Israel and the chip war between the U.S. and China

Introduction

The current era of the international system is witnessing a new paradigm of rivalry between major international players. The United States and China are the key actors in this rivalry, in which they are working hard to protect their interests through their internal and external policies. Israel, which is believed to be the main ally of the U.S. in this conflict, has been affected by the hectic relationship between China and the U.S. This suffering is mainly manifested in the new cold war between Washington and Beijing. Although there are numerous aspects of this war, the chip war will eventually affect the entire international system. Many experts have illustrated the outcomes of this war with regard to U.S. or Chinese interests; however, Israel’s perspective on the issue has not been fully discussed. Israel and its reputation for advanced technological development have a direct link to this war. Being negatively affected could demolish the Israeli image, which, consequently, will raise questions about the future of the state of Israel. In this regard, this paper aims to shed light on the importance of chips in the future of the international system, the rivalry between the U.S. and China, Israel’s interests in chips, and finally, the Israeli position between the U.S. and China.

The importance of chips

The importance of advanced microchips (which is the collective term for semiconductors)[1] lies in their use in all modern technologies. Without semiconductors, there is no aerospace exploration, new advanced military weapons, planes such as the F35, cars, civil planes, smartphones, televisions, washing machines, information networks, or other technologies.[2] If chip production were threatened in any way, our daily lives would be paralyzed. Several countries in the international system are known to produce chips. Taiwan is a top producer, manufacturing most of the world’s microchip supply,[3] but it faces challenges with Beijing in terms of its historical differences and national independence from China. Many countries depend on microchips from Taiwan Semiconductor Manufacturing Company Limited (TSMC), a top producer. The net price of TMSC is $600 billion, which represents 40% of Taiwan’s state production and 15% of its GDP ($124 billion annually).[4]

It is crucial to understand the significance of microchips by looking at their functions and manufacturing process. Microchips, which regulate the flow of electric current in any technological device, are made of extremely small silicon components. Without them, it would not be possible for many machines to work.

Establishing a microchip factory, which takes around five years, costs up to $10 billion.[5] It must work at all times, systematically, and continuously. Furthermore, it requires nanotechnology in its making,[6] which is expensive and not available in all countries. Moreover, it requires a highly efficient workforce, and the error margin in manufacturing should not exceed 0%.

TSMC produces more than 90% of the semiconductors in the world,[7] which represents a serious national security issue for many countries. In addition, the world supply chain depends on technology for import and export processes. Globalization and interdependence will collapse if this technology is threatened. When any country faces war or other crisis, its import states opt to find a substitute for them; however, in the case of microchips, it is entirely different, as the world will be simultaneously affected without a feasible substitute. Therefore, the country that controls this field will lead the international system; this is why Washington and Beijing are keen on hegemonizing this technology.

Since the Fourth Industrial Revolution, the future of the global economy belongs to those who dominate the industrial domain. The chip war is one of the stages of this revolution, as it concentrates on the crux of new technology that is believed to shape the new international order if the U.S. does not take such steps. 

Rivalry between the US and China

Undoubtedly, the cold war between China and the U.S. is intensifying significantly, especially in terms of the economy. Various U.S. administrations have worked to prevent China from achieving a GDP that matches that of the U.S. However, as shown in the bi-chart below, the U.S. GDP has been growing continuously from 2018 to 2022, and the case is similar for China, which means that all American policies concerning China have not achieved what they were looking for. Most importantly, as shown in the chart, there is nearly a $7 trillion difference in the GDP of the countries from 2018 to 2022. This clearly indicates that although the American approach did not affect Chinese economic growth, it succeeded in maintaining its stable growth in addition to guaranteeing that it does not match the U.S. GDP. These numbers can be understood when we correlate them with the international economic system, which is globalized and interconnected. It is not in the interest of the U.S. to demolish the Chinese economy. In other words, the U.S. needs the Chinese economy but not in a format that threatens its interests as a unipolar player in the international system.

