For the Money, the Power or Glory? by Antall József Tudásközpont

A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E

FOR THE MONEY, THE POWER OR GLORY? ANALYSING ISRAEL’S BALANCING BETWEEN BUSINESS ENGAGEMENT WITH RISING POWERS AND ITS SPECIAL RELATIONSHIP WITH THE WEST

ZSOLT CSEPREGI

COMMENTARY AJRC-Analyses 2019A03

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E

AJRC-Analyses Series of the Antall József Knowledge Centre

Publisher-in-Chief: Péter Antall Managing editor: Tamás Péter Baranyi Editorial office: Antall József Knowledge Centre H-1093 Budapest, Czuczor Street 2

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E FOR THE MONEY, THE POWER OR GLORY? Analysing Israel’s Balancing between Business Engagement with Rising Powers and Its Special Relationship with the West ZSOLT CSEPREGI1

Israel, the unavoidable battleground The State of Israel is situated in a unique position on the globe, as it is the only land bridge between Eurasia and Africa, literally the centre of the “World Island.” The “World Island,” an expression which came from the works of the renowned geopolitical thinker Halford Mackinder, is the superstructure of the Asian, Europeana and African continents.2 These three large geographical entities have only one dryland meeting point: the Sinai Peninsula and Israel itself, and, in this sense, the Jewish state’s position is crucial. Its close proximity to the Suez Canal makes Israel a guarantor of the most important maritime transit route between the Indian Ocean and the Mediterranean, connecting the industrial and technological powerhouse, Europe, and the fastest-growing, most populous region on the globe, the Indo-Pacific. However, threats to the Jewish State come from the same source as the advantages: Israel is literally in the way for any power which wants to expand its reach through the Middle East. The combination of the fact that Israel is a relatively small country, possessing a degree of strategic depth only through occupying the highlands between its internationally recognised territory and the Jordan River and its hostile environment, created a nation bent on ensuring its survival by any means necessary. This hostile and turbulent characteristic is coded into the geography of the Middle East, where three major centres of power, creating a regional triangular balancing act, vie for regional hegemony, generating high levels of geopolitical tension.3Following these considerations, two aspects of Israeli national security strategy are relevant for our enquiry. The Jewish state’s interest in securing for itself a great power guarantor and its nature as a knowledge-based economy. Since its independence, Israel has maintained partnerships with outside powers which needed a reliable ally in the Middle East. The relationship

1 Written by: András BRAUN, International Relations Manager at the Brussels Office of the Antall József Knowledge Centre, PhD Student at Eötvös Lorán University, Doctoral School of Political Sciences. 2

Halford J. Mackinder: The Geographical Pivot of History. The Geographical Journal. 1904/4. 421–437.

Ahmet Davutoğlu: Stratégiai mélység. Törökország nemzetközi helyzete. Antall József Tudásközpont, Budapest, 2016. 319–325. 3

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E which has emerged with the United States of America after the Six-Day War has been tremendously beneficial to the Jewish state, especially from a military and diplomatic aspect. Israel, while it maintains a robust military capacity on its own right, sees its deterrence level greatly enhanced by the backing of the US. However, it is important to highlight that there is no formal alliance between Israel and the United States, unlike among NATO member states, and the most significant contractual relationship between the two countries is the extensive, military assistance packages which are provided by Washington, encompassing ten years, and revised and renewed after expiring.4 While this is a significant contribution to Israel’s defence, the broader partnership cannot be reduced to only arms transfers, but it also includes joint training, R&D cooperation, and standing shoulder to shoulder in international forums. On the flipside, it is more difficult to capture what Israel provides to the US.During the Cold War, the Jewish state was a stable bastion of anti-communist forces in the Middle East, considering that neighbouring Arab states— apart from Jordan—associated with the Soviet Union and adopted Arab socialist political systems, and, thus, threatened—at least until Egypt switched allegiances—with handing the Eastern Bloc the strategic region connecting Eurasia and Africa. After the Cold War, Israel, retaining its vital geostrategic position, emerged not only as a conventional military powerhouse but also as an innovation hub. In the 1980s, Israeli decision makers realised that a country lacking natural resources but bearing a nearly limitless security budget burden must base its economic growth on knowledge-intensive sectors. Israel has adopted as part of its national identity the innovation- and business-oriented scientific advancement, which manifested itself through a lively start-up scene and a presence of a large amount of foreign venture capital. That has guaranteed it a secure place in the highest echelons of the group of the most innovative countries.5 A number of multinational companies such as Intel, Microsoft, and others maintain research laboratories in Israel utilising the outstanding innovation and scientific scene of the Jewish state.Other than attracting the aforementioned Western companies’ attention, in recent years, emerging economic giants like China also appeared with bulging purses to utilise Israeli technological achievements to improve their own companies’ global economic positions. The combined factors of Israel’s geostrategic position and its wide palette of frontier technologies make it a double edge sword for the West and, particularly, the current sole global hegemon, the United States of America.Israeli enthusiasm to 4

