Is industrial cyber-espionage the biggest threat to relations between America and China?

About this debate China's vast, government-orchestrated effort at industrial cyber-espionage has gone from a dirty little secret to front-page news. In a new book, Eric Schmidt, the executive chairman of Google, brands China "the most sophisticated and prolific" hacker of foreign companies. The administration of President Barack Obama has made numerous angry denunciations in recent weeks of China's industrial cyber-spying, and businesses and leading news organisations say they have been victims. So go the American claims. China's government, for its part, vociferously denies the allegations, especially those suggesting that the People's Liberation Army is orchestrating such espionage. On the contrary, insist Chinese officials, it is America that is the most aggressive cyber-attacker and China but a victim. Some argue that this once-marginal disagreement now threatens to poison the broad and deep relationship between these great geopolitical rivals and economic partners. Others insist it is a manageable conflict that will not destablise relations. What do you think? Background reading Chinas cyber-hacking: Getting Ugly Graphic detail: Hack-attack Cybercrime: Smoking gun Chinese cyber-attacks: How to steal a trillion Corporate espionage: Who needs cyber-spying? Foreign policy: Changing faces The moderator's opening remarks Apr 2nd 2013 | Vijay V. Vaitheeswaran The notion that industrial cyber-espionage could be the biggest threat to relations between America and China would have seemed far-fetched until recently. Even if the problem was widespread, it was not much discussed. All that has changed over the past few months. China's vast, government-orchestrated effort at industrial cyber-espionage has gone from a dirty little secret to front-page news. The administration of President Barack Obama has made numerous angry denunciations in recent weeks of China's industrial cyberspying, and businesses and leading news organisations say they have been victims. China's government vociferously denies the allegations, especially those suggesting that the People's Liberation Army is orchestrating such espionage. On the contrary, insist Chinese officials, it is America that is the most aggressive cyber-attacker and China but a victim. During the course of this debate, we will be wrestling with the question of whether concerns over China's use of industrial cyber-espionage will be merely a minor irritant in US-China relations or if they could prove to be the main source of friction between these great powers. We are fortunate in having two formidable debaters on opposite sides of this tussle. Duncan Clark of BDA Consulting and Stanford University, a leading expert on China's growing technological prowess, will argue in favour of the motion. He is likely to observe that the economic symbiosis that has long benefited both powers is being jeopardised by cyber-hacking. If evidence piles up that China's government has been undermining that economic relationship through widespread cyber-theft designed to benefit its state-

1 |Page

owned industries, he is likely to argue, that would undermine the most important economic relationship of the 21st century. Minxin Pei, a respected China scholar at Claremont McKenna College, will probably cast a wider net in making his arguments. The US-China relationship has many areas of potential geopolitical conflict, for example the continuing war of words between China and Japan over the Diaoyu/Senkaku islands. If that conflict escalates, it threatens to bring America in too, given the US-Japan security alliance. Yes, cyberhacking is a sore point, he is likely to say, but it surely pales in comparison to the threat of armed conflict between these superpowers. Along the way, the debaters may well touch on questions of intellectual property rights and China's capacity to innovate, America's own secret history of cyber-hacking and its much-trumpeted "pivot" to Asia in its foreign policy. Which of our gurus will win you over? Let the war of words begin. The proposer's opening remarks Apr 2nd 2013 | Duncan Clark While relations between the American and Chinese governments are rarely easy, and occasionally tense, the economic relationship between the two countries has proven remarkably robust. Over the past three decades, and especially since its entry to the World Trade Organisation in 2001, China has benefited from tens of billions of dollars of foreign direct investment from American companies and investors, and the associated development of human capital and technology transfer. Many American companies have benefited greatly by shifting or outsourcing production to China. Rapid economic growth and urbanisation in China have also unlocked major infrastructure contracts and, especially in recent years, a burgeoning consumer market for American multinationals to tap. For a growing number of companies, China is now one of their most important markets. Being a leader in the global market often means being a leader in China, and vice versa. Business is the bedrock of US-China relations. So it is all the more concerning to observe a crack appearing in this foundation: allegations of increasing, and increasingly sophisticated, cyber-espionage attacks that emanate from China and target the confidential business information and proprietary technologies of American companies. Cyber-attacks are nothing new. Rumours have been circulating in computer security circles and in the Western business community in China for years. But the increasing volume and sophistication of the alleged attacks have reached a level where American officials are now publicly voicing concerns that they endanger US-China relations as a whole. Barack Obama highlighted cyber-security threats on March 14th in his very first call to China's newly appointed president, Xi Jinping. Although he referred diplomatically to the issue as a "shared challenge", in the State of the Union address the previous month President Obama stated "we know foreign countries and companies swipe our corporate secrets" and that "we cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy". These remarks were echoed by the US Director of National Intelligence, which ranked cyber-attacks for the first time ahead of terrorism as the leading threat to US security. In this context, in an important speech on March 11th Thomas Donilon, an American national security adviser, singled out China: "US businesses are speaking out about their serious concerns about cyber intrusions emanating from China on an unprecedented scale." American executives may share their concerns with their government, but have little incentive to voice them in public given the consequences for the reputation, or share price, of their organisations. But public awareness of the threat of Chinese cyber-espionage has been growing since the release in February of detailed allegations by Mandiant, an American computer security firm. Its report details over 140 cyberintrusions into the computer networks of American and other Western corporations or organisations which it alleges were conducted since 2006 by hundreds of employees working for Chinese military unit "61398" from a building in Shanghai.

