Last October, the Israeli Security Cabinet announced the establishment of an advisory committee to consider national security issues throughout the approvals process for foreign investment in Israel. This widely is regarded as a result of a US pressure campaign on its allies around the world to follow its lead and establish oversight committees for inbound foreign investment.

Foreign Investment Oversight in the US – CFIUS

Since the mid-1970’s, the US government has used its Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee of the US government, to study foreign investment in the country.

CFIUS evolved over time.

During the 1980’s, Congress authorized the President to block foreign investment in light of national security concerns (the review process of investments was delegated to CFIUS). This stemmed from concerns surrounding Japanese investment in those days, when there was a fear that Japanese innovation and economic power might rival that of the US.

CFIUS continued to strengthen and its authorities increasingly overshadowed inbound foreign investment. It has peaked in its current form, which is the result of the Foreign Investment Risk Review Modernization Act (FFIRMA) and two recent sets of regulations implementing FFIRMA. Today, CFIUS is a powerful body that can proactively veto and retroactively unwind foreign investment transactions involving US businesses, all in the name of national security. These developments occurred in the shadow of the US trade war with China and China’s rise as both an economic rival of and perceived strategic threat to the US.

The US is Demanding more Oversight Abroad

The US hasn’t limited its strategy for countering China to strengthening CFIUS. Part of its arsenal has included coaxing (and pressuring) allies around the world to adopt similar foreign investment oversight committees (in order to push back against Chinese expansionism).

This pressure campaign has paid off. Like the US, Germany, France, England, and others have adopted similar oversight bodies.

Israel is no exception to this US pressure campaign. In fact, Israel’s announcement regarding the creation of its new foreign investment oversight committee came days after a visit by Steven Mnuchin, the US Secretary of the Treasury. The US has long voiced concern about Chinese investment in Israel and, presumably, Mnuchin’s visit related to these issues. It’s well known that Israel is caught between US-China tensions, and that the US has warned Israel against potential consequences should it fail to regulate foreign investment.

Israel’s new foreign investment oversight committee is a general application of the pressure asserted by the US over Israel in recent years in relation to Chinese investment. This pressure has been seen in a number of cases, such as the Phalcon Affair, and more recently, regarding the Haifa Port and Soreq 2 desalinization plant.

The Phalcon Affair

The Phalcon Affair occurred in the mid-1990’s, after Israel and China negotiated and signed an agreement regarding the sale of an early warning system for military planes developed by a subsidiary of Israel Aerospace Industries. The idea was to install the Israeli technology on Russian IL-76 planes in a deal worth hundreds of millions of dollars. The US grew concerned about the deal, citing security threats posed to US forces in the Pacific region. The US objected to it and, ultimately, exerted enough pressure that Israel backed out. Israel’s buckling to US pressure aggravated the Israel-Sino relationship, despite the USD 319 million in financial compensation that Israel paid to China.

More recently, the US appears to have continued this approach and seems to be behind additional pressure campaigns to push back against Chinese investment in critical Israeli infrastructure.

The Haifa Port

Five years ago, Israel awarded a tender to Shanghai International Port (Group) Co. to operate the Haifa port for a period of twenty-five years (following construction, which is slated to be completed in 2021). Chinese investment in infrastructure around the world has been trending in recent years, placing it in a position to improve its surveillance, intelligence gathering, and cyber warfare capabilities. Recognizing the threat posed to the US Navy, which often docks at the Israeli naval base near Haifa, the US has applied pressure on Israel to change course. This may be behind rumors that the US Navy Sixth Fleet may stop visiting Haifa.        

The Soreq 2 Desalinization Plant

A number of companies are in the final round of an Israeli government tender to build (what will be) the world’s largest desalinization plant – Soreq 2. As of September 2019, Israel had narrowed its choices to two applicants – IDE Technologies Ltd. and Hutchison Water International (a subsidiary of Hong Kong-based holding company CK Hutchison Holdings). Here, again, Israel has faced pressure from the US to prevent Chinese investment in such infrastructure – US Deputy Secretary of Energy, Dan Brouillette, warned Israeli Energy Minister Yuval Steinitz that failure by Israel to implement more stringent screening for Chinese investment could impair intelligence sharing between the two countries.

The new Israeli foreign investment committee was not born in a vacuum; it should be understood in the context of the US-China trade war and pressure campaign that the US has been putting on its allies around the world to track and control foreign direct investment.

In my next post, I’ll explain how the idea of foreign investment oversight is not new in Israel, and will delve into the precursor to the new Israeli “CFIUS.”