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International relations

Israel's blossoming China ties become thorny issue with US

Port and other infrastructure deals draw scrutiny amid superpower rivalry

Israeli Prime Minister Benjamin Netanyahu, center, has cultivated close relations with U.S. President Donald Trump, but his country's ties with Xi Jinping's China are creating complications. (Source photos by Reuters)

TOKYO -- Israel is at the center of an escalating tug of war between the U.S., its longtime ally, and China, an investor it has courted for years.

This week, a company backed by Hong Kong billionaire Li Ka-shing's CK Hutchison Holdings conglomerate lost a bid to build one of the world's largest water desalination plants in Israel. Government officials told local media that the domestic winner had a better pitch. But the decision came less than two weeks after a whirlwind visit by U.S. Secretary of State Mike Pompeo, who reportedly delivered a warning against Chinese investment.

The optics, at least, suggest Prime Minister Benjamin Netanyahu's government was reluctant to antagonize the Donald Trump administration. Either way, U.S.-China friction is likely to mean more awkward decisions for the sliver of a state on the Mediterranean Sea -- especially with a key container port due to come under Chinese management next year.

"As U.S.-China relations become more tense, what Israel sees as natural growth in its relations with China is going to become more contentious," said Jon Alterman, senior vice president and director of the Middle East Program at the Center for Strategic and International Studies in the U.S.

That growth is the result of a persistent effort by the country of 9 million to woo the rising superpower of 1.4 billion.

"An Israeli foreign ministry delegation came to me more than 10 years ago, concerned about how Israel could be strategically relevant to China," Alterman recalled. "They were concerned that they're a small country, and China's natural interests would be toward [Middle Eastern] oil producers."

The answer has turned out to be a combination of trade, access to Israel's innovative startups, and Belt and Road Initiative infrastructure deals.

Israeli exports to China nearly quadrupled over the decade to 2018, reaching $4.79 billion according to World Bank data. Imports more than doubled to $10.46 billion. Only the U.S. trades with Israel more.

Alexander Pevzner, founding director of the Chinese Media Center at Israel's College of Management Academic Studies, said the relationship accelerated after Netanyahu made a state visit to China in 2013. Today, Pevzner said, "Israel is important for China from a strategic perspective, both because of BRI and also because of Israel's ties with the U.S." He added that Israel and China have also concluded several rounds of free trade agreement talks.

But the budding relationship has become a thorn in Netanyahu's friendly ties with the Trump administration -- particularly sensitive infrastructure projects.

The desalination plant CK Hutchison lost is to be built near an Israeli air base and a nuclear research facility. The company did not respond to the Nikkei Asian Review's request for comment, and Tuesday's decision renders the matter moot. But other projects have raised eyebrows too.

A prime example is the Port of Haifa. Shanghai International Port Group is set to run a new container terminal there for 25 years starting in 2021 -- an arrangement that echoes controversial Chinese port contracts in Sri Lanka, Pakistan and elsewhere.

Haifa's sprawling harbor area includes an Israeli naval base and frequently hosts the U.S. Sixth Fleet. In Washington, a Senate bill last year warned of "serious security concerns with respect to the leasing arrangements of the Port of Haifa."

Some experts allege that SIPG's presence could subject U.S. and Israeli military assets to sophisticated electronic surveillance and spy recruitment. But separating real risks from trade war tactics is difficult.

Pevzner stressed that none of this came up before SIPG won the contract in 2015, that the Chinese company was the sole bidder, and that China has port interests in the U.S. itself.

"There were no public objections from the U.S. until 2018, when the Trump administration started its trade war with China," he said. "In other words, when the U.S. started to warn Israel, including threats from various U.S. officials to halt port calls by the Sixth Fleet, the Chinese presence was already a fait accompli."

Professor Shaul Chorev, director of the Maritime Policy & Strategy Research Center at the University of Haifa, agreed there is no turning back.

"If Israel were to go to China now and say we would like to terminate the contract, it would not be good for Israel," said Chorev, a retired rear admiral and former deputy chief of naval operations who co-authored a report that takes a grave view of China's global port ambitions -- especially the Haifa contract.

In an interview with the Nikkei Asian Review, Chorev praised Chinese efficiency and conceded there are understandable economic reasons to have SIPG run the port. He also said Israel is "very happy" with Chinese investment overall, and that the country should not be expected to "work only according to U.S. wishes."

Sure enough, a Pew Research survey last year found 66% of Israelis viewed China favorably, one of the highest ratios in the world and well above the 26% in the U.S.

Yet, several factors give Chorev pause -- not only possible espionage but also China's trade and investment links with Israel's nemesis, Iran. On top of that is the sheer uncertainty of relying on any foreign entity to run vital infrastructure in a crisis. "The lesson we learned during all the wars Israel has had," he said, "is that you can't rely on others to operate the port."

At this point, however, Chorev said the only option is to "minimize the consequences."

"We have to maintain our economic connections with China. But we should understand that with China, Israel doesn't share the same unique relationship it shares with the U.S."

Chinese construction workers build a port in the southern Israeli city of Ashdod in 2016. While Ashdod's facility will be run by a European consortium, the new terminal in the northern city of Haifa will be managed by a Chinese company.   © Reuters

The question, then, is how best to balance ties with two increasingly bitter rivals. Last fall, Israel moved to establish a new screening mechanism for sensitive foreign investments -- a step toward soothing American anxieties. But none of the experts the Nikkei Asian Review spoke with see this triangle becoming less awkward anytime soon.

"I believe the debate on the solution for this question is not over yet, partly because the internal debate within the U.S. on how far to go is also not concluded," Pevzner said.

Alterman called it "an issue that will continue to need to be managed" but said that "it's going to be hard to get countries to close the door on China."

And China has no intention of closing the door on Israel -- even if the U.S. tries to shut it out.

"Especially in terms of technical and military cooperation, the United States has stood in the way of the development of China-Israel relations," said Shu Meng, a research fellow at Shanghai International Studies University. Nevertheless, "the continuous development of China-Israel relations will remain a major trend."

Shu, who specializes in the Middle East, stressed China's keen interest in Israeli technology. She suggested that the small state has used its reputation for ingenious startups to gain a foothold in the world, and that this makes it an important "reference" for an "innovative China."

Indeed, from 2016 to May 2020, Chinese investors provided $1.43 billion in financing for Israeli tech companies, according to the IVC Research Center in Tel Aviv. Among startup exits, or stake sales, Chinese acquisitions in the same period were worth $6.2 billion. These numbers were still a fraction of the $33.15 billion in overall financing and $73.67 billion in exits, but they are part of a larger, steadily deepening bond.

Shu called Israel "irreplaceable in diplomatic and strategic value" for China as a "pivot point" on the Belt and Road. At the same time, she said, "China's increasing economic strength and huge market capacity have also strengthened Israel's confidence to 'look east.'"

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