Between the Devil and the Deep Blue Sea

Daniel E. RAK


Establishing an Israeli Council for Foreign Investments

According to Andrew Scobbel, China’s involvement in the Middle East can be divided into three weight groups: “...Economically heavyweight, Politically lightweight, Military featherweight” (Scobell 2016, 2). Yet China’s involvement in the Middle East can hardly square with this definition. Chinese foreign policy is multilayered, but unitary: a cohesive economic, political, and military voyage that serves China’s aspirations to surpass the United States as the leading world superpower.

Israel is no stranger to this trend and has reluctantly found itself in a zero-sum game: Israel aspires for economic gain from Chinese trade and investments, that in turn summons national security concerns and diplomatic ramifications on the part of the United States (U.S). In order to navigate in the deep waters that separate between the parameters of this equation, Israel is in a situation where it has to increase the enforcement of investment screening and scrutiny regulations in a unitary form through the creation of an Israeli Foreign Investment Committee – IFIC.


U.S Shadow Cast on Sino-Israeli Relations

Though Israel recognized the People’s Republic of China back in 1950, the two countries have not issued diplomatic ties until 1992. The substantial delay in the formation of open diplomatic relations originated in numerous motives: Israel’s support for the U.S during the Korean War; the Chinese political support of the Palestinian cause; Chinese stance aside Arab countries in the Bandung Summit of 1955; the 1956 Suez Crisis; and since 1973 onwards the stance of Israel on the shoulders of the U.S. Despite the reserved relations between China and Israel during the 20th century, the two countries were involved in major arms and defense trade deals during the 70s and 80s. Much to the disappointment of the U.S, during this period Israel sold to China the plans for the canceled Israeli Aerospace Industry (IAI) “Lavi” multirole fighter aircraft. The deal might have contributed to the development of the Chinese Chengdu J-10 fighter given their visual similarities. The deal represents profound arms trade between the countries in the shadow of U.S discontent (Evron, 2017, p. 3).

As Sino-Israeli diplomatic ties were founded in 1992 the first trade agreement between the countries has been signed. In 1998, Israeli Prime Minister Benjamin Netanyahu paid an official visit to China. The Chinese have since increased their interest in Israeli defense and arms technology. Subsequently, the beginning of the year 2000 signaled an impediment in Sino-Israeli defense and security trade which rippled to a diplomatic recoil between Israel and the U.S. China was interested in the purchase of the PHALCON airborne early warning and control radar, dubbed in Sino-Israeli diplomatic history as the “Phalcon Crisis”. The U.S urged Israel to cancel the deal the radar system holds U.S military technology and may serve as a game-changing threat to American interests in East Asia, especially given the American military presence in Taiwan. The cancellation of the deal has led to a triangle diplomatic backlash between Israel, the U.S and China. China accused the U.S for the bulldozing of the deal, and Israel was forced to pay a fine deducted from an original $1.2 billion demand to $350 million after exhaustive negotiations (Shai, 2011, pp. 26–27).

Despite the Phalcon crisis, China has maintained its interest in economic, scientific, and technological ties with Israel. In 2002, two years after the crisis, Chinese President Hu Jintao declared that Sino-Israeli relations are to be based on four foundations: Continuation of high-level political dialogue; Enhancement of bilateral economic cooperation and trade; Scientific and technological cooperation; Expansion of relations as a whole (Rajiv, 2017, pp. 417–419).

Two years after President Hu’s declaration, another monumental setback hampered the U.S-Israel-China triangle. The 2004/2005 Israeli upgrade of Chinese-owned IAI Harpy loitering munition drones resulted in scrutiny from the U.S that in turn pressured Israel to halt the entire arms trade with China. Subsequently, the U.S forced the resignation of Amos Yaron, Israel’s Director General of the Ministry of Defense on grounds of concealing the Harpy deal from the Pentagon (Sharp & Ave, 2019, p. 26). Since the Phalcon and Harpy crises and until today, the U.S influence on Israel’s trade with China serves as an axe threatening to obstruct the strengthening ties between the two countries and is a major concern in Sino-Israeli relations.


Chinese Technology and Infrastructure Investments in Israel


Since the 2010s, China sees Israel as a high-profile investment country in the Middle East, given the Jewish state’s relative political stability and thriving high-tech industry. Following the U.S-induced decline in security and defense deals, Sino-Israeli relations shifted trade to civilian technology and infrastructure investments and commodity trade. From 1992 to 2020 bilateral Sino-Israeli trade has soared from $35 million to more than $10 billion, making China the third-largest trade partner of Israel after the European Union and the U.S (Orion, Lavi, Ella, & Kanner, 2017, p. 84).

