In April 2025, one of the most significant decisions in recent years in the field of international trade came into effect. U.S. President Donald Trump, who returned to office in January 2025, issued an executive order imposing new tariffs on imports into the United States. This move, part of the “America First” trade policy, marks a dramatic shift in the commercial relations between the U.S. and many countries worldwide, including Israel.
As early as January 20, 2025, upon taking office, Trump signed a presidential memorandum on trade policy titled “America First.” This memorandum directed his administration to investigate the causes of the United States’ large and persistent trade deficits in goods. On February 13, he signed another memorandum titled “Trade and Reciprocal Tariffs,” which expanded the review of non-reciprocal trade practices by U.S. trading partners.
The culmination of these investigations came on April 1, 2025, when Trump declared a national emergency regarding the threat posed by trade deficits to U.S. national security and the economy. This declaration served as the legal basis for imposing new tariffs, including on countries with which the U.S. has free trade agreements, such as Israel.
In the initial announcement, a basic tariff of 10% was imposed on most countries (excluding Canada and Mexico), with additional surcharges for certain countries based on their trade deficits with the U.S. For Israel, an additional 7% was initially added, so the total tariff on Israeli exports to the U.S. stood at 17%. However, the Trump administration later decided to lower the tariffs for all countries to a uniform rate of 10%. This was a significant reduction for Israel and for many other countries that were initially subject to higher rates.
Structure of the New Tariffs
The new tariffs are divided into three main categories:
- Reciprocal Tariffs:These were imposed in April 2025 and are now set at a uniform rate of 10% on all countries, except Canada and Mexico.
- Steel and Aluminum Tariffs:A 25% tariff on steel and aluminum products, applicable to all countries, including Canada and Mexico. These tariffs were imposed as early as March 2025.
- Automotive and Auto Parts Tariffs:These tariffs were imposed in February and March 2025.
The tariffs came into effect in two stages: the basic 10% tariff took effect on April 5, 2025, and the various surcharges (including the additional 7% for Israel, which was later canceled) took effect on April 9, 2025.
Goods in Transit and Exemptions
Goods that were in transit at the time the tariffs were imposed received special consideration. According to the executive order, goods shipped to the U.S. before April 5, 2025, are exempt from the basic 10% tariff, even if they arrived after that date.
There are also substantial exemptions from the new tariffs. Annex 2 to the executive order lists products exempt from the new reciprocal tariffs. These include copper products, pharmaceuticals, semiconductors, wood products, certain minerals, and energy products. The exemption is determined according to the product’s HS (Harmonized System) code, which is an international product classification system.
It is important to note that these tariffs apply only to goods, not to services. There is also a special exemption for the American content of products. According to the executive order, products that include at least 20% U.S. content are exempt from tariffs on the American portion.
Impact on Israeli Exports
The impact of the new tariffs on Israeli exports is highly significant, even after the reduction to 10%. Israel, which was the first country to sign a free trade agreement with the U.S. in 1985, has until now enjoyed full exemption from tariffs on most of its exports to the U.S. The shift from full exemption to a 10% tariff still represents a substantial blow to Israeli exporters.
The U.S. is Israel’s main export partner, with about one-third of Israeli exports directed to the American market. Excluding the exemptions (semiconductors, pharmaceuticals, and minerals), about 25% of Israeli exports, amounting to approximately $10 billion, are now subject to the new tariffs.
The main sectors affected are optical products, electronic products, equipment and machinery, avionics products, cosmetics, and more. For these industries, the 10% tariff may render previously profitable transactions unviable or at least significantly reduce their profitability.
Broader Impact on Global Trade
The new Trump administration tariffs are expected to cause significant trade distortions worldwide. Products that can no longer reach the U.S. market due to high tariffs will seek alternative markets, including Israel, which is considered the “Dead Sea of tariffs” due to its low tariff rates.
Many countries have already begun to respond to the imposition of tariffs. China has announced retaliatory tariffs, as has the European Union. These responses could lead to further escalation and a global trade war.
