How Israel Could Get Shot Down in a U.S.-China Tech War

As America cracks down on Chinese activity in startups, Israel may attract both more Chinese investment and more U.S. anger

Send in e-mailSend in e-mail
Send in e-mailSend in e-mail
An Israeli air force F-15 fighter jet releases flares during an air force pilots' graduation ceremony at Hatzerim air base in southern Israel December 29, 2011.
Illustration: An Israeli Air Force jet releasing flaresCredit: Nir Elias, Reuters

In an event that received little media coverage, Donald Trump this week signed into law something called the Foreign Investment Risk Review Modernization Act, or FIRRMA.

The legislation gives the U.S. government more power over vetoing foreign investments. But its real target is Chinese investments in American startups, and that could have major implications for Israel.

Trump’s trade war isn’t just about China’s bulging trade surplus with the United States. It is also about American anxiety over China’s growing technological prowess.

The Chinese challenge to America’s technology leadership is probably not as serious as it’s widely thought to be, as the ZTE affair demonstrated. When the giant Chinese maker of telecommunications gear was threatened with a ban on using American chips, it was all but set to close up shop, until Washington relented.

Beijing is certainly set on creating for itself a tech industry on par with America’s, which in itself is good reason to arouse American anxieties. The U.S. stands no chance of ever being able to make cars or washing machines that can compete with China’s on price, but it still leads the world in all things digital. If it loses the No. 1 spot to China, the U.S. will have effectively conceded global economic leadership to the Chinese.

One way China is seeking to get ahead of the U.S. is by investing heavily in technologies like artificial intelligence that are expected to underlie the next wave of tech advances. But it is also building its tech capabilities by stealing intellectual property and by investing in foreign startups,  that then entitle the Chinese shareholders to see their intellectual property.

Chinese "private sector" and "government" investment is often blurry. A venture capital fund or company buying a stake in in a foreign startup could be doing it as a financial investment, or to stay ahead of the market; or to give the Chinese government access to critical technologies.  

FIRRMA is aimed at thwarting this. As it is, the Chinese have been feeling the chill and investment flows into the U.S. have been falling: FIRRMA will only exacerbate the trend.

How much it actually does so, depends on how strictly officials in Washington enforce the law’s “critical technology” standard. Rhodium Group, which tracks Chinese investments, points out that it could cut investment by as little as 10% or as much as 75%.

So where can tech-hungry Chinese investors go? There aren’t many places with world-class technology. Europe is one, but it is also growing wary of Chinese investment, so that leaves Israel.

Unpretentious in Israel

Many think China already invests heavily in Israeli startup companies, but that isn’t entirely true. Israel Venture Capital Research estimates that in 2015-17, Chinese capital represented no more than 6% of all the money invested in Israeli startups, and probably a lot less. Chinese companies buy even a smaller share of Israeli startups. That could change with FIRRMA.

Israel is also working on a plan to more seriously scrutinize foreign (read: Chinese) investment, but Jerusalem isn't likely to crack down that much: Our relationship with Chinese is regarded as too strategic and too tied to technology partnerships to let it fall victim to heavy-handed government intervention.

Anyhow, Israel doesn’t have the pretensions to world technology leadership like America or China. We’re innovators of cool technology, not builders of world-conquering tech giants, and we are happy to let the big boys fight it out in the arena.

The catch is that America is unlikely to look on a growing Israel-China technology partnership as so benign.

As long as 20 years ago, Washington interfered in a deal by Israel to build Phalcon (AWACS) aircraft for China, and that was way back when America had not a worry in the world about the Chinese technology threat. But it had enough respect for Israeli technology to be fearful.

Lee Branstetter, a professor of economics and public policy at Carnegie Mellon University who is deeply involved in IP policy, has said the Pentagon is concerned that Beijing will use Israel to access technologies it can’t access in the U.S. He thinks America likely to insist that Israel prevent that from happening.

“If an American pilot were ever shot down by a Chinese missile powered by Israeli technology, it would be a real problem for the Israeli government,” he warned in an interview with the BBC last month.

That’s a worst-case scenario, but there are lots of others, such as America concluding that Chinese automakers are getting a leg up on their American rivals in self-driving cars with Israeli IP, or that Israeli hacking technology is alleged to have been used by Chinese companies or the government.

Caught between the conflicting interests of two world powers, Israel found itself in an embarrassing situation in the early 2000s over the Phalcon deal. Now, if such problems crop, they will be problematic many times over.

American is still Israel’s key ally when it comes to politics, business and defense. But China is a far, far more powerful player on the global scene and it’s far more important to Israel than it was 20 years ago. It’s also a country that doesn’t take perceived offenses to its interests lightly.