The U.S.-China Power Struggle:
Can Israel Remain on the Sidelines?

By Tommy Steiner | October 10, 2019

Spotlight: Israel in the International Arena
Insights on strategic issues facing Israel, the Middle East and the International Arena

Photos: White House | Shealah Craighead

Israel will not be able to continue developing its relations with China irrespective of the U.S.-China rivalry. The growing likelihood of economic decoupling between the two great powers will make it ever more difficult for Israel to remain on the sidelines.

Regardless, Israel must protect its interests and assets vis-à-vis China. In numerous cases around the world, China has attempted – and too often succeeded – to leverage its financial investments to acquire knowledge and technological capabilities, conduct industrial and strategic espionage, and attain political influence.

Therefore, Israel ought to prepare for the highly probable contingency – commercial and business ties with China will decrease. Hedging and managing the risks might limit the damage. Furthermore, this turning point could offer an opportunity to further deepen Israel relations with the U.S. and Western countries in Europe and Asia.

Meanwhile, many Israeli senior officials and business executive are pursuing a "business as usual" approach towards China. For instance, the Municipality of Ashdod recently announced that it reached an agreement with China that would designate the city as a port for the Belt & Road Initiative (BRI), including considerable Chinese investments in the city's infrastructure. The U.S. considers the BRI as one of the critical Chinese efforts to acquire global political influence at America's expense. In the absence of a clear Israeli national policy, the City of Ashdod could trigger a pointless but severe crisis between the U.S. and Israel.

A Very Different "Cold War"

The power struggle between the U.S. and China will shape global politics in the coming decades, just as the U.S.-Soviet Cold War defined the second half of the 20th Century. Since the assent of Xi Jinping to power, China has powerfully and resolutely sought to enhance its position as a global power. China's main courses of action have focused on achieving technological primacy, controlling global networks of supply and manufacturing, expanding political influence, and military force construction leading to enhancing its military presence in the Pacific and Indian Oceans, including the South and East China Seas.

President Xi's flagship venture – the BRI – is a cornerstone of China's strategy to enhance its global posture. This ambitious venture, backed with promised vast financial investments, is presented as reconstructing the historical "silk road". China asserts that the BRI is about developing land-based and maritime infrastructures to connect China with Europe via Central Asia, the Indian Ocean, and the Middle East. However, the BRI is growingly perceived as a Chinese attempt to control trading routes and establish spheres of influence. For instance, in Sri Lanka, China granted the local government loans to construct a deep-water port. When Sri Lanka failed to service the loans, it was forced to lease the port to China for 99 years.

China's interest in political influence is not limited to small, struggling nations in Asia and Africa. Having received considerable Chinese investments that include acquiring the Port of Piraeus, Greece blocked in 2017 an EU statement on Chinese human rights violations. A year earlier, and along with Hungary, Greece toned-down an EU statement on China's actions in the South China Sea. Portugal – another "benefactor" of Chinese investments – has been obstructing an initiative to establish a European screening mechanism to oversee Chinese investments.

From an American perspective, the BRI aims to diminish U.S. global power, but the U.S. is more concerned by Chinese practices that take-on the U.S. more directly. American grievances regarding Chinese conduct go well beyond mere trade disputes. The U.S. administration considers policies and practices of China's government and business corporations (both public and private) as an attempt to reach technological and economic primacy by exploiting the U.S. economy. Chinese corporations require their American and Western partners to transfer technologies and manufacturing to China. Reportedly, there is growing evidence that Chinese IT hardware sold to the West is used for espionage, in addition to widespread Chinese hacking efforts for strategic and commercial purposes. The mounting evidence led the U.S. administration to limit access and business cooperation with Chinese IT corporations.

The U.S. however, is not content with its unilateral measures. Unlike other international issues, the U.S. maintains ongoing exchanges with its allies in Europe and Asia to limit and roll-back China's footprint. The current American top priority is to block the entry of Chinese IT firms into 5G cellular networks in Western countries. The issue has been on the top of the U.S. exchange with Israel as well.

The perception that China poses a present and imminent threat to the U.S. national security and economic welfare is a bipartisan consensus. It is not President Trump's own whim. Even senior Obama administration officials openly concede that the U.S. China strategy since the end of the Cold War – engagement and cooperation – has failed and is no longer relevant.

