Understanding the Phalcon Controversy

China signed a deal with Israel in 1996 to acquire the Phalcon Airborne Early Warning (AEW) system. Instead of this transaction being carried out as a normal arms sale, the Phalcon deal precipitated a major crisis in Israeli foreign policy. It became a major irritant in Israel-US relations and greatly damaged Sino-Israeli relations. Placed in a broader context, the Phalcon deal turned out to be one of the worst-managed episodes of the Sino-Israel military relationship. The most important questions that arise are what prompted the United States to veto the deal only in 2000, even though it was appraised of it much earlier, and why was the cancellation actually necessary? Answering these questions necessitates close scrutiny of the transaction itself. Eight years after its cancellation, the ramifications of that decision are still felt in the corridors of power in Israel and China. 

China’s desire to acquire the Phalcon system was part and parcel of the Chinese quest for national reunification, which basically involves bringing Taiwan and the disputed territories of the South China Sea under mainland Chinese sovereignty. Of these two, Taiwan is the major, pressing concern. China maintains that Taiwan is a ‘renegade province.’ Formosa, it is claimed, is an integral part of China proper and any means, including force, are justified to attain national reunification. But pursuing this goal is not easy for China because of the United States’ military presence in the region. Having said this, the fact is that Beijing cannot be diverted from pursuing the ‘One China policy.’ China believes that the only real solution to this problem is the reintegration of Taiwan. Once Taiwan is dealt with, China could then turn its attention to the South China Sea. This is the reason for China’s drive for military modernization, and why it invests heavily in improving the operational capability of the People’s Liberation Army (PLA). Acquisition of an AEW system must be seen as an important part of that program. The lack of an effective early warning capability was one of the Chinese military’s severest shortcomings. The AEW system could have provided the PLA with the militarily meaningful intelligence and control capability to achieve and maintain air superiority across the Taiwan Strait. Given the extensive military relations between the two countries, it was only natural that the Chinese wanted to buy this sophisticated system in Israel. After this acquisition, China could, conceivably, have fully functional AEW platforms by the middle of the twenty-first century. 

Before examining the details of the Phalcon deal, it is important to discuss the background to the Sino-Israeli military relationship. Israeli arms sales to China began in the 1980s. At that time, China reportedly bought billions of dollars worth of military technology and hardware from Israel. This is especially dramatic when one considers that in the early 1970s the two countries had no relations whatsoever. Israeli arms sales to China included tank guns, night-vision equipment and aeronautical sub-systems. According to a CIA estimate, Israel sold some $3 billion worth of arms and military technology to China from 1983 to 1993.[1] This and other estimates do suggest a substantial transfer of Israeli hardware to China. Israel did all this in the face of rising criticism in the Western, and in particular American, press. Sino-Israeli cooperation extended even to the work on China’s latest indigenously built fighter aircraft, the J-10 (which is modelled on the aborted Israeli Lavi jet fighter). 

Clearly, mutual interests were at the very heart of defence cooperation between the two countries. In Israel, China found a high-tech military exporter with detailed knowledge of the Soviet-made weaponry on which China’s own arsenal was largely based. Moreover, Beijing was able to acquire some military or ‘dual use’ technology, which the United States and other Western European countries were reluctant to sell. Thus, Israel served as a kind a ‘back door to US technology.’  

For Israel, on the other hand, the military relationship with China brought a number of political, economic and military advantages. With the sale of such high-end technology, Israel was able to gain at least partial support from Beijing for its position in the international arena. The military relationship also boosted diplomatic ties between the two countries. Moreover, because its domestic needs were relatively modest, Israel’s military industry relied upon exports for survival, but Israel had fewer potential markets than the other major players in the high-tech arms market. Selling weapons systems to China also meant that Israel was  able to replace the two big arms markets that it lost in the late 1970s—Iran and South Africa. Therefore, Israel energetically pursued military relations with China, which enabled it to gain entry into the Asian arms market. Significantly, Israel’s defence cooperation with China facilitated its intelligence gathering on Chinese weapons sold to Middle Eastern countries. It also provided Israel with an opportunity to influence this Chinese weapons transfer. It was no wonder, then, that both sides developed a lucrative military relationship over the past twenty-five years. The Phalcon deal marked the culmination of this relationship.[2] 

