(What’s Left of) Our Economy: Intel – & Often China – Inside Your Hackable Electronics

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China, computers, counterfeits, cyber-security, Defense Department, electronics, globalization, hacking, Intel, microchips, semiconductors, smart phones, technology, Trade, {What's Left of) Our Economy

OK, who out there has an electronic device like a computer or a smartphone? I thought so. And who uses them like…nearly all the time? And engages in lots of financially or personally sensitive activity on-line? Thought so again. And you no doubt weren’t thrilled to find out yesterday that the computer chips vital to the operations of virtually all of these devices have some big security flaws that make them eminently hackable.

Well, here’s worse news: There’s an excellent chance that the hackers could be working for the Chinese government. And for that, you can thank decades of stupefyingly boneheaded American trade and globalization policies.

I can’t tell you how excellent the chances are, because one of the completely unnecessary failures of these policies has been pre-Trump Washington’s complete lack of interest, from either major political party, in tracking and letting the American public know how dependent they and their economy have become on products from potentially dangerous countries.

But I feel confident in claiming that the chances are at least pretty excellent. The reason? Private sector specialists have published detailed studies on subjects like the Chinese electronics industry. Thanks to them, it’s well established that, although China has yet to become a top global player in manufacturing semiconductors, and especially cutting-edge microchips, it’s a powerhouse in what’s known as “back end” semiconductor production – relatively low-tech phases of the process that involve activities like packaging, assembling, and testing.

So many U.S. and other non-Chinese information technology companies do so much of this activity in China that, according to a report from the consulting firm PwC, in 2015 (the latest available data) China-based facilities accounted for 44.6 percent of total global revenues from these back end operations. That’s up from just 20.3 percent in 2009. In other words, Chinese employees of these companies have ample opportunity to insert all sorts of bugs in them, and these opportunities have been growing rapidly.

Think I’m paranoid? Or just anti-Chinese? Then you need to learn that the Defense Department had admitted that, over a recent two-year period, its weapons systems had been studded with some 1 million counterfeit electronics parts and components – some 70 percent traceable to China. DoD now claims it’s solved much of the problem with a “trusted supplier” program. But good luck reliably inspecting the gargantuan Chinese electronics production complex over any serious length of time.

Longstanding American trade and globalization policies deserve most of the blame because, through priorities like indiscriminately expanding U.S. commerce with and export-oriented investment in China, they actively encouraged much of the world’s electronics industry to migrate to the People’s Republic.

The world’s current Number Two semiconductor producer, likes to tout “Intel Inside” a huge share of the world’s electronics devices. Maybe it, and others, should start to advertise “China Inside”?

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Our So-Called Foreign Policy: Sense and Nonsense on Russia’s Hacking

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2016 election, Amy Klochubar, China, cyber-security, cyber-war, defense spending, Democrats, hacking, Hillary Clinton, intelligence, John McCain, Middle East, NATO, Obama, Office of Personnel Management, Our So-Called Foreign Policy, Putin, Republicans, Russia, sanctions, terrorism, Trump

What could be more predictable? The growing uproar over charges that Russia’s government waged a cyber-focused disinformation campaign to influence the last U.S. presidential election has let loose a flood of positively inane statements and arguments on both sides that show politics at its absolute worst.

Even worse, unless both Democrats and Republicans – and the various conflicting camps within the two major parties – get their act together quickly, the odds of further attacks and all the damage they can cause to American governance will only keep shooting up.

Let’s start with those who have expressed skepticism about these allegations, including regarding the substance of yesterday’s intelligence community report concluding that “President Putin ordered an influence campaign in 2016 aimed at the US presidential election. Russia’s goals were to undermine confidence in the democratic process, denigrate [former] Secretary [of State Hillary] Clinton [the Democratic nominee], and harm her electability and potential presidency.”

Can they really be serious in contending that the intelligence agencies’ publicly expressed judgments don’t pass the credibility test because no smoking gun or any other compelling evidence has been published? Do they really want the CIA etc to reveal whatever human and technical sources and methods they rely on? Do they really believe that any effective counter-hacking strategy can be developed or continued after disclosing that information?

The insistence on definitive proof, moreover, amounts to terrible advice for making foreign and national security policy generally. It seeks to apply to the jungle realm of international affairs the standards of the American legal system. President Obama’s years in office should have taught Americans how dangerously childish it is to believe that relations among sovereign countries are governed by commonly agreed on rules and norms, that the world is on the verge of this beatific state of affairs, or even that significant progress is being made. And Americans should hold shadowy world of spying and counter-spying to a simon-pure standard?

A more defensible rationale for doubting the intelligence community’s work emphasizes its past major blunders. And from what’s been made public, they have indeed been all too common and all too troubling.  (Please keep in mind, though, that successes often cannot be made public.)