In a notable departure from previous practices, the Chinese government appears resolute in challenging U.S. efforts to thwart its path to economic and technological primacy. The Chinese government permits, and probably encourages, harsh anti-American rhetoric across the social networks it closely surveils. In exchanges with U.S. government officials and in public statements, Chinese officials display a tough and non-compromising position. Presumably, President Xi is convinced that China will manage to deal effectively with American pressure and containment measures.

Considering these trends together, the mounting rivalry between both superpowers is becoming a long-term fixture of 21st Century international politics. Despite the lingering "Thucydides Trap", and as opposed to the U.S.-Soviet Cold War, the U.S.-China rivalry will probably not lead the world to the brink of war. Notwithstanding, the power struggle between the U.S. and China seems far more challenging and multi-dimensional than any previous great power competition.

Against this backdrop, the likelihood of economic decoupling between China and the U.S. (along with its allies) is on the rise, potentially leading to a bipolar economic system. Even if the decoupling will not be total and an impenetrable "economic iron curtain" will not descend upon the world, the ramifications for the global economy will be grave. This will be particularly the case for global corporations that depend on worldwide networks of manufacturing and supply.

Perhaps in contrast to prevalent assumptions, decoupling will probably harm China more than the West. China's aggressive attempts to acquire political influence, also known as "sharp power", have triggered counter-measures in Asia, Europe, and Australia. As it tightens its grip over its population, China is increasingly perceived as a repressive, authoritarian, and mercantilist regime. This perception is not appealing and China might find it difficult to solicit partners and allies. Despite the troubled relations between the U.S. and Europe, most European leaders share the American perspective on China even as they remain averse to President Trump's rhetoric and conduct. Recently, the EU designated China as a "systemic rival".

Notably, China faces considerable challenges at home, particularly dealing with the brewing demographic crisis and addressing the results of the "One Child" policy. At the end of the day, China's strategic influence remains mostly limited to East and South Asia. Although dealing with the emerging global challenges will be a tall order for the U.S. as well, it seems that it continues to retain a stronger starting point. This assessment casts serious doubts on earlier assessments that considered the 21st Century as the "Chinese Century".

Meanwhile in Israel…

Concerns regarding Chinese involvement in Israel started to draw the attention of Israel's defense establishment. The watershed event was an agreement with a Chinese consortium to build and operate for 25 years a new container facility at the Port of Haifa with no security scrutiny. Israel's largest naval base and home to its submarine group is adjacent to the Port of Haifa that is also a calling port of the U.S. Sixth Fleet.

Nevertheless, senior Israeli officials – particularly those serving in economic and civilian ministries – do not consider China's growing involvement as a source of concern and dismiss American misgivings. Furthermore, they appear to believe that one needs not to get overly-excited regarding American demands. Nonetheless, the defense establishment's outlook is different. It learned an expensive lesson on U.S.-China relations following two crises with the U.S. administration (the Falcon Crisis in 1999/2000 and the HARPY crisis in 2005) that led to a comprehensive reform of Israel's defense export regime. These crises effectively ended all of Israel's arms sales to China.

Over the past year, top U.S. officials – from the White House, Pentagon, Treasury, State and Energy Departments – have repeatedly raised the China issue with their Israeli interlocutors. U.S. officials, including President Trump himself, demanded that Israel will block Chinese involvement in Israeli physical and IT infrastructures and establish oversight mechanisms to scrutinize Chinese investments in Israel.

Despite Israeli promises to U.S. officials, it appears that there is an attempt to drag-on and dilute the response to China's involvement. If that is indeed the case, it would most likely end up to be a policy folly. To be clear, it would not only be imprudent to appear dismissive towards American national interests, but it might also be reckless for Israel's own national interests.

First of all, complying with American entreaties regarding U.S. national interests would not suggest that Israel is an American lackey. Just as Israel expects that the U.S. will not undermine Israeli interests, Israel is expected to reciprocate in kind.

Furthermore, the earlier crises between the U.S. and Israel regarding China occurred some 14 and 20 years ago – at a time when U.S.-China relations were far closer and cooperative. Even during the heydays of engagement and partnership, the U.S. considered the transfer of advanced military systems to China as a threat to its national security and forced Israel to end its arm deals with China. Two decades later, the American threat perception of China is peaking and China is considered a present and imminent threat to the U.S.

