Washington has in recent years given Israel an earful about its economic ties to China. Israel has responded positively, even at the risk of inviting short-term economic harm. Recently, Israel rejected a bid by the state owned China Railway Rolling Stock Corporation to build a light rail system. In a bizarre twist, CRRC is now more welcome in the United States thanks to a decision by the Biden administration to remove it from a list of Communist Chinese military companies.
Israel and the U.S. enjoy a strong and long-standing alliance. However, China has occasionally been a source of friction. This was not the case for the first four decades of Israel's existence. China sided with the Arab states and sold them weapons. But in the 1990s, ties began to thaw. In 1999, Washington vetoed Israel's proposed sale of Phalcon advanced airborne radar systems to China, fearing that they could be turned on America or our allies in Asia. In 2004, Israel stood down again when the United States opposed, for similar reasons, Israeli upgrades of Harpy unmanned aerial vehicles for China. After these incidents, the Israelis created a Defense Export Control Agency, which has prevented other controversial sales before they happen.
Then, in 2015, Israel signed a contract with the Shanghai International Port Group to operate a new terminal in the port city of Haifa. The Israelis probably would have preferred to work with an American company, but the margins were too small. The contract was barely noted in Washington. However, as the port neared completion, questions suddenly swirled about whether Israel was now contributing to China's Belt and Road Initiative, which was providing infrastructure footholds for the Chinese to project power far beyond their borders. Worse, there was the threat that Chinese port operators might pose to the U.S. 6th Fleet, which docks in Haifa.
The Israelis ultimately assuaged White House concerns on Haifa (the Chinese-invested port is operated separately from the military port). But other challenges soon surfaced as the Trump administration openly entered into great power competition with China. Israel found itself on the receiving end of bruising criticism for its trade relationship with Beijing. Trade data from 2020 suggests that China accounted for more than $17 billion in trade with Israel, or some 4.3% of its GDP.
Of course, Washington was then and still is wrestling with its own China dependencies. The United States still relies on China for myriad products and services. If anything, this great power competition looks increasingly like an economic version of "Mutually Assured Destruction," or MAD, which was the way in which analysts viewed the U.S.-Soviet brinkmanship of the Cold War.
So, while Washington tries to figure out how to "de-couple" from Beijing, it is leaning on allies such as Israel to lead the way. At a moment of bitter, partisan disagreements on just about everything, there is remarkable continuity between Donald Trump's policy and Joe Biden's. Chinese investment in Israel's high-tech industry is the primary area of focus now, especially in critical emerging fields such as artificial intelligence. Concerns also linger about the physical infrastructure investments that are hallmarks of Beijing's Belt and Road Initiative. China's strategy of military-civil fusion increases the risk that cutting-edge civilian technology acquired from abroad could contribute to the People's Liberation Army's modernization. Likewise, Beijing's overseas infrastructure investments risk providing critical information and positions from which to project a new type of international power. The U.S. government has expanded efforts to document these risks and to restrict U.S. technology and capital from supporting China's security apparatus.
And Israel has responded as an ally should. It created a screening mechanism similar to the Committee on Foreign Investment in the United States. Admittedly, the mechanism is not yet as fully developed as its American counterpart. Screening is not mandatory, and elements of the process appear a bit too informal. Moreover, the Israelis have remained reluctant to subject their high-flying tech sector to the kind of scrutiny that could slow it down.
However, it is clear that the American message is getting through. The Israelis announced last month that CRRC lost the tender to build the green and purple lines of Tel Aviv's light rail system. CRRC may be the largest rolling stock company in the world, but it is also a Chinese state-owned enterprise. Its extensive ties to the People's Liberation Army prompted the Trump administration to list it among the Chinese companies into which U.S. investors would be prohibited from investing.
CRRC is certainly not the only problematic Chinese transit company. Several companies in this space pose risks relating to critical technology, infrastructure, and data. These risks are so apparent that Congress actually put in place a legislative fix in 2019: The Transportation Infrastructure Vehicle Security Act prevents federal dollars from being used to buy rail cars or buses built by Chinese state-owned firms.
This appears to have been determinative in Tel Aviv's CRRC decision. As reporter Danny Zaken noted, "The construction of one of the mass transit lines would include excavations and maintenance for electrical cables, which run in close proximity to the Israel Defense Forces headquarters in central Tel Aviv."
But this is only part of the threat picture. Chinese state champions also pose strategic economic risks. The opportunity cost of selecting low bids from Chinese vendors means that not only do project investments flow to China's coffers, but they also lead to the hollowing out of industrial capacity, whether in Tel Aviv or Los Angeles. Israel understands this risk. So, rather than reward players that benefit from Beijing's nonmarket subsidies, the Israeli project will serve as a boon to a consortium led by the French company Alstom and Spanish rail giant CAF.
Inexplicably, after haranguing Israel to get on the right side of America's great power competition with China, the Biden administration is more welcoming of CRRC than the Israelis. For reasons not yet made public, the Biden administration removed CRRC's designation as a Communist Chinese military company in 2021. This has enabled CRRC to continue to operate in the U.S. market.
It appears that the White House needs to reexamine its China policies. But not the Israelis. Indeed, one might have expected Israel simply to shrug and accept the CRRC bid. It did not.
Looking ahead, Israel's considerations in reviewing the bids for its light rail might also serve as a template for other American allies. In fact, they might serve as a wake-up call to federal, state, and local transit authorities across the U.S. to jettison CRRC and other Chinese rail interests.
Israel has admittedly not fully aligned its China policy with the United States. But as the CRRC episode reveals, the U.S. still has a long way to go in aligning with itself.
Nathan Picarsic is a senior fellow at the Foundation for Defense of Democracies, where Jonathan Schanzer is senior vice president for research.