TIME U.S.-Germany spy scandal

Germany May Counter U.S. Spying With Typewriters

The use of typewriters instead of e-mail was adopted by Russia last year following similar claims of U.S espionage

A leading German politician has suggested that typewriters will be used to write confidential documents, in the wake of the U.S. spying scandal.

Patrick Sensburg, head of the German parliament’s enquiry into NSA activity, said that email may soon become redundant, in an interview with the Morgenmagazin TV show Monday night.

Faced with the incredulity of the interviewer, Sensburg insisted that his announcement wasn’t a joke. He added that should German politicians adopt typewriters, they’ll be using manual, not electronic, models.

Sensburg said that ongoing U.S. monitoring of Germany necessitated the change in operation.

Berlin isn’t the first country to consider reverting to old-school technology. Germany follows in the footsteps of Russia, which reportedly took similar measures after whistleblower Edward Snowden revealed the Kremlin had been a target of NSA spying.

The Kremlin’s security agency spent 486,540 rubles, or around $14,162, on typewriters equipped with a unique typing pattern that allowed each document to be linked to a particular machine.

The scandal surrounding U.S. surveillance of Germany escalated last week after the top U.S. Intelligence official at the American Embassy in Berlin was ordered to leave Germany.

The CIA station chief’s exodus clipped on the heels of news reports earlier this month that a German intelligence official arrested on suspicion of spying had been working as a double agent for the U.S.

U.S. Secretary of State John Kerry traveled to Germany Sunday to play down tensions, calling the two nations “great friends.”

TIME Germany

U.S. and Germany Make Nice Amid Espionage Claims

U.S. Secretary of State John Kerry, left and German Foreign Minister Frank-Walter Steinmeier during a press conference, after talks between the foreign ministers of the six powers negotiating with Tehran on its nuclear program, in Vienna, Austria on July 13, 2014.
U.S. Secretary of State John Kerry, left and German Foreign Minister Frank-Walter Steinmeier during a press conference, after talks between the foreign ministers of the six powers negotiating with Tehran on its nuclear program, in Vienna, Austria on July 13, 2014. Jim Bourg—AP

"We have enormous political cooperation and we are great friends," says Secretary of State John Kerry

U.S. Secretary of State John Kerry called the U.S. and Germany “great friends” on Sunday, playing down the tensions surrounding recent allegations that the U.S. has been spying on Berlin.

Kerry and German foreign minister Frank-Walter Steinmeier met in Vienna to discuss Iran’s nuclear program, but used the occasion to reiterate their commitment to the U.S-German alliance as the espionage scandal that has battered the relationship between the two countries in recent weeks continues to reverberate.

Germany ordered the CIA’s station chief in Berlin to leave the country last week, after the arrest of a German man earlier in July on suspicion of spying on behalf of the U.S. government.

Although Kerry did not explicitly address the espionage claims, he stressed the importance of the U.S.-German partnership after noting that he and Steinmeier discussed ongoing conflicts in Iran, Iraq, Afghanistan and the Middle East.

“Let me emphasize the relationship between the United States and Germany is a strategic one,” Kerry said in a statement alongside Steinmeier. “We have enormous political cooperation and we are great friends. And we will continue to work together in the kind of spirit that we exhibited today in a very thorough discussion.”

Steinmeier said the two countries “want to work on reviving this relationship, on a foundation of trust and mutual respect,” Reuters reports. He mentioned that the effort applies to “all the difficulties that have arisen in our bilateral relations in recent weeks,” adding that the U.S.-German alliance will strengthen attempts to resolve issues in Afghanistan, the Middle East and Iran.

Both Steinmeier and German Chancellor Angela Merkel have highlighted the necessity of continuing Germany’s partnership with the U.S. despite recent setbacks, but Merkel said in a Saturday interview with public German broadcaster ZDF that the two countries have completely different notions of the role of intelligence.

The Chancellor expressed hope that the reaction in Germany would persuade the U.S. not to spy on its allies. “We want this cooperation based on partnership,” she said in the interview. “But we have different ideas, and part of this is that we don’t spy on each other.”