2 |Page

It might be tempting to dismiss such attacks as common-or-garden, state-to-state cyber-espionage, especially when some of the companies targeted are American government departments or companies active in defence technologies, aerospace or advanced electronics. But the Mandiant report also details attacks in the health-care, entertainment and food industries. Specifically, Coca-Cola's networks were allegedly hacked at the same time as the company was conducting its ultimately unsuccessful attempt to acquire the China Huiyuan Juice Group for $2.4 billion. These attacks are indeed industrial, both in scale and in their ultimate beneficiaries. Although Mandiant does not provide explicit evidence of the connection, it would be odd if any sensitive commercial information successfully downloaded was not then handed over to those companies that could ultimately benefit the most: leading Chinese enterprises, principally state-owned. With spiralling labour costs and serious environmental challenges, China urgently needs to move up the value chain and away from low-margin, high-polluting manufacturing. As Mr Donilon pointed out, both America and China recognise that intellectual property and trade secrets are vital to innovation and economic growth. But if China develops a dependency on cyber-espionage as the principal means to bolster its industrial performance, this will seriously undermine both US-China relations and China's own capacity to innovate. Already bloated from their monopolistic positions and preferred access to state-directed lending, stateowned enterprises' dead weight on the economy could become unsustainablecreating trade tensions abroad but more importantly crowding out private-sector companies that are the key drivers today of employment, economic growth and emerging innovation in China. It is time to blow the whistle. As Mike Rogers, chairman of the United States House Permanent Select Committee on Intelligence, commented recently: "Right now there is no incentive for the Chinese to stop doing this If we don't create a high price, it's only going to keep accelerating." America and China are increasingly dependent on each other, and on the internet. For the sake of each country and the global economy, it is vital that the world's largest and second largest economy work to build a new set of ground rules for how to deal with each other in cyberspace. The opposition's opening remarks Apr 2nd 2013 | Minxin Pei Allegations of China's industrial cyber-espionage against American companies may have captured headlines in American newspapers and prompted angry calls to punish China on Capitol Hill, but it would be a gross exaggeration to claim that Chinese industrial cyber-espionage presents the biggest threat to US-China relations. To be sure, industrial cyber-espionage attributed to China is a serious issue that has harmed ties between America and China. Such activities may have allowed China to obtain valuable technology and commercial secrets. But in the complex and multi-faceted US-China relationship, there are other factors that affect the tenor and nature of this relationship in a far more important and substantive way than industrial cyberespionage. Those familiar with US-China strategic rivalry probably would agree that China's military modernisation, designed to counter America's technological advantages and deny the unfettered access so far enjoyed by the American navy in the Western Pacific, is a far more contentious factor in US-China relations than industrial cyber-espionage. Another related development that has the potential of turning US-China relations in a far more adversarial direction is the much-hyped American "pivot to Asia", which is supposed to result in the transfer of the bulk of America's naval assets to the Pacific, a move seen in China as overt military containment. China's territorial disputes have a destabilising effect far more potent than allegations of industrial cyberespionage as well. The ugly row between China and Japan over a few rocks in the East China Sea not only risks accidental military confrontation, but has already dragged America into the spat. To demonstrate its commitment to the US-Japan security treaty, America has publicly announced its opposition to recent Chinese moves to contest Japan's administrative control of the Senkaku/Diaoyu Islands and pledged that

