Chinese President Xi Jinping and Israeli Prime Minister Benjamin Netanyahu shake hands ahead of their talks at Diaoyutai State Guesthouse in Beijing, China March 21, 2017.
(photo credit: ETIENNE OLIVEAU/POOL/REUTERS)
We cannot ignore the emerging public debate about the Chinese over-investment in the Israeli market. What used to be a topic for salon chats behind closed doors now occupies primetime news shows and national security forums. Former senior security officials and leading economic commentators raise concerns about the potential risks to Israel’s national security and the resilience of its economy.
Israel is not alone. Third World countries and advanced economies have both been targets for Chinese foreign investment as part of China’s global economic vision, and now those countries are looking for the right balance between protecting national interests and keeping open-market policies.
Several Western economies, such as those of Australia and Germany, have reformed their review processes of foreign investments to adjust procedures to the new buyers and industries. Yet it is the United States and its US-China trade and investment war that has caught the world’s attention, and which is so relevant to the Israeli commercial and political reality.
The need to adapt the Israeli regulatory regime to rising Chinese investments and new global industries, such as AI and Big Data, is long overdue. The Israeli government has not developed a comprehensive foreign investment policy that includes defining “national security” or “national interests.” Nor has it built a review process that is transparent, systematic, and interdisciplinary, bringing all ministries and factors on board.
The recent debate about the role of the Chinese in Haifa’s port and Tel Aviv’s underground railroads could be the right moment to complete an intra-ministerial analysis that will lead to the right regulatory response. This process was just started by the Prime Minister’s Office, but the upcoming Israeli elections may delay the process and the necessary results.
Several critical transactions have been blocked by the Israeli government in recent years, such as the sale of several public insurance companies to potential Chinese buyers. Often the identity and credibility of the buyer is a reason. Yet, those decisions have been made ad hoc and without consistency, leaving many Chinese companies and investors wondering whether they should continue to invest more time and resources in the Israeli market.
The American experience can serve as an important precedent. Following several years of rising Chinese investments in America, foreign investment there is now in decline. According to the Rhodium Group, Chinese companies completed acquisitions and green field investments worth only $1.8 billion in the first half of 2018, a decline of more than 90% from the first half of 2017, – the lowest level in seven years. The perception that foreign investments are unwelcome – “America First,” foreign investment regulatory reform and several merger rejections by the US government – all led to Chinese investors going elsewhere.
Many recent examples reflect the new US approach. The US president protected Qualcomm, a company that is critical to the future of 5G infrastructure and national security in the US, and blocked a takeover attempt by Broadcom, a foreign, Asian entity. Other approved deals, such as the acquisition of the US insurance firm Genworth Financial by China Oceanwide Holdings Group Co., a Chinese investment company, could go through only based on a mitigation agreement that secures the personal data of policy holders.
WHAT DID we learn from the American experience in recent months?
First, as part of the US foreign-investment reform, the US government reached out to stakeholders to make sure the new rules and their implementation would be more effective and reasonable. The Commerce Department asked last November for public comments on the process of imposing tighter export controls on R&D, technology transfers, and national-security reviews of foreign investment in hi-tech, following a pilot program. The pilot program includes “critical technology,” such as biotechnology, artificial intelligence and microprocessor technology. So far, the Israeli government has pursued a different track. The more we can reach to market players and their input, the better.
Second, the uncertainty surrounding the implementation of the reform and structural and budgetary changes within the Treasury Department, the responsible agency, has put many transactions on hold. To avoid market disruptions, any Israeli reform should be backed by the proper budget and administrative support.
Third, who are the investors that are going to fill the gap? America needs foreign investment, especially in infrastructure, the same way that Israel does. When there is a vacuum, other investors should fill it. The new Israeli rules should not send a negative signal to the market that would block “favorable investments.”
Fourth, the US reform did not create white or black lists. While clearly China was one of the main players that triggered the new reality, the government’s response is neutral, with no discrimination, addressing the market failure or national security risk rather than attacking a specific state. Israel should take it into consideration as well.
Fifth, the Israeli legislature should decide if there is a need to use the new reformed system to review foreign investment, including Chinese, with respect to its impact on jobs and economic growth. While Canada includes “economic impact” as one of its review factors, the US has been focused on security elements, avoiding projecting economic protectionism.
Finally, US-China commercial wars are complex. “Trade wars” are not “investment wars.” Certain trade measures can protect economies and industries against unfair competition. Investment review based on legitimate national security concerns should protect national interests. Yet, blocking investment for populist reasons and using questionable security considerations might lead to the collapse of the whole review system and its legitimacy. The Israeli government should not confuse trade protectionism with legitimate foreign investment concerns and their security implications.
While Israeli companies have “gone global” in recent years, foreign investment in the Israeli market is still the engine of the Israeli economy. It was reported only last week that in 2018, foreign investment in Israel’s technology reached all-time high. Any Israeli reform that redesigns foreign investment, from old industries like tunnels to cutting-edge technologies, should bring transparency and effectiveness to the table without diminishing the strong momentum of the Israeli economy in global markets.The writer is a professor of law and business, media commentator and adviser.
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