TIME espionage

U.S. Spy Scandal in Germany Is Music to Putin’s Ears

Russian President Vladimir Putin attends a meeting with Serbian Prime Minister Aleksandar Vucic at the Novo-Ogaryovo state residence outside Moscow
Russian President Vladimir Putin attends a meeting with Serbian Prime Minister Aleksandar Vucic at the Novo-Ogaryovo state residence outside Moscow, July 8, 2014. Pool/Reuters

The rift in relations between Western allies could not have come at a better time for the Russian President

The American habit of spying on its European allies turned out to be one of the more memorable topics to come up in April when Vladimir Putin held his annual call-in show on Russian television. Toward the end of the four-hour marathon of questions for the Russian President, Putin was asked about the tone of his conversations with European leaders. He gave a wry response. “It’s hard to talk to people who speak in whispers to each other even when they’re at home, because they’re scared the Americans are eavesdropping,” Putin said, causing a wave of laughter spread across the studio audience. “Listen, I’m being serious,” he deadpanned. “I’m not kidding.”

But it must have been hard for him not to smile at the latest U.S. spying scandal this week. Germany on Thursday asked the resident spy chief at the American embassy in Berlin to leave the country after German authorities uncovered two spies in the course of a week, both of them allegedly selling secrets to the U.S. from inside the German intelligence service.

The depth of the outrage left no one laughing in the German capital, though there was no doubt something comical in the whole affair. As Thomas de Maiziere, the German Minister of Interior, put it in a statement on Thursday: “The information reaped by this suspected espionage is laughable.” He did not say exactly what the information was, but German media have reported that it pertained to a parliamentary investigation into past allegations of American spying in Berlin.

“That’s so stupid that one can only cry at the foolishness of it,” the influential German Finance Minister Wolfgang Schaeuble said, adding in televised comments that Chancellor Angela Merkel is “not amused” by the latest scandal.

Neither is the diplomatic corps in Washington. With the West locked in its worst dispute with Russia since the Cold War, the U.S. and Europe need to form a united front against the Kremlin more now than at any point in a generation. That much was clear on Wednesday when Victoria Nuland, the Assistant Secretary of State for European and Eurasian Affairs, went before the Senate’s Foreign Relations Committee to discuss the standoff with Russia.

The Senators demanded to know why the U.S. had not moved ahead with another round of sanctions to punish Russia for its military incursions in Ukraine, instead only making what Bob Corker, the committee’s ranking Republican, called “hollow threats.” Looking down at Nuland from his desk, Corker added, “It has to be very frustrating to continue to wake up in the mornings and look in the mirror and practice talking tough, but know that nothing’s going to happen.” The diplomat replied that the White House did not want to move against Russia alone and was waiting for the Europeans to come on board. “As the President has said, these sanctions will be more effective, they will be stronger, if the U.S. and Europe work together,” Nuland said.

But the following day, it became much harder for that cooperation to move ahead when Germany asked the top U.S. intelligence official in Berlin to get out. Making the case for another round of Western sanctions against Russia requires a great deal of intelligence sharing between the U.S. and its European allies. Their spy agencies need to provide each other with evidence of Russian meddling in eastern Ukraine, evidence that is often obtained through espionage. So however laughable the substance of U.S. spying in Germany may have seemed to officials in Berlin, their response has severed a key channel for exactly that kind of confidential communication with Washington.

For Russia, that is fantastic news. The state-run media in Moscow splashed the latest blow to U.S.-German ties across their headlines on Thursday evening, and as Putin has long made clear, he would love for the Europeans to reconsider their transatlantic alliances. “The modern world, and especially the Western world, is very monopolized,” Putin said during his call-in show in April. “Many Western countries, however unpleasant this may be for them to hear, they have willingly given up a significant part of their sovereignty. In part this is the result of the policy of forming blocs.”

The blocs Putin was referring to were the European Union and NATO, the military alliance that Russia sees as a strategic threat to its security. Over the years Putin has made no secret of his desire to see NATO downsized if not dismantled, and amid his recent standoff with the West over Ukraine, he has made a point to sew discord within that bloc of Western nations, most recently and publicly during his call-in show this spring. Just after his joke about European leaders whispering in their kitchens, the hosts of the tightly choreographed program took a call from Berlin, where a Hungarian political commentator named Gabor Stier asked Putin a somewhat leading question: “Aren’t you afraid that the U.S. will spoil Russia’s relations with Europe for a long time to come?”