Subsequently the rate of Chinese investments in Israel have profoundly increased. Accompanied by a team of leading Israeli CEOs, Netanyahu’s 2013 visit to China amplified this trend. The Chinese investment storm is monumentally represented by the 2015 Chinese state-owned enterprise (SEO) Bright Food acquisition of Tnuva, the largest Israeli food company and a national symbol of Israeli labor (Ella, 2019, p. 63). s

Israel’s reputation as the “Start-up Nation” has led to the Chinese definition of Israel as an “entrepreneurship, innovation and technologically leading country”, converging and compliant with China’s “Made in China 2025” strategy, answering China’s external economic and technological needs to become a technology and service-based powerhouse while Israel sees China as a substantial source for capital inflows (Ella, 2019, p. 52). The growing Chinese involvement in leading Israeli tech venture capital firms signal China’s ever increasing interest the Israeli cyber and information and communication technology sectors (Orbach & Pasovsky, 2019).


Following Netanyahu’s third visit to China in 2017, Chinese President Xi Jinping designated the Sino-Israeli relations as a “comprehensive partnership for innovation”. This partnership category is different in definition and in practice from higher profile “Strategic Comprehensive Partnerships” that apply for more than 30 countries, including Egypt and Iran, and different also from a “Strategic Innovation Partnership” that is being held with Switzerland (Efron et al., 2019, pp. 26–28). China has shown clear interest towards Israeli technology while offering an incentive for Israel to increase its relations with China, even on the expense of its U.S and European counterparts. Between 2015-2018 annual Chinese investments in Israel have increased fivefold, from $100 million to more than $500 million FDI inflows (OECD, 2020).


Chinese Economic Involvement in Israel: Diplomatic and Security Concerns

Since the beginning of the 2010s, China has been investing in Israeli technology firms with a growing interest in the latter’s thriving start-up ecosystem. In addition, China is increasing its infrastructure investments, coinciding BRI. Despite the security-to-civilian shift in investment culture, Sino-Israeli economic relations are still coming under domestic and external scrutiny.

The alarming issue of Chinese investments in Israel is an outcome of Chinese companies’ direct link to Chinese Communist Party and military apparatuses. Chinese SEOs and private companies alike hold CCP cells within their boards of directors. Thus, any Chinese foreign investment serves the party’s interest and every Chinese company is a governmental asset. In addition, Chinese investments are used to acquire highly competitive intellectual property and are used as an element of corporate espionage (Ella, 2019, p. 56). As mentioned, Chinese goals are economically, politically, and militarily conjoined to fulfill the aspiration of being a leading superpower. Most Israeli cyber and ICT technological developments are military-civilian intertwined and thus serve as potential dual-use. The Israeli start-up and high-tech ecosystems are based on military foundations – multiple Israeli high-tech firms were founded by former soldiers and officers from the military, retired and reserved software developers and computer engineers from elite technological units such as the Signal Intelligence Unit 8200 of the IDF Intelligence corps. State-of-the-art Israeli cyber security and communication products originate from highly confidential military back-end technological developments which did not escape the CCP’s watchful eye (Rajiv, 2017, p. 420).

Israeli companies Toga Networks and HexaTier serve as R&D centers for Chinese telecom giant Huawei holding suspected ties with the Chinese military and intelligence apparatus. Alibaba and GoCapital invested in cyber security companies ThetaRay and Kaymera, founded by personnel from military and security backgrounds. Thus Israeli private sector high-tech is an asset not only for domestic technological development, but is also prone to serve Chinese military aspirations, and therefore serves as a national security concern (Efron, Schwindt, & Haskel, 2020, pp. 27–28). The concern is amplified into a major security threat following the existing strategic ties China shares with Israel’s neighboring countries in the Middle East, including adversaries Iran and Pakistan who have a chance to gain significant knowledge of Israeli information security vulnerabilities (Efron et al., 2020, p. 39).


Infrastructure investments serve as an additional organ of multifaceted Chinese aspirations. The Middle East is situated at the center of the Belt and Road Initiative (BRI). Thus, the Middle East serves as a corridor that connects East Asia, Europe, and Africa. Israel is situated in the Western part of the corridor, an area that holds importance as a terrestrial and naval transportation hub. Transportation and railway tunnels have been built, and two railways between Tel Aviv and Ashdod to Eilat are being planned. In addition, Chinese SOEs are co-constructing the Tel Aviv Light Rail which is built in proximity to Israel’s military headquarters in the city center, a potential security and intelligence concern (Efron et al., 2020, pp. 72–73)


As part of the BRI and “ring of pearls” doctrine, China is gaining control over strategic maritime ports and naval infrastructure for parallel economic and military influence. In this context, China is gaining control over the two main Israeli ports: Ashdod and Haifa. In 2014, China Harbor Engineering, an SOE that has extensive ties with Iran, won a tender to build a private port in Ashdod. The port is to be a terrestrial bypass of the Suez Canal. Pending approval, a railway is planned from the Port of Eilat to the new Ashdod port facing the Mediterranean coast (Efron et al., 2020, pp. 18–20).

