As the U.S. imposes restrictions on Israel's access to AI chips, it becomes increasingly clear just how much Israel needs them. Despite the stories we’ve told ourselves, Israel’s standing in the AI sector is far from stellar. Contrary to popular belief, Israeli AI is not the next big thing; it’s more like a rerun from the History Channel.
Last week, the Knesset’s Innovation Committee held an emergency meeting to address Israel’s declining position in AI and the recent U.S. decision to limit chip exports. To the committee’s dismay, Israel has been downgraded to Tier 2 in the U.S. export control rankings—a category requiring scrutiny before granting access to advanced AI chips.
Committee Chair MK Orit Farkash-Hacohen warned, “The U.S. is signaling that Israel is not aligned with its vision for AI and advanced technologies. These restrictions could critically impact Israel’s economic and security standing, undermining its strategic edge.”
She’s right. Beyond the strain on the bilateral relationship, this development poses a serious threat to Israel’s security, which increasingly relies on advanced AI capabilities—not just planes and bombs. Take, for instance, Palantir, a U.S.-based company that began collaborating with the IDF after the October events. Palantir’s operations are 90% AI-driven and only 10% human-powered. Could future restrictions prevent it from working with the IDF? What would that mean for Israel’s security framework?
The US fear of China’s AI ascendancy
The American concerns are understandable. China’s growing dominance in AI is alarming, particularly the prospect of achieving Artificial General Intelligence (AGI) before the West. If that happens, it could shift global power dynamics. For now, U.S. Big Tech firms are leading the race, and Washington is determined to keep it that way. Still, lumping Israel into the same restrictive category as other nations seems counterintuitive.
Nvidia, the global leader in AI chip production, relies on its Israeli R&D center for cutting-edge innovation—a center built on the talent and technology of Mellanox, the Israeli company Nvidia acquired. Similarly, Intel develops and manufactures chips in Israel, leveraging the expertise of Habana Labs, another Israeli acquisition. In other words, Israel isn’t just another country; it’s integral to the U.S.’s technological spearhead.
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Lieutenant Colonel Elad Dvir, head of AI at the Defense Ministry, noted that Israel and the U.S. are in talks to redefine the boundaries of Israel’s operational freedom. Meanwhile, the defense establishment is fast-tracking AI chip purchases before restrictions take full effect. However, in the post-restriction landscape, every Israeli acquisition could be subject to Washington’s approval.
Missing the AI revolution
More concerning than U.S. restrictions is Israel’s underwhelming position in the AI domain. A nation that prides itself as the “Startup Nation” and later the “Unicorn Nation” has failed to stay ahead of the curve. While Israel once excelled in communication and cybersecurity technologies, it has largely missed the AI wave.
Daniel Schreiber, CEO of Lemonade, told the committee, “The technology paradigm has shifted dramatically in recent years, but Israel hasn’t kept pace. The long-term consequences of these lost years will be severe. The next wave of trillion-dollar companies will emerge in AI, and it’s unlikely any will be Israeli, given our weak starting point. This will be a generational failure.”
Michael Eisenberg, a general partner at Aleph VC, added, “Government ineptitude remains rampant. AI will determine which nations become global powers in the coming decades. While the U.S. is charting its AI vision, we’re not even in the game.”
AI is the defining technological revolution of the 21st century, poised to reshape humanity as profoundly as the wheel, electricity, and the internet. Countries like the U.S. and the U.K. understand this. America’s progress is fueled by groundbreaking entrepreneurship and massive economic investment, while the U.K. has implemented an ambitious government-led strategy, placing AI at the center of its national agenda.
Israel has one unique advantage: an entrepreneurial spirit on par with the best in the world. The country also has access to substantial U.S. investment. What it lacks is a cohesive, long-term plan. For years, Israel has floundered with short-sighted initiatives and uninspired budgets, relegating itself to the back of the AI train.
What Israel needs is a bold, national strategy to join the AI vanguard. Recently, the Prime Minister’s Office announced plans to lead such an effort, even naming prominent investor Dovi Frances as Israel’s potential “AI czar.”
If this effort is genuine—and not just a marketing ploy—it could finally steer Israel out of its AI doldrums. An ambitious, actionable strategy, led by a dedicated executive arm, could set lofty goals for Israeli tech and back them with proper funding and research. Only then can Israel reclaim its rightful place as a global technology leader.