Guess who Israel’s second largest trading partner is — China

In 2016, China’s direct investment in Israel nearly tripled to $16 billion and China is expected to soon overtake the United States as Israel’s top source of foreign investment.

China and Israel hardly seem natural partners yet Israel recently hosted Chinese Vice-President Wang Qishan, the most senior official from Beijing to pay an official visit.

China is Israel’s second largest trading partner globally. Trade volume has multiplied 200 times since 1992, reaching $11 billion in 2017. Israel exported $2.8 billion worth of goods to China in the first half of 2018, an 80% jump from the previous year, government figures indicate.

Military ties are not all but play an important role in this trade despite China being one of the few countries to concurrently maintain warm relations with Israel, the Palestinian territories and the Muslim world at large. Israel is closely aligned with China’s main competitor, the United States.

When it comes to sheer size, demography and geopolitics, the two countries are vastly different. China has ten cities larger than Israel’s population and no indigenous Jewish community. Israel boasts no Chinese community.

However, in recent years, trade, investment, educational exchanges and tourism have all been rising. China’s status as a potential world power prompted Israel and its leaders to build ties with a country that Israeli Prime Minister David Ben-Gurion called in an essay in 1953, along with India, a “great and ancient nation.” Both countries’ weight in the scales of humanity was “increasing,” he said.

The two countries started building military ties in the 1980s during the Soviet war in Afghanistan, which both opposed. They both supplied weapons to the Afghan mujahideen — Israel sending captured Palestine Liberation Organisation weapons via the United States and Pakistan.

As they stepped up their assistance to the Islamic resistance against the Soviets, Israel and China exchanged visits of academics, experts, businessmen and military. Reportedly many of the heavy tanks used in China’s 1984 National Day parades were retrofitted from captured Six-Day War equipment.

The door to China opened seriously when Deng Xiaoping became the country’s leader in 1978 and allowed market reforms and foreign investment. One of the first to take advantage of those changes was Shaul Eisenberg, who was among the 20,000 Jews who took refuge in China during the second world war when his family settled in Shanghai.

In 1979 Eisenberg arranged for the leaders of Israel’s defence industry to have a secret meeting with their Chinese counterparts, which led to lucrative arms deals. Thanks to a shared American-Chinese interest in thwarting Soviet ambitions, the United States quietly supported Israeli-Chinese cooperation. Not wishing to antagonise their traditional Arab allies, the relationship largely flew under the radar.

As the Israelis sat down with the Palestinians in Madrid in 1991 and the Soviet Union collapsed, a new challenge arose: The United States no longer had an interest in allowing Israel to pass on advanced technology to China. As relations between China and the United States became tense under the Clinton presidency, the Americans forced the Israeli government in 2000 to cancel a $1 billion deal to sell China four Phalcon airborne early warning and surveillance systems. China was angered but, being pragmatic, its leaders kept cool heads. As Israel’s high-tech came into its own in the 2000s, trade between the two countries tripled.

The decisive shift occurred after the Western economies crashed in 2008. In 2010, China announced its intention to make innovation the new engine of its economy and Israeli politicians and businessmen concluded that the time had come to reorient their country’s economic future.

This transformation is illustrated by three examples: in September 2011, the Sino-Israel Global Network & Academic Leadership (SIGNAL) hosted the first China-Israel Strategy and Security Symposium in Israel. SIGNAL established five Israel studies programmes at Chinese universities (11 exist today) and, in 2013, the Technion, Israel Institute of Technology announced it would have a campus at Shantou University in Guangdong, the country’s most populous province. Israel set aside hundreds of scholarships for Chinese students to study science and technology in Israel.

Other initiatives followed that reinforced links between the two countries: China Harbour Engineering Company is building a port in the southern Israeli city of Ashdod to integrate it into China’s Belt and Road Initiative by unloading goods in the Red Sea port of Eilat and taking them by train to the Mediterranean port of Ashdod and hence to Europe.

Direct flights are available between Beijing and Tel Aviv and Israel is one of the 51 founding members of the Asian Infrastructure Investment Bank, which fits into China’s overall foreign economic policy.

The two countries are expected to sign a free trade agreement soon. Visas between China and Israel have been cancelled. The result is clear: In 2016, China’s direct investment in Israel nearly tripled to $16 billion and China is expected to soon overtake the United States as Israel’s top source of foreign investment.

China is attracted to Israel’s vaunted technology sector while Israel welcomes China’s investment and potential as a research collaborator. It views China as a rebuff to boycotts and divestment efforts by other countries.

It is worth remembering that in 2004, the US government asked Israel to renege on its pledge to upgrade the Harpy missile system, which Israel Aerospace Industries had sold to China ten years earlier. Israeli officials denied US allegations the missile system contained American technology and followed through with its contractual commitments to China.

Some Israelis, especially among former national security officials (such as the former Mossad Director Efraim Halevy) warn of potential security issues and possible friction with the United States resulting from Chinese involvement in Israeli infrastructure projects. Israel knows it must be careful lest it find itself at odds with its greatest ally regarding products with potential military uses. That would be even truer if disputes between the United States and China turn into a trade war.

Meanwhile, trade between the two countries and Chinese investment in Israel keep rising.  The trade figure of $11 billion may seem small compared with China’s trade with the United States or the European Union but it continues to increase. The high-tech and military components of trade play key roles in overall economic cooperation.

Francis Ghiles is an associate fellow at the Barcelona Centre for International Affairs.

This article was originally published in The Arab Weekly.