August 9, 2016
ON JUNE 19, 2016 the Israeli cabinet approved an additional 82 million shekels (about $20 million) for Jewish settlements in the West Bank. At roughly the same time, it was reported that President Obama was seeking to phase out the Offshore Procurement (OSP) program that permits Israel, unlike any other country, to spend just over 26 percent of its total aid package on indigenously produced weapons, equipment and other military products. That program currently totals $815 million, more than twice what the United States spends on any other country, bar Egypt. It has enabled Israel to become a major international arms supplier, at times even competing with American firms for third-country contracts.
There was no linkage between the two announcements. But there should be. Money is fungible, and the money that Washington provides Israel for domestic defense-industrial spending allows Jerusalem to divert funds from its defense-technology accounts to support its settlement projects in the West Bank.
Estimates of just how much Israel spends to support West Bank settlements vary widely, in part because the Israeli Finance Ministry buries its funding of settlements in a variety of accounts. A conservative estimate of spending on West Bank settlements in the past few years amounts to no less than $250 million annually. It is that sum that is indirectly provided by the United States by means of OSP funding.
ISRAEL WAS first granted Foreign Military Financing (FMF) for domestic expenditures in 1977, under an agreement reached two years earlier, when Jerusalem asked for and received permission to use $107 million in FY 1977 FMF funds to develop the Merkava tank (added to the Israeli arsenal in 1979). Several years later, Israel asked for a similar waiver to develop the Lavimultipurpose fighter aircraft, and Congress responded with legislation allowing Israel to spend $250 million of FMF in Israel to develop the Lavi.
The United States, after initially supporting the Lavi, had by 1985, shifted its position and increasingly opposed its production. As the cancellation of theLavi became a realistic prospect, Congress enacted legislation that permitted Israel to expend OSP funds on programs other than the Lavi, thereby creating other claimants for these dollars. When the Lavi was cancelled in August 1987, the United States agreed to defray Israel’s termination liabilities with its indigenous contractors, even though the largest of them, Israel Aircraft Industries, was a government-held corporation (for a time, its chief executive officer, David Ivri, also served as director-general of the Ministry of Defense). In any event, the Congress went along with the request and agreed to raise the FMF earmark for offshore procurement for FY 1988 to $400 million to defray the cancellation costs of the Lavi program. The Reagan administration agreed to maintain the OSP program at this higher level. Since FY 1988, the Offshore Procurement program has been incorporated into the annual Foreign Assistance Act.
The OSP provision remains unique to Israel; it is not available to any of America’s other allies and friends worldwide. Moreover, with the passage of time, OSP has come to consume an ever-larger portion of military assistance to Israel. By 1991, OSP spending in Israel amounted to $475 million, or about 25 percent of the total level of military assistance to Israel. Beginning in FY 2009, the Congress approved legislation that enabled Israel to spend 26.3 percent of the foreign military-assistance funds to support its indigenous defense industry.
Israel was once a poor country. During the 1980s, as OSP became institutionalized, Israel suffered from runaway inflation. This is no longer the case. Israel is a member of the OECD, the club of the world’s wealthiest states. Its per-capita gross domestic product exceeds that of Italy, Spain, Portugal, Greece and Russia. It rightly has earned the reputation of being the “start-up nation” par excellence. For the better part of the past decade Israel has produced more start-up companies on a per-capita basis than all of Europe, Canada and the major economic powers of East Asia. Indeed, Israel is second only to the United States in the number of companies it has listed on the NASDAQ—second only to Silicon Valley in technical start-ups.
In particular, Israel’s defense industry is one of the most sophisticated in the world. In the early-to-mid 1980s, when Israel was developing the Lavi in the midst of an economic crisis, it was an innovative, but relatively small, arms exporter. Israeli remote-piloted vehicles, as drones or unmanned aerial vehicles were then called, were perhaps the most sophisticated in the world. It even sold a small number of drones, called Mastiff, to the U.S. Marine Corps, which had no such aircraft in its inventory. By the late 1980s, Israel arms sales approximated $1.5 billion, including sales to some nations with which it had no diplomatic relations. Still, it had far fewer markets open to its products: the USSR, China and India were all closed to Israel’s defense industry.
No longer. Israel is now the world’s fifth-largest arms exporter on a per-capita basis, and the ninth-largest exporter in absolute terms. Israel maintains excellent relations with China and India, and has sold billions’ worth of military equipment to both since the late 1990s. The USSR no longer exists, and Israel has sold military equipment to both Russia and many of the Soviet Union’s successor republics. All told, Israel’s arms sales in 2015 amounted to $5.7 billion, to which the OSP program clearly has made an important, if indirect, contribution. In light of its economic prowess and sophisticated arms industry, surely Israel can afford to finance its settlement policy without American funds that, in effect, get redistributed through its domestic accounts.
