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Netanyahu’s good news story

As the longest-serving prime minister in Israeli history, Benjamin Netanyahu has had a profound influence on the course of Sino-Israeli relations. In March 2009, when Netanyahu returned to the helm for the second time (his first stint as PM being from 1996-99), relations with Beijing and Jerusalem stood virtually dormant. Today, diplomatic relations between the two countries are the widest-reaching since normalization in 1992, with China having emerged as Israel’s second-largest trading partner country. 

But as Israel’s ties with China grew more robust, they also became increasingly complex. 

China’s swift ascent to global economic and military might coupled with distinctly Chinese-styled economic and diplomatic statecraft has led to a growing unease among many of Israel’s Western allies – most notably, the US. As countries scrambled to meet the challenge, they have had to improvise a range of strategies to address the rapidly shifting realities on the ground. Israel, too, has had to adapt. But has Netanyahu’s administration done enough? 

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 Startup Nation for innovative solutions to its domestic challenges. The timing could not have been better. Netanyahu had just launched Israel’s very own pivot to Asia to diversify its economy beyond the US and Europe. Accordingly, Israel’s Ministry of Foreign Affairs closed embassies in Minsk, Marseilles, Philadelphia, and San Salvador, establishing new missions in Shanghai, Guangzhou, and Bangalore. Today, only the USA has more missions in China than Israel. 

Under Netanyahu, Israel’s embassy and the four consulates in China were all instructed to promote business ties with Beijing. Israel saw the giant Asian nation as the ‘good news story,’ promising a stream of investment money into the innovation nation. During his 2013 visit to Beijing, PM Netanyahu proposed that the two nations establish “a government-to-government systematic plan to make partnerships between Israeli technologists and experts and [their] Chinese counterparts.”

Meanwhile, China had already identified Israel as a key source of  innovation after a 2012 visit to Israel by the International Institute of Strategic Studies (IISS) at the Central Party School, invited and hosted by SIGNAL – an Israeli policy and academic organization focusing on China. The policy advisors from IISS noted that Israel’s innovation and tech potential was far beyond Beijing’s original assessment.  

Subsequently, hundreds of millions of dollars flowed from China into innovative tech companies and R&D centers in Israel. Toga Networks, for example, with two locations in Israel, became an R&D center for Huawei – the Chinese telecom company now struggling under US sanctions. Other Chinese multinationals followed suit, and today, Alibaba, ChemChina, Kung Chi, Legend, Lenovo, and Xiaomi have all established a presence in Israel. Many of these investments and acquisitions have been in firms focused on cloud computing, AI, semiconductors, and communications networks, areas that continue to grow in both strategic and economic importance. 

The Netanyahu government also looked to China to answer Israel’s massive infrastructure needs, from tunnels and roads to the Tel-Aviv light rail. When US companies were invited to compete for tenders and refused, Israel turned to China. This is precisely what occurred when Israel was seeking foreign companies to operate the newly privatized section of the Haifa Port in 2015, ultimately awarding the 25yr contract to the only bidder – Shanghai International Port Group (SIPG). 

It hasn’t all been smooth sailing. 

Already in 2014, China’s expanding footprint in the Jewish State began to spook officials and securocrats alike. That year, former head of Israel’s intelligence agency, Efraim Halevy, criticized Israel’s dairy corporation’s acquisition by Chinese state-owned enterprise, Brightfood, arguing that food security is a vital national interest and should not be in the hands of foreign governments. The Israeli Parliament’s then Economic Affairs Committee chairman, Avishai Braverman, also called on the Israeli public to protest the Brightfood deal – albeit, it seems, to little avail. In 2019, Brightfood formed part of a consortium that won the Israeli government tender to establish a $238 million local food-technology incubator. 

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. Nevertheless, outside of the financial realm, Israel continued to welcome Chinese capital with no indication that there was a need for scrutiny or investment oversight. After all, Israel and China cut defense ties in the early 2000s, when the US compelled Israel to cancel a series of defense contracts with Beijing. From 2004 onward, so long as cooperation remained strictly in the civilian realm, all was deemed kosher. Israel was thus eager to join the AIIB in 2015 – much to America’s chagrin, and also launched negotiations to establish a Sino-Israeli free trade agreement.  

