The Economic Case for the US-Israel Partnership

Washington should treat the US-Israel partnership as strategic industrial architecture

This piece was originally published by Hudson Institute

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Discussions of the United States–Israel relationship tend to focus on security assistance, as though the partnership were primarily an exercise in strategic patronage. However, this framing overlooks that Israel is a significant economic and innovation power whose deep integration into the American industrial, technological, and capital ecosystems bolsters the US economy. Further, Israel’s capacity for innovation is indispensable to building and maintaining America’s military and economic advantages.

After October 7, 2023, credit agencies, foreign investors, and geopolitical commentators assumed that Israel’s economic resilience would buckle under the weight of a prolonged, multifront war. One agency, Moody’s, downgraded Israel’s credit rating in 2024. Capital outflows, a spike in defense expenditures, and the mobilization of hundreds of thousands of reservists from the civilian workforce gave credence to the view that the so-called start-up nation had pushed its small economy to the brink. Some observers concluded that isolation, war fatigue, and fiscal strain would erode the foundations of Israeli economic power. Others went further, pointing to perceived fragility and casting doubt on the strategic logic behind the US-Israel partnership.

That assessment has not held.

The integration of Israeli innovation into American industry has proven resistant to disruption. Israeli firms continue to supply critical components to the United States’ most profitable technology companies, including Cisco, Intel, Motorola, Applied Materials, and HP. American companies have established two-thirds of the more than 300 foreign-invested research and development (R&D) centers in Israel precisely because partnerships in Israel make US firms more innovative, competitive, and profitable.

The scale of this integration is significant. Israeli firms are the second-largest source of foreign listings on the NASDAQ after China. Meanwhile, Israeli investment in the United States has tripled over the past decade to nearly $24 billion and shows no sign of retreating.

Israeli innovation’s practical value to the United States has only become more apparent in recent years. Israeli breakthroughs in water and energy conservation, cybersecurity, and artificial intelligence have addressed real challenges that American communities faced. The US-Israel commercial relationship, driven by mutual benefit, now spans nearly all critical and emerging sectors.

The economic case for the US-Israel partnership is neither sentimental nor irrational. It is structural and becomes more important with each passing year as Washington seeks to counter China’s growing dominance across the Middle East and Central Asia.

Strategic Returns: The Economic Architecture of the US-Israel Partnership

In 1985, the United States signed its first free trade agreement. Its partner was not Canada, nor Britain, nor Japan. It was Israel. Four decades later, the results of this relationship prove that it deserved such high priority. Bilateral trade has increased tenfold to roughly $49 billion, on top of Israel’s nearly $24 billion in investments in the US.

The institutional architecture underpinning the relationship has deepened in parallel. One joint framework deserves particular attention: the Binational Industrial Research and Development Foundation (BIRD). Since 1977, the foundation has allocated $282 million across over 800 projects. Both directly and indirectly, these projects have generated roughly $8 billion in sales. Cabinet-level joint agreements now cover civil aviation, public health, energy, space, and autonomous transportation. The relationship endures because it produces returns.

There are three structural features of the Israeli economy that make the country such a valuable partner.

The first is innovation density. Israel has 10.1 million people but produces a technological output rivaling nations many times its size. The number of Israeli listings on the NASDAQ surpasses the combined total of firms from India, Japan, and South Korea. More than 2,500 American companies operate in Israel, directly employing roughly 72,000 Israelis.

The second is sectoral alignment on technologies of the future. The US-Israel economic relationship spans the domains in which twenty-first-century strategic competition will be decided: cybersecurity, artificial intelligence, autonomous systems, biotechnology, water technology, and renewable energy.

The third is institutional compatibility. Israel is a rule-of-law democracy with independent courts, transparent capital markets, and strong intellectual property protections. American firms conduct sensitive R&D there because contracts are enforceable and legal recourse is credible. In 2019, Israel created a centralized national security investment screening mechanism, and strengthened it in 2022 by lowering foreign ownership thresholds and clarifying review standards. Strategic sectors, including banking, insurance, and defense, require regulatory approval, with the Israeli Ministry of Defense overseeing foreign investment in the defense domain.