3 |Page

the security treat will apply to the defence of these islands. China's expansive maritime claims in the South China Sea have also provoked America to take a stand that publicly repudiates Chinese claims and implies support for other claimants, such as Vietnam and the Philippines. Any military clash between China and Vietnam or China and the Philippines (an American treaty ally) could result in a confrontation between the Chinese navy and the American Seventh Fleet. In the context of Sino-American strategic distrust and the changing balance of power, geopolitical risks far outweigh specific acts motivated by commercial interests in setting the course of US-China relations. Even if we concede that industrial cyber-espionage is fast emerging as a huge irritant, with the potential of severely damaging bilateral relations, we need to consider the following mitigating factors. First, industrial espionage is no different from other forms of espionage. If nations accept espionage as part of the game they play (although individuals caught doing it get punished), it is unlikely that they will treat industrial cyber-espionage differently. It is also very likely that America has used its potent cyberoffensive capabilities to purloin valuable information from Chinese entities. In other words, China's actions, however deplorable from the American point of view, may merely mirror America's actions. Second, in industrial cyber-espionage cases, victims tend to get as much blame as perpetrators. Their lax security is often seen as equally responsible for the loss of secrets. Finally, based on published investigations, the alleged Chinese cyber-attackers seem to observe some sensible rules: they may have stolen secrets, but they have chosen to do no damage to the critical infrastructure (such as power grids and computer networks). As long as espionage is confined to theft of commercial secrets or national security intelligence, the political fallout is real, even substantial, but ultimately manageable for China and America. Featured guest Adam Segal After years of being a known but generally ignored irritant, cyber-espionage has emerged as one of the most contentious issues in the bilateral relationship between America and the People's Republic of China. Tom Donilon, an American national security adviser, has said that the "international community cannot afford to tolerate such activity from any country" and called on China to recognise the problem, take serious steps to investigate and stop cyber-theft, and engage with America in a dialogue on norms of behaviour in cyberspace. China, not surprisingly, has consistently denied that it is behind the cyber-attacks. The Chinese press often portrays such claims as an effort to poison the bilateral relationship and as evidence of the influence of the "China threat" school of opinion, defence contractors and others who hype Chinese strength. The People's Daily notes that while America is portraying itself as the "patron saint of the free internet" it is developing cyber-weapons and has plans to expand the US Cyber Command fivefold. Other Chinese commentators have argued that the claims of hacking are being used to justify protectionist trade measures against firms that are beginning to challenge the big American technology companies. Furthermore, Chinese officials also point out that China is the "world's biggest victim" of cyber-attacks; according to the National Computer Network Emergency Response Co-ordination Centre of China, the majority of attacks are conducted via IP addresses in Japan, America and South Korea. Now that the claims are out in the open, there are worrying signs that the two sides could drift into a trade war. Numerous bills in the American Congress relate to trade and other sanctions against Chinese technology companies, and a new government funding bill, signed by Barack Obama last week, bars a few federal agencies from buying Chinese technology equipment unless the FBI determines that the purchase would be in the national interest. There is no evidence that the current public campaign against Apple's repair policiesthePeople's Daily complained of the company's "incomparable arrogance"is connected to these new procurement rules, but it is clear that the government can make business even more difficult for American technology companies in the Chinese market. Neither side wants cyber-espionage to derail the relationship. While America and China are both likely to see the other as a, if not the, major actor able to frustrate the pursuit of strategic interests in cyberspace, the two countries are highly economically interdependent. They also continue to seek broader cooperation on a range of global and regional issues such as containing the nuclear programmes of Iran and North Korea.

4 |Page

Still, cyber-espionage could have two long-term negative effects. Throughout all the ups and downs in the US-China relationship, the American business community has been vocal about the benefits of close trade relations with China. It has been an important voice in the public debate, often counselling calm when emotions are high. But the cyber-attacks could begin to erode the breadth and depth of that support. In a recent survey of 325 companies operating in China conducted by the American Chamber of Commerce in Beijing, 26% of respondents said they had already been victims of data theft and 40% said the risk of data theft in China seemed to be growing. Furthermore, there is evidence that China's image is in decline in many parts of the world. While the reasons for this are varied, many believe that China is not playing by the rulesin economics, protecting intellectual property rights and now cyberspace. The Chinese government's unwillingness or inability to respond seriously to the fairly convincing evidence that China-based hackers are behind the cyber-attacks further deepens distrust of China. This is not just a US-China problem. Japan is beginning to develop new cyber-security measures in part in response to attacks on Japanese defence contractors and government agencies, and German intelligence has warned businesses about the threat of attacks from Chinese and Russian hackers. Industrial cyber-espionage is unlikely to be the catalyst of a major break in US-China relations. But if China does not begin to recognise the severity of the problem and take steps to rein in the attacks, they will certainly be corrosiveincreasing distrust, making co-operation more difficult and accelerating competition. The moderator's rebuttal remarks Apr 5th 2013 | Vijay V. Vaitheeswaran Our debate on industrial cyber-espionage is now well under way, and it has proved to be a feisty affair thus far. The proposition in front of the house is this: industrial cyber-espionage is the biggest threat to relations between China and America. Both sides fired powerful opening salvos, but at the moment it is Minxin Pei, arguing against the motion, who is carrying public sentiment. However, this battle of wits is only getting started, and the tide could yet turn in favour of Duncan Clark, who is leading the charge in favour of the motion. Both debaters have brought out the heavy artillery for this rebuttal round, so be sure to scrutinise their claims and savour their barbs. We already have an expert comment posted in favour of the motion from Adam Segal of the Council on Foreign Relations. Soon, we will have one posted against the motion from Orville Schell of the Asia Society. And, of course, we also have seen some thought-provoking postings from you, gentle reader, and I hope to see more in coming days. J.Kemp is a cool voice of reason in this otherwise fiery affair, observing that it is hardly in China's economic interest to provoke a conflict with the United States: "Americans purchase more unnecessary consumer goods than any country of the world, and China is quite deft at manufacturing these." Quite so, and as good an argument for peace as any. Arguing in favour of the motion, Whthawke66 observes that cyber-hacking troubles and geopolitical risks need not be unrelated risks. If the simmering conflict between Japan and China over the Diaoyu/Senkaku islands escalates, this reader observes, "the fact that China even has the ability to impair sensitive US computer networks and electrical grids adds to the likelihood" of America rushing to Japan's side and thus escalating the conflict dramatically. Arguing against the motion, rogers8852300 states that "industrial cyber-espionage should be attributed to both China and US, who are also both the winners and victims of that kind of act". This echoes a point made by Mr Pei himself in his opening remarks, in which he suggested that "China's actions may merely mirror American actions". Ah, but Mr Clark violently disagrees with such an equivalence. In his rebuttal, he insists that the "very reason that China is engaged in these efforts is its own frustration with its 'innovation dissymmetry' compared with America's: Chinese companies typically don't (yet) possess information worthy of being purloined." That is a rude thing to say, though it is probably true, so he rushes to sheathe his iron fist in a velvet glove. He explains that his dim view of Chinese innovation, for example "within the state-owned

