Publications

Over the last year, several attempts have been made by the Israeli media and a number of government ministries to assess the level of economic damage attributable to the delegitimization campaign being led by the BDS (Boycott, Divestment, and Sanctions) coalition against Israel. While these attempts have led to several important publications, there is as yet no comprehensive study which combines the wealth of available theoretical and empirical knowledge about sanctions with a political-economic analysis of the Israeli economy. This memorandum hopes to fill this gap by examining how sensitive the Israeli economy is to economic pressures deriving from political motives.

Chapter 1 presents a general review of the academic literature on sanctions. A consideration of this literature and of past instances demonstrates the complexity of the drive to implement economic sanctions whose effectiveness depends on the behavior of different players and their varying interests. Understanding this complexity is integral to my analysis. While most attention is currently directed at the activities of the BDS movement, it must not be forgotten that their undertakings do not take place in a political-economic vacuum, but rather in an arena involving a variety of players who are not, in most cases, interested in harming economic ties with Israel.

The BDS movement will only manage to cause significant economic harm to the Israeli economy if it finds a sympathetic ear in governments and commercial enterprises. I have therefore invested great efforts in identifying the variables that can be expected to influence the decisions of governments and relevant commercial bodies whether to either adopt or block the punitive measures that unofficial players are attempting to promote. Thus, in Chapter 2, I analyze the political-economic arenas of Israel’s major trading partners and examine how important trade and investment in Israel is for each of them. I have identified a number of factors that limit the implementation of 8 I In the Shadow of Delegitimization: Israel’s Sensitivity to Economic Sanctions most of the punitive economic measures that the BDS movement aims to advance. Among these, the following three issues stand out:
1. The majority of Israeli exports comprise production inputs and intermediate components for a range of products and are therefore not sensitive to campaigns calling for a consumer boycott of Israeli merchandise. It is only by convincing governments to change their trade agreements with Israel or by leading a boycott of companies whose products are based on Israeli inputs that the BDS movement will cause a noticeable drop in demand. The memorandum will show the improbability of unofficial organizations managing to lead such pervasive processes.
2. While it may be true that Israel’s major trading partners will not face a strategic macroeconomic threat if economic ties with Israel are significantly downgraded, the interests of many companies and the activities of specific sectors are likely to be harmed. European industry and other industries will manage to find replacements for most of the Israeli products, but this will entail significant costs for many industrialists, who also wield political power. Therefore, governments that chose to place sanctions on Israel will not only incur economic losses, but will also pay a political price. These economic and political costs are only two of the various factors that support the assessment that the EU is unlikely to initiate any significant change in its trade agreements with Israel.
3. Many components of the merchandise exported from Israel are manufactured by multinational companies—foreign corporations that have established manufacturing operations in Israel or acquired controlling interests in Israeli companies. Any government decisions that harm Israel’s capability to export or to attract foreign investment will also damage the interests of these powerful multinationals, and they are thus likely to try and influence their home countries to block such measures.

Beyond these three important issues, the memorandum raises a long series of additional economic, political, institutional, legal, and technical constraints that are likely to hinder attempts by the BDS movement to cause strategic macroeconomic harm to Israel. Nevertheless, one cannot discount the possibility that the movement may create a dynamic inspiring punitive measures that will inconvenience many Israeli companies and raise their business costs. The negative public atmosphere and the application of effective pressure on governments already dissatisfied with Israel’s policies and conduct on the Palestinian issue may spawn measures that will ultimately Executive Summary I 9 harm Israel’s interests. Even without the implementation of extreme punitive measures at their own economic and political costs—e.g., the alteration of trade agreements or the official adoption of broad sanctions against Israel—these governments can express their disapproval of Israel’s policies toward the Palestinians in many ways. For example, the desire to avoid public criticism may lead certain governments to discriminate against Israeli companies in government tenders; likewise, sanctions against merchandise manufactured in settlements may lend greater prestige to the unofficial campaign against Israel and even affect the export of merchandise manufactured within the Green Line. The analysis also indicates that any official punitive measures— even those with negligible direct economic impact—will be considered a success for the BDS movement and will increase its momentum.

Chapter 3 develops an econometric model that provides, for the first time, empirical evidence for the claim that Israel’s economic ties with EU countries are, in fact, sensitive to deterioration in the Israeli-Palestinian conflict; for example, increased numbers of Palestinians harmed in the conflict result in reduced Israeli exports to EU countries but not to other trading partners. By neutralizing the effects of important economic variables, the model allows for the assumption that unique political processes occurring in EU countries do, in fact, make it somewhat more difficult for Israeli companies to operate in the EU when the conflict flares up.

The findings show that the conflict’s negative political consequences for Israeli trade with Europe have not, thus far, been significant in macroeconomic terms. However, further expansion of the delegitimization campaign against Israel is liable to strengthen the link between trade and the conflict. It seems that the most important variable determining the extent of damage caused by the unofficial campaign being waged against Israel by groups such as the BDS movement is the level of antagonism among the general public and within EU governments toward Israel’s actions against the Palestinians.