Author: AGHAVNI HARUTYUNYAN
(Institute of Oriental Studies, National Academy of Sciences of Armenia)
Abstract: In recent years, with the cessation of defense relations, Israel and China have sought to expand their diplomatic and economic relations, mainly in the field of industrial research and development, large-scale academic cooperation, and investment. The expansion of cooperation between the two countries is mainly due to the status of Israel as a start-up country, which can satisfy China’s technological needs and help it modernize many of its industries. Beijing also sees Israel as a strategic outpost in its regional interests – a small but vital stopover under the China Belt and Road Initiative (BRI), connecting the Indian Ocean and the Mediterranean Sea through the Gulf of Suez, as a land bridge connecting trade and energy routes from the Far East through Africa to the Middle East and further to Europe on profitable trade routes by land and sea. The construction of a railway line from Eilat to Ashdod connecting the Red and Mediterranean Seas, as well as the construction of a new port in Ashdod, will provide a safe alternative route to the Suez Canal, filling another ring in the Beijing strategy of a “String of Pearls”. Israel’s well-secured human capital, a developed economy, a high-tech foundation, a stable public and state business environment have further enhanced the country’s attractiveness as a key element of BRI.
Keywords and phases: China-Israel relations, Belt and Road Initiative, infrastructure, investment, innovation, start-up nation.
- Introduction
Israel was the first and, until 1956, the only country from the Middle East (ME) to recognize the People’s Republic of China (PRC), even though the two countries did not exchange ambassadors until 1992. In the 1980s, under Deng Xiaoping, when China began to look with interest at developing arms cooperation with Israel, making the first deliveries of Israeli weapons to the PRC, and began the active phase of the peace process between Israelis and Palestinians, this allowed both countries to establish full-fledged diplomatic relations in January, 1992. Following the opening of embassies in Beijing and Tel Aviv, economic and trade ties between Israel and the China grew, first moderately and then at a faster pace.
Although in the early 2000s, under pressure from the United States (U.S.), Israel unilaterally abandoned existing military contracts and broke off its close relations with Beijing, the mutual perception of future economic and technological benefits contributed most to overcoming the crisis between the two countries. On November 1, 2005, the PRC and Israel signed an intergovernmental agreement in Jerusalem, according to which Israel officially recognized the full market status of the Chinese economy.
From 1992 to 2018, the volume of bilateral trade with China increased from 50 million to US 13.9/15.6 % billion dollars. It makes China the largest trading partner of the Jewish state in Asia and the third largest foreign trade partner in the world after the U.S. and the European Union (EU), and second only to the U.S. by 2019. The U.S. remains the main country for export to Israel, but China, together with Hong Kong, occupy the second line. Since Chinese trade excludes business relations with Hong Kong, despite the fact that most of it is directed to the mainland, the actual trade figures are higher than officially announced. Moreover, these figures do not include Israel’s lucrative arms sales to China. However, Israel is not an important market for the Chinese economy, since transactions with Israel account for only 0.3 % of total Chinese trade.
One of the main reasons Israel seeks to deepen its economic relations with the fastest growing large economies in the world and expand trade with Asian markets is the desire to diversify its export markets and investment sources from its traditional partners, the U.S. and the EU. Israeli companies are increasingly turning to Asia to capture a boom in demand for their technology, as the government urges them to diversify export markets in response to Europe’s rising “anti-Semitism” and potential trade sanctions.
China is one of the leading manufacturing markets on the planet, and Israel is one of the leaders in research and development (R&D). The fields wherein Israel envisaged economic cooperation with China included industrial R&D, large-scale academic cooperation, investments. Israel’s achievements in innovation and in some technical fields make it a particularly attractive partner for China, as Beijing is trying to become a world leader in high technology, moving from an economy focused on investment and exports to an economy focused on innovation and consumption. For a long time, Israel’s exports to China consisted of high-tech products, including electronics, optical, agricultural and water technologies, chemical industry, communications, while China’s exports to the Israeli market include popular and competitive raw materials, textile products and consumer goods.
China has relatively low labor costs, huge production capacities and high demand for advanced technologies, and Israel is looking for export markets for its advanced technological products, while it carries high labor costs and limited industrial production capabilities. Well-secured human capital, a developed economy and high-tech base, as well as a stable business environment for society and government, make Israel a particularly valuable asset for the Chinese New Silk Road Initiative (NSRI) or “Belt and Road Initiative” (BRI) in the long run.
- Israel’s Significance in the China’s Belt and Road Initiative
- Israel as a Part of Belt and Roads Initiative
Originally announced in 2013 by Chinese President Xi Jinping with the goal of restoring the ancient Silk Road linking Asia and Europe, the scope of the NSRI has expanded over time to include new territories and development initiatives. This project, also called the BRI or Belt and Road (B&R), envisages the construction of a large network of roads, railways, seaports, electric networks, oil and gas pipelines, and related infrastructure projects. The first part of the project is called the Economic Belt of Silk Road (EBSR) or Belt, which is actually a network of predominantly land roads that are expected to connect China with Central Asia (CA), Eastern and Western Europe. The second is called the 21st Century Maritime Silk Road (MSR) or Road, which is a sea route that is expected to connect China’s southern coast with the Mediterranean Sea, Africa, Southeast Asia and CA.
