© 2015 Prof. Farok J. Contractor, Rutgers University
Chinese President Xi Jinping and US President Barack Obama. Joint news conference, Washington, DC, September 25, 2015.
PHOTO: PETE MAROVICH/BLOOMBERG NEWS (WALL STREET JOURNAL)
American companies state that their secrets are being stolen by Chinese hackers. US counter-intelligence says it has traced several of these attacks back to outfits sponsored by the People’s Liberation Army (PLA),[1] and that designs stolen from American companies’ computers have shown up—sometimes barely disguised—in Chinese companies’ products and services. The Obama administration has threatened sanctions against hackers and Chinese firms that benefit from such intellectual property theft.
But wait a minute! Isn’t the “pot calling the kettle black”? The US has by far the best cyber-capability in the world and has used it to spy on millions of international communications, including Angela Merkel’s mobile phone—as well as to gather data from both European and Chinese companies’ computers. It can access any Internet-connected device, anywhere, to read its contents. So well-developed is the US government’s data-mining and cyber-capability that it has harvested detailed information, even family photos, on the very PLA hackers that penetrate American companies’ computers.
This is a “game” played by most major governments. So why single out China?
The “pot-and-kettle” analogy has a flaw: it is not symmetrical. The legal and political systems of the two nations tilt the game in China’s favor because:
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The Chinese government can, and does, share its information with its companies—especially State Owned Enterprises (SOEs)—whereas the US government cannot, for a myriad of legal and ethical reasons.
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SOEs, or government-controlled firms, still make up a major fraction of the Chinese economy, accounting for 34 percent of fixed total investment.[2] Some observers indicate that state ownership in China has continued to grow, not shrink, especially in key sectors (although the growth rate of private enterprise is even higher). The government-owned sector in the US, by comparison, is minuscule.
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As US firm CEOs made it clear to President Xi Jinping during his Seattle visit in September 2015, US companies in China are increasingly being squeezed and pressured to share technology and proprietary designs with Chinese partners as a precondition for doing business in China or getting access to markets. In brief, the Chinese government makes no bones about its drive to help its companies learn from US and European firms. Neither the US nor Europe makes any such demands on foreign investors.
The “pot calling the kettle black” notion does not, therefore, really hold up, even though the hacker abilities of US government or private experts are most likely superior to their counterparts in China. In the US, the role of government and its interests are separate from those of private business. The Chinese government sees its role as allied and interpenetrated with business, both SOEs and privately held companies. The Chinese have a very different notion of nationalism, and solidarity, that idealizes a utopian vision of all noses pointing in the same direction—one that promotes China. By contrast, the American War of Independence from Great Britain was fought largely on the very principle that government should keep its nose out of private business, and not tax or overly regulate commerce.
The farthest the US government goes in scrutinizing some incoming foreign direct investment (FDI) is through CFIUS (the Committee on Foreign Investment in the United States), chaired by the Treasury Secretary, that each year examines a handful of investment proposals that are sensitive in terms of defense or some vital strategic interest of the US.[3] In 2010, Tangshan Caofedian of China wished to acquire Emcore, a US fiberoptics and solar panel producer, but scrapped the deal because of objections from CFIUS.[4] In 2006, Dubai Ports World withdrew its agreement to take over the management of three US ports. Because of ideological embarrassment, the US government openly admits only to examining a handful of such sensitive cases each year, although CFIUS staffers, the Commerce Department, and the CIA probably cursorily and quietly screen thousands of FDI proposals behind the scenes. After all, the US is the world’s leading exponent of free markets and international business.
But the PLA-sponsored hacking poses a policy dilemma. What policy options does the US government have? Should the American government share commercial secrets it has gleaned from Chinese or European firms with US companies? Clearly, it cannot. Should the American government expand its scrutiny of incoming FDI, or even “encourage” foreign companies to share their technologies locally? That would be going against the principles and ideology of free markets, open entry, and separation between commerce and government. Should the American government sanction Chinese firms that have clandestinely appropriated American designs? That, too, is highly problematic since—in an interdependent world where US-China trade alone is worth half a trillion $US each year—sanctions would invite retaliation and a further squeeze on US companies invested in China. Retaliatory sanctions would further undermine the already fragile state of international business.
With the US and China alone making up approximately one-third of world’s gross domestic product (GDP),[5] a commercial war between the two could be ruinous to the entire planet—leaving no more pots and no more kettles to judge each other.
[1] For example, see, among several similar news reports over the past three years, Cyber Sleuths Track Hacker to China’s Military. Wall Street Journal, September 23, 2015.
[2] Richard N. Cooper. China’s Growing Private Sector. Caixin Online, October 30, 2014.
[3] Jackson, J. The Committee on Foreign Investment in the United States (CFIUS). Congressional Research Service, March 6, 2014.
[4] Kirchgaessner, S. US Blocks China Fibre Optics Deal Over Security, Financial Times, June 30, 2010.
[5] Using purchasing power parity (PPP) estimates.
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