The U.S. Is Pressuring Israel to Rethink Investment From China

(Bloomberg Businessweek) -- Gray concrete walls rise out of the Mediterranean off the coast of Haifa in northern Israel, part of what, by 2021, is supposed to be among the world’s most advanced class of seaports. The future shipping terminal, along with another being built farther down the seaboard in Ashdod, constitutes an effort to attract larger vessels and more trade to Israel, whose blue-and-white flag waves over the construction site. It’s also been a major source of tension with the U.S., Israel’s closest international ally, because of what’s flying nearby: the red and yellow colors of the People’s Republic of China.

U.S. President Trump has sought to portray China as the world’s adversary on trade, ratcheting up tariffs against its goods and encouraging others to put pressure on the rising superpower. This has proved difficult, in no small part because of China’s “Belt and Road” initiative, a global infrastructure development program that’s grown to involve almost $600 billion of construction, with more than 130 countries either signing deals or expressing interest, ­including Israel. In 2015 the Israeli government extended a 25-year offer for the operation of the Haifa terminal to state-controlled Shanghai International Port Group.

With national elections approaching on Sept. 17, Prime Minister Benjamin Netanyahu can ill afford to alienate the Trump administration on its signature international issue. Trump has endeared himself to Netanyahu by transferring the U.S. Embassy from Tel Aviv to Jerusalem and recognizing Israeli sovereignty in the disputed Golan Heights. Netanyahu reciprocated by naming a new Golan settlement after Trump and praising the American leader for, among other things, quitting the Iranian nuclear accord. “Over the years, Israel has been blessed to have many friends who sat in the Oval Office, but Israel has never had a better friend than you,” Netanyahu told the president during a March trip to the White House. An October Pew study found that 69% of Israelis had confidence in Trump’s performance as president, and many of Netanyahu’s campaign ads prominently feature the U.S. leader.

China today is Israel’s second-largest trading partner after the U.S., responsible for $11.5 billion in annual transactions, according to data compiled by Bloomberg. U.S. officials have pressed their longtime ally to create a process that would mimic the Committee on Foreign Investment in the U.S., or Cfius, which reviews certain transactions for national security risks and has the power to impose conditions on or block deals. While Israel is unlikely to issue a formal decision before its elections, Daniel Shapiro, a U.S. ambassador to Israel under President Barack Obama, says, “Israel and Israeli companies are quickly coming to the realization that it’s going to be difficult to sustain business as usual in work with China while keeping the United States as the primary partner.” For the U.S., Israel may be the ultimate test of its global influence on trade. If the country doesn’t follow America’s China strategy, who will?

Economic ties between Israel and China date to 1979, before China had formally recognized the Israeli state. Israeli billionaire Shaul Eisenberg brokered a secret meeting between representatives that led to Israeli arms sales to China. Diplomatic relations were formalized in 1992. In the early 2000s, the U.S. successfully pressured Israel to cancel a sale to China of its Phalcon radar system, as well as parts for the armed Harpy drones it had already sold them. But the Sino-Israeli relationship recovered. In the past few years, Chinese investment in the country’s tech sector has increased sharply, reaching about a quarter of all funds raised by Israeli tech companies in the third quarter of last year, data from the Israeli high-tech tracker IVC Research Center show.

As recently as October, Netanyahu hailed the “natural partnership” between Israel and China as he hosted Vice President Wang Qishan at a meeting of the Israel-China Joint Committee on Innovation Cooperation in Jerusalem. Since then, a string of U.S. officials have taken issue with the relationship, including recently ousted national security adviser John Bolton and Secretary of State Mike Pompeo, who threatened to limit intelligence sharing with Israel unless the country falls in line.

The Haifa seaport in particular has been a cause for concern because of its proximity to a harbor used occasionally by the U.S. Navy’s Sixth Fleet. Although the two facilities are separated by a breakwater and an older commercial port, the U.S. Senate passed a defense spending bill that includes a provision expressing “serious security concerns” about the development. Zhan Yongxin, China’s ambassador to Israel, pushed back with an op-ed in Israeli daily Haaretz in August, arguing that “the win-win cooperation between China and Israel” ought to be “respected.”

“Using Chinese contractors to build some of our infrastructure is very important for Israel because there are very few infrastructure builders in the world,” says Avi Simhon, Netanyahu’s top economic adviser. “If we have additional competition for these projects, that could save us many billions of dollars.” The Shanghai group was the only operator to submit a complete bid for the Haifa port, and multiple Chinese companies are bidding against one another to build a new mass-transit system in Tel Aviv.

Developing some kind of Cfius-like process is now under discussion at the highest levels of the Israeli government, according to two people familiar with the matter who asked for confidentiality to discuss the private deliberations. On one side is the defense establishment, which has argued for tighter controls, while on the other are financial officials, who are wary of anything that could impede foreign capital flowing into the country. It’s possible that whatever comes out of the conversations would focus solely on strategic, regulated sectors such as defense and energy, thereby falling short of addressing U.S. concerns.

Despite the hand-wringing on both sides, it’s tough to imagine Israel won’t choose the U.S. over China. In July, Israel began soliciting bids for 5G mobile telecommunications frequencies. The man in charge, Minister of Communications David Amsalem, says the issue of foreign investment is complicated. “It’s not like buying some shoes,” he says. So will Huawei Technologies Co., the Chinese giant and frequent Trump target, be allowed to participate? Amsalem’s reply: “Go to the next question.”

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

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