Israel did not declare its position on the BRI after its announcement, and only after China launched the Asian Infrastructure Investment Bank (AIIB) in October 2014, Israel became one of the last seven countries to apply for membership. On March 31, 2015, Israeli Prime Minister Benjamin Netanyahu formally signed a declaration of accession to the AIIB, and Israel became one of the 57 founding states. In this way, Tel Aviv positively supported the Chinese BRI, which could cause confusion in Washington. In January 2016, the Knesset Finance Commission approved in the second and third readings the bill on Israel’s entry into the AIIB, which became the first pan-Asian economic structure with full membership of Israel in one working group with South Korea, Mongolia, Uzbekistan and several other Asian countries. Of the bank’s total registered capital of US $ 100 billion, Israel’s share will be US $ 150 million (Israel has 0.91 % of the vote), and Tel Aviv will provide commitments in the amount of US $ 600 million in case of need to buy back shares.
Israel’s AIIB membership will open up opportunities for the integration of Israeli companies into bank-financed infrastructure projects. The Israeli Foreign Ministry hailed the AIIB as “a diplomatic achievement” and “one of the most important initiatives in terms of China’s foreign policy and, in particular, for President Xi Jinping”.
During Netanyahu’s visit to China in March 2017, President Xi announced the intention of the two countries to consistently promote major joint projects as part of the jointly building of the BRI. Prime Minister Netanyahu also expressed the readiness of the Israeli side to actively participate in infrastructure and other cooperation within the framework of BRI, and declared that Chinese-Israeli ties are “a marriage made in heaven”. Chinese Prime Minister Li Keqiang reminded that “the Chinese people and the Jewish people are the great nations of the world”.
In March 2015, Premier Li Keqiang underscored in the “Report on the Work of the Government” that China should promote Free Trade Area negotiations with Israel and other countries. The two nations wrapped up their 7th round in November 2019, and could very well finalize the deal by the close of 2020. The idea that one of America’s closest allies would enter into such an agreement with its “strategic rival” could have been accepted without enthusiasm in Washington. However, it should be noted that this is part of the Chinese strategy to create free trade zones (FTZ) in those states that can be called traditional U.S. allies in order to facilitate the supply of goods and simplify the creation of joint ventures through the FTZ.
- Israel as a Logistics Center and a Potential Hub for China’s BRI
On March 28, 2015, a year and a half after Xi Jinping’s first proposal of the BRI, the Chinese National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs (MFA) and the Ministry of Commerce (MOFCOM), authorized by the State Council, jointly published a document entitled “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road”. It describes also plans for how the Belt will link China with the Persian Gulf and the Mediterranean Sea through CA and West Asia (passing through Gwadar, Istanbul and Tehran and through Afghanistan, Iraq, Iran and Turkey); and how the Road will connect China’s South China Sea all the way to the Mediterranean via the Indian Ocean, Gulf of Aden, Red Sea and Suez Canal.
Given the country’s geographical position, China also needs Israel as a BRI logistics center and land bridge connecting China’s trade routes from the Far East through Africa to the ME and further to Europe. Since BRI routes require not only seaports, but also railways, logistics centers, warehouses, airports, as well as hardware and software for the transportation system, Israeli companies can contribute to B&R projects by developing and integrating transport and logistics technologies and related systems, for example, for trains, aircraft and marine equipment. Through BRI, China seeks to play a more active role in the ME, and improved ties with Israel could offset China’s historically closer ties with other countries in the region, including Iran and Israel’s Arab neighbors. Some Chinese authors even see Israel’s location next to the Arab states as a “balancing factor” that can “give credibility to Chinese soft power in the region”, considering Israel’s limited role in the BRI due to its small size, bounded transport links with countries in its region and lack of experience in large-scale projects. Tel Aviv’s deep ties with the U.S. and the EU can help China expand its ties in the Eastern Mediterranean and the ME, and Sino-Israeli ties can enhance Israel’s role in trade between Asia and Europe.
Chinese companies, involved in national infrastructure and construction projects in Israel, have good experience in implementing infrastructure projects at a lower price and in a shorter time. The ability of Chinese companies to successfully build infrastructure in a highly developed country such as Israel, not only can help Chinese infrastructure companies enter the U.S. or Europe, but will improve their image and give legitimacy to their activities, leading to additional projects in other developed states, since most BRI countries where Chinese companies are building infrastructure have low and medium incomes.
- Israel as Pivotal Location for the Implementation of Maritime Silk Road Initiative (MSRI)
To implement MSRI, China has been actively developing several global infrastructure and investment projects designed to increase the efficiency of the economic interaction of the Asian giant with its partners around the world. One such project is a network of commercial ports “String of Pearls”, similar to the “Dual Use Logistics Facility”, which focuses on creating Chinese strongholds or “naval posts” with military or geopolitical influence along the Indian Ocean littoral, in the Persian Gulf and the Mediterranean Sea.
Israel has the potential to be a small but important stop on the MSR, connecting the Indian Ocean and the Mediterranean Sea through the Gulf of Aqaba and the Suez Canal. From the east coast of the China, the ships follow the South China Sea to the Straits of Malacca, from where they are sent to the shores of northern and northeast Africa to reach the Israeli ports via the Bab el-Eilat and Ashdod – bypassing the Suez Canal. To ensure reliable access for Chinese commercial shipments from the Red Sea to the Mediterranean, Beijing took an adopted a dual-track approach while expanding its interests in the Suez Canal corridor and following the land route through Israel.
