Opinion

Bibi Has Bet on the Wrong Horse in the U.S.-China Race

The trade war is growing bitter and Israel can't just cuddle up with both sides as if nothing has changed

The Netanyahus hosting Chinese President Wang Qishan, Oct. 22, 2018
Kobi Gideon / GPO

Benjamin Netanyahu may not have much sense when it comes to domestic deals, like trading political favors for friendly media coverage. But on the international scene he has been justifiably hailed as a master strategist who ran rings around Obama, strengthened ties between Israel and the world’s rising economic powers, and even finessed something of a partnership with Gulf Arab states.

But these days the prime minister seems to be betting big on the wrong horse. The nag is China, and the race is a critical one for Israel, because the other horse is the United States.

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Anyone who through that U.S. President Donald Trump would pull back from the fight with China when he realized how unpopular it was with the stock market, and with many of his voters, must realize by now how wrong they were. Trump doesn’t have many principles but he does have a few obsessions, and one of them is that China has been taking America for a sucker.

He has surrounded himself mainly with people who take the same view, like Robert Lighthizer and John Bolton. The Washington establishment may have been skeptical at first but has gradually come around to the idea that the fight against China is a worthy one and won’t necessarily end with a quickly-wrapped-up trade deal.

The Trump administration wants its friends and allies to stand by his side. In Israel’s case, Trump himself reportedly made that very clear to Netanyahu in a private meeting when the prime minister was in America for a pre-election lovefest last month. If not, Israel’s security relationship with America will suffer.

It’s not surprising that Washington is particularly concerned vis a vis  Israeli-China ties because they are about technology as much as they are about trade. That puts Israel in a sensitive position, because we are one of the few places in the world where China can source the tech it needs to challenge American dominance in the field, and to upgrade its military capabilities.  

Last week, Washington took its most powerful step yet in the tech war by barring Huawei from buying parts and components from U.S. companies without Washington’s approval. That is just the beginning. The tech world is quickly lining up behind the U.S. blacklisting. Other Chinese high-tech companies could be hit as well by the same measures as Huawei has.

The message the U.S. is sending is about as clear as it can be, but it seems to have fallen on deaf ears in Jerusalem.

The U.S. wants Israel to be more cautious about investments by Chinese companies: Huawei, for instance, has a research and development center in Israel formed after it bought the local startup Toga Networks.

One way would be to set up a government body to vet foreign investment, which everyone understands to really mean: Chinese investment.

Netanyahu ordered a government team to look into the matter, but Haaretz reported this week that the team has recommended against the idea. It’s only a recommendation, but it’s likely to be the recommendation the prime minister arranged to hear.

He should reconsider.

Compared to the U.S. or even Europe, China is still a small player in the Israeli tech scene. It accounted for just 5% of all investment in Israeli startups over the past five years, compared with 35% coming from the U.S. China accounted for 3% of exits, versus 53% for America.

It’s no contest. But the working assumption has been that China is an up-and-coming power that Israel must cultivate, especially as Europe seems to be in decline and is increasingly hostile to Israel. Israel assumed it could grow closer to China without risking its relationship with its No. 1 ally, the U.S.

Those assumptions are out of date.

China isn’t going into reverse economically, but its days of hypergrowth are behind it. Its population is aging, the seemingly limitless labor pool it exploited for the last two decades is tapped out, and it is struggling to transition its economy from low-cost manufacturer to a technology pacesetter. For its part, the U.S. is no longer content to serve as an open market for Chinese goods.

The trade war is gradually exposing China’s weaknesses, for instance the degree to which the country’s technology champion, Huawei, relies on U.S. intellectual property and components. But the trouble runs deeper because the hit China is taking on exports to the U.S. is going to reverberate through its economy.

Beijing has been using stimulus measures to maintain growth, but it can’t maintain them indefinitely in the face of a prolonged trade war.

The U.S. is paying a price, too, as is the world economy, but China is more vulnerable, if for no other reason than it is so reliant on exports compared to America.

The era of rising China is over and a new one of a U.S.-China cold war is beginning. Israel doesn’t have to abandon China, but it’s not going to be as easy or as rewarding as it was in the past to be everyone’s friend.