WHICH BRINGS us back to President Obama’s desire to scale back and ultimately eliminate OSP, and the recent announcement of additional Israeli government support for West Bank projects. Obama is not proposing to reduce the absolute level of military assistance to Israel; he wishes, rather, to transfer OSP funds into Israel’s Foreign Military Financing (FMF) account. The president’s proposal does not compromise the other unique aspects of American assistance—notably, cooperation on missile defense that has resulted in ongoing support since 1988 for Israel’s Arrow program, as well as more recent funding for both Israel’s Iron Dome and David’s Sling antirocket programs. Beginning in FY 2016, Congress passed legislation that provided for American financial support for, and cooperation with, Israel’s tunnel-defense program, which addresses a key threat from Hamas in Gaza. The Obama administration, moreover, is negotiating a ten-year military-assistance agreement with Israel that would increase current FMF levels, in addition to funding line items for rocket, missile and tunnel defense that are part of the Department of Defense budget. The United States produces many cutting-edge military products of its own, such as the F-35 fifth-generation fighter that it will continue to make available to its Israeli ally. In other words, phasing out the entire OSP account would not jeopardize America’s commitment to maintaining Israel’s “qualitative military edge.”
For years Israel has received its military-assistance funds at the beginning of each fiscal year. What if Washington withheld part of that initial payment—not all Offshore Procurement funds, but up to one half of the OSP program that equated to Israeli spending on settlements, their infrastructure and the economic support that sustains them? To the extent that during the fiscal year Israel expended funds on settlement expansion, those withheld U.S. funds, initially earmarked for OSP, would instead be reprogrammed, or transferred from the OSP account, on a dollar-for-dollar basis into Israel’s regular FMF account. Should Israel reduce the level of its support for West Bank settlement expansion and infrastructure, more OSP funds would be made available. Such a policy would force Israel to choose between supporting its defense industry and supporting the settlements, a choice that Jerusalem has never had to make in the past.
The United States has long been committed to a two-state policy in the territory between the Jordan River and the Mediterranean Sea. So is Israel, at least nominally. It is widely recognized, including by the Israeli government, that a one-state solution, in which Palestinian Arabs would never have a state of their own, is impractical. It is not merely a matter of losing the Jewish character of the State of Israel if the Arab population of the West Bank were ever given the right to vote in national elections, something that they have been denied for nearly five decades. Even if the Palestinians were never to attain a majority, they would constitute a large, resentful and embittered minority population, and would pose a constant danger to the lives of Jewish Israelis.
A one-state solution could only work if predicated on the expulsion of Israel’s Arab population, both those living inside and outside the Green Line. This radical notion, which finds favor among a small number of the most extreme settlers, is infeasible. To begin with, no Arab state is likely to accept Palestinian refugees, especially after taking in hundreds of thousands of Syrian refugees (and some Arab states have refused to do even that). Moreover, no Israeli government is likely to risk international isolation, including a rupture with Washington, to implement such a plan. Jerusalem would risk an outright Arab uprising coupled with the potential outbreak of war with its neighbors. In addition, it would confront the real possibility that, in such a scenario, even the United States would not come to its rescue, as it did in the 1973 Yom Kippur War. It is precisely because it has been loath to take such risks that Israel has never contemplated what in other circumstances has been described as “ethnic cleansing.” The truth is that the only solution for Israel is a two-state solution, however difficult it may be to implement.
It is nevertheless highly questionable if two states, a Jewish state of Israel alongside an Arab state of Palestine, could ever come into being if the current Israeli settlement policy persists. Many of the so-called settlements are not settlements at all. Several are now towns with thousands of residents and some, like Beitar Illit and Modi’in Illit, are actually small cities, with populations in excess of thirty thousand.
It is clear that the majority of these cities and towns will always remain under Israeli sovereignty. It would be exceedingly difficult, if not impossible, to displace their residents. Areas such as the Etzion Bloc, a group of towns in the West Bank that had been populated by Jewish Palestinians prior to the 1948 War of Independence, would therefore have to be the subject of land swaps that all advocates of a two-state solution, including the sponsors of the Arab Peace Initiative, recognize must take place. If settlements continue to expand, however, villages will become towns, and towns in turn will evolve into small cities. There will simply be no contiguous territory upon which any kind of viable Palestinian state could be established.
