From Subsidy to Sovereignty - Middle East Forum
AI Analysis
Israel intends to phase out U.S. military aid over the next 10-12 years, simultaneously increasing domestic defense investment to $120 billion over the next decade. Formal talks between the U.S. and Israel are scheduled to begin in May 2026 to establish a new framework for the defense relationship, moving away from direct financial assistance. Israel's robust defense export industry ($14.79B in 2024) demonstrates its capacity to sustain its defense capabilities independently.
Key Takeaways
- Israel plans to eliminate U.S. Foreign Military Financing (FMF) by 2038.
- The termination of the Off-Shore Procurement (OSP) provision in 2028 will end the practice of Israel using FMF funds to support its domestic defense industry.
- Recent U.S. aid packages ($8.7B supplemental + $3.8B baseline) highlighted both the value of the alliance and potential U.S. leverage.
- Operational integration with CENTCOM is increasingly prioritized over direct financial aid.
- Israel's defense industry (IAI, Elbit, Rafael) has a combined order backlog exceeding $65 billion, indicating strong self-sufficiency.
Why It Matters
This shift represents a significant restructuring of the U.S.-Israel defense relationship, moving towards a more transactional model based on arms sales and operational cooperation. The transition could impact U.S. defense contractors reliant on FMF-driven procurement and incentivize Israel to further develop its independent defense industrial base. This development may serve as a model for other U.S. allies seeking greater defense autonomy.
From Subsidy to Sovereignty - Middle East Forum
From Subsidy to Sovereignty
Restructuring the U.S.-Israel Defense Relationship for the Post-Aid Era
May 5, 2026
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MEF_From_Subsidy_to_Sovereignty_Apr2026.pdf
Executive Summary
Prime Minister Benjamin Netanyahu announced on December 25, 2025, that Israel will invest 350 billion NIS/shekels (NIS), equal to roughly US$120 billion, in domestic defense production over the next decade. Two weeks later, in his Mar-a-Lago interview with The Economist, he confirmed that he intends to taper U.S. military aid to zero over 10 years. On April 26, 2026, the Calcalist financial daily reported that Washington and Jerusalem will open formal talks next month on a successor framework that drives Foreign Military Financing to zero by 2038. The era of unconditional grant aid to Israel is closing.
This paper examines the strategic question those decisions force into the open. If U.S. defense aid to Israel ends, what is the best way for Israel and the United States to manage the transition, and how should businesses prepare?
The relationship under review is large and old. Cumulative U.S. bilateral assistance to Israel since 1948 totals approximately US$174 billion in nominal terms, exceeding US$300 billion in inflation-adjusted terms when missile defense funding and post-October 7 supplementals are included. Active Foreign Military Sales cases with Israel reached approximately US$39 billion by April 2025. The decisions made over the next 30 months will shape an alliance that is both deeper and more contested than at any prior moment in its 78-year history.1
The paper presents nine core findings.
- First. Aid ends from a position of mutual strength, not American withdrawal. Israeli defense exports reached US$14.79 billion in 2024, the fourth consecutive record year. The combined order backlog at IAI, Elbit, and Rafael exceeded US$65 billion at the end of 2024 and continues to grow. Israel doesn’t need grant aid to remain a tier-one defense power.
- Second. The 2016 Memorandum of Understanding already set the structural conditions for a phaseout. Off-Shore Procurement (OSP), the unique provision that allowed Israel to spend roughly 26.3 percent of FMF on Israeli industry, terminates entirely in fiscal year 2028. Without OSP, the legacy aid model converts almost dollar-for-dollar into U.S. industrial subsidy.
- Third. The October 7 supplementals proved the war-fighting case for the relationship while exposing its civilian vulnerabilities. Congress appropriated US$8.7 billion in April 2024 plus the US$3.8 billion annual baseline. The Biden hold on heavy munitions in May 2024 confirmed that aid creates leverage. Operation Rising Lion in June 2025 and Operation Epic Fury in 2026 showed that operational integration through CENTCOM matters far more than the FMF check.
- Fourth. South Korea offers the closest historical analogue. Seoul received roughly US$250 million per year in U.S. military ass