The Tariff Crisis with the U.S. Rekindles the Debate Over Israel’s Reciprocal Procurement Obligation
The Ministry of Finance, in conjunction with other government ministries, is currently formulating a plan to reduce the US trade deficit with Israel, in order to reduce the tariff rate that the Trump administration has imposed on goods imported from Israel.
According to reports, one of the proposals currently being considered is to exempt US companies from reciprocal procurement obligation in exchange for their winning large-scale tenders in Israel.
What is reciprocal procurement?
Israel’s reciprocal procurement obligation is anchored in the Mandatory Tender Regulations (Mandatory Industrial Cooperation) of 2007. According to these regulations, foreign companies (foreign suppliers) that win tenders issued by government ministries, government companies, municipal companies and HMOs are contractually obligated to undertake to purchase Israeli products and services or engage in investments and collaborations with Israeli industry on a significant scale, throughout the duration of the engagement and at a fixed percentage of the contract value.
Currently, when an Israeli entity engages in a contract with a foreign supplier for purchases exceeding USD 5 million, that foreign supplier is obligated to execute purchases in Israel at 50% of the contract value in relation to defense purchases, at 18% of the contract value in relation to civil purchases in transactions with suppliers from countries that are signatories of the World Trade Organization’s GPA (Government Procurement Agreement) (which includes EU member states and other countries, including the United States), and at 35% of the contract value in relation to all other transactions.
Foreign suppliers can fulfill their reciprocal procurement obligation by engaging with local subcontractors, by purchasing products manufactured in Israel, by investing in local companies, by conducting R&D collaborations, etc.
Over the years, there has been a significant increase in the volume of new reciprocal procurement commitments by foreign companies that won tenders in Israel, mainly due to the advancement of strategic infrastructure and transportation projects and due to the execution of major defense procurement transactions.
Is it in Israel’s best interests to require reciprocal procurement?
This question is a loaded one with opposing answers. The position of the Ministry of Economy and Industry is that reciprocal procurement boosts Israel’s economy and helps local companies penetrate new markets and expand their activities.
On the other hand, the position of the Ministry of Finance, as expressed on numerous occasions, is that the reciprocal procurement obligation increases the costs of government procurement, imposes a burden on foreign companies wanting to compete for tenders in Israel, and offers no significant benefit to the local economy.
Furthermore, the Industrial Cooperation Authority (ICA) in the Ministry of Economy and Industry is responsible for ensuring that foreign suppliers fulfill their reciprocal procurement obligations, and it sometimes has to take significant enforcement measures. In one such case, the German company, Thyssenkrupp, failed to fulfill its reciprocal procurement obligation after it won a tender for the supply of submarines and was summoned to a hearing before being placed on Israel’s blacklist of suppliers who are no longer authorized to engage with State or government corporations. Ultimately, a new agreement was reached between the ICA and Thyssenkrupp.
In the past, the Ministry of Finance tried to exempt large-scale projects from the reciprocal procurement obligation. In 2021, the Ministry of Finance proposed excluding the reciprocal procurement obligation from the metro project, claiming that it would not contribute to increasing the GDP and would lead to significant delays and hikes in the project costs in order to subsidize local industry. The Ministry of Finance claimed at the time that only half of the OECD member states require reciprocal procurement. Following discussions between government ministries responsible for the project, the Ministry of Finance withdrew its proposal.
Legal aspects and regulatory restrictions
The Israeli Supreme Court was in addition called upon to decide on whether the Mandatory Tenders Law and the regulations enacted by virtue thereof also apply to the Ministry of Transportation’s competitive proceedings for the granting of licenses to operate public transportation lines. In its ruling, the Supreme Court reversed an earlier ruling of the Court of Administrative Affairs and ruled that a license granting proceeding is not a tender, and therefore, it was not necessary to impose a reciprocal procurement obligation on the foreign winners in this proceeding (Adm. Appeal 7002/19). In so doing, the Supreme Court validated the Ministry of Transportation’s decision to stop imposing a reciprocal procurement obligation on foreign bus manufacturers, based on the rationale that canceling the obligation would enable streamlining of the procedures for procuring new buses and result in lower bus fares.
Israel is also a signatory of the WTO’s GPA, which is intended, inter alia, to prevent discrimination against foreign suppliers during government tenders. As part of the agreement, Israel undertook to gradually reduce the reciprocal procurement obligation in relation to suppliers from countries that are signatories of the GPA. As of 2029, the reciprocal procurement obligation will continue to apply only to defense transactions and to civil transactions with suppliers from countries that are not signatories of the GPA.
What can we expect going forward?
It appears that the tariff crisis with the Trump Administration has reraised the question of reciprocal procurement with Israel, and whether it is in Israel’s best interests to insist on continuing to impose this obligation, particularly on American companies. According to the existing version of the regulations, it is not possible to grant an exemption from the reciprocal procurement obligation in relation to suppliers from specific countries or in relation to specific transactions (apart from exemptions for reasons relating to national security or engagements for the issue of legal tender). Therefore, any decision that the government might reach regarding American companies would ostensibly require legislative amendments to the regulations. Furthermore, the Israeli government will have to contend with claims of discrimination from other countries, especially from countries that are signatories to the GPA along with Israel and the United States. Concurrently, the government will have to provide alternative solutions to local industries, which will likely suffer considerable financial losses due to the cancellation of the reciprocal procurement obligation, especially during this already challenging period for the Israeli economy and considering the downtrend in foreign investments in Israel.
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Adv. Efrat Cohen, a senior partner in the Regulation Team, is available to assist with any questions regarding this matter.