Controversy of US Aid to Israel By MIFTAH (Palestinian NGO in Ramallah)
March 17, 2004
The following overview has been compiled from various sources and has made primarily made use of a number of Issue Briefs prepared by the Congressional Research Service. All sources are listed below.
Israel is by far the largest recipient of US foreign aid. The US financial support to Israel has been exceeding the three billion mark per year since 1985, the majority of which is in military aid.
Israel, which is not economically self sufficient and relies on foreign assistance and borrowing to maintain its economy, has been the single highest annual recipient of US aid since 1976, and is the largest cumulative recipient of foreign assistance since WWII.
US financial assistance to Israel started in 1949, predominantly in the form of economic aid (%95) and remained so until 1965, during which years, aid to Israel averaged around US$63 million. Military loans began in 1959, albeit modestly, and grew significantly between 1966 and 1970, by which time military loans made up around 47% of the 102 million dollars in aid.
Congress began designating (earmarking) specific amounts of aid to Israel in 1971, and aid to Israel has since then averaged $2 billion per year, two thirds of which went to military assistance. Aid in 1971 changed from specific programs, such as agricultural development to the Commodity Import Program (CIP) for purchases of US goods. The latter was terminated in 1979 and replaced by largely unconditional direct transfers for budgetary support.
1974 saw an emergency aid for Israel to help it following its 1973 war, which included the first military grant. In 1981 all economic aid became grant cash transfer, and as of 1985 all US military aid to Israel was made on a grant basis.
U.S. assistance to Israel consists of predominantly military aid, which makes up for the major part of the aid package to Israel, typically around two thirds of the whole. Military assistance also included the development of arms systems, such as the ARROW anti-missile missile.
Economic assistance has been gradually decreased in favor of an increase in military aid, but still constitutes around one third of the annual financial assistance.
In addition to both these types of assistance, the U.S. has provided Israel with loan guarantees for $10 billion, and has regularly waived the payment of loans due before maturity date.
Profile of aid:
US financial aid to Israel is unique in both its sheer volume and the terms that govern its use. It is characterized by special treatment and a general practice that runs against the rule.
The total amount of aid received by the State of Israel by 1997 was calculated to be a grand total of nearly 85 billion US dollars. That included direct aid grants and loans of around 74 billion US dollars, around 10 billion in other US aid, and around 1.5 billion US$ earned by Israel from interest on advance payments.
These figures however do not reflect the actual cost of US aid to Israel to the American taxpayer, which include another 50 billion in interests borne by the US. The total cost to the American taxpayers is close to 135 billion US dollars.
Translated in per capita terms, the total benefit of US aid per Israeli is about US$ 15.000, the total taxpayer cost per Israeli however is closer to US$ 23.000.
According to Thomas Stauffer, an international oil and finance consultant, much of the US’ aid to Israel is consequential or indirect, and is kept off the government’s budget balance sheet and conventional U.S aid records, thus making it very difficult to put a price tag on the total amount. Furthermore Israel enjoys a “remarkable” spectrum of ad hoc and special forms of aid, which for years has cost the American people billions of dollars in lost trade, contracts, jobs, and business ventures in the Middle East.
For FY2003, the US administration requested close to $2.8 billion for aid to Israel, $600 million in economic, $2.1 billion in military, and $60 million in migration resettlement assistance.
Reports by Reuters in early January 2003, said that Israel had requested $4 billion in military grants and $8 billion in economic loan guarantees. The military grants were to assist Israel prepare for the war with Iraq and to cover expenses of the Palestinian uprising. The economic loans were urgently needed to help Israel’s struggling economy. The grants and loan guarantees were to be made in addition to Israel’s regular $3 billion in annual foreign assistance.
$200 million in anti-terrorism Economic Support Fund (ESF) grants that were withheld by President Bush in FY2002 were added to the FY2003 foreign operations appropriations bill by the House of Representatives.
Controversy of US aid to Israel
1. Use of US economic aid in occupied territories:
US policy in effect categorically prohibits the use of its aid in the Palestinian occupied territories as it does not want to foster the appearance of endorsing Israel’s annexation of the territories without negotiations.
However suspicions that U.S. aid funds have been used by Israel to establish Jewish settlements in the occupied territories are regularly raised.
Israel denies that it uses U.S. funds for settlement activities and in the past have provided an annual letter to the U.S. Agency for International Development stating that the economic funds were used to service Israel’s debt to the United States.