5 |Page

enterprises (SOEs) that stand most to gain from state-led cyber-hacking", does not extend to the many individual Chinese innovators who have proven themselves overseas. He concludes his rebuttal with a thundering warning that industrial cyber-hacking by China will be seen in America as a "digital Pearl Harbour". Clever detectives investigating mysterious robberies always ask: who benefits? Mr Clark clearly thinks that Chinese SOEs are big winners from the alleged wholesale theft by government cyber-hackers of American intellectual property. In his rebuttal, Mr Pei takes a bludgeon to that claim. "However hungry China's lumbering SOEs may be for such technologies," he says, "they make their money through monopoly, not innovation." That is also a rude thing to say, and again it is also probably true. Rather than sugar-coating his attack, though, Mr Pei tries to go for the kill by making a very large claim. SOEs are so incompetent, he suggests, that "advanced American technologies are not only difficult to digest and deploy, but also likely to be useless or unattractive". The battle lines are drawn, and the combatants have entered the fray with gusto. Which way will this important debate go over the next week? That is up to you. The proposer's rebuttal remarks Apr 5th 2013 | Duncan Clark Chinese-orchestrated phishing attacks on economic targets in America, not Chinese fishing vessels and their armed escorts in the East and South China Seas, are the biggest threat to US-China relations. Here's why. First, while the Communist Party has burnished its nationalist credentials by stoking anti-Japanese sentiment, it also has much to lose if things get out of hand. The party prizes stability above all else. China faces slowing economic growth and proliferating domestic tensions over environmental degradation, corruption, land conflicts and the widening gap between rich and poor, urban and rural. Japan's move last September to purchase the disputed Senkaku/Diaoyu islands provided a distraction. State-owned media bombarded the public with coverage of repeated excursions to the area by China's fishing and coast-guard vessels (and aircraft). But this dispute could equally serve as a match to light the dry tinder of social tensions. While both the Chinese and Japanese governments have dug in their heels, China's newly appointed president, Xi Jinping, has conspicuously avoided ratcheting up tensions further. The risk remains of an accidental collision, but China's move last month to consolidate fisheries law enforcement, coast guard and anti-smuggling authorities into the State Oceanic Administration gives it more control over the situation and potential responses. Despite the rhetoric, pragmatism still reigns in China. Japan's foreign direct investment (FDI) in the country dropped 16% last year, amid the first overall drop in FDI since 2009. A severe escalation of the dispute with Japan would be lose-lose for both countries, as America has continued to emphasise. Second, while China has other maritime disputes in the South China Sea, including with the Philippines and Vietnam, it is likely that for the same reasons mutual self-interest in maintaining the status quo will prevail. As to the "pivot" (or "rebalancing" in official American parlance), which has undoubtedly been a source of tension with China, here too there are signs of potential moderation. In January at his Senate approval hearings, the incoming secretary of state, John Kerry, stated: "I'm not convinced that increased military ramp-up [in Asia-Pacific] is critical yet That's something I'd want to look at very carefully." Third, by contrast, America is now ramping up its military response to cyber-hacking attacks with the expansion of the US Cyber Command from 900 to 4,900 military and civilian personnel, including 13 new teams tasked specifically with defending against destructive attacks from abroad. With all respect to Minxin Pei, industrial espionage is indeed different from other forms of espionageit has the potential to erode support for engagement where China needs it most: American businesses and the American public. For American businesses, the damage continues to spread. A survey released last week by the American Chamber of Commerce in China found that over 25% of respondents had been victims of cyber-attacks in China; 40% said that the risk of a data breach was increasing and 95% saw this as unlikely to improve. The report concluded that this concern "poses a substantial obstacle for

