In recent months, the tightrope Israel has been walking between its desire for cooperation with China and its commitment to maintaining normal relations with the United States has been stretched even further. The Israeli market, companies and businesspersons alike, find navigating between the two superpowers to be increasingly complex, and it seems this complexity will only increase.
For some years now, the United States regards China as the most significant challenge to American foreign policy and security policy. The US is contending with the Chinese on several fronts – militarily, politically, and in the media. The clearest expression of the developing conflict between the two superpowers as it pertains to the Israeli market is in the economic sphere. The United States has adopted a policy designed to make it difficult for the Chinese to invest in various countries around the world, and for countries to do business with China. In doing so, the United States is trying to change a decades-old policy that advocated expanding Western cooperation with China.
In October 2022, two changes in regulation were implemented that reflect this policy and make it difficult for Israelis to engage in business collaborations with China. The first change is the Israeli expansion of the powers of its Advisory Committee for Evaluating the National Security Aspects of Foreign Investments, adopted after significant American pressure was employed on Israel. The second change is the restrictions the United States imposed on exports of various products in the advanced computing industry to China, restrictions that also affect particular Israeli manufacturers.
Expansion of the Powers of the Israeli Advisory Committee on Foreign Investments
The Israeli State Security Cabinet formed the Advisory Committee for Evaluating the National Security Aspects of Foreign Investments in 2019. Its main goal was to limit Chinese investments in Israel. According to the 2019 cabinet decision, a regulatory authority vested with the statutory power to grant approvals, licenses, or control permits in sectors such as banking, transportation, or infrastructure, may appeal to the committee if it believes a foreign investment raises concerns of harm to national security, i.e., Israel’s security, foreign relations, or state secrets. The committee may (but is not obligated to) recommend to the regulatory authority that it should not approve the investment for reasons of national security. In practice, of course, it is unlikely a regulatory authority will disregard the advisory committee’s recommendations.
In October 2022, the Israeli cabinet approved an expansion of the committee’s powers. Firstly, it expanded the definition of “foreign investor” even further. In some instances, for example, a corporation will be deemed a “foreign investor” even if a foreign investor’s holdings amount to a mere 5% of the corporation. Secondly, a representative of the Ministry of Foreign Affairs joined the committee, whose members already include a representative of the Ministry of Economy, a representative of the Ministry of Defense, and a representative of the National Security Council. This move strengthens the influence of non-economic interests in the committee. The committee also received authority to consider not only the specific foreign investor it is examining, but also the volume of foreign investments in the industry as a whole. Finally, the cabinet’s decision requires the addition of a condition in all government tenders whereby the regulatory authority may appeal to the committee at the preliminary stage, or before approving a change in control, and disqualify the tender proposal or the change in control as a result of the committee’s recommendation.
As stated, although the committee is supposed to discuss every foreign investment, the clear intention is to limit Chinese investments in Israel, and the committee itself and the expansion of its powers was adopted in response to significant US pressure.
The Advisory Committee for Evaluating the National Security Aspects of Foreign Investments currently has no authorities in relation to investments in Israeli high-tech. However, the US government actually imposed restrictions on this sector in October.
American Restrictions on Exports of Computing Components to China and the Implications for Israeli Investors
In early October, the US Department of Commerce published the new rules controlling exports of advanced technology to China. These new rules require the issuing of authorization to export advanced computing components and technology in the semiconductor and integrated circuits industry, as well as components and technology used to develop supercomputers. The restrictions on exports of these components to China is formally justified because they can improve China’s military capability. However, many consider these restrictions as designed to maintain American supremacy considering Chinese developments in the high-tech fields.
The restrictions imposed by the United States are relevant to Israeli companies in at least two ways. First, the restrictions apply to anyone who is a US citizen or lives in the United States and who engages in any way in the development, sale, or transfer of the regulated products. Second, and more importantly, the US applied the Foreign Direct Product Rule to some of the regulated products and to a list of Chinese companies. Thus, even products manufactured outside the United States but that use American technology or materials are included in the definition of a regulated product, and their export to China requires prior authorization from the US Department of Commerce.
These limitations will severely limit companies’ technological collaboration with China in the development of advanced computing capabilities. Moreover, the US government has already announced it is considering expanding the restrictions on exports to additional sectors.
What’s Next?
The limitations described in this short article attest to the general trend of imposing restrictions on economic and technological collaborations between China and Israel. Insofar as tensions continue to rise between the United States and China, it is reasonable to expect further tightening of the imposed restrictions.
Of course, economic cooperation between Israel and China is still likely to continue. Between 2007 and 2020, Chinese companies invested some USD 20 billion in Israel, and Chinese companies own several infrastructure projects in Israel, such as the Haifa port. However, collaborations between Israel and China now require paying more attention to the imposed regulatory restrictions, as well as a legal understanding of the possibilities in this regard.
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Professor Amichai Cohen is a Special counsel on International Law in our firm. Professor Cohen is a faculty member in the Faculty of Law at the Ono Academic College and serves as a senior fellow at the Israel Democracy Institute.
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