Israel tariffs wreck the US trade model, along with Netanyahu’s economic legacy

In 1985, the United States made a bold and unexpected move. At the height of the Cold War, it signed its first-ever Free Trade Agreement – not with a fellow superpower or a key regional bloc, but with Israel, a small, economically distressed Middle Eastern democracy battling triple-digit inflation and geopolitical isolation.

At first glance, the deal seemed minor. But in reality, it was revolutionary: a Cold War-era gamble that economic access, not just military assistance, could serve as a strategic tool to stabilize allies and project American influence abroad.

That agreement would become a cornerstone of a new kind of American foreign policy, one that extended beyond bases and weapons to include markets and rules. This was Ronald Reagan’s vision of “peace through strength,” translated into economic terms: open trade not just as a pathway to growth, but as an instrument of ideological alignment. Israel, trusted and in urgent need, became the test case. And it worked.

The US-Israel Free Trade Agreement helped stabilize Israel’s faltering economy, attracted foreign capital, and encouraged long-overdue structural reform. It catalyzed the country’s transformation into a globally connected, innovation-led economy.

At the same time, it offered the US a blueprint for a liberal international economic order, where smaller democratic nations could grow and prosper by aligning with Washington and embedding themselves in the US-led global system. In the post-Cold War years, this model would proliferate – first through NAFTA, then through trade deals with Jordan, Morocco, South Korea, and others. But Israel was first.

No one internalized this strategy more deeply than Benjamin Netanyahu. Trained in the United States and steeped in Reaganite economics, Netanyahu rose to power on a platform of market liberalism, deregulation, and economic integration. As finance minister and then as prime minister, he reoriented Israel’s economy away from its socialist roots and toward global capital flows. For Netanyahu, the 1985 FTA wasn’t just a diplomatic tool – it was his proof of concept. He turned it into the foundation of a strategy to rebrand Israel as a “Start-Up Nation”: a nimble, hyper-connected, innovation hub dependent not on territory or size, but on strategic interdependence.

Central to this vision was trust in American consistency. Netanyahu bet that as long as Israel remained a loyal partner, invested in the West and aligned with US interests, it would be rewarded with stable access, political protection, and economic integration. His worldview was built on the assumption that trade was not just transactional but relational; that proximity to American power would guarantee prosperity and security. Crucially, he rejected the idea of autarky – the economic model of national self-sufficiency and isolation. Instead, he wagered that Israel’s strength would come from openness, integration, and specialization in a global economy.

A profound reversal

That worldview is now collapsing under President Donald Trump’s sweeping “Liberation Day” import tariffs,  including a 17% tariff on Israeli goods. The logic behind these tariffs is simple: any country running a trade surplus with the US is taking advantage and must be penalized, regardless of the nature of the relationship. Indeed, just days before Trump’s announcement, Israel eliminated all remaining tariffs on American imports. But it didn’t help. Alliance, reciprocity, strategic value – none of it matters. Trade deficits are the only metric.

This is a profound reversal. Reagan used trade to bind allies and build coalitions. Trump treats trade as a weapon to punish partners and enemies alike. Where Reagan believed economic integration was a tool of peace and strength, Trump sees economic interdependence as vulnerability and betrayal. If Reagan built a world of bridges, Trump is systematically dismantling them.

Israel is now lumped together with strategic competitors like China and Vietnam. For decades, Israel has served as a vital ally to the US – sharing intelligence, advancing joint defense systems, contributing critical technologies in cybersecurity, health care, and artificial intelligence. It is one of the few countries to fully align its trade, diplomatic, and military policies with Washington’s strategic interests. To now treat it in the same category as authoritarian powers engaged in open technological and economic rivalry with the US is not only economically incoherent, it is diplomatically self-defeating. It sends a dangerous message: that loyalty, alignment, and democratic values are no longer meaningful under US economic policy.

Netanyahu, more than any other world leader, had staked his economic strategy and political identity on his close alignment with Trump. He has mirrored Trump’s populism, embraced his disdain for liberal institutions, and positioned himself as a loyal ally in a world defined by personality over policy. He believed that ideological and personal loyalty would buy Israel strategic insulation. He was wrong.

Trump’s worldview is transactional and unpredictable. The economic model Netanyahu championed – globalized, US-anchored, trade-dependent – is now being dismantled by the very man he helped normalize and legitimize on the world stage. Neither Netanyahu nor Israel has received special treatment. The bill for blind loyalty has come due.

The irony is hard to miss. Netanyahu, once the face of Israel’s liberalization, now presides over its marginalization and democratic backsliding. He has come to mirror Trump’s ideological descent – from globalist optimism to nationalist grievance, from market openness to autocratic instinct. From Reagan to ruin.

Even if Netanyahu ultimately negotiates the tariffs down – or succeeds in securing exemptions – something fundamental has already been broken. The entire model was built on predictability, strategic trust, and the idea that alignment with the US brought long-term economic security. Trump’s willingness to target Israel, despite decades of loyalty and integration, reveals the fragility of that assumption. This alone undermines the credibility of the system Netanyahu spent his career promoting.

And this shift is not just about Israel. It is a cautionary tale for all democracies embedded in the liberal trade order the US once led. That system offered small nations like Israel a path to relevance, resilience, and prosperity. Its erosion threatens global stability and empowers autocratic alternatives.

A path forward still exists. Liberals in Israel, in the US, and across the democratic world must rearticulate the case for an economic system that is open yet resilient, fair yet strategic – one that values reciprocity, protects its allies, and re-establishes trade as a mechanism of trust, not coercion.

The bridge built in 1985 was about more than goods. It was about values. Trump has torched it. Netanyahu has so far stood idly by. Rebuilding it is not only possible – it is essential. But it will require leadership grounded in principle, not ego. Something neither Trump nor Netanyahu seem to possess.