Politics and Growing Sino-Israel Trade

In May 2014, China’s Vice Premier Liu Yandong visited Israel, accompanied by a 400-member delegation that included China’s ministers of science, health, and education. During the whirlwind trip, she signed an agreement with Prime Minister Benjamin Netanyahu on scientific exchange, inaugurated the Confucius Institution at the Hebrew University, and witnessed the signing of an agreement between Tel Aviv University and Tsinghua University in China to invest $300 million to establish the XIN Research Center aimed at studying biotech, solar energy, water, and environmental technologies. She also visited the Technion, which in the fall of 2013 received a $130 million grant from Hong Kong tycoon Li Ka-shing to build a research institute at Shantou University in Guangdong.

Earlier, Prime Minister Netanyahu had visited Beijing where he and Prime Minister Li Keqiang signed a series of trade and cultural agreements including creation of a joint research and development teams focused on renewable energy and water technology. Netanyahu was followed in China by President Shimon Peres.

China’s Investments in Israel

The list is impressive: In 2011, Chem China spent $1.44 billion to purchase 60 percent of Machteshim-Agan, a leading Israeli and global firm specializing in chemicals and fertilizers. Since then, Chinese firms have invested more than half a billion dollars in Israel, mainly in hi-tech, advanced medical equipment, and agricultural technology. Chinese companies built a tunnel linking the Haifa Bay industrial zone with the Tel Aviv-Haifa coastal road. Another will dig a tunnel linking the railway from Haifa to the northern Galilee. China is also considering bidding to build the highly strategic Eilat-Ashdod railway, linking its Red Sea port with Israel’s major port on the Mediterranean. China Harbor, an infrastructure company, signed a contract in 2014 for the construction of Israel’s first non-public port in Ashdod worth $1 billion.

Bright Food concluded a deal to purchase a controlling 60 percent in Israel’s second largest food distributor, Tnuva, and another firm was seeking to buy a major share in Clal, Israel’s leading insurance company. Israel’s Bank Leumi announced the opening of an office in Shanghai and eventually will open a branch there. The Times of Israel, an English language digital newspaper, launched a website in Chinese to highlight hi-tech innovation and other spheres central to Israeli-Chinese interaction. The move was lauded by both President Shimon Peres and Prime Minister Netanyahu who noted that China is already Israel’s largest trading partner in Asia and the future holds even greater promise.

Throughout 2014, China moved fast and furious into Israel in its global search for energy and commercial investments, as well as seeking contracts to meet Israel’s growing construction needs. At the same time, Israel is actively seeking markets in India, China, and Japan, perhaps to offset growing tensions with the United States and the European Union, its traditional markets. Concern about American and European pressure and even possible partial economic sanctions have propelled Israel to diversify its exports and seek allies in the eastern part of its continent. But that effort could come at a cost.

Growing Chinese involvement in Israel’s economy has left many Israelis wondering if it could endanger important, and even strategic, Israeli interests. First, could there be an impact on the paramount Israeli-American strategic ties? Second, what might the impact be if China finds itself fully supportive of Arab political, economic, and even military moves against Israel? The Israeli government has not answered these concerns.

A Bit of History

For over 40 years, Israel and China did not have diplomatic relations. Secret contacts were established in the mid-1980s. In 1987, the two foreign ministers met at the UN General Assembly, leading to the opening of a branch office of the Israel Academy of Science in Beijing and a Xinhua News Agency branch in Tel Aviv. After the fall of the Berlin Wall and the First Gulf War, many states in Africa, Europe, and Central Asia, released from the clutches of the Soviet Union, rushed to establish relations with Israel, especially in light of the new peace process founded at the Madrid Conference in late 1991.

However, China was not invited to Madrid because it did not have full diplomatic ties with Israel, a situation it finally corrected in January 1992. Since then, trade has skyrocketed, from $50 million in 1992 to over $1 billion in 2001 to $8.4 billion in 2013, almost 50 percent higher than the previous year. In 2010, China was Israel’s fourth largest export partner and the most important country in East Asia for Israeli goods, followed by India, South Korea and Japan. As a result, aside from its Embassy in Beijing, Israel has opened Consulates and Economic Representative offices in Guangzhou, Shanghai, and Shenzen. In 2014 it opened another Consulate General in Chengdu.

In 2000, those who feared fallout with the U.S. over Israel’s business in China saw those fears realized. Israel had agreed to install its own avionics and electronics into a Russian-made Antonov frame, giving China an early warning plane that was called Phalcon, for which China paid in advance. During a visit to Israel in early 2000, President Jiang Zemin was assured the sale would go through, but by July of that year, massive American pressure caused Israel to cancel. Prime Minister Ehud Barak informed the President of China that Israel “will not be able, under the current circumstances, to continue in the implementation of the Phalcon project.” Barak had to take into account adverse feelings in the U.S. Congress and public opinion, and above all in relations with President Bill Clinton, who feared that in a possible future war, China would use Israeli technology against America.