Source: World Bank

However, it is clear how the U.S. is approaching the Indo-Pacific region to counter the increasing Chinese influence with the aim of securing the current status quo when it comes to the polarity of the international system. The Biden administration announced its strategy toward this region in February 2022, which clearly states how this area in Asia is connected to its interests and national security.[8] As such, the U.S. started expanding its approach with countries such as South Korea, Japan, and India. Obviously, Taiwan is on the American agenda in the Indo-Pacific region due to its unique position as a semiconductor producer.

In August 2023, President Joe Biden signed an executive order that authorized the Ministry of Treasury to restrict some investments in Chinese entities.[9] This order will be applied at the beginning of 2024 and will focus on three sectors: semiconductors, microelectronics, and big data technology. Furthermore, based on the American rhetoric, this measure will prevent the American technological experience from being stolen by China, which the Chinese are willing to have to reach the American level in technological development. Besides that, it will achieve the American goal of stopping the development of Chinese military capabilities, which threaten the national security of the U.S.

As shown in the graph, US semiconductor exports to China declined from $828 million to $704 million from 2020 to 2022. Beyond its own efforts to target the Chinese chip market by restricting its own companies, the U.S. influenced the Netherlands and Japan to reduce their semiconductor exports to China.[10] This action strategically serves American interests since it is based on securing the U.S.’s position as the most substantial global power that can influence the international arena for its own benefit.

Source: International Trade Centre

Furthermore, the U.S. venture capital investment in China fell to $9.7 billion in 2022 after being $32 billion in 2021. In the first half of 2023, it continued its dramatic decline, reaching $1.2 billion.[11] This rapid decrease indicates how serious the U.S. is in tackling China’s vision for its economy. Although the August 2023 order targets specific aspects, these aspects have the ability to affect all economic sectors because of their inter-relationships. Thus, the American decision is well-calculated and strategic, as it targets the Chinese economy and development internally and externally.

As previously mentioned, the strategy of the U.S. does not aim to destroy China’s economy; instead, it aims to lower Chinese capabilities that could put China and the U.S. at the same level. China witnessed the visits of U.S. officials, such as U.S. Secretary of State Antony Blinken, U.S. Special Presidential Envoy for Climate John Kerry, and U.S. Secretary of the Treasury Janet Yellen. Also, some popular American private figures visited China this year, such as Elon Musk, Bill Gates, and Tim Cook. Furthermore, Henry Kissinger made a historic visit to China in July 2023, where the Chinese president and other officials welcomed him to discuss the most critical issues that affect the future of U.S.-Chinese relations.[12] Kissinger was well-received by China, as he is known as one of the core personalities who improved relations between Washington and Beijing. All these visits indicate that the U.S.’s strategies toward China are limited to the economy, and it is not willing to expand or escalate to other sectors, at least in the short run.

The American influence in the Indo-Pacific is debatable, especially with its efforts to secure it from Chinese hegemony, which targets American presence and influence in this region. This is in favor of countries in this region that perceive Beijing as its greatest threat; thus, they have been coordinating extensively with the U.S. For instance, South Korea and Japan have collaborated to tackle a mutual concern about the threat from China. In this sense, the two countries expanded their relations with NATO, and mutual meetings were increasing.[13] They persuaded NATO to think about opening a liaison office in Tokyo,[14] where, if that were done, it would be the first outside of Europe and Eurasia. All these steps make it clear how the U.S. is systematically approaching this region by involving its allies to counter their mutual enemy.

This case is similar to Israel, a state of U.S. interest in the Middle East. Taking into account Chinese-Israeli relations in the technological sector, the chip aspect comes in front in the U.S. calculations, which might play a significant role in affecting the chip war with Beijing.

Israel’s interest in microchips

The future of Israeli technological capabilities relies on the security and continuity of international supply changes. Since the global economy depends on technology, achieving superiority in this field is the top priority of both the U.S. and China. The chip war is affecting the technology market, especially with the intensification in Taiwan and the U.S. presence in the Indo-Pacific, which the Chinese perceive as a threat.