Negotiations to acquire the Phalcon AEW system (nicknamed ‘eye in the sky’) for the PLA Air Force (PLAAF) began in 1994. After a series of talks, the deal was signed by China and Israel in 1996. It was finalized during Prime Minister Benjamin Netanyahu’s visit to Beijing in 1998. The AEW sale formed an essential component of the Israeli government’s expanding of its military and defence partnership with China. Under the terms of the deal, Israel Aircraft Industries (IAI) was supposed to install the Phalcon system aboard a Russian-made Il-76 aircraft at a cost of $250 million per system. The contract called for Israel to equip one plane with the Phalcon system, with an option for China to order three more systems. The deal was potentially estimated to be worth some $1 billion.[3] Realizing the immense monetary benefit of the Phalcon deal, Israel lobbied hard with Beijing to exercise the optional clause in the contract. However, because of budgetary constraints, China did not exercise that option. In fact, it was reportedly thinking of postponing the installation of radar on the other three planes. Instead, it chose to assess the system’s performance on the first plane. Some reports suggested, however, that China planned to order as many as seven more such systems, making the entire deal worth $2 billion.[4] 

What was at the core of the controversy precipitated by the Phalcon deal? It began in 1994-1995, when Israel and China commenced talks on the Phalcon deal. The United States was kept informed by Israel. For its part, the Clinton administration did not fully approve the deal, but did not raise any objections. However, circumstances changed dramatically in 1999-2000 when, taking a very serious view of the transaction, the United States pressured Israel to cancel the sale. This ultimately led Israeli Prime Minister Ehud Barak to suspend it on July 13, 2000. 

Several questions arise here. Firstly, why did the United States government object to the deal? And more importantly, why did it wait so long to pressure Israel to cancel it, despite its prior knowledge? The answers lie in a close scrutiny of the events that took place between 1995 and 2000. This examination reveals that the Phalcon deal got bogged down in two separate, and yet somehow related, sets of issues and events. These were the Sino-US bilateral relationship, especially as it related to the Taiwan issue, and the renewed efforts to achieve Middle East peace. 

The Clinton administration’s somewhat mild reaction to the Phalcon deal was largely due to a considerable improvement in Sino-US ties in the early 1990s.[5] After a souring of bilateral relations in the aftermath of the 1989 Tiananmen Square massacre, improving ties was a central priority for the leaders of both countries. Despite the war of words over Taiwan, the missile crisis in 1996 and other challenges to the relationship, bilateral ties were returning to normalcy. An indication of this was the fact that by June 1998, President Clinton during his historic China visit referred to Beijing as a ‘strategic partner.’ 

However, as a result of many events in 1999 and early 2000, Sino-US relations began to deteriorate rapidly. Most notable among these were the bombing by an American warplane of the Chinese embassy in Belgrade (during the NATO campaign in Yugoslavia); the release of the Cox Report (accusing China of spying at American nuclear-weapons laboratories); the failed World Trade Organization deal (to secure China’s entry into the world trading body); the discussion of the possible sale of the Theatre Missile Defence (TMD) system to Taiwan, and also the victory of pro-independence Democratic Progressive Party candidate Chen Shui-bian in Taiwanese presidential elections.  

The Phalcon deal fell victim to this instability in Sino-US relations. Evidence was growing that China was positioning itself as a significant security threat to the United States. It continued to claim that on the issue of Taiwan, it was ready to resort to force to attain national reunification. China was no longer viewed as a ‘strategic partner,’ but rather a ‘strategic competitor.’ Suddenly, Clinton administration officials became sensitive to any attempt by China to upgrade its military capabilities against Taiwan, which could have indirectly affected the American ability to operate effectively in the region. Washington feared that the deal had the potential to change the strategic balance in the region.  