Putin’s response was winding, but it ended with an anecdote meant to embarrass the current Secretary General of NATO, Anders Fogh Rasmussen. Years ago, when Rasmussen was still serving as the Prime Minister of Denmark, he asked for a private meeting with Putin, who said he was glad to oblige. “It turns out he took a tape recorder with him, secretly recorded our conversation and then published it in the press,” Putin claimed. “What kind of trust could there be after such incidents?”

NATO dismissed the allegations as “complete nonsense” and claimed Putin was simply trying to “divert attention” away from Russia’s meddling in Ukraine. But that probably wasn’t the aim of the anecdote. Putin’s more likely goal was to make the members of the NATO alliance suspect each other of spying and, ultimately, to erode the trust on which that alliance is based. Already the fallout from Germany’s latest spy scandal with the U.S. seems to have achieved something close to that very outcome, and if it leads to a rupture in their relationship, Putin will surely be able to allow himself a mischievous smile.

TIME espionage

Germany Asks U.S. Intelligence Official to Leave Amid Spying Concerns

German Federal Chancellor Merkel receives the Prime Minister of Moldova, Leanca, at the Chancellery in Berlin, Germany on July 10, 2014.
German Federal Chancellor Merkel receives the Prime Minister of Moldova, Leanca, at the Chancellery in Berlin, Germany on July 10, 2014. Adam Roe—Scholz Press/Corbis

With tensions between the two allies already high

Germany told the top U.S. intelligence official at the American embassy in Berlin to leave the country, the German government said Thursday.

Steffen Siebert, a spokesperson for German Chancellor Angela Merkel, said the American official has been asked to leave as a result of ongoing investigations into alleged U.S. spying in Germany.

“We have seen these reports and have no comment on a purported intelligence matter,” said Caitlin Hayden, spokesperson for the U.S. National Security Council. “However, our security and intelligence relationship with Germany is a very important one and it keeps Germans and Americans safe. It is essential that cooperation continue in all areas and we will continue to be in touch with the German government in appropriate channels.”

White House Press Secretary Josh Earnest said Thursday that “any sort of comment on any reported intelligence acts would put at risk U.S. assets, U.S. personnel and the United States’ national security.”

“We do continue to be in touch with the Germans at a variety of levels, including through law enforcement, diplomatic and even intelligence channels,” Earnest added. “The strength of our national security relationship with Germany is important to American national security; it’s also important to the national security of the Germans.”

Earnest said he knew of no contacts between POTUS and Angela Merkel, other than last week’s conversation that preceded the announcement by German law enforcement officials about the alleged espionage.

The move comes amid growing tension between Germany and the U.S. over revelations of spying. Reports surfaced last year that intelligence officials tapped Merkel’s personal cell phone. And German media reported earlier this month that a foreigner arrested on suspicion of spying had been acting on behalf of the U.S.

“If this is true … I would see this as a clear contradiction to what I understand as trusting cooperation of intelligence services as well as of partners,” Merkel said when asked about the arrest Monday.

-Additional reporting by Zeke J Miller

TIME intelligence

German Mistrust of the U.S. Deepens Amid Latest Spy Scandals

Angela, Merkel, German chancellor
German Chancellor Angela Merkel Ute Grabowsky—Photothek/Getty Images

Just as the outrage over U.S. surveillance in Germany was starting to die down, a fresh set of allegations sends their relations into another tailspin

The annual Fourth of July party this year did not go quite as the U.S. embassy in Berlin had planned. The event still gave the German political elites a chance to mingle with American diplomats, sample a hotdog and take home a box of donuts. But even as the band played the Star-Spangled Banner, some of the guests couldn’t stop grumbling about the spying habits of their hosts.

Just before presiding over the party on Friday, U.S. Ambassador John Emerson was called into the Foreign Office in Berlin to explain the latest case of alleged U.S. espionage against the German government. It wasn’t the first time. Since last fall, when German Chancellor Angela Merkel learned that the U.S. had been tapping her cell phone for years, U.S spying allegations have eroded decades of trust between Berlin and Washington. But the mess just keeps getting worse.