Israel’s interest in the chip market relates to its reputation as a high-tech nation. Based on the Israel Innovation Authority 2023 report, the number of Israelis who work in the high-tech sector has reached 400,000, and 100,000 work in tech jobs in other sectors. These figures represent 14% of the total number of Israeli employees,[15] indicating that it is crucial for Israel to secure the dynamics of this sector and, therefore, its citizens’ jobs. The high-tech sector also represents 18% of Israel’s GDP, which means it plays a significant role in the overall Israeli economy, and any threat to it represents a threat to national security.

The distribution of high-tech companies in Israel includes organizational software, content and media, e-commerce, digital health, agri-tech, water, and food tech, advanced manufacturing, life sciences, medical devices, fintech, communications, cyber, smart transportation, energy, pharmaceuticals, and security.[16] It is imperative for Israeli decision-makers to guarantee that all companies in these sectors continue to secure the Israeli position as a high-tech nation, as any shortage of chips will eventually affect their performance and, ultimately, Israel’s economy.

Although Israel has plants that produce semiconductors, it also imports semiconductors from other countries, especially China. According to the Observatory of Economic Complexity data, in 2021, Israel was ranked the 29th largest semiconductor importer. It imported $294 million worth of semiconductors from China, $148 million worth from the U.S., $60.8 million worth from Germany, $51 million worth from Singapore, and $44.4 million worth from Hong Kong.[17] These data indicate that targeting China’s semiconductor sector will affect Israel’s imports, as it makes up the most considerable portion of Israel’s imports in this field.

For Israel, the threat to the chip market will affect the high-tech sector, which is already facing challenges in terms of internal political development that affects Israeli democracy. For instance, based on Start-Up Nation Central, 70% of Israeli startups took steps to relocate parts of their operations outside Israel because of Netanyahu’s judicial reform plans.[18] Furthermore, in the last two years, funding for Israeli startups has decreased, as shown in the chart; this development indicates that Israel is facing a real threat in the technological sector. Hence, Israel is not prepared for any crises that target the chip market and threaten its ability to retain its growth and investments in technology.

Israel’s relations with the U.S. and China

Israel’s relations with the U.S. and China are unique, as the U.S. is its main ally, guaranteeing its security and existence internationally, whereas China is one of its main economic partners heavily involved in the Israeli economy. Relations between Tel Aviv and Beijing took a new turn in 2013, when Israel’s Prime Minister Benjamin Netanyahu used a new approach to opening up the Israeli market to investors, especially in terms of infrastructure projects. A clear sign of the seriousness of this approach was Israel’s Ministry of Economy opening economic offices in China in 2013 while it was closing its economic attachés in the U.S. and Europe.[19] In the last decade, as a forward step, Chinese state-owned enterprises (SOEs) and private companies started acquiring different Israeli companies. They began investing in several Israeli civilian industries, including food, transportation infrastructure, cellular technologies, medical technology, and cybersecurity.[20] These moves by China into Israel made it clear to the U.S. how its allies in Asia and, more specifically, in the Middle East were coming under the Chinese umbrella economically, which they perceived as posing a severe threat to the U.S. internationally.

In that sense, alerts from different U.S. administrations were issued to Israel, especially by Trump and now Biden. The leading American concern was the open economic relations between Israel and China, especially in technology, which could reveal U.S. technologies that could be copied and used by the Chinese in a way that could threaten U.S. national security. As a consequence of being an ally to Washington and being one of the main American interests in the Middle East, Israel started favoring the American approach. That was obvious in the advisory committee that Israel established in 2019 to assess the national security implications of foreign investment in Israel,[21] resulting in some projects being pulled back or frozen from China. For instance, Tel Aviv informed the U.S. in 2020 that it was re-evaluating the project granted to China to operate the Sorek Desalination Plant for 25 years because it was adjacent to Palmachim Airbase, where American forces were stationed, as well as being near the Nahal Nuclear Research Center.[22]

