Israel Shouldn’t Let a Little Spying Undo Its Economic Ties With China, Ex-chief Analyst Argues

Yuval Shereshevsky, until recently head of research for Prime Minister Netanyahu, suggests ways Israel can adjust to the reality of a U.S.-China trade war

Israeli Prime Minister Benjamin Netanyahu and Chinese President Xi Jinping shake hands ahead of their talks at Diaoyutai State Guesthouse in Beijing, China March 21, 2017.
POOL/REUTERS

Under pressure from Washington, Israel’s security cabinet has been considering for months which steps to take to restrict commercial relations with China. But officials are taking their time deciding, partly because no decision will be made until after the September 17 election and partly because crafting concrete measures has proved complicated.

Israeli officials are also in no rush because Israel doesn’t see China as the same national-security threat that the United States does. Relations with Washington are crucial to Israel, but China is a rising economic power that Israel wants to cultivate.

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However, time may not be on Israel’s side, says Yuval Shereshevsky, who until recently was head of analysis in Prime Minister Benjamin Netanyahu’s office and today is a strategic consultant in the private sector.

“Tensions between China and the U.S. are getting worse and are expected to intensify in the coming months,” he told TheMarker in an interview. Over the weekend, China imposed additional tariffs on U.S. goods and U.S. President Donald Trump threatened to order American companies to leave China.

Those tensions could moderate as the November 2020 U.S. elections draw near, but before that Washington will pursue an assertive policy.

“Therefore, the likelihood is that the Americans will demand that Israel limit cooperation with China regarding its unique communications and cybersecurity capabilities,” Shereshevsky said.

In his view, Israel has to consider the risk that China will abuse its presence in the Israeli economy as a developer and operator of infrastructure projects and as an investor in Israeli high-tech. China, for example, has contracts to build two ports and operate one of them, which has aroused American concerns.

While Israel has largely given Chinese companies carte blanche to invest in Israel, a notable exception has been the financial sector, where regulators blocked bids by Chinese firms to buy two big insurance companies. Shereshevsky said Israel should continue to encourage Chinese investments but not in sensitive areas such as energy infrastructure.

He sees one of two likely scenarios developing between the United States and China for which Israel must be prepared.

Yuval Shereshevsky poses for a photo at his home in Tel Aviv, August 11, 2019.
Ofer Vaknin

The first and most probable scenario is that the trade war will grow more severe and Washington will demand that allies like Israel treat China more cautiously. That would mean blocking Chinese involvement in areas like developing and equipping 5G communications networks, cybersecurity and military security. It would also mean blocking China from infrastructure investments with a defense element such as ports but not electric power.

A less likely scenario is that the trade war will grow more severe and the United States will demand that its allies not cooperate with China in a much broader range of areas. Shereshevsky says this includes sectors like life sciences and artificial intelligence, two areas where the United States sees itself engaged in a struggle with China over who will be the world’s tech leader.

“This would cause Israel a lot of damage because the U.S. won’t replace Chinese investments, which are seen in Israel as a success,” he said. “But, in light of our reliance on the U.S., Israel will have no choice but to agree.”

He sees two other possible scenarios playing out, but he gives them much lower chances of occurring, and Israel doesn’t need to prepare for them. The first is that Washington and Beijing will enter a cold war, and the United States will demand that countries take a clear side.

The least likely scenario – which Shereshevsky says there’s almost no chance will happen – is that the United States and China will patch things up.

He believes that Beijing indeed uses Chinese companies’ telecommunications equipment installed overseas for espionage, and Israel must take that into consideration. American suspicions are justified on that account.

When Israel begins seeking contractors for 5G, which would enable the supplier of the equipment much wider access to users than in earlier generations of mobile technology, Israel should be cautious.

Shereshevsky notes that Israeli cybersecurity companies are aware of the problem and are inclined to do business with Americans more than Chinese. Executives say their U.S. counterparts question them about their visits to China and whether they have Chinese investors.

Still, Israel should err on the side of caution in restricting Chinese activities, he says.

“The government would be making a mistake if it overly harmed Chinese involvement in Israel or Israeli companies in China,” he said. “A country that wants to thrive can’t close the gate to China. The question is which policies will let Chinese involvement in Israel be intelligently managed.”

As big and powerful as China is, Israel has its own strengths that will enable it to deal with China. Beijing understands that for it be a world economic power it must have global interests.

It’s particularly interested in cultivating economic ties with the Middle East, not only because of its oil and gas but because it’s at the center of world trade routes – the Suez Canal, the Strait of Hormuz and the Dubai port to name a few.

In China’s view, Israel is important for geopolitical reasons as well as for its high-tech capabilities. “Israel has room to operate without damaging relations,” Shereshevsky said. “China sees Israel as a long-term partner, so Israel can be more assertive.”