Forecasting Trade Potential between Former Non-Trading Neighbors - The Israeli-Arab Case

A gravity model at the industry level is implemented to estimate the potential and industrial distribution of trade between former non-trading neighboring countries. The model incorporates a differentiated proxy for transportation costs at the industry level, rather than simply using geographic distance, and is implemented to estimate the trade potential between Israel and its Arab neighbors. Results show that a differentiated proxy for transportation costs is a better explanatory variable to the volume of trade than distance, and indicate a much larger trade potential between Israel and its Arab neighbors than estimates of previous studies