Nevertheless, if a president or president-elect has no faith in a high confidence judgment of this importance from his intelligence agencies, then it’s clearly time to clean house. If the next administration does indeed decisively reject the community’s work on this matter, it will have no legitimate choice but to replace it leaders.

Back to the genuinely ditzy positions: statements that the Russian hacking failed to influence the course of the election. I personally believe this, and shame on those partisans who keep insisting that this interference prevented former Secretary of State Hillary Clinton from winning the White House or that it delegitimizes to any extent Donald Trump’s victory.

But should the United States count on Moscow – or any other actor – continuing to fail? Should it wait to respond forcefully until a U.S. adversary succeeds? Shouldn’t Washington capitalize on its adversaries’ current evident shortcomings in this regard and focus on punishment and deterrence? Simply posing these questions should make clear how obvious the answers are.

A final major objection to hammering the Russians represents another more reasonable judgment call, but it’s still fatally flawed. It’s the argument that Washington needs to softpedal the hack attack because the United States has a vital interest in improving relations with Moscow.

As I’ve written, opportunities for better ties with Russia abound, and they should be pursued. But that’s no reason to let Moscow off lightly for its cyber-aggression. In the first place, in any mutually beneficial relationship, boundaries need to be drawn. This is especially true given how much stronger and wealthier than Russia the United States is. If an effort to subvert America’s democratic processes doesn’t qualify, count on further, even worse provocations by Moscow.

Just as important, this approach overlooks a crucial reality: Clear indications that Russia has an incentive to cooperate with the United States in fighting Islamic extremism and terrorism haven’t appeared because Moscow is in a charitable, or even helpful, mood. They’ve appeared because these are vital interests as well for Russia, which both borders the dysfunctional Middle East and rules over its own Muslim populations.

In other words, Moscow has plenty of incentive to play ball with Washington on the Middle East whether the United States retaliates sharply for the hacking or not. And if the Russians don’t understand that, then there’s little hope of any form of meaningful cooperation.

Yet the actual and potential inconsistencies and hypocrisies of those urging tough retaliatory measures are equally troubling. Some are exclusive to Democrats. For example, the sanctions imposed on Moscow by the Obama administration for the hacking seem pretty modest for actions that it claims “demonstrated a significant escalation” of Russia’s “longstanding” efforts “to undermine the US-led liberal democratic order.”

And at the same time, the outrage voiced at Moscow contrasts conspicuously with reactions to China’s successful attack on the federal Office of Personnel Management, in which the records of some 22 million U.S. government employees – including classified and confidential information – were compromised. Indeed, President Obama never publicly blamed China’s government nor announced any responses.

Most important, however, is the question of whether Russia hardliners in both major parties old and new will act on the logical implications of their views of Russian actions and intentions – including on Moscow’s efforts to expand its influence along its own European borders. If for instance the hacking, as per Arizona Republican Senator John McCain, is truly an “act of war,” then will the call go out to cut off economic and diplomatic relations with Moscow?

If Russia’s moves against Crimea or Ukraine or the Baltics mean, in the words of Minnesota liberal Democratic Senator Amy Klochubar, that “Our commitment to NATO is more important than ever,” will today’s hawks – especially the noveau liberal variety – call for more U.S. defense spending and bigger American military deployments in endangered countries? And will they demand that American treaty allies in Europe finally get serious collectively about contributing to the common defense – which is first and foremost their own defense?

The answers to these questions will speak volumes to the American people as to whether their government is truly determined to defend interests declared to be major against foreign threats. And you can be sure they’ll convey the same vital information to America’s foreign friends and foes, too.

Following Up: How Intel May Wind Up Inside China’s Military

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China, cyber-security, Digitimes, Following Up, hacking, Intel, multinational corporations, national security, Obama, Office of Personnel Management, South China Sea, technology transfer, The New York Times, The Wall Street Journal

China keeps challenging American security interests, notably by staging damaging cyber attacks on key U.S. strategic and commercial targets, and by asserting territorial claims in Asian waters that could threaten global shipping and air traffic. And evidence keeps pouring in of U.S. technology companies showering China with valuable capital and defense-related know-how – and of a decided “What, me worry?” attitude taken by the Obama administration.

Last week, a post of mine summarized two recent New York Times articles reporting the beginnings of some concerns in the national security community about these dangerous corporate activities, along with a Wall Street Journal piece that summarized some especially troubling recent tie-ups involving entities part of or clearly controlled by the Chinese government.

This week, the Taiwanese publication Digitimes shed major new light on the American tech sector’s role in beefing up China’s capabilities in a piece focusing on Intel’s operations. According to Digitimes, by the end of this year, the world’s biggest semiconductor company will have committed nearly $1.80 billion to helping Chinese companies develop advanced new products and services. Just as alarming as the scale of this investment are some of the specific recipients.

