Analysis

Is Trump Using Netanyahu and Israel as Soldiers in His Trade War With China?

One of the president’s goals is to ensure that the Chinese don’t overtake the U.S. lead in technology — and he may insist that Startup Nation do its part

Prime Minister Benjamin Netanyahu (left) and Chinese President Xi Jinping during a 2013 meeting.
ASSOCIATED PRESS

Whenever a Chinese delegation is in Israel, we hear about China’s enthusiasm for Israeli high-tech, innovation, boldness and chutzpah.

Before we start to blush it is best to put things in perspective: When you consider the immense scope of Chinese overseas investment in recent years, Israel looks like nothing more than a grain of rice in a paddy the Chinese has cultivated of assets and intellectual property across the globe.

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The Chinese have amassed a portfolio from mines and farmland in Africa, Australia and Latin America; ports and infrastructure in Europe to insurance, high-tech, chemicals and agribusiness companies wherever it can.

Even so, you can’t ignore the strength of the business ties between Israel and China. According to the Central Bureau of Statistics, Israel last year exported to China 11.4 billion shekels ($3.1 billion at current exchange rates) of goods, not counting diamonds. Imports from China were over double that.

Direct investment in Israeli startups

Cumulative direct investment by Chinese firms in Israel reached $16 billion in 2016, the South China Morning Post has estimated. That includes the purchase of Tnuva by Bright Food and Makhteshim-Agan (now Adama) by ChemChina as well as a host of tech companies such as Lumenis and Alma Lasers.

Bilateral ties are important these days not only for Israel, which is dwarfed by China in terms of population and output, but because of the trade war U.S. President Donald Trump has declared on China. Trump has already slapped tariffs on Chinese goods in recent weeks representing $50 billion in exports annually and threatens to increase that tenfold.

The president not only wants to reduce China’s a big trade surplus with the United States, he aims to block China from taking control of American intellectual property, especially in the most advanced technologies. He fears China would wrest global technology leadership from America in such key areas as artificial intelligence.

In his war with China, Trump has used tariffs and inflammatory rhetoric of the kind rarely employed by world leaders to the point some U.S. policymakers, including Treasury Secretary Steve Mnuchin, say could do permanent damage to the global trading system and to American business. So far, however, it’s Trump who is making the calls.

Trump hasn’t limited his attacks to China — Europe, other Asian countries, Canada and Mexico have been targeted as well. Even America’s strategic partners have come under fire for running real trade surpluses with the U.S. (Germany, for instance) and imaginary ones (like Canada, which actually has a deficit).

An employee packages 100-yuan notes at a bank in China's eastern Jiangsu province on July 23, 2018.
AFP

The fact that Trump is just as ready to fight trade wars with his closest friends as with his enemies is a worrying development for Israel, which has enjoyed unprecedented support from the current White House.

Israel isn’t a big enough a player on the world trade stage to attract demands from Trump to demand we import more American cars instead of the European, Japanese and Korean makes that dominate Israeli roads. On the other hand, Israel has something that the Chinese want and that Trump may decide he wants to deny them — technology, especially military, cybersecurity and communications technology.

Israeli tech companies are well aware of the potential China and Asia generally hold. It’s a potential that is far from being realized because China isn’t an easy market to penetrate. That’s not just because it is such an unfamiliar culture but because the Chinese government works hard and often brutally to protect its interests and the interest of Chinese companies and that often comes at the expense of foreign companies working in or with China.

Until now we haven’t heard anything about American intervention in Israeli-Chinese relations. In an interview with the BBC last week Lee Branstetter, a professor of economics and public policy at Carnegie Mellon University, said Washington feared Israeli technology could reach the Chinese armed forces.

“The Pentagon is increasingly worried that artificial intelligence capabilities acquired by Chinese firms through civilian investments or licensing deals could find their way into a new generation of Chinese weapons that would threaten American troops and American allies,” he said.

“The Pentagon is also worried that Israel could become a back door through which China could acquire capabilities that it could not get in the U.S. due to regulatory scrutiny.”

Branstetter said he suspected Washington would place some limits on the emerging Israel-China relationship. “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.

Moves like that seem improbable, but this is the age of Trump, when everything is possible. The Washington Examiner, a right-wing magazine and website, issued a similar warning last week.

“China’s investments [in Israel] are not ultimately rooted in economics. They are rooted in gaining access to and proprietary rights over the most cutting-edge technology software and hardware coming out of Israeli design laboratories and factories. And they are focused on those things because China wants to challenge the U.S. in its leadership and structuring of the global order,” writer Tom Rogan said.

And concluded: “ Trump should thus be clear with Netanyahu. He should welcome Israeli prosperity while noting that it cannot come at the cost of exigent U.S. interests.

Was the Examiner article a signal from the Trump White House? Was it a coincidence that Avi Simhon, the head of Israel’s National Economic Council, just over a week ago said the government was considering the establishment of a body to vet foreign investments?

Such a forum would be a complete reversal of Israel’s approach, especially for Netanyahu. The prime minister has encouraged foreign investment and takes time out during visits abroad to meet with local CEOs and investors.

Business sources have told TheMarker that the change in attitude in a direct outgrowth of the Trump White House’s policies. True or not, Israel is now in a delicate position. America is still Israel’s biggest trade and investment partner, and its most important ally, but China is home to the world’s fastest growing major economy and it’s hard to believe the future doesn’t belong to it. Israel could be left with an unenviable choice.