The Middle East became even more significant to American power following the nationalisation of crude oil reserves across most of the region (and elsewhere) during the 1970s and 1980s. Nationalisation brought the longstanding direct Western control of Middle East crude supplies to an end (although American and European firms continued to control most of the global refining, transport, and sale of this oil). In this context, US interests in the region revolved around guaranteeing the stable supply of oil to the world market – denominated in US dollars – and ensuring that oil would not be used as a ‘weapon’ to destabilise the American-centred global system. Moreover, with Gulf oil producers now earning trillions through the export of crude, the US was also deeply concerned about how these so-called petrodollars circulated through the global financial system – a matter that is directly consequential to the dominance of the US dollar.
In pursuing these interests, US strategy became fully focused on the survival of the Gulf monarchies, led by Saudi Arabia, as key regional allies. This was particularly important following the overthrow, in 1979, of Iran’s Pahlavi monarchy, which had been another mainstay of American interests in the Gulf since the 1953 coup. US support to the Gulf monarchs was manifested in a variety of ways – including the sale of massive amounts of military hardware that turned the Gulf into the largest market for weapons in the world, economic initiatives that channelled Gulf petrodollar wealth into American financial markets, and a permanent US military presence that continues to form the ultimate guarantee of monarchical rule. A pivotal moment in the US–Gulf relationship came with the Iran–Iraq War, which lasted between 1980 and 1988, and ranks as one of the most destructive conflicts of the twentieth century (up to half a million people perished). During this war, the US supplied weapons, funding, and intelligence to both sides, viewing it as a way to sap the power of these two large neighbouring countries and further ensure the security of the Gulf monarchs.
In this manner, US strategy in the Middle East came to rest upon two core pillars: Israel, on one side, and the Gulf monarchies, on the other. These two pillars remain the crux of American power in the region today; however, there has been a critical shift in how they relate to one another. Beginning in the 1990s, and continuing through to the current moment, the US Government has sought to knit these two strategic poles together – along with other important Arab states, such as Jordan and Egypt – within a single zone that is tied to US economic and political power. For this to happen successfully, Israel needed to be integrated into the wider Middle East – by normalising its relations (economic, political, diplomatic) with Arab states. Most importantly, this meant getting rid of the formal Arab boycotts of Israel that had existed for many decades.
From Israel’s perspective, normalisation was not simply about enabling Israeli trade with, and investments in, Arab states. Following a major recession in the mid-1980s, Israel’s economy had shifted away from sectors such as construction and agriculture, towards a much greater emphasis on high-tech, finance, and military exports. Many leading international companies, however, were reluctant to do business with Israeli firms (or inside Israel itself) because of the secondary boycotts imposed by Arab governments.4 Dropping these boycotts was essential in order to attract big Western firms into Israel, and also to enable Israeli firms to access foreign markets in the US and elsewhere. Economic normalisation, in other words, was just as much about ensuring Israeli capitalism’s place in the global economy as it was about Israel accessing markets in the Middle East.
To this end, the US (and its European allies) employed a variety of mechanisms from the 1990s onwards aimed at driving forward Israel’s economic integration into the wider Middle East. One was the deepening of economic reforms – an opening up to foreign investment and trade flows that spread rapidly across the region. As part of this, the US proposed a range of economic initiatives that sought to tie Israeli and Arab markets to one another, and then to the US economy. A key scheme involved the so-called Qualifying Industrial Zones (QIZs) – low-wage manufacturing zones established in Jordan and Egypt in the late 1990s. Goods produced in the QIZs (mostly textiles and garments) were given duty-free access to the US, provided that a certain proportion of the inputs involved in their manufacture came from Israel. The QIZs played an early and decisive role in bringing together Israeli, Jordanian, and Egyptian capital in joint ownership structures – normalising economic relations between two of the Arab states that neighbour Israel. By 2007, the US Government was reporting that more than 70% of Jordan’s exports to the US came from QIZs; for Egypt, 30% of exports to the US were produced in QIZs in 2008.5
Alongside the QIZ programme, the US also proposed the Middle East Free Trade Area (MEFTA) initiative in 2003. MEFTA aimed to establish a free trade zone spanning the entire region by 2013. The US strategy was to negotiate individually with ‘friendly’ countries using a graduated six-step process that would eventually lead to a full-fledged free trade agreement (FTA) between the US and the country in question. These FTAs were designed so that countries could connect their own bilateral FTAs with the US with other countries’ bilateral FTAs, thereby establishing sub-regional-level agreements across the Middle East. These sub-regional agreements could be linked over time, until they covered the entire region. Importantly, these FTAs would also be used to encourage Israel’s integration into Arab markets, with each agreement containing a clause committing the signatory to normalisation with Israel and forbidding any boycott of trade relations. While the US failed to meet its 2013 goal for establishing MEFTA, the policy successfully drove an expansion of US economic influence in the region, underpinned by normalisation between Israel and key Arab states. Strikingly, today the US has 14 FTAs with countries across the world, of which five are with states in the Middle East (Israel, Bahrain, Morocco, Jordan, and Oman).