Marketplace: Israel and China— The way forward

Beijing, China: A beautiful romance has blossomed between Israel and China in recent years. But it is now threatened by the Trump administration, which increasingly adheres to an old Middle East saying, “The friend of my enemy is my enemy.” Israel greatly benefits from foreign investment. Writing in The Jerusalem Post on November 8, Ilan Berman noted that “so far this year, Israel's tech sector has drawn in [from foreign sources] $3.2 billion, more than the total amount of capital raised between 2010 and 2013.” Most of that money comes from the US and Europe. But, he observed, “a significant – and growing – share is Chinese in origin. “Estimates now suggest China is on track to overtake the United States as Israel's single largest source of investment in the near future.” And the US is decidedly unhappy about it. “Officials in Washington have begun to worry over what they see as pervasive Chinese penetration of Israel's hi-tech sector,” he wrote. “Informal assessments now circulating within the US government estimate that China directly controls, or has influence over, as much as a quarter of Israel's total hi-tech industry.” One-quarter? I think this is a massive exaggeration. But storm clouds are gathering. At present, President Trump has bigger things on his mind. But at some point, he may tweet, like a betrayed spouse – Israel in bed with our foe China? After all I've done for Israel? Stop it at once! The US has already protested the construction of a new port in Haifa by a Chinese company, Shanghai International Port Group. And my regular drive to Technion from Zichron Yaakov takes me through Haifa's lovely 6 km (4 mi) Carmel Tunnels, built by he diligent Chinese on schedule and within budget. There is no question the Chinese are terrific builders. The view of the incredible new buildings from my hotel window here in Beijing proves it. Chinese Vice President Wang Qishan, a close confidant of President Xi Jingping, paid a high-profile official visit to Israel in late October, for talks on economic cooperation. And the numbers speak for themselves. Israel's exports to China rose 62% in the first eight months of 2018, from $2.14 billion to $3.5 billion, compared to the same period last year. For the same period, imports from China grew 10%, from $4.45 billion to $4.9 billion. Trade with China has doubled in the past decade. And Chinese tourism is booming. Last year, 113,600 Chinese tourists visited Israel, more than double the number in 2015. The US has confronted Israel over its China ties before. In early 1992, the US accused Israel of illegally transferring Patriot anti-missile technology to China. And in 2000, the US forced Israel to cancel the sale of the Phalcon advanced airborne early-warning system to China. As the US grows increasingly hostile to Chinese foreign investors, Israeli assets become more accessible and more attractive to them. What does China seek from Israel? And what can Israel gain from China? China and the US are locked in an intense competition. The true battle ground is not solely trade, even though the Trump administration has focused on America's chronic, huge $375 billion import surplus from China. Last year, US exports to China were only $130 billion while imports were $505 billion. But the real war is over technology. China is rapidly threatening US supremacy in such key technologies as big data analysis and artificial intelligence. And China sees Israel as a great source of innovative technologies. Meanwhile, the US is deeply worried about so-called “dual use” technologies, which can find uses both in civilian and defense applications. And indeed, almost all technologies, directly or indirectly, can have both defense and military implications. Bilahari Kausikan, former director general of Singapore's Foreign Ministry, told me during a recent visit to Israel, “Trump scares China the most. It is not because of Trump's trade restrictions and tariffs he wants to impose on Chinese imports. It is the restrictions on US technology.” Israel's technology development is closely linked to the US, with some 300 foreign R&D centers in Israel, many of them belonging to US firms. Hence the looming US technology war with China closely involves Israel, too. What does Israel gain from its links with China, apart from money? Take for instance IronSource, an Israeli start-up that builds technologies to help developers of applications monetize them. IronSource has benefited from Chinese venture investments – from PingAn Ventures and China Broadband Capital. CEO Tomer Bar-Zeev told Reuters that “once we became a portfolio company of these Chinese investors, they helped with opening doors in China…where the business community really relies on connections you build there.” IronSource says it seeks long-term growth rather than a short-term exit. For many years, venture capital investors have spurred Israeli start-ups to do exits – be acquired by global giants – in order to capture profits and repay their investors. As a result, Israel has not succeeded in growing a start-up to global size and independence for two decades. Chinese VCs and investors may be more patient, allowing Israeli start-ups to scale up and grow independently. And China's $12 trillion economy is the world's second largest, offering Israeli start-ups scale-up opportunities. China could even play an honest peace broker role, as the abortive US Mideast peace plan falters. Last December, Israeli and Palestinian delegations met in Beijing to discuss a peace policy paper based on a two-state solution. In the past, when the Israel-US-China love triangle faced fierce US jealousy, Israel chose the US. Can Israel maintain good relations with both the US and China, even when those two superpowers are facing off in the global boxing ring? I spoke here in Beijing with Einar Tangen, an American lawyer and city planner who has lived in China for many years and appears often on Chinese TV. Tangen observes that “China is an all-weather friend in good times and bad.” He cites Pakistan as an example. China's friendship with Pakistan has not faltered, even when Pakistan has become a pariah in many Western countries. “Get involved with multinational trade deals,” Tangen counsels. “There is strength in numbers.” He cited the RCEP (Regional Comprehensive Economic Partnership), a proposed free trade agreement between the 10 ASEAN nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and six Asia-Pacific states (Australia, China, India, Japan, South Korea and New Zealand). My friend R. James Breiding has written a fine new book, “Too Small to Fail,” about eight highly successful small nations, including Israel. He proposes creating a formal organization of the “S8” like the G7. Israel could play a key role in creating such a group. It would give each member increased leverage and relevance. China's economy defies gravity. For 29 years, from 1989 until 2018, China's annual GDP growth rate averaged nearly 10%. Using “the rule of 72” (divide 72 by 10), we see that China's GDP doubled every seven years, doubling four times in that period and now approaching US GDP. No big country, or even a small one, has ever done this before. But the Trump-inspired US-China trade war, along with large, dubious loans to local authorities, slowed the growth rate to 6.5% in the third quarter of this year. Among business people here, there is a definite sense of harder times, as China struggles to deleverage (pay off) its mountain of debt, and as the fog of uncertainty shrouds the global economy. Every country pursues its own national interest. China is no exception. To maintain strong relations with both the US and China, Israel will need to find an elusive “sweet spot” where US, Chinese and Israeli national interests overlap, and then persuade the US that such a sweet spot really exists. But as Israel moves toward elections in the spring, attention will focus on domestic politics, rather than on the crucial relationship with China. Israel's leaders should not be surprised if and when the US lowers a huge hammer on Israel-China ties. I asked Bilahari Kausikan what should small countries like Israel do in this newly formless uncertain world? First, he counsels, be aware. Be aware of what is happening, not just in your neighborhood but in the world. Second, cultivate the capability of doing cold-blooded objective analysis of your situation and acting on it. Your conclusions will of course be wrong at times, but better to be wrong than directionless. Third, he advises, have agile and robust institutions – agile, to adjust to surprises, and robust, to adjust to mistakes. Keep dancing. Small countries need to be agile dancers. As Israel does the tango with China, will the US seek to cut in? Will they ask Israel to cha-cha exclusively with it? Stay tuned. The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com

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Marketplace: Israel and China— The way forward

What does China seek from Israel? And what can Israel gain from China?

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