Last week alone saw two separate scandals involving U.S. espionage in Germany. The first one broke on Thursday, when German media reported that the U.S. National Security Agency, or NSA, has been spying on a German privacy advocate who works to protect Internet users from the snooping of … the NSA. The following day, July 4, a second scandal broke in the German daily Süddeutsche Zeitung and other media, which reported that an employee of Germany’s foreign-intelligence service, the BND, had confessed to selling secrets to the U.S. government. New details of that case continued to emerge on Monday, with Reuters reporting that the CIA was involved in the spying operation that led to the man’s recruitment. But German officials have confirmed little about the investigation, saying only that a 31-year-old man was arrested July 2 on suspicion of spying for a foreign government.

So Chancellor Merkel, who is on a trip to China this week, was cautious when asked about the case on Monday. “If this is true, then I believe we are dealing with a very serious development,” she told a news conference in Beijing. “I would see this as a clear contradiction to what I understand as trusting cooperation of intelligence services as well as of partners.”

Not everyone in the German leadership has been so diplomatic. After their long experience living under the watch of their own secret police — first the Nazi gestapo and then the East German Stasi — the German public is particularly sensitive to issues of individual privacy. So they were especially alarmed last year when Edward Snowden, the NSA whistle-blower, revealed how millions of German citizens, including Chancellor Merkel, had been caught up in the NSA’s dragnet surveillance programs.

William Binney, another NSA whistle-blower, testified last week before the ongoing parliamentary inquiry into the Snowden leaks in Germany, and his characterization of U.S. spying practices as “totalitarian” and “senseless” made headlines across the country. The latest set of spying allegations came out against this background, and the public reaction was summed up nicely over the weekend by German President Joachim Gauck, who said if the allegations are true, “It’s really time to say, ‘Enough already!’”

What makes the most recent scandal particularly galling is not the scale of the spying so much as its apparent clumsiness, says Sylke Tempel, the editor of a leading foreign-affairs journal in Berlin, Internationale Politik. The suspected double agent at the BND was apparently not even providing the U.S. any groundbreaking intelligence. According to the German media reports, he approached the U.S. embassy in Berlin offering a small stash of secret files, some of which were related to the German Parliament’s probe into the Snowden leaks. “They could have gotten that same information just from talking to German lawmakers,” says Tempel. Instead, the U.S. reportedly paid the man about $34,000 for his secrets.

Asked to respond to these accusations on Monday, White House spokesman Josh Earnest said the U.S. would “work with the Germans to resolve the situation appropriately.” But he declined to say whether any of the claims were true. “What I can say, more generally, though, is the relationship that the United States has with Germany is incredibly important,” Earnest said.

But if the U.S. had wanted to repair some of the damage to that relationship, it could have informed the BND that one of its employees was hawking secrets, says Constanze Stelzenmüller, a senior fellow at the German Marshall Fund in Berlin, a think tank focusing on U.S.-German ties. “That would have been a huge help in rebuilding trust,” she says. “So I don’t know what our American friends were thinking. This is just awful incompetence.”

So far, the scandal doesn’t seem likely to cause any sudden rupture in relations, but the broader lack of trust is sure to eat away at Germany’s willingness to help the U.S. on a variety of issues. By the end of this year, the U.S. is hoping to sign a free-trade and investment deal with the E.U., where Germany has a decisive vote. In the Western standoff with Russia over Ukraine, the U.S. also needs to maintain solidarity across the Atlantic, and it could find support dwindling for new sanctions against Moscow if Germany turns away. “The spying just adds to the feeling of exasperation, disillusionment, fatigue with America,” says Tempel. “It becomes so much harder to defend the transatlantic relationship.”

That issue becomes more important — especially for younger German voters — as each new spying scandal breaks, and that has made it costlier for a German politician to tout the U.S. as a trusted friend and ally. “This is indicative of larger trust issues,” says Stelzenmüller of the German Marshall Fund. “This isn’t something that just blows over.” Yet when the U.S. ambassador arrived on Friday to address the Fourth of July party, he made no mention of the scandals that all his guests were talking about. “We are a nation of forests and fields and farmlands,” Emerson assured them from the stage before the band began to play. “Of mountains high and deserts wide.” But to a growing part of the German electorate, the U.S. has come to feel a bit like a nation of spies.

TIME espionage

Germany Arrests Man Said to Be U.S. Spy

With relations between allies already tense over snooping

A German man was arrested this week on charges of spying for foreign intelligence services, a German official confirmed to TIME on Friday.