The massive development of energy resources in the Eastern Mediterranean, new ports appearing on its Mediterranean shores, new trade routes between Israel and its Arab neighbors, a growing geo-economic alliance between Israel, Cyprus and Greece and significant financial resources in Israeli investment intuition make this a very attractive market BRI for China. China has raised its naval presence in the strait of Hormuz, Bab al-Mandeb strait, and Suez Canal as well as made ports of call across the Gulf and in Egypt, Israel and Iran. Given the natural naval points of the ME (Hormuz, Suez, Mandeb), each of which faces a high level of geopolitical uncertainty, China’s modern dependence on others for providing these points of attraction and sea routes is unstable in the long run. While most of these transcontinental routes will be located in Central and South Asia, the littoral states of the Eastern Mediterranean—Turkey, Lebanon, Israel and Egypt—play a crucial role in completing China’s Eurasian bridges.
“String of Pearls” strategy is particularly evident in the fact that China gained control of two of Israel’s three sea gates, the ports of Haifa and Ashdod, which are part of China’s ambitious trans-Asian strategy to use three key resources for China’ future greatness: petrochemicals, consumer markets and advanced technologies.
In 2014, one of China’s largest state-owned enterprises and the second largest dredging company in the world – the China Harbor Engineering Co. Ltd – won a tender for the construction of new container terminals in Ashdod port (25 miles/40 km south of Tel Aviv), worth US $ 3 billion, which will become the most important port for maritime trade with Europe. Ashdod on the Mediterranean coast is the destination of 90 % of Israel’s international maritime traffic. It is one of the largest foreign investment projects in Israel in history, as well as one of the largest projects for the China Harbor Engineering.
And in 2015, Shanghai International Port Group (SIPG), which operates the Port of Shanghai, won the bid to expand the deep-sea private Haifa Port, near Israel’s alleged nuclear-armed submarines. It will also have the operation rights for the terminal for 25 years after the facilities enter into service in 2021. This new terminal is just 1 km from the docks, where U.S. warships are anchored when they call at the port of Haifa. The Israelis allowed to rent and maintain a terminal in the port of Haifa due to traffic difficulties and increased strikes by local workers. It was assumed that new facilities built by the Chinese would unload the old port, and enterprises arriving from China would violate the Israeli state port company’s monopoly. However, some observers believe that if the SIPG extends the lease of the port due to the lack of competing offers, then the Israeli authorities will be in a dependent position for a long time. It is also noteworthy that the decisions to award the Haifa tender to a Chinese company were made by the Transportation Ministry and the Ports Authority without involvement of the National Security Council and the participation of the Navy.
Another long-term plan, that Israel hopes China could participate in, is building a railroad connection between the port of Eilat (in the southernmost point of Israel on the Red Sea) and the port of Ashdod, so-called “Red-Med Railway”. It will connect the Red Sea to the Mediterranean Sea, thereby providing a safe alternative to the Suez Canal, and creating an inland trade and logistics center for Chinese trade between Asia and Europe via the Red Sea. From Eilat goods will be transported by new railway to the port of Ashdod on the Mediterranean coast and delivered further by sea to European customers, thereby bypassing the vulnerable neck of the Suez Canal, provided that the fare on the new line remains at a fairly competitive level.
From an Israeli perspective, the “Red-Med” would bring economic benefits as a catalyst for development of the southern Negev region. It could also improve its regional standing and strengthen its bargaining position vis-à-vis Egypt. For decades, Cairo was able to partially isolate Israel by threatening to close the Suez Canal. To solve the problems of competition between Egypt and Israel over China in the construction of new transport corridors between the Red and Mediterranean Seas, the presidents of China and Egypt met and discussed trilateral negotiations with Israel in December 2015.
To avoid a bottleneck in the Strait of Malacca, China is building the Sino-Pakistan Economic Corridor (CPEC) as a workaround. And Bab al-Mandab will guard Beijing’s military base in Djibouti. The only missing node in ensuring the security of China’s Sea Lines of Communication and “String of Pearls” is the Suez Canal, for which the “Red-Med railway” is considered the ideal logistics solution. Taking into account the fact that the full railway and road corridor going to the port of Gwadar (on the Arabian Sea) between China and Pakistan, Turkey-Pakistan FTA will strengthen the interaction of Beijing, Ankara and Tel-Aviv.
China has been a partner in important national initiatives, such as construction of the Red Line – the first stretch of a light rail line going from Petah Tikvah to Tel Aviv. Israel has added a rail line from the port of Haifa to Beit She’an (less than 10 km from the border with Jordan) and has invited Chinese companies to take part in a project of extending further its north-eastern spur right up to the border with Jordan. From there, a short link to the Jordanian town of Irbid will enable connection to the Jordanian rail network and on to Saudi Arabia and the Persian Gulf. Under the auspices of BRI, this international project, led by multinational corporations, and built on a centuries-old Ottoman network, with the intention of linking the Palestinian Authority and incorporating an inland logistics and trading port in Jordan, passed through non-diplomatic countries, such as Israel and Saudi Arabia.