In the American view, the cancellation of the deal was necessary because Washington suspected that the system would eventually be used by Beijing against the American forces, deployed to defend Taiwan or other places in East Asia. The Phalcon would have enabled China to keep watch not only over the Taiwan Strait but also the entire South China Sea. This would have significantly extended the range of air-to-surface, surface-to-air and air-to-air missiles for the PLAAF.[6] In fact, many US Navy officials suggested that the Phalcon system could have been used to warn the supersonic SS-N-22 Sunburn (Moskit) anti-ship missiles carried by the Soveremenny-class destroyers purchased from Russia. Their primary mission was to stave off US aircraft carrier battle groups, which would have come to rescue Taiwan in case of possible Chinese invasion of the island. In short, the PLA would have been able to conduct distant intimidation missions. Given the serious implications of the Chinese acquisition of the Phalcon, it was no longer possible for the United States to take an indifferent view of the deal, and so it began to put pressure on Israel to scotch it. Still, Israel was reluctant to cancel the transaction. The US ‘punishment’ for this Israeli reluctance came in the form of a slowdown in the approval procedures for a variety of defence-related programs. American officials also threatened to withhold certain types of military technology to Israel. 

However, an even stronger line was taken by the US Congress. Many lawmakers threatened to reduce the $3 billion in aid that Washington has continued to provide Israel over the last two decades, if it proceeded with the sale.[7] In fact, one congressman sought a symbolic cut in US aid to Israel by delaying the delivery of $250 million of Israel’s aid package—the same amount that Israel was supposed to receive from the delivery of the first Phalcon system to China. Clearly, a rift was emerging between the Clinton administration and the US Congress itself. Many senior administration officials, including Secretary of State Madeleine Albright, were of the view that linking the Phalcon deal to US assistance to Israel was not an appropriate way to handle the matter. The Clinton administration, with the help of pro-Israeli congressmen, managed to scuttle the congressional initiative to slash Israel’s aid. But the Phalcon controversy was a source of bitterness in US Israeli relations. The problem facing the Clinton administration was that since the Phalcon system contained no US-controlled technology, American law could not block the sale. Nevertheless, it was determined to prevent Israel from selling such sophisticated technology to China. 

American leverage on this issue came in the form of the Camp David talks. By this time, efforts to achieve Middle East peace had been revived. That meant that Israel needed more US aid to help implement whatever agreement would be reached. Israel also had its eye on a $17 billion US military assistance package associated with its eventual withdrawal from the Golan Heights and a potential peace deal with Syria. In short, Israel was seeking a firm commitment for billions in US aid to help pay for security arrangements after the signing of any peace accord. Spotting a rare opportunity in this situation, the Clinton administration made the cancellation of the deal a precondition for holding the Camp David talks.  

Under tremendous pressure from the US and also some sections of his domestic constituency (not to mention the prospect of a potential aid package), Israeli Prime Minister Ehud Barak had no option but to terminate the deal. In effect, Israel made a choice between the interests of its military industry and its longstanding links to Washington. In his letter to Chinese President Jiang Zemin, the Israeli prime minister wrote, ‘Israel is now—together with the United States—in the midst of an effort to achieve historic decisions relating to its vital interests and cannot under the existing circumstances carry on with the Phalcon project.’ But he also noted that Israel would continue to search for ways to revive the program with the complete understanding of the US, if circumstances changed.[8] Reading between the lines, this meant that the deal was merely suspended and not cancelled. Israel sought to convince China that if Israel could show enough flexibility on this issue, it might be able to convince the US, particularly the next administration, about the deal. Israel sought to keep its options open while studying the American reaction. Events, however, did not play out as Israel had hoped. One year later, the new Israeli government under Ariel Sharon tried to revive the Phalcon deal, but the new Bush administration rejected it outright. The deal was then formally cancelled, putting an end to one of the bitterest rows in US-Israeli as well as Sino-Israeli relations. However, the suspension of the deal did not put an end to the Phalcon controversy; Israel still feels the consequences of its suspension. 

As could be expected, the Chinese side was seething with anger over the cancellation of the deal. It blamed the US for pressuring Israel and maintained that the deal should have been honoured. It regarded the American pressure on Israel to cancel the deal as US interference in Sino-Israeli relations. The damage done to bilateral relations by the cancellation of the deal was extensive. Not only did the Israelis lose a highly lucrative deal, but also temporarily (if not permanently) the support of a rising power at a critical time—something much more valuable than the mere monetary benefits of the deal itself. Following this, China became increasingly critical of Israel and its policies towards the Palestinians. 

