Analysis

When It Comes to China, Trump Expects Israel to Follow His Lead

U.S. no longer wants to be the world’s policeman, but it still wants to be the world’s regulator and Israel is feeling the effect

China's Vice President Wang Qishan, right, and Israeli Prime Minister Benjamin Netanyahu tour the Israeli Innovation Summit in Jerusalem, Wednesday, October 24, 2018.
Ariel Schalit,AP

When Finance Minister Moshe Kahlon was doing battle with Tnuva, Israel’s biggest dairy company, over his refusal to allow a price hike for dairy products, a Tnuva executive said angrily that it was as if the company had been nationalized.

When asked who owns Tnuva, the answer was, of course, “China’s Bright Food.” When asked who owns Bright Food, he responded: “the Chinese government.” How can a government-owned company be nationalized? The executive smiled bitterly and didn’t answer.

As exemplified by Bright Food’s 2014 acquisition of Tnuva, Chinese foreign investment is inextricably linked to the Chinese government. That creates a dilemma for developed countries seeking to rein in Chinese appetites, especially when it comes to infrastructure investment or corporate acquisitions in sensitive areas.

On the one hand, every country wants to attract foreign investment, and China is one of the biggest and fastest growing sources of it. The country has $3 trillion in foreign currency reserves. On the other hand, the United States and other countries are increasingly worried about the strategic threat posed by China.

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Nadav Argaman, the head of Israel Shin Bet security service, warned this month, in a nonpublic lecture at Tel Aviv University, that Chinese investment in Israel may endanger national security. He said laws and an enforcement mechanism were needed to vet all foreign investment.

The Israel Television News Company reported this week that Chinese officials were unhappy with Argaman’s remarks and are demanding an explanation from Israel.

Prime Minister Benjamin Netanyahu has invested a lot in the last several years in developing Israel-China economic relations. He has traveled to China several times and pleaded with his ministers to do the same. Now, however, it looks as if pressure from Washington on countries doing business with China is about to change things.

The U.S. is in the midst of a titanic trade war with China and officials are increasingly concerned about growing Chinese investment in the past decade in Africa, Europe, Asia — and Israel. China could use investment to access valuable technology or for espionage.

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Since the 1970s, the U.S. has vetted incoming foreign investment through its Committee on Foreign Investment in the United States. Its mandate is to protect critical technology and intellectual property from foreign takeover. In recent years, and more so under Trump, its main concern has been China.

America expects its friend to adhere to the same codes. Therefore, Netanyahu has instructed Prof. Avi Simhon and Meir Ben-Shabat, the heads of the National Economic Council and the National Security Council, respectively, to formulate recommendations for an Israeli equivalent to CFIUS.

The word “China” doesn’t appear in Netanyahu’s request, but everyone knows China is the target. The team examining the issue, which is expected to present its recommendations in the next few weeks, will have to find a balance between the needs of the Israeli economy and encouraging foreign investment and U.S. demands.

Right now, Israel has no rules on foreign investment. The only exception is the most sensitive cases, such as control of Bezeq, the domain telecommunications provider, which needs to be cleared by the Shin Bet. The Defense Ministry has say over defense industry investments.

Chinese companies have made some big investments in Israel. Apart from Tnuva, ChemChina bought the agrochemicals company Adama; Chinese companies are building part of the Tel Aviv Light Rail as well as two new ports, one of which they will operate. Chinese companies are increasingly big investors in Israeli tech.

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But regulators turned down offers to buy two big insurance companies out of concern over foreign control of Israeli financial assets. It was a clear message to Chinese investors that Israel’s financial sector was off limits.

Israeli officials say the U.S. campaign against China is not very different from the pressure it has exerted for the past two decades on its friends to crack down on money laundering.

For years, Israeli banks received deposits from clients in the U.S. and Latin America without asking questions about the source of the funds and even helped them evade the tax authorities. But one day the Americans changed the rules of the game.

In Israel, one bank (Leumi) has already paid a $400 million penalty to the U.S. for its role in helping American evade taxes and two others (Hapoalim and Mizrahi Tefahot) face the same. Israeli banks have decided to make a clean break and have divested their overseas private banking business.

Washington’s new demands on Chinese investment will also have a far-reaching impact. Chinese investment in Israel isn’t big, but globally it is rising quickly. In the decade to 2017, it rose 31% annually on average.

Israel doesn’t sell arms to China, but Chinese investments in Israeli companies can give it access to sensitive technology with military applications. That will be one of the areas that the Simhon-Ben-Shabat team will be focusing on — it’s one of the reasons that both an economic and a defense official are leading the committee writing the recommendations.

America doesn’t want to play the role of world’s policeman by sending troops overseas, but it is more intent than ever on being the world’s regulator. It did that with money laundering and on the financial side of the war on terror, and is now turning its attentions to China.

It’s a more complicated task because the U.S. doesn’t want to block Chinese investment entirely. Nor does Israel, clearly. But even restricting investments in sensitive technology and critical infrastructure won’t be easy.

As Ziva Eger, head of the government’s of the Foreign Investment and Industrial Cooperation Authority, noted in Knesset testimony a few months ago, a Chinese company’s role in building the Tel Aviv Light Rail will bring its workers within 20 meters of the army’s Hakirya headquarters.