David's Harp / What Do the Chinese Really Want From Israel?

Our failure to invest in the very thing that has made us a startup nation could lose us a valuable friend.

Its seems that everywhere you turn these days in business and high tech, you find Chinese where you would expect to find Americans, or at least a European or two.

A group of Chinese headed by JT Capital are angling to buy a controlling stake in Clal Insurance. A Chinese company is expected to finance, build and operate the projected Eilat-Ashdod railway.

Li Ka-shing, the Hong Kong billionaire and a major investor in Waze, is donating $130 million to build an Israeli-Chinese institute of technology co-sponsored by the Techion in the Chinese province of Guangdong. Last month, Tel Aviv University and China's Tsinghua University signed an agreement to cooperate in innovative research and teaching, including a research institute focused on technology and life sciences. 

Pitango, Israel's biggest venture capital fund, said its latest round of fundraising included a "meaningful portion" of capital from China and other Asian countries. There is still talk of shipping Israeli natural gas to China, which could end up being the biggest deal of them all.

All this activity marks a major and welcome presence in Israel of a country that is emerging as a global economic superpower. But we need to distinguish between the Old Economy and New Economy sorts of trade and investment.

Israel, a statistical discrepancy

The Old Economy stuff -- Clal Insurance, the railway project and shipping liquefied natural gas halfway around the world -- represent gigantic projects, by Israeli standards. For the Chinese it's small change. Indeed, as measured by Old Economy standards, all of Israel is a few grushim. Two-way trade with China in the first eight months of the year amounted to just $5.5 billion, just 6% of Israel's total. For China, it's 0.2%.

Israel's economy is less than 3% of China's and our entire population is equivalent to a statistical discrepancy by China's census bureau.

What do the Chinese really want from little Israel? That is, what is really valuable and important for the Chinese that the leadership in Beijing wants from us? Tapping into Israeli technology and learning how to copy our capacity for innovation. Here, Israel can really pull punches well above its weight. Not that possessing natural resources and huge consumer markets have lost their preponderant weight in global economic calculations. That's by no means the case. But over the least two decades, technology and innovation have become an important factor, too.

China has amply demonstrated its ability to manufacture cheaply and efficiently. But it aspires to more – not to make Apple's iPhones but to make its own new smartphone. That's the route to real wealth and power.

In that context, China has declared its industrial priorities to be solar and wind energy, information technology and telecommunications, and battery and manufacturing technologies for automobiles, mostly areas in which Israel excels as an innovator but not as a competitor for manufacturing. Beijing would also like to develop a more advanced arms industry, so Israel's strengths in communications, UAVs, cyber warfare are also likely coming to the table as well.

Can Israel supply the goods? For now, of course, it can.

But it is interesting to note that at a time when China is drooling over Israel's creative prowess, the World Economic Forum ranked us 27th among 122 countries for the quality of its human capital, which is the basis for all our achievements to date. That's not a very encouraging statistic for startup nation. Among leading Western economies, only Italy scored worse (37) and China (43) itself not far behind.

Bad math

Israel's workforce got a relatively high ranking of 20 and we ranked second in the world for the percentage of the workforce with a higher education. But our educational system was 27th. The quality of our primary schools was a miserable 60th and the quality of math and science education was even worse at 68th.

The simple conclusion someone would derive from these numbers is that Israel is failing to invest in the very thing that has made it a technology super-power over the last decades. They wouldn't be far off the mark.

Note what the Technion's president, Peretz Lavie, told Haaretz last week while Li was singing the praises of his institution.

The university's annual budget from the Council for Higher Education has been shrinking as funds are divided among a growing number of institutes of higher education. We have lost 100 faculty positions, class sizes have grown and half of our buildings are at least 30 years old," he said.

It is interesting that Economy Minister Naftali Bennett is leading the economic charge eastward, followed by a cavalry of right-wingers who look forward to the day they can tell the sanctimonious statesmen in Washington and Brussels they can take their peace process and stuff it. The Chinese, so the logic goes, don't care about the occupation or about human rights. "All they care about is Israeli high tech, Israeli innovation and how we can bring these technologies here," Bennett said last summer from Shanghai after a string of meetings with government officials and executives.

Of course, the Chinese probably won't supply $3 billion in military aid every year no strings attached, routinely veto Security Council resolutions unfriendly to Israel, share critical intelligence or airlift weapons in case Israel finds itself desperately in need. But, so what, as long as they don't disturb the settlers.

The Chinese have no emotional attachment to Israel -- and there's no reason why they should, that's not the usual practice between nations -- and there is no AIPAC in Beijing to encourage it. Indeed, for all the attractions Israel offers, the Arab and Muslim world offer just as many as critical sources of energy and lucrative contracts. Just like America, and even more so, China will act according to its own interests in the region, which (in case Bennett hasn't noticed) aren't always identical to Israel's, for instance, on how to deal with Iran.

Sorry, settlers, the Chinese are excellent business partners, but they will not take the place of America as an ally in the foreseeable future. But, as China becomes an ever greater economic, political and military power, Israel does need to ensure we have the goods they need in the years to come.

Reuters