The Chinese government also sought to sue Israel for about $2 billion in compensation fees—the huge amount sought reflected their intense anger over the cancellation of the deal. Israel, realizing the extent of the damage, began discussions over how China could be compensated. Officials proposed that the Russian aircraft on which the Phalcon system was being installed be returned to China outfitted with some less controversial civilian and defence hardware. There was also discussion about a Sino-Israeli communication satellite deal. The compensation package was basically intended to persuade the Chinese side to not file suit against Israel, thereby preventing further damage to Israel’s standing. Through intense negotiations, Israel also tried to remove the Phalcon issue from the bilateral agenda. Within a year’s time, defence ties were renewed by both sides. An Israeli military contingent visited China and toured army bases in the country, and the two sides discussed avenues of cooperation, including in the field of weapons development.  

The biggest casualty of the cancellation of the Phalcon deal was, however, the Israeli arms industry. Israel’s very credibility as an arms exporter was called into question. In particular, the cancellation was a blow to IAI, as it had conducted extensive work on the Russian plane. No wonder, then, that IAI was the first to expect compensation from the United States for cancelling the deal. Furthermore, Israel also sought at least $1 billion in additional US aid as compensation for economic damage sustained by the Israeli arms industry. Israel also became reluctant to negotiate any new arms deal with other countries. The pressure on Israeli defence firms was evident when at least two companies, Rafael and Elbit, imposed their own internal restrictions on dealings with Beijing.[9] This happened even before Israel suspended the deal. Some strategic analysts warned that such pressure could sound a death knell for the Israeli defence industry. 

The cancellation of the deal also had serious implications for US-Israeli relations. In particular, questions were raised about the continued benefit of the annual US military aid to Israel. A growing number of Israeli lawmakers and experts began demanding a reassessment of the costs and benefits of US military aid, their contention being that the political conditions the US was attaching to the annual aid were becoming untenable, and that Israel would be much better off without this generous aid. Reduced financial support from the United States could have restored Israeli independent decision making in defence exports and other matters considered crucial to national security. On the whole, the impression that emanated from Israel in this controversy was that Israel needed clear and explicit approval from the US for any future arms sales to countries which top the US list of ‘states of concern,’ so as to avoid another loss of face. 

Finally, the cancellation of the deal worsened Sino-US bilateral relations. Beijing saw it as one more attempt by the United States to contain China. The momentum that had come to characterize the bilateral ties in the early 1990s was suddenly lost; more significant was the loss of trust between the two sides. In the aftermath of the Phalcon controversy, the Clinton administration did try to engage China on matters of bilateral significance. But time was running out for Clinton, as he was at the tail-end of his presidency. In 2001, the new Bush administration placed more emphasis on US-Japan relations rather than Sino-US relations, a strategic shift which did not go unnoticed in the corridors of power in Beijing.  

In the final analysis, one can see that the Phalcon controversy proved to be a major foreign policy debacle for Israel. The immense opportunity that Israel had for further developing military and economic relations with China was lost. In some sense, the Phalcon controversy revealed a basic dilemma of Israeli foreign policy—how to handle the close ties with the US, a nation that provides economic, political and military support to Israel (but one that also identifies China as the greatest challenge to American power in this century), and an engagement with China, a nation that offers a host of political, economic and military benefits (but one that also perceives the US as the main hurdle to its achieving the status of a global superpower). 

Caught between principle and the desire to execute a lucrative deal, Israel had to tread very carefully. The controversy also raised questions about Israel’s prospects for pursuing an independent foreign policy free from US pressure. Could Israel allow itself to be so dependent on US aid that it impinged upon Israel’s freedom to carry out its foreign policy decisions? On the one hand, Israel needed to reemphasize its traditional ties with Washington and make assurances that it was not acting contrary to US interests. On the other hand, it was also imperative for Israel to identify with China’s future as a great power. Contradictions are inherent in this approach; nevertheless, Israel needs to understand and exploit the complexities of the new world order for its own benefit. Only such a nuanced approach will serve the interests of Israeli foreign policy. 

This is a slightly modified version of the paper that was originally published in Israel Journal of Foreign Affairs (Jerusalem), vol.2, no.2, 2008 and is reproduced with permission.

Sameer Suryakant Patil is a researcher on contemporary international developments. Email.   

As part of its editorial policy, the MEI@ND standardizes spelling and date formats to make the text uniformly accessible and stylistically consistent. The views expressed here are those of the author and do not necessarily reflect the views/positions of the MEI@ND. Editor, MEI@ND: P R Kumaraswamy

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