Countering China Is for the BIRDs

In 1950, as Cold War tensions were on the rise, President Harry Truman asked allies to stand and be counted. Israel reflexively stepped up and backed the president who bravely supported the creation of the Jewish state just two years before.

Seventy years later, new cold war tensions are stirring. This time, the adversary is the Chinese Communist Party (CCP). The White House is once again asking allies to step forward. Israel is expected to oblige. After all, America is its most important ally. But Jerusalem can’t afford to move too quickly, this time. Its financial stability is at stake.

It all began with Washington’s miscalculation that money would seduce the hard men of Beijing to become responsible global stakeholders. This notion dominated the thinking of U.S. foreign policy and business since President Richard Nixon and his national security consigliere Henry Kissinger began wooing China in 1972 in order to drive a wedge between China and the Soviet Union.

American money soon flowed east. China-U.S. investment and trade skyrocketed. By 2018, the economic relationship between Washington and Beijing topped $778 billion, an increase of roughly 4,750 percent in real dollar terms from 1980. The rest of the West followed. For example, Chinese trade with Germany stood at $231 billion in 2018, an almost 2,000 percent increase in real dollar terms since 1992.

However, after years of Chinese hacking, intellectual property theft and challenges to the American-led world order, Washington is coming to grips with what we might call “Nixon’s Nonstarter” or “Kissinger’s Collapse.” The Chinese Communist Party is not a responsible global stakeholder. Chinese leader Xi Jinping has turned his country into a wealthier, more belligerent authoritarian state.

The picture is even more bleak considering China’s dominance of vital supply chains, acquisition of new lethal technologies, illicit financial activities and corrupt foreign investments. Beijing has provided nuclear, missile and military assistance to Iran and North Korea. It threatens its Indo-Pacific neighbors with military maneuvers. It represses and spies on its own citizens. And it undermines American allies like Hong Kong, Taiwan and India.

Washington has finally adopted a clear-eyed view of the threats posed by China. The administration’s 2018 national security and defense strategies and bipartisan legislation from Congress reflect a clear shift from engagement to competition. Republicans and Democrats agree: Beijing is a problem.

Washington seeks allies for a global coalition. Israel is, not surprisingly, among them. Israeli leaders have recently heard from White House officials and congressional leaders, including some of the Jewish state’s strongest supporters, who want to see a reduction in Chinese investment—particularly in Israeli critical infrastructure and high-tech.

But for Israel, it’s not so simple. China accounts for roughly 10 to 15 percent of the Israeli economy. In fact, China is currently Israel’s second-largest trading partner and source of foreign investment, after the United States. Sino-Israeli trade stood at $15.3 billion in 2018, an almost 4,400 percent increase in real dollar terms since 1995.

Economics aside, Israel saw China as a geopolitical hedge. Between the Obama administration’s dalliances with the Muslim Brotherhood in 2012 and the fatally flawed 2015 Iran nuclear deal, Israel was worried that its most valued ally had gone wobbly. Even now, Jerusalem worries about America’s desire to leave the Middle East.

Israel never believed China would take America’s place. It was insurance. And, for Israel, the risks seemed low. America had its own economic ties to China. So did the rest of the West. And the Chinese were not Soviets: They had no history of anti-Semitism, even though they supported Iran, Israel’s most formidable enemy. Rather, they admired and sought to learn from the Jewish state’s ingenuity and success.

But times have changed. As Washington and Beijing lock horns, Jerusalem has moved in the right direction. Israel has banned Huawei, the Chinese telecom company tied to the Chinese security state, from its 5G network (the U.K. has not yet gone quite this far). The Israelis also stood up an advisory committee to review foreign investment. Admittedly, the committee can’t stop investments, and it lacks jurisdiction over Israel’s coveted high-tech sector. But it will flag problematic deals before they are made.

Such mechanisms are particularly important after the Israeli ministry of transportation awarded a 2015 contract to a Chinese engineering company to manage the Haifa port, near where the U.S. Sixth Fleet docks. For now, Washington appears satisfied with steps Israel took at the port to mitigate the CCP’s intelligence threat. It should also be pleased that a Chinese company recently lost out on a tender offer to build a major Israeli desalination plant.

But the problem is not in the rear-view mirror. Israel needs Chinese money, especially after the economic devastation wrought by COVID-19. China will continue to court Israel’s high-tech sector, which produces cutting-edge technologies at a pace only rivaled by California’s Silicon Valley and Boston’s Route 128. They want Israeli tech related to artificial intelligence, autonomous vehicles, cyber, biotechnology and other means to fuel Beijing’s rise as an economic and military power.

Israeli high-tech start-ups raised $325 million from Chinese investors in the first three quarters of 2018, up from $76 million in 2013. The numbers are going up, but they are not astronomical. Some of Beijing’s smaller investments are strategic, as part of an effort “to drain the brain” of Israeli innovation, as one Israeli venture capitalist put it.

To date, the Trump administration’s China strategy consists primarily of finger-wagging at its allies. Admittedly, it has introduced some creative initiatives to counter Chinese strategic foreign investments like the Blue Dot Network, co-founded by the U.S., Japan and Australia to establish transparent standards for infrastructure development. There is also $60 billion, funded by Congress through the U.S. government’s Development Finance Corporation (DFC), to jumpstart projects in the developing world.

But Israel is not part of the Blue Dot Network and, as a developed country, doesn’t quality for DFC funds. What it does quality for, however, is a 1970s program that encourages U.S.-Israel technology cooperation.

Founded in 1977 by the U.S. and Israel with bipartisan support from Congress, the Binational Industrial Research and Development (BIRD) Foundation had approved 1,000 joint American-Israeli projects and grants of $363 million, as of 2019. Other binational agreements between the two countries build on the BIRD model, including the Binational Agricultural Research and Development fund and the Binational Science Foundation.

Private American capital also flowed into Israel. American venture capitalists and companies accounted for 35 percent ($9.3 billion) of the $26.6 billion in investment in Israeli tech companies between 2013 and the third quarter of 2018. China accounted for four percent ($1.1 billion) of this total, with Germany and the U.K. at three percent ($800 million each) and Japan at two percent ($532 million). Israeli venture capital funds represent 30 percent of this total ($8 billion). From 2009 to 2018, Israeli venture capital funds raised almost $12 billion, mostly from foreign investors (including China).

But there is more upside potential to bring in America’s Indo-Pacific allies who view Beijing’s rise with justifiable alarm. They can displace CCP investments. The India-Israel Research and Development Cooperation Initiative, for example, which is based on the BIRD model, could include American participation to jumpstart greater Indian investment in Israel’s high-tech sector. Other Indo-Pacific allies should be brought into new BIRD-like trilateral agreements with the U.S. and Israel in order to unleash more capital.

With the CCP on the march, and efforts underway to decouple America’s allies from Beijing, Congress should build upon the success of the BIRD. It has already jumpstarted U.S.-Israel high-tech cooperation. It’s time now to help Israel and our friends in the Indo-Pacific region develop technologies critical to the competition with Beijing. In doing so, America can displace Chinese funding in Israel and mount a successful campaign to counter CCP influence that should have started long ago.

Mark Dubowitz is chief executive officer of the Foundation for Defense of Democracies (FDD), where Jonathan Schanzer is senior vice president of research. They co-founded FDD’s China Program. Follow Mark and Jon on Twitter @mdubowitz and @JSchanzer.