The Israeli industry is expected to face tough competition both in the U.S. market and domestically. In the U.S. market, it will have to compete with local industries not subject to tariffs and with exporters from countries enjoying lower tariff rates. In the domestic market, it will compete with products from around the world seeking alternatives to the U.S. market.
The Israeli Government’s Actions
The State of Israel is acting on several fronts to cope with the new situation. Prime Minister Benjamin Netanyahu has tried to persuade the U.S. administration to lower the tariff rate for Israel, efforts that yielded partial results with the reduction from 17% to 10% (although this reduction applied to all countries, not just Israel).
A central strategy for Israel is to try to improve its trade balance with the U.S. by increasing imports from the U.S. The Minister of Economy announced the expansion of the “What’s Good for Europe is Good for Israel” policy to the U.S. as well, meaning automatic recognition of American standards, in order to facilitate the import of American products into Israel.
Israel is also considering imposing new tariffs on imports from other countries to protect local industry from a flood of products diverted from the U.S. market. However, it is likely that the U.S. itself will be exempt from these tariffs, so as not to harm efforts to improve the trade balance.
Strategies for Israeli Exporters
Reviewing Product Origin: A product will be considered Israeli for tariff purposes if it underwent “substantial transformation” in Israel. Israeli exporters who manufacture in countries with higher tariff rates may consider relocating part of their production to Israel to benefit from the lower tariff rate.
Checking Product Classification: Exporters should carefully check whether their product is included in the list of tariff-exempt products (Annex 2 to the executive order). In the past, when most Israeli exports were tariff-exempt, precise classification was less critical. Now, with the difference between a 10% tariff and full exemption, accurate classification becomes crucial.
Utilizing the U.S. Content Exemption: Israeli exporters can consider increasing the use of American components in their products to benefit from the exemption for American content constituting at least 20% of the product’s value.
Transfer Pricing and the New Tariffs
Transfer pricing refers to the prices at which multinational companies transfer goods, services, and intangible assets between group companies in different countries. In the context of trade between Israel and the U.S., transfer pricing is a critical issue that has become even more complex with the new tariffs.
There is an inherent gap between the transfer pricing methodology for income tax purposes and customs law. Transfer pricing for income tax purposes focuses on the overall profitability of related parties and appropriately reflects the functions, risks, and assets of the parties. In contrast, customs law focuses on the specific price of each transaction and product.
In the past, when Israeli exports to the U.S. were tariff-exempt, this gap was not significant in practice, as there were no tariffs to pay. Now, even with the reduced 10% tariff, this gap becomes highly significant and requires Israeli companies to re-examine their transfer pricing policies.
Israeli companies may need to reconsider their transfer pricing models in light of the new tariffs. For example, is there justification to change the target profitability of the U.S. company? Is it possible to switch to another transfer pricing method that is more suitable for customs law?
Instead of making large year-end adjustments, companies can move to monthly or quarterly profitability monitoring and make smaller, ongoing adjustments. This reduces the need for large year-end adjustments.
It is also possible to separate product price adjustments from other adjustments: not all transfer pricing adjustments need to be related to the product price. Adjustments can also be made through other mechanisms, such as payments for services, royalties, or cost-sharing, which may not be subject to tariffs.
Joining the Reconciliation Program: U.S. Customs offers a Reconciliation Program that allows importers to pre-report expected adjustments and avoid penalties. Israeli companies that regularly make transfer pricing adjustments should consider joining this program.
Separating Transactions: Instead of selling a bundle that includes both a product and ancillary services, companies can consider separating the transaction into a product sale and a service agreement, so that only the product component may be subject to tariffs.
Use of the First Sale Rule
The First Sale Rule is a unique principle in U.S. customs law that allows the customs value of a product to be based on the first sale in the supply chain, rather than the last sale. For example, if an Israeli manufacturer sells a product to an Israeli distributor for $80, and the distributor sells it to the U.S. for $100, customs can be paid only on the $80, not the $100.
Applying this rule requires meeting several conditions, including appropriate documentation and proof that the goods were originally destined for the U.S. This is a strategy that previously received little attention among Israeli exporters, but now, with a 10% tariff, it can lead to significant savings.
The content in this update is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis.
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