US reciprocal procurement demands put Israel in a bind

The US administration demands on tariffs are putting Israel in a bind, with the issue of reciprocal procurement at the core. One of the main demands raised by the Americans is against the Israeli requirement for foreign suppliers who win tenders to either procure local products or invest in the country.

This type of procurement injects billions of dollars into Israel every year and supports hundreds of local companies. However, government ministries are currently holding feverish discussions on the dilemma of whether to exempt US companies from reciprocal procurement to gain relief in Trump’s tariff plan. If this does happen, entire industries, especially in the defense sector, could suffer a painful blow.

Government ministries are trying to reduce the US trade deficit with Israel, which is the basis for the relatively high 17% tariff imposed on Israel. The Ministry of Finance is leading the discussion on forming a unified position and raft of measures, which will be submitted for approval by Minister of Finance Bezalel Smotrich and then Prime Minister Benjamin Netanyahu.

According to Israel’s reciprocal procurement mechanisms, US companies must make purchases in Israel totaling 50% of the value of any defense deal not based on US defense aid funds. In contracts with civilian US companies, the reciprocal procurement rate is 35%, and 18% in deals with government bodies.

In the Israel chapter of the tariff plan report published by the Trump administration, it is claimed that “US suppliers are basically at a disadvantage due to the significant ‘offset’ requirements”, this is “despite an Israeli court decision prohibiting consideration of ‘offset’ offers in determining tender winners.” The report stresses, “Small and medium-sized suppliers from the US are often hesitant to commit to making procurements in Israel”, and “as a result, their participation in Israeli tenders is limited.”

Caught between giants

Israel has already taken initial steps to appease the US, including eliminating tariffs on products from the US and expanding recognition of US standards. The possibility of diverting government procurement from Europe to the US market is also being examined.

Ultimately, Israel is a small player in the global trade arena, especially vis-à-vis the US, and it is clear that Trump’s tariff war is aimed at powers like China. According to Israeli officials, the Washington administration is concerned not only with which countries Israel will buy from but also with which countries it will not buy from. Thus, small Israel could find itself caught between global giants.

A test case for Israel-US-China relations is the Blue Line project of the Jerusalem light rail. The Ministry of Finance decided to sign the financial closing for the project without the carriage supplier component, after withdrawing from approving a contract with the China’s CRRC due to US pressure. CRRC manufactured the carriages for the Tel Aviv light rail’s Red Line. At the same time, South Korea’s Hyundai concern is working to fulfil the supply of the carriages.

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The defense advantage

In facing the challenges from the Trump administration, large Israeli defense companies have an advantage over startups and small players, due to their US subsidiaries. For example, Elbit has Elbit Systems America, Israel Aerospace Industries has Stark, which deals with subsystems in the military field, and Rafael has PVP, which deals with electro-optical systems. This allows them to manufacture in the US with a Made in US label, employ locals and still benefit from Israeli innovation and the demand that stems from the extensive proof of the systems on the battlefield.

At a time when countries worldwide are engaged in attempts to cut the US tariffs to the minimum possible, such subsidiaries provide important versatility. On the other hand, small companies and startups will be required to explore creative ways that will keep them in the business arena, since according to data from the Stockholm International Peace Research Institute (SIPRI), the US was the second largest customer of Israeli defense industries between 2020 and 2024, with 13% of all exports.

Published by Globes, Israel business news – en.globes.co.il – on April 17, 2025.

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