There is an alternative argument, one that hasn't received as much attention as it undoubtedly ought, and which has been well-articulated in the Jerusalem Post by Eugene Kontorovich, who teaches constitutional law at Northwestern University in the United States.

Here's part of what he writes:
'These criticisms are wrong as a matter of principle. More insidiously, they hold Israel to a standard never applied to other nations, and criticizes it for passing laws that are well within the western democratic mainstream. Moreover, the outrage over the anti-boycott law carries a dose of hypocrisy, as it ignores numerous other laws in Israel that are used to restrict political speech generally associated with the right wing.
There is no universal code of free speech. Determining what gets protection involves trade-offs between the very real harm that speech can cause and the benefit of free expression....
The United States has far more robust constitutional speech protections than almost any Western country....
But even the US has a law against boycotting Israel. It has been on the books for decades, and has been regularly enforced, but no one has suggested it is unconstitutional – and that is for a law protecting another country’s economy. Moreover, Israel’s law, unlike the American one, applies only to organizing boycotts, not to actually adhering to one....
Every nation has laws against conspiracies to cause economic harm: antitrust laws prohibit speech when its purpose is to unfairly cause economic harm. And the common law makes it a tort to “interfere with prospective business advantage,” i.e. scaring off someone’s customers.
The anti-boycott law prohibits speech intended to cause economic harm to businesses solely because of their national identity. Nondiscrimination laws commonly ban plans to deny business to specified groups of certain national or ethnic origins.
Israel’s new law bans discrimination against businesses because they are Israeli.
Most European states – and Israel – have laws prohibiting speech that is perceived as “hateful” or which simply offends the feelings of particular groups. Often such speech expresses important viewpoints.
A boycott of Israel promotes hatred of Israel, and certainly offends the vast majority of Israelis. To be sure, boycott supporters argue that at least when it comes to settlers, such hatred is deserved, but that is always the opinion of those whose speech is blocked by such laws.
The boycott movement is designed to imperil the State of Israel, and can actually do so. This danger outweighs the benefits of allowing such speech, especially since the law does not in any way limit advocating policies or viewpoints that such boycotts are supposed to promote. Indeed, the law has a characteristic crucial for free-speech scrutiny – it is “viewpoint neutral.”
That is, it applies to boycotts of Israel whether organized by the left wing or the right wing.
Like most European democracies, Israel’s constitutional protection of speech has long been narrower than America’s....
Israel’s current practice is clearly well within the limits of an open democracy. Singling out Israel for laws that are identical to, or just as restrictive as, laws on the books in America and Europe manifests the very problem that exists with the boycotts themselves – the application of an entirely different set of standards to Israel than to the rest of the free world.'

The entire article can be read here: http://www.jpost.com/Opinion/Op-EdContributors/Article.aspx?id=229780
H/T Daphne Anson