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When it comes to formulating Israel's overall policy on China, the way it usually works has been upended. In general, we are used to the Ministry of Defense, as the representative of the defense industries, supporting, initiating, advancing and promoting arms deals, while it is the Foreign Ministry, in the name of a broad and comprehensive vision, that tries to prevent or suspend them for fear of a deleterious impact on Israel's foreign relations.

When it comes to China, though, things are different. In this case, it's the Defense Ministry that will bar any consideration of a deal, even one still in its earliest stages, for defense-related exports to China. "In this matter, Israel has capitulated completely to American dictates," says Prof. Yitzhak Shichor, a China expert at the University of Haifa. Having been burned in the twice in the past, the ministry now exercises extreme caution when it comes to China.

The first scalding took place in 2000, when under heavy American pressure and threats of damage to Israel's defense industries, then prime minister and defense minister Ehud Barak ordered the cancellation of the Phalcon venture, for the production of advance warning jets for China. Israel even had to pay China some $400 million in compensation. China's leader at the time, Jiang Zemin, behaved as if he had been personally offended, and he ordered the implementation of a policy to punish Israel, which in effect meant a downgrading of diplomatic and financial ties. Four years later, Israel was burned again, once more offending the U.S. and insulting the Chinese. When Israel undertook to repaired Harpy drones for China, Washington saw this as a deceitful action on Israel's part and a serious violation of the understandings between the two countries. This time the U.S. did not make do with merely voicing its protest, but intervened directly and bluntly in Israeli domestic policy. It demanded the removal from their positions of Defense Ministry director general Amos Yaron and its security chief Yehiel Horev, as they were the ones the U.S. responsible for the actions.

Indeed the two men in the end did leave their jobs. But the U.S. did not stop there. In response to American pressure, the ministry also established a special department to oversee defense exports.

Since these two incidents and the creation of the department, the Defense Ministry has exercised extreme caution. China, says a diplomatic official, long ago forgave Israel for the offenses and is ready to resume defense ties. The Foreign Ministry is advocating a careful and measured policy. But Defense is standing firm in its position. It is unwilling to approve not only deals for the sale of weapons systems, but also the marketing of basic knowledge or technology to China.

The most obvious test case is the Olympics. After the Chinese initially thought they could rely on themselves alone, they realized they would need knowledge and assistance from experienced countries in order to improve the security of the Beijing Olympiad. They were in fact willing to accept help from any possible source, including Israel. Then foreign minister Silvan Shalom visited China in November 2004 and spoke with his hosts about integrating Israeli companies into ventures and contracts relating to the Olympic games and the Chinese responded in the affirmative.

Then prime minister Ariel Sharon himself told the Chinese that Israel was interested in getting involved in the ventures, and again the reaction was favorable. None of that prevented the Defense Ministry from stepping in and made it difficult for any Israeli company or businessman that attempted to obtain an export permit for security know-how destined for the Olympic games.

In the end, Israeli companies lost out on a large market that could have brought in tens of millions of dollars, and only one company, ISDS, managed to sign on as a consultant for Chinese government security agencies. This is in fact a case of the ministry acting "more Catholic than the pope." The situation is especially absurd, considering that American companies themselves, led by General Electric, are supplying knowledge, equipment, experts and technology to secure the games, and benefiting from contracts worth hundreds of millions of dollars.

"China is very interested in technologies from Israel," estimates Prof. Shichor, and therefore is in the company of the Foreign Ministry, which recommends a change in policy toward China. And not just in the matter of defense exports. China is experiencing unprecedented annual economic development, and growth of more than 10 percent a year, and is confidently on the way to becoming the world's largest financial superpower. Every country is trying to get its foot in the door. The balance of trade between Israel and China totals some $5 billion annually. Israel exports $1 billion worth of goods, knowledge and technologies, and purchases $4 billion worth of goods.

"If Israel doesn't make a concerted effort," stresses a Foreign Ministry official, "Israel is likely to lose China." The Defense Ministry declined comment.

After an investigation that went on for some two years, Defense Ministry director general Pinchas Buchris has decided to clear Dr. Avigdor Shafferman, the director general of the Israel Institute for Biological Research in Nes Tziona, of all suspicions.

The episode, first reported extensively in Haaretz at the time, started during Shafferman's trip to the United States in the summer of 2006, at the start of a sabbatical year. Shafferman has for years been trying at the Biological Institute - so far with no success - to develop a vaccine against anthrax derived from weakened bacteria. He was employed as a consultant for a Canadian company that was sold to an American company in the same field. In this capacity, Shafferman was included in the company's stock-options plan. Dr. Yehoshua Gozes, the former head of the institute's workers committee, who was forced to resign a few years ago due to differences of opinion with Shafferman, submitted a complaint to the security chief of the Defense Ministry. Gozes argued that there was reason to believe that Shafferman had a conflict of interests, and had used knowledge and secrets that are the property of the State of Israel for personal objectives and gain. Yehiel Horev, who was the security chief at the time, reviewed the complaint and concluded that the suspicions of criminal violations were unfounded and passed the complaint on to the Civil Service Commission's investigations department. The latter found a suspicion of disciplinary violations and recommended holding a disciplinary hearing for Shafferman. "The prosecutor" for the Civil Service Commission, lawyer Assaf Rosenberg, accepted the recommendation and recommended to the Ministry of Defense that it take action against Shafferman in a disciplinary proceeding, in accordance with section 31 of the Civil Service Law. Buchris, following the recommendation, held a hearing for Shafferman, after which he decided not to try him and closed the investigation file. The Civil Service Commission said that the proceedings were properly handled and legal. But the spokesperson of the Defense Ministry did not respond to a request from Haaretz for the director general's explanation of his decision.