Washington Report on Middle East Affairs, December 1998, page 54

Trade and Finance

U.S. Trade With the Middle East Is Up (For Now)

By Colin MacKinnon

How fares trade between the Middle East and the U.S.?

So far this year not badly at all, considering. According to the latest Commerce Department figures, U.S.-regional trade, which has been trending upward for the past few years, has remained healthy in 1998. This is despite a world financial crisis, low petroleum prices, U.S. trade sanctions on a number of countries in the region, and an American administration, never sensible when it comes to the Middle East, distracted to the point of brain death.

Consider the figures: in 1996 total U.S. trade with the region (including Israel, excluding Turkey) was $46.9 billion; in 1997 it was $51.5 billion—an increase of almost 10 percent over the previous year; and in the first half of 1998 it was $25.5 billion (compared with $23.9 billion in the first half of 1997—an increase of almost 7 percent).

So U.S.-regional trade is growing. The balance, however, is uneven: U.S. exports to the Middle East exceed imports. The U.S. trade balance with the region in 1996 was a positive $1.8 billion; in 1997 it was $835 million; and in the first half of this year it was $1.9 billion. (Much of the increase in this year’s U.S. balance is due to last year’s dramatic fall in the prices of petroleum and natural gas; prices are low now and will stay that way until the world, East Asia in particular, gets itself out of recession.)

The U.S.’s Largest Partners

The U.S.’s two largest regional trading partners by far are Israel and the Kingdom of Saudi Arabia (if you consider Israel a Middle Eastern country—the Commerce Department does). Total trade with Israel in 1996 was $12.6 billion; in 1997 it was $13.5 billion; and in the first half of this year trade hit an historic high of $7.8 billion.

With the Kingdom, total U.S. trade was $16.7 billion in 1996; $18.6 billion in 1997; and in the first half of this year $8.9 billion. Together Israel and Saudi Arabia accounted for 62 percent of our trade with the Middle East last year.

The U.S. consistently runs large negative trade balances with Algeria, Israel, and Saudi Arabia, the only countries in the region for which this is so. The U.S. exported only $632 million worth of goods to Algeria in 1996 but imported $2.3 billion. In 1997 the figures for Algeria were $695 million in U.S. exports and $2.6 billion in imports. The reason for the imbalance is Algeria’s proximity to Europe and France’s hammerlock on the Algerian market.

With Israel the U.S. deficit was –$537 million in 1996; –1.5 billion in 1997; and –$746 million in the first half of this year. (The U.S.’s trade deficits with Israel, along with the U.S.’s annual $3.2 billion-plus in economic and military largesse, help to finance Israel’s trade deficit with Europe; that is to say, the U.S. government is paying the Israelis to buy from the U.S.’s foreign competitors—but that’s a separate topic.)

The U.S. trade deficit with Saudi Arabia was –$2.1 billion in 1996 and –$1.7 billion in 1997. In the first half of 1998, however, the balance tipped in the U.S.’s favor because of lower oil prices, with the U.S. experiencing a surplus of $1.1 billion.

The U.S.’s other large regional trading partners are Egypt (total trade was $4.5 billion in 1997); the UAE (total trade was $3.6 billion in 1997); and Kuwait (total trade was $3.4 billion in 1997).

All other countries of the region put together account for only 16 percent total American trade with the area. Poor Gaza and the West Bank (WBG) have a minuscule trade with the U.S.: American imports from the WBG totaled only $300,000 in 1997, this due largely to the efforts of one or two Palestinian entrepreneurs in the U.S. American exports to WBG totaled $1.3 million in 1997.

Trade Sanctions

Trade sanctions of one kind or another limit overall U.S. trade with the region. Under U.S. law, American firms may not trade with Libya or Iran, though U.S. products are popular in both countries and can be found, thanks mostly to third-country intermediaries, on store shelves and in sidewalk displays in each.

With Iraq it is legal for U.S. firms to do business under the U.N. “oil-for-food” program. Last year the U.S. bought $317.1 million of Iraqi petroleum. The figure has risen dramatically in 1998: in the first half of this year alone, U.S. imports from Iraq came to $356.7 million. Only $13.1 million of U.S. goods were sold to Iraq last year; in the first half of this year U.S. exports to Iraq were $76.3 million.

The upshot of all this is that, despite problems, U.S. exporters are doing well in the region—they enjoy a constantly growing market and have done so for years.

U.S. Exports Exceed Imports

Regional exporters to the U.S., however, have had less success. The overall trade balance is chronically in favor of the Americans. In the first half of 1998 U.S. imports have actually shown a nominal decline, $11.8 billion this year compared with $12.2 billion over the same period last year. But the fall in world hydrocarbon prices explains most of this: the U.S. is not really importing significantly fewer goods, it is simply paying less for them.

And one should add that U.S. trade with the region as a slice of the U.S.’s total world trade is small, though it has remained more or less steady. Last year the Middle East bought 3.8 percent of total U.S. exports; in the same year 2.8 percent of U.S. imports came from the region.

The World’s Sickly Economy

It is likely, however, that the future, at least in the near term, will not be so rosy. Trade figures tend to lag economic phenomena and, as we know, economic phenonema over the last year have not been happy. Because of the world economic downturn, in fact, some oil producers are having to deal with as much as a 40 percent drop in their foreign exchange revenues.

Saudi Arabia’s benchmark crude, Arab Light, has averaged $11.15 a barrel this year, well under the planned $14, once thought a cautious figure. The Kingdom will therefore see its oil revenues plunge, probably by $13 billion this year, to a total of something like $30 billion.

This is serious stuff. National Commercial Bank in Riyadh is predicting that because of the Kingdom’s revenue loss, overall Saudi Gross Domestic Product will fall 2 percent this year; the oil sector will show worse performance, contracting by 10 percent. This year’s budget deficit was projected last December to be $4.8 billion. The deficit is now expected to be $13.3 billion. And no one knows when it will be in balance. As a result, the government is phasing new projects in more slowly and contractors are having to wait longer to get paid.

The Kingdom of course is the major economic engine among regional oil suppliers, but other national economies—Kuwait’s, the UAE’s—will perform similarly. Such news inevitably means lowered trade all round, including lowered U.S. sales to the region.

Colin MacKinnon is contributing editor to the Washington-based Middle East Executive Reports.