Another official, German Chancellor Angela Merkel’s spokesman Steffen Siebert, said Merkel was informed about the arrest on Thursday. The 31-year-old man was not identified and German authorities didn’t divulge who they suspect him of spying for. But the German newspaper Süddeutsche Zeitung, citing unnamed government sources, reported that he had been spying on behalf of the United States.

Tensions have been high between Germany and the U.S. ever since documents leaked by former NSA contractor Edward Snowden revealed that the intelligence agency had monitored Merkel’s personal cell phone. U.S. officials didn’t weigh in on the latest report: The White House declined to comment Friday, and an official readout of a Thursday phone call between Merkel and President Barack Obama made no mention of it.

Süddeutsche Zeitung reported that the man, who was arrested Wednesday, is an employee of the German Federal Intelligence Service, and that he was initially arrested on suspicion of spying for Russia. He appeared at a federal court in Karlsruhe in southwest Germany on Thursday, and has been detained on suspicion of being a foreign spy while authorities investigate further.

News of his arrest came a day after two U.S. citizens who once worked for the NSA testified before a German parliamentary committee investigating the agency’s overseas surveillance activities.

-Additional reporting by Zeke J Miller and Denver Nicks

TIME China

Chinese Hacking Charges Explained

Here's what the Chinese military was looking for and why

U.S. Attorney General Eric Holder announced Monday that members of the Chinese military allegedly engaged in the hacking of American businesses, including U.S. Steel Corp., Westinghouse, Alcoa, Allegheny Technologies, the United Steel Workers Union and SolarWorld.

The 31-count indictment by a feral grand jury in Pennsylvania charges that the hackers stole trade secrets that would have been “particularly beneficial to Chinese companies at the time that they were stolen,” Holder said.

China’s foreign ministry has denied the federal charges, the BBC reports.

Watch the video above for the details.

 

 

TIME foreign affairs

The U.S.’s Hypocritical Stance Against Chinese Hackers

A Virtual Conversation With Edward Snowden - 2014 SXSW Music, Film + Interactive Festival
Edward Snowden speaks at the "Virtual Conversation With Edward Snowden" during the 2014 SXSW Music, Film + Interactive Festival at the Austin Convention Center on March 10, 2014 in Austin, Texas. Michael Buckner—2014 Getty Images

The problem with taking a stand against China is that we've also been stealing secret data from them, a longstanding practice on both sides as old as the Cold War.

Chinese hacking of American computer networks is old news. For years we’ve known about their attacks against U.S. government and corporate targets. We’ve seen detailed reports of how they hacked The New York Times. Google has detected them going after Gmail accounts of dissidents. They’ve built sophisticated worldwide eavesdropping networks. These hacks target both military secrets and corporate intellectual property. They’re perpetrated by a combination of state, state-sponsored and state-tolerated hackers. It’s been going on for years.

On Monday, the Justice Department indicted five Chinese hackers in absentia, all associated with the Chinese military, for stealing corporate secrets from U.S. energy, metals and manufacturing companies. It’s entirely for show; the odds that the Chinese are going to send these people to the U.S. to stand trial is zero. But it does move what had been mostly a technical security problem into the world of diplomacy and foreign policy. By doing this, the U.S. government is taking a very public stand and saying “enough.”

The problem with that stand is that we’ve been doing much the same thing to China. Documents revealed by the whistleblower Edward Snowden show that the NSA has penetrated Chinese government and commercial networks, and is exfiltrating — that’s NSA talk for stealing — an enormous amount of secret data. We’ve hacked the networking hardware of one of their own companies, Huawei. We’ve intercepted networking equipment being sent there and installed monitoring devices. We’ve been listening in on their private communications channels.

The only difference between the U.S. and China’s actions is that the U.S. doesn’t engage in direct industrial espionage. That is, we don’t steal secrets from Chinese companies and pass them directly to U.S. competitors. But we do engage in economic espionage; we steal secrets from Chinese companies for an advantage in government trade negotiations, which directly benefits U.S. competitors. We might think this difference is important, but other countries are not as as impressed with our nuance.

Already the Chinese are retaliating against the U.S. actions with rhetoric of their own. I don’t know the Chinese expression for “pot calling the kettle black,” but it certainly fits in this case.