6 |Page

businesses in China, especially when considered along concerns over [IPR] enforcement and de facto technology transfer requirements". To assert, as Mr Pei does, that "China's actions may merely mirror American actions" is not only pure conjecture, but also fundamentally improbable. The very reason that China is engaged in these efforts is its own frustration with its "innovation dissymmetry" compared with America's: Chinese companies typically don't (yet) possess information worthy of being purloined. This is not a comment on individual Chinese innovatorsmany of whom have proven their excellence outside the mainlandbut on the lack of innovation happening within China itself, especially within the state-owned enterprises that stand most to gain from state-led cyber-hacking. By undermining the conditions for innovation to occur in Chinahampering the private sector at home and damaging the ability of Chinese companies to expand overseasindustrial cyber-hacking inflicts its greatest cost. The important trend of cloud computing is one example. Concerns over data security were cited as the overwhelming reason why only 10% of American companies surveyed in the AmCham report would consider using China-based cloud computing. For the American public, the difference between state-to-state espionage and state-led espionage of American companies couldn't be more stark. The former is the (entertaining) stuff of Hollywood. The latter is the grubby business of stealing intellectual property, business processes and confidential business informationwhich undermines both American employers and the smooth functioning of financial markets. This has the potential to hit Americans where it hurts the most: their communities, jobs and wallets. Victims are hardly likely to, as Mr Pei asserts, "get as much blame as perpetrators". Finally, further asserting that China's alleged cyber-hackers observed "sensible rules" by choosing to do no damage to critical infrastructure misses the point. Just because the perpetrators haven't yet exploited their penetration of these networks, it doesn't mean they won't in future. Authors from China's own military have said as much. General Dai Qingmin in 2002 wrote: "Computer network reconnaissance helps to choose opportune moments, places and measures for attack." Colonels Qiao Liang and Wang Xiangsui wrote in 1999 that attacking financial markets, then activating a hidden computer virus, "will cause the enemy nation to fall into social panic, street riots, and a political crisis". Imagine if an attack were to occur in America similar to that experienced by South Korea on March 27th, when computer systems of TV stations and banks, including ATMs, slowed to a crawl or shut down. China was not responsible for the attack, but this didn't stop the South Korean authorities publicising erroneously and unfairly as it emergeda trace to a Chinese IP address. Given the aggressiveness of China's industrial cyber-hacking, any similar attack on American soil might prompt the American public to rush to judgment and point at Chinaeven it if had nothing to do with it. Although the internet was born in America, China is today home to the world's largest online population. With this size comes responsibility. Industrial cyber-hacking across the Pacific stokes fear in the American public of a future "digital Pearl Harbour". It is time for this to stopor at least, cynics might argue, for China to raise its game so it doesn't get caught. The opposition's rebuttal remarks Apr 5th 2013 | Minxin Pei There are several important points made by Duncan Clark that bear scrutiny and reflection. First, he argued that "business is the bedrock of US-China relations". While such a statement describes the importance of commerce in bilateral relations, it overstates its role in determining the ties between China and America. To be sure, economic interdependence provides a degree of stability in Sino-American relations, but other factors also shape the nature and direction of this relationship. Far more important than commercial interests is the overall direction of China's foreign policy. Is China intent upon challenging America's supremacy and undermining its interests around the world? Is the Chinese government co-operative on national security issues deemed vital to American interests (such as Iran)? Is China set to use its growing military capabilities to coerce its neighbours in sovereignty and territorial disputes?

7 |Page

To appreciate how national security considerations dominate US-China relations far more than economic issues, consider the exchange-rate dispute. Admittedly, China's reliance on a cheap exchange rate is a far more contentious political issue than allegations of cyber-espionage (the dispute du jour). Congress threatened legislative action and political ads attacking China filled the airwaves in the Midwest during election campaigns. But because they understood that US-China relations were about more than trade, the Bush and Obama administrations worked hard to contain the political damage caused by the decadelong exchange-rate row with China. Like the exchange-rate controversy, the cyber-espionage problem will not go away. If both sides fail to come to an understanding in setting the rules of the game of cyber-espionage (a tall order considering the critical importance of cyber-espionage in both countries' national security strategy), the issue will continue to fester and even occasionally create headline-grabbing political firestorms. But it alone is unlikely to destroy US-China relations. Indeed, in 1999, there was a similar casethe Cox Report (written by Republican congressman Chris Cox's special committee on Chinese espionage against America). It contained sensational allegations that China conducted systematic and massive espionage efforts in the United States. Its release coincided with the now-infamous Wen Ho Lee case, in which a TaiwaneseAmerican scientist working in the Los Alamos nuclear lab was accused of giving China the design secrets of one of America's most advanced nuclear warheads. The political uproar caused in America at that time would make the current excitement over alleged Chinese cyber-espionage look like a storm in a teacup. Another questionable point made by Mr Clark is the implicit connection between alleged Chinese industrial cyber-espionage and the demand for cutting-edge technologies from China's state-owned enterprises (SOEs). While such a connection may seem obvious to casual observers, it is important to keep in mind that, however hungry China's lumbering SOEs may be for such technologies, they make their money through monopoly, not innovation. In most cases, advanced American technologies are not only difficult to digest and deploy, but also likely to be useless or unattractive to their business strategies. The more likely customers for such technologies are Chinese private entrepreneurs, who lack government subsidies but are far more eager to embrace such technologies to make a quick buck. In any case, the commercial motivations of the Chinese military to engage in industrial cyber-espionageeven if we assume that the allegations are truehave remained a mystery. So far there is no evidence suggesting that the People's Liberation Army's cyber-warriors are turning their purloined commercial secrets into monetary profits. The prudent thing for analysts to do at this point is to make plausible assumptions but not jump to conclusions. Finally, veteran watchers of the volatile US-China relationship have grown accustomed to high-decibel political rhetoric coming from all quarters in America. While no one should dismiss America's denunciations of China's industrial cyber-espionage as pure theatre, it would be equally unwise to accept them at face value. The US-China relationship may indeed collapse one day, but the cause will almost certainly be something else. The moderator's closing remarks Apr 10th 2013 | Vijay V. Vaitheeswaran "I think this is perhaps the most significant economic issue between the US and China at the current time." So declared Charlene Barshevksy, formerly America's top trade official and an influential economic analyst, in describing industrial cyber-espionage. Speaking a few days ago at the Boao Forum, a gathering of business and political elites on China's Hainan island, she insisted that such hacking was having an "extremely negative" effect on bilateral relations. Economist readers are famously independent minded, and not easily swayed by the opinions of pundits and poohbahs. That may explain why the vast majority of you have so far ignored Ms Barshevsky's comments. Minxin Pei's efforts to downplay the importance of industrial cyber-espionage have consistently gathered about two-thirds of the vote in this debate. As we enter the final phase of this contest of wits, Duncan Clark, arguing in favour of the motion, is surely hoping the mood changes. In his closing statement, Mr Clark returns to his earlier argument that China's efforts at cyber-hacking arise from a fundamental insecurity about its inability to innovate. But the backlash against such efforts is reaching a fever pitch, he argues, pointing to very recent moves by the American government to crack down on purchases of Chinese electronic products by federal agencies.

