Blessing Through Holy Separation
בפסוק יצו ה' אתך כו' הברכה באסמיך כו' יקימך כו' לעם קדוש כו' וראו כל ע"ה כו' ויראו כו'
On the pasuk, "Hashem will command the blessing to be with you... the blessing in your storehouses... Hashem will establish you... as a holy people... and all the nations of the earth will see... and they will fear" (Devarim 28:8-10).
The Sfas Emes opens with the pesukim of the blessings in Ki Tavo, which describe how Hashem will bless Bnei Yisrael with material abundance, establish them as a holy people, and cause the nations to see and fear.
שעיקר הברכה המיוחדת לבנ"י א"י לחול עד שמתרוממים ונבדלין מכל האומות כמ"ש חז"ל בדבר הסמוי מן העין
The essence of the blessing that is uniquely set aside for Bnei Yisrael in Eretz Yisrael is that it should rest upon them to the point where they become elevated and set apart from all the nations, as Chazal said that blessing rests only on something hidden from the eye.
The true blessing meant for Bnei Yisrael is one that lifts them above and apart from the other nations; like all blessing, it rests specifically where it is hidden and concealed from the eye.
ובבהמ"ק שהיו נבדלין מאומות הי' הברכה
And in the Beis HaMikdash, where they were set apart from the nations, the blessing rested.
When Bnei Yisrael stood distinct from the nations in the Beis HaMikdash, the divine blessing was able to rest upon them.
וכמו כן בש"ק פורס סוכת שלום
And likewise on Shabbos Kodesh, Hashem spreads over us the sukkah of peace.
Shabbos accomplishes this same separation, as Hashem spreads His sukkah of peace over Bnei Yisrael and sets them apart.
וגם בכל יום יש מצות מסוגלים לזה כמו הטלית שמתעטפין בו
And also on each and every day there are mitzvos that have a special power for this, such as the tallis in which one wraps himself.
Even on ordinary weekdays there are mitzvos that bring this set-apart blessing, such as wrapping oneself in the tallis.
וכשבנ"י נבדלין ויש בהם הברכה ממילא וראו כע"ה כו' ויש להם ג"כ יראת שמים ע"י בנ"י ז"ש ויראו ממך כלומר על ידך
And when Bnei Yisrael are set apart and the blessing is found among them, then automatically "all the nations of the earth will see," and they too come to have yiras Shamayim by means of Bnei Yisrael; this is the meaning of "and they will fear of you" (Devarim 28:10) -- that is to say, fear of Hashem that comes through you.
Once Bnei Yisrael are set apart and carry the blessing, the nations automatically see it and are drawn to yiras Shamayim through them -- the "fear" the pasuk speaks of is really fear of Hashem awakened by means of Bnei Yisrael.
כי מה לנו שיראו ע"ה מאתנו:
For what concern is it of ours that the nations of the earth should fear us in itself -- rather, the point is that through us they come to fear Hashem.
The Sfas Emes clarifies that the goal was never that the nations should fear Bnei Yisrael for our own sake, but that through us the nations should come to fear Hashem.
Summary: The Sfas Emes explains that the blessings of Ki Tavo center on a blessing uniquely reserved for Bnei Yisrael -- one that rests upon them only when they are elevated and set apart from the nations, since, as Chazal teach, blessing dwells only in what is hidden from the eye. This separation was realized in the Beis HaMikdash, is renewed each Shabbos through the sukkah of peace that Hashem spreads over us, and is even available daily through mitzvos such as the tallis. When Bnei Yisrael are thus set apart and the blessing rests among them, the nations come to see it, and through Bnei Yisrael they are drawn to yiras Shamayim. The Sfas Emes concludes that the verse "and they will fear of you" means fear of Hashem awakened through us -- for the purpose was never that the nations should fear Bnei Yisrael in itself, but that through Bnei Yisrael the nations should come to fear Hashem.