Digitimes correspondents Monica Chen and Joseph Tsai report that the company now owns part of a Hong Kong company that makes unmanned aerial vehicles, and parts of firms in China proper involved in smart devices, robotics, cloud computing services, artificial intelligence, machine vision, three-dimensional modeling, virtual reality technologies, and advanced optics.

Every single one of these investments could easily find its way into Chinese weapons – which could easily wind up using them against the American military. But although tensions in the South China Sea may be rising, and the files of tens of millions of federal employees may have been hacked earlier this year, don’t tell any of Intel’s top executives or anyone making China policy for President Obama. For them, it’s clearly business as usual with Beijing.

Following Up: Defense-Related Tech Keeps Flowing to China While Obama Fiddles

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China, cyber-security, Defense Department, Following Up, forced technology transfer, hacking, IBM, Obama, technology, The New York Times

It’s great to report that at least some of the Mainstream Media’s biggest guns are finally waking up to the dangers posed to U.S. national security by decades of the nation’s most advanced and militarily-relevant know-how being transferred to China by many of America’s leading technology companies. (The main examples can be seen here, here, and here.) Less great is having to report that the Obama administration still too often seems asleep at the switch.

Let me start with a little personal story. Thirteen years ago, while visiting IBM’s software-research lab in Beijing, I observed dozens of Chinese employees moving about seemingly free of any security-related limitations. I asked the lab’s manager two questions – and told him his answers would be on the record, for attribution for an article I was thinking of writing. He confidently assured me that would be OK.

The questions were: “Do you have any way of knowing whether any of your Chinese staff is also working for the Chinese government?” and “Do you have any way of knowing whether any of your Chinese staff is a spy?” The manager unhesitatingly answered “No” to both. He hastily added, “But you can be sure that we at IBM work very hard to protect our core intellectual property.” I responded, “I think you at IBM would turn cartwheels trying to make the Chinese government happy and keep it as a customer,” and he declined to comment.

But the story didn’t quite end there. The next day, the lab manager called me and let me know that he had changed his mind about his answers being on the record. I told him that’s not the way it works in journalism when the ground rules have been set in advance, but offered to negotiate with him in exchange for further info from him. When he waxed indignant about ungentlemanly behavior, I wished him a good day – but never felt compelled to use his name, and possibly ruin his career.

And a few weeks later, when I mentioned this incident to U.S. officials in China, they noted that the resources at their disposal for monitoring the tech transfer situation in the People’s Republic were hopelessly inadequate.

Thirteen years later, the situation looks far worse. As I detailed in a 2013 Bloomberg article, U.S. tech companies spent much of the decade showering Chinese entities – all of whom have relations of some kind or another with the Chinese government – with all the knowledge they would need to set up world-class cyber-hacking operations. And more generally, China’s overall high tech prowess has burgeoned as Beijing repeatedly has extorted advanced knowhow, along with capital, from American-owned and other firms all too eager to serve their crown jewels in exchange for market access. I can’t think of any remotely comparable historical precedent for one great power so energetically strengthening the defense-related capabilities of a likely rival.

And if you think about it, U.S. tech transfer policy these days has become worse still. For during most of the time since I was in China, China was acting only like a “likely rival.” Between its recent hacking offensive and expansionism in the South China Sea, it’s now acting like an unmistakable rival.

But according to the two recent New York Times reports cited above, the Defense Department is staying mum on a new report – from a firm that government agencies rely on for “classified military analysis and intelligence” – charging that IBM’s tech partnerships with China are “endangering the national and economic security of the United States, risking the cyber-security of their customers globally, and undermining decades of U.S. nonproliferation policies regarding high-performance computing.”

Just as disturbing: The Times is no doubt right in observing that “There is nothing to suggest that the partnerships have broken American laws,” and that many aspects of IBM’s operations in China “have been vetted and approved by the United States government, which is empowered through a review process to decide whether American tech companies are giving away too much advantage to military rivals.” As one wag once cracked, what doesn’t violate the law in Washington is often more disturbing than what does.

Meanwhile, back on the hacking front specifically, the Obama administration has both been deferring to the export-happy tech industry in developing new rules for controlling the sale overseas of hardware and software for on-line surveillance, and apparently doesn’t realize that these eavesdropping-focused products are indistinguishable from those that can penetrate a wide range of critical computer and internet systems. Moreover, the focus of the administration’s new efforts seems to be out-and-out rogue states like Iran, North Korea, and Syria. Super-hacker China apparently isn’t even on the screen. (That particular Times piece didn’t give it much attention, either).

Because the Mainstream Media plays such a big role in setting official Washington’s agenda, its improved coverage of China and other tech transfer-related security issues is genuinely good news. But it’s no substitute for a government that’s genuinely, or even minimally, vigilant.