This framework carries strategic weight in the competition with China. The effectiveness of advanced technologies in real combat depends on ensuring that investors in friendly countries own and finance them. Israel’s screening regime and regulatory safeguards reduce the risk of opaque, state-directed capital gaining leverage over critical technologies. For the United States, Israel therefore functions as a secure, institutionally aligned partner within a democratic technology ecosystem, reinforcing resilience in the broader AI and critical infrastructure contest.

China can build ports and lay subsea cable networks across continents. But it cannot replicate the institutional trust on which genuine innovation ecosystems depend. Authoritarian regimes can mobilize capital at scale, but they struggle to produce the open, risk-tolerant research culture that transforms ideas into durable industries. Israel has built that culture within a democratic order that makes long-term partnership structurally durable rather than transactional.

The result is a force multiplier for American power operating along three axes:

1. Israeli innovation extends America’s technological frontier. R&D centers in Israel produce capabilities that flow directly into American supply chains.

2. Israeli investment bolsters America’s domestic economic prosperity. Israeli-founded companies create high-value American jobs in sectors that determine long-term competitiveness.

3. Israel’s technological diplomacy gives the US-led order a competitive instrument in developing states that seek alternatives to Beijing. Israeli capabilities in AI, cyber defense, water management, and energy diversification operate within an American-anchored framework, so vulnerable countries do not have to depend on China.

For these reasons, Israel is a vital contributor to America’s security and economic capacity.

The Resilience Dividend

Those who predicted Israel’s economic devastation have been forced to reassess. In January 2026, Moody’s revised its outlook for Israel from negative to stable, citing declining geopolitical risk and demonstrated resilience.

The Bank of Israel projects that the country’s gross domestic product will grow 5.2 percent in 2026, which will help the country reduce its deficit. The International Monetary Fund issued another assessment projecting 4.8 percent growth. Bank of Israel data also show foreign exchange reserves at $233 billion, and unemployment has declined to 3 percent. The TA-125, Israel’s stock market, rose 9 percent in January 2026.

An economy that can sustain a prolonged, multifront war while still growing and maintaining its foreign exchange reserves has strategic value beyond being a financial partner. Israel has therefore demonstrated that its economy has several characteristics that will benefit the United States, including the following:

Supply-chain reliability under pressure. Israel’s technology and defense sectors continued operating under sustained wartime conditions. That performance reflects institutional resilience. Production, exports, and joint programs held despite missile attacks, reserve mobilization, and sustained cyber pressure.

This resilience aligns with Pax Silica, the US Department of State’s flagship effort to build a new consensus among allies and trusted partners on AI, tech supply chains, and economic security. Washington integrated Israel into this framework because technological sovereignty depends on reliable, battle-tested nodes within the network. In the competition with China, continuity under fire strengthens the credibility and durability of the allied technology ecosystem.

Capital preservation. American capital deployed in Israel performed well and did not need emergency stabilization measures. Financial markets remained functional, venture activity persisted, and cross-border investment flows did not collapse despite wartime conditions. In a global environment in which conflict often erodes asset values, Israel demonstrated that institutional credibility and market integration can preserve American capital, even in wartime conditions.

Deterrent credibility. Every Israeli economic indicator that held or improved reinforced the credibility of the American-anchored regional order. Israel’s stability under pressure strengthened US deterrence, which demonstrated the strength of the US-led framework. Adversaries now realize that even sustained economic coercion will not easily unravel the US or allied economies. Stability under strain projects durability, which is itself a strategic asset.

This century has already seen repeated economic shocks: financial crises, pandemics, and disruptions to key supply chains like semiconductors and energy. Partnerships that endure under stress matter more than those that perform only in stable conditions. Israel has demonstrated such resilience, which proves its value as an ally.

American Returns

The US-Israel economic relationship also provides immense benefits to America’s domestic economy.

First, Israeli investment creates high-value American jobs. In New York, nearly 600 Israeli-founded companies generated $19.5 billion in gross output and supported over 57,000 jobs. In Florida, 429 Israeli-founded companies generated $7.3 billion in output. In Virginia, 119 firms produced $2.3 billion. In California and Massachusetts, Israeli enterprises support thousands of high-wage positions in semiconductors, clean energy, and biotechnology.

