The U.S.-Israel-China Triangle and the Sorek B Project

On May 13, U.S. Secretary of State Mike Pompeo made a lightning visit to Israel reiterating the need for Tel Aviv to bolster investment-screening efforts, especially in its dealings with China. Pompeo’s pressures came after the U.S. recent concerns regarding Hutchinson, a Hong Kong-based multinational conglomerate that reached the final stage of a tender procedure for the construction of Sorek B, a desalination plant, which will rise up in Kibbutz Palmachim, near Israel’s primary spaceport. However, Sorek B is not a simple project. Indeed, it is expected to be the largest desalination plant in the world, with a production capacity of 200 million cubic meters of water per year, meaning a quarter of Israel’s annual needs.

The change of direction suggested by Pompeo seems to have paid off. Indeed, on May 26, the Israeli Finance Ministry named the Israeli company IDE Technologies as the winning bidder for the $1.5 billion desalination plant contract, beating out Chinese competition. The prospect that Hutchinson could sign the deal had raised eyebrows in Washington from the very first moment, already concerned about the large inflows of Chinese investment recorded in Israel in the last few years, particularly in strategic sectors.

While U.S. concerns about Israel’s deepening ties with China are not new, the rhetoric is heating up again between Beijing and Washington especially regarding the potential geopolitical impact of the Coronavirus. While Europe and the U.S. are reeling from the economic impact of the pandemic, the Chinese trade surplus landed at $45.34 billion in April, rising by 8,2% compared to the same month last year. Furthermore, Chinese outbound investments are expected to increase in the near term. Given the large demand for capital more and more companies could turn toward China during the economic downturn, becoming targets for considerable investments. On the other hand, Chinese companies, backed by the government’s financial muscle, have no intention of slowing down their global investment strategy. In this sense, the COVID-19 emergency is acting as a catalyst for Chinese investments worldwide.

Israel, a leader in the high-tech sector, fits perfectly in the Chinese diplomatic strategy, offering an optimal space for investments in areas such as biotech and medi-tech. In fact, in April, the Israeli Ministry of Health approved the partnership between the Chinese genomics giant – BGI Genomics – and the Israeli MyHeritage for the creation of a COVID-19 testing lab. A $25 million deal with BGI to supply equipment that will carry out testing alongside Israel’s facilities. However, the deep ties between BGI and the Chinese government and the security risks involved further contributed to escalate tensions between the U.S. and its top strategic ally in the Middle East.

In order to understand the dynamics of the Sino-Israeli relationship and the U.S. resulting pressures over time it is useful to analyze how Israel has tried to balance its interests vis-à-vis the two superpowers. Israel and China established diplomatic relations in the early 1990s; however, the two countries recently substantially expanded their commercial cooperation. Indeed, the latter has experienced a significant growth in the last few years; in 2017 the value of trade between the two countries was 200 times greater than in 1992. Since 2013, Chinese companies have increasingly consolidated their presence in Israel by purchasing local companies and bidding on key infrastructure projects. Such activities focused mainly on the high-tech sector, in which Chinese investment of venture capital doubled from $500 million in 2014 to $1 billion in 2016. In particular, Israeli hi-tech startups received Chinese investments of $325 million in the first three quarters of 2018, marking a 37% increase over the previous year. During the same period, Chinese imports from Israel (chipsets, semiconductor devices and other high-tech products) experienced a 47.2% increase, numbers that made China Israel’s largest East Asian trading partner and its third largest trading partner worldwide.