On the other hand, there are many smaller settlements that have not yet expanded to any great degree. Some of these so-called “hilltop settlements” are considered illegal even by the Israeli authorities. Were Israel to choose to maintain its current level of OSP for its defense industry, at the expense of supporting its current West Bank policy, there would be an immediate impact on the growth of West Bank settlements. Cutbacks in Israeli spending on the West Bank would terminate support for the hilltop settlements and slow down, if not entirely put a halt to, the territorial expansion of larger towns and the infrastructure that supports them.
It is often argued that the Offshore Procurement program has resulted in benefits to the U.S. military, which has accessed Israeli-developed weapons and ancillary systems that have subsequently been manufactured in the United States. Implicit in this contention is that reducing OSP would have a negative impact on America’s military capabilities in addition to Israel’s. But these critics have failed to demonstrate a direct linkage between OSP and the sale of Israeli military items to the United States. Those items might well have been developed without OSP. By capping the potential transfer of OSP funds to one-half of the program’s total, or some $400 million, Washington would enable Israel to capitalize upon what would still be robust American subsidies for its defense industry. In addition, should there indeed exist a direct link between OSP and the defense-related products that America acquires from Israel, the U.S. military could continue to benefit from those products, which could be transferred for domestic American production.
Furthermore, not all Israeli military products are made available to the United States, as is obviously the case vice versa. In addition, Israel has in the past employed some of its OSP funds to sustain its systems; no benefit to the United States would accrue from these particular expenditures. Reducing OSP, in short, would not necessarily result in the loss of cutting-edge Israeli military products that otherwise would have been made available to the American military.
The Congress could, of course, refuse to approve any presidential reprogramming action that would result in the transfer of funds out of the OSP account. Any such action would require the prior approval of the Foreign Relations Committees and the Appropriation Committees’ Foreign Operations subcommittees of both houses. Any one of these four committees could block the transfer. But would it? After all, in so doing, it would rightly be seen as directly spending U.S. taxpayer funds on settlements that both Democratic and Republican administrations have long opposed on policy grounds. Very few members of Congress are likely to apply taxpayer dollars to explicitly flout long-standing bipartisan policy, especially if no actual reduction of funding for Israel would be involved.
LINKING OFFSHORE PROCUREMENT spending to settlement expansion would be far more effective than the boycott, divestment and sanctions (BDS) efforts that have thus far failed to gain much traction in the United States. Whereas BDS seeks to undermine Israel’s civilian economy, OSP transfer will not reduce American assistance by one penny. Nor will it have any impact on the nonmilitary sector, whose contribution to the civilian economy has long been a subject of debate.
Unlike BDS, it would pose no threat to Israel’s existence. (Whatever its advocates might assert, the BDS campaign is a direct descendant of the original Arab boycott that was meant to strangle Israel economically when the Jewish state first came into being.) Again unlike BDS, it would not provide a haven for those who not-so-innocently insist that they are only anti-Israel, not anti-Semitic, even though their campaign ultimately would result in the destruction of the one place in the world where Jews escaping persecution, violent threats or both would be welcomed unreservedly and without question.
It is time Israel accepted full financial responsibility for its West Bank policies. For its part, the United States has long opposed Israel’s settlement policies and continues to do so. In no way should Washington aid and abet them. Israel could, of course, choose to cut back on its domestic military procurement and continue to finance its current settlement policy. Moreover, even if it were to choose not to finance that policy, it would not automatically follow that the so-called two-state solution would be imminently attainable.
Stopping settlement expansion and the current level of expenditure on West Bank infrastructure is a necessary, not sufficient, condition for an agreement between the Israelis and Palestinians.
At present, neither side seems particularly interested in any kind of solution. In the absence of a mutual willingness by the principal parties to negotiate with each other, external efforts to get them to do so will come to naught. Indeed, many observers believe that it will take a new generation of leaders on both sides before any agreement can be reached. In the interim, it is important to ensure that the situation on the ground is not radically altered to the point where any agreement becomes virtually impossible. Tying the level of America’s OSP program to Israel’s settlement policy would help avoid such a development. By directly linking the level of American expenditure on OSP to that of Israeli expenditure on settlements, Washington would finally force Jerusalem to make choices that it has for too long been able to avoid. It will then be up to Israel to decide whether, and how much, to spend on maintaining its cutting-edge defense industry versus supporting the ongoing expansion of settlement activity in the West Bank.
Dov S. Zakheim is vice chairman of the Center for the National Interest. He was under secretary of defense (comptroller) from 2001 to 2004 and deputy under secretary of defense (planning and resources) from 1985 to 1987.
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