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It’s the End of Israel’s Beautiful Friendship With China. So What?

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Building the new port in Haifa
Building the new port in HaifaCredit: Rami Chllouche

A week ago, the new Haifa port was formally dedicated. A $1.7 billion facility built by one Chinese company and to be operated for the next 25 years by another, the port itself is a welcome break from Israel’s maritime past of inefficient state-run docks. But the port may be the last hurrah for Israel’s beautiful friendship with China.

That may not be a bad thing.

Benjamin Netanyahu correctly sought to get Israel on the inside as China emerged a decade or more ago as a major world economic power and one intent on becoming a technology power as well. Israel was too small to offer much to China in the way of big infrastructure contracts or traditional foreign trade, but its technology prowess could be the basis for economic ties.

For a while it looked like Israel and China were going to do a lot of tech business. Meanwhile, Chinese companies were winning competitive bidding for big infrastructure projects, like Haifa Port and parts of the Tel Aviv Light Rail, because they could deliver them at such low prices. They even bought a few old-line companies like the iconic Israeli dairy maker Tnuva.

But then Trump declared his trade war on China, which was as much a war over global technology leadership. Israel inevitably found itself drawn in.

Netanyahu’s strategy was to weave and bob around U.S. demands for greater restrictions on Israel-China ties, for instance establishing a foreign investment vetting committee but giving it few powers and exempting the tech industry from its purview.

As prime minister  Naftali Bennett has quickly discovered, that policy will no longer work. The Biden administration is as distrustful of China and as committed to strategic competition as Trump was. And this time, the administrative confusion and inconsistency that criticized the mercurial Trump White House is no longer there for Israel to exploit. Bennett is already said to be taking measures to rein in Israel's China ties.

Fortunately, the timing is good for Israel to be pivoting away from China because China’s best days as a high-tech power are looking increasingly behind it.

When capitalism runs riot

I used to hold that China’s innovative ability would be held back by its authoritarian government. It would be difficult for China to tell its people to be creative when they are developing software but to obey party dictates when it comes to everything else. That turned out to be wrong.

What has happened instead is that Chinese tech companies, like Alibaba, Tencent and Didi, have become so powerful that the government has begun cracking down on them.  It started with the Beijing authorities’ blocking a U.S. initial public offering in Ant Group last November and has grown to encompass nearly all of Chinese big tech, as well as sectors such as cryptocurrencies and for-profit online tutoring. It has manifested itself in limits on teenage video gaming and bizarrely, in the disappearance of Alibaba founder Jack Ma.

Beijing's tech crackdown has no shortage of defenders, even inside the industry. Some say China is taking down its ultra-powerful tech giants where America doesn’t dare, or that it will benefit competition by giving smaller companies a better chance, or that it is a strike against out-of-control capitalism. Consumers will benefit.

But the fact is no one really knows what’s behind Beijing’s new policies, and that itself is a problem. How can businesses operate in such an opaque process, with rules being enforced retroactively and arbitrarily? It’s one thing to set limits on the free-wheeling and often lawless capitalism that characterizes China’s tech sector; it’s another for the state to take the wheel and refuse to tell the passengers where it’s driving them.

Yet, it should be pretty evident where Xi Jinping is heading: It’s the same place he is taking the rest of China, to a new era of greater authoritarianism, where the state exerts control over everything from popular culture to family planning. Xi’s authoritarian state doesn’t brook other power centers.

The big tech companies, with their celebrity CEOs, the hundreds of billions of dollars at their command and (perhaps most importantly) their control over the kind of data the state believes should be its monopoly was simply intolerable. They had to be cut down to size and the data brought under government control, the better to control the masses.

And this is what might finally bring down Chinese tech. At the very least, it will make Chinese high-tech companies undesirable partners for Israeli companies – restricted by what they can do with data, suspected of doing the bidding of their government masters and wary of breaking arbitrary and fuzzy rules. At the worst, it will deter innovation and entrepreneurship in China.

As it is, the beautiful friendship between Israel and China had already begun to sour both in high-tech and in infrastructure.

A Chinese company was reportedly pushed out of bidding for development of the Soreq 2 desalination plant last year and Hong Kong-based Hutchison gave up any hope of seeking approval to regain control of the Israeli cellular company Partner Communications.

In the high-tech sector, a recent study by the Institute for National Security Studies found that Chinese investment peaked three years ago. It hasn’t put any money into an Israeli venture capital fund since 2017 and the number of investment deals in which a Chinese company participated has fallen from 72 in 2018 to 45 in 2020. Israel-China trade peaked in 2018 as well, although it hasn’t fallen off to the same degree as investment.

COVID played a role, of course, as did the Trump trade wars and Beijing’s decision to restrict exports of capital. Even at its peak, however, China never accounted for more than 10 percent of foreign direct investment into Israel, according to the INSS.

The new China will no doubt continue to be a major economic player (though perhaps a less dynamic one than the one we have seen over the last two decades). But it will become more inward-focused and less welcoming to foreign investment and trade. Israel has already begun the process of unraveling some of its China ties. Beijing’s tech crackdown will make it easier to allow the process to continue.

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