Our So-Called Foreign Policy: How to Stop China’s Maritime Expansionism

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12-mile limit, allies, Asia, asymmetric warfare, China, cyber-security, cyber-war, export-led growth, forced technology transfer, free-riding, freedom of navigation, hacking, international law, multinational companies, Our So-Called Foreign Policy, South China Sea, territorial waters, Trade, trade barriers, U.S. Navy

It’s too early to say that President Obama’s decision to use the U.S. Navy to challenge China’s expansionism in the South China Sea shows he’s grown a backbone. But maybe a vertebra or two? At the same time, it’s clear that this story is far from ended, that there may be less than meets the eye to Beijing’s apparent acquiescence in the administration’s clear dissing of Chinese unilateral claims to East Asian waters, and that the United States needs to explore new types of responses if it wants to maintain its leading position in the Asia Pacific region.

To recap, in recent years, China has put muscle behind its long-stated insistence that many of the seas to its east and south, along with various tiny islands and island chains, are Chinese territory. As with similar longstanding claims made by other Asian countries ranging from Japan and South Korea to the Philippines and Vietnam, these positions aren’t recognized by international law.

For literally decades, all of these countries generally agreed to disagree (despite testing each others’ resolve from time to time).  Yet nearly two years ago, China began upping the ante by creating large physical presences on some of the (mainly uninhabited) islands in the South China Sea, and then by literally enlarging some of the smallest ones (which are so tiny that they literally sink below the waves on a regular basis), and creating new ones through various land reclamation techniques. (Other countries have made similar efforts, but they’ve been much smaller and far more sporadic.) China has also claimed exclusive air rights over many of the disputed regions.

In addition, China has unilaterally declared sovereignty over the waters surrounding all these locations out to 12 miles – the normal allowed by international law, but a standard that doesn’t always apply to the kinds of artificial creations produced by China. Moreover, Beijing went even further, stating that foreign naval vessels needed to notify Chinese authorities whenever they wanted to enter such waters.

This decision apparently convinced Washington that China’s actions unacceptably threatened freedom of navigation in the South China Sea. That’s a huge deal, since trillions of dollars worth of U.S. and other international commerce sail through these waters annually, and since they’re rich in natural resources as well. And incidentally, all other regional powers seem to agree.

So the president finally authorized an American guided missile destroyer to sail close enough to one of the disputed islets to violate Chinese claims – and without asking permission. The administration has also made clear that the kind of mission carried out by the U.S.S. Lassen would be repeated frequently. Even better would be participation by regional allies, whose historic specialty so far has been free-riding on American defense guarantees.  But except for Japan, they don’t seem to be even actively considering such assistance, and the United States bizarrely hasn’t even officially sought it.

China has protested strongly, but don’t dismiss it as a paper tiger just yet. Despite America’s continuing military edge in East Asia, Beijing is hardly devoid of options. For instance, China could create significant military presences on some of the islands. In addition, and more worrisome, according to a tweet from China-watcher Patrick Chovanec, Beijing could escalate its cyber-attacks on American businesses and government agencies.

The United States would be hard-pressed to respond in kind, as I’ve noted, because it lacks clear-cut (and perhaps any) cyber-war superiority, and because such hacking could be much more damaging to America’s more advanced economy and society than to China’s.  And in fact, capitalizing on such disparities would be fully consistent with the notion of waging “asymmetric war” developed by Chinese strategists. 

A much better means of retaliation would be economic. China’s economy, which depends heavily on exporting, and especially to the United States, is slowing. And that growth threatens Communist Party rule because it’s hold on power has for decades depended heavily on its success in boosting living standards throughout Chinese society.

Of course, erecting major barriers to Chinese imports would be condemned, especially by offshoring interests, as shortsighted and even dangerous protectionism that could plunge the two countries, and the larger world, into a “trade war.” But as always, such warnings ignore the long-term net damage inflicted on the U.S. economy – and especially its invaluable productive sectors – by the huge expansion of bilateral commerce since the early 1990s.

They also ignore the clear message being sent by the persistence of the American recovery (however inadequate) in the face of a weakening global economy, and by the reemergence once that recovery began of overall U.S. trade deficits (including of course with China) as major drags on American growth: The United States needs the rest of the world economy even less than ever, and certainly much less than trade-dependent countries like China need the United States.

Would wielding this kind of economic stick against China be cost-free for Americans? Of course not, especially in the short- and even medium-term, before supply chains got restructured. Yet tariffs and other curbs could always be phased in. Nor need they cover all Chinese products (although the more, the merrier). And other means of economic retaliation could be employed as well. How about cutting off all or at least some of the defense-related technology and capital that U.S. multinational companies are still recklessly transferring to China, either voluntarily or under threat of being shut out of the Chinese market?

More important, whatever the resulting costs, they look a lot less intimidating than those that could result from even a brief military conflict (which logically would trigger even greater and costlier economic adjustments), or from massive Chinese cyber-attacks. And don’t forget the flip side of passivity: An America that failed to use its biggest advantage over China for fear of experiencing any pain at all inevitably would be an America that flashed a big, fat green light to Beijing’s expansionists.