Jim Zanotti: Israel: Background and U.S. Relations in Brief. CRS Report, R44245. 20 September 2019. 3.

Bloomberg Innovation Index 2019. Bloomberg. <https://www.bloomberg.com/news/terminal/ PLJD1IDWRGG1 > Accessed: 4 November 2019. 5

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E engage with emerging Asian powers requires a comprehensive analysis, especially as it has to endure American criticism for its relations with China. The Jewish state’s national security interests necessitate, as stated before, a vigorous economy and technological know-how to maintain or even widen the quality advantage it has in the military field over its current and potential regional adversaries. Israeli population of nine million makes it vulnerable to more populous countries, which it compensates with a robust army, utilising expensive and numerous equipment, and maintaining an overall quality edge over its adversaries. The military budget has to be sustained by a large and ever-expanding state budget, and, for that, the export-driven Israeli economy cannot depend solely on the market of the European Union, its largest trading partner traditionally, because of fears of another potential financial meltdown, similar to that in 2008–2009, and also of possible EU sanctions on Israeli goods and services proposed to force Israel to make more efforts at the Israeli–Palestinian peace process.6 Israel should not rely on the United States in its trade relations either, as the US is also prone to face a financial crisis in the coming years and, as a whole, is positioned less favourably than the EU to be a hegemonic trade partner for Israel. The emerging and rapidly expanding Asian economies, such as China and India, provide a continuous opportunity for Israel to attract foreign capital, raise and diversify exports, and broaden the diplomatic–political network in the international arena. Two other, less tangible factors that should also be factored in are the leadership of Prime Minister Benjamin Netanyahu and the Israeli business climate. About the personal issue, we may say, based on reported news, that the Prime Minister is an avid supporter of the economic opening to Asia.7 This process has started mainly during the arguably hostile presidency of Barack Obama and a strong BDS movement among Western publics. Secondly, apart from any grand strategy concerns of the Israeli state, operating in a market economy, Israeli companies and businessmen are interested in profit, and, as such, they do not need to be “forced” by anyone to engage with Asia. On the contrary, the Israeli State may find itself playing a moderating and guiding role in this process, which, as we will see, is not an easy task especially in the current international environment. While Israel is interested in engaging with all rising Asian economies, this paper mainly focuses on its relations with the People’s Republic of China. There are four strongly interconnected reasons for this special

6 Elai Rettig–Oded Eran: Economic Relations between Israel and Europe: Selected Issues. Memorandum No. 175, The Institute for National Security Studies. June 2018. 7 Raphael Ahren: PM lauds ‘growing friendship’ between Israel, China as he hosts vice president. The Times of Israel. 23 October 2018. <https://www.timesofisrael.com/pm-lauds-growingfriendship-between-israel-china-as-he-hosts-vice-president/ > Accessed: 4 November 2019.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E emphasis. First of all, China is the third largest economy of the globe and one which grows at more than 6% a year, according to the Chinese state institutions’ and international organizations’ official statistics.8 Secondly, China has the most ambitious investment and acquisition scheme in place, manifested as the framework of the Belt and Road Initiative, which has overarching global ambitions combined with a plan to make a technological leap in China and transform its economy.9 Thirdly, these frameworks have ample projects in place and are planned in and with Israel, i.e., in a highly competitive environment. Finally, Chinese ambitions are perceived in the US as a move to upset global power relations, and Israel is threatened with retribution for any substantial part it would play in this grand game. Even though other Asian countries, such as India, Japan, Vietnam, and Korea, do play an important role in Israeli economy, this paper will be analysing largely the Chinese engagement with Israel.

