New U.S. Foreign Aid Agreement Provides Israel a Net Increase in U.S. Foreign Aid

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New U.S. Foreign Aid Agreement Provides Israel a Net Increase in U.S. Foreign Aid

U.S. State Department, Pentagon and Israeli officials reached a tentative agreement in May to phase out U.S. economic aid to Israel gradually over 10 years, while simultaneously increasing U.S. military aid. Under the agreement worked out by negotiating teams led by Israel's Finance Minister Ya'acov Neeman and U.S. Undersecretary of State for Economic and Business affairs Stuart Eizenstat, starting in fiscal year 1999 (which begins Oct. 1, 1998) the United States will reduce its annual $1.2 billion in economic aid to Israel by $120 million each year until the program ends in 2007.

During that same period, the United States will increase its annual $1.8 billion in grant military aid to Israel by $60 million annually until it reaches an annual total of $2.4 billion in fiscal year 2008.

A significant sticking point in the negotiations was how much of its military aid grant Israel will be allowed to spend in-country on purchases of Israeli-made defense items. Unlike any other country receiving U.S. military aid -- the intent of which normally is to subsidize American defense companies and create jobs in the United States -- Israel presently is allowed to spend $475 million of its annual $1.8 billion in U.S. military aid on Israeli-made defense items.

Israeli officials initially hoped to spend all of the additional military aid from the United States in Israel, a suggestion that was flatly refused by U.S. officials, including Assistant Secretary of State for Near East Affairs Martin Indyk. Indyk, former U.S. ambassador to Israel, described the Israeli demands as a "very problematic issue," according to the Jerusalem Post.

"U.S. defense contractors want the business and that's understandable," Indyk said. "The Congress and administration want the business to go to American companies, so that's one [issue] that people should understand is very difficult for us."

Finance Minister Neeman later said that Israel would settle for spending 40 percent of the additional aid in Israel -- in addition to the $475 million -- a suggestion that also was refused.

The eventual settlement, according to the U.S. trade weekly Defense News, was that Israel will be allowed to spend 25 percent of the additional aid on Israeli-produced or co-produced defense items. That will result in an additional $15 million windfall each year for Israeli defense companies until the total amount of U.S. aid Israel is allowed to spend annually on Israeli-produced or coproduced military hardware reaches $625 million in 2008.

In the past and at present, this annual infusion of U.S. aid directly into Israel's numerous defense industries has helped them compete for and win lucrative international and American defense contracts, often at the expense of American defense companies. Israeli companies currently are competing against U.S. firms for more than a dozen large contracts worth billions of dollars and thousands of jobs.

One example of this competition is for an estimated $5 billion contract from Turkey for 1,000 main battle tanks. Competing against the M1 Abrams tanks made by General Dynamics Land Systems is Israel's Merkava main battle tank. In fiscal year 1977 Israel asked for and received a "onetime only" provision to spend $107 million in U.S. military aid in Israel to build the Merkava. Since 1977, Congress has allowed Israel to spend more than $5 billion in U.S. military aid in Israel on weapons systems like the Merkava, a massive subsidy which routinely creates competition for American-made military hardware.

One important question that remains conspicuously unanswered is how Israel will repay its outstanding financial debts to the United States government. Attached to every foreign aid bill since 1984 has been the Cranston Amendment, named after its Senate sponsor, California Democrat Alan Cranston, that compels the U.S. government to give Israel enough economic aid to pay the interest and principal due each year on its debts to the U. …