Israel-UAE trade will overtake deals with Egypt

Emirati market regulations are far more business friendly, and its contract enforcement is significantly more reliable

TIMOTHY KALDAS |10 SEPTEMBER 2020 |BUSINESS DAY

The agreement between the United Arab Emirates and Israel to normalise their relations, described by some as a “peace” deal, seems to have hit a snag over weapons purchases. The UAE is keen to join the exclusive club of nations allowed to buy F-35 fighter jets; in exchange for allowing the transaction to proceed, Israel is seeking additional US weapon systems.

For those with a long memory, this all sounds very familiar. Egypt’s 1979 treaty with Israel was also attended by questions over weapons purchases. Indeed, President Anwar Sadat’s decision to make peace helped pave Egyptian access to US arms and military aid after he had downgraded ties with the Soviet Union and expelled Soviet military advisers. The two deals have something else in common: they reduced pressure for a peace between Israelis and Palestinians.

But the echoes between them don’t travel much farther than that. While normalisation between Israel and the UAE is expected to lead to substantial trade between both countries, there was no such windfall for the first Arab nation to officially recognise Israel. Four decades after the historic peace treaty, economic relations between the signatories are mainly limited to some high profile natural-gas deals and Israeli tourism to Egypt.

This contributes to the common characterisation of Israeli-Egyptian relations as a “cold peace” rather than a genuine friendship: co-operation and engagement between them has been limited. The reasons for this can be traced back to the historical trajectories and motivations that brought about the 1979 treaty.

The two countries had been at war with each other four times in the three preceding decades. Egyptian and Israeli families had lost loved ones in the fighting. On each side, military and security agencies were used to regarding the other as a threat. The treaty allowed both countries to secure increased financial support from the US while ending any serious risk of another war, but it never fully dissolved the distrust between them.

Throughout the negotiations and since the signing of the treaty, Egypt deepened its economic relations with the West, securing growing sums of aid, loans and investments. While Egyptian and Israeli governments developed robust security co-operation, there was little interest in building deep economic ties.

The US tried to address this by establishing Qualified Industrial Zones in Egypt in 2004 that allowed duty-free access to the US market for goods produced with at least 10.5% Israeli input, but the output of the QIZs never reached the expected levels.

Nor has there been much by way of people-to-people exchange. Hundreds of thousands of Israeli tourists visit Egypt each year, most of them heading to the beaches and dive sites of the Sinai Peninsula. But virtually no Egyptians cross the other way. The few who dare are often required to endure, upon their return home, extensive interrogation by suspicious security officials. (The main exception to this is a small number of Egyptian Christian pilgrims who visit holy sites in Israel and Palestine, in defiance of the Coptic Church which has banned such visits.)

Could the Israel-UAE agreement hurt the limited Israeli-Egyptian economic ties? That’s unlikely. Israeli-Egyptian gas deals, built on the logic of geographic proximity and existing pipelines, will not be affected. And although some Israeli sun-seekers will avail themselves of direct flights to Dubai and Abu Dhabi, those megacities are too expensive to represent a significant threat to the Sinai resorts.

But the absence of a history of war and greater economic compatibility between them will allow the UAE to develop a much deeper relationship with Israel than Egypt has managed in the past 40 years. It helps, too, that the UAE is much more open to foreign businesses and investments than Egypt.

Israelis are not alone in finding the Egyptian marketplace inhospitable. Both Egyptian and foreign investors have often been put off by onerous, opaque and inconsistent regulations, coupled with political intervention in the market, that disadvantage private-sector businesses. Foreign direct investment outside the energy sector has been a trickle; indeed, Egypt’s non-hydrocarbon private sector has shrunk for much of the past five years.

Emirati market regulations are far more business friendly, and contract enforcement in the UAE is significantly more reliable. For perspective, the World Bank ranks the UAE ninth in the world for contract enforcement; Egypt is ranked 166th.

After four decades of peace, the annual volume of Israeli-Egyptian trade is still measured in the hundreds of millions. Only on occasion has it expanded beyond that, thanks to energy deals such as the new effort to turn Egypt into an export hub for natural gas, especially Israeli gas. The Emiratis can expect a much greater return for their agreement. Already, Israeli trade delegations are visiting the UAE, and Israel’s finance ministry expects bilateral trade to quickly reach $2bn a year, rising eventually to $6.5bn.