These positions drive productivity, strengthen local tax bases, and anchor innovation clusters. Weakening these ties would impose direct economic costs on American communities by reducing investment, slowing technological dynamism, and thinning industrial capacity.

But employment figures only capture the relationship’s visible layer. The more significant dimension is shared industrial capacity. The United States and Israel are increasingly linked through joint development, coproduction, integrated supply chains, and collaborative research that moves technologies from concept to deployment.

Modern strategic competition turns not on aggregate trade volume but on control of production ecosystems. The decisive advantage lies in the sustained ability to design, prototype, manufacture, secure, scale, and continuously upgrade complex systems across critical sectors.

The US-Israel partnership functions at that level. It combines American scale and capital with Israeli technical specialization, which reinforces a common production architecture built for long-term strategic competition.

In semiconductors, Israel functions as an allied design hub embedded in American supply chains. In cybersecurity, Israeli firms are the first layer of defense for American infrastructure. Israeli technologies also reinforce US food and water security and supply medical devices and diagnostic equipment to American hospitals. Israeli defense firms provide US warfighters with combat-proven systems without the lead times of long development processes. In AI and autonomous systems, Israeli expertise integrates semiconductor design, cybersecurity, and defense applications into deployable platforms.

Israeli innovation is woven into American systems, and this integration shapes international economic competition. The strategic challenge facing the United States is not merely maintaining domestic growth but sustaining technological leadership across a widening front of competition. No single country can dominate every critical sector. The technological front of the US-China competition—including semiconductors, AI, cybersecurity, energy, water, biotechnology, and defense—is too broad for even the world’s largest economy.

The Israeli codevelopment model expands America’s R&D capacity without the risk of compromise. Meanwhile, China deploys state capital so that other countries depend on its supply chains, digital infrastructure, and technical standards in precisely these sectors. The American answer cannot be to try to beat China at its own game. Washington needs to cultivate an allied innovation base whose collective depth exceeds that of centralized systems. Israel occupies a mature position within that base, earned through decades of performance and proven under stress.

The Boycott Threat

The US-Israel economic partnership is a strategic asset whose returns are accelerating. Washington needs to deepen and protect it. Since October 7, 2023, momentum behind boycott movements has expanded in Europe, and what began as political signaling now carries regulatory and commercial consequences. The trajectory threatens not only Israeli interests but also Western industrial coherence and the transatlantic partnerships that underpin American competitiveness.

European Defense Partnerships with Israel Face a Contradiction

The scope of European action against the Israeli defense industry has expanded rapidly, including in the following countries:

• Slovenia imposed a total weapons embargo on Israel in August 2025.

• Spain placed a total embargo on the export and import of defense materials, dual-use goods, and technologies to and from Israel. This measure includes transit bans for related aircraft and ships.

• Italy suspended new arms export licenses.

• The Netherlands halted F-35 parts shipments, though courts are reassessing this measure.

• Belgium expanded restrictions to include arms transit through its territory.

• Ireland proposed a boycott on dual-use trade after exporting €97 million in networking, data storage, and cybersecurity equipment since October 2023. Multinational firms such as Intel, Google, and Microsoft faced potential exposure under American anti-boycott laws.

Yet European countries still rely on Israeli defense systems. They purchase roughly half of Israel’s $14.8 billion in defense exports while simultaneously rebuilding their own defense capacity as the Russia-Ukraine War rages on.

Recent developments in the Israeli defense industry underscore the contradiction:

• Romania signed a €2.3 billion air defense contract with Rafael in July 2025.

• Latvia agreed to acquire Spike anti-tank systems in June 2025.

• Germany received its first operational Arrow 3 exoatmospheric ballistic-missile defense system from Israel in December 2025, with a formal handover ceremony at a German Air Force base near Berlin. The delivery is pursuant to a 2023 agreement initially valued at approximately $4 billion. That same month, Germany agreed to expand the contract by roughly $3.1 billion, bringing its total value to about $6.5 billion and making it the largest defense export in Israel’s history.

European governments are therefore restricting trade in one channel while deepening defense integration in another. They do so because replacing Israeli suppliers would raise costs, extend delivery timelines, and strain defense markets.

