31

What about Israeli value-added embedded in other countries' exports? Brunei Indonesia Value added ($ millions) 0.5 1 1.5 2 THA CHN ESP JPN BEL GBR USA MYS DNK SGP Value added ($ millions) 0 10 20 30 40 DEU THA ROW IND JPN KOR CHN USA MYS SGP Exporters Exporters Source: WIOD. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 27 / 31

What about Israeli value-added embedded in other countries' exports? Malaysia Saudi Arabia Value added ($ millions) 0 5 10 15 20 25 DEU IDN TWN IND THA KOR JPN CHN USA SGP Value added ($ millions) 0 5 10 15 20 TUR BEL GBR DEU KOR CHN IND ROW SGP USA Exporters Exporters Source: WIOD. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 28 / 31

Conclusion As in previous studies, an asymmetric policy gives rise to illicit trade Economics trumps politics? (Rotunno & Vézina) Punchinello's Secret June 12, 2015 29 / 31

References I DellaVigna, S. and E. L. Ferrara (2010, November). Detecting illegal arms trade. American Economic Journal: Economic Policy 2(4), 2657. Fisman, R., Y. Hamao, and Y. Wang (2014, May). Nationalism and Economic Exchange: Evidence from Shocks to Sino-Japanese Relations. NBER Working Papers 20089, National Bureau of Economic Research, Inc. Fisman, R. and S.-J. Wei (2004). Tax rates and rax evasion: evidence from missing imports in China. Journal of Political Economy 112(2), 471500. Fisman, R. and S.-J. Wei (2009, September). The smuggling of art, and the art of smuggling: Uncovering the illicit trade in cultural property and antiques. American Economic Journal: Applied Economics 1(3), 8296. Michaels, G. and X. Zhi (2010). Freedom fries. American Economic Journal: Applied Economics 2(3), 25681. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 30 / 31

References II Mishra, P., A. Subramanian, and P. Topalova (2008). Taris, enforcement, and customs evasion: Evidence from India. Journal of Public Economics 92(10-11), 19071925. Umana Dajud, C. (2013). Political proximity and international trade. Economics and Politics 25(3), 283312. (Rotunno & Vézina) Punchinello's Secret June 12, 2015 31 / 31