Chinese interests in Israel Chinese President Xi Jinping unveiled the Belt and Road Initiative (formerly known as One Belt One Road Initiative) in 2013 as a government-supported plan to realise massive infrastructure investment in Eurasia and Africa with an ever-widening scope and depth.10 Due to its geographic location, Israel is supposed to become a vital node in the emerging transportation network, but, on the flipside, while the Jewish state’s position is highly strategic, its small territory and relatively isolated position in its region limits the Chinese interest and possibilities.11 Parallel to these infrastructure-related plans, China is interested in utilising Israeli tech to support its transition to become an advanced, post-manufacturing economy; an effort manifested in President Xi’s “21ˢᵗ-Century Digital Silk Road” scheme, which orders Chinese institutions and companies to engage in international cooperation and development in the “frontier areas” of current technological advancement, such as digital economy, artificial intelligence, and big data.12 Israel presents, in a sense, an exception to the general rule in which Chinese companies use Chinese

8 Data. Country profile: China. The World Bank. <https://data.worldbank.org/country/ china?view=chart > Accessed: 4 November 2019. 9 The EconomistIntelligence Unit At a Crossroad: What China’s new economic diplomacy means for business. The Economist. December 2015. <http://growthcrossings.economist.com/wp-content/ uploads/sites/14/2016/02/growthcrossings-briefingpaper-crossroad-chinatrade-201512.pdf > Accessed: 14 November 2019. 10 Andrew Chatzky–James McBride: China’s Massive Belt and Road Initiative. Council on Foreign Relations. Last updated: 21 May 2019. <https://www.cfr.org/backgrounder/chinas-massive-beltand-road-initiative > Accessed: 14 November 2019. 11 Shira Efron, et al: The Evolving Israel-China Relationship. The Rand Corporation, Santa Monica, California, 2019. 39-40. 12 Huang Yong: Construction of digital Silk Road lights up BRI cooperation. The People’s Daily. 24 April 2019. <http://en.people.cn/n3/2019/0424/c90000-9571418.html > Accessed: 15 November 2019.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E funds to build infrastructures in developing and capital-strapped countries, while technological cooperation and company acquisitions are often pursued in advanced countries.13 Meanwhile, Israel is important for China for both reasons; therefore, this situation presents a unique challenge to Israeli leaders and their American allies. The Chinese geostrategic interest in Israel stems from its position close to the vital maritime route between the Mediterranean Sea and the Indo-Pacific. This corridor is one of the strategic priorities of the “Vision of Maritime Cooperation under the Belt and Road Initiative,” which was unveiled by President Xi in 2017.14 China aims to build up hard infrastructure along the Eastern Coast of the Mediterranean Sea by investing in the Haifa port, the largest landing place in Israel, to operate a new container terminal starting from 2021. Plans have also been made to invest in Ashdod, the country’s second largest port. Preferring Israel in the region is logical choice, as the two other alternatives, namely Syria and Lebanon, are much more instable than the Jewish state, and any Chinese investment would be under grave security threat in these civil war–prone countries. Even though Israel is quite isolated in infrastructural terms, it does have access to Egypt and Jordan, two countries it has peace agreements with, which could provide a diplomatic–political base for expanded transportation routes towards Chinese owned ports in the Mediterranean. It is worthwhile to note that “on the other side” of the sea, China has already acquired ports in Greece (Piraeus) and Romania (Constanța) so a clear pattern is emerging. Another possibility for China is to create an alternative transportation route to the Suez Canal by connecting the port of Eilat on the Red Sea with Ashdod with the proposed Red–Med rail project. The alternative route would reduce the risk of using the Suez Canal as China’s sole access to Europe for its shipments. On the other hand, the project (which would cost anywhere between USD 6.5 billion and 13 billion) lacks political approval and secure funding.15 Concerns connected to these Chinese infrastructural investment ventures and plans are threefold from a US/Western perspective. First of all, the port of Haifa is a frequent port of call to US capital ships, all of which possess advanced military technology, not to mention Israeli ships and submarines themselves which use Haifa as their main base of operation, securing the Israeli maritime domain and coastline. All these vessels would supposedly be threatened by Chinese surveillance and spying, which could be done through equipment installed in the 13

Efron [et al.], 82.