Although Israelis and their supporters strongly oppose any conditions attached to U.S. aid, the US administration has so far not relinquished this primary condition. Secretary of State Baker for example made it clear during a congressional hearing in 1992, that the US administration would not approve Israel’s loan guarantee request until Israel froze settlement activity in the occupied territories including east Jerusalem. The Israeli government led by Rabin had briefly frozen its settlement activity in response, and was subsequently granted the loans.
In a similar case in 1990 the Israeli Foreign Minister at the time, David Levy, stated in a letter to the Secretary of State that Israel would not use the housing loan guarantees in the occupied territories, before $400 million in housing loan guarantees and $5 million in additional refugee settlement funds were provided to Israel in the supplemental appropriation for FY1990.
As US economic aid is granted to Israel in the form of direct budgetary support and without specific project accounting it is nearly impossible to determine how Israel used its aid.
Although conditions on aid to Israel have been suggested, such as withholding assistance until Israel stops establishing settlements in the occupied territories, or the reversal of its annexation of the Golan Heights and east Jerusalem, the US, except for once, has never withheld aid to Israel. The exception was in 1953 when during Eisenhower’s Administration, aid was withheld until Israel stopped a water diversion project in a U.N. demilitarized zone along the Israeli-Syrian boundary.
2. Violation of military related agreements:
The 1952 Mutual Defense Assistance Agreement and subsequent arms agreements between Israel and the United States limit the use of American military equipment to defense only. The Arms Export Control Act states that the United States may stop aid to countries which use U.S. military assistance for purposes other than legitimate self defense.”
The Secretary of State has so far reported four times to Congress about possible Israeli violations of the provisions of the Arms Export Control Act and the Mutual Defense Assistance Agreement, such as in 1978, after Israel’s invasion of Lebanon, on August 6, 1979, after a series of Israeli raids into south Lebanon in 1981, after Israel’s bombing of the Iraqi nuclear reactor, as well as in a “secret” letter to Congress in July 1982, after the Israeli invasion of Lebanon.
Reports also appeared in February 2001 to the effect that the United States was investigating Israeli misuse of US military equipment during the resurgence of hostilities in the Palestinian occupied territories, specifically the use of Apache and Cobra helicopters, as well as f-16 fighter-bombers in extra-judicial killings of Palestinians leaders and the destruction of Palestinian facilities.
In early June 2001, Members of Congress requested a Government Accounting Office investigation of Israeli use of U.S. F-16 aircraft in attacks against Palestinian facilities.
Israeli violations of the Arms Export Act:
Despite clear conditions attached to US aid prohibiting Israel from supplying third parties with arms without US permission, numerous cases of Israeli non-compliance have so far been recorded. These include,
Technology transfer to China:
Among the more prominent cases of non-compliance has been the Israeli transfer of Patriot missile technology to China without US approval, as had been reported by the Washington Times in early 1992. The Wall Street Journal had also reported that the State Department Inspector-General and U.S. government intelligence agencies had been investigating unauthorized Israeli technology transfers to China, South Africa, Ethiopia, Chile, and other countries.
Israel denied violating U.S.-Israeli agreements on weapons security and transfers, and the State Department later announced that a team that visited Israel found no evidence of an unauthorized transfer of Patriot technology to China. A report by the Inspector-General however stated that Israel did transfer other equipment and technology to other countries without proper U.S. authorization. Reports by major news agencies continued to appear in 1993 saying that Israel sold China billions of dollars worth of military equipment, including U.S. sophisticated technology. The sale according to reports had also transferred Israeli “Lavi” technology, which stems from an Israeli aircraft prototype built with US money and technology.
In 1996 Israel was again making headlines when it signed a contract with China to deliver one Airborne Early Warning and Command and Control (AEW) radar system, mounted on an Ilyushin-76, at a cost of $250 million, with the option order three to seven more. The United States complained that delivery of the AEW to China could endanger Taiwanese and U.S. aircraft if it became necessary to defend Taiwan from a Chinese attack, and that the AEW in Chinese hands would create an imbalance in the Asian military picture. Israeli officials stated that they had informed the United States of the deal in 1996, and had received no complaints then, that the AEW was a defensive system, and that Israel needed the income from the sale. An amendment that would have delayed $250 million in military aid to Israel if it did not agree to cancel the sale to China was defeated in the Foreign Operations Subcommittee of the House Appropriations Committee by nine to six.
Iran Arms Affair:
Further implications of Israel in illegal arm transfers arose in 1986, when it was reported that the proposal to trade U.S. arms for hostages in Lebanon originated with Israeli Foreign Ministry official David Kimche.
According to the report Israel was involved in facilitating the US-Iranian secret negotiations, and that at least one of the shipments to Iran was made through Israel, possibly at a US request.