(What’s Left of) Our Economy: If Washington Was Serious About the China Economic Challenge….

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aerospace, allies, Boeing, China, Cisco, cyber-security, Edward Snowden, forced technology transfer, imports, investment, lobbying, manufacturing, multinational companies, national security, offsets, offshoring, South China Sea, subsidies, telecommunications, Trade, Xi JInPing, {What's Left of) Our Economy

However understandable, the intense administration and media focus during Chinese leader Xi Jinping’s U.S. visit on Beijing’s cyber-hacking has overshadowed several other major Chinese threats to American national security and economic well-being – and the need to fix U.S. strategies that are failing badly to cope with them. High on the list is China’s widespread practice of extorting corporate investment and technology transfer by threatening to shut uncooperative companies out of its large and potentially bigger market. And this blackmail deserves special attention this week because two big examples of it have made it into the news recently.

The first involves Boeing, which apparently will build its first foreign factory in China – a move that not so coincidentally coincided with China’s announcement that it would buy 300 Boeing jets. The second was Cisco Systems’ decision to start cooperating with a Chinese server company on projects that reportedly could include developing new telecommunications hardware products. This deal has followed several years in which Cisco has encountered big trouble in China due to fall-out from Edward Snowden’s techno-spying revelations and charges, and to Beijing’s policy of punishing American companies after Congress in effect froze China’s version of Cisco out of the U.S. market due to espionage concerns.

Since aerospace and telecommunications are clearly central to military strength, these American corporate cave-ins could easily endanger national security – unless you believe that they’ll forever remain in their current limited form. So more effective responses are urgently needed – unless Washington wants to face ever more harmful Chinese cyber-hacking (see this article of mine on how American firms have undoubtedly shared advanced cyber-war-related technologies with China), or ever better armed Chinese forces in possible future military showdowns in the South China Sea and other disputed Asian waters.

The companies themselves explain their agreement to China’s trade and investment conditions with the “half-a-loaf” argument, and it’s not completely unreasonable. They’re obviously not thrilled to be helping create likely new competitors (whether they care about American security is another matter entirely), but they point out that any China business they preserve or gain via their cooperation is more than they’d have without the China market. In fact, Beijing has used its leverage to string them along effectively enough that they’re reluctant even to complain about their China troubles to Washington – for fear of becoming targets for Chinese retaliation, and of excessively rocking the boat of bilateral economic relations generally.

But although the companies’ behavior may be justifiable from their own individual standpoints, their unavoidably narrow, self-interested perspectives make clear why they can’t be relied to protect or advance broader U.S. interests. Washington needs to take the lead. But can it do so without imposing heavy costs on these firms? To me, the answer clearly is “Yes” – and not just because China’s economy is slowing down. The key to success is understanding that a case-by-case approach inevitably leaves China in the driver’s seat, and that the United States can and should capitalize on position as an export market desperately needed by China to ensure adequate growth.

Severely restricting China’s access to this American market would grab Beijing’s attention not only for economic reasons. Chinese leaders would begin worrying about their political futures – and their own personal well-being – since their hold on power depends so strongly on delivering jobs and rising incomes to the country’s increasingly restive population. Moreover, even keeping in mind that short-term costs for the U.S. economy are inevitable – because policy shifts of this magnitude are always disruptive, and because it may take Beijing a while to get the message – the most obvious objections are surprisingly easy to dismiss.

Where will affected companies find customers to replace those they may temporarily lose in China? In many cases, in the American market, because the smaller U.S. trade deficit with China that would result from import curbs would spur more American growth overall. Moreover, so much U.S.-China trade nowadays is “head-to-head,” (in which the same goods compete with each other), that many American firms could fill the gap left by missing Chinese imports. And when it comes to U.S. companies that can’t make up China losses this way, government compensation seems appropriate.

Given Washington’s willingness to bail out Wall Street and auto-makers for blunders largely of their own making, subsidies look defensible for firms in the line of fire of whatever trade conflict develops. (One possible caveat: Many larger, multinational companies rely on China business heavily because they lobbied so effectively for the U.S. China trade policies that have created their vulnerabilities – and other major damage to the American economy – in the first place. So there’s also a case for letting them take their lumps, at least to some extent.)

If such subsidies don’t pass muster politically in the United States, another alternative is available to Washington: using the power of the American market to dissuade non-Chinese competitors to U.S. firms from seizing the opportunities created by these new American policies to boost their own China sales. Although the American firms’ China sales would remain lost, they at least wouldn’t lose competitve ground to foreign rivals.

