Record U.S. Aid Carries Sting in Tail for Israeli Defense Firms

(Bloomberg) -- Israeli defense companies are warning that changes to the way U.S. military aid can be spent threaten their future, and want a rethink from a White House that has showered Israel with political gifts.

The latest U.S. aid package for Israel allotted $33 billion over 10 years starting in 2019 for military financing, alongside $5 billion for missile defense -- a record when taken together and the biggest given to any country. But the accord, signed three years ago at a time of tense relations between the Obama administration and Israel, eliminates in phases Israel’s ability to spend a quarter of the military funding in shekels on locally produced equipment.

Firms like TGL SP Industries, which was founded in 1952 and produces rubber road wheels for Israeli tanks, say the change poses an existential risk. Thousands of jobs could be lost across the sector.

“This is the biggest threat for small and medium businesses that are dealing with the defense industry in Israel,” said TGL chief executive Tal Dekel. “Five years from now, probably we will not be able to survive as a company in Israel.”

The restriction isn’t a problem for larger corporations such as Elbit Systems Ltd. and Israel Aerospace Industries Ltd., which often have U.S. subsidiaries able to handle dollar deals for Israeli forces. But for many smaller firms that operate as subcontractors and rely on shekel spending it looks catastrophic and they face losing roughly $200 million in orders each year.

Major Layoffs

The amount of U.S. funding that can be spent in Israel will be phased out, with the largest cuts coming from 2024. Members of Congress in Washington have repeatedly pressed Israel to spend more of its American aid on U.S. products, just as lawmakers do for other countries.

A spokeswoman for Israel’s Defense Ministry said the government was working with Israeli industry in preparing to implement the agreement, after warning last year that the change could could lead to 22,000 layoffs.

There’s a risk Israel could be seen as ungrateful if it pushes for an overhaul of the accord, and one Israeli official, who requested anonymity to discuss the sensitive issue, said the government was uninterested in reopening the pact.

Shraga Brosh, president of Israel’s Manufacturers’ Association, sees greater danger in not trying. “If we do nothing, it will be a problem,” he said. “This loss of volume will go to the Americans.”

U.S. Trip

A spokeswoman for the U.S. Embassy in Israel declined to comment for this story. Pentagon spokesman Sean Robertson said in an emailed statement that the Department of Defense “supports the decision as agreed by the U.S. and Israeli governments to phase out the use of U.S.” foreign military financing for offshore procurement over the next 10 years.

TGL, which employs 95 people, is among companies being asked by the government to move a major part of their production to the U.S. due to the rule change. Dekel said 35% of the firm’s revenue comes from the defense forces, and losing the sales would mean job losses and uncertainty for the military supply chain.

One subcontractor, Solrom Electronics, is in talks with two American firms on a joint venture since the Defense Ministry made clear new orders tied to aid are dependent on U.S. production, according to Zvika Bix, its chief executive. “If we want to grow and get bigger, we need to think about producing in the U.S.,” he said.

Brosh earlier this year accompanied a delegation of executives from smaller defense firms to the U.S. to explore tie-ups, a trip co-led by a Defense Ministry unit.

Largest Recipient

Israel is by far the largest recipient of U.S. foreign military financing, receiving about 61% of total assistance worldwide in the 2019 fiscal year, according to the Congressional Research Service. That accounts for 19% of Israel’s defense budget.

The funding has been criticized by some in Israel as a subsidy for the American defense industry, or for making Israel too dependent on its superpower benefactor.

In the U.S., emphatic support for Israel remains part of the political consensus, and President Donald Trump has delivered policy bonanzas for right-wing Prime Minister Benjamin Netanyahu, topped by recognition of contested Jerusalem as the nation’s capital.

Aid-Cut Threats

However, figures like Democratic presidential candidate Pete Buttigieg and firebrand freshman representative Alexandria Ocasio-Cortez raised the idea of cutting aid after Netanyahu said before April elections that he’d extend sovereignty over West Bank settlements -- an incendiary move for Palestinians seeking their own state.

Dov Zakheim, a former Pentagon comptroller, suggested Israel could simply rejig its budget to overcome the difficulties posed by the funding shift. “They want to buy their stuff with our money, and I think the argument would be: buy your own stuff with your own money,” he said.

The Manufacturers’ Association though is hoping Washington will at least allow U.S. funds to be spent on goods partially made in Israel.

“Maybe there will be some details that we can change,” said former Defense Ministry budget director Sasson Hadad, who helped negotiate the agreement. “We must try.”

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, ;Benjamin Harvey at bharvey11@bloomberg.net, Mark Williams, Amy Teibel

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