Implications for the United States

For Washington, the stakes extend beyond bilateral trade. European Union debates over suspending trade frameworks affect commercial systems that support American firms operating across Europe and Israel. Irish or Spanish restrictions on dual-use technology disrupt supply chains linking Israeli R&D to American platforms in cybersecurity, semiconductors, and advanced manufacturing.

This also matters for the US industrial base and long-term resilience for three structural reasons:

1. Capital formation and investment signaling. The US industrial base depends not only on inputs but also on predictable capital flows and a trusted investment environment. Integrated US-Israel technology partnerships signal institutional stability to global investors. When political fragmentation or boycott measures disrupt those linkages, they introduce regulatory uncertainty that chills joint ventures, delays capital deployment, and weakens long-term industrial planning. So industrial resilience requires confidence in the continuity of allied production networks.

2. Time to field and operational readiness. Industrial strength is a factor of output speed. US competitiveness depends on compressing the timeline from concept to deployment in defense, cyber, and advanced manufacturing systems. Israeli firms contribute operationally tested technologies and rapid iteration cycles that shorten US deployment timelines. If those connections are restricted, then time to field expands, procurement costs rise, and the responsiveness of the American industrial base under crisis conditions declines.

3. Strategic autonomy within the allied system. The US industrial base relies on trusted partners to sustain technological depth without depending on adversarial ecosystems. Integration with Israel strengthens an allied production sphere, thereby reducing reliance on Chinese or other state-directed supply chains. If these partnerships deteriorate, American companies must shift sourcing toward less reliable or adversarial markets, expanding exposure to coercion and narrowing Washington’s room to maneuver in a crisis.

The boycott dynamic now threatens the integrated innovation and production architecture that sustains the United States’ advantage in critical sectors. This is a structural issue for US competitiveness and alliance cohesion.

Recommendations

Washington should treat the US-Israel partnership as strategic industrial architecture and act accordingly. Below are four concrete steps to do so.

Enforce against boycott spillover. Use trade law, financial authorities, and anti-boycott statutes to deter measures that disrupt US-Israel technology integration. European restrictions affecting American firms should be treated as trade barriers and addressed through bilateral leverage and multilateral channels. Indeed, Washington can respond with targeted tariffs, procurement exclusions, export-control adjustments, investment-screening scrutiny, or the suspension of sector-specific cooperation agreements. The point is to raise the cost of discriminatory treatment until reciprocity becomes the rational choice. In parallel, Washington should also offer a structured US-Israel-EU technology framework to align procurement, defense, and digital policies within a coherent allied system.

Modernize the free trade framework. The White House should update the 1985 US-Israel Free Trade Agreement to reflect a digital- and services-driven economy. The administration should also incorporate binding provisions on data flows, AI and cybersecurity standards alignment, facilitation of joint ventures in critical technologies, and protections against third-party coercion. Regulatory certainty is a competitive asset in technology ecosystems.

Institutionalize coproduction in critical technologies. The US should seek to shift its procurement deals with Israel to structured coproduction in sectors where Israeli capabilities complement US capacity gaps. This effort should seek to embed advanced defense, cyber, and emerging technology systems into American production lines to increase America’s industrial depth.

Build a bilateral industrial integration platform. America should establish a federal industrial matching mechanism linking Israeli firms to US manufacturing clusters. The mechanism should tie incentives to physical production, workforce development, and supply chain integration on American soil to bolster shared production capacity.

Collectively, these steps would secure the US-Israel partnership at the level that matters in strategic competition: capital control, production ecosystems, and institutional alignment.

Conclusion

Critics of the US-Israel partnership present it as a legacy arrangement sustained by habit and the idiosyncratic preferences of special interest groups. In fact, it is a prototype of allied codevelopment under conditions of strategic competition. The central challenge facing the United States is constructing an international economic order capable of outperforming authoritarian alternatives over time. The US-Israel relationship demonstrates what that order looks like when it matures: integrated innovation, institutional trust, and resilience verified under stress.

Alliances built on codevelopment and shared industrial capacity generate compounding returns. The United States possesses one that works. Washington now needs to protect it and scale it as part of a broader allied economic architecture for the next generation.