Can Israel's economy sustain an extended conflict?

0:04Hello and welcome to Business Matters. I'm Roger Hearing. On the programme today, as the Israel-Iran war continues, how is the conflict and uncertainty affecting Israel's economy? Also, Greenland's Minister for Business tells me how she deals with threats of a takeover by the US. My job is not to panic, as I usually say. My job is to figure out what different actors want and what is their aim and end goal. Also, the surge of Chinese goods now flattening other markets in Asia. Thailand moves to liberalise its gambling laws. And we hear from the Cook Islands in the South Pacific as New Zealand cuts off millions of dollars in aid because of that territory's deals with China.

0:47And I'll be joined throughout the programme by two guests on opposite sides of the world, Sushma Ramachandran, independent journalist and columnist with the Tribune newspaper, who's joining us on the line from Delhi. Sushma, very good morning to you. Good morning, Roger. It's great to be back. Good to have you there. And across the other side of the world, Annika Green, Republican political strategist at Reach Global Strategies, former political speechwriter, who's joining us on the line from Washington. So, Annika, a very good evening to you. Thank you. Good evening and good morning. Well, let's start, as we always do, by getting a sense of what's going on where you are.

1:19So, Annika, what's kind of caught your eye news-wise, apart from obviously the very big things we're all aware of? What's caught your eye in Washington? Oh, there's so much going on. Everybody's talking about Iran, which I know we'll discuss a little bit later. There's – on this side of things, what we're kind of focusing on from a political angle is the conflict within President Trump's base, the disagreement between – like among the MAGA crowd, some saying, hey, invading Iran shouldn't be on the table. We've – Donald Trump ran on less involvement in foreign wars. He said he was going to end the war in Ukraine and not get us into new conflicts, and this seems opposite to that.

2:03And then there's the other side that says, hey, no, this is our chance. And he's going to do what previous presidents should have done. So that's really the focus. Yeah, it's very interesting, isn't it, seeing how this is working at the moment and the different ways in which people look at these things. Sushma, let me come to you. I mean, what's catching your eye this morning in Delhi? Well, actually, today's newspapers haven't come. But yesterday's newspapers, the headlines were the conversation that Prime Minister Narendra Modi had with President Trump for half an hour. Apparently, Prime Minister Modi told President Trump that, you know, he's been claiming that he is responsible for the ceasefire between India and Pakistan.

2:43And he said, you know, this was not true. It wasn't due to mediation. We didn't discuss trade and kindly, you know, refrain from saying this kind of a thing, which is all very well. The headlines said that, but the headlines also added that immediately after that, Trump, President Trump said, you know, Prime Minister Modi is a fantastic man and we resolve the India-Pakistan conflict. So there's nothing much you can do about that. No, no. The way things are presented is always interesting in Trump world, certainly. Thanks. That's interesting. Well, let's talk about the way things are going, obviously, in relation to President Trump, but also, of course, his involvement in what's going on between Iran and Israel.

3:24The latest, in fact, from Washington, as far as we know, is that Donald Trump is going to decide whether the US gets involved in Israel's war against Iran within the next two weeks, because the president's spokesperson, Caroline Levitt, made it clear that any decision, she said, would be the president's alone. I know there has been a lot of speculation amongst all of you in the media regarding the president's decision making and whether or not the United States will be directly involved. In light of that news, I have a message directly from the president, and I quote, based on the fact that there's a substantial chance of negotiations that may or may not take place with Iran in the near future, I will make my decision whether or not to go within the next two weeks.

4:08Caroline Levitt there. Well, the Israeli Prime Minister Benjamin Netanyahu said that regime change in Iran was not a goal of Israel's military campaign, but could, he said, be a result. Speaking to the BBC, Iran's Deputy Foreign Minister Saeed Khatbizadeh said that diplomacy was his country's top priority. Look, we were on diplomacy. We are on diplomacy. But until this aggression continues under this bombardment, under these brutal atrocities that is happening against my country, nobody can go for negotiation. Look, the moment that this aggression stops, of course, diplomacy is the first option.

