Citizens Proposal for a Border between Israel and Palestine
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Could American Firms Choose to Gradually Disinvest from Israel?

Dr. Mark Barry
April 3, 2015

U.S. Secretary of State John Kerry warned last year, before the break-up of the nine-month American-brokered negotiations between Israel and the Palestinians, that efforts to “delegitimize” and boycott Israel will increase if it spurns efforts to conclude a two-state settlement.

Last month, Israeli Prime Minister Benjamin Netanyahu rode to re-election by promising that there would be no two-state solution while he is in office. Despite Netanyahu’s later effort to walk-back his disavowal, President Obama and White House senior officials have reiterated that the U.S. takes Netanyahu at his word and therefore the U.S. must reevaluate its policy toward Mideast peace. Already speculation centers on a change in U.S. policy in the UN, where the U.S. may no longer veto and could even support a Security Council resolution outlining parameters of a two-state solution, which would be binding.

In 2013-14, warning signs of growing economic isolation of Israel came from Europe as several European pension funds withdrew investments from Israel and some large firms cancelled contracts. Considered part of the BDS (boycotts, divestment and sanctions) campaign, The Economist observed a year ago that this trend “has begun to grab the attention of some of the world’s largest financial institutions.” BDS is an analogy to when South Africa found itself in opposition to the rest of the world in the last days of apartheid, and it has stronger roots in Europe, making an American impact mostly in mainline churches and on campuses.

But for American investment banks and corporations, particularly after the recent Israeli elections, future investment in Israel may be based less on political and largely on economic considerations. Gradual disinvestment from Israel could occur as portfolios change due to rational market forces and prudent assessment of risk. It simply may not be sensible to maintain investment in companies based in a country whose status may veer toward that of a pariah.

American disinvestment could occur due to a combination of factors that increase risk for neutral economic actors – U.S. entities seeking the least risky foreign direct investment. Factors increasing uncertainty and risk include: the deterioration of the special U.S.-Israeli relationship which has been a bedrock for Israel; the increased possibility of a third intifada as Palestinian frustrations might boil over; a likelihood that the BDS movement will gain steam and worsen Israel’s economic climate; and, a potential Israeli economic downturn as a consequence of rising regional instability in neighbors such as Syria, Iraq and Yemen. Redirecting some investments away from Israel and toward more stable Euro-markets (and Asia) could be much more appealing to U.S. investors because those markets would be deemed a much safer bet.

U.S. disinvestment from Israel certainly won’t happen overnight but could pan out over the course of several years. Its direct economic impact on Israel would be relatively minor, but would become far more significant if at the same time trade with the European Union, accounting for one-third of Israel’s trade, were to seriously slump. Former Israeli finance minister Yair Lapid estimated even a partial EU economic boycott of Israel would immediately cost thousands of jobs and a loss of almost $6 billion in investment. To compensate, Israel would attempt to seek more foreign direct investment from India and China, but that could never replace its lost and highly-valued commerce with the EU.

But because of the special relationship, the political impact of even a minor reduction in U.S. investment in Israel, in tandem with rising EU disinvestment, would set the Netanyahu government into a quiet panic like never before.
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