Israel's Export Landscape Shifts Dramatically as Goods Bypass Nation
In the second quarter of 2026, approximately 40% of Israel's total goods exports, valued at $11.2 billion, did not physically pass through the country's borders. This phenomenon, termed "exports not passing through Israel," refers to Israeli companies facilitating trade between other nations without importing or exporting the goods themselves. While this represents a significant shift from previous years, where such trade constituted only about 9% of exports before 2023, it does not necessarily mean a decline in Israeli manufacturing.
Several factors contribute to this trend. Globalization of supply chains, increased international sales by Israeli firms, and overseas production are key drivers. Additionally, the strong Israeli shekel makes production within Israel more expensive for companies earning revenue in foreign currencies. Businesses are also seeking cost reductions and more efficient logistics, sometimes opting to manufacture closer to their end markets in Europe or elsewhere.
A notable acceleration in this trend occurred after October 2023, coinciding with the war. While not directly attributable to international sanctions, the altered global climate has prompted companies to reconsider production locations. European buyers, wary of potential issues related to the origin of goods, sanctions, or reputational risks, may prefer suppliers whose products are manufactured in their destination country or a third country, encouraging Israeli companies to decouple production from Israeli territory.
The complexity of modern manufacturing, where components are sourced globally, makes defining a product's origin challenging. An Israeli company can contribute significant value through research and development, intellectual property, and management while selling a product that is not considered Israeli for customs purposes. The example of Nvidia, which maintains a large R&D center in Israel but manufactures its products elsewhere, illustrates how Israeli innovation can contribute to exports without physical production within the country.
This shift has significant implications for employment. While high-paying R&D and management jobs may remain in Israel, the loss of physical production can lead to the disappearance of manufacturing jobs, particularly impacting traditional industries. This presents a dual reality: increased competitiveness and global reach for companies, but potential job losses and a reduced tax base for local communities.
Economists note that while total goods exports have grown, the portion physically produced in Israel has seen a smaller increase. This indicates a structural change in the economy, moving from a model of "we produce here and sell to the world" to "we create here and sell to the world." While Israel's technological sector continues to thrive, the weakening link between Israeli companies and goods manufactured within Israel raises concerns about preserving domestic factories, production, and jobs.