8 |Page

However, Mr Clark adds a new twist to his argument by invoking the perils that Chinese companies venturing abroad may now face. He warns that "industrial cyber-hacking thickens the glass ceiling' against which Chinese companies are bumping their heads overseas". In this, he is supported by Adam Segal of CFR, our expert commentator in favour of the motion, who warns that "the two sides could drift into a trade war". In his closing statement, Mr Pei says that states do not base their foreign policy exclusively on economic calculations such as those involved in industrial cyber-espionage. He is adamant that there is a distinction between irritants and deal-breakers in bilateral diplomacy, and in his opinion cyber-hacking is clearly an irritant. He goes further, insisting that the chances of an unprovoked Chinese cyber-attackakin to the virtual Pearl Harbour attack feared by Mr Clark"are non-existent". Orville Schell of the Asia Society, our expert commentator against the motion, agrees that to view industrial cyber-hacking as a problem "of first magnitude is to dangerously underplay other far more concerning points of tension". The biggest problem facing US-China relations, he insists, is "China's pugnacious and belligerent approach to island disputes in the East and South China Seas." What do you think? Will a last-minute surge of cyber-concern sweep the motion to success, or will the weight of geopolitical arguments sustain the side opposite to the end? Make your voice heard: vote now. The proposer's closing remarks Apr 10th 2013 | Duncan Clark The conclusion of our debate approaches, and I hope our audience has enjoyed participating as much as I have. To sum up, the key issue we are presented with is not whether industrial cyber-espionage is a threat to relations between America and ChinaMinxin Pei and I agree that it isbut whether it is the biggest threat. Mr Pei dismisses it as merely an economic issue. Certainly the targets of the alleged cyber-attacks are principally economic entities: American (and other Western) companies engaged in a wide range of industries. But it is wrong to relegate industrial cyber-hacking from the category of national security issues to a lower league of "economic" issues, along with the dusty old chestnut of whether the Chinese currency is undervalued. On the contrary, the Obama administration has recently and explicitly elevated Chinese industrial cyber-hacking attacks to the major league. Predictably, China is resisting engaging with America on this topic. Denial is not a river in China after all. No government would readily admit to sanctioning such attacksand there remains the remote (and arguably more frightening) possibility that these were conducted by rogue agents. But if steps are not taken by China to limit the incidents of industrial cyber-hacking, the US-China relationship could deteriorate rapidly. Already, as Adam Segal, Senior Fellow at the Council on Foreign Relations, points out in his guest post to this debate, there are "worrying signs that the two sides could drift into a trade war". If China loses the American boardroom suite as an anchor for this relationship, this drift could happen much faster than it imagines. The costs would not be just to American businesses but to the ambitions of Chinese businesses to "go global", by engendering increasing trade friction and suspicion among consumers overseas. Already Chinese telecommunications-equipment providers Huawei and ZTE have seen much of their efforts to expand in American stymied. These companies have a lot to offer America, provided their equipment is carefully inspected and monitored as it is already by many of America's allies. By broadening the choice of network equipment providers for American telecoms companies, competitive Chinese vendors can help bring down the (comparatively high) cost of mobile and broadband communications for American consumers, and arrest the decline in American competitiveness in this area. A growing American market for Chinese businesses would also help dampen calls for protectionism from within China.