Assessment on U.S. Defense Implications of China’s Expanding Global Access. US Department of Defense. 20 December 2018. 12. 14

15 Mordechai Chaziza: The Red-Med Railway: New Opportunities for China, Israel, and the Middle East. BESA Center Perspectives Paper. No. 385. 11 December 2016.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E Chinese-maintained sections of the port. Chinese companies, which are extensively overseen by the government, could turn Haifa (and Ashdod) into a listening post through signal intelligence.16 Secondly, the United States is alarmed by Chinese maritime ambitions, as its army suspects that these supposedly civilian investments would in time serve as forward positioning bases for the Chinese navy and aid in resupply missions in faraway engagements. Thirdly, a common fear connected to Chinese investments is the debt-trap diplomacy. Consequently, there are concerns that Chinese investments would eventually result in an attempt to undermine Israel’s commitment to the US-led world order, which serves as a key anchor for Washington’s Middle East strategy through economic leverages.17 These three aspects have to be analysed separately, as they usually come in a package, but each of them has a different degree of plausibility in the unique case of Israel, which is a small, threatened—but, in the military and economic field powerful—country. These concerns were explicitly voiced by leading American diplomats and politicians, among them former US ambassador to Israel Dan Shapiro, who reportedly said, “[t]o have a Chinese company operate a port of a close ally potentially poses a significant challenge and maybe a risk for U.S. Navy operations,” 18 and National Security Adviser John Bolton, who emphasised an even broader unease over the scope and strategic nature of Chinese investments and acquisitions in Israeli infrastructure during his January 2019 visit to the country.19 The second category of enhanced Israeli–Chinese ties mostly involves the high-tech sector of the economy. Concerns stemming from the significantly growing interest in Israeli innovations can be grouped into business- and military-related ones. The latter can greatly affect the global balance of power and the military qualitative edge which the US has over its main competitor, China. Chinese companies, following the natural evolution of a developing economy, are interested—and, indeed, guided—by the political leadership to engage in partnerships through which they can raise Chinese civilian high-tech levels. This process offers advantages and threats to Israel even on the purely economic front. On the one hand, China can channel significant funds into the Israeli economy and provide opportunities to international scientific engagement, a factor which cannot be understated, considering the

16 Jonathan E. Hillman: Influence and Infrastructure. The Strategic Stakes of Foreign Projects. CSIS Reconnecting Asia Project. 2019/January. 17. 17

Efron et. al., 36.

Raphael Ahren: Has Israel made a huge mistake letting a Chinese firm run part of Haifa port? Times of Israel. 20 December 2018. 18

19 Michael Wilner: Bolton Tells Netanyahu of U.S. Concern with Chinese Presence at Haifa Port. The Jerusalem Post Online Analysis. 6 January 2019.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E fears of a renewed BDS pushback against Israel. On the other hand, China aims to become a leading technological power and leapfrog over more established advanced economies, utilising technologies it can acquire through frameworks such as the 21ˢᵗ-Century Silk Road and individual efforts by its companies and research institutions. Israel may attract a large amount of capital during this process, but also faces the threat of being left behind on the technological front. For a country which lacks any other significant backup plan for income apart from knowledge intensive agriculture, manufacturing and services, this process can become a death-trap. The gravest concern is not the regular learning process and knowledge sharing which occurs in any international partnership, but the state of intellectual property protection in China. Israel must carefully balance its immediate economic interests with its long-term strategy to remain in the echelons of innovative nations, a factor—but not the only one—which advise it to carry out a comprehensive national security review of foreign investments and ventures realised in its territory. The more significant factors in Chinese technology acquisition through various illegal and semi-legal means are sensitive and dualuse, which is noted as the gravest of concerns in the US Department of Defense evaluation on Chinese interests. As the report states: China continues to supplement indigenous military modernization efforts through the acquisition of targeted foreign technologies and the know-how pertaining to their development, including engines for aircraft, tanks, and naval vessels; solid-state electronics and microprocessors, and guidance and control systems; enabling technologies such as cutting-edge precision machine tools; advanced diagnostic and forensic equipment; and computer-assisted design, manufacturing, and engineering. China often pursues these foreign technologies for the purpose of reverse engineering.20 The United States is especially concerned not only because of indigenous Israeli dual-use technology getting into Chinese hands but about its military know-how’s being indirectly transferred to Israeli equipment. Washington has been highly sensitive to this type of (sporadic) Israeli carelessness in the past, and Israel was quick to correct its conduct. Two instances demonstrate that, unlike in the case of the less tangible— but nonetheless grave—concerns connected to port development and other infrastructural projects, the US reigns in its allies swiftly when it comes to concrete, critical military tech. In 2000, Israel had to scrap a previously agreed contract with China for an advanced airborne tracking system for the Phalcon reconnaissance aircraft because of the highly critical nature of the technology the deal contained. Israel has suffered 20

