Like most industrialized nations, U.S. defense manufacturers routinely grant offsets to purchasing governments, usually in the form of agreements to co-produce specific weapons or invest in commercial enterprises. It has long been U.S. practice not to allow offsets on products and services purchased with U.S. military assistance funds — except when it comes to Egypt and Israel. The billions of dollars in additional defense assistance that Israel has secured through this legislative loophole may prove to be a significant source of leverage in the Middle East peace process.
For example, Israel is hoping to pen a deal for $20 billion worth of U.S.-built F-35s that could include offsets of nearly $10 billion — that's in accordance with Israeli policy requiring offsets of 48% of the overall contract value. These offsets would accrue mostly to the Israeli defense department, possibly via agreements that Lockheed Martin would purchase Israeli-built computer components for the assembled planes. Israeli press reports suggest the offset provisions are holding up the deal, signaling Israel's continued pursuit of offsets even in its most strategic procurement decisions. These funds represent a significant tool the Obama administration should use to press Israel on the settlement issue.
There is precedent for trying security assistance to Israeli settlement policy. In the 1990s Congress frequently reduced multi-billion dollar loan guarantee programs by the amount the Israeli government spent on settlements in the occupied territories. This logic applies to offsets as well, since they may indirectly finance projects that support settlements by providing Israel with financial flexibility to commit additional resources to build more settlements or by funneling the profits from offsets into acquiring controversial crowd-control devices and other materials that many countries (including the United States) refuse to export to Israel.
She has more in there about the Egyptian link too, and how reform in the US defense sales process could provide leverage not only against Tel Aviv, but also Cairo.