In 1997, Israel and Jordan signed an agreement on the establishment of a Special Industrial Zone (SIZ) in the Jordanian city of Irbid (it began to operate in 1998). Apparently, using the holes in the SIZ agreement, the main advantage of the work of the SIZ in Jordan is received by the Chinese, who invest in the enterprises operating there, and manage to hire cheaper Chinese workers, not Jordanians. Of the 71 companies operating in 2008 in the SIZ, the majority of employees 23 of them came from mainland China. At least 50 % of the profits from the supply of textiles to the U.S. from Irbid are received by companies with Chinese ownership.
If we add to this that China is actively interested participating in the construction of a light metro in Tel Aviv and digging a tunnel on Mount Carmel in Haifa, it seems that the PRC seriously considers Israel as a logistic hub between Europe and Asia. It is believed that the strategic security implications of the tunnel on Mount Carmel and the high-speed train in Tel Aviv, were also not considered.
In recent years, a significant breakthrough has been made in the field of inbound Chinese tourism in Israel. As a result of a strategic decision taken in 2012 by the Israeli Ministry of Tourism to focus on attracting a large number of tourists from China, the flow of tourists from China to Israel increases by 15-30 % annually. And if in 2015 the country was visited by 47,000 Chinese tourists, then in 2016 it was already 79,000, and in 2017 their number for the first time in history exceeded 100,000, amounting to 113.6 thousand people. The increase in tourist flow from the Middle Kingdom was stimulated, in addition to the growth of general interest in Israel, as well as marketing campaigns and simplification of visa procedures.
50 weekly flights help not only to establish an exchange of tourist flows but learn to understand each other’s culture and mentality. By early 2019, there were direct flights from Beijing, Shanghai, Hainan and Chengdu to Israel, which not only bring economic benefits of tourism but also greatly promote exchanges and cooperation between Israel and China in various fields. With the booming China-Israel tourism industry, China’s e-commerce giant Alibaba has launched payment service in Israel since January 2018 to provide convenience for Chinese tourists in Israel. At present, Alipay is available at nearly 100 vendors in Israel, while Tencent, Alibaba’s competitor in China, has geared up to launch WeChat payment service in Israel.
- The Promotion of Innovation on China-Israel Relations and
the Increase in China’s Investment in Israel.
3.1. Israel’s Attractiveness for China as a “Start-up Nation”
In order to achieve its ambitions to become a leading superpower and dominate the global high-tech industry, China uses not only the strategy of BRI, but also the policy “Made in China 2025” (MIC 25) – a state industrial initiative aimed at opening their capital markets. China wants to become a world leader in advanced technology, both for commercial and military purposes, and has many national plans designed to stimulate the development of its technology sector. The Chinese government is issuing various industry-specific plans, such as the Next-Generation Artificial Intelligence Development Plan, released in July 2017. Key plans and policies include the National Long- and Medium-Term Plan for Science and Technology Development (2006–2020), Internet Plus, and MIC 2025.
The MIC 2025 Initiative, launched by Prime Minister Li Keqiang in 2015, aimed at modernizing China’s industrial potential, consolidating China’s global leadership position in high technology, reducing the country’s dependence on foreign technology imports, and investing in significant funds in their own innovations to create Chinese companies that can compete both domestically and around the world. China sees MIC 2025 as a chance to fully integrate into the global manufacturing chain and more effectively cooperate with industrialized economies. Beijing’s ambitious plan to create one of the world’s most advanced and competitive economies using innovative manufacturing technologies (“smart manufacturing”) aims to turn the country into a “manufacturing superpower” in the coming decades and challenge the economic primacy of today’s leading economies and international corporations.
In July 2017, China’s state council released its new generation artificial intelligence (AI) development plan, intended to make China the leading global powerhouse in AI by 2030. In July 2018, two state-backed Chinese companies, China Merchants Group and peer SPF Group, announced a partnership with London-based investment firm Centricus to launch a US $ 15 billion fund that will invest in or acquire tech companies in both China and globally.
Thus, China is making its move from a commodity manufacturer economy to a high-tech one – and Israel is playing a key part. Since 2005, when defensive and diplomatic relations between China and Israel were in decline, China was still looking for opportunities for technological cooperation with Israel. Chinese companies have set their sights on Israeli commercial technology in line with China’s national mandate to become a world leader in industrial technology by 2025. Israeli technology attracts Chinese companies because many of them have global operations and the same standards as in Silicon Valley, but without sky-high cost estimates. Chinese investment in Israel covers almost every major breakthrough technology sector in industries such as autonomous and electric vehicles, where major Chinese automakers support research centers. In other sectors, such as the use of artificial intelligence, Israel is one of the leaders in almost every area.
It is no coincidence that Chinese investors have focused on Israel, the “start-up nation”, with the highest number of start-ups per capita of any country in the world and the highest absolute number outside of Silicon Valley. Israel is especially known for its high-tech sector, with thousands of well-regarded companies focusing on cybersecurity, defense, agriculture, biotechnology and pharmaceuticals—all of which have found eager investors in China. Israeli entrepreneurs are highly sought after in China, predominantly in the fields of mobile and web technologies, telecommunications, gaming, clean-tech, agro-tech and digital health, which all go hand in hand with Israeli high-techexpertise.
In 2018, 12 % of all investments in Israeli startups were Chinese. Regarding large investments, whose size is US $ 25 million or more, 25 % of all investments in Israeli startups are of Chinese origin. More than 1,000 Chinese companies are active in Israel and several hundred Israeli in China. Of all foreign investments in Israeli hi-tech, 20 % belong to the Chinese.