US Department of Defense, 15.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E financial and diplomatic damage in the process. An even more grave case occurred in 2004, when the US outrage prevented Israel from returning the Harpy UAVs the state-owned company Israeli Aircraft Industries (IAI) had repaired to China, as, according to Washington, they were upgraded with party American defence technology. These two incidents show that Israel did not dare to face significant and concrete American concerns. The country has since abstained from similar defence deals with China.21 The second affair even led the US to suspend Israel from the Joint Strike Fighter project, which produced what is known today as the the F-35, demonstrating that Israel may lose American support to maintain its qualitative edge over its regional adversaries, and, therefore, not leaving any significant room to manoeuvre when it comes to military technology.22 But real concerns come from the more subtle ways China may use to obtain military technology from Israel, as most civilian Chinese companies have extensive connections to the government, the armed forces, and other military entities. Therefore, they are obligated to transfer any sensitive technology they obtain during their foreign business venture.23 Unlike previous examples of clear-cut military deals, civilian business investments and conduct needs complex supervision and screening, analysing each venture through various lenses and factoring in a large number of potential consequences. This process requires a national security review mechanism, but, as with any tool, apart from having the equipment, one also has to have the will to use it.

National security review mechanisms

It is important to highlight that Israel only recently adopted a comprehensive national security review committee which includes all major stakeholders from the state. However, its mandate is relatively weak. The committee, which has been established on 30 October 2019, has to start operating in 45 days and receiving cases from 1 January 2020. The mandate of the new body is much weaker than the hawkish Israeli and US defence officials pushed for, as it only has advisory role in cases which are handed on a voluntary basis.24 The multiagency ministerial institution, which was created through the Israeli security cabinet’s decision, can also be viewed as a timid compromise step towards a 21 Hiddai Segev: Sino-Israeli Security Relations: In America’s Shadow. The Middle East Institute. 15 May 2018. <https://www.mei.edu/publications/sino-israeli-security-relations-americas-shadow > Accessed: 15 November 2019. 22 Elliott Abrams: What’s Behind Israel’s Growing Ties With China? Council of Foreign Relations. 21 June 2018. <https://www.cfr.org/expert-brief/whats-behind-israels-growing-ties-china > Accessed: 15 November 2019. 23

Efron [et al.], 86.

Mordechai Chaziza: Israel Agrees to Monitor Foreign Investment. BESA Center Perspectives Paper. No. 1,340. 11 November 2019. 24

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E comprehensive and mandatory national security review system, as, in six months after the start of the operation, stakeholders shall convene to introduce necessary changes to the body, based on the accumulated experience. The main rift which is going to re-emerge after the sixmonths period is nearing its end, and the government in place now is between the hawkish and dovish sides, the former consisting of the Israeli Ministry of Defense and the National Security Council (with the tacit support of the US-allied institutions), and the latter of the Ministry of Finance and the National Economic Council. The advisor body was established under the Ministry of Finance, and technology, the most relevant destination of foreign investments, especially in the Chinese case, is not covered by it.25 The dovish side is afraid of scaring away potential new investors by establishing a mandatory national security review system, while the defence officials are not content with not being able to block business ventures which potentially harm Israeli national security and military technological edge. The compromise solution now in place does not make any stakeholder content, and it only provides a platform for the further institutionalisation of screening practices for private ventures in Israel, since there is a much more comprehensive system in place for military deals. The Israeli Ministry of Defense does have a previously established control system in place for defence exports.26 The Israeli MoD furthermore has a body and a coordination mechanism with the US concerning military and dual-use technology export but the current complex international environment and frameworks such as the Belt and Road Initiative need a more overarching, whole-of-government approach. During recent years US and EU attitudes towards investment from China has changed considerably and in many countries the welcoming attitude gave room to greater cautiousness of true Chinese interests. This shift has started to make an impact on Israeli conduct towards non-military deals with China, as, Avi Simhon, indicated that the government might form a new “body or team that would vet foreign investments, a move largely seen [as] aimed at China.” 27 Israeli decision makers making this move towards a more wary approach to China and foreign investment in sensitive sectors in general in 2019, they had a number of Western examples to draw on and could create a renewed alignment with traditional partners. The most developed national security review system, especially the one

