Israeli settlement boycotts risk triggering economic isolation

They seem like minor and isolated events: Western nations withholding components for an Israeli submarine; Dutch customs agents searching passengers landing from Tel Aviv; a shipment for Israeli defense company Elbit Systems Ltd. held at a Malaysian port.

But as a dozen major countries, led by the U.K., pledge a ban on goods from Israeli West Bank settlements amid international anger over Israeli policies there and in Gaza, sanctions experts say the nation as a whole may face growing economic isolation as foreign companies seek to protect themselves.

“Markets get ahead of compliance and start to de-risk,” said Mark Dubowitz, chief executive officer of the Foundation for Defense of Democracies, who’s spent decades helping to build the sanctions regime against Iran and warns something similar may be applied to Israel. “Not every Iranian company was listed, but the perception is created that doing any business in Iran is risky, so the entire economy becomes a toxic asset.”

The U.K.-led bloc, which includes France, Canada and Spain, announced planned sanctions against Israeli settlements in the West Bank earlier this month, saying they were seeking to protect the viability of a two-state solution. The settlements, which are considered illegal by the United Nations and International Court of Justice, have been expanding since Prime Minister Benjamin Netanyahu’s ruling coalition took power in 2022 and caused outbreaks of violence between Jewish Israelis and Palestinians.

More than 100 settlers took part in an attack on a Palestinian town on Monday night, torching cars and buildings, the Israeli military said.

On the face of it, commerce with West Bank settlements is a rounding error — $627 million out of Israel’s total exports of $55 billion, according to the country’s economy ministry. And less than a third of that goes to the 12-nation group that announced sanctions.

But U.K. Foreign Secretary Ed Miliband said the measures will also include individuals and companies that provide services such as financing and construction to the settlements. The move has been condemned by Israel, which announced the closure of the British consulate in east Jerusalem.

“Importers don’t always have the resources to conduct meticulous checks regarding origin of goods,” said Ofer Fohrer, deputy director of the Israeli economy ministry’s Foreign Trade Administration. “The sentiment could reduce importers’ appetite to get involved with Israeli products.”

Fohrer was talking about the Netherlands, which has banned the import and sale of goods originating from Israeli settlements in the West Bank, East Jerusalem, and the Golan Heights, which lies along the border with Syria. It’s one of the toughest unilateral trade restrictions by a European Union member state and penalties range from the confiscation of goods to criminal prosecution.

Last week, passengers landing in Amsterdam from Tel Aviv reported that their bags were searched for prohibited products, the Israeli foreign ministry said.

“The concern is that foreign banks will cease providing correspondent services to their Israeli counterparts, effectively severing Israel’s ability to conduct international economic activity,” said Yair Avidan, former banking supervisor with the Bank of Israel.

“This could push us toward a blow to GDP, unemployment, a decline in the standard of living and could even damage Israel’s national security,” he said.

All of this is happening against a charged backdrop: Israel has been condemned globally for its conduct in the war against Hamas in Gaza, triggered when militants from the Iran-backed group attacked Israel in October 2023, killing 1,200 and abducting 250. The death toll in Gaza exceeds 70,000, according to its Hamas-run health ministry, and the vast majority of its 2 million inhabitants are living in unsanitary tents in ruined cityscapes.

International sentiment against Israel has worsened due to surging violence in the West Bank, with the Netanyahu government overseeing an unprecedented expansion of settlements and outposts.

Israel is holding an election on Oct. 27, and an opposition win may prompt foreign governments to reconsider the boycotts and sanctions. But if Netanyahu’s right-wing religious coalition is reelected, that could turbocharge the move to isolate the country.

The E.U. is Israel’s largest trading partner, accounting for about 29% of the country’s exports last year and a similar portion of imports. In 2025, overall trade volume including goods and services increased year-on-year to about $42 billion, excluding diamonds, yet data indicate that exports dropped 7% while imports surged by 8%.

Dubowitz, the Iran sanctions expert, said he’s also got an eye on U.S. policy, especially if the Democrats win the White House in 2028. Former President Joe Biden’s administration had started to sanction settlement figures and entities, but that process was reversed when Donald Trump returned to the Oval Office last year.

So far, Israel’s tech industries are thriving, with foreign direct investment growing last year by 78% to a record $26.2 billion. In 2026, it’s increased again, already reaching $30.1 billion. Israeli defense companies are registering record-breaking foreign orders.

But bans and boycotts are increasingly on the minds of Israelis who rely on foreign relations.

International airlines have delayed restarting operations despite the pause in intense fighting in the U.S. and Israeli war on Iran, hindered in part by aircrews’ reluctance to overnight in Israel. And last Saturday an unusual incident occurred when an Air Seychelles flight to Mauritius was denied landing.

The Israeli tour operator, Spirit World Productions, said that “according to information provided to the company, the decision was based on diplomatic and political considerations.”

The number of international carriers operating out of Israel has dropped 40% between August 2023 and August 2026, according to the Airport Authority, complicating travel for tech companies.