Further, giving these third-party companies and countries the choice of doing business with China, or with the far bigger – and more reliable – United States would have the added benefit of adding international support to American efforts to fight Chinese protectionism and economic predation.  Working with Washington would also aid foreign governments and companies by reducing China’s scope to play trade partners off against one another. 

Finally, it’s true that the kind of jobs and even technology extortion used by China are standard operating procedures – especially in aerospace and in military aerospace – for many foreign governments, including those of U.S. allies. So how could Washington justify singling out China for counter-measures? Yet when it comes to allies and their policies (called offsets), the answer couldn’t be more evident: They’re allies and China manifestly is not. It makes no sense whatever to treat all foreign governments and economies the same when their relationships with the United States are so dramatically different, and this kind of foolish consistency certainly shouldn’t hamstring America’s approach to China’s economic transgressions.

There is, however, one obstacle to this kind of revamp of U.S.-China economic relations that I don’t see being overcome anytime soon – the continued domination of China policy-making in Washington by those aforementioned multinational, offshoring-happy business interests. The China policy status quo has undermined the American economy’s productive core, and increasingly threatens national security. But the offshoring lobby believes it’s worked well enough for its members. So until a critical mass of national political leaders decides to reject their lavish campaign contributions, expect China to keep taking America to the cleaners. And when Chinese actions sting enough, expect a few grumbles from the multinationals – no doubt mainly for show.

Following Up: U.S. Again Confirms it Lacks Cyber-War Superiority

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cyber-security, cyber-war, David Sanger, deterrence, Following Up, James Clapper, Martin Dempsey, technology, The New York Times

The Big Media’s habit of burying the most important news – or its most uproarious gaffes – just keeps growing and growing. Yesterday, I posed on the Financial Times‘ hilariously sympathetic portrait of American tech executives – who clearly conned two reporters into thinking they often served as diplomatic intermediaries between Washington and Beijing, and selflessly kept U.S.-China relations on a safe course that was continually threatened by reckless politicians. Completely ignored by the paper was the companies’ overriding self-interest in preserving China profits that too often have been made at the American domestic economy’s expense – and the resulting, often furious, lobbying, that has dominated their China policy role.

Today’s example is much more serious: A New York Times account of American struggles to combat cyber-hacking by China and other rivals that glossed over the latest official U.S. acknowledgement that America lacks the technological superiority required to retaliate against cyber-aggression without fear of a devastating response.

At least give Times reporter David Sanger credit for mentioning at all a statement by U.S. intelligence chief James Clapper that the United States lacks “both the substance and the mindset of deterrence” in the cyber-war realm. This confession went unreported outside specialty publications and website, if a Google search for the quote is accurate.

Admittedly, Clapper’s statement is somewhat ambiguous. A deficiency in the “substance” of deterrence could mean that technology capable of striking back at hackers and their sponsors with impunity simply isn’t available at all, or to U.S. policymakers. But Clapper’s reference to the “mindset” could also mean that this knowhow is available but hasn’t been deployed by the appropriate government agencies, or that it’s close enough to being developed but that a lack of political will keeps slowing progress.

In any event, Clapper’s sobering description of the global cyber-war situation sounds ominously close to that offered in January by retiring U.S. Joint Chiefs of Staff Chairman Martin Dempsey – which you RealityChek readers learned about first! And as long as cyber attacks remain a threat to America’s national and economic security, that means that the U.S. government, corporate America, and vital infrastructure systems all remain dangerously vulnerable.

(What’s Left of) Our Economy: Media Flattery for America’s Corporate China Lobby

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China, cyber-security, Financial Times, hacking, lobbying, multinational corporations, offshoring, protectionism, technology, technology transfer, The Wall Street Journal, {What's Left of) Our Economy

Even before checking out The Wall Street Journal this morning, I was going to post an item on some truly weird material quasi-buried in a Financial Times piece from last week. The Journal article, however, showed  that it’s become nothing less than vital to spotlight this latest instance of how the media spreads the most whoppingly one-sided information on many U.S.-China-related subjects in the most offhanded ways.

According to FT writers Geoff Dyer and Richard Waters in a September 11 piece on “High-tech diplomacy” between the United States and China, “The American business community once saw itself as almost a go-between in the US-China relationship, an embodiment of the two countries’ intertwined economic fates and a diplomatic actor that was sometimes able to take the edge off political arguments” and a “conduit between governments.”

More recently, they observe, the companies have “started to lean more heavily on Washington for support against Chinese policies that seemed designed either to shut them out of large sections of the Chinese market or pressure them to hand over key technologies.” And of course, the article dutifully quotes an “expert” from an American think tank (which happens to be heavily funded by such businesses) sympathetically describing the companies as “being pulled in many directions by both governments in what has become a much more complicated relationship….Most of them do not like being caught in the middle.” Who could help but feel their pain?

