Israeli Defense Industry Warns of Layoffs if U.S. Changes Military Aid Rules

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Israel's Iron Dome system in operation. Changes in the U.S. military aid plan to Israel could threaten such new technologies, industry sources say.Credit: Reuters

Israeli defense industry sources predict layoffs if the United States follows through with its plan to end the possibility of Israel using some of its U.S. military aid to buy equipment from local defense companies.

The sources say they don’t intend to fight the plan, but warn that the change could also impair the development of new technologies.

Since the 1980s, Israel’s military aid agreements with the United States all included an “offshore procurement” clause, allowing Israel to exchange 26.4 percent of the aid money from dollars to shekels. These were then spent on military equipment from Israeli companies, rather than purchasing U.S. military goods.

The deal effectively meant the United States subsidized Israel’s military industry by hundreds of millions of dollars annually, for nearly three decades.

In practice, the Israeli defense establishment may spend almost 40 percent of annual military aid from the United States on procurement from the Israeli defense industries, according to top U.S. sources.

Israel and the United States are currently negotiating a new 10-year military aid deal. U.S. sources claim that using the money to buy Israeli military equipment – by converting dollars into shekels – is inefficient.

The big defense companies are studying the implications of the potential change. So far, there is no consensus. Some companies suspect it could be bad news, others don’t believe it will matter much – partly because of procurement pledges by the Israeli defense establishment.

Domestic military giant Elbit, for example, is not happy with the mooted change, but foresees no damage to the company itself, noting that it has U.S.-based subsidiaries.

A major voice against the change is the Manufacturers Association, which analyzed potential implications and concluded that it could lead to 2,000 job losses locally, and even lower future arms exports. The association also views the change as de facto diminishment of the defense budget.

“Dozens of production lines and even whole defense plants will shut down, thousands of workers will be fired and the State of Israel will lose its security independence,” MA President Shraga Brosh warned a few months ago.

The topic of Israel’s military aid is also a hot-button issue for U.S. Jewry. On Sunday, former New York Mayor Rudy Giuliani advised Israel not to close the next 10-year aid agreement with the Obama administration but to hold out until next year. “I’d wait for the next president,” Giuliani said, during an interview with journalist Sharon Kidon on Israel’s Channel 2 TV, also calling Obama “the worst president for Israel.”

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