The US, China and Israel - a complex triangle

David Rank  / Photo: Dupont

US China trade frictions will escalate whoever wins the presidential election, argues Dave Rank. Israel must adjust accordingly.

At the risk of dating myself, I recall car travel before everyone had his or her own source of entertainment. On my family’s summer road trips from Chicago to the mountains near Denver, my father (and only my father) would drive, one hand on the wheel (cigarette between his fingers) and the other on the dial of the car’s AM radio, trying to extract a signal from the mass of static noise in the airwaves of middle America.

I think of those trips now, as I try to make sense of the noise coming from the US-China relationship. Like my Dad (although without the cigarette), the challenge is to cut through the noise to find the signal - where US-China relations are headed and what that means for a country like Israel.

And there is a lot of noise out there. While you can’t ignore them entirely, some issues receive a lot of attention even though they will not fundamentally change the relationship. At the top of the list is the "Phase One" trade agreement - China’s sweeping commitments to increase imports of US products and reform some of its economic practices. It is largely irrelevant in the bilateral relationship and remains important only to the extent that it can affect Trump’s electoral prospects. China was never going to come close to meeting the import targets even before Covid hit; they are even more fanciful now. And many of the Chinese reform commitments, such as improved intellectual property protection and financial sector openings, were things Beijing wanted to implement anyway.

Even less relevant is the talk of a "Phase 2" trade agreement to address U.S. concerns such as Beijing’s market-distorting economic behavior. Even before the relationship had sunk to its current status, Beijing was signaling that it would not alter its basic approach to economics. That is even truer now. China has concluded that the Trump administration is fundamentally hostile and, having alienated many traditional US partners, is poorly-positioned to enlist other industrialized countries to press Beijing to change.

Finally, talk of total decoupling fails to acknowledge the pain involved in disentangling the deeply and profitably intertwined US and Chinese economies.

That said, there is a clear signal coming out. No matter who wins the November US election, do not expect predictable, low-friction US-China relations. Both candidates and both countries are previewing sharper confrontation on political, economic and security issues. Indeed, this could be even more pronounced in a Biden administration, which will almost certainly be better-organized than the Trump administration has been and will be better at leveraging traditional US strengths such as our global alliances.

And, while wholesale decoupling is unlikely, there exists the clearest possible signal that tech competition will be at the heart of the US-China rivalry. China has recognized the national security implications of US dominance in technologies for almost as long as the United States took that dominance for granted. Indeed, just a few years ago, Silicon Valley paid little attention to what happened in Washington. That is no longer the case. Outside the US, the Trump administration’s effort to counter Huawei is a preview - though not a particularly well-organized one - of things to come.

This has implications well beyond the US and China, of course. In Israel, it will go beyond Huawei or Hutchison. As the tech rivalry becomes sharper, Israel and Israeli innovators will find it hard to straddle the divide.

The Israeli government’s establishment of an investment screening mechanism was, at least in part, a response to US concerns. Some compare the Israeli mechanism to the American "CFIUS" (Committee on Foreign Investment in the US) process. While there are differences in how the two countries’ investment screening mechanisms are designed, it may be useful for Israelis to keep CFIUS in mind, since it will give them a sense of how Washington might react to Chinese investments in Israel. Those in Israel’s impressive tech sector will also want to keep an eye on Beijing and its plans (including through strategic investments) to make China the dominant player in key industries of the future.

US concern goes well beyond ports, desalinization plants, and 5G networks. At a minimum, Israeli innovators working in the fields Beijing has targeted in its "Made in China 2025" plan (including AI, new energy, biotech and other fields) should not be surprised if their work gets caught up in US-China rivalry. Moreover, those tempted to wait out the Trump administration, hoping that a change in presidents will lead to a change in focus, are likely to be disappointed. While it would be smart policy and good economics for the US to focus on restricting Chinese access to only those technologies that are truly central to US national security, the clear signal coming from Washington is that these issues are here to stay.

The author is Senior Advisor at The Cohen Group, a global strategic consultancy, and served as Chargé d’Affaires (acting Ambassador) at the US Embassy in Beijing. The article is based on his lecture about ‘The Impact of The US-China Trade War on Israel and Israeli Companies’, given, on-line, last week to DLA PIPER’s Israel country group.

Published by Globes, Israel business news - en.globes.co.il - on June 28, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

David Rank  / Photo: Dupont
David Rank / Photo: Dupont
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