US–Israel partnership’s resilience and innovation drive strategic advantage in a changing global economy

Amid geopolitical tensions, Israel’s robust economic and technological strength continues to bolster the US strategic and industrial edge, demonstrating resilience and innovation in a disrupted world.

Debates about the United States’ relationship with Israel frequently reduce the partnership to military aid and strategic patronage, overlooking a broader reality: Israel is a compact but potent economic and innovation hub whose integration with American industry, capi...

Since the outbreak of large-scale hostilities on 7 October 2023 many analysts and investors predicted a sharp economic contraction for Israel. Credit-rating downgrades, capital flight and the mobilization of reservists fed narratives of fragility. Yet subsequent performance has confounded those expectations. Moody’s revised its outlook on Israel from negative to stable in January 2026, citing reduced geopolitical risk and demonstrated economic resilience. The Bank of Israel projects 5.2 percent GDP growth in 2026, the International Monetary Fund forecasts roughly 4.8 percent, foreign-exchange reserves stand at about $233 billion and unemployment has fallen to near 3 percent; Israel’s main equity index rose in January 2026. Those indicators suggest an economy that has maintained functionality under prolonged strain, preserving supply chains, investment flows and production in critical high-technology sectors.

The commercial links between the two countries are extensive and mutually reinforcing. The 1985 United States–Israel Free Trade Agreement, the first such pact for the US, laid the groundwork for deep economic integration by lowering trade barriers and increasing regulatory transparency. According to the Office of the United States Trade Representative, US goods exports to Israel reached $14.8 billion in 2024, continuing a long-run expansion in bilateral commerce. US Department of Commerce analyses describe Israel as an export-focused, innovation-driven economy that attracts American firms and R&D centres; more than 2,500 US companies operate in Israel, directly employing tens of thousands.

Three structural features explain why Israel matters for American competitiveness. First, Israel’s innovation density: a small population produces a disproportionate share of advanced startups and NASDAQ listings, making Israeli firms a major source of foreign listings after China, as industry briefings note. Second, sectoral alignment: Israeli specialisms, cybersecurity, artificial intelligence, semiconductors and biotech, water and energy technologies, overlap with the domains that will determine twenty-first-century economic and military advantage. Third, institutional compatibility: as a democratic market economy with enforceable contracts and intellectual-property protections, Israel offers a secure environment for sensitive joint research and co‑development.

Those features yield practical returns for the United States. Israeli-founded companies operating in US states generate substantial output and employment; AIPAC’s briefing book cites Israeli investment supporting more than a quarter of a million American jobs. Beyond direct employment, Israeli technologies are embedded in American supply chains, shortening the cycle from R&D to deployment. In semiconductors Israel serves as a design and innovation node; in cybersecurity Israeli firms routinely supply layers of protection for US infrastructure; in defence, Israeli systems have been co‑produced, field‑tested and integrated with US platforms. That codevelopment model expands US R&D capacity without ceding control of critical technologies to potentially hostile actors.

The partnership also has strategic benefits in competition with state-directed economic systems. Israel’s screening mechanisms for foreign investment and regulatory controls over sensitive sectors reduce the risk that advanced technologies become vectors for strategic dependence. In contrast to the state-led model of adversaries that can leverage infrastructure or investment to bind customers and suppliers, Israel contributes capabilities within an allied institutional framework that supports interoperable standards and trusted supply chains.

The resilience demonstrated through wartime pressures, maintained production in high-tech and defence industries, functioning financial markets and continued venture activity, has a direct bearing on allied industrial policy. The US Department of State’s initiatives to build resilient technology ecosystems among partners echo this logic: dependable, battle-tested nodes within a networked allied industrial base are valuable precisely because they remain operational under duress.

Europe’s recent political fissures over trade and defence illustrate the fragility of that ecosystem. Since October 2023 a number of European states have tightened restrictions on defence-related trade with Israel, with measures ranging from export embargoes to suspension of new licences. Yet those same countries continue to procure Israeli systems, underscoring a transactional contradiction: political pressure has produced regulatory friction even as operational needs drive deeper defence integration. Concrete contracts signed in 2025 and 2026, including major air-defence and missile-defence procurements, demonstrate that demand for Israeli capability persists despite political headwinds. Such fragmentation risks creating regulatory uncertainty that chills joint ventures, delays capital deployment and elongates procurement timelines, outcomes that would erode the allied advantage in rapid technological fielding.

For Washington the implications are threefold. Predictable capital flows and coherent regulatory regimes underpin industrial resilience; shortening the time from concept to fielded capability depends on trusted partner contributions; and maintaining strategic autonomy within an allied production sphere requires preserving integration with reliable partners. Disruption to US–Israel technology linkages would therefore raise costs, extend delivery schedules and deepen exposure to adversary-controlled supply chains.

Policy steps to protect and deepen the relationship are straightforward in principle. The United States could enforce existing anti-boycott and trade statutes to deter measures that functionally discriminate against US firms operating with Israeli partners, while offering a trilateral alignment framework with European allies to harmonise procurement, digital standards and export controls. Updating the 1985 Free Trade Agreement to reflect a services- and data-driven economy, with binding provisions on data flows, AI and cybersecurity standards, would reduce regulatory frictions and bolster predictability. Embedding co‑production clauses in procurement contracts would shift cooperation from transactional purchases to durable industrial partnerships, and a federal industrial matching mechanism could tie incentives to onshore production, workforce development and supply‑chain integration.

Critics who portray the US‑Israel relationship as anachronistic miss its contemporary function: an allied codevelopment model that multiplies resources and accelerates technological iteration across sectors vital to economic and military strength. Israel’s demonstrated capacity to sustain innovation and commerce in adversity enhances allied resilience and provides the United States with a partner whose strengths are structural, not merely sentimental.

Preserving and scaling that partnership will require deliberate policy to lock in shared production ecosystems, defend against political fragmentation that impedes collaboration and modernise institutional frameworks to reflect a digitalised economy. In strategic competition, alliances that can both innovate and manufacture together will outlast those that rely primarily on one-off transactions; the US–Israel relationship already exemplifies that integrated approach and merits protection and expansion as part of a broader allied industrial architecture.

Source: Noah Wire Services