However, some experts consider that for the U.S. and other major industrialized democracies, the Chinese tactics of MIC 2025 not only undermine Beijing’s stated commitment to international trade rules, but also pose a security risk and are based on discriminatory treatment of foreign investment, forced technology transfer, intellectual property theft and cyber espionage. This prompts the U.S. President Donald J. Trump to set tariffs on Chinese goods and block several China-backed acquisitions of technology companies. In addition to the U.S. trade war, which is an important tool to curb the rapid growth of its strategic competitor China, Washington has also put the MIC 2025 at the forefront, trying to hinder the development of China’s high-tech sector, including artificial intelligence, chip manufacturing, and 5G technology. Meanwhile, many other countries have tightened control over foreign investment, and debate has intensified on how to respond to China’s behavior.
- China-Israel Cooperation in Innovation Economy
The successes of military-technical cooperation (MTC) have pushed the Chinese leadership and business people to look closely at Israel in terms of evaluating its successes in developing China’s innovation economy. China’s unique interest in Israel is evidenced by the dozens of delegations of senior government officials and businesspeople who have visited Israel in recent years. Representatives of large companies and private investors from China often arrive in Israel in an attempt to crack “the Israeli code”, to understand the local innovation ecosystem and to implement the innovative and entrepreneurial Israeli character into their own DNA.
China and Israel have both made innovation a top priority in their domestic development strategies. China’s strategy of pursuing innovation on three investment direction: bilateral, regional, and global, has become an essential part of China’s “New Era” vision of a country of innovators, as articulated by Xi Jinping in his 2017 speech to the leadership of the Chinese Communist Party (CCP) at the 19th Party Congress. In addition, through many projects under the BRI, China promotes and invests in innovation, both regionally and globally. At the regional level China seeks large investments in industrial parks in countries neighboring China, such as Vietnam, Thailand and Russia. At the global level, under the BRI flag, China seeks and invests in innovation in less developed countries such as Africa, as well as in countries with developed innovative economies such as Switzerland and Belgium. If, in the framework of investment diplomacy with innovation, China and Israel cooperate on a bilateral basis, within the framework of the BRI, in the context of Beijing’s desire for scientific and technological innovation, it cooperates at the global level.
Technology and innovation was one of the main topics of conversation during the two separate visits of Prime Minister Benjamin Netanyahu and then-President Shimon Peres to Beijing. In May 2014, Liu Yandong, Deputy Prime Minister of China, during his visit to Israel, attended the first Innovation Conference in Israel, and published an article entitled “to Make China-Israel STI Cooperation Bloom” on the Jerusalem Post. In January 2015, in Beijing, at the first meeting of China-Israel Innovation Cooperation Joint Committee, the two sides signed “the Three-Year Action Plan for Cooperative Innovation“, including the establishment of the Cooperative Innovation Center, set-up of China-Israel “7+7 University Research Federation”, agreement on the 2015-2019 Cultural Cooperation Action Plan, and the start of construction of China-Israel Changzhou Innovation Park.
In March 2017, Beijing hosted a meeting between Chinese President Xi Jinping and Israeli Prime Minister Benjamin Netanyahu. The parties announced the creation of an innovative comprehensive partnership. In 2018, Israel and China held the fourth intergovernmental “Innovation Conference: Israel-China” for the establishment of a comprehensive partnership in the field of innovation. A Sino-Israeli trading platform has been created, the first of its kind in China. And immediately, 4 patents were acquired, which Tel Aviv University possessed: from the field of intellectual production, smart cities, digital economy and biomedicine. The Chinese bought a patent to detect neuropathy for a symbolic sum of US $ 49 thousand, acquiring not supporters, but advocates and lobbyists. The first China-Israel Changzhou Innovation Park (CIP), created by the two governments in the area of complementary technological innovation, was founded in Changzhou for Israeli companies seeking to open a branch in China and to give Israeli companies a “soft landing” in the Chinese market, to facilitate the adaptation of Israeli technology in the Middle Kingdom. China is encouraging the establishment of Israeli innovative enterprise in China, such as Shouguang’s Water City, which incorporates Israeli water technologies.
3.3 Israeli-China Research and Development (R&D) Collaboration
A more substantial channel of Israeli technology transfer to China is R&D collaboration between companies and academic institutions of both states, as well as R&D activity of Israeli companies in China. In the early 2000s, Israeli government bodies and Venture capital (VC) firms started to promote technological-commercial cooperation between companies in the two states. The national academic science foundations in the two countries signed an agreement in 2012 to support joint research projects in science and engineering (Council for Higher Education). While the projects are purely academic, some of them, for example, in nanotechnology, new materials, and satellite technology, can be of military relevance.
In September 2013, Tel Aviv University (TAU) and Tsinghua University signed a memorandum of understanding to establish the XIN (“new” in Mandarin Chinese) Center. It should become one of the largest academic R&D centers in both countries, develop strategic cooperation in research and teaching, and will also serve as an international center for scientific and technological innovation for research both in the early stages and projects that can be prepared for market. Two governments provided funding for the project, but most of the money came from private sources in both countries. In 2014, TAU and Tsinghua launched a US $ 300 million joint center for innovative research and education, initially focusing on nanotechnology, particularly with medical and optics applications, but will later expand to other areas, such as raw materials, water treatment, and environmental issues.
