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How Will Israeli Defense Firms Fare Under the New $38 Billion US Arms Deal?

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An Israeli Air Force F-151 plane. Photo: Wikipedia.

An Israel Air Force F-151 plane. Photo: Wikipedia. – A tour of any Israeli army base quickly reveals a wealth of American equipment. M-16s are stamped, “Property of the US Army.” Tuna cans and teabags come with ShopRite labels. And tents have English-language instructions sewn onto their fabric walls.

The close Israeli-US relationship extends into all areas of defense procurement, especially when it comes to Israel’s high-tech qualitative edge in air power, missile defense and other related sectors.

But the new $38 billion Israel security deal — America’s largest-ever aid package to Israel — fundamentally changes the way that Israel will be able to spend the money.

Traditionally, America’s billions in military aid have been constructed, in part, as a subsidy for US manufactures, with Israel required to expend some three quarters of the funds in the United States.

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Under the new deal, however, the Jewish state will no longer be allowed to spend any of the money on supplies and services by local defense contractors. This promises to force significant changes in the way Israeli companies do business.

And while the new deal will bring in $3.8 billion a year over the next decade — a $700 million increase over the last agreement — critics, such as Netanyahu rival Yair Lapid, say the new deal will cost Israeli manufacturing jobs. He has also claimed that Israel would have received more money if not for Netanyahu’s high-profile campaign against Obama’s nuclear deal with Iran last year.

Lapid’s worries have been echoed by several local defense contractors. One industry source, quoted by Globes, the Israeli business daily, said, “This clause is a catastrophe for small and medium-sized Israel defense companies.”

He added that, “Spending in shekels from the defense budget on procurement of weapons and systems from the local industry is already low. And procurement from small defense companies is made possible to a large extent by conversion into shekels of aid money in dollars.”

Potential problems for smaller businesses 

Small and medium-sized companies will be affected the most because unlike larger firms, they cannot rely on export income to help them weather the storm.

Another industry leader was quoted as saying that he believed between 70 and 80 local firms could close their doors as a result of the deal. A representative of the Economy and Industry Ministry agreed, telling Haaretz that smaller businesses may not be able to make such a transition.

Another official, speaking with the Jerusalem Post, explained that many of the larger companies have the option of setting up American subsidiaries or becoming subcontractors to US firms — yet they, too, will certainly face hardships.

Many Israeli firms refused to speak publicly on the matter.

“Besides a general [statement] saying that we regret all actions that might harm the Israeli defense industry, I can’t comment,” a spokeswoman for Israel’s Elbit Systems told Several other firms contacted by also declined comment.

Under the new agreement, Israeli domestic spending won’t be cut until the sixth year of the 10-year deal. That means that local expenditures could actually rise in the short term, creating a buffer period to help companies prepare for the future.

Upside to the deal

Prof. Efraim Inbar, director of Bar-Ilan University’s Begin-Sadat Center for Strategic Studies, said, the agreement is “not a holy document and those things can be renegotiated in the future.” In the meantime, having such a multi-year commitment “makes it easier for our budgetary planners in the IDF.”

Chuck Freilich, a former deputy national security adviser in Israel, told that there’s likely to be increased competition with American defense contractors as well as new cooperative agreements between companies in both countries.

Cutting offshore spending was a sign the deal could have been better, he said. Freilich noted that in the late 1980s, after Jerusalem’s plans to manufacture its own fighter plane, the Lavi, were shelved, “everybody thought that would be a catastrophe. But it forced industry here to get its act together and [everyone] made more money in the end,” he said.

And, just as Israeli firms are beginning to partner with their American counterparts, there could be increased agreements with other countries, such as India and Singapore, which buy significant amounts of military hardware from Israel, he added.

“It’s a very negative development but sometimes you turn adversity into opportunity,” Freilich said. “Maybe in end, the defense industries will find ways to cope, and in the long term, even benefit, [but] I don’t see how yet. In the short-to-medium term, it’s definitely a negative development.”

Asked if diplomatic relations between Israel and third party countries that buy its arms would be affected by fallout from the new US-Israel deal, Inbar said he doesn’t believe that there will be any effect on relations with existing clients abroad. Israel has traditionally been constrained in selling to certain countries, such as China, because of American sensitivities.

Ambassador Alan Baker, director of the Institute for Contemporary Affairs at the Jerusalem Center for Public Affairs, told, “I think now Israel will be more intent on [strengthening the] arms industry to make up the lack of income.”

Firms will have to compensate for lost business, said Oded Eran, PhD., a senior research fellow at Tel Aviv University’s Institute for Strategic Studies. Both large and small companies “will have to invest a lot of effort,” and while some may be successful, others “may need to be assisted by the Israeli government.”

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