25 Adrian Filut: Israeli Cabinet Greenlights Advisory Body for Foreign Investments. CTech. 31 October 2019. <https://www.calcalistech.com/ctech/articles/0,7340,L-3772754,00.html > Accessed: 15 November 2019. 26

Defense Export Control Law. Office of the General Counsel, Ministry of Defense of Israel. 2007. 1–32.

Efron [et al.], 112.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E which is supported by extensive background knowledge, and, therefore, tuned to China, exists in the US. Washington’s policy, despite the current “trade war,” “does not opposed China’s investment activities as long as they respect sovereignty and rule of law, use sustainable financing, and operate in a transparent and economically sustainable manner.” 28 Which they do not. Therefore, the US is at the forefront of stopping the Chinese acquisition of US companies possessing critical assets, technology, or assets which it could use to further its global agenda. It is important to highlight that the US only recently became institutionally equipped to deal with the challenge, as it instituted its first major reform of The Committee on Foreign Investment in the United States (CFIUS) and adopted new export control laws only in 2018 after a previous revision in 2007.29 Under the new rules, CFIUS reviews now cover certain purchases of real estate as well as concessions at airports, seaports, and military bases, and they were also extended to transactions beyond acquisitions if they involve certain types of infrastructure, technology, or personal data.30 The Committee itself is an interagency panel of government officials that reviews acquisitions of US businesses by foreign business entities to assess security risks. It is led by the Treasury secretary, and it includes a broad membership to guarantee a 360-degree assessment of the investments. However, it is important to highlight that US and Israeli interest vis-à-vis China are not the same. The US perceives China as a competitor for global hegemony, a rising power challenging its alliance system. Israel, on the other hand, as a small, insecure state is interested in creating a broad network of partners and allies to secure its position in the international order. Differing interests will result naturally in different type of national security review mechanisms, which, in the Israeli case, would mean a less prohibitive process, as it is interested to attract capital but also to defend its critical technologies and secure its privileged partnership with the US. Another set of examples Israel should take into account when considering further tightening its national security is the frameworks of the member states of the European Union and the system of the political– economic bloc as a whole. Even though the European Union does not have a CFIUS-like mechanism, it has developed a mechanism to further align European responses to potentially malicious investment practices mainly as a reaction to Chinese efforts. Member states of the European Union identified the emergence of “new investors” in recent years, which are moving their investments into specific, knowledge-intensive sectors 28

US Department of Defense, 23.

James K. Jackson: The Committee on Foreign Investment in the United States (CFIUS). Congressional Research Service Report, RL33388.23 October 2019. 2. 29

US Department of Defense, 136.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E in a concentrated manner. The fact is that critical acquisitions are made in greater number by state-owned companies of third countries such as Russia, China, and the United Arab Emirates.31 These investments have alarmed EU decision makers—especially the broad framework of the Chinese Belt and Road Initiative, which has appeared in ambitious slogans of global connectivity and win–win relations but was manifested in acquisition and building contracts for critical infrastructure and purchasing companies owning dual-use technology. Unlike the US stance of direct and unilateral hostility, the EU aims to transform its economic relationship with China, maintaining the engagement but enforcing its core values of fairness and transparency.32 Huge differences exist between each individual member state’s practices in how to approach the evaluation of foreign investments and acquisitions. Large states, such as the United Kingdom, France, and Germany, have substantial screening processes, but a number of member states lack any kind of mechanism. The European Union’s highest institutions registered the threat stemming from these discrepancies and are working in order to introduce a level of cooperative framework to share information on the possible national security threat implications of the investments. This lack of a comprehensive framework at the Union level for the screening of foreign direct investments on the grounds of security or public order was—and, to a degree, it remains—a threat to the EU, especially as all the major trading partners of the EU have already developed such frameworks.33 For instance, Germany is a good example of a European country which moved to regulate foreign investment on a domestic and Union level after experiencing a dramatic shift in Chinese investment to acquire highly sensitive technologies.34 German steps show that laws are one thing, but enhancing knowledge sharing and analysing capabilities of the actors in the cross-sectoral screening framework need a significant amount of institutional development. Similar mechanisms are in place in the United Kingdom and France, which both underwent an evolution in recent years. National steps in EU member states have recently been complemented with an overarching national security review framework at the Union

