Stock in Trade

For a country the size of New Jersey with a population smaller than Virginia’s, Israel has achieved spectacular progress in a once unlikely economic sector: science and technology. From a small cluster of industries once focused primarily on the military, this sector has blossomed into a vibrant international hub that shapes the country’s foreign partnerships.

Today, Israel’s homegrown Israeli IT companies rank among the fastest growing and most innovative in the world, and its high-tech weapons industry is among the top five gobal producers and exporters. The country is a leading destination for venture capitalists and private investors, among them Warren Buffett, who chose an Israeli firm for his first major overseas acquisition in 2006. Cisco Systems, IBM, Intel, Microsoft, and Nortel have all launched local state-of-the-art research and development centers. As Prime Minister Benjamin Netanyahu put it this past February, foreign business leaders “all want the same three things: Israeli technology, Israeli technology, and Israeli technology.”

These gains led many Israel’s policymakers to expect that its new commercial ties would influence diplomacy and help secure greater international support for some of the country’s contentious domestic policies. As just one example, Israel’s economics minister Naftali Bennett argued last year that “diplomacy can follow economy.” Trade, he said, would help Israel “deemphasize” the world’s preoccupation with the Palestinian issue.

But Israel’s high-tech dominance has also underscored the limits of using trade as a foreign policy tool. Israel has indeed been able to attract major new trade partners -- China and India -- and strengthen its foothold in some of the world’s fastest-growing markets. But the country’s expanding trade ties thus far haven’t won it greater international support for its policies toward Gaza and the West Bank and its priorities in the Middle East more generally. Israeli officials should recognize that the country’s economic successes can only marginally alter its tenuous diplomatic status quo.

A PIVOT TO ASIA

Thanks to Israel’s booming science and technology industries, it now enjoys thriving bilateral relations with China and India. Each country played only a small role in Israel’s economy as recently as two decades ago. But since then, the number of Israeli joint ventures with the countries' high-tech industries -- from industrial R&D and software development to telecommunications and nanotechnology -- has skyrocketed. The Netanyahu government has made it a priority to further expand these ties, and its efforts have met with a welcoming response.

Take India. The country has increasingly come to rely on Israeli technology to spur economic development. Working closely with Israeli experts, several Indian regional governments have adopted Israeli innovations in drip irrigation that have significantly improved farmers’ lives. Standing beside Netanyahu during a 2012 visit to Jerusalem, India’s then Foreign Minister Shri S. M. Krishna praised Israel as a natural ally in “seizing the future,” adding: “We have learned so much from Israel, particularly in the field of agriculture and science and technology innovation.”

In 2013, Israel’s total volume of trade with India reached $6 billion, and it’s likely to increase even further during Narendra Modi’s tenure as prime minister. Modi had been promoting deeper ties with Israel long before his election to the national office. He relied on Israeli expertise as governor of Gujarat in 2001–14, when he created a local high-tech hub and awarded several key tenders to Israeli firms. In 2006, he visited Israel himself to learn firsthand about its start-up strategy. By the time of his election, observers called him “Israel’s best friend in South Asia.”

In the defense industry, too, Israel is now widely viewed as India’s second most important partner after Russia. The two countries cooperate closely in counterterrorism and intelligence sharing and have numerous cooperation and co-production agreements.

These developments echo Israel’s evolving relationship with its other new large trading partner, China. The two countries’ bilateral trade stood at $8 billion in 2013, and Chinese policymakers and investors are likewise attracted to the promise of Israeli innovation. Israel’s high-tech exports to China have risen by 170 percent since 2008, leading Chinese Foreign Minister Wang Yi to praise a “significant complementarity” of the two counties during this year’s meeting of the World Economic Forum in Davos.

This collaboration is already leaving a mark across China. Israeli water treatment specialists have recently helped build China’s first desalination plant in Tianjin, its largest northern city. In the west, Chinese officials are adopting Israeli irrigation technology in agricultural projects. And in the south, a newly opened Chinese-Israeli industrial park will focus on water management and treatment.

China’s innovators and officials involved in their country’s own high-tech boom have come to admire Israel for its entrepreneurship and start-up spirit. During a visit to Israel this past May, Yongjie Chen, a member of the Communist Party’s ruling body, gushed that Israel was “the best place in the world for China to invest. ... You have to come to Israel to understand what the term ‘start-up nation’ really means.” No surprise, then, that Start-up Nation, the recent best-selling book on Israel’s knowledge economy, has been translated into Chinese and has been recommended to government officials in Jiangsu Province by a local Communist Party head.

Defense cooperation has been slower to take off because of Washington’s objections to the sale of sensitive technologies to Beijing. But even here, Israel and China are drawing closer. The year 2012 marked two symbolic developments: the appointment of Matan Vilnai, a former top general, as Israel’s ambassador to China; and a goodwill visit of the Chinese navy’s 11th escort fleet to the Israeli port of Haifa.

COMPETING BUSINESS

Yet even as Israel’s economic relations with China and India thrive, their convergence in other areas has been much less extensive. On two sore points in particular, trade has done little to win China and India to Israel’s side.

First, both China and India have long been stalwart supporters of the Palestinian cause. India became the first non-Arab state to recognize the legitimacy of the Palestine Liberation Organization and invited it to open a New Delhi office in 1975. For its part, China has hosted a PLO embassy in Beijing since 1974 and officially calls itself “one of the first countries" to support "the State of Palestine.”

