Once-high hopes for close Israel-China relations based on Israeli technology have faded due to U.S. pressure and China’s go-it-alone strategy. Netanyahu’s trip to Beijing can’t revive a tech marriage that’s dying
Why is Bibi going to Beijing?
Poking Joe Biden in the eye is one reason that is being widely discussed. Reliving the past glories of an Israel-China relationship that Netanyahu can take pride in building is another possibility. A visit to a major world capital where no one will speak unkindly about the judicial overhaul? Sounds reasonable.
Sources in the Prime Minister’s Office say that the prime minister wants to show the Americans that “Israel has other options,” just like Saudi Arabia has demonstrated by allowing Beijing last March to mediate talks with Iran to restore diplomatic relations. With Mahmoud Abbas’ Beijing trip earlier this month, even the Palestinians are reaching out to China.
If it is indeed about options, then Netanyahu would do just as well to stay home.
As the Iran-Saudi deal shows, China is becoming more deeply entrenched in Middle East politics at a time when America is pulling back. Israel does have to engage with Beijing, just as it had to engage with Russia from the moment Moscow entered the war in Syria.
But the idea that the Chinese can begin to take the place of the Americans is even less likely than it was a decade ago when Netanyahu decided to prioritize relations with Beijing. At the time, looking east made sense: China was an up-and-coming economic power and the U.S. didn’t see its competition with China as a zero-sum game.
But what could Netanyahu offer to entice China into paying Israel attention? Israel was a small country not central to Beijing’s concerns. But it was big in one thing of great interest to China’s leaders, namely technological innovation: China was keen to become a tech power itself and was happy to accept a boost through ties with Israeli startups and academic institutions. If Saudi Arabia and Iran are, for China, about oil, Israel is about high-tech.
Or, more properly, it was about high-tech. The budding ties got off to a strong start in the first years. A study by the Institute for National Security Studies found that the number of deals in which Chinese entities invested in Israeli tech companies and venture capital funds rose from 22 in 2013 to 72 in 2018. In dollar terms, it grew to as much as $4.8 billion in 2016, the year a Chinese group bought the Israeli online gaming company Playtika.
Alibaba Group and Huawei Technologies were among the Chinese companies that set up research and development centers in Israel. The Technion-Israel Institute of Technology and China’s Shantou University established the Guangdong Technion in 2015 with money from the Li Ka Shing Foundation.
There was other business, too. Chinese companies bought Israel’s chemicals company Makhteshim-Agan (since renamed Adama) and its biggest dairy company, Tnuva. The Chinese won big infrastructure contracts to build new ports in Haifa and Ashdod, Tel Aviv’s light rail’s Red Line, the Sorek A desalination plant and others. Israel-China trade grew more than 40 percent in 2013-2018.
But at the end of the day, it was really all about tech know-how, because all this infrastructure work was nothing but small change for China.
In any case, 2018 turned out to mark the peak of commercial ties. Chinese exports to Israel have continued to grow, but Israeli exports to China have stagnated at about $4.5 billion annually. Meanwhile, China has been cut out of infrastructure projects due to national security concerns: A Chinese company lost the bidding for the Sorek B desalination plant in 2020 and others for new light rail contracts two years later.
Most critically, the tech ties that had been at the core of the Israel-China relationship have cooled.
When America frowns
The data here are harder to measure because investment in startups is often done quietly, with few if any details revealed publicly. Nevertheless, INSS researchers estimate the number of investment deals dropped from 2018’s 72 to 23 the next year and 45 in 2020, the last year for which it had figures. In dollar terms, the decline was even faster, reaching just $146 million in 2020, a year when total startup investment reached $10.5 billion.
The high hopes for Israel-China tech have faded for two reasons.
Starting with the Trump administration and continuing under Biden, the United States has come to view China not as an economic partner but a dangerous rival. And, one of the most dangerous rivalries is over technology, not only because of the military dimension but because both sides understand that whoever dominates global tech will dominate the global economy.
“Historical facts have shown that a big economy doesn’t mean a powerful economy. If a country is persistently lagging behind others, the fundamental reason is that its technology is lagging behind,” Xi said in a 2013 speech that was recently publicized.
Israel’s high-tech prowess is today working against it. Washington sees Israel as a door through which Beijing could source advanced technology, and is determined to close it. When the Israeli government succumbed to American pressure and agreed to begin vetting foreign (read: Chinese) investments in 2019, it exempted the tech sector. But Israeli companies saw which way the wind was blowing and have opted on their own to steer clear of Chinese capital and relationships.
The other blow is coming not from Washington but from Beijing itself. Xi has been cracking down on China’s high-flying tech companies, forcing CEOs and investors to step down and piling on regulations. The Chinese leader apparently thinks that big tech had become too big for its breeches – too powerful, in possession of too much data, too chummy with Silicon Valley and (when they list shares on Wall Street) too answerable to U.S. regulators.
Meanwhile, Xi has been pushing the industry to focus on technology the state deems to be strategically important – semiconductors and artificial intelligence rather than social media or the gig economy – in what he calls a “whole nation” system.
Even if they wanted to join this tech-industrial complex that Xi envisions, it’s not clear where Israeli startups would fit in. China tech is becoming more and more about big, politically connected enterprises, big, bureaucratic government and about the country going it alone.
In any event, Xi’s vision stands a good chance of stifling China’s tech miracle because the history of governments exerting a heavy hand on a hyper-dynamic industry like tech is replete with failure, as Allen Morrison and Stewart Black, authors of “Enterprise China: Adopting a Competitive Strategy for Business Success,” warned in a recent analysis for The Hill.
“The question goes not to the intelligence of Chinese businessmen or their innate ability to innovate. This is not in doubt. The question goes to the culture and systems needed to bring out, foster, and support the transfer of that intelligence and creativity into market-ready innovations,” they conclude. “Xi Jinping’s crackdowns on tech companies have shifted the balance strongly in favor of the state and risks choking the engine of the country’s long-term economic ambitions.”
Netanyahu can go to Beijing, shake hands with Xi, meet with business leaders and sign a few agreements (maybe even the long-awaited free trade accord). But it takes two to tango – it’s not enough that Israel values China, China has to value Israel. But without the tech card to play, Israel doesn’t have much to offer – it’s just another smallish market for Chinese exports and an occasional infrastructure project of middling strategic value.