9 |Page

But industrial-cyber hacking is generating growing friction, including the measure passed within the past ten days that requires the FBI to sign off on any purchases of Chinese electronics products by several American federal agencies. Industrial cyber-hacking thickens the "glass ceiling" against which Chinese companies are bumping their heads overseasguilt by association with a country whose brand is associated with mistrust. Cyberespionage taxes Chinese efforts to generate "soft power" abroadcreating more fear, not the respect the country craves. Ironically, within China there is much for American business to respect and admire todaynot the massive state-owned enterprises (SOEs) dependent on monopolies and patronage, but the millions of entrepreneurs who are the drivers of the country's economic vitality. They are offering growing choice to Chinese consumersin what they buy, as well as how they inform and entertain themselves. Their "Chinese dream", to coin a phrase, bears much resemblance to the American dream. Chinese entrepreneurs are not lacking in ambition and optimism. But state-directed industrial cyberhacking efforts, like all acts of cheating, indicate a profound lack of self-confidence: in the ability of China to catch up with America and other trading partners. Earlier attempts by SOEs to generate "indigenous innovation" have largely failed. Progress in achieving technology transfer to such enterprises through joint ventures has reached its limits. SOEs themselves are under fire from Chinese consumers over monopolistic behaviour. The Chinese government has recently stepped up efforts to make Chinese consumers more patriotic by tarnishing the names of popular Western brands such as Apple or Volkswagen (itself engaged in a joint venture with a Chinese SOE) with attacks from state-owned media. Can the Chinese government tackle reforms of SOEs, as well as rein in military led cyber-espionage of economic targets abroad? Even if China's economy stays on track to surpass America's in GDP terms within a decade, the innovation gap that divides the two countries still looms large. The risk is growing that industrial cyber-espionage is becoming a central part of China's efforts to level the playing field with America. If allegations of industrial cyber-espionage do not diminish, the economic underpinnings of US-China relations will be at riska lose-lose for both countries. The opposition's closing remarks Apr 10th 2013 | Minxin Pei It is puzzling that Duncan Clark continues to insist that phishing attacks attributed to the Chinese military would be more likely lead to a conflict between America and China than territorial disputes in the South and East China Seas. There is simply no historical precedent in which disputes of an economic nature directly led to shots fired in anger. States assess their relations with each other through broad lenses. Obviously, economic interests form part of this assessment. And there is no doubt that allegations of Chinese industrial cyber-espionage have hurt US-China relations. But states do not base their foreign policy exclusively on economic calculations. In fact, economic interests are always subordinate to national security concernsthat is why America has banned transfers of military technologies and weapons to China despite obvious economic benefits. In the case we are discussing, however upset the American government may be about alleged Chinese industrial cyber-espionage, it is unlikely that it will make this the most critical issue in deciding what kind of China policy it will adopt. There are many other far more potent disputes that could turn US-China relations in a completely adversarial direction. Just imagine the political firestorm in America if China is discovered to have intentionally broken American sanctions on Iran, or there is a replay of the mid-air collision between an American reconnaissance plane and a Chinese jetfighter in the skies over the South China Sea. In diplomacy, as in business, there are irritants and deal-breakers. Alleged Chinese industrial cyber-espionage, however awful it is to American businessmen and politicians, is an irritant, not a dealbreaker, in the complex and multi-faceted US-China relations.

10 | P a g e

Of course, if industrial cyber-espionage somehow morphs into what is sensationally billed as a "digital Pearl Harbour", then it is another story. However, for a digital Pearl Harbour to take place, America and China would have to be at war with each otheran inconceivable scenario in the age of nuclear mutual assured destruction. At the moment, to the extent that available evidence and common sense can inform us, the risks that the Chinese military will, without casus belli, launch a massive surprise cyber-attack on America are non-existent. There is one point on which I would agree with Mr Clark. Chinese industrial cyber-espionage hurts American businesses and thus undermines their support for China in America. Losing this vital constituency will have severe and negative consequences for China if it desires to improve its ties with America. Another cost, as Mr Clark points out, is the unwillingness of American firms to transfer technology to China or base their high-tech operations there out of fear of cyber-espionage. But however real and harmful such consequences are, they alone will only weaken, not destroy, US-China relations. I also remain puzzled by Mr Clark's assertion that it is improbable that American government entities have also broken into the networks of Chinese state-owned entities. He believes, rightly from his own point of view, that moribund Chinese SOEs possess no secrets worth stealing. I think what he means is that Chinese SOEs have no secrets that are of any commercial value. What he may not realise is that, for states, all secrets are strategically valuable. Understanding where your potential adversary is weak gives you an enormous advantage. Indeed, to claim that Western government entities do not engage in cyberespionage of any kind is not only factually wrong (do we need to mention the Stuxnet incident?) but politically naive. The Pentagon and the CIA would be wasting their tax dollars if they were not aggressively engaged in cyber-espionage activities of all kinds in order to detect and mitigate threats to American national security around the world, China included. Featured guest Orville Schell I am joining this debate somewhat late, but here are some thoughts. There is no doubt that the recent revelations documenting suspicions of massive Chinese hacking of privileged foreign internet sites are troubling. (Indeed, not so many months ago the FBI appeared in my New York office to inform me that even my own work e-mail had been hacked by China, something that I had long presumed, albeit without any concrete evidence.) Such charges are not good indicators of China's ability to recognise that as a new global stakeholder, its national interests now increasingly lie outside its borders in the new global commonweal where rigid notions of national sovereignty are increasingly outdated. Harvard's Edward Lutwak has recently spoken of "great state autism" and China has, indeed, recently evinced just such tone-deafness to outside reactions. So much for its once-vaunted notion of "peaceful rise". That America also engages in cyber-espionage on China, especially on its military, is undeniably true. But the scope of China's evident hackingespecially its intrusions into Western and Japanese corporate sites and the theft of their intellectual propertyis another matter entirely and is bound to set back US-China relations. To make matters worse, this is all happening precisely as a whole host of other increasingly urgent global problemsnuclear proliferation, climate change, transnational epidemics and world trade disputes, to name a fewalso beg our joint attention. But, and here I agree with Pei Minxin, even this unprecedented level of cyber-hacking is not the most destabilising problem dividing our two countries. The problem is serious, but should be viewed as a low-grade infection, not an acute fever. It is an annoying and enervating problem that needs remediation. But to view it as of first magnitude is to dangerously underplay other far more concerning points of tension. The problem which now most menaces US-China relations is China's pugnacious and belligerent approach to island disputes in the East and South China Seas which, because of American security treaties with Japan and the Philippines, could end up dragging America into a war with China over very little. What makes these disputes so menacing is not just that they involve sensitive issues of national sovereignty, but that Chinese officials have also suggested that they are matters of "core interest", which means that like Taiwan, Tibet and Xinjiang, they brook no compromise. However, even more worrisome in my view is the way that China's historical sense of having been aggrieved at the hands of the "great powers" now plays into these new disputes. Over the past century, the Chinese Communist Party (like the Nationalist Party of Chiang Kai-shek before) has woven an elaborate tapestry of victim kultur into its ideology, which