On December 16, 2015, the Technion-Israel Institute of Technology, a world leader in science and technology education, funded by billionaire Lee Ka-shing in the amount of US $ 130 million, laid the foundation for the establishment of the Guangdong Technion Israel Institute of Technology (GTIIT) in Shantou (Guangdong Province, PRC). For the Technion, GTIIT means increasing global reach and status, and the industrial park planned for the GTIIT campus will serve as a stronghold for Israeli companies to crack key markets in the U.S. and China.
To bring down the cost of production for the many consumer and industrial products made in its factories, China is undergoing a robotics revolution, installing machines to replace people on the assembly line, and working with Israel to develop smarter and better robots, via the newly established Sino-Israeli Robotics Institute. It will be the centerpiece of a new US $ 2 billion industrial park in the Guangzhou region of China that will be built around the technology developed jointly by Israeli and Chinese researchers. It is noteworthy that some Israeli scientists believe that laid-off workers who will be replaced by robots will eventually find more paid jobs with a higher status, and that automation will not lead to higher unemployment, but to expand the economy, resulting in more workers places than lost, which is the goal of China.
Israeli-Chinese private equity firm Infinity Group and Neusoft Corporation – China’s largest IT Corporation, holding a 50 % share of the medical market in China – have approved the establishment of a US $ 250 million investment to back Israeli life science companies operating in China. This fund will assist Israeli medical companies to connect with the Chinese market through the integration of cloud-based platforms, which assists Israeli life science companies with regulatory approvals and product promotion in China.
The state structures of both countries have also formed special programs to support bilateral scientific and technical cooperation with an applied bias, making it possible for joint research and development to receive state money on preferential terms from the governments of both countries. In the Chinese case, it can be state structures of a regional scale. In fact, these programs are unique funds that invest in projects if they meet established requirements. It is important that, most often, the money received should not be returned to the company in case of failure. And if successful, the government agencies that issued the money will receive royalties until the grant is fully repaid. Such financial infrastructure stimulates the effective and intensive development of scientific and technical cooperation between China and Israel.
- China as a Strategic Market for Israel: Israel as a Strategic Investor for China
Though situated in a turbulent region, Israel is an island of relative stability with the highest “B&R risk on investment” ranking. Israel ranked as the second lowest investment risk on the Economist Intelligence Unit BRI risk index, making investment in the market highly attractive for China, which is currently looking for a more strategic regional footprint. China is likely to pay more attention to the fact that Israel does not have more serious national security problems than in the past, which will give Israel more leverage as a stable, prosperous and growing geopolitical force in the region.
Against the backdrop of increased confrontation between China and the U.S., forcing Chinese investors to reduce their presence in this market, in 2016 there was an unprecedented increase in investment from China to Israeli high-tech. If in 2015 the amount of Chinese investment in Israeli companies was less than a billion dollars, then in 2016 it soared to a fantastic figure of US $ 16.5 billion. A significant portion of this amount came from investing in Israeli startup companies, with a focus on the field of information and computer (cyber) security and medical technologies. The MSRI agreement with Israel includes Chinese investments in several sectors as renewable energy, the use of solar energy (solar energy technologies), robotics, telecommunications, chemicals market, biotechnology, agriculture, irrigation and the secondary use of water resources, infrastructures beyond ports and other areas of high technology.
In 2001, Netafim, a leading Israeli agri-tech company and a world leader in drip irrigation systems, invested in its first manufacturing facility in China. The Israel Global Environment Service (GES) is participating in a US $ 5 million water treatment project in Inner Mongolia of China. The Chinese “water city” Shaoxin has benefited from Israel’s innovative water technologies for developing municipal, agricultural and industrial water infrastructure. Such cooperation will be adopted in the northwestern part of China – in the Xinjiang province, where China seeks to stimulate development in order to maintain stability in the region, as well as bridge the economic gap between the eastern and western parts of the country. The introduction of Israeli inventions and technological solutions in the field of agriculture, water supply and renewable energy sources can help China turn the country’s west into an agricultural production center in order to meet China’s growing food needs.
One of China’s biggest and best-known technology companies, Baidu, is also keen on investments. Ping An Ventures, a major Chinese VC fund, has made investments in eight Israeli companies. In 2004, after receiving a number of requests from various foreign VC funds, China’s first foreign-funded onshore RMB denominated license was granted to Infinity. Furthermore, one of the group’s companies, a leading global manufacturer in the chip industry, became the first company with a foreign c-founder to go public on the Shanghai Stock Exchange. Infinity, on its part, pledged to introduce, invest, and generate innovation in China. ECI Telecom, a maker of telecommunications equipment, initially entered the market through a joint venture, but in the course of 2006 took over full control of the venture.