Nuclear Weapons detonators:
In 1985 High speed electronic switches that can be used to detonate nuclear weapons, called Krytons, were illegally exported to Israel from by Richard Smyth.
Richard Smyth was indicted in California for illegally exporting 800 Krytons to an Israeli company. Israel subsequently claimed that it was not aware of needed export licenses for the devices, and no further action was taken. Smyth however was arrested by Spanish authorities in 2001, after jumping bail in 1985, and is to face 30 counts of violating the Arms Export Control Act and filing false statements.
In addition 3 U.S. companies were raided by U.S. customs late 1985, and materials related to metallurgical processes for tank guns, and which were being transferred illegally to Israel seized.
In 1986, 3 Israelis were arrested for conspiring to sell arms to Iran, and another two arrested on another weapons selling scheme.
Also in 1986, 3 U.S. companies were searched by U.S. customs for information about a plan to transfer technical information for cluster bombs to Israel, and a company in Illinois claimed that Israelis tried to steal data on its aerial reconnaissance cameras.
Israel denied connections to any of these cases.
In 1997, an engineer at a military testing admitted an “inadvertent” release of classified materials to Israel over a ten-year period.
3. Israeli Espionage:
In 1985 Jonathan Pollard, a former U.S. naval intelligence employee together with his wife Ann Pollard were charged with selling classified documents to Israel for $2,500 per month over an 18-month period. In 1987, Pollard was sentenced to life in prison, and his wife to two consecutive 5-year terms. Four Israelis, including an Air Force Colonel were also indicted
The Israeli government quickly disavowed any knowledge of the spy network, which was headed by Raphael Eitan, a former Israeli intelligence officer, and called it a renegade operation. Despite the publicity the espionage episode received Israel promoted both Raphael Eitan and Aviem Sella, the Air Force Colonel. Israel however rescinded the latter’s promotion after negative U.S. reactions.
Jonathan Pollard was granted Israeli citizenship in 1996, and his wife who was released in 1990 moved to Israel. Israel continues to complain that Pollard received an excessively harsh sentence, and sought his release on a number of occasions, most recently during the 1998 Wye negotiations.
4. “Cranston Amendment”:
The Cranston Amendment named after its Senate sponsor, stated that it was “the policy and the intention” of the United States to provide Israel with economic assistance “not less than” the amount Israel owed the United States in annual debt service payments (principal and interest).
It was added to the foreign aid legislation in 1984 and was repeated each year in the annual aid appropriation bill through FY1998.
For 1998, Israel received $1.2 billion in ESF and owed the U.S. government about $328 million in debt service for direct loans.
5. Israel earning interest on US aid:
Israel unlike any other recipient of US financial aid receive its aid in a lump sum during the first month of the fiscal year, allowing it invest the funds in the U.S. and earn interest on them. The foreign assistance appropriation bill signed on
November 5, 1990, provided this special treatment for Israel.
6. Subsidizing Israeli arms industry:
The extensive US military aid to Israel has also been argued to be an effective subsidization of the Israel Arms and Industry, as Israel is permitted under unique terms to commission Israel arms manufacturers using a significant part of the U.S. funds.
According to Stauffer, the United States has poured billions of dollars into Israeli military technology, technology that is in direct competition with that of the U.S., citing the Israeli Lavi fighter program and Arrow missile system as examples.
Israel enjoys large discounts on what are considered “surplus” U.S. arms, and Israeli military firms have the upper hand in relationships with U.S. military firms. U.S. contractors, Stauffer asserted, are required to subcontract Israeli firms for military components, subcontracts that would otherwise have gone to American firms.
Other aspects to US aid
The United States provides indirect assistance to Israel by helping the Israeli economy, such as through the establishment of a free trade area (FTA) in 1983. The FTA was formally approved in May 1985, and removes virtually all trade barriers in bilateral commerce.
Contributions by Jewish organizations and individuals are another element of consequential aid to Israel. These contributions are estimated to be averaging $1 to 1.5 billion annually, and are tax-deductible.
Special benefits :
Israel receives favorable treatment and special benefits that may not be available to other countries or that may establish precedents for other U.S. aid recipients.
Many of the benefits listed below were reported in a June 24, 1983 General Accounting Office (GAO) report, U.S. Assistance to the State of Israel (GAO/ID-83-51), or in another GAO report, Security Assistance: Reporting of Program Contents Changes, GAO/NSIAD-90-115 of May 1990.
