Drawing the curtain on China–Israel cooperation?
Authors: Carice Witte and Dale Aluf, SIGNAL
As the longest-serving prime minister in Israeli history, Benjamin Netanyahu has had a profound influence on China–Israel relations. Diplomatic relations between the two countries are the widest-reaching since normalisation in 1992, with China having emerged as Israel’s second-largest trading partner.
But China’s swift ascent to global economic and military might has led to a growing unease among Israel’s Western allies, especially the United States. Has Netanyahu’s administration done enough to adapt to the rapidly shifting realities?
After China emerged as the world’s second-largest economy in 2010, it identified advanced technology as a national priority in its 12th Five Year Plan and began looking to the ‘Start-up Nation’ for innovative solutions to its domestic challenges. Netanyahu had just launched Israel’s pivot to Asia to diversify its economy beyond the United States and Europe.
Israel’s embassy and the four consulates in China were all instructed to promote business ties with Beijing. Israel saw China as a ‘good news story’, promising a stream of investment money. China identified Israel as a key source of innovation after a 2012 visit to Israel by the Central Party School’s International Institute of Strategic Studies.
Hundreds of millions of dollars subsequently flowed from China into innovative tech companies and R&D centres in Israel. Toga Networks became an R&D centre for Chinese telecommunications giant Huawei. Now Alibaba, ChemChina, Kung-Chi, Legend, Lenovo and Xiaomi have all set up shop in Israel. Many of these investments and acquisitions have been in firms focussed on cloud computing, artificial intelligence, semiconductors and communications networks — areas that have great strategic and economic importance.
The Netanyahu government also looked to China for Israel’s infrastructure needs, especially in cases when US companies were invited to compete for tenders and refused. This is what occurred when Israel sought foreign companies to operate the newly privatised section of Haifa Port in 2015.
China’s expanding footprint in Israel began to alarm officials in 2014, when the former head of Israel’s intelligence agency, Efraim Halevy, criticised Israeli dairy corporation Tnuva’s acquisition by Chinese state-owned enterprise, Bright Food, arguing that food security is a vital national interest and should not be in the hands of foreign governments.
Israel has not been entirely naive regarding the risks associated with foreign entities investing in critical sectors. While serving as Commissioner of Capital Markets, Dorit Salinger blocked multiple attempts by Chinese companies to acquire Israeli insurers Phoenix and Clal. Yet, outside the financial realm, Israel continued to welcome Chinese capital with no indication that there was a need for scrutiny.
After all, Israel and China cut defence ties in the early 2000s, when Washington compelled Israel to cancel a series of defence contracts with Beijing. From 2004 onward, so long as cooperation remained strictly in the civilian realm, all was deemed kosher.
The geopolitical landscape began to change in 2017 when Jerusalem’s most important ally labelled China a strategic rival. The United States has since raised concerns about Chinese companies conducting espionage and views China’s infrastructure development projects and acquisition of advanced technologies as a threat to its global primacy.
The United States imposed export restrictions on Chinese multinationals wishing to acquire US tech and launched a pressure campaign on its allies to curb ties with China. At a maritime conference held at Haifa University in 2018, members of the US think tank community lambasted their Israeli counterparts over approving the 2015 Haifa port deal with the Shanghai International Port Group.
Meanwhile, the Netanyahu government continued awarding tenders to Chinese companies for infrastructure projects and cultivating Chinese investment into its high-tech industries. Facing mounting US pressure, Israel still sought to maintain trade and investment relations with China.
The US-China trade war has, in some ways, brought Israel and China closer together. Israel’s semiconductor industry saw exports to China increase by 80 per cent in 2018. As the United States closed the door to Chinese tech companies, they began looking to Silicon Wadi. As China–Israel technology cooperation continued unabated, Washington ramped up pressure on Israel regarding Chinese infrastructure projects, as it ‘puts the capacity for the United States to work alongside Israel on important projects at risk’. More recently, the United States has warned Israel publicly from increasing Chinese involvement in Israel’s high-tech sector.
Israel has not entirely ignored American concerns. Following an independent review by Israel’s Ministry of Defense, and in close consultation with the United States, Jerusalem is expected to exclude Chinese companies from tendering to build Israel’s 5G infrastructure. Israel also established a CFIUS-style foreign investment oversight committee in 2019.
Since 2010, bilateral trade between Israel and China has doubled, with US$11.53 billion in Chinese capital flowing into Israeli tech firms and infrastructure contracts. But for China, this is less than 3 per cent of its total outbound investment.
The Netanyahu government has never issued a formal, clearly articulated China strategy. While this provides flexibility in terms of tactical adjustment, it also limits the benefits Israel can reap from the relationship.
As tensions between the United States and China continue to flare, it remains to be seen whether Israel will be able to maintain its delicate balancing act or if Washington will ultimately pull down the iron curtain — just as it did in the early 2000s.