A military drone known as the Harpy, which Israel sold to China, had a similar story. The drone, sold with American permission, was returned to Israel for upgrading, at which point the U.S. pressured Israel not to return the upgraded version to China. Israel was forced to compensate China in both cases, badly souring bilateral relations. It also demonstrated an effective American veto on Israeli arms and technology sales to China. Although not easily forgotten by either party, this highly unpleasant incident did not prevent the two from increasing their economic ties.

Since 1992 the two nations have signed a variety of agreements covering shipping, air transport, R&D, double taxation, financial cooperation, and an agreement to promote and guarantee investments. These enabled Israeli companies to compete in China on an equal basis with other countries. Additional agreements were signed concerning cooperation in various spheres of science, agriculture, water, hi-tech, and communications. The last was signed by Vice Minister Liu Yandong in May 2014. A year earlier, during Netanyahu’s visit to China, agreements were concluded to advance mutual interests including agriculture, water, technological and medical equipment, and increased academic ties. While Chinese airlines do not fly to Israel, nonstop El Al flights to Beijing and Hong Kong flights are fully booked.

Why Invest in Israel – Israeli and Chinese Perspectives

By 2014, the volume of trade between China and Israel was almost 200 times greater than in 1992. What led the two countries to strengthen their ties after so many years of alienation and estrangement—and to maintain them after the Harpy and Phalcon decisions?

The Chinese considered the fact that from 2004-2008, Israel’s annual growth rate was 5.2 percent, and during the meltdown of 2010-2011, its average growth was 4.7 percent, far better than in Europe or America. Israeli hi-tech is the locomotive of economic growth, attracting foreign investment in research and development. Israel invests 4.5 percent of its GDP in research and development. Israel has the highest number of start-up companies per capita in the world and more Israeli companies’ shares are traded on the NASDAQ than Canadian or Japanese companies. The Chinese were paying close attention.

Israeli innovation, daring, ambition, and willingness to take risks are also studied carefully in China with the realization that Israel has a great deal to offer in terms of scientific and technological expertise, not only in hi-tech, but in such fields as agriculture and public health. Israel’s renowned highly trained and qualified human capital became a byword in China, underpinned by Beijing’s interest in ties with Israeli institutions of higher education.

There is also conjecture that with the realization that the U.S. was the only remaining superpower, what were perceived to be Israel’s strong ties with Washington and the ability of the “Jewish lobby” in the U.S., meant that Israel could facilitate links for China in the United States. Furthermore, the American Jewish business community could be attracted to invest in China. The perception that Israel and world Jewry carry weight in Washington worked in Israel’s favor.

But the Chinese also know that Israel is a small country beset by huge problems (outside the security sphere) in which much of the local market is controlled by only a few dozen business conglomerates. Seventy percent of Israel’s exports to China are controlled by only two companies—Intel Israel (hi-tech) and Israel Chemical Industries (chemicals and fertilizers). Another 400 smaller Israeli companies account for 10 percent, mostly dealing with technology and hardware.

Seeking Chinese Investment

For Israel, the answer is clear. Since 1948, most Arab States have challenged Israel’s right to exist as an independent Jewish State. In response, Prime Minister David Ben-Gurion initiated what became known as Israel’s “periphery doctrine,” attempts to forge ties with non-Arab countries in the Middle East and in Africa such as Iran, Turkey, and Ethiopia, and non-state actors such as the Christians in South Sudan and the Kurds in Iraq. Even then, Ben-Gurion was calling for ties between Israel and China, realizing the vast importance of the People’s Republic of China and the futility of America’s effort to isolate it.

Some Israelis argued that ties with China could help prevent Iran from becoming a nuclear power. Since China has leverage over North Korea and Iran, it might be persuaded to use its influence to slow the movement of nuclear technology and missiles from North Korea to Iran and from there to Gaza and Lebanon. In discussions over Iran at the UN Security Council in 2013 and 2014, China usually vetoed Western sponsored resolutions imposing sanctions on Iran, but there was still some hope that China would exert influence

Israelis feel a cultural affinity with China and appreciate its respect for tradition, sages, language, family ties, learning, and experience. In addition, China had no record of anti-Semitism, a point not lost on Israelis. On the contrary, China opened its gates to thousands of Jewish refugees from Germany and Austria who made their way to Shanghai in the late 1930s.

In more recent years, the growth of Islamic fundamentalism, expressed in eruptions of the Muslim Uighurs in Xinjiang, created another sphere for cooperation. In the spring and summer of 2014, a number of suicide bombings and shootings occurred in Urumchi and other locations in that vast region. The Chinese government believed that Israel’s expertise in fighting terror could be helpful to China in fighting against religious extremism, separatism, and terrorism in its eastern provinces.

The Debate in Israel

Growing ties led to the emergence of a public debate in Israel, reaching a climax in the spring of 2014 when Israeli economic journals and even daily newspapers, devoted many articles to what some called “The Chinese Threat.”