4:52Iran's deputy foreign minister there. Well, a lot of the focus in all this has been on the damage that Israel has done to Iran. But the war is also harming Israel, and not just in the physical effects of missile strikes, but also in the impact of the conflict and instability on Israel's economy. I've been speaking about all this to Anshul Pfeffer, who's Israel correspondent for The Economist. Israel has already been at war for now for over 20 months, since October 7, the Hamas attack from Gaza. and according to the Israeli Treasury, that war has cost both indirect and indirect costs around 300 billion shekels, which is about$85 billion.

5:33But the war with Iran is on a different level. Well, I was going to say, I mean, this is a situation we've seen, obviously, rockets coming in from Hezbollah to some extent in the earlier part and some from inside Gaza. But this is, it seems or appears to be, a much more destructive and therefore threatening to business kind of operation. That's very true. And this war is costly both to wage it. The government economists who I've spoken to have said that just the costs of this type of an air campaign, where hundreds of Israeli fighter jets are flying thousands of miles every day back and forth, the type of weaponry being used, guided munitions, both they're dropping or launching on Iranian targets, and the cost of Israel's interceptor missiles, the ones which are shooting down around 90 % of these Iranian missiles, the direct cost of that, according to government, is just a billion shekels, just that in a day.

6:27And we're not talking about indirect cost to the economy. So there's the, as you mentioned, the destruction that is being caused by the relatively small number of missiles, but these are big ballistic missiles, most of them coming through with a ton of explosives in the warhead. That wasn't as much as the government feared that would fall. That's going to cost a lot of money. And then there's the effect on the economy. This, at least in the first week, hasn't altogether paralyzed the Israeli economy, but it certainly has hit the economic output. Many people are at home because they can't be in their offices for the missile attacks.

7:02There's no schools keeping more people at home. Many more reservists have been called up. These are all working people for various tasks. So from what I'm hearing, and that's another billion shekel a day or around$280 million, just the indirect costs of the war and the destruction. And one of the interesting things we're hearing from Israeli ministers and even from around the prime minister in the last few days is that this is going to be a short war. Now, the reason they're saying that the Israelis have been grumbling for a long time, why hasn't the Netanyahu government ended the war in Gaza now?

7:37Obviously, around the world, people see the destruction in Gaza and the terrible death toll there. Israelis are also seeing the fact that it's bad for the economy and it's bad just for their own lives. This is a drain and it's a slow drain on the economy. And I think that's one of the reasons why the Israeli ministers have been saying in various ways to the public, this war in Iran is a short one. And if this war does end within a week or so, then I think the Israeli economy will bounce back from this. and perhaps there'll even be some confidence if the fact that Israel has managed to destroy Iranian nuclear programs and missile programs that would actually add confidence to the economy.

8:13Well, I was going to say confidence is an interesting one because obviously people looking to invest in Israel at the moment, foreign direct investment, is going to be scratching their heads about the wisdom given what they've seen. And, you know, this might come again. It's not guaranteed that this war, once it's over, will end the threat. Well, that's a really good question. But the thing is, Israel has never been in a hospitable neighborhood. There was always the fear of investors. And what we've seen for the past, I think by now, quarter of a century, is that they've kind of priced that in.

8:46And there have been wars and there have been intifadas in the period in which the Israeli tech economy has been booming and growing at a rate like now other than in the world. So I think that if this war does end in two or three weeks with what could be seen as a successful outcome for Israel, it will be good for the Israeli economy ultimately. Indeed. I mean, there's another element. I'm tourism and we talked about foreign direct investment. Tourism is a big part of the Israeli economy or has been. And again, you know, people struggling to leave Israel right now on the advice of many of their own countries.

9:18I mean, that could be a massive problem. It's a big part, 2.8 percent, in fact, of Israel's GDP, I think. The tourism industry here has been hit. It's not an economy which is reliant on tourism. It is, like you said, a chunk, but also for the last 20 months, there hasn't been much tourism. So most of the tourism industry has sort of reverted to internal tourism and Israelis going to Israeli hotels and so on, especially because it's been more difficult for them to travel abroad. That is something which has been hit. But it has been compensated by the success of the tech sector and especially the defence tech sector.