31 Commission Staff Working Paper on Foreign Direct Investment in the EU. European Commission, SWD (2019) 108 final. 13 March 2019. 32 Erik Brattberg–Etienne Soula: Europe’s Emerging Approach to China’s Belt and Road Initiative. Carnegie Endowment for International Peace. 19 October 2018. <https://carnegieendowment. org/2018/10/19/europe-s-emerging-approach-to-china-s-belt-and-road-initiative-pub-77536 > Accessed: 18 November 2019. 33 Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union. Official Journal of the European Union. 21 March 2019. 2. 34 John Seaman [et al.]: Chinese Investment in Europe. A Country-Level Approach. European Thinktank Network on China (ETNC),.Mayenne,2017. 66.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E level, which has altogether been a significant step in order to protect its interest but significantly falls sort of the investment screening that every G7 states have in place, especially compared to other like-minded democratic countries with market economies like the US and Japan, or individual member states like Germany, the UK, or France.35 The new EU framework for screening foreign direct investments has officially entered into force on 10 April 2019. It aims to secure a sensitive balance between maintaining the world’s most open investment regime and guaranteeing the national security of member states. While ambitious in its intents, it should be highlighted that the new mechanism keeps final decisions on investments in member the state’s hands and serves only as an information-sharing system and to providing administrative backing for interested member states.36 This may function as a non-coercive tool to pressure EU countries to increase their scrutiny when it comes to sensitive investments, but it does not create a true legal shield for member states to mitigate the national security threats stemming from hostile acquisitions and technology theft with overarching effects on the Union. The importance of the review system is that it encourages EU member states to cooperate with third countries in information-sharing practices.37 This fact provides a platform for further cooperation with the like-minded US and Japan, and, potentially, Israel.

Diverse partnerships on both sides The Israel–US–China relationship has to be also analysed in the complex international environment it is positioned in. Engagements with other partners shape Israeli options and limitations when it comes to its balancing between the two major powers (balancing does not mean, of course, an equal distance from each of them). Israel’s new and developing partnerships in Asia does not only include China but also a triad of nations playing a vital role in the US’s IndoPacific strategy. India, Japan, and Vietnam serve as a counterbalance to China’s rise. All three provide extensive business opportunities to Israel, helping it diversify its Asian economic relations so that it not rely y on an engagement with China. Rapidly growing defence exports and cooperation with India and, to a lesser extent, Vietnam, also complement US plans to secure an open Indo-Pacific region not succumbing to unilateral Chinese hegemony.38 A strong difference can be seen in Washington’s tacit approval for Israeli weapon exports to

Foreign Investment Screening and the China Factor. New protectionism or new European standards? Rasmussen Global. 16 November 2017. 5–6. 35

Official Journal of the European Union, 4.

Ibid.

Efron [et al.], 63.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E China’s competitors, and the aforementioned quasi-ban on Beijing’s defence technology acquisition schemes. Israel is also well advised to be wary of providing weapons technology or sensitive intelligence to China, as they can easily end up in its sworn enemies’ hands. Chinese strategy for its Middle East engagement is based on non-interference in regional enmities, and, as such, it enjoys extensive relationships with countries not having a peace agreement with Israel— the Gulf Arab states—or openly hostile to Israel—Iran and Syria’s Assad government.39 Also, China maintains its support for the Palestinian cause in international forums and keeps its partnership with Israel strictly on business terms, visible in its voting pattern on UN Security Council resolutions. The lack of a truly comprehensive and obligatory national security review framework in Israel debilitates its ability to evaluate the effects of its ventures jointly conducted with China in terms of its regional balance of power, presenting a clear danger to Israeli national security. Such a situation should motivate Israeli decision makers not to provide China with technology or access to sensitive intelligence which can be used against it, and the implicit lack of trust creates a “soft ceiling” for the improvement of the Israeli–Chinese partnership.