Cash flow financing:
Israel is allowed to set aside FMF funds for current year payments only, rather than set aside the full amount needed to meet the full cost of multi-year purchases. GAO believes that cash flow financing creates a commitment to furnish aid in future years at a level sufficient to meet the future payments.
Israel receives offsets on FMF purchases (contractors agree to offset some of the cost by buying components or materials from Israel). Although offsets are a common practice in commercial contracts (countries dealing directly with U.S. firms), GAO said offsets on FMF sales were “unusual” because FMF is intended to sell U.S. goods and services.
In 1982, Israel asked that the ESF funds be transferred in one lump sum early in the fiscal year rather than in four quarterly installments, as is the usual practice with other countries. The United States says more in interest for the money it borrows to make lump sum payments. A.I.D officials estimate that it cost the United States between $50 million and $60 million to borrow funds for the early, lump-sum payment. In addition, the U.S. government pays Israel interest on the ESF funds invested in U.S. Treasury notes, according to A.I.D. officials. It has been reported that Israel earned about $86 million in U.S. Treasury note interest in 1991. ! FMF drawdown: Israel was permitted to draw down the grant (waived) portion of its FMF credits before the loan portion, thus delaying paying interest on the loans. Usually, loans and grants are drawn down at an equal rate.
Unique FMF funding arrangements:
Other countries primarily deal with DOD for purchases from U.S. companies for U.S. military items, but Israel deals directly with U.S. companies for 99% of its military purchases in the United States. Other coutries have a $100,000 minimum purchase amount per contract, but Israel is allowed to purchase military items for less than $100,000.
According to the GAO report, Israel processed over 15,000 orders for less than $50,000 in 1989, with no DOD review of the purchases as would have been the case with other countries’ purchases.
Other countries have the U.S. government disburse funds to companies directly, but the Israeli Purchasing Mission in New York pays the companies and is reimbursed by the U.S. Treasury. ! FMF for R&D: Israel asked for and received permission for a “one-time-only” use of $107 million in FY1977 FMF funds to be spent in Israel to develop the Merkava tank (prototype completed 1975, Merkava added to Israeli arsenal 1979). Israel asked for a similar waiver to develop the Lavi ground-attack aircraft. In November 1983, Congress added an amendment to the FY1984 Continuing Appropriation (P.L. 98-151) that allowed Israel to spend $300 million of FMF funds in the United States and $250 million of FMF in Israel to develop the Lavi. Between 1983 and 1988, Congress earmarked a total of $1.8 billion (through FY1987) for the Lavi. GAO reported in January 1987 that the United States provided $1.3 billion of $1.5 billion Lavi development costs between 1980 and 1986.
Loan Guarantees have been a typical component of US aid to Israel since 1990, when Israel proposed that the United States government provide $10 billion in loan guarantees over 5 years to finance the housing, infrastructure, and jobs needed to settle in Israel an anticipated 1 million immigrants from the former Soviet Union.
The US government would underwrite the loans, agreeing to pay the commercial lenders is Israel defaulted.
In 1992, that the US announced that it would support loan guarantees for Israel and the loan guarantees were approved under Title VI, P.L. 102-391, (H.R. 5368) on October 6, 1992.
As the number of immigrants arriving from the former Soviet Union was less then expected initially, Israel has not yet drawn the whole amount available to it, and the loan guarantees are being used for other infrastructure projects as well.
The US administration at the time insisted that Israel stopped building or expanding settlements in the occupied territories before the guarantees would be made. Negotiations among Israel, the White House, and the Senate
Appropriations Committee were unable to solve the stalemate caused by Israel’s refusal to comply with the administrations conditions. Finally Prime Minister Rabin’s announced a freeze on new housing on July 13, which apparently met the Bush Administration conditions for the loan guarantees.
During Sharon’s visit to the White House in October 2002, he reportedly asked for $8 billion in new loan guarantees and an additional $4 billion in military aid, the latter to be used for preparations for the US war with Iraq. President Bush has not yet made a formal request to Congress for the additional funds.
The Loan Guarantees for Soviet and Ethiopian Jewish Refugees have come in the form grants through the Department of
State refugee and migration account, which began in 1973 and through the housing loan guarantee and Soviet immigrant loan guarantee programs.
As part of the ongoing grants made through the Department of State and Migration account, President Bush requested
$60 million for immigrant assistance for FY2003.
ARROW anti-missile system:
The aid also includes co-operation in weapons development projects like the Arrow anti-missile system, such as Israel’s participation in the Strategic Defense Initiative (“Star Wars”) research, under which it developed the “Arrow” anti-ballistic missile with a U.S. contribution of about $625 million through FY1999.
