That's the title of a 1998 Middle East Quarterly article by Ephraim Kleiman, Don Patinkin Professor of Economics at the Hebrew University of Jerusalem, and his answer is resoundingly negative: "Trade data fails to support the existence of a substantial clandestine trade by Israel with the Arab countries. The rumors may have originated from a misreading of Israeli trade statistics."
I mention his article because it's a stock in trade of journalists covering the Middle East to engage in speculation on this topic. Today's example is "Israel, Arab World Engage in Hidden Trade," by Jasper Mortimer based in Cairo for the Associated Press. He cites a figure of US$400 million a year provided by Gil Feiler, director of a Tel Aviv consultancy specializing in Arab markets and economics professor at Bar Ilan University. To Mortimer's credit, he also cites a skeptical voice, Dan Catarivas, foreign trade director at the Israeli Manufacturers' Association, who calls such estimates significantly inflated. "All the figures are very sexy for the press, but the reality is much less than what is written."
Caveat lector: Israeli trade with the Arab countries is likely to remain small until the latter accept the former's existence. (December 26, 2005)