Israel China Trade Tensions

President Donald Trump and China’s Xi Jinping met at the G20 summit in Japan this weekend after months of tension over trade. The US cut off Chinese telecoms provider Huawei from US suppliers, and has enlisted allies worldwide to curtail commercial links with China. As a close ally of the US and a major trade partner of China, Israel faces growing concerns that it will be forced to choose between the two superpowers.

In recent months, US policymakers have called out Israel for its trade with China, citing the high levels of Chinese investment and involvement in critical infrastructure projects.

Most Israelis, however, have not been swayed by US concerns. Both the government and Israel’s business sector see little credible threat to Israeli sovereignty or concern that critical technologies are being transferred to Chinese investors.

Trade tensions

A year has passed since the US-China trade dispute deteriorated into tariffs and sanctions, initially focused on manufactured goods but more recently concerned with technology. At the company level, the Trump administration has blocked or delayed a series of high profile investments by Chinese groups, including Broadcom’s acquisition of Qualcomm, Alibaba’s bid for MoneyGram, and multiple acquisitions by ZTE in the US.

Seeking to further protect American technology from “foreign adversaries” – unnamed but understood to be Chinese technology companies, Trump signed an executive order on May 15 blocking US companies from buying foreign telecommunications equipment deemed a national security risk.

While the Chinese government has moved more cautiously, on May 31 Beijing responded by announcing it will shortly release a list of “unreliable” foreign entities against which “necessary measures will be taken.”

A net result of these tensions is a sharp decrease in Chinese outbound investment. After increasing annually since 2002, China’s investment overseas dropped for the first time in 2017, by 19%. In 2018, Chinese investment in the US and Europe fell even more, declining by 83% and 40% respectively, with Western governments suspending 21 separate acquisition bids by Chinese companies.

While the US government says it welcomes Chinese investment, efforts are underway by the Trump administration to expand the reach of the US agency charged with blocking overseas investment. Known as CFIUS (the Committee on Foreign Investment in the United States), the agency may soon have foreign counterparts overseas, as the US government is encouraging global allies to establish their own bodies to oversee foreign investments by Chinese companies.

Israel & China

Israel is one of the allies facing American pressure to impose stricter regulation on Chinese investment. With Israeli infrastructure joining the country’s dynamic technology markets as a target of Chinese investors, the US government is on record asking Israel to increase scrutiny of Chinese commercial activity.

As well as encouraging Israel to establish an investment review board, American officials have warned that Israeli startups with Chinese shareholders may find their access to US markets blocked by future CFIUS regulations. These moves are leading some to speculate that Israeli companies could be forced to choose between the US and China.

These fears are overblown. While the challenges of navigating a deterioration in global trade are real, Israeli companies are positioned to not only avoid these hurdles but even find commercial advantage. The government of Israel has led the way in establishing a thoughtful balance between commercial and national security interests, banning trade with China in most military products while at the same time welcoming infrastructure and technology investment.

China’s flagship role in Israel infrastructure involves the construction of ports, bridges, tunnels, and rail lines. Despite US concerns over these projects, especially Shanghai International Port Group’s management of part of the Haifa port, none of them are considered national security risks. Chinese firms won these tenders based on price, delivery and flexibility of terms.

Moreover, the Israeli infrastructure projects involving Chinese companies – such as the Haifa port and a Tel Aviv light rail that five Chinese companies are expected to bid for – pale in comparison with infrastructure projects that Chinese firms are pursuing in the US and across Europe. Indeed, Israel’s relative role in China’s ambitious Belt and Road Initiative – a transcontinental infrastructure program opposed by both the Obama and now Trump administrations – is minor compared to US allies such as Italy and Greece.

As for technology, China’s interest in Israel is overwhelmingly in civilian technologies like health, agriculture, fintech, mobility and advanced manufacturing. In these areas of Israeli strength, Chinese companies are as free to purchase products and services as they are throughout the West, including in the US.

What seems to concern US policymakers, as reported recently, is Chinese investment in the more sensitive technology sectors, such as telecommunication, micro-processing and certain AI capabilities.

No access to IP or company secrets

Israeli officials have shown limited interest in introducing regulation over what civilian technologies can be targeted by international investors. This is chiefly because foreign investment is a main driver of Israel’s innovation economy, but also because most of the foreign investment comprises the purchase of “financial” stakes, which generally do not grant an investor any access to IP or company secrets.

Recently, startups and investors active in Israel have warmed to the idea of introducing legislation that would help streamline regulatory uncertainties about what technologies are most sensitive. This, it is hoped, might help mitigate the concerns of US authorities regarding sales to US customers, government and civilian. Such legislation might also placate American co-investors in Israeli companies with Chinese shareholders.

At the same time, Israeli startups and investors are not rejecting Chinese capital. Over the past decade, Chinese involvement in Israeli high-tech investment – particularly “minority” or “financial” investments in Israeli targets – has grown dramatically, from next to nothing to around 50 deals per year on average according to Tel Aviv-based IVC Research Center.

With technology markets in the West turning away Chinese investors, the message in Israel through the first half of 2019 is that the Startup Nation is open for business.

Consider the following snapshot of Chinese investment in Israel in the last six months:

• China’s TAL Group acquired education startup Codemonkey Studios for $20 million.

• Shenzhen Capital Group participated in a $9 million cash infusion into telehealth provider Tyto Care, following a $25 million C round last year led by China’s Ping An Insurance.

• China Glory Ventures led a $21 million A round for chip maker Hailo Technologies.

• China Merchant Capital led a $132 million C round into computer vision developer Innoviz Technologies.

• Emerge, a Chinese funded Israeli venture capital fund, participated in a $15 million A round for drone developer Percepto.

Far from curtailing bilateral tech trade, both the Israeli and Chinese government play a key supportive role. Following the visit of China’s vice president to Israel in October 2018, the past six months have witnessed a blizzard of government-hosted technology roadshows, bringing Israeli technology startups to China and Chinese corporates and provincial leaders to Israel.

A recent event in China’s Shandong province attracted over 100 Israeli startups and thousands of Chinese investors.

Israel’s success at navigating the escalating trade conflict between the world’s two largest economies is a credit to the fundamental attraction of the country’s thriving technology industries. Despite the difficult global environment, the opportunity to leverage these technologies remains attractive to investors from both China and the US, which continue to lead capital inflows to Israel’s tech sector.

The vast majority of Chinese investment is not in sectors that would be considered sensitive from a national security perspective – and even in the sectors that are, almost all Chinese investment comprises “financial” stakes that involve no transfer of IP or know-how.

But as Chinese companies are increasingly banned or discouraged from investment in the US and Europe, Israel is likely to grow as a market for Chinese technology investment and acquisitions. Judging by the numbers of Chinese visitors to Israel in the first half of 2019, this trend will only gather pace if trade tensions continue to increase.