Australia/Israel Review

Faced with intractable antagonism in much of the Middle East and cooling relations with many European Union countries, Israel has found a largely pragmatic Asia presenting new opportunities and huge new markets. China is arguably the centrepiece of Israel’s strategic pivot to the region, but with the benefits come complications.

In sheer size, demography and geopolitical orientation, China and Israel are vastly different, but their motivations are pragmatic. Recent years have seen marked increases in trade, investment, education exchanges and tourism between the two countries.

In particular, China is attracted to Israel’s vaunted technology sector, while Israel welcomes China’s vast reserves of investment capital and potential as a research collaborator. 

From 1992 to 2017, China’s bilateral trade with Israel has grown from US$50 million to US$13.1 billion, making it Israel’s largest trading partner in Asia and its third-largest trading partner in the world after the EU and the United States. In the first half of 2018, China’s imports from Israel reached US$2.77 billion, an increase of 47% compared with the same period in 2017.

Chinese investment has poured in, purchasing Tnuva, Israel’s largest producer of dairy products, as well as winning tenders to build roads, light rail in Tel Aviv and the Carmel Tunnels in Haifa. China has also expressed intentions to buy Israeli insurance companies and banks, to lease large areas of land in the Negev Desert to grow avocados and wheat, and to build a rail link from Tel Aviv to Eilat. 

Chinese companies are now enlarging Israel’s two major ports in Haifa and Ashdod, which handle most of Israel’s trade, and have gained the concessions to operate and run the new harbours for 25 years. Both ports are also the bases for the Israeli navy and regularly host ships of the US Sixth Fleet, including aircraft carriers.

Because of its high-tech economy, Israel also faces the sensitive problem of foreign spying and theft of its advanced technologies. 

As Israeli strategic analyst Yossi Melman wrote in Foreign Policy recently, China has targeted Israel’s two largest arms exporters, Israel Aerospace Industries and the arms manufacturer Rafael, along with the company Elbit Systems. All three companies have subsidiaries in the United States that help manufacture Israel’s most advanced weapons. Furthermore, he noted that investigations by Israeli counterintelligence agencies found that Chinese hackers were particularly interested in the Israeli companies’ ties with US defence contractors, with Israel perceived as a back door through which they can access and penetrate secret US programs.

All this has unsettled Washington. The Trump Administration asked Israel to reduce its exposure to China, and the likes of US National Security Advisor John Bolton and Secretary of State Mike Pompeo have publicly requested it. 

The growing security concerns have prompted some Israeli start-ups to reconsider whether to accept Chinese financial backing. The South China Morning Post reports that venture capital investors in Israel say some tech companies are factoring those concerns into their deals, particularly as Jerusalem is set to consider proposals from the National Security Council to set up an oversight committee for foreign investments with strategic implications, similar to the Committee on Foreign Investment in the United States (CFIUS).

Industry analysts say that Israeli tech start-ups with Chinese investors may find it more difficult to enter the US market or exit to a US buyer, particularly those in sensitive sectors, such as firms looking to sell military technology to the US. Nonetheless, Chinese attendance at Israeli investor events reportedly remains high.

Meanwhile, China’s chief Asian rival is also ramping up its engagement. Japanese investments in Israel have also surged over the past 20 years, with total investments reaching some US$6.35 billion from 2001 to the end of 2018. 

The world’s third-largest economy, Japan previously avoided doing business with Israel out of Arab boycott concerns, but relations have warmed since 2014, and the two countries have traded prime ministerial visits.

Some 36% of the Japanese investments have been in the field of information technologies (IT) and 30% in semiconductors, with the rest in cyber, automotive, pharma, medical and agritech.

“The Japanese noticed the interest China was giving Israel and that worried them,” Israeli investment consultant Elchanan Harel told the Times of Israel recently. But with US warnings about reduced intelligence sharing unless Israel implements stringent screening procedures for Chinese investments, Japan may find an opening.

“These tensions are likely to cause Israeli tech firms to stay away from Chinese investors, and prefer Japanese investors instead,” Harel said. “Japan, like Israel, is a strategic ally of the US and Japan could also be a hub for the Asian activities of Israeli firms. So, it is very likely that Japanese companies will step into the shoes of China.”