Again, none of this is new. The U.S. and the Chinese have been conducting electronic espionage on each other throughout the Cold War, and there’s no reason to think it’s going to change anytime soon. What’s different now is the ease with which the two countries can do this safely and remotely, over the Internet, as well as the massive amount of information that can be stolen with a few computer commands.

On the Internet today, it is much easier to attack systems and break into them than it is to defend those systems against attack, so the advantage is to the attacker. This is true for a combination of reasons: the ability of an attacker to concentrate his attack, the nature of vulnerabilities in computer systems, poor software quality and the enormous complexity of computer systems.

The computer security industry is used to coping with criminal attacks. In general, such attacks are untargeted. Criminals might have broken into Target’s network last year and stolen 40 million credit and debit card numbers, but they would have been happy with any retailer’s large credit card database. If Target’s security had been better than its competitors, the criminals would have gone elsewhere. In this way, security is relative.

The Chinese attacks are different. For whatever reason, the government hackers wanted certain information inside the networks of Alcoa World Alumina, Westinghouse Electric, Allegheny Technologies, U.S. Steel, United Steelworkers Union and SolarWorld. It wouldn’t have mattered how those companies’ security compared with other companies; all that mattered was whether it was better than the ability of the attackers.

This is a fundamentally different security model — often called APT or Advanced Persistent Threat — and one that is much more difficult to defend against.

In a sense, American corporations are collateral damage in this battle of espionage between the U.S. and China. Taking the battle from the technical sphere into the foreign policy sphere might be a good idea, but it will work only if we have some moral high ground from which to demand that others not spy on us. As long as we run the largest surveillance network in the world and hack computer networks in foreign countries, we’re going to have trouble convincing others not to attempt the same on us.

Bruce Schneier is an internationally renowned security technologist. He is the author of 12 books – including Liars and Outliers: Enabling the Trust Society Needs to Thrive — as well as hundreds of articles, essays and academic papers. Schneier is a fellow at the Berkman Center for Internet and Society at Harvard Law School, a board member of the Electronic Frontier Foundation and the Chief Technology Officer of Co3 Systems, Inc.

TIME foreign affairs

Michael Chertoff: China’s Strategic Campaign To Steal Western Commercial Secrets

The indictment lays down an important marker that strategic intellectual property theft will be treated as a serious breach.

This week’s indictment of five members of Chinese People’s Liberation Army “Unit 61398″ shines a spotlight on China’s strategic and systematic campaign to steal Western commercial secrets in order to unfairly advantage Chinese state owned or favored enterprises.

For years, many of us inside and outside government have warned that China was using espionage to obtain American intellectual property and confidential business plans for the benefit of Chinese companies. Recent US government reports have identified China as a profligate source of cyber intrusions into Western commercial networks. A private report by Mandiant released in 2013 pointed at the same Chinese Army unit as targeting over 140 companies across a wide variety of corporate systems, including those of technology companies and even media outlets. Last year, President Obama raised the intellectual property theft issue with President Xi at their summit in California.

But this is the first time criminal charges have been brought against specific Chinese military personnel for commercial cyber espionage. Of course, it is not plausible that these individuals will be extradited to the US to see the inside of a courtroom. Nevertheless, the indictment is a milestone for several reasons.

First, these charges set an important precedent that state sponsored intellectual property theft is not immune from prosecution. Indeed, taking the logic of this prosecution further, we may one day see prosecution of companies that induce and benefit from this cyber espionage under a theory of conspiracy. Such prosecutions would operate as an economic deterrent and would pave the way for ancillary civil lawsuits to recover damages.

Second, the lengthy indictment spells out in detail the kinds of commercially valuable data that was stolen and — somewhat unusually — identifies the victims, which include iconic American companies. What emerges is the portrait of a Chinese military unit assisting state owned enterprises by mounting a strategic campaign to target particular business processes, negotiating plans, and sensitive pricing and marketing information of their Western competitors. This puts real meat on the bones of what are usually just general warnings about cyber espionage. And it is striking to observe the sheer breadth of data that was taken, including very particular product specifications and business strategies. The result included giving Chinese companies an illicit look at their American counterparts’ negotiating tactics, as well as at attorney-client privileged communications in a trade dispute.

