Washington Obstructing Israeli High-tech Exports to China

Israel wants to expand economic ties with China; Washington doesn't want Israeli defense tech there.

Israel’s efforts to expand economic ties with China are being stymied by the United States. Israel imposes tight restrictions on the sale to China of defense equipment and the export of technologies that have both civilian and military uses, two industries in which it enjoys a comparative advantage and global reputation. But Washington is reluctant to allow Israel to sell products in these two areas since it regards China as a potential adversary that could use Israeli technology to enhance its abilities.

Any expansion of Israeli high-tech exports to China is particularly tied to dual-use civilian/military technology issue, a senior government official told TheMarker. “The Israeli industry needs greater certainty regarding the exports of dual-use products,” he says.

Even companies that manufacture products that are not dual-use do not export to China out of fear of harming their sales in the United States.

Israel has been pondering its strategy as China becomes increasingly important in everything from tourism to high technology. Although the official figures probably underestimate the magnitude of ties, two-way trade with China amounted to $7.7 billion in the first 11 months of 2013. But Israeli exports of electronic components fell to $986 million in the first 11 months of 2013 from $1.1 billion over the same period in 2012. Exports of telecommunications equipment were stagnant at $98 million and exports of computer equipment slumped to $21 million from $39 million.

Due to its strategic dependence on the United States, Israel long ago agreed to limit exports of militarily sensitive items to China. Consequently, Israeli companies seeking to export such products to China must first receive the approval of the Defense Ministry’s Defense Export Controls Agency, which includes representatives from the foreign and economy ministries. Other export markets considered sensitive to the United States that also require such approval are India and Russia.

Official forced to resign

Not that this arrangement resolves all issues. About a month ago, the head of the defense export control agency, Meir Shalit, was forced to resign after the United States discovered that his agency had approved the sale of an Israeli defense product to France without restricting its resale. The shipment of Ricor cryogenic miniature coolers, which are used in electro-optical systems, foremost among them infrared guided missiles, ended up being resold to China. Officials suspect that its final destination may have been Iran. Shalit flew to the United States to present the findings of the investigation into the incident, apologized and resigned upon returning to Israel.

This was not the first time a senior Defense Ministry official has been forced to step down over defense exports to China in violation of assurances given to the Americans. In 2005, when the United States discovered that Israel Aerospace Industries had done maintenance work on a Harpy drone previously sold to China and had agreed to upgrade it, Defense Ministry director general Amos Yaron was forced to resign under American pressure. Washington accused Israel of a repeated pattern of behavior vis a vis military exports to China.

In light of this incident, it is not surprising that one of the changes proposed by supporters of increased defense exports to China would be the sale of older technologies to China, products Beijing can easily acquire from third countries, such as older versions of unmanned aerial vehicles.

Another obstacle to tighter economic ties with China is the issue of sensitive industries. There are restrictions on Chinese investment, for example, in telecommunications to prevent the utilization of such equipment for espionage purposes. As part of the new understandings between Israel and China, both countries are supposed to encourage Chinese investment in Israeli companies to reduce barriers to the Chinese market.

But sources close to discussions regarding Israel’s economic policy toward China say that a clear policy must be formulated in Israel for giving investment permits to Chinese institutions seeking to invest in sensitive industries.

According to industry sources, officials in the Prime Minister’s Office, Economy Ministry and Foreign Ministry have recently been seeking to open debate about how to ease restrictions on defense and dual-use technology exports to China amid opposition from the Defense Ministry. The defense establishment says it is not opposed to easing restrictions but it has been foot-dragging, saying there other matters that must take precedence over exports to China.

The Defense Ministry will not say what these issues are, but it is known that the Pentagon is in discussions with the ministry about joint research and development efforts and American financing for strategic weapon systems. The ministry also benefits from $3 billion a year of U.S. government aid, most of it earmarked for purchases from American military manufacturers and doesn’t want to jeopardize that.

“The defense industry is pushing for a more liberal policy [toward exports to China], in particular in response to the increasing difficulty of selling to the Defense Ministry in Israel and the exchange rate which is eroding the profitability of exports,” says a defense industry source. He adds that it was known in the industry that the Defense Ministry was trying to receive Washington’s silent approval of specific export deals to countries considered sensitive by the United States.

When asked for comment, the Economy Ministry verified in a statement that it was currently examining the policy guidelines for dual-use exports and was in talks with its counterparts in government to seek to ease the export process subject to Israel’s international treaty obligations.

The Foreign Ministry responded by saying that it does not comment to media regarding defense industry exports.

“The Defense Ministry operates based on a defense exports policy that is clear and set by the country’s laws and international agreements and understandings,” the Defense Ministry said when asked for comment.

Olivier Fitoussi