Can the U.S. and Israel Manage the China Challenge?

Can the U.S. and Israel Manage the China Challenge?

Moving away from the zero-sum game of superpower competition offers the United States an opportunity to champion a more creative approach to the Middle East.

 

As great power competition intensifies between the United States and China, particularly in the sphere of technology, Israel has increasingly found itself stuck between a rock and a hard place. While Beijing is interested in furthering its cooperation with Israel, especially in the infrastructure and technology sectors, Israel is also under growing pressure from Washington to limit its engagement with China, especially its technological collaboration.

Amid significant geopolitical changes taking place in the Middle East and ongoing questions over the future of America’s footprint in the region, Israel is trying to navigate between the United States, its most important ally and defense guarantor, and China, an increasingly important economic partner and a rising regional player.

 

Though Israel's attentiveness to U.S. concerns has grown in recent years, so too have American pressure and demands. If not properly managed, the current dynamic has the potential to not only impact Israel’s economic relations with China but also damage the longstanding relationship and trust between Israel and the United States. It is against this backdrop that Israel and the United States must work together to ensure that their alliance is left unharmed by what is likely a bumpy road ahead.

China: From a Challenge to a Major Threat

To understand the inherent tensions surrounding the China factor in Israel-U.S. relations, it is useful to recall recent developments. When President Donald Trump entered the White House in 2017, China-Israel relations were at their peak after twenty-five years of formal diplomatic ties. Then-Prime Minister Benjamin Netanyahu, who took power once again following the recent Israeli election, paid an official visit to China in March 2017, marking his second visit in four years. When Netanyahu met with President Xi Jinping and announced the forging of an “innovative comprehensive partnership” between their two countries, he famously described Israel and China’s relationship as a “marriage made in heaven.” Although Trump had not yet launched his “trade war” against China at that point, the United States already viewed China as a strategic challenge and geopolitical rival, but not a threat.

However, events such as Beijing’s enforcement of the National Security Act in Hong Kong, its continuous pressure on Taiwan, and its lack of transparency in dealing with the Covid-19 pandemic saw relations between the United States and China quickly deteriorate to the point that China was soon perceived as the leading threat to the United States and Western democracy. When President Joe Biden took office in 2021, this trend only accelerated, with fissures in U.S.-China relations growing wider over issues like human rights, the security of Taiwan, and perhaps most markedly, U.S. efforts to prevent China from obtaining advanced technologies and protect U.S. economic and business interests at home and abroad.

As a close ally of the United States, these rapid geostrategic developments, together with Covid-19, took a toll on Israel’s relations with China. State visits and official dialogues almost completely stopped. This atmosphere also created less favorable conditions for Chinese companies to do business in Israel and contributed to more negative public perceptions of China in Israel.

In recent years, criticism of China’s activity in Israel has been on the rise. The United States has expressed concerns over China potentially using Haifa Port for espionage purposes, being involved in intellectual property theft, and posing a general threat to Israel’s national security. Calls for Israel to “choose sides” in the superpower competition between the United States and China have been raised repeatedly by scholars and officials in both countries.

Such calls, however, are based on a fallacy. Israel has already made a clear choice: the United States, Israel’s closest and most important ally. The special relationship between Israel and the United States is rooted not only in shared values but also in deep and practical cooperation in almost every field, ranging from military and security to diplomacy and business. For Beijing, which is well aware of the close nature of the U.S.-Israel relationship, this makes Israel both more and less attractive as a partner.

On the one hand, growing pressure from the United States is already having an impact on the scope of the Sino-Israeli relationship, making it difficult to develop areas of interest for China. On the other hand, being a close ally of the United States and a technological leader makes Israel a potentially important resource for Beijing.

Faced with a rapidly evolving regional and geopolitical landscape, Israel must safeguard its special relations with the United States while also considering its own unique national security challenges and other issues. The current gap between the allies is a result of, at least in part, the rapid speed with which the United States moved from perceiving China as an economic competitor to its main strategic threat.

Not a Zero-Sum Game

Countering China’s technological advancement has become a leading priority for the United States. For Israel, however, trade with China remains important. Nevertheless, in contrast to recent media hype, Chinese investments in Israel have fallen drastically since their peak in 2018, dropping from 9 percent of all foreign investments in the Israeli high-tech sector before the pandemic to an estimated 2.5 percent in 2021. This slowdown is mostly a result of tighter regulations on transferring capital out of China, but it has also been caused by the less positive atmosphere for Chinese investors in Israel.

Although Chinese investments in Israel have experienced a downturn, overall trade between Israel and China continues to break new records, with China likely to become Israel’s second-largest trading partner this year. According to the Chinese ambassador to Israel, mutual trade volume reached almost $23 billion in 2021, and the growth potential remains substantial given the free trade agreement currently under negotiation between the two countries.

However, with the tensions in the current dynamic, there are a number of steps that need to be taken to ensure that both American and Israeli interests are met.

A Better Foreign Investment Review Mechanism

Under American pressure, Israel set up a foreign investment advisory committee in 2019. The committee reviews foreign investments (not only those originating from China) and makes recommendations, but they are not binding. Additionally, the committee did not classify state-owned companies as a significant risk factor or require investments in the technology sector to face closer scrutiny. Most importantly, the guidelines for screening were unclear, and the process itself was opaque. With some of these issues in mind, the Israeli government recently announced a slightly upgraded mechanism with clearer definitions and policies, which allows for more transparency on all actors.

The amendments could help promote better understanding with U.S. officials, prevent last-minute setbacks with Beijing following unsuccessful Chinese bids for projects, provide more certainty to foreign investors, and direct Israel-China relations to sectors that are beneficial for both while protecting Israel’s national interests. Other developments, such as the recently announced Israel-U.S. technology dialogue, are also designed to provide a platform for increased technological cooperation and iron out some of the remaining differences.

While these steps are in the right direction, recent geopolitical and regional developments may soon render them irrelevant.

The Big Picture

Technical solutions such as the Investment Review Committee can help manage some immediate frictions, but the Israel-U.S.-China triangle should be managed with the broader picture in mind. As the geopolitical and regional landscape continues to evolve rapidly and the United States reevaluates its priorities, a new kind of conversation needs to take place between the United States and Israel.

The scope and intensity of competition between the United States and China is expanding quickly. This trend is likely to continue despite America’s willingness to leave the door open for dialogue with China. The United States’ recent export control regulations in the semiconductor sector could be a game changer for U.S.-China relations and put many U.S. allies in a difficult position. The solution should be deeper cooperation between U.S. allies to find a delicate balance between U.S. interests and their own.

On the regional level, the Middle East is undergoing substantial changes. The perception that the United States is seeking to minimize its footprint in the Middle East is an ongoing concern among U.S. partners in the region, and the Abraham Accords are reshaping Israel’s regional position. But China, too, is becoming much more visible in the region—especially where infrastructure and technology overlap.

A New Regional Vision

New regional groupings, such as the I2U2 grouping between India, Israel, the United Arab Emirates (UAE), and the United States, provide Washington with an opportunity to play a positive role and reshape its regional position. While the United States is the convener of the group, the other members could take the lead and create novel, flexible, and issue-based partnerships, adding new members like Japan and South Korea.

On a cross-regional level, the United States should work to expand the Indo-Pacific Economic Framework (IPEF) to include the UAE as well as other Persian Gulf countries and Israel. This will help alleviate concerns among U.S. partners in the Middle East that any pivot to Asia will come at their expense.