The American approach reached the semiconductor chip market as well, especially since there are several American companies that have chip development centers in Israel, including Intel, Apple, Amazon Nvidia, Broadcom, and Qualcomm.[23] Israel, having those mega-companies’ centers, should naturally make U.S. decision-makers careful since they represent the lion’s share of modern technology worldwide. Thus, regulating and coordinating their presence needs to be taken seriously, even if they represent the private sector. For that, it is crucial for the White House to be guaranteed that its investments in Israel should not be contradicted by the Chinese presence, especially when it comes to technology and, more especially, any sector that might be related in some way to the chip market.

Taking into account the above factors, some American companies pursued expansion into the Israeli market in order to maintain an understanding with Israel, especially regarding the chip market. A good example of this is Intel, which intended to purchase the Israeli company Tower Semiconductor Ltd., for $5.4 billion.[24] Its plant is based in Migdal Ha’Emek with the aim of confronting the Chinese moves with Israel when it comes to chips. Moreover, American moves were reflected in the export figures of the two countries. As shown in the chart below, American exports of semiconductors to Israel rose sharply from $62 million in 2020 to $214 million in 2022. Similarly, exports in the other direction increased dramatically from $94 million in 2020 to $482 million in 2022.

Source: International Trade Centre

Regarding Israel and China, American influence was particularly clear for the Israelis, especially with the unstable situations that appeared during the Biden administration. For instance, Israel condemned China in the Uyghurs case presented at the United Nations Human Rights Council in 2021.[25] Then, in May 2022, an Israeli newspaper, The Jerusalem Post, conducted an interview with the Taiwanese Foreign Minister, Joseph Wu,[26] which infuriated China and led them to reprimand the Israeli ambassador to China in August of the same year.  Liu Jinshao, head of the International Relations Department of the Chinese Communist Party, insisted on the need to separate their relationship with Washington when managing their interests.[27] The Israeli response was centered on the Chinese position against Israel when it comes to the Palestinian cause. In the same month, an escalation in Taiwan’s case was witnessed, especially with the visit to Taiwan by the Speaker of the U.S. House of Representatives, Nancy Pelosi.[28]

Source: International Trade Centre

Based on the above graph, the Chinese exports of semiconductors to Israel started declining to $343 million in 2022 from $359 million in 2021. In contrast, Israeli exports of semiconductors to China fell from $21 million in 2020 to $11 million in 2022. All these steps clearly suggest that the American initiatives are achieving their targets, especially when it comes to pulling its allies back under its umbrella in order to secure its base and allow it to serve its ultimate interests for maintaining its unipolar position in the international system.

Israel, as a high-tech nation, can play a significant role when it comes to the modern global economy, which the U.S. does not want to jeopardize, as the U.S. is Israel’s main ally. Therefore, the Americans are accommodating Israelis’ needs regarding economic support and security, either by knowledge sharing of technology or by supporting them financially on an ongoing basis. Hence, Israelis and Americans believe that it is imperative to support each other against any harmful threat that might jeopardize their relationship or themselves. 

Conclusion

Israel is an important player in the Middle East, where it represents an important part of U.S. foreign policy. Thus, it is understandable why the Israelis should lean toward Washington when it comes to American concerns and the threats that they are facing. The fact that Israelis are witnessing some internal challenges, especially given the current war in Gaza and protests in Israel against the judicial reforms that Netanyahu’s Coalition wants to implement, makes it clear that it is crucial for Israeli decision-makers to think about all security threats they are facing in all sectors. For that, they must take a stand against economic threats, especially with talk of some high-tech companies leaving Israel as well as Israelis working in the high-tech industry being drafted into military service, as such circumstances might lead some companies to rethink the feasibility of them staying in Israel. However, it is well understood at the same time that the calculations on the ground are clear when it comes to China or the U.S., where the latter is more rooted and well-prepared to defend Israeli security from any threat, which means Israel is expected to do the same in order to secure its interests with the U.S.