November 17, 2022 | Policy Brief

Wary of China, Israel Toughens Screening of Foreign Investments

The Israeli Cabinet’s National Security Affairs Committee approved a resolution on October 12 to establish a more rigorous oversight mechanism to prevent foreign investments that pose national security risks. This is the Israeli government’s most assertive response to date amidst growing U.S. pressure to update Israel’s foreign investment screening mechanism, which Israel established in 2019.

The new mechanism is designed to scrutinize Chinese and Russian investments primarily, denying certain foreign companies a stake in sensitive Israeli sectors. Specifically, the measure lowers the threshold for the oversight committee’s intervention. Previously, the threshold stood at 50 percent ownership by a foreign entity. The new resolution lowers the threshold to 20 percent, with an even lower threshold of 5 percent in cases of significant concern.

The resolution also calls on regulators to consider national security interests before approving foreign investments and to define criteria that will mandate referral to the oversight committee. Previously, referral to the committee was on a voluntary basis. Finally, it upgrades the status of the Ministry of Foreign Affairs in the screening committee from observer to full member, thus emphasizing the diplomatic concerns potentially raised by foreign investment deals.

The new regulations come amidst a U.S. campaign in Israel and other allied nations to establish more stringent processes to safeguard sensitive sectors. Foreign investment has been a concern of successive U.S. administrations and the topic of high-level dialogues.

For its part, Israel is navigating an intensifying great power competition between its second and third largest trading partners: the U.S. and China, respectively. Washington’s effort to counter Beijing began in earnest in 2019, when U.S. President Donald Trump called upon then Prime Minister Benjamin Netanyahu to curb his country’s ties with China. At the time, Chinese company Shanghai International Port Group (SIPG) was building a new terminal at Haifa Port, Israel’s largest shipping hub. Despite the fact that no American contractors bid on the project, the U.S. objected, citing potential Chinese espionage at a port where the U.S. Navy frequently docks.

Since then, Israel has largely excluded Chinese companies from multiple infrastructure projects. This includes bids on power plants and light rail systems. Beijing has not been pleased. A top Chinese diplomat warned Israel’s ambassador to Beijing this summer that Israel was risking its relations with China by acceding to Washington’s demands.

The cabinet’s new resolution is a sign that Israel is cooperating more closely with the United States. However, the concerns about Chinese investments in Israel and elsewhere are certainly not settled. Washington continues to look for ways to decouple its allies from Beijing.

U.S.-Israel cooperation in the field of artificial intelligence is a current area of intense focus, as Israel is a world leader in the field. In September, the countries developed a plan to create “trusted technology ecosystems” in order to work closely on sensitive emerging technology like AI, quantum computing, and machine learning. The U.S. and Israel are also collaborating on advanced research in other areas, including innovations to combat the effects of climate change and pandemic preparedness initiatives.

Washington should acknowledge Israel’s progress on investment screening. But the work is not done. The existing U.S.-Israel Joint Economic Development Group — an annual bilateral forum — must identify additional ways to reinforce economic cooperation. The U.S. should place particular emphasis on the private sector in Israel, with the goal of educating business owners about the risks of working with businesses tied to the Chinese Communist Party. Direct outreach to the Manufacturers Association of Israel, the Association of Banks in Israel, the Unit 8200 Alumni Association, the Israel Bar Association, Start Up Nation Central, the Israel Venture Association, and others would be an important and proactive initiative that the United States should lead.

Indeed, after years of signaling that doing business with China was not off limits, the onus is as much on the United States as it is on Israel.

Jonathan Schanzer is senior vice president for research at Foundation for Defense of Democracies. Enia Krivine is senior director of FDD’s Israel Program and National Security Network. Follow them on Twitter: @JSchanzer and @EKrivine. Follow FDD on Twitter @FDD. FDD is a nonpartisan research institute focusing on national security and foreign policy.


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