11 | P a g e

sees China as having been historically the butt of unfair treatment and bullying. For decades nationalist tub-thumpingwhich grew out of Lenin's theories on imperialism in the 1920s outlining how the "Chinese people" could play a critical role in Marxist world revolution by overthrowing colonialism and foreign occupation in Asiahas when it comes to relations with the West and Japan created a deeply rooted Chinese sense of us versus them. This inflammatory pool of sentiment continues to animate much of China's response to the outside world. In fact, in an almost Freudian transference, Chinese leaders now tend to see America's "pivot to Asia" not only as a new form of containment, but also as a form of latterday imperialism once again out to thwart China's regaining its rightful place in the world. One of the most fearful aspects of the ideological scheme of which these island disputes are now part is that it makes China's leaders afraid that they may appear weak if they seek resolution through tactical compromise. (In 1978 during a Tokyo visit, Deng Xiaoping had said that he didn't mind if the issue was shelved because "the people of our generation don't have sufficient wisdom to settle this discussion, but the people of the next generation will probably be wiser".) Alas, when it is most emphatically in China's national interest to once again defer to the future, its leaders are unable to do so. With the party's legitimacy so dependent on nationalism, new Chinese leaders feel compelled to press stubbornly forward. But they should be careful not to allow themselves and their people to become too addicted to this intoxicating, but toxic, cocktail of muscular and belligerent nationalism. Whatever the reasons for pressing on so aggressively in these island disputes, the result is that China's leaders not only have lost much of the goodwill that they had previously succeeded in cultivating among their Asian neighbours, but also have helped create an extremely dangerous situation which could end up as a great power conflagration as well. Even if China is right on the sovereignty questionand I think in the case of the Diaoyu/Senkaku Islands, China's charge that it was illegally dispossessed of the islands after Japan vanquished it at sea in the Sino-Japanese War of 1895 and annexed Taiwan as a colony and these islands as territories gives it a reasonable claimits present course hardly seems like the most effective way to settle disputes with a once "friendly" trading partner. And it certainly has been foolish to threaten US-China relations at the same time. Such threats make the problem of cyber-hacking seem minor in comparison. Paradoxically, I now find myself worrying far less about one other point of former tension between America and China: namely, China's reluctance to be more proactive in constraining North Korea at a time when its leadership has been evincing ever more frighteningly desperate and extreme behaviour. In this case, China's reluctance to appear to intrude in the internal affairs of a neighbour grew out of its fears that such behaviour might serve as an invitation for other powers to interfere in its domestic affairs. But now, mirabile dictum, China seems finally to be getting fed up with North Korea's dangerous brinksmanship and even to be drifting closer towards America and Japan in its concern that Kim Jong-un might end up running the whole region towards apocalypse. From the perspective of world peace, this is bad news. However, from the perspective of US-China relations, it could be a hopeful new point of convergence. And, when it comes to this parlously fraught, but seminal, relationship, we must take the attitude: any port in a storm.

Winner announcement
After two weeks of hard-fought battle, this debate now comes to a close. The side against the motion, which early on surged to two-thirds of the vote, has managed to capture the flag with much the same share of the final vote. Duncan Clark fought brilliantly, with able support from Adam Segal, and managed to land quite a few powerful blows in support of the motion. However, in the end it was the indomitable Minxin Pei, with help from Orville Schell, who carried the day. Hats off to the winners. Thanks go to all our fine contributors, as well as to our readers, for participating in this debate. I will make the bold prediction that this issue will not go away any time soon, so be sure to follow our newspaper's close coverage of cyber-espionage. We'll be watching the watchers

12 | P a g e