The limits of the Israeli-Chinese partnership

For Israel, Beijing’s offer of economic benefits doesn’t compare to what the U.S. can offer on the security front

In recent weeks, observers have pointed to an apparent strengthening of relations between Israel and China. A new center for research on Israeli-Chinese relations, called the Israel-China Policy Center, opened in Tel Aviv last month, and officials from both countries confirmed a trade deal is expected to be signed by the end of the year.

The possibility of enhanced ties raises the question of what this could mean for Israel’s relationship with the United States, its most important security partner and an adversary of Beijing.

Although Beijing can offer certain economic benefits, they are diminishing as the Chinese economy continues to struggle, and more importantly, they don’t compare to the value the U.S. can bring on the security front.

Israel and China

Strong relations between two states are built on shared interests and mutual benefits. In the case of Israel and China, Beijing has more to gain from the relationship than Israel.

One of China’s top imperatives is to move away from an economy dependent on cheap exports to one that produces value-added goods. It wants to become a technology hub, producing high-tech products for both itself and global markets, which requires establishing strategic relationships with other countries that can give Beijing access to advanced technology. This makes Israel, an established global tech leader, an attractive partner for China.

Israel’s location in the Middle East and on the coast of the Eastern Mediterranean also has strategic advantages for Beijing, which is looking to expand its international presence to challenge the U.S. and improve access to international trade networks. Thus, Israel is uniquely positioned to contribute to China’s long-term economic strategy.

But China’s ability to contribute to Israel’s economic imperatives is less clear. When trade talks between them began in 2016, Israel was seeking to diversify its export markets and sources of investment.

At the time, much of the world was pivoting to East Asia, particularly China, given the region’s level of overall growth and share in the global economy. Israel wanted investments for major infrastructure projects, and China wanted more

locations in which to expand its Belt and Road Initiative. It seemed like a good fit.

But recent shifts in the global economy and security environment have reduced China’s value to Israel. Since the COVID-19 pandemic, the Chinese economy has been in a precarious state.

Consumer demand has fallen, and China’s purchases of Israeli goods have declined since 2018, according to Israel’s Central Bureau of Statistics. At that time, Israel’s monthly exports to China peaked at roughly 1.7 billion shekels ($499 million).

This year, the monthly high is just 1.3 billion shekels, and exports from May to July are down 16.5 percent annually. Meanwhile, Israeli exports to other regions of the world remain strong. The U.S. is a major buyer of Israeli goods. The same can be said of the EU, whose import levels have rebounded since 2020, an unusually slow year for trade globally because of the pandemic.

Between May and July, EU imports of Israeli goods increased 24.6 percent compared to last year. Other markets, like the Middle East and Africa, have also shown strong growth over the past two years.

In the tech sector, Chinese investment can be counterproductive because it feeds into the tendency of Israeli entrepreneurs to sell their businesses rather than develop them into larger firms that can create jobs, produce exports and invest in future capacity.

China’s interest in acquiring Israeli firms may be attractive for businessowners, but it doesn’t bode well for Israel’s overall economic health. In addition, Israel is looking for investors to help upgrade its transportation infrastructure, but Chinese investment doesn’t seem to be rising, having peaked in 2018. This can be attributed in part to competing demand for funding at home, drawing Chinese spending away from overseas projects.

The fallout from the pandemic and the recent use of economic warfare between East and West further deter enhanced cooperation between Israel and China. The collapse of global trade during the pandemic made clear that countries must align their economic needs with their national security objectives.

Countries were forced to consider how their choice of suppliers, logistical systems and gaps in domestic production could affect their national security outlook. The war in Ukraine reinforced the point, through for example the EU’s energy crisis that resulted from its dependence on Russian natural gas.

Israel and the U.S.

The reemphasis on aligning economic and security concerns is a key reason Chinese involvement in the Israeli economy has triggered alarm bells in Washington. Much of China’s investment in Israel is in the tech sector, which could have national security implications.

