The East is calling Israel

Size-wise, Israel may be a microscopic molecule in comparison to China, but the Asian giant has found much to gain from a budding relationship with the Start-up Nation.

May 14, 2016 01:01
Liu Yandong‏ Israel

Prime Minister Benjamin Netanyahu meets with China’s Vice Premier Liu Yandong‏. (photo credit: HAIM ZACH/GPO)

When China’s Bright Foods in 2014 bought up Tnuva, the symbol of Israel’s homegrown agricultural prowess and creator of its iconic cottage cheese, the Israeli public was, briefly, apoplectic.

Then-Knesset Economic Affairs Committee chairman Avishay Braverman (Labor) called on the Israeli public to protest the deal. Hearings were held. Polls were taken.

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Attempts to block the deal were proposed in the Knesset.

Fast forward two years to the Chinese acquisition of another iconic Israeli company, Ahava, and nary a peep has been heard.

Perhaps the warmer reaction can be chalked up to the difference between a foreign company’s owning a manufacturer of staple food as opposed to face cream. But another explanation is simply that Israel and Asia as a whole are increasingly warming as trade partners.

Every way you look at it, Israel’s connection with China – and Asia in particular – is getting stronger.

In 2013, Prime Minister Benjamin Netanyahu visited China, which he has constantly called a potential growth engine for Israel and its economy.

“Israel is not as big as China,” he said on that trip. “We have eight million residents, approximately one-third the population of Shanghai. But we manufacture more intellectual property than any other country in the world in relation to its size. If we create a partnership between Israel’s inventive capability and China’s manufacturing capability, we will have a winning combination.”

In 2014, Wafer Level Chip Scale package (WLCSP), a portfolio company of Israel’s Infinity Group, became the first company with a foreign co-founder to go public in China.

“They don’t do big steps, they don’t change things suddenly, they go little step by little step,” Infinity managing partner Amir Gal-Or said at the time.

But the steps have been ongoing and substantial. The countries expanded trade credits. Israel has opened up more and more foreign trade offices across China. The countries have increased funding for trade credit, eased visa restrictions and added more direct flights.

Most recently, in March of this year, Israel and China announced the opening of free trade talks, which will help boost commerce between the start-up nation and the world’s second-largest economy.

The Israeli government estimated that a deal, which would take several years to sort through, could double trade from today’s level of roughly $9 billion a year.

Asia has already become an important regional trade partner. As an export destination, for example, in March Asia (22%) was still behind the US (29%) and Europe (28%). In imports, though, it has surpassed the US (Europe was by far the greatest source of imports, accounting for 46%, while Asia stood at 22% and the US at 15%).

All these developments could dramatically alter how Israel views its geopolitical relationships. Some have suggested that closer ties with Asia could help relieve Israel from BDS-related threats emanating from Europe. But serious BDS efforts have failed to gain traction, and many experts see the diversification of Israeli trade partners as an economic good in and of itself.

And though the traditional view is that China simply provides an enormous market for Israel, the relationship will likely grow along more specific lines.

For example, Israel’s leadership in the green energy sector, cultivated to extract maximum use out of scarce resources in the state’s early days and expanded to save energy and reduce pollution, is seen as an asset in China.

China’s pollution and smog are well known, and a country that continues to ramp up both industrial output and urban development needs ways to do so with as little energy expenditure and hazardous environmental output as possible. For instance, a few years ago, China’s Suntech Solar joined forces with Capital Nature, an Israeli investment firm, to test solar panels in the Arava Desert, and the HuaXiang Group made a $2.5 million investment in Jerusalem-based solar company 3GSolar.

On his 2014 visit to China, then-economy minister Naftali Bennett announced the formation of a “Water City” in Shougang, which would be the focal point of Israeli water tech in China. The project set out cooperation in areas such as desalination, agricultural water reuse, sewage treatment and irrigation.

Outside green development, Israel is looking to China as a source of investment in general.

In 2015, IVC Research forecast a 54% increase in Chinese investments into Israel, up to $467 million. In 2012, the figure hovered around $100 million. IVC also pegged Horizon Ventures, the venture capital fund headed by Asia’s richest man, Li Ka-Shing, as the largest source of cash for an ever-growing number of Israeli start-ups. As of 2015, it had invested in 28 of them. (Li has also invested heavily in the Technion, one of Israel’s major tech universities.) A third way that closer China-Israel ties could affect Israel is in dealing with the cost of living. As noted above, Asia accounts for roughly 22% of both Israeli imports and exports, but a free trade deal may well affect the trade relationship unevenly. As much as Israel seeks to sell goods and technology to China, once regulatory frameworks are aligned, it may end up turning to China as a source of imports.

That’s great news for Israelis burdened with a high cost of living, one of the main economic issues the country faces. Once cheaper products and raw materials are available to Israeli consumers, they may introduce some much-needed competition to concentrated markets in the Jewish state.

All that is not to say that everything will go smoothly. There are certainly concerns about intellectual property, especially sensitive cyber security issues. Israelis are still learning to overcome cultural and linguistic gaps that are more easily bridged with American and European partners.

Many issues remain to be addressed in the forthcoming Israel-China FTA. As China rises, Israel will have to balance growing economic opportunities in the East with its traditional alliances with the West, particularly in cases where the United States raises objections to trade in certain sensitive sectors.

But all those factors are surmountable, so make no mistake: The economic ties between Israel and Asia are just getting warmed up.

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