Israel concedes link between US aid and tariffs relief

Last April, at a press conference at the White House, Prime Minister Benjamin Netanyahu sat alongside President Donald Trump and waited to hear an answer to the question that rocked the Israeli economy: Will Israel be granted relaxations of the president’s tariffs policy? Trump’s answer was short and non-committal: “We’re talking about a completely new trade…,” he started to say, and then cut himself short: “Maybe not. Don’t forget, we give Israel billions of dollars a year,” he said, referring to US military aid.

Nine months have gone by since then, and Israel is in the final stages of negotiations on the tariffs. This week, in an interview with “The Economist”, Netanyahu made the surprise statement that he wanted to end US aid to Israel within a decade. The circle was closed. What Trump hinted at in April, namely a connection between the aid and relief from tariffs, became declared Israeli policy.

Government sources acknowledge that there is a link between the military aid issue and the tariffs. “The Americans ask: ‘What do you want? You receive billions every year,’” one of them said, “If we offer to reduce our dependence on American money, that improves our bargaining position.”

The rationale is to become aligned with Trump’s goals. The president is cutting foreign aid on all fronts, and Netanyahu acted out of the understanding that it was better for Israel to propose that itself. As far as Trump is concerned, Israel’s declaration that it will gradually give up the aid is a political achievement. The ability to present an ally that willingly foregoes billions strengthens the “America first” narrative. That is much better than having to deal with criticism for causing a strategic ally harm.

The declaration on reducing the aid comes, however, just at a time when Netanyahu himself is talking about increasing the defense budget. According to the plans that have been presented, Israel will invest an additional NIS 250 billion in strengthening itself militarily in the coming decade. How does that fit with giving up NIS 120 billion of US aid over the same period? “The bottom line is that the citizens of Israel will pay,” is the response at the Ministry of Finance. “It’s possible to interpret it like this, that a large part of the NIS 250 billion that Netanyahu talked about was meant to come from the aid, In other words, the budget addition should be NIS 130 million if there is no aid from the US. It’s not possible for the army to receive the whole substitute for the aid from the public. There’s an order of priorities here,” a Ministry of Finance source said.

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The timing of the declaration is not coincidental. Israel is at the height of complicated negotiations with the Trump administration on tariffs. The US imposed a 15% tariff on Israeli goods, and Israel is trying to obtain relaxations and exemptions for various sectors. The negotiations are not restricted purely to trade, and also cover wider geopolitical aspects of relations, from Iran to Gaza. Government sources familiar with the process explain that there is a connection between the issues, even if it’s not a matter of an official package deal.

Gap between Prime Minister’s Office and Finance Ministry

If the military aid does end, a new fight is liable to take place between the Ministry of Finance and the Ministry of Defense. The Ministry of Finance makes a fairly simple calculation. “Let’s say that the shortfall of NIS 12 billion a year is divided half-half between us and the army,” the senior Ministry of Finance source says. The army will have to absorb NIS 6 billion within its existing budget, and the other NIS 6 billion will be budgeted in addition, he says. “But of course that will have to come from higher taxes or from a reduction in public spending elsewhere.” NIS 6 billion a year is equivalent to an extra 1% on the rate of VAT.

In discussions at the Prime Minister’s Office, things look a little different. The assumption there is that the Israeli economy is growing rapidly and will be able to provide enough money for defense by itself in taxes, and to deal successfully with cutting the dependence on the US even without raising tax rates or significant spending cuts.

The gap between the two sides is, however, more than a matter of numbers. The Ministry of Finance finds itself at a very preliminary stage of preparation, and no substantial staff work took place at the ministry before the prime minister’s declaration. It is not even clear whether Minister of Finance Bezalel Smotrich himself knew that it was coming.

A history of dependence

US military aid to Israel in its present format began in 1985, when Ronald Reagan was president, and when Israel was undergoing a crisis of inflation. Until then, Israel received smaller amounts, of one to two billion dollars a year. Reagan decided to turn the aid into a regular grant of $3 billion, and it has remained so until today, with special supplements at times of crisis.

At the end of the 1990s, in his first term as prime minister, Benjamin Netanyahu appeared before Congress and sprung a surprise by announcing that Israel no longer needed civilian aid, but only military aid. Civilian aid was gradually reduced until it was eventually completely abolished, and the money was diverted to military aid. Now, almost 30 years later, Netanyahu is talking about the next step: foregoing the military aid itself.

The current aid agreement, signed in 2016 with President Obama, gives Israel $3.3 billion annually for military procurement and another $500 million for collaboration on air defense. The agreement will expire in 2028, and negotiations on a new agreement have already begun.

Published by Globes, Israel business news – en.globes.co.il – on January 13, 2026.

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