The current Memorandum of Understanding (MOU) on US aid to Israel expires in 2028, and no solution is yet in sight for the decade beginning in 2029. While Prime Minister Benjamin Netanyahu remarked over the weekend that Israel can no longer rely on US defense assistance in its current form, urging the economy to prepare for a significant shift, *Globes* has learned that the primary point of contention between Jerusalem and Washington on aid does not concern the financial aspect, but rather the issue of cooperation.
As part of their demands, US officials are seeking not merely the sharing of knowledge, but the transfer of Israeli expertise to the US, to be managed by the US including patents and joint development programs. This is a scenario that Israel cannot accept: the erosion of the fundamental technological advantage held by its defense industries in the international market.
Future aid will differ substantially from the current MOU
Negotiations on this main bone of contention, as well as other issues, which are being led on Israel’s behalf by Ministry of Defense director general Maj. Gen. (Res.) Amir Baram, may regain momentum after the US midterm elections. In any event, future aid will not resemble the current MOU, which will expire in two years. The agreement signed in 2016 by Netanyahu and former US President Obama guarantees Israel $3.3 billion in annual US Foreign Military Financing (FMF). Additionally, $500 million was earmarked for cooperation in air defense.
As part of the discussions held so far, both the US and Israel have agreed to a major cut in FMF. While it will not be eliminated entirely, it is unlikely to remain anywhere near the current figure. What will be cut to zero is the "conversion" provision - the mechanism allowing a portion of the annual grant to be converted into shekels for use by Israel’s domestic defense industry.
At the inception of the current agreement, this conversion provision stood at $815.3 million (24.7% of the total aid budget), but it has been subject to a consistent, phased reduction. The most significant reduction occurred last year when the conversion budget dropped from $725.3 million (21.9%) to $450.3 million (13.6%). This year, there was a further decline to $250.3 million (7.5%). By 2028, the final year of the MOU, the conversion provision will reach zero. This does not affect the major Israeli defense firms, which maintain a presence in the US, but rather smaller companies.
US President Trump’s "America First" policy benefits the major Israeli defense companies, due to the subsidiaries they operate in the US. These include, among others, Elbit’s subsidiaries Elbit America and Sparton; IAI North America and Stark (owned by IAI); and Rafael USA and Prometheus (owned by Rafael). Among the relatively smaller firms, companies such as UVision, Plasan Sasa, Orbit, and Ashot Ashkelon also maintain US units.
However, at a time when the Israeli defense-tech startup market is growing, the absence of a conversion clause is highly significant. Without an established US footprint, these companies can only secure US contracts by setting up American subsidiaries or entering into joint ventures.
This was already evident at the AUSA exhibition, where small Israeli defense firms seeking American partners were present at the Ministry of Defense’s national pavilion. Among them were AccuBeat, which develops atomic clocks, Steadicopter, specializing in unmanned helicopters, and Lontel Hybrid, which develops advanced hybrid propulsion systems for UAVs, drones, and loitering munitions.
While the current MOU guaranteed Israel record-high levels of financial defense aid ($3.8 billion), amounting to roughly 0.95% of Israel’s GDP in 2019 and about 0.62% last year, future aid is set to be significantly lower, both in absolute dollar terms and as a percentage of GDP.
Israel ranks seventh in international arms trade
Data from the Stockholm International Peace Research Institute (SIPRI) found that between 2021 and 2025, the shares of both the US and Israel in the international arms trade increased compared with the 2016-2020 period. Over the past five years, Israel has ranked seventh, accounting for 4.4% of the trade (up from 3.1% in the preceding five-year period), while the US has strengthened its position in first place, accounting for 42% (up from 36%).
The defense industries, particularly in recent years, as Western governments have frequently criticized the state and even imposed embargoes, continue to serve as a source of diplomatic resilience for Israel, by virtue of their role as technological leaders across various arenas.
Evidence of this can be seen around the world. For instance, last week the Japanese Navy independently showcased an exercise utilizing the "SMASH 3000" system, an AI-based smart sight and fire-control system developed by Smart Shooter. This technology enables rifles and machine guns to achieve a hit rate of 95% against drones with the very first round. This development follows an earlier demonstration in Tokyo, where the local infantry showcased the use of these same sights for identical operational purposes.
In Europe, the defense news website "Hartpunkt" reported that Rafael’s subsidiary, Dynamit Nobel, will begin manufacturing the AT2+ anti-tank mine in Latvia, a nation bordering Russia, starting in 2028. Meanwhile, in the US, defense giant Lockheed Martin conducted an initial test firing of Rafael’s Spike NLOS missiles from an ISV-U vehicle. Rafael also recently leveraged the AUSA exhibition in the US to unveil the Spike MCLU2 system, which allows for the launch of Spike LR2 missiles using the TOW launchers currently fielded by the US Army. Nevertheless, there remains a fundamental distinction between adapting existing Israeli defense technologies and managing research, development, and innovation within the US.
The results of the US midterm elections will be critical
Even after a MOU has been signed between the two governments, Congress must still approve aid to Israel as part of every US budget bill.
With the midterm elections just around the corner, there is significant concern about there being a Republican majority in the House of Representatives and the Senate. If the majority shifts to the Democrats, it would not only pose a challenge for President Donald Trump as he enters his final two years in office, but it could also lead to a situation, even with an MOU in place for 2029 and beyond, where the growing number of anti-Israel members of Congress within the Democratic Party place obstacles in the way of aid to Israel year after year. Should this occur, it would remain an ongoing issue until the subsequent midterm elections in 2030, by which time there will be a new president.
The Ministry of Defense declined to comment.
Published by Globes, Israel business news - en.globes.co.il - on October 25, 2026.
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