Those who opposed Israel’s enhanced economic ties with China claimed China’s political-economic and strategic goals in the Middle East run counter to Israel’s interests in the region. How could Israel, they asked, trust a country whose need for energy requires it to be more than friendly with Iran, Saudi Arabia, and the Gulf States? Critics charge China with helping Iran achieve nuclear capability, thus endangering Israel’s very existence, and point out that China does not rigorously adhere to the international economic sanctions imposed on Iran and even helps Iran evade them.

Opponents also contended that since most of the firms investing in Israel are either government-owned or government-controlled, they could play a crucial role in possible future Arab-Israel hostilities. They worried that Israel was transferring to China resources and sensitive technology that eventually could be used against Israel by either China or its proxies.

Ephraim Halevy, former head of the Mossad, said publicly that no country should hand over strategic assets—such as its second largest food producing and distribution company—to a company controlled by a major foreign power; food being a central asset for a government in ensuring the safety of its people. He expressed fear that the Chinese government might seek to control food prices in Israel and the wages of the almost 8,500 Israeli employees to cover the cost of the purchase. He also felt that close Israel-Chinese ties in the areas of technology might eventually harm Israel’s relations with the United States, which are far more important to Israel than its new ties with China.

Zehava Galon, chair of Israel’s left wing Meretz party, told the Knesset she wanted the Attorney General to bar the sale of Clal Insurance, a major company, until regulators could devise a way to ensure Israeli savers’ money. Nissan Slomiansky, chair of the Knesset Finance Committee, was also opposed to the sale because for $600 million, a Chinese company would gain control of $60 billion belonging to Israeli citizens. The sale did not go through, although for economic, not political, reasons.

Some Israeli experts feel that through its growing investment in Israel, China may seek to play a greater role in resolving the Israel-Palestinian conflict. China is not part of the Quartet (U.S, Russia, EU, and UN), but it is a member of the UN Security Council. Chinese Foreign Minister Wang Yi has talked about a peaceful and diplomatic resolution to the conflict and safeguarding the legitimate rights and interests of all parties, but added that “China will support the Arab states in their chosen path.” In Israel this was interpreted to mean that China seeks a greater role in the Middle East and there is no doubt China has become more assertive, more confident and stronger in recent years.

Those in Israel who caution against closer ties with China share a growing fear in the West that China will use all means—fair and foul—to acquire advanced technology and resources it deems critical to its economic future. Ties with Israeli institutions of higher education can serve as the conduit for such a transfer of technology. Opponents cite the new powers given to the French government to block foreign takeovers on strategic grounds. What’s good for France is certainly good for Israel, they say.

On the other side are many who openly support growing ties with China. Among their arguments are that Chinese companies are motivated by profit and loss even if they are government owned or controlled. They also argue that the world has become one global village and this new reality means that Israel cannot close its gates to Chinese investments lest it be accused of prejudices and caving in to American demands. They cite growing Chinese investment in the U.S. and Western Europe, which are no less sensitive than Israel to possible Chinese inroads. With China as the world’s second largest economy, Israel needs this huge market for its own exports; it can only be expected that China would turn to Israel as a center of innovation and expertise in many fields. The upshot is that Israel cannot afford to antagonize China lest it pay a high price both politically and economically.

By investing in Israel, China is paying a huge compliment to Israel’s flourishing industry, science, technology, and economy, showing faith in Israel’s continued growth and, assuredly, in its continued existence. It is also true that China has become far less dependent on Iranian and Saudi oil, while buying gas from Russia in a 30-year agreement, giving it a freer hand with Middle East security issues. In early 2014, a public program at the Israel Institute of National Security Studies (INSS) debated the issue of China. The consensus was that Chinese investments should be encouraged and welcomed as long as they contribute to the growth of Israel’s economy. But participants were also mindful that in certain highly sensitive areas the Government of Israel should establish guidelines governing Chinese investments. The fact remains that the government of Israel has not yet crystallized its policy regarding Chinese investments. As China moves from production based industry to an IT industry, it provides Israeli companies with new opportunities.

The growth of economic ties still face a number of hurdles including distance, culture, habit, and an almost insurmountable language barrier requiring translators and middlemen. There is also the slow pace of approvals and finalizing contracts in China, the many regulations and guidelines governing business transactions in both countries, and the Israeli desire to achieve quick results versus the Chinese tendency to focus on long term planning and take time to reach decisions. Trust, patience and perseverance—traits Israel is not known for—are required in this process. There may be fears on both sides regarding economic stability and possible acts of violence and hostility as seen during “Operation Protective Edge” against Hamas in Gaza last summer. Israelis are aware that their Chinese counterparts seek not only the final product but also knowledge and understanding of production technology. There is also growing competition for the Chinese market.

Conclusion

Since the establishment of diplomatic relations between Israel and the People’s Republic of China over 20 years ago, it is evident that both countries understand and appreciate the mutually beneficial cooperation in many areas. The two have come to understand that relations are now of strategic importance. Despite some misgiving in Israel over the long term strategic implications of growing Chinese investments and the potential danger to U.S.-Israel relations, both wish to continue to enhance and expand their political and economic ties.