These offshoring companies have indeed been hoisted by Beijing on the petard of their longtime claims that expanding trade with China would greatly benefit the U.S. economy, too; that China was moving steadily towards Western business and even legal, and political norms; and that therefore Washington should mainly turn the other cheek in response to any continued economic predation by the Chinese. The firms also undoubtedly told the two FT reporters that they previously saw themselves as valuable diplomatic intermediaries – as is their right. And perhaps some executives actually believed that.  It’s true, moreover, that the FT didn’t present these descriptions as fact.

At the same time, because an alternative perspective was completely ignored, what else could a reader not steeped in these subjects conclude? And omissions like this matter, because what Dyer and Waters didn’t mention is all the evidence that American companies operating in China have actually served, and every effectively, as de facto lobbyists for a Chinese government. Their common interest? Preventing American officials from rocking the boat of bilateral economic relations in order to preserve profits both were reaping at the expense of domestic U.S. producers and their employees – aka the productive core of the American economy. For as the media has ignored ever since China trade issues have been stirring controversy, U.S.-owned firms whose products are made in China for export to the United States benefit every bit as much from Chinese subsidies and protectionism as Chinese-owned companies.

Where the Journal piece comes in is in providing crucial perspective about the growing number and volume of corporate complaints about China’s increasingly brazen protectionism. On top of refusing to support measures that arguably could counter China’s latest moves, the American firms – especially the tech companies – have massively caved to the pressure. As reported by the Journal’s Eva Dou and Don Clark (and as described by RealityChek for months), these companies are doubling down on their longstanding policies of transferring capital and, most important, cutting-edge technology, to Chinese enterprises. The FT referenced these moves, but only briefly, and deep into the second half of the article.

And by the way, if you look at the types of knowhow being provided to China (as I’ve been doing for years), it’s no mystery why it’s become so adept at hacking key U.S. government and private sector computer systems. In other words, reasons abound for viewing the corporations so indulgently portrayed in the FT not only as whiners, but as dangerously two-faced whiners.

No one should want the FT or any other news organization to take sides in this debate. But the media needs to do a much better job remembering that these giant companies already have their own flacks.

Our So-Called Foreign Policy: The Big Backfire Potential of Obama’s Reported New Cyber-Security Policy

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China, cyber-security, cyber-war, hacking, Martin Dempsey, Obama, Our So-Called Foreign Policy, Washington Post

If Rule Number One in medicine is “Do No Harm,” then Rule Number One in foreign policy-making is surely “Do No Harm to Your Own Country.” Which is why the Washington Post‘s report this morning on the latest wrinkle in the Obama administration’s cyber-security strategy is such bad news if it’s true.

According to Post reporter Ellen Nakashima, the president is seriously considering retaliating against China’s cyber-attacks on American business in significantly stronger ways. At first glance, this kind of decision seems welcome. After all, unlike Chinese (and other) hacks of U.S. government agencies, attacks on business don’t qualify as just the newest version of the kind of national security-related spying that’s common practice by all the world’s governments, including America’s. The administration has responded so far mainly by complaining to Beijing, urging the negotiation of international cyber “rules of the road,” and by indicting a handful of Chinese military personnel for penetrating American corporate computer systems – to no apparent avail.

But the likeliest effect of this report – much less an actual U.S. decision to take the steps described – is to advertise American weakness on this front, not strength, and encourage still more, and more destructive, Chinese (and other) attacks. The reason is simple. The retaliatory moves supposedly being mulled by Mr. Obama wouldn’t target the Chinese economy as such. Instead, they would be aimed at “Chinese companies and individuals who have benefited from their government’s cybertheft.”

Targeted sanctions arguably make sense when companies and individuals are the real culprits. But does anyone seriously think that whatever and whoever Chinese actors are hacking American companies are free agents having nothing to do with the Chinese government – and in fact the top Chinese leadership? Of course not.

One former Obama cyber security official quoted (by name) in the article argued that the contemplated sanctions could effectively put out of business any large and global companies that are sanctioned. Why so? Because, as he explained “most significant financial institutions refuse to do business with individuals who have been sanctioned by the United States. ‘So any company that’s been targeted under this authority…will likely find it very difficult to participate in the international financial sector. ‘”

That reasoning sounds impressive – but only if the sanctions hit one of the state-owned business giants so prominent in the Chinese economy. Any entities even modestly smaller would seem to face few obstacles under China’s fake legal and regulatory systems in dodging retaliation by simply changing their names and resuming operations after a decent interval. The Chinese government is so secretive that Washington would face excruciating difficulties even identifying the ruse.

And since both the Chinese government and the U.S. government are undoubtedly aware of all these realities, it’s hard to avoid concluding that this new American approach amounts to (unwittingly) flashing a green light for Beijing’s hackers, not issuing a credible warning. And this interpretation looks even more convincing given the statement I’ve flagged from recently retired Chairman of the Joint Chiefs of Staff Martin Dempsey (while he was still on duty) that the United States does not enjoy cyber-war superiority in today’s world. Just to remind you – that’s the American military’s top post.