What makes Israel a sui generis partner for Beijing is its alignment with two primary Chinese objectives: the development of the Belt and Road Initiative (BRI), and the deep interest in Israeli advanced technology, considered as an instrumental factor through which Beijing can consolidate its role as global economic hegemon. In fact, the focus of China’s overseas investments over time has shifted from energy, mining and manufacturing to such high-tech sectors, such as artificial intelligence (AI), robotics and information technology. At the same time, engagement with Israel advances China’s broader goal of increasing its influence in the Middle East, eventually offsetting China’s traditional partners in the region, mainly Iran and Saudi Arabia; ties essentially dictated by China’s energy dependence. Israel has all the characteristics to be a key node in the 21st Century Maritime Silk Road, connecting the Indian Ocean to the Mediterranean Sea through the Gulf of Suez. Two significant examples of such architecture concern the construction of the new port in Ashdod by an Israeli subsidiary of the China Harbor Engineering, and the potential construction of the Red-Med railway, a bridge between the ports of Eilat and Ashdod, by another Chinese company. However, Ashdod is not the only port that witnesses Chinese engagement. In fact, in 2015 the Chinese company SIPG, based in Shanghai, won the bid for the concession to operate the port of Haifa’s new Bay Terminal for 25 years, starting in 2021. Such deal, according to Israeli authorities, was part of a state program aimed at increasing competition and participation of the private sector in the Israeli port industry. However, it is worth noting how the decision reportedly excluded the involvement of either the National Security Council or the Navy, a key factor if considering that the Israeli submarine fleet is based in Haifa, which is also a port of call for the U.S. Sixth Fleet. The Chinese control over the Israeli critical infrastructure, possibly entailing security risks, has caused friction with the American side, whose warnings eventually prompted Prime Minister Netanyahu to review the deal.

Foreign investments in Israel’s infrastructures considered ‘vital’ to the nation’s security have recently started drawing more attention and suspicion, particularly given the absence of a clear and comprehensive screening mechanism in the country. Since 2013, Benjamin Netanyahu has shown particular openness to Beijing, openly welcoming Chinese infrastructure projects. The primary motivation is found in the willingness to strengthen Israel’s economic relations with the Chinese economic giant and, at the same time, diversifying its commercial partners away from its historical ones: the U.S. and Europe.

Increased Chinese activity in Israel has been facilitated by a relatively permissive investment environment, with a regulatory intervention aimed solely and exclusively at investments in Israeli firms that provide strictly military or dual-use technologies, namely civil and military. Prior to 2020, Israel had never had a comprehensive review mechanism similar to the U.S. Committee on Foreign Investment in the United States (CFIUS), whose role is to evaluate any foreign acquisition of domestic companies in order to shield any potential threats to national security. However, on October 30, 2019, the Israeli government announced the formation of a new advisory committee to assist the screening of foreign investment. Although no country is specifically mentioned, it is clear that this decision was concerned primarily with China, with the aim of easing the tensions with the U.S. without compromising the relationship with Beijing. However, Washington did not meet the formation of the committee with enthusiasm, exposing a number of important legal and structural limitations. First, the committee was set up by a caretaker government. Being not formalized through legislation may hamper its operability which basically means the committee might not substantially change the regulation environment. Second, the ‘advisory’ denomination implies a deliberate choice by the regulators to consult (or not) the committee for an advice, which is ultimately non-binding. Third, the committee’s mandate is extremely limited; the only areas of intervention include investments in finance, communications, infrastructure, transportation and energy. The exclusion of the technology sector is the key element that distinguishes the Israeli committee from its U.S. parallel, the CFIUS. The latter, in fact, can review transactions related to technologies that are defined as critical, emerging and foundational, including biotechnology, artificial intelligence, robotics. Most of the Chinese investments in Israel fall under these areas, yet excluded from the committee’s responsibility.

The case of the Sorek B project, defined as vital infrastructure, further outlines the limited nature of the committee. In fact, it does not have a retroactive advisory function, therefore, it cannot intervene on a tender that was published before its formation. However, it is evident that the creation of the committee is apt to quickly find solutions to the tensions with Washington, Israel’s vital strategic partner. This highlights the challenge Israel faces in balancing its interests with China without unwittingly causing too much friction with the U.S. As a fact, the high degree of attractiveness of Chinese investments represent an important opportunity for Tel Aviv to keep its absolute edge in the high-tech sector over the competition; a priority that currently seems to prevail over Washington’s pressures.