As US-Israel aid talks open, MEF releases strategic roadmap for the post-aid alliance

Aid ends from a position of mutual strength, not American withdrawal.

By Middle East Forum

The Middle East Forum has released “From Subsidy to Sovereignty: Restructuring the U.S.-Israel Defense Relationship for the Post-Aid Era” (click here), a major strategic research paper by executive director Gregg Roman examining how the United States and Israel must design the successor framework to U.S. military aid as formal negotiations open next month.

The paper arrives days after Calcalist reported that Israeli and American negotiating teams—led by Defense Ministry Director General Amir Baram and Secretary of State Marco Rubio, respectively—will begin formal talks in May on a new 10-year framework that drives Foreign Military Financing to zero by 2038.

The current $38 billion Memorandum of Understanding, signed in 2016, expires in fiscal year 2028.

“The era of unconditional U.S. grant aid to Israel is closing. The only open question is whether the transition is built or improvised,” said Roman.

“Both governments now share the work of designing a successor framework. The risks of drift fall on both sides—U.S. primes facing an investment cliff, Israeli industry over-rotating away from American partners, and political coalitions on both sides capturing an issue that should be resolved by professionals.”

The paper makes seven core findings:

Aid ends from a position of mutual strength, not American withdrawal. Israeli defense exports reached $14.79 billion in 2024, the fourth consecutive record year. The combined order backlog at IAI, Elbit, and Rafael exceeded $65 billion.

The 2016 MOU already set the structural conditions for a phaseout. Off-Shore Procurement, the provision that allowed Israel to spend roughly 26.3 percent of FMF on its own industry, terminates in fiscal year 2028. Without it, the legacy aid model converts almost dollar-for-dollar into a U.S. industrial subsidy.

Operational integration through CENTCOM has surpassed FMF as the strategic backbone of the alliance. Operation Rising Lion in June 2025 and Operation Epic Fury in 2026 demonstrated that joint capability — not the FMF check — drives the relationship.

Israel’s substitute revenue base already exists in fragments. The Arrow 3 sale to Germany at €4 billion, the Iron Dome co-production facility that opened in Camden, Arkansas, in November 2025, the Iron Fist contract for U.S. Army Bradleys, and the EDGE Group partnership in the United Arab Emirates form a viable export portfolio.

South Korea offers the closest historical analogue. Seoul graduated from $250 million in annual U.S. aid to a $14 billion defense export complex over 50 years using offset programs, prime consolidation, and export credit financing. Israel proposes to compress the same transition into a decade.

Israel will face structural disadvantages in any phaseout. ITAR friction, third-party transfer restrictions, antidumping vulnerability, and political risk during high-intensity operations must be designed around, not wished away.

The post-aid relationship is not weaker. It is different.

The right architecture replaces grant subsidies with three pillars: government-to-government joint development at the program level, business-to-business co-production at the industrial level, and government-to-business preferential access on dual-use innovation.

The paper makes specific recommendations to four constituencies.

For the Government of Israel: establish a Defense Industrial Transition Authority inside the Prime Minister’s Office; codify a Defense Bond Law to ring-fence funding from general debt issuance; and build an Israel Defense Export Credit Agency modeled on the Export-Import Bank of Korea.

For the Government of the United States: open formal negotiations now with target signature by end of FY2027; double the missile defense allocation from $500 million to $1 billion per year; authorize a Joint Advanced Technology Envelope on AI, autonomy, directed energy, and counter-hypersonic capability; and reform ITAR for tier-one allies on the AUKUS model.

For Israeli and U.S. defense companies: open or expand cross-border subsidiaries; accelerate joint ventures; and develop defense-adjacent service lines.

For investors: capital allocation to Israeli defense deep-tech; dual-headquarter structures from inception; and underwriting defense export financing.

“Asking Israel to fund its own defense is not abandonment; it is the recognition of strength,” Roman said.

“Defense exports are at $14.79 billion, the combined prime backlog is above $65 billion, three battle-tested missile defense systems are in active production, and a 350-billion-shekel domestic capital pull is committed over the next decade. Israel approaches the transition from a position of strength. The United States approaches it with reasons of its own. The question is no longer whether to phase out but how.”

The paper situates the transition within the broader strategic environment: the ongoing U.S.-Israel campaign against Iran (Operation Epic Fury), the European rearmament cycle following Russia’s invasion of Ukraine, Indo-Pacific competition with China, and the unfinished Abraham Accords expansion. In each theater, Israeli capability matters and grows.