Therefore, one can only hope that the Israeli foot-dragging on establishing mechanisms to oversee Chinese investments and involvement will not be interpreted as disrespecting U.S. interests. As noted above, the bipartisan consensus across the U.S. political system prioritizes containing Chinese pursuit of global political influence and economic-technological primacy.

A valid argument raised by proponents of China-Israel economic cooperation is that heeding to American demands will harm Israel's economic interests. This concern cannot be easily dismissed. Furthermore, if the current trajectory of decoupling will persist, Israel's economic and commercial ties with China will suffer. Moreover, if the U.S.-China rivalry will further escalate, one can expect additional American requirements to limit the export of certain products to China. For instance, the policy debate in Washington regarding future measures to contain China include proposals to limit the export of semi-conductors to China. Israel is one of the top manufacturers of semi-conductors. Israel's export-dependent economy will suffer from a global economic crisis, which is a likely outcome of a U.S.-China economic decoupling.

During the previous U.S.-Israeli crises regarding China, one of the main reasons for Israeli initial reluctance to accept American positions was that it would severely harm Israel's defense industries. Indeed, the crises led to a full cessation of Israeli arm sales to China. However, Israel's defense industries were able to absorb the blow and expanded Israeli arm sales to new markets.

This experience – adjusting to new circumstances and developing new markets – is one of the most important lessons of the earlier crises. Israeli decision-makers ought to plan in advance and prepare the Israeli economy for the increasingly likely contingency – that its economic and commercial relations with China will decline. This will harm Israel's economy, but if there will be an attempt to hedge and manage risks – it might be possible to limit the damage. Furthermore, this turning point might also offer new opportunities – deepening and broadening Israel's economic and commercial ties with the U.S., Europe, and like-minded economies in Asia-Pacific.

Finally, proponents of developing China-Israel ties assert that China's involvement in the Israeli economy is not malicious. That assertion cannot be disputed. There is nothing malevolent in China's pursuit of political and strategic influence; that is what great powers do. Has China sought to gain influence in Israel? Probably yes. The former regulator of Israel's financial markets has already blocked attempts of Chinese corporations to acquire two major insurance firms. Two years ago, Israeli media exposed that China's mega IT corporation – Huawei – has been operating in Israel secretly through a local Israeli technology firm for several years. The head of the Israeli Security Agency (Shin-Bet) recently warned that the Chinese involvement in Israel raises security risks.

Furthermore, China appears to be applying its playbook for port cities in Israel as well. For example, Chinese acquisition of the Port of Piraeus gained it considerable political influence. The Chinese COSCO corporation did not only acquire the port and turned it into one of Europe's leading ports, but also began advancing additional investments in Piraeus, including hotels, shopping malls, and more. These plans have been recently blocked, probably following American and European pressure.

Back in Israel, the Municipality of Ashdod announced earlier this year that it has reached an agreement with the Chinese government to expand Chinese involvement and investments in the city. With 250,000 residents, Ashdod is located along Israel's southern Mediterranean coastline and is home to Israel's largest container port and second largest naval base. In the vicinity of the city, there are several critical energy infrastructure facilities.

According to the Municipality of Ashdod, the new agreement will designate Ashdod as a port of China's BRI. While a Chinese corporation is constructing a new facility in Ashdod's port, the Chinese have promised to build a new industry park in the city, build a monorail connecting the new industry park with the port and the city center, and establish an academic center that three Chinese universities will operate.

Even if designating Ashdod as one of the maritime hubs of the BRI makes sense – in terms of developing the ambitious initiative – it is hard to avoid the thought that Ashdod was chosen for additional reasons, such as the critical infrastructures that surround the city.

Israeli leaders and officials have sought to reassure their American counterparts that Israel is taking seriously the U.S. position on China. However, the American administration might find it difficult to understand how such a close ally is facilitating and advancing an initiative that the U.S. considers detrimental to its national security.

In any case, designating a city – home to Israel's largest container port – as a hub of China's BRI cannot be a matter solely determined by the respected city councilors of Ashdod. Israel's relations with the U.S. – and with China for that matter – are important enough to be determined by the government through a national policy.

Authored by Tommy Steiner

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