Chinese companies have invested in cybersecurity firms like Jerusalem Venture Partners. In 2018, the China-Israel Innovation Hub was established to promote scientific cooperation between the two countries. It also granted China access to over 200 pieces of intellectual property.

China has also increased its involvement in critical and sensitive infrastructure in Israel. In 2021, the Shanghai International Port Group opened a new commercial shipping facility in Haifa where it maintains a presence to this day. Chinese state-owned enterprises have also worked on transportation, electricity, agriculture and mineral projects, which have opened access for China to valuable technologies.

Washington views Beijing’s increased presence in Israel as a security risk, especially given the closeness of the U.S. and Israeli security establishments. Joint ventures and cooperation in the tech sector open the door for China to access sensitive technologies, many of which can have dual civilian and military applications.

China’s participation in infrastructure projects raises questions over cybersecurity, data privacy and espionage. There are also concerns regarding military assets. China’s presence in Haifa, a port where the Israeli navy has a base that’s also used by the U.S. Navy, could jeopardize naval cooperation between the U.S. and Israel.

Top U.S. officials from both the Biden and Trump administrations have warned Israel against accepting Chinese investment in infrastructure and high-tech projects. They noted that China’s involvement in these sectors could be used to further its military objectives and thus hinder U.S.-Israeli cooperation.

That said, the U.S. has learned from other allies the dangers in viewing foreign relations as a zero-sum game. Washington has said it doesn’t have an issue with IsraeliChinese trade provided that it doesn’t impact sensitive areas like high-tech. Nevertheless, the U.S. government has in a number of ways pushed Israel to curb its coordination with China.

The U.S. is by far Israel’s most valuable ally and essential to its existence as a state. Any advancement of ties with China that could jeopardize its relationship with the U.S. would force Israel to consider whether Beijing could ever replace Washington as its top security benefactor. The answer is a resounding no.

China and Israel differ on key regional issues, including the Iran nuclear talks on which Beijing has sided with Tehran. Beijing sees Tehran as another anti-U.S. ally and potential energy supplier. Israel, on the other hand, views Iran as a threat to its existence. China and Israel are also at odds on the Palestinian question and the status of the Uyghurs. Moreover, cybersecurity firms FireEye and Cybereason have documented Chinese espionage efforts against Israeli targets.

Israel has slowly started to more closely scrutinize Chinese business partnerships. In 2020, Israel established an advisory board to evaluate the national security implications of certain foreign investments. Though the board’s decisions are non-binding, its recommendations are taken seriously by the business community.

Since its launch, there has been a decline in the number of tenders awarded to China for construction projects (notably, China no longer participates in the building of cellular networks in Israel), and none have been awarded for operations programs.

In addition, the Israel-China Policy Center will be run by the Institute for National Security Studies, a Tel Aviv-based think tank with close ties to the Israeli military and government. The INSS also maintains close working relationships with the Center for a New American Security and the Foundation for the Defense of Democracies.

Israel has also started cooperating more closely with the U.S. on security concerns related to doing business with China. Last year, Israel and the U.S. agreed to establish joint working teams on 5G technologies, a clear move against Chinese tech giant Huawei.

More recently, during President Joe Biden’s trip to Israel in July, the two countries launched strategic bilateral dialogue to increase coordination on managing tech risks and to address geostrategic challenges.

The dialogue, which will be headed by both countries’ national security councils, will conduct research and development efforts in areas like artificial intelligence, transpiration optimization, climate change response, renewable energy technologies and quantum computing. These areas resemble the Israeli government’s stated priorities for research and development that will help propel economic growth.

The two countries also plan to increase cooperation on research security, investment screening, export controls, technology investment and protection strategies for critical and emerging technologies.

Israel’s need to maintain its security relationship with the U.S. overshadows any promise of economic gains from China. This means that any trade deal between Israel and China will likely not include strategic or sensitive goods, limiting its scope to more benign areas, such as agriculture and non-tech public health issues.