As a result, no one should blame President Obama for proceeding cautiously in the cyber warfare realm. But he can legitimately be blamed for making – and telegraphing – policy choices that can only embolden U.S. adversaries.

(What’s Left of) Our Economy: What Really Matters About China These Days

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Asia, asymmetric warfare, China, China Century, cyber-security, intellectual property, Japan, manufacturing, protectionism, Soviet Union, stock market, subsidies, supply chains, technology, {What's Left of) Our Economy

U.S. financial markets haven’t been the only case of volatility in the world recently. Just look at the American economic and financial establishment’s broad conventional wisdom about China. Between its mysterious but apparently slowing economy, and its leaders’ erratic reactions over the last few weeks, the PRC has been at or near the center of the investment turmoil. Therefore, maybe it’s not surprising that hitherto prevailing assumptions about a dawning Chinese Century or epoch are being rethought dramatically. But it’s especially important that U.S. political leaders not succumb to the kind of fallacies that have muddled their dealings with Japan for decades.

As followers of international and business news are endlessly reminded, during the 1980s and into the mid-1990s, many American analysts were convinced that Japan’s growing prowess and wealth could enable it to challenge U.S. global predominance in finance, technology, and even overall economic power. Almost immediately afterwards, of course, Japan ran into major problems on all those fronts, and those claims – along with calls for the United States to emulate many Japanese policies and practices – were quickly dismissed as quintessential alarmism. Views of China could well start moving along the same trajectory.

What has largely been missed about Japan, however, is that what always mattered to America for the foreseeable future was not whether Japan would become “Number One” or not. First of all, no one’s crystal ball is good enough to know and second, that’s largely because, barring “shock” events like wars, these kinds of shifts usually unfold over very long time periods. Instead, what has always mattered most has been that regardless of Japan’s overall power versus America’s, it has gained enough specific strengths to be able to pose major ongoing problems for the U.S. economy.

Notably, Japanese industry has gained global leadership in a variety of advanced manufacturing sectors ranging from automotive to information technology components. Because such components are so crucial to manufacturing competitiveness, this means that Japan’s global rivals, including in America, depend heavily on Japanese businesses for key supplies – as was illustrated dramatically after the Fukushima earthquake struck in 2011.

Since Japan is still the world’s third largest national economy, its longstanding protectionist trade and anti-competitive business practices deny U.S.-based producers access both to a potentially huge foreign market and to domestic American customers they would be servicing if bilateral trade was not distorted by Tokyo’s decisions. These lost markets, in turn, mean not only lost profits but lost advantages of scale for U.S. producers and their employees. And undoubtedly Japan has been able to continue posing these problems because American confidence in its demise has persuaded U.S. leaders that it no longer deserves urgent attention.

Unlike Japan, China is not a quasi-ally of the United States – and often challenges American security interests. So it’s even more important that U.S. assessments of the PRC focus on the essentials, as opposed to “Chinese Century” claims or “Whither China” debates. There is one important exception. The suddenness of the Soviet Union’s demise demonstrated how fragile even global behemoths can be, especially when ruled by intrinsically brittle dictatorial systems. It’s not necessary to believe that China is facing a “1990 moment” to recognize that the regime’s survival could before too long be mortally threatened by any number of economic, political, and even environmental setbacks. In fact, it’s a sign of China’s current predicament that more and more commentary is going out of its way to note that some kind of collapse isn’t imminent.

But this speculation aside, what we can and do know about China is that its own advanced manufacturing industries are rapidly gaining on America’s; that its dumping of steel and other industrial products can harm U.S.-based producers for reasons having nothing to do with free trade; that it continues to steal valuable American intellectual property, which kneecaps the sales and all of their commercial benefits for American producers; and that it can marshal enough wherewithal to (a) finance investments in the United States that are both strategically and economically important, especially in the tech sector, and (b) seed the creation and foster the ramp-up of numerous high value industries.

Militarily, China has emerged as a major threat to America’s cyber-security – and possibly, as a top American military official recently suggested, a “peer competitor.” And although its more conventional military forces are doubtless far from matching U.S. global capabilities, some of its own strategists believe in a doctrine called “asymmetric warfare.” This school of thought suggests that China can prevail in regional conflicts in Asia by exploiting specific vulnerabilities against American forces even though the latter enjoy overall superiority.

China has become so big and important that I certainly hope someone important in Washington is thinking through the implications for America of large-scale upheaval in China, or worse (and of continued rapid Chinese progress). But the preeminent challenges America faces from China are much more immediate and concrete, and they should be policymakers’ first and foremost concerns. Nonetheless, I can think of one way in which the recent spate of bad news from China could significantly improve America’s approach – if it reminds Washington that the United States has always held the main cards in this bilateral relationship.