Bloomberg News

Slowing Growth Will Temper Chinese Retaliation Over Hacking Charges

May 27, 2014

TRACKING HACKERS

Joe Stewart, director of malware research at Dell SecureWorks, a unit of Dell Inc., works on multiple computer screens in his office in Myrtle Beach, South Carolina, U.S.. Stewart, 42, spends his days hunting for Internet spies. Photographer: Stephen Morton/Bloomberg

(Corrects number of U.S. cases filed against China in 19th paragraph of story published May 21.)

China will almost certainly retaliate against the U.S. for accusations that it infiltrated computer networks to steal corporate secrets, though its slowing economy will restrain any actions, according to trade analysts.

China, which has a long history of retaliating in trade disputes, could set higher standards for U.S. imports, add bureaucratic hurdles for companies, order extra inspections of goods, or mimic the U.S. action and charge American citizens with cybertheft. China isn’t expected to raise tariffs, the analysts said.

Related:

  • Charges Against Chinese Hackers Cap Anti-Spying Push
  • China Halts Cybersecurity Cooperation After U.S. Spying Charges

“The one thing that’s certain is that they always do something,” William Reinsch, president of the National Foreign Trade Council, a Washington-based business group, said in a phone interview. But, he said, “They don’t have a need to start a trade war.”

An economic slowdown will restrain a response by China, which suspended its participation in a cybersecurity working group with the U.S. after the indictment. Further escalation by the Beijing government risks the U.S. taking retaliatory steps that would imperil an economy that is slowing as well as damage diplomatic relations with a superpower.

Economic growth in China, the world’s second-largest economy, has cooled after a three-decade spurt, slowing to 7.7 percent last year from 10.4 percent in 2010. The World Bank in April forecast China’s gross domestic product will grow 7.6 percent this year and 7.5 percent next year.

Five Charged

The U.S. Justice Department on May 19 charged five Chinese military officials with cyber-espionage. The officials from 2006 through this year allegedly conspired to collect confidential information from companies U.S. Steel Corp. (X:US), Toshiba Corp.’s (6502) Westinghouse Electric Co. and the U.S. unit of SolarWorld AG (SWVK), according to the indictment.

President Barack Obama’s administration “remains fully committed to developing a constructive and productive relationship with China, and ready to work with China to prevent this activity from continuing in the future,” U.S. Trade Representative Michael Froman told reporters yesterday on a conference call from Singapore.

The U.S. indictment targeted China’s actions against industries, including steel and solar-energy manufacturing, that have brought trade complaints against China.

Steel Imports

The U.S. Commerce Department on May 5 set penalties of 159 percent on imports of certain steel imports from China to block the goods from being dumped, or sold below cost in the U.S. The penalties were part of a preliminary finding that also levied duties on the imports from six other nations.

The agency in 2012 levied duties on imports of solar cells made by China’s Trina Solar Ltd. (TSL:US) and Suntech Power Holdings Co. (STPFQ:US) to counter U.S. industry charges of government subsidies and dumping.

“It’s not just the gathering of the intelligence itself, it’s what it’s used for” that can harm American manufacturers, Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, which advises Congress, said in a phone interview. The “fruits of that intelligence” have led to a flood of exports that have undercut U.S. workers, said Wessel, who lobbies for the United Steelworkers union that filed one of the complaints against China.

The labor union along with Allegheny Technologies Inc. (ATI:US) of Pittsburgh and Alcoa Inc. (AA:US) of New York were identified as victims in the Justice Department’s indictment.

Trade Actions

The indictment says some hacked companies were involved in trade actions against Chinese competitors at around the time their networks were breached, indicating the possibility of retaliation.

Around the time SolarWorld’s U.S. unit was hacked in 2012, it was a litigant in trade cases against Chinese solar manufacturers, and the Commerce Department was imposing duties on imports of Chinese solar products, the indictment says.

About two weeks before an anticipated decision in a trade dispute involving U.S. Steel in 2010, one of the defendants “stole hostnames and descriptions” for servers that controlled physical access to the company’s facilities and mobile-device access to its networks, the indictment said.

“Would the Chinese be pursuing this stuff to penetrate networks to know the negotiating positions of these companies, or to somehow steal technology to somehow punish them?” said Duncan Clark, the Beijing-based chairman of advisory firm BDA China Ltd., whose clients have included Nokia Oyj and Samsung Group. “It’s possible.”

Bombarding Networks

At the same time, multinational companies’ networks are constantly bombarded by hacking attacks from China and elsewhere even when they are not involved in trade disputes, Clark said. “That’s part and parcel of being a multinational,” he said.

The greatest unknown is what happens next. China’s economic relationship with the U.S. in recent years has become increasingly intertwined, though fraught with tension. DuringObama’s administration, the two nations have disputed trade on issues including tires, chicken parts, autos, rare-earth minerals and credit-card payment services.

Since 2009, the U.S. has filed 17 complaints against nations including China, India and Indonesia at the World Trade Organization in Geneva, according to the U.S. Trade Representative’s office. Six of those complaints have been against China, according to the WTO.

Two days after the U.S. imposed tariffs on tire imports from China in September 2009, China announced dumping and anti-subsidy investigations on imports of poultry and autos from the U.S.

Renewable Energy

After the U.S. Commerce Department set duties on imports of solar cells two years ago, China alleged that renewable-energy subsidies in five U.S. states violate free-trade rules.

Reinsch, who is also vice chairman of the U.S.-China Economic and Security Review Commission, said he expects any retaliatory measures to mimic U.S. actions.

“They’ll probably see if they can identify Americans that are guilty of the same thing from their perspective,” he said.

“Right now, frankly, they need us more than we need them,” he said. “They need to sustain their exports.”

China’s response may be tempered by the need for its enterprises to expand overseas as they attempt to build global businesses and brands, BDA’s Clark said.

Domestic Pushback

“Self-respecting companies here want to be big in the U.S.,” he said. “There would be pushback domestically if there’s a massive trade dispute with the U.S. Tensions would emerge between a very muscular response from China on this and its companies.”

James Andrew Lewis, director of the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, said it’s too soon to tell what steps China will take.

“What they’ll do over the long term is look for ways to squeeze the U.S., and what that’s meant is putting pressure on U.S. companies,” he said. “They look for economic advantage.”

Lewis said possible actions against American companies could include new equipment-inspection requirements or rules that require U.S. goods to incorporate Chinese standards.

“That would be spite,” he said. “It really wouldn’t get them anything” because doing more would stunt China’s economic growth.

Escalation Risk

Derek Scissors, a scholar at the American Enterprise Institute in Washington who focuses on Asia economic issues, said the severity of China’s reaction will be determined in part by whether the U.S. takes further actions.

“If this is just a one-off thing, there will be a Chinese harassment of a couple people,” he said. Further U.S. actions could risk an escalation and greater retaliation.

Scissors said it’s unclear whether the dispute over cyber intrusions can be addressed by the WTO or other multilateral forums.

“There are a slew of arguments calling for caution,” including retaliation, he wrote in a May 19 blog post. “The U.S. side must determine whether Chinese theft is a big enough problem that such risks should be faced. (If not, then perhaps American credibility is best served by shutting up about this.)”

To contact the reporter on this story: Brian Wingfield in Washington at bwingfield3@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net Steve Geimann


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