In the northern city of Haifa, The Shanghai International Port Group SOE (SIPG) is constructing the new Haifa Port and will operate it from 2021 to 2046. The Israeli Security Agency (also Shin Bet) has issued a security assessment of the prospective Chinese presence in Haifa and issued limitations on SIPG’s control over the port. Despite the Shin Bet’s regulatory limitation efforts, there is a growing fear that Chinese workers, equipment and infrastructure will serve as strategic intelligence gathering assets towards U.S naval and Israeli financial and security assets in the Middle East (Haaretz, 2019). The port serves as a security threat for the U.S Navy frigates following their annual dockings in the old Haifa port, where U.S military technologies may be subject to Chinese espionage (Harel, 2018). Additionally, China will be able to monitor commercial activity in Israel (Efron et al., 2020, pp. 71–73). Thus, the Chinese maritime involvement in Israel serves as an economic and geopolitical arm in the hands of the Chinese government.

The growing Chinese infrastructure and technological investments in Israel pose a threat not only to it, but also to its chief strategic main ally. The security threat is re-escalating U.S concerns again over Sino-Israeli relations, and thus leading to recurring American diplomatic ramifications. Since the Obama administration, U.S-China relations have transformed into essential rivalry that is constantly intensifying during the current Trump administration. In May 13, 2020, amidst the COVID-19 outbreak, during his first foreign official visit to Israel since the beginning of the international lockdown, Secretary of State Mike Pompeo stated in an interview to Israeli news: “…We do not want the Chinese Communist Party to have access to Israeli infrastructure (and) Israeli communication systems that put Israeli citizens at risk and put the capacity of the U.S to work alongside Israel at risk as well” (Kan News, 2020).


“Between the Devil and the Deep Blue Sea”: Recommendations for an Israeli Regulation Mechanism on Chinese Foreign Investments

China’s ever-increasing grasp of the Israeli economy serves as a warning sign in which Israel is sailing swiftly to a point of no return. The ownership and exploit of technological dual-use intellectual property and strategic infrastructure, in the shadow of scattered and vague investment screening policies, coupled with the fear of a decrease in U.S-Israeli high-profile cooperation point out that China’s political leverage on Israel has the potential of getting out of control.

In this setting and following U.S pressure, on 30 October 2019 the Israeli cabinet issued decree 372/b for the creation of an investment committee under the ministry of treasury, similar in structure to the Council for Foreign Investments of the United States (CFIUS), but limited to non-existent enforcement capabilities. In the decree, major fallacies can be found that harm the regulatory process of the future committee. According to article 2.a, the regulatory bodies of the State of Israel (The Bank of Israel, Securities Authority, Insurance Agency and other departments) are not obligated to pass a foreign investment offer to the committee for screening, but rather the decision is based on independent reasoning of the regulatory bodies. Secondly, article 2.b states that the regulator does not have an obligation to answer to the committee’s demands. Third, the decree does not clearly state any criteria for technology investments. Hence the screening process is predominantly lacking real enforcement capabilities and does not represent an effective regulatory body on foreign investments (State of Israel, 2019, p. 2).

As of May 2020, the committee is in full coordination with the U.S administration and its decisions are confidential. In addition, the cabinet declared that within 6 months of its initiation, the committee will be revised (Amit, 2020). The reason for creating a presumably vague, impotent committee with weak, decentralized scrutiny capabilities lies in the fear of reciprocal actions that might be conducted by foreign investors and countries. These in turn could issue screening mechanisms towards Israeli investments, an action that might lead to increased scrutiny towards Israeli capital outflows (Pilot, 2019). As it is impossible to issue a partisan decree towards China without any major economic and diplomatic ramifications, coupled with the U.S pressure to enforce increased screening on Chinese investments, Israel is situated “Between the Devil and the Deep Blue Sea.” Therefore, it is necessary that Israel will establish a profoundly enforced foreign investment regulation mechanism.

Despite the fear of reciprocal scrutiny, increased enforcement should be issued not in fear of economic and diplomatic ramifications, but rather from three points of understanding. First, the Chinese multifaceted geopolitical interest in Israeli technology and infrastructure is unparallel to the Israel’s economically oriented interests towards China. Secondly, Israel’s national security is prime to economic gain. And third, that global technological competitiveness will be increased by the existence of structured, accessible, and cohesive investment regulation mechanisms.

