Israel's Export Boom Masks Shift From Manufacturing to Services

In the second quarter of 2026, Israeli companies achieved a new record in goods exports, totaling $28.4 billion. This represents a significant 60% increase, or $10 billion, over just three years. However, a substantial portion of this figure, $11.2 billion (40%), represents goods sold by Israeli-registered companies to foreign clients but shipped directly from one foreign country to another, never passing through Israel. While counted as Israeli exports by international accounting standards, this "re-export" activity generates no domestic production or employment.

The rapid growth of these re-exports, from a single-digit percentage before 2023 to four times that amount in three years, initially suggests that manufacturing is fleeing Israel. Contributing factors include a strong shekel, high labor costs coupled with low productivity, regulations, tariffs, and a desire to be closer to target markets amid supply chain disruptions. The fear of boycotts and restrictions since October 7 has also become a consideration, pushing profit-maximizing companies to seek production locations abroad.

He likens it to Apple, which doesn't manufacture phones in the US but remains a highly profitable and innovative American company. In this model, the intellectual property, design, management, and profit remain in Israel, while manufacturing is outsourced. This aligns with Israel's broader economic shift, where services have surpassed goods as the primary export since 2021, now comprising about 53% of total exports.

This economic model argues that in a near full-employment economy, subsidizing activities where Israel lacks a comparative advantage is illogical. By focusing on R&D, intellectual property, and management while outsourcing production, Israeli companies can grow faster, pay higher wages, employ more productive workers, and ultimately contribute more taxes to fund public services and future economic growth. This transition from physical production to services and intangible assets is a global trend, further bolstered by the fact that services are harder to boycott than physical goods.

The article also addresses the negative consequences of globalization, citing Professor Carmen Reinhart, who notes that while consumers benefit from lower prices and the economy grows overall, the cost is borne by workers, particularly the unskilled, who lose jobs to foreign competition. In reality, the gains have disproportionately benefited capital owners and executives, while tax cuts have further widened wealth inequality. The closure of factories also has ripple effects on local communities, impacting businesses, property values, and tax bases.

This phenomenon fueled populist movements like Donald Trump's "MAGA" campaign, which promised to bring back manufacturing jobs by imposing tariffs and trade wars. However, the article argues this is a flawed economic response to a genuine social problem. The real issue, according to economic historian Neil Ferguson and the article's analysis, is not that Adam Smith's and David Ricardo's theories are wrong, but that governments have failed to fulfill their end of the bargain by not adequately compensating displaced workers or facilitating their transition to new roles. The Israeli economy faces a similar challenge: while sophisticated global companies can thrive by keeping high-value activities in Israel and outsourcing production, the state must ensure that this transition does not leave behind less-skilled workers. The solution lies not in forcibly bringing back production, but in creating quality jobs for all, reducing living costs, easing regulation, and investing in infrastructure, as recommended by the Bank of Israel and OECD reports.