US concern about Chinese biotech investments in Israel rises with COVID-19

Part II: Why US warnings are likely to increase, and how Israel needs better oversight to allay them – and for its own security.

US President Donald Trump and China's President Xi Jinping arrive at state dinner, Great Hall of the People, Beijing, 2017. (photo credit: THOMAS PETER/REUTERS)
US President Donald Trump and China's President Xi Jinping arrive at state dinner, Great Hall of the People, Beijing, 2017.
(photo credit: THOMAS PETER/REUTERS)
US-China ties have hit another low point in the wake of coronavirus. US President Donald Trump rails against China in his daily press conferences, pointing to a cover-up of information about when the coronavirus outbreak began and to a hypothesis from US intelligence agencies that the virus was accidentally released from a laboratory in Wuhan.
Chinese officials have spread unfounded theories about COVID-19 originating in the US or Europe, messages taunting the West as weak and videos mocking the American response to the virus. And this is after two years of a trade war.
Meanwhile, Israel is dealing with continued pressure from the US over Chinese investments in Israeli technology and infrastructure.
US Secretary of State Mike Pompeo sprung some of that pressure on Prime Minister Benjamin Netanyahu in their statements to the press ahead of their meeting in Jerusalem on Wednesday. He spoke of American and Israeli cooperation fighting the coronavirus pandemic and then commented: “You’re a great partner. You share information, unlike other countries that obfuscate and try to hide that information, and we’ll talk about that country, too.”
Read part one of the series, "Israel caught in the middle of growing US-China tensions - analysis">>
As reported in Part One of this series, the US has long been concerned with China using investments in Israeli innovations to give itself a military and technological edge, as well as its ability to gather intelligence, whether by taking advantage of cybersecurity weaknesses, reverse-engineering technology to which it gains access, or physical proximity to sensitive areas by Chinese operatives on infrastructure construction sites. In response, Trump and Pompeo last year said intelligence sharing with Israel could be reduced if they are not given reassurances that these concerns have been taken care of.
Dr. Shira Efron, a visiting fellow at the Institute for National Security Studies and one of the authors of a report by the RAND think tank titled “Chinese Investment in Israeli Technology and Infrastructure: Security Implications for Israel and the United States,” projected this week that tensions in the US-Israel-China triangle will intensify in the aftermath of COVID-19.
“Even though the Chinese economy was hurt substantially, China has very unique financial measures because it is not really an open economy,” she said. “It can lend heavily to banks it owns and [it can] subsidize companies. So it looks like China is emerging from the crisis a little bit stronger economically, relative to the US and Europe.”
Furthermore, the US and EU are looking inward and calling for people to buy locally manufactured products, while China’s economy is dependent on making investments abroad, Efron said.
This is significant for Israel because it likely would mean the Chinese share of foreign investments in Israeli companies will grow, she said, adding: “If US and EU investors don’t have any money, we’ll see more Chinese investments here… If start-ups need the capital, they’ll go with whatever they can get.”
Efron identified public health, medical technology and biotechnology as sectors China will likely target following the COVID-19 pandemic. Biomedical and high-performance medical equipment are among 10 priority sectors for the Beijing in its Made in China 2025 project, which is meant to turn the country into a global hi-tech manufacturing leader. The RAND report identified more than $1 billion in Chinese investments in the Israeli health and biomedical sectors in the years 2013-2018.
“Israel views these as totally kosher and purely civilian,” Efron said. “But the EU issued guidance to its members in late April to be more protective about investments in public health companies. In the US, CFIUS [the Committee on Foreign Investments in the US] monitors these investments with much more scrutiny. Medical security is also national security.”
One major concern about Chinese investments in this area is the collection of people’s medical data. Last month, Israel’s Defense and Health ministries signed a NIS 90 million (about $25m.) contract with Beijing Genomics Institute (BGI), the world’s largest DNA and genetics company, for coronavirus testing and processing equipment. Clalit, Israel’s largest HMO, decided against working with BGI due to its ties with the Chinese government and a concern that it could access medical information of nearly five million Israelis, including their DNA.
The US would also be concerned about Chinese investments in this area because of supply-chain vulnerability, meaning that it seeks to be more self-sufficient in this area and encourages its allies to be, as well. Even before the shortage of personal protection equipment and coronavirus tests in the US, New Jersey, once a pharmaceutical manufacturing hub, lost many of those jobs to China.
A Trump administration official said: “Our concern about China doubled and tripled because of coronavirus... We realized that we’re the richest, strongest, most-powerful country in the world.” But America was not able to get enough personal protective equipment and testing kits because “we off-shored cheap labor and can’t get it back when we need it.”
“We offloaded all the manufacturing jobs to China because they provide cheap labor, and we hurt ourselves,” he said. “We’ll have to pay a little more for things now to have control over them.” He called on Israel to do the same.
Efron concurred, saying: “Every country should be able to safeguard the public health of its own population.”
WHAT CAN Israel can do to allay tensions with the US over China? It can create a regulatory environment that properly reviews the security risks these investments may pose.
Israel should have a more-comprehensive system for regulating foreign investments, US Ambassador to Israel David Friedman said, expressing hope that the new government would do more toward that end.
“There is a robust system of protecting any foreign investment in the US,” he said, referring to CFIUS. “I wouldn’t say right now that Israel is at that level.”
Europe and Canada have similar committees on foreign investments, which Efron posits is a euphemism for China.
In theory, Israel has dealt with this issue. Following US pressure, the Prime Minister’s Office on October 30, 2019, announced it would form an advisory committee to “find the appropriate balance between the need to encourage foreign investments in Israel and ensure continued economic prosperity and considerations of national security.”
Representatives of the Finance and Defense ministries and the National Security Council are members, and there are observers from the Foreign Ministry, the Economy Ministry and the National Economic Council.
“This is a step in the right direction,” the RAND report said. “However... in practice, the committee might not fundamentally change the regulation environment.”
THE COMMITTEE has a number of weaknesses, foremost of which is that its recommendations are nonbinding, and it does not have the power to cancel deals.
It is also voluntary, meaning that regulators in different fields can choose whether to bring a potential investment before the committee. In addition, investments that don’t already need government approval won’t be brought to the new committee at all.
The committee’s establishment is not anchored in legislation, but rather in a security-cabinet decision. This means there is almost no transparency about its membership or mandate and none at all about its meetings, all things that lawmakers may have tried to require.
The committee only gives advice on investments in finance, communications, infrastructure and energy.
CFIUS can review investments in technologies that are “critical, emerging and foundational,” the US Department of Treasury says. This includes biotechnology, artificial intelligence, machine learning, navigation, data analytics, robotics and microprocessors, all of which can be considered dual-use technologies.
Not one of those areas is included in the Israeli committee’s purview, which excludes the tech sector, even though the majority of Chinese investments in Israel in the last decade fall into those categories.
The committee’s narrow mandate, despite calls from the security establishment to institute stricter regulations, comes from concerns in the business and economic sectors that its existence would antagonize China and reduce its investments in Israel.
All of these weaknesses in the committee have piqued American concerns, Efron said.
“It’s not clear that the Americans are getting straight answers about what the committee actually does,” she said. “This is like a test case. Israel needs to show the US that we care about their concerns. Relationships are a give and a take; we need to show that we’re listening.”
The RAND report co-author suggested that Israel take this committee seriously and not only do it to satisfy the Americans.
“We need to examine the long-term implications of foreign investments from China – or any other country – on our national security,” Efron said. “There are actual risks; it’s not just about not wanting to make Trump angry.”
Read part one of the series, "Israel caught in the middle of growing US-China tensions - analysis">>