9:52Angel Pfeffer there, Israel correspondent for The Economist. Annika, it is interesting that potentially part of what might be driving the way Israel is conducting all this might be an eye on the economy because it's clearly suffering. It is interesting, but I think messaging about something, keeping an eye on the tensions can still intersect with the geopolitical reality, right? Israel sees itself as under existential threat. It has been dealing with Iran funding Gaza, funding Hezbollah, funding Hamas. And they've gone over. They've had, like we said, we heard missiles from Lebanon. And now we know after right after the report from the UN that Iran is not abiding by its nuclear nonproliferation commitments.

10:47They they went ahead and struck, which Iran has complained, as we know, was providing a pretext. There's disagreement about that. But this has been an ongoing issue. I mean, tying it to the economy now, it is very interesting. But I hear it as more messaging for Israelis who are tired of war. You think they're saying, you know, let's do it for economic reasons, because we don't want this to go on and on and on. But I mean, from what I'm hearing interestingly on this, and Sushma, let me bring you in on this. A lot of most Israelis are united about the idea of taking on Iran in a way they certainly aren't about dealing with Gaza.

11:20Yeah, I think this, of course, is something because Iran is an enemy which has been seen to, you know, attack, not only attack Israel, but has made the statement that our aim is to demolish the state of Israel. For India, of course, it's a very ticklish issue because India surprisingly has excellent relations with both countries, both with Israel and with Iran. You know, with Israel, we've had wonderful relations for the last 20, 25 years. Before that, we didn't. But now we have very close defense ties, ties on the economic relationship, agricultural issues. With Iran, India is actually developing the Shabahar port for Iran.

12:05And that's going to be a big casualty of this war. So India has, and plus there are about right now about 10 ,000, I mean, 10 ,000 Indians in Iran. and India is trying to get a lot of them who are students out of the country. Well, I was going to say, Sushma, there must be a lot of concern about that because even Indian diplomatic personnel in Tehran might feel they're under threat. Yes, yes. So they have asked the families of the embassy to leave, but the embassy personnel are still going to stay there. But there's really a massive, massive program to try and evacuate these students via various other countries like Turkmenistan, and the flights have already started coming in of these students.

12:49So there is a lot of concern. But as I said, it's very ticklish. But the thing that India has done so far has kind of shown a slight tilt towards Israel because the Shanghai Cooperation Association issued a statement condemning Israel. And India specifically said that we disassociate ourselves from the statement because, you know, know, we have not been involved with the discussions. So they're trying to keep, you know, keep a distance. But this kind of shows a little tilt towards Israel. It's interesting because, I mean, Russia in some ways issued a similar thing of saying that it both respects Israel and it respects Iran.

13:25This is interesting diplomatically how this is playing out. Well, let's talk about another area of controversy in diplomatic terms and one that Donald Trump is also, I suppose, presiding over, which is what's going to happen with Greenland. Now, Greenland is, well, generally unused to being in the international spotlight, but that is where it has been, in fact, since President Trump declared his determination to make it a US territory shortly after he was inaugurated. I think he also touched on it beforehand. It's not technically part of Denmark, but Greenland is an autonomous territory in the Kingdom of Denmark, and its leaders are not keen to join the US.

14:03What it does need at the moment is investment, and its natural wealth of valuable minerals seems to offer a way forward. Its Minister for Business and Mineral Resources, Nadja Nathen-Alyadson, recently urged US and European mining companies to hurry up and invest. Well, now one actually has. Greenland has agreed today, on the last 24 hours, a 30-year permit to mine molybdenum. Now, that's a silvery white metal used primarily to strengthen steel. And it's been awarded to Greenland Resources. That's a company backed by the European Union. Well, I asked the minister, Nadja Nathanielsen, about this deal.

14:39It's now the second exploitation license we granted within a short period of time. And you can say that the Millennium Project in Greenland Resources on the Greenland East Coast, they just signed a 10-year offtake agreement with the European steel industry. So that is really positive. Also, we have the graphite project in the southern part of Greenland that just became a strategic project for the European Union. And we just learned that 10 Brees, a rare earth project, is being looked into by Ex-Im Bank, the American Export-Import Bank. So I think there's a lot happening right now, and I'm really pleased about that.