Even as their civilian and trade ties with Israel expanded over the past decade, China and India have continued to apply steady pressure on Israel over this issue. They called on the Israeli government to dismantle the separation wall and to cease building settlements; condemned its handling of the Gaza flotilla crisis; opposed the Gaza blockade; and supported the Palestinian bid for observer status at the UN. Most recently, they endorsed the Fatah-Hamas unity government sworn in this past June (which Israel refused to recognize) and voted in favor of launching a UN inquiry into the violations of international law in Gaza during the most recent bombing campaign.

Second, both China and India maintain flourishing relations with some of Israel’s staunchest adversaries in the Persian Gulf and the Middle East. The two countries’ trade ties with energy exporters such as the United Arab Emirates and Saudi Arabia far outweigh those with Israel in terms of volume, value, and strategic importance. China sources much of its crude-oil exports from Saudi Arabia and, with bilateral trade valued at $73 billion in 2012–13, is the kingdom’s second-largest trading partner after the United States. India, with bilateral trade valued at $43 billion in that same time period, comes in fourth.

Both China and India have been pushing for even deeper collaboration with the Arab countries. For instance, in 2010, Beijing upgraded existing ties with the Arab world to the level of a strategic relationship. Both Beijing and New Delhi have pursued a deeper involvement in political and security issues of concern to the Arab governments, signing cooperation agreements in the areas of law enforcement, energy security, and defense cooperation.  

Some observers have pointed to signs that China and India might be inching closer to Israel on both of these counts. Both governments were more muted in their criticism of the recent conflict with Hamas, for example, than they had been during the Gaza war in 2008. In August, India’s city of Kolkata even hosted a 20,000-strong rally in support of Israel. And in China, one senior official attributed the government’s “much more positive political policy towards Israel” to the growing technology cooperation. Such optimism, however, is premature. Instead, signs point to both Beijing and New Delhi maintaining the status quo on all counts.

Indeed, rather than take sides, China and India have increasingly sought to find a middle path. Over the past decade, they have depoliticized their approach to trade and investment in the region and pursued simultaneous bilateral cooperation with many longtime rivals. As Sushma Swaraj, India’s external affairs minister, recently told a group of Arab League delegates, there was no contradiction in “extending strong support to the Palestinian cause, while maintaining good relations with Israel.”

Given these calculations, neither country is likely to line up behind Israel’s position on its conflicts with the Palestinians anytime soon. That’s the bad news for Israel. The good news is that as long as high-tech ties are going from strength to strength, it hardly matters; the economic and political relations will just proceed on separate tracks, as they’ve done till now.

MARRIAGE OF CONVENIENCE

A good case study of how Israel’s ties with China and India could develop further is its relationship with another major trade partner, the EU. In those relations, too, trade links and technology-fueled cooperation have developed alongside political disagreement -- and often in spite of it.

As with China and India, Israel’s trade ties with Europe grew from a low starting point, spurred by the country’s technological progress. Just as it aims to reach the growing Chinese and Indian markets today, Israel in the 1950s and 1960s made it a priority to capture some of Europe’s vast trade potential, becoming the first non-European state to open an embassy in Brussels. In turn, the European countries concluded a series of far-reaching trade agreements with Israel over the years. Echoing the words of top Indian and Chinese officials, European Commission President José Manuel Barroso explained that “a continent such as Europe, that invests heavily in innovation, needs to have close links with a ‘start-up nation,’ like Israel.”

Nevertheless, even as this convergence took place, Europe grew increasingly vocal in supporting Palestinian rights. In 1996, the EU took the unprecedented step of declaring the Oslo peace process a fundamental interest of the European Community. It then backed up this resolution with cash to help build Palestinian state institutions in anticipation of a peace deal. When Oslo collapsed, many European officials put the blame on Israel.

Yet none of this tension was reflected in the sphere of high-tech trade. Rather, trade ties had the effect of reinforcing the status quo and muting the criticism. Even when European opposition to Israel’s policies reached its peak, no European leaders were willing to act in a way that would jeopardize commercial ties. Calls for boycotting or sanctioning Israel have found only negligible support at the highest policymaking levels.

In 2000, for example, even as the Oslo peace process was disintegrating, the EU invited Israel to take part in the COST (Cooperation in Science and Technology) research program, which coordinates nationally funded research among the European countries. In 2002, months after a diplomatic clash following the Israeli attack on the Palestinian town of Jenin that killed scores of civilians, Israel joined the EU’s framework program on scientific and technical cooperation. On a bilateral level, the same pattern played out. In 2004, French and Israeli scientists built new partnerships in neuroscience research, even as relations between the two countries imploded over French opposition to Israel’s response to the second intifada.

This dichotomy persists to this day. Just before the most recent crisis in Gaza began, Israel became the only non-EU member of Horizon 2020, Europe’s seven-year, $100 billion flagship research and development program. Indeed, as former EU foreign policy chief Javier Solana joked in 2009, Israel has come as close as possible to integrating with the EU without actually becoming a member state, thanks to its help “with all the problems of research and technology, which are very important.”

Similarly, China and India will likely continue to pursue closer relations with Israel regardless of how its conflict with the Palestinians evolves in the years ahead. As the two countries' economies continue to grow, they won’t allow political differences to hinder high-tech collaboration or deter new trade and defense ties. On the other hand, such ties, no matter how advanced, will only entrench the status quo -- and neither neutralize nor reduce the trading partners’ political differences. Only an equitable and viable solution to the conflict will achieve that.