Following the recent swearing-in of the government, Israel should reissue the decree by stating the creation of an “Israeli Foreign Investment Committee” (IFIC) that will have complete independence from ministerial regulators under the supervision of the Director of Security of the Defense Establishment and will hold full coordination with the Israeli intelligence apparatus and Ministry of Treasury. Based on the grounds of intertwined national security and economic competitiveness, it will enjoy a veto power on regulator-level decisions. The IFIC will serve as a check and balance for managing the pendulum between economic gain on one hand and security and diplomatic ramifications on the other.


Confidential: Policy Recommendation for Cabinet – Israeli Foreign Investment Committee

Conscious of the increase of Chinese investments in Israel that hold economic, geopolitical and security concerns

Concerning the maintenance of economic resilience and national security amid COVID-19 crisis

Aware of the importance to preserve U.S-Israeli relations

Determined to fortify and defend the integrity and interdependence of the economic, diplomatic and security environments of the State of Israel

The Israeli government will establish the Israeli Foreign Investment Committee (IFIC). IFIC is to be based on 4 risk-management pillars within a regime structure.


The guiding principles for the IFIC are thus two-fold:

  1. Potential political, economic, and security leverages gained by investor actors (state and non-state) through direct or indirect investments are to be prevented.

  2. Investments that hold a potential for the dissemination or leakage of any financial, technological, and governmental information that can reduce economic competitiveness, threaten national security and diplomatic ties are to be prevented.

The IFIC is to be a division under the supervision of the Director of Security of the Defense Establishment (the Malmab). Economic branches within the Israeli intelligence apparatus are to assign non-compartmentalized teams that will be in full coordination with the IFIC including a designated team from the Ministry of Treasury.


The norms, rules and decision-making procedures are to be based on four internal risk management pillars that will remain undisclosed while screening Chinese investments:


Pillar 1: Identify potential dual use technologies as a function of a threat to national security

  • i. Developing technological sectors: AI, Quantum computing, communication, cyber security, and aerospace technologies will be subject to increased scrutiny. The Cyber Directorate will supervise assessments.

  • ii. Include any firm that consists of technological military personnel who hold security clearances from “secret” upwards.

Pillar 2: Which technologies can lead to diplomatic ramifications with the U.S?

  • iii. Create an IFIC-CFIUS coordination center for reducing uncertainty.

Pillar 3: Which Israeli technologies hold economic and political leverage towards China?

  • iv. Create an assessment of technologies that can gain economic and political leverage in China or serve as science diplomacy organs.

  • v. Prioritize technologies that can serve as financial and governmental information gathering assets within the Chinese governmental, military, and economic fields.

Pillar 4: Which foreign investments can decrease Israeli business and technological competitiveness in the short and long-term?

  • vi. Preserve Israeli ownership over highly competitive and strategic intellectual property and infrastructure.

  • vii. Map the short-term and long-term overt and covert Chinese investments trends to continuously reshape regulation mechanisms.

References

- Amit, H. (2020). Pompeo’s visit is a warning for Israel against Chinese infrastructure investments. The Marker. Retrieved from https://www.themarker.com/news/politics/1.8843524

- Efron, S., Schwindt, K., & Haskel, E. (2020). Chinese Investment in Israeli Technology and Infrastructure. Santa Monica: RAND Corporation.

- Efron, S., Shatz, H., Chan, A., Haskel, E., Morris, L., & Scobell, A. (2019). The Evolving Israel-China Relationship. The Evolving Israel-China Relationship. https://doi.org/10.7249/rr2641

- Ella, D. (2019). Regulation of Foreign Investments and Acquisitions : China as a Case Study. INSS, 22, 49–77.

- Evron, Y. (2017). The economic dimension of China–Israel relations: political implications, roles and limitations. Israel Affairs, 23(5), 828–847. https://doi.org/10.1080/13537121.2017.1343870

- Haaretz. (2019, January 9). Chinese Investments in Israel Could Pose Security Threat, Shin Bet Chief Warns. Retrieved from https://www.haaretz.com/israel-news/business/chinese-investments-in-israel-could-pose-security-threat-shin-bet-chief-warns-1.6827146

- Harel, A. (2018, September 17). Israel Is Giving China the Keys to Its Largest Port – and the U.S. Navy May Abandon Israel. Haaretz. Retrieved from https://www.haaretz.com/us-news/.premium-israel-is-giving-china-the-keys-to-its-largest-port-and-the-u-s-navy-may-abandon-israel-1.6470527

- Kan News. (2020). Pompeo to Kan11 News: “China is putting Israeli citizens in danger.” Retrieved from https://www.youtube.com/watch?v=_ySeQ0W8ha4

- OECD. (2020). Inward FDI flows by partner country (indicator). https://doi.org/10.1787/04f8069b-en

- Orbach, M., & Pasovsky, U. (2019, January 18). Chinese Investments in Israeli Tech Mapped. Calcalist Tech. Retrieved


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Daniel E. RAK is Co-Founder and Head of Events Team of APRA.

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