15:15And is it going to bring wealth to ordinary Greenlanders? Is that what this is about? That's the entire purpose. I mean, we don't mind just for our own sake. We mind because we want to bring welfare to the Greenlandic people. We do have very high levels of ESG, environment, social and government standards, which makes us a more expensive jurisdiction, I think, to operate in. But we do have this in order to be sustainable and to make sure that investments and activity in the mineral sector goes to the Greenlandic people. Now, Minister, we were talking about this new deal with the European Union-backed group, but you have in the past had an agreement on mineral development with the US.

15:54In fact, it was signed during Donald Trump's first presidency. Is that going to be renewed? We don't know, of course, yet. We're hoping for it to be renewed in some form or other. Times, of course, have also changed, and maybe the American perspective is a bit different now. They may want to focus on other things, such as critical minerals, which was really not that much in focus in 2019. So I expect that from the American administration side, you're sort of now taking stock of what they need. We are, of course, willing to discuss this, and we've been quite happy about the old agreement. Well, you talked about a change of perspective, perhaps, from Washington.

16:31I mean, that's perhaps a tactful way of putting it. Of course, Donald Trump has said that he wants to have Greenland. He wants Greenland to be taken over by the US. Is that not going to threaten this kind of agreement? I think my job is not to panic, as I usually say. My job is to figure out what different actors want and what is their aim and end goal. And I think Greenland and the U.S. do have similar goals. We want to develop the mineral sector in Greenland and the U.S. can be helpful in assisting that to become a reality. The U.S. do have a lot of skills and competences we want to learn more from and build on.

17:06And the U.S. do have capital that is very much needed in Greenland. And at the same time, we do realize we are part of the American national interest sphere in terms of security and defense. We have an American base in Greenland. We have an 80 year long relationship with the U.S. in that regard. So we are quite aligned, I think, in the end goals. Of course, we don't want to be annexed or be Americans. And I think when you try to descale a bit and try to take a step back, I think we can agree upon a lot of things. OK, but I mean, I suppose the threat, even if perhaps you don't see it as a real threat, or maybe you do, isn't that having an effect on investment?

17:43People might think, well, I might put my money into Greenland, but hang on, I might be dealing with the wrong people. Shouldn't I be dealing with Washington, perhaps? Well, of course, I'm worried about that. I've been worried about that since day one, that as long as this sort of rhetoric keeps going on, it will, I think, have an effect on the investment climate. So far, we haven't seen it. But of course, I think we need to quickly find an agreement in which we can move forward together on a similar ground and have the same perspective on development of Greenland. Now, we've talked about the EU.

18:15We've talked about the US as investors in Greenland. What about China? Have they shown interest? Would you want investment from China? The entire world is doing a lot of trade with China. So as Greenland, we do have a lot of export to China that we're really happy about. It's an important market for our fisheries. So in that respect, we really want to continue that growth and export to China. When it comes to the mineral sector, we don't see a lot of interest from the Chinese. Naya Taniilson there, the Greenland Minister for Business and Mineral Resources, speaking to me earlier. So it's interesting how much diplomacy now seems to depend on mineral resources.

18:53I mean, we knew all this, of course, with Ukraine, and now Greenland seems to be focusing on it. I know that much of the diplomacy around a lot of places in the world seems to focus on that. Yeah, I'd say it's, of course, suddenly this issue of rare earths has come into this spotlight because China has been restricting the exports. And even in India now, we're looking at the fact that, you know, we actually do have so many minerals and we really haven't paid enough attention to them. So now everybody's talking about the fact that, you know, we've got this mineral and we've got that mineral and we have to mine it and we have to process it and we actually have them.

19:27And, of course, the fact is that, as you said, I mean, diplomacy is important Because if China right now is the country which is mining and processing about 90 percent of these rare earths, then, you know, you have to have a fairly OK relationship with China. So but countries like Greenland are also important. India, in fact, doesn't have any direct, of course, ties with Greenland. But with Denmark, we have a strategic green partnership, as it's called. and a lot of the research and collaboration would involve areas in Greenland. So perhaps I mean, India would like to try and bank on that to try and get some help.

20:08Well, you've got the name now of the minister there, so I'm sure it can be advanced. She's certainly keen on deals, I know that, from speaking to her. Annika, let me bring you in on this because, I mean, obviously, what one thinks of the idea, how serious it is that America takes over Greenland, It's clearly galvanized the Greenlanders, at least, to start really making deals on investment. It has. And I found it very interesting in your interview that the minister acknowledged that their ESG standards play a role in the deals that are struck. And with the second Trump administration really ushering in a move away from ESG, and we're really seeing that in just culturally in the United States.