While the Arrow was conceived as a joint research and development project in which the US and Israel would share technology, and as thus not technically foreign aid, the US army said it would not procure the Arrow for US use, thus practically leaving Israel alone to benefit from the project.
In addition to that, in 1996 President Clinton said that the United States would provide Israel with an additional $200 million for deployment of the Arrow in Israel, and in March 1998, Secretary of Defense Cohen was quoted as saying that the US would provide an additional $45 million for deploying a third battery of Arrow missiles.
President Bush requested $60 million for the Arrow for FY2003. The 2004 budget includes a request for $136 million for the Arrow, of which $66 million is for the improvement program and $70 million is for production.
Other military projects included $1.3 billion to develop the Lavi aircraft (cancelled), $200 million to develop the Merkava tank (operative), $130 million to develop a high energy laser anti-missile system (ongoing).
Another “consequential” cost to the U.S. economy with a potential price tag of $20-30 billion a year is the oil supplies
guarantee. Should Israel’s oil supply be cut off, the United States guarantees to provide Israel with oil regardless of U.S. oil supply levels.
A hidden cost to the U.S. economy with a direct effect on the American people is trade losses with Israel and with those countries Israel perceives as hostile. According to Stauffer’s data the United States’ trade deficit with Israel is about $5-5.5 billion. One reason for this is that Israel, for example, can buy textile from China, re-label it, and sell it to the United States duty-free. But the real reason behind the losses, said Stauffer, is the trade imbalance between the United States and Israel. While the United States pays real money for its imports from Israel, Israel does not pay real money for its imports from the United States. The result is an annual trade imbalance of just under $10 billion. In terms of jobs, that comes to about a quarter of a million American jobs lost.
U.S. sanctions on Libya, Syria, Iran, are linked to U.S. policy toward Israel and are costing the U.S. economy about $14 billion annually in potential trade. According to Stauffer’s research these sanctions, which only affect U.S. companies and not their competitors, translate into 500,000 to 600,000 in lost U.S. jobs.
The Israeli lobby in the United States has foiled major U.S trade contracts with Arab and Muslim countries, like the 1980s aircraft sales contract with Saudi Arabia that cost the U.S. economy between $20-25 billion annually.
Waiver of Loan repayments:
While the United States has not actually canceled any of Israel’s debts to the U.S. government, the U.S. government has waived repayment of aid to Israel that originally was categorized as loans.
The first U.S. military “grants” actually began in 1974 when the United States waived repayment of part of a military loan, which was asked from Congress by President Nixon.
The waiver of loans before maturity date has effectively become a practice that has continued by successive U.S. administrations since.
Since 1974, some or all of U.S. military aid to Israel has been in the form of loans for which repayment is waived.
Technically, the assistance is called loans, but as a practical matter, the military aid is grant. From FY1974 through FY2002, Israel has received more than $42 billion in waived loans.
Israel perceived advantage from receiving aid in the form of loans rather than grants as it helps it avoid having a U.S. military contingent in Israel to oversee a grant program.
Wye Agreement Supplemental aid:
As part of the Wye Agreement that was facilitated by the American administration, Israel received $1.2 billion in military grants in FY2000 for implementing the agreement’s provisions.
The funds which were requested by Israel in addition to the regular U.S. aid were allocated for the movement of troops and military installations out of the occupied territories as called for in the agreement.
Despite the fact that Israel was not completing the called for withdrawals the US administration requested $600 million in military aid for Israel for FY1999, and $300 million in military aid for each fiscal year 2000 and 2001.
In November 1999, the US President signed the consolidated appropriations bill, H.R. 3194 (P.L. 106-113), which included, in Division B, passage of H.R. 3422, the foreign operations appropriations bill, after a former House Resolution was vetoed by the president for including the Wye funding.
According to a State Department report presented to Congress in late October 1999, the Wye funding was intended to be used as follows (in millions of dollars):
Reduction of US aid to Israel:
In 1996 Israel announced that it would reduce its need for US aid over the next four years. A proposal was made to gradually reduce the $1.2 billion economic aid over 10 years. The proposal however would increase the military aid by 600 million over the same period. Effectively reducing the total aid received by Israel by $600 only. Military aid to Israel would thus reach an annual $2.4 billion by 2008.
The omnibus appropriations bill signed into law on October 21, 1998, cut Israel’s economic aid from $1.2 billion to $1.08 billion, and increased Israel’s military aid from $1.8 billion to $1.86 billion for FY1999. The FY1999, 2000, 2001, and 2002 appropriations bills included cuts of $120 million in economic aid and an increases of $60 million in military aid for each year.