But towards the end of 2017, the geopolitical landscape began to change, and Israel found itself in a peculiar position. Jerusalem’s most important ally had just labeled China a “strategic rival” – one that allegedly wishes to “shape a world antithetical to US values and interests.” Since Xi Jinping outlined China’s quest for civil-military integration in “Made in China 2025,” the US has become concerned that Chinese companies are conducting espionage on behalf of the Communist Party and supporting the People’sPeople’s Liberation Army. Washington has since come to view China’s infrastructure development projects and acquisition of advanced technologies as a threat to American global supremacy. 

The US has since gone on the offensive, imposing export restrictions on Chinese multinationals wishing to acquire US tech and launching a pressure campaign on its allies to curb ties with China. As the US trade confrontation with Beijing picked up speed, so did the fallout from China’s tech investment and infrastructure deals, from Myanmar and Sri Lanka all the way to the United Kingdom. It wasn’t long before the fallout made its way to Israel. 

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 SIPG. This development once again sparked debate in Israel over the nature of Jerusalem’s ties with Beijing. Senior US officials from the Pentagon, State Department, and the NSC rotated visits to Israel to convey their concerns regarding the port’s proximity to a sensitive naval installation and a periodic port of call of the US 6th Fleet. 

Meanwhile, the Netanyahu government continued awarding tenders to Chinese companies for a wide range of infrastructure projects and cultivating Chinese investment into its high-tech industries. Facing mounting US pressure, Israel, nevertheless, sought to maintain trade and investment relations with China at their highest possible extent. Just a few months after the Haifa port conundrum rose to the fore, around 100 Israeli entrepreneurs traveled to Jinan in search of investors willing to pump money into their budding tech firms. 

Notably, the trade war has, in some ways, brought Israel and China closer together. Israel’s semiconductor industry, for example, saw exports to China increase by as much as 80% in 2018. As the US closed the door to Chinese tech companies, they began looking to Silicon Wadi. As China Israel technology cooperation continued unabated, the US ramped up pressure on Israel regarding Chinese infrastructure projects. 

On a visit to Jerusalem in May 2020, Secretary Pompeo personally pressed the Israeli government on the China file under rather exceptional circumstances. On his first trip during the height of the Covid-19 lockdown in May, just four days after the passing of his father, Pompeo arrived in Israel to address key security issues, including reminding PM Netanyahu of Washington’s stance on China. The Secretary of State focused specifically on critical infrastructures.

Pompeo told the Israeli press: “We do not want the Chinese Communist Party to have access to Israeli infrastructure, Israeli communication systems, all of the things that put Israeli citizens at risk and in turn put the capacity for America to work alongside Israel on important projects at risk as well.” 

Israel has not entirely ignored American concerns. Following an independent review by Israel’s Ministry of Defense, Jerusalem is expected to exclude Chinese companies from participating in the tender to build Israel’s 5G infrastructure. Adhering to US advice, Israel also established a CFIUS styled foreign investment oversight committee in 2019. However, Israel’s state comptroller has recently called into question the efficacy of Israel’s review mechanism, explaining that the absence of mandatory consulting by regulators with the advisory body might cause them to prioritize economic benefits over considerations of national security.

These economic benefits seem immense. Since 2010, bilateral trade between Israel and China has doubled, and according to AEI’s Global China Investment Tracker, $11.53 billion in Chinese capital has flowed into Israeli tech firms and infrastructure contracts. But for China, these deals amount to less than 3% of its total outbound investment. Perhaps that’s why Israel has gained little from the relationship beyond investment capital. China has repeatedly ignored Israel’s calls to reign in Iran’s destabilizing behavior and continues to throw Israel under the bus when voting at the United Nations to appease its Arab/Muslim partners. 

The Netanyahu government has never issued a formal, clearly articulated China strategy. While this has provided flexibility in terms of tactical adjustment, it has also limited the benefits Israel could have reaped from the relationship – those beyond financial gains. Now well aware of the growing US-China tensions, Netanyahu’s administration still seeks a balance between its economic and security alliance with the US and its interest in cultivating Chinese markets and investments while engaging China’s infrastructure companies. As tensions between the US and China continue to heat up, 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. 

An abridged version of this article was published in the East Asia Forum Journal this month.

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