The coronavirus has Israel in lockdown. Prime Minister Benjamin Netanyahu has so far managed to contain the crisis through extreme measures. The crisis will almost certainly get worse, but it will at some point get better. When it does, Israelis will be eager to get back to the innovation and economic growth that the Start-Up Nation has enjoyed in recent years.
But it should not be business as usual for Israel. After the crisis, Israel must reexamine its ties with China. This is the moment to do so. The coronavirus, which originated and spread from China around the globe, has shut down Chinese supply chains. This has exposed Israel’s overreliance on imports from China, and, to a lesser extent, its exports. This is a wake-up call.
China accounts for roughly 10%-15% of the Israeli economy. Israel relies on China for a wide array of imports. This includes raw materials and food, but also elements of Israel’s automobile, pharmaceutical, construction and national infrastructure sectors, to name a few. Chinese components abound in Israeli toys, furniture, jewelry and more.
There are existing or impending shortages in the aforementioned sectors in Israel. Diversifying trade partners in the Far East and beyond is the only way to ensure this doesn’t happen again. And in doing so, Israel can also assuage its American allies that it is cooling its ties with China. Indeed, American officials have warned in recent months that Israel’s recent economic ties with this geopolitical rival have made Washington uncomfortable.
Of course, America has its own China exposure that it must address. But its concerns about Israel are real. They have been primarily focused on the defense and dual-use sectors. Israel has responded by monitoring and limiting deals with China through the Export Control Division at the Defense Ministry.
But tensions linger. This is because technological advancements in recent years have blurred the boundaries between defense systems or supervised dual-use systems, and systems with no clear defense nexus. As a result, Israel risks contributing to Chinese technological advances in defense without intending to do so.
Israeli companies and start-ups are developing products in fintech (banking and economy), medicine, transportation and other sectors that draw on its talent in the fields of cyber, artificial intelligence and data science. These products have no direct connection to the defense sector, but their underlying technology may.
With this in mind, China has invested considerably in Israeli start-ups, academic collaboration and research and development. It’s all civilian businesses, and it’s all legal. But most of it has been unsupervised because it falls outside of the defense or dual-use sector.
At the same time, in an effort to expand its Belt and Road Initiative, China has been steadily investing in Israeli infrastructure projects. This has created unnecessary tension with the United States, as US officials voice concerns about potential efforts by the Chinese to spy on Israel and the US. The Haifa Port issue was a case in point. That crisis appears to have passed, but China’s infrastructure efforts extend to Ashdod Port and the underground tunnels for the country’s metro. Israel must think carefully about these and other critical infrastructure projects.
More broadly, Israel must think carefully about its Chinese investors, particularly state-owned enterprises (SOEs), when it comes to technology and infrastructure investments. While many appear innocuous, China could exploit them in ways that are not readily apparent at the time.
Some might say that the United States is tripping up Israel’s ability to engage in free trade. It’s not. America is entering a global technological competition with China and it wants reliable allies, especially when sensitive and futuristic technologies are on the line. The US provides Israel with tremendous security and economic assistance. It protects it in the halls of the United Nations, often alone. Israel should appreciate America’s needs.
In this spirit, the Israelis have created a mechanism, not unlike the American CFIUS (Committee on Foreign Investment in the United States), to determine when certain foreign strategic investments may pose a problem. The Israeli mechanism has done a good job so far, but more work needs to be done.
As Israel considers reductions in its exposure to China, there will be economists and policy-makers who argue that Israel desperately needs Chinese investment and that it cannot be replaced by other countries. They will likely be proven wrong. Israeli tech is coveted by Japan, South Korea, Brazil, India and European states, to name a few. When the coronavirus crisis has passed, Israel must view them as possible alternatives to Chinese investments and supply chains.
Critics might also charge that Israel would be kicking China while it is down. This is not the intention. Israel must prioritize its own independence, resilience and continued economic prosperity. It must also think about its long-term relationship with its most important strategic partner – the United States.
Once it diversifies away from China, Israel should convene a high-level working group with US officials. The two countries can begin to engage in deeper strategic partnerships in areas such as artificial intelligence, computing and quantum sensors, advanced computing capabilities and more. One of the primary impediments to such cooperation now is Israel’s flourishing business with China. American officials are clear on that point.
For now, another threat beckons. Israel, as a leader in biotechnology, can play a major global role in the creation of a vaccine or other virus mitigation techniques. Once that’s in the rearview mirror, Israel must then turn to other implications of the coronavirus. Its overreliance on China must be addressed. Israel has no choice but to deal with this important and delicate matter, for the benefit of continued prosperity and security, and for preserving close relations with its greatest ally.
Brig.-Gen. (res.) Jacob Nagel is a visiting professor at the Technion aerospace faculty and a senior visiting fellow at Foundation for Defense of Democracies (FDD). He previously served as Prime Minister Benjamin Netanyahu’s acting national security adviser and head of the National Security Council. Jonathan Schanzer, a former terrorism finance analyst at the US Department of the Treasury, is a senior vice president for research at FDD.