Another method of importing Israeli technology into China is acquisition of Israeli companies by Chinese. The China National Chemical Corporation bought Israeli pesticides manufacturer ADAMA Agricultural Solutions Ltd. for US $ 2.4 billion in 2011. In 2014, state-owned Bright Food Group Co bought a 70 % stake in Israeli dairy company Tnuva, one of the most famous Israeli companies, for a deal worth US $ 960 million. China purchased controlling shares in Makhteshim Agan by Chinese state-owned firm ChemChina in 2011, the purchase of Alma Lasers by Fosun Pharma in 2013, and the acquisition of Ahava Cosmetics by Fosun in 2016. Unlike the stark opposition that state-owned Chinese firms often run into when they claim a stake in foreign energy or mineral companies in the West, the deal with ChemChina was mostly welcomed in Israel precisely because it was probably approved by the Politburo and interpreted as a sign of China’s confidence in the future of Israel. Israeli company, Nextec Technologies, which developed measurement technology for the auto-motive and aviation industries, was acquired by a Chinese company in 2014. China has become a major buyer of Israeli agricultural technology from companies such as Netafim, the world leader in drip irrigation systems.
Chinese investors are interested in several of Israel’s largest arms exporters — Israel Aerospace Industries, Rafael, and Elbit Systems. The first two are state-owned corporations, but all three have “daughters” in the U.S. who also develop modern weapons.
Experts explain that one of the reasons for such a sharp increase in Chinese investment in Israel was their reduction in the U.S. and the redirection of the flow of Chinese investment by tightening regulation in the U.S., as well as lower ratings of Israeli companies compared to American ones. However, it should be noted that Israel did not want to oppose the U.S. and strictly adhered to its understanding of the mid-2000s with the U.S., according to which scientific and technical cooperation with China includes only civilian know-how. But China’s direct investment in Israel’s high-tech industry is relatively small and sporadic. More than 90 % of China’s direct investment in Israel at the end of 2018 was made by purchases of only three companies, of which only one is a high-tech company. The remaining technology investments are limited to a few hundred million U.S. dollars per year. Other Chinese investments in Israel are through VC funds, providing investors with very limited access to know-how. Overall, by mid-2018 Chinese investments in Israel constituted just 4 % of Israel’s foreign direct investments (FDI), compared to the U.S. with a share of 35 %. Considering the limited flow of Chinese FDI to Israel (around US $ 100 million in 2018 out of the total US $ 21.8 billion), China is far from gaining a foothold in Israel’s high-tech sector. Meanwhile, it is very difficult to determine the full scope of Chinese FDI in Israel, since in many cases, investments were carried out through off-shore Chines companies.
- The Obstacles and Prospects for the Development of China-Israel Relations
Of course, relations between Israel and China are not without problems. The most vulnerable areas are now at risk: Israeli spy technology and the defense sector. A 2019 RAND corporation report states that current and former Israeli parliamentarians have pointed out many problems that could arise with Chinese investment, including the “risk of cyber espionage by the PRC and corruption crimes”, as well as the possibility of gaining control of China over Israel’s basic infrastructure, especially important to the national security of Israel. It is known that the Americans supported Israel on key issues of Jerusalem and sovereignty in Judea and Samaria and now demand that their younger ally curtail a significant part of their cooperation with China.
Some representatives of the Western intelligence community called Israel’s decision to award a Haifa tender to a Chinese company a serious threat to the security of the Jewish state. This caused serious criticism from the U.S. for security reasons, since the anchoring of U.S. Navy ships close to Chinese targets makes them easy prey to China’s intelligence activities. The civilian port in Haifa is adjacent to the exit route from the neighboring naval base, which houses the Israeli submarine fleet (which has the ability to deliver a second strike at launching nuclear missiles). The scandal was also caused by the fact that the Chinese company is developing an underground section of the Tel Aviv tram metro station, which is only tens of meters from the General Staff building and the main military intelligence directorate. Israeli Navy Brigadier General Shaul Horev notes that since Americans now turn most of their attention to the South China Sea and the Persian Gulf, Israel should strengthen its status as a strategic base for the Americans. According to several former senior Pentagon and navy personnel, once China is in the picture, the Israeli navy will not be able to count to maintain close relations with the Sixth Fleet. It is no coincidence that in December 2019, Zhai Jun, special envoy of the Chinese government in the ME, who made a working trip to the region, condemned U.S. pressure on the Israeli government to block Chinese investment.
Among some analysts there is an opinion that although Beijing has spoken about its intentions to have foreign bases, however, under the pretext of creating a trade route from the Indian Ocean through the Suez Canal to Europe, it buys ports, for example, the port of Piraeus in Greece, Italian port of Trieste, and even acquired base in Djibouti.
The Israeli intelligence community also protests against the admission of one of the Chinese companies to build a new desalination plant 15 km south of Tel Aviv, where the nuclear facility is located. This can be undertaken by local companies IDE Technologies and Hutchison Water International (a subsidiary of Hong Kong-based Hutchison Holdings), with Chinese participation. The problem is that the desalination plant, which is supposed to produce about 200 million cubic meters of water per year, was planned to be built in the area where the Israeli Air Force Palmahim is located, as well as the Nahal Soreq nuclear center, which was built under a contract with the U.S. in 1955 and in the territory of which the first nuclear reactor in Israel is located. This was the reason why the head of the security service of the Israel Defense Forces (IDF) Nir Ben-Moshe sent a letter to the Israeli Ministry of Energy with an objection to participation in the tender of Hutchison Water International.
Investigations by Israeli counterintelligence experts have shown that links between Israeli businesses and U.S. defense contractors are the subject of scrutiny by Chinese hackers. They consider it likely that China perceives Israel as a window through which it can gain access to U.S. secret programs.