Conclusions Israel has found itself in a precarious position as it aims to maintain US support and privileged partnership and, at the same time, expand its network of partner countries, especially manifested in attracting investments from China. The country is not alone in this careful balancing, as European states also aim to continue their economic engagement with China but also secure themselves against hostile intents. Israel has a number of options to keep balancing between the major powers and utilise its position to reap the maximum benefit from all relations. Three options are available to the Jewish state: creating a comprehensive and mandatory national security review framework, enhanced cooperation with the US and EU, and maintaining a diverse Asian partnership network. These steps will manifest themselves in the perceptions and decisions of the civilian and armed Israeli leadership to differing degrees. A large number of examples exist for Israel to create a comprehensive, whole-of-government national security review system and to not solely rely on the Ministry of Defense export control process combined with the recently established advisory body for foreign investments. Even though Israeli decision makers previously hinted that they were considering the establishment of a comprehensive and mandatory system for at least

39 Jon B. Alterman: China’s Middle East Model. Commentary. Center for Strategic & International Studies. 23 May 2019. <https://www.csis.org/analysis/chinas-middle-east-model > Accessed: 19 November 2019.

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A N TA L L J Ó Z S E F K N OW L E D G E C E N T R E the coming six month, the current flexible and non-binding scheme will remain in place. Israel will continue to be in this sense a state with extensive political give-and-take between different stakeholders when it comes to Chinese foreign investments. What we can also expect is a combination of a soft and hard ceiling when it comes to the arguably even more sensitive defence technology export. The hard ceiling is an unstated assurance from the IDF and the Ministry of Defense to guarantee that it will not anger its main security partner, the United States. The soft ceiling is manifest in China’s relations with Israel’s adversaries and create a deficit in trust. ln the mediumto long term, as more and more countries and entities like the EU adapt a comprehensive and mandatory screening framework—actually, even China is adopting one in the framework of its legal reform process—it will be easier for Israel to take this much needed step, but, in this issue, it will not be a frontrunner in the international arena as we can see from the adoption of a lax system. Even without a national security review system, having just an advisory committee on the issue, Israel can benefit from enhanced knowledge sharing with the United States and the European Union. The US has extensive capabilities in this field, which it is eager to share to sustain Israel as a secure intelligence partner. The EU, introducing an Union-wide information sharing framework, will become a worthwhile partner in this field, but it will take months, maybe even years, to develop an intra-EU processes that could become the basis of the partnership. Here, again, the lack of Israeli consistency in screening investments will become an obstacle, but the partnership might also catalyse the further tightening and strengthening the Israeli approach to a national security review system. The third option utilised by the Israeli government is the diverse partnership it is building with Asian partners parallel to its engagement with China. These countries, first and foremost India, and to a lesser extent Vietnam and Japan, are all favoured by the United States in its quest to balance Chinese emergence in the Indo-Pacific. Israeli engagement, especially the extensive defence cooperation with India, is favoured by Washington and creates a more favourable perception of overall Israeli engagement with Asia and value as a quasi-ally of the US. To conclude, Israel is of major importance in the competition between Washington and Beijing for global power because of its critical and dualuse technological prowess and strategic infrastructure in the Eastern Mediterranean. Even though Israel should be well advised to catch up to other developed nations in terms of developing its foreign investment screening into a national security review system, it cannot be expected to be among the early adapters of a modern, comprehensive framework. It maintains its commitment to the US in terms of not exporting

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A N TA L L J Ă&#x201C; Z S E F K N OW L E D G E C E N T R E advanced defence technology, or it is willing to bow to US pressure if mistakes are made in the Israeli Ministry of Defense. It is also in its interest not to equip China with critical technology which can get to its Middle Eastern adversaries like Iran. Israel will maintain its careful balancing in the accelerating competition, not acquiescent completely to any side but also not cutting relations completely. Israel will aim to reap maximum benefit for its national economy without endangering its national security with its international ventures. With the current export and investment control systems in place, the Israeli governmentâ&#x20AC;&#x2122;s capabilities for balancing are less than optimal, and, as mistakes will be made, it is a good piece of advice to adopt international best practices and shape them to the countryâ&#x20AC;&#x2122;s special needs.

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