Sanctions may cause isolation
Trading partners raise pressure over policies in Gaza, West Bank
Mourners attend a funeral Sept. 29 for 41 Palestinians whose bodies were recovered from the rubble of a residential building hit in an Israeli strike on Oct. 31, 2023, in Nuseirat refugee camp in the Gaza Strip.
A Jahalin Bedouin walks amid tents and huts near the Jewish settlement of Maale Adumim in the West Bank.
ISRAEL
They seem like minor and isolated events: Western nations withholding components for an Israeli submarine; Dutch customs agents searching passengers 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 to ban goods from Israeli West Bank settlements amid international anger over Israeli policies there and in Gaza, sanctions experts say the nation may face growing economic isolation as foreign companies seek to protect themselves.
The U.K.-led bloc, which includes France, Canada and Spain, announced the planned sanctions in September, saying they seek to protect the viability of a two-state solution. The settlements, which the United Nations and International Court of Justice consider illegal, have expanded 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 a Sept. 28 attack on a Palestinian town, torching cars and buildings, the Israeli military said.
"Markets get ahead of compliance and start to de-risk," said Mark Dubowitz, chief executive officer of the Foundation for Defense of Democracies, who has 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."
Restrictions enacted
Commerce with West Bank settlements comprises $627 million out of Israel's total exports of $55 billion, according to the country's economy ministry. 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 also will include individuals and companies that provide services such as financing and construction to the settlements. Israel condemned the move and 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 referred to the Netherlands, which banned the import and sale of goods originating from Israeli settlements in the West Bank, East Jerusalem and the Golan Heights along the border with Syria. It's one of the toughest unilateral trade restrictions by a European Union member state; penalties range from the confiscation of goods to criminal prosecution.
Passengers landing in Amsterdam from Tel Aviv recently reported that their bags were searched for prohibited products, Israel's 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.
Violence scrutinized
Israel is condemned globally for its war against Hamas in Gaza, triggered when the Iranbacked militant group attacked Israel in October 2023, killing 1,200 people and abducting 250 others. Gaza's death toll exceeds 70,000, according to its Hamasrun health ministry, and most of its 2 million residents live in tents among ruins and unsanitary conditions.
International sentiment against Israel worsened due to surging violence in the West Bank, with Netanyahu's government overseeing an unprecedented expansion of settlements and outposts.
An opposition win in an Israeli election Oct. 27 may prompt foreign governments to reconsider the boycotts and sanctions, but if Netanyahu's right-wing religious coalition is reelected, that could turbocharge moves to isolate the country.
Dubowitz said he's also got an eye on U.S. policy, especially if Democrats win the White House in 2028. Democratic former President Joe Biden's administration started to sanction settlement figures and entities, but that process was reversed when Republican Donald Trump returned to the Oval Office last year.
The EU 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 increased year-over-year to about $42 billion, excluding diamonds, yet data indicate exports dropped 7% while imports surged by 8%.
So far, Israel's tech industries are thriving, with foreign direct investment growing last year by 78% to a record $26.2 billion. It increased again this year, reaching $30.1 billion, and Israeli defense companies registered record-breaking foreign orders.