20:54somebody mentioned to me some groups call June Pride Month and in the past under other presidents that's been very front and centre in a part of messaging. It's been very muted this year you almost wouldn't know that it's June connected to that type of messaging here and then in terms of other things like ESG is often tied to DEI. Trump campaigned on saying drill a drill. We're getting a lot of initials here. I think I better just gloss this with people so ESG is environmental social and governance. I think I'm right. And DEI is diversity, equity and inclusion. Yes. And there are there's a lot of arguments in the United States over these concepts that I think maybe doesn't happen as much in Europe now.

21:37I think the European mindset is it's more down the road that, oh, climate change is an established fact and man's role in it is established. Whereas in the United States, that is very much still being debated and models being looked at with people saying, OK, do we really want to base our energy policies on these ideas, particularly if it disadvantages us internationally? And that's very much where the United States is right now, which is how Greenland has come to be so center stage, particularly with rare earth metals, rare earth elements, which Robert Bryce, energy thinker Robert Bryce, was warning that China has a chokehold on about three dozen key elements.

22:18So that's something everybody's got to take into account. Yeah, and Greenland sees itself in the focus there and very much in the crosshairs. But it's doing lots of deals. It'll be interesting to see if that deal with the Trump administration of the last time does hold out. We'll keep you posted on that. Meanwhile, we're going to be looking at lots of other things in the next part of Business Matters, not least a new China shock. China's exports in Asia, well, kind of destroying local markets. We'll tell you all about that when we come back in just a moment.

23:03Welcome back to Business Matters with me, Roger Hearing, and my guests today, Annika Green and Sushma Ramachandran. Now, it's been called the second China shock. The first came 20 years ago when the country's goods began to flood the world, cheaper and faster exports that stunned the competition. Well, the second shock seems to be following President Trump's tariffs. As they start to shut China out of the United States, its biggest market, Chinese factories are sending their toys and cars and shoes to other countries at a pace that is reshaping economies and geopolitics. Well, Alexandra Stevenson is the Shanghai Bureau Chief for the New York Times.

23:40She's been writing about all this and she joins me now. Alexandra, thanks for being with us here on Business Matters. Hi, great to be here. Good to have you there. And let me ask you then first, I mean, just tell us how you found this China shock, the second China shock, and how it's working. Why is it flooding markets and which markets is it flooding? Well, basically, I think the big number is China's trade surplus with the world. So if you look at that figure so far this year, China's trade surplus with the world is nearly$500 billion or half a trillion dollars. And that, to put it in context, is more than 40 percent increase from last year.

24:18So that means all all the things that China is sending overseas, it's increased by 40 percent. And I guess if you want to look at it this way, you know, the U.S. was once China's biggest market, biggest consumer market. And now we have the Trump administration that's basically effectively closed off China's biggest market because of tariffs at the moment. And so all those goods are going to everywhere else in the world, basically. So it's the same goods, in effect. They just turn the ships around and send them somewhere else. Yes, basically. Yeah. And which countries are the main places for that?

24:51Because, you know, certainly the European Union has taken quite a lot of action against dumping within that area. But there are plenty of markets, I suppose, even around and close to China geographically where these things could easily get to. Yeah. So it varies month to month. And, you know, the data is, is, you know, happening in real time. But so far this year, we've seen huge increases, like 20 % plus increases in these shipments of goods, Chinese exports to countries like Vietnam, to Indonesia. We're also seeing it in the past month of May to Europe, to Germany. In Germany specifically is a 20 % increase.

25:28So these are, you know, it's actually really everywhere, but depending on the month, you know, you'll see it pop up and be more pronounced in certain places. But I would say Asia and Southeast Asia in particular is really exposed because, for example, with Vietnam, the country shares a border with China. Right. So it's a lot easier for China to send its goods across the border to a country like Vietnam. Yeah, but I guess they're not necessarily that keen on it. I mean, as you said, countries around Vietnam, Cambodia, Indonesia, they all have pretty active manufacturing sectors themselves. I mean, they're not going to welcome cheap Chinese goods being, as I say, effectively dumped on their markets.