Anyway, in a difficult situation, Israel cannot afford to lose either its ally – the U.S., or China, its largest economic partner with significant investment and infrastructure potential. However, maintaining a delicate balance is becoming increasingly difficult, because on the one hand, construction has already begun in the port of Haifa, and on the other hand, Washington is increasingly disagreeing with the withdrawal of the Sixth Fleet from Haifa. In addition to the importance of global competition between the U.S. and China, the problem of the regional influence of the expanded port of Haifa and the influence of a complex network of relations in the ME, when more trade begins to flow into the region through the Israeli port, which is expanded and served by the Chinese, is equally important.
- Conclusion
As we know, Israel’s relations with China have not developed easily. Their official aspect has long been hindered by the ideological confrontation between the two countries in the Cold War era, the support that Beijing provided to the Palestine Liberation Organization and other Arab opponents of the Jewish state. Only in the early 1990s, shortly after the establishment of full diplomatic relations between the two countries (January, 1992), the existence of various cooperation schemes between Jerusalem and Beijing in the previous period was first announced, and cooperation in the fields of economics, high technology, agriculture and especially in the military industry began to develop rapidly. However, Israeli-Chinese defense cooperation was practically frozen at the beginning of the new century under pressure from the United States. And the military sphere, which initially was primarily of interest to Beijing in relations with Israel, began to clearly give way to cooperation in civilian areas.
The complementarity of the two countries can be considered obvious: the status of the PRC as a world power and a potential superpower, a permanent member of the UN Security Council, capable of lobbying the interests of Israel, has prompted Tel Aviv to maintain closer ties with it, integrating China’s global influence with Israel’s pragmatic economic governance, political stability and its strategic importance as one of the regional pillar of China’s influence in vital ME region and the world. Israel for China is a developed Middle Eastern state with enormous potential in the field of advanced scientific technologies and the military-defense complex. For Israel, China is the most important market for startups and military equipment, an investor in the development of infrastructure, where Israel has big problems. Due to its geographical and political-economic features, Israel can claim to be the strategic partner of China, and the creation of a free trade zone within the framework of the Chinese BRI can help double trade and expand cooperation in the field of technology; increase the number and volume of investments and the further development of economic relations between the two states.
And indeed, following President Xi’s BRI, Chinese investment in Israel has expanded significantly, covering most sectors of its economy. Chinese systemic and strategic investments through state-owned or state-affiliated companies (mainly Chinese giants such as Ali Baba, Baidu, Huawei, Lenovo and others) in Israeli technology and infrastructure are more or less aimed at technology and financial companies and startups whose work can be redirected to increase security, privacy and dual-use technologies with the obvious goal of creating integrated financial ecosystems that combine finance, healthcare, social issues, banking, insurance, education, etc.
However, the fact that China is actively involved in the Israeli economy and, according to some resources, controls about 15 % of the Israeli economy, have been the subject of a geopolitical struggle and a new front in the competition between the U.S. and China. Although Washington’s influence on the ME has somewhat diminished, it remains the most prominent player in the region, hence the growing activity of China in the region and the rather successful development of ties with Israel seriously worried the U.S. and prompted it to pursue a containment policy. One of the political reasons for China’s investment in Israel is the breakdown of U.S.-China relations in information technology and cybersecurity. The technological leap made with Israel’s help will turn China into a leader in e-commerce and digital banking, replacing the U.S. as a leader in technology. In addition to reinforcing the rhetoric of the Trump administration regarding China due to trade wars, the problem is that China will have a significant impact on Israel’s critical infrastructure and will carefully examine some of Israel’s military capabilities. It is no coincidence that many Israeli experts have criticized the privatization of Israeli ports, arguing that this poses a significant threat to Israeli security.
However, the outbreak of the COVID-19 pandemic has put the world on the brink of a comprehensive economic crisis, which cannot but affect China and its very active economic promotion of the BRI in the ME. In this situation, even the most active proponents of economic cooperation with China will need to compare opportunities with the risks identified during the current crisis. Some experts consider, that the growing tensions between the U.S. and China, Israel should be expected to join Washington and exercise great caution in its dealings with Chinese firms, especially when it comes to strategic national infrastructure and sensitive technologies. Despite the fact that Israel must modernize its transport infrastructure and improve trade relations with China, it must take into account the risks associated with this. Israel needs to create a mechanism that will examine Chinese investments to ensure that they do not put Israel’s security interests at risk. And if Tel Aviv fails to strike a balance between national security needs and economic interests, Israel could give up many of the BRI’s opportunities.
However, there is a group of experts who believe that if leveraged cautiously and with full consideration of America’s interests in the region, Israel could become a small yet strategically critical outpost on China’s BRI, and Israeli-Chinese economic partnership should be a model in how other western successful states deal with China. Although Jerusalem has a deeper and stronger relationship with Washington than Beijing, both capitals are vital to the economy and prosperity of Tel Aviv. Nevertheless, when the financial benefits of economic and military-technical cooperation are on the map, the parties prefer to remain within the framework of a pragmatic approach and turn a blind eye to some political differences.
SOURCE:
Harutyunyan Aghavni Alexander, Ph.D. in History,
Leading Researcher at the Department of International Relations,
the Institute of Oriental Studies, National Academy of Sciences of Armenia.
0019, Yerevan, Marshal Baghramian Ave., 24g, Republic of Armenia
aghavni.harutyunyan1@gmail.com