Third, the detailed nature of the charging document serves as a not too subtle warning that US investigators are quite capable of assembling a detailed picture of Chinese state backed cyber hacking operations. While that will not prevent all future such espionage efforts, it may cause foreign authorities to be more hesitant to engage in massive intellectual property theft.

Why does this all matter? Of course all nations engage in intelligence collection and espionage for national security purposes, and we have an intelligence community that does the same. But in the field of commercial competition we expect a level and fair playing field. When a nation state harnesses its intelligence capabilities to give its state-favored enterprises the advantage in negotiating or in bringing technology to market, the global trading system is skewed. Cyber espionage in the service of commercial companies allows those companies to harvest the benefit of others’ research and development without making any investment of their own. If state owned companies can secretly see their competitors’ production data, pricing calculations, and business strategies, those state enterprises can underprice or block the competition.

This week’s indictment lays down an important marker that strategic intellectual property theft will be treated as a serious breach of the rule of law and as a threat to the global economic and trade system.

Michael Chertoff was secretary of the Department of Homeland Security from 2005 to 2009. He co-founded and is chairman of the Chertoff Group, a global security and risk management advisory firm, and is senior of counsel at Covington & Burling LLP.

TIME trade

What Chinese Cyber-Espionage Says about the Chinese (and U.S.) Economy

The Obama Administration's outrage over Chinese hacking has its roots in conflicting views of the government's role in private business. So don't expect a meeting of the minds anytime soon.

Imitation is the sincerest form of flattery, but that’s probably cold comfort to firms like Westinghouse and U.S. Steel, which the U.S. Justice Department says have been hacked by Chinese cyber-espionage teams. By indicting the Shanghai-based team allegedly responsible for the attacks, which are largely conducted in order to give the Chinese an edge in the global economy, Attorney General Eric H. Holder Jr. is trying to draw a line between the sort of snooping that the U.S. National Security Agency does for strategic security purposes, and the kind that the Chinese do, which often involves intellectual property theft or the culling of business secrets for competitive advantage.

The problem is that the Chinese don’t recognize that difference, because in China, the state is the economy. I was actually in China as the Edward Snowden story was breaking in 2013, and I remember the Chinese being indignant about what they perceived as U.S. hypocrisy around cyber-snooping.

The importance of the Chinese state in the Middle Kingdom’s economy, which has been growing over the last 15 years or so, is crucial to understanding the hacking affairs. During the period of China’s highest growth, in the years leading up to 1995, the country was all about unleashing the private sector, and paring back the public. A lot of public sector workers were laid off, Beijing liberalized various sectors of the economy, and the private sector took off. But since the mid 1990s, that trend has been shifting.

State-owned enterprises, or “SOEs” have been sucking up more of the countries financial resources (they get about 80% of all debt financing, while providing only 20% of employment), which is one of the reasons that the Chinese economy is slowing. That makes it harder for the country to move up the economic food chain, from lower-end manufacturing to higher-end products and services, which is what it needs to do to move from being a poor country to one in which most of its citizens are middle class. It’s telling that some of the highest levels of unemployment in China are amongst new white-collar college graduates; the country just isn’t creating enough high-level companies, or jobs.

Which goes right to the heart of the hacking indictments. Despite all the hoopla recently over the fact that the World Bank expects China to surpass the U.S. as the world’s largest economy this year, there’s a big difference between being big, and being rich. Average U.S. worker wages are between 6 and ten times what they are in China because U.S. companies produce higher end goods and services. The Chinese economy is still largely a copycat economy—albeit a very good one. Chinese companies tend to take ideas from developed country firms (either legally or otherwise) and try to tweak them slightly to make them cheaper, more suited to local markets, etc. That’s why Chinese hackers were searching for intellectual property secrets at Westinghouse, and probably countless other Western firms. It’s something that American firms in China complain constantly about, and have largely taken as a cost of doing business there.

What’s more interesting, though, are reports that Chinese hackers were also looking for things like the trade deals and strategies of U.S. steel firms. This may speak to one reason that the Obama administration decided to make a big deal of Chinese hacking now. In an age of slower global growth, when all boats are not rising, issues like intellectual property theft and trade tensions become more fractious. The U.S. has been complaining for some time now that China won’t play by the existing rules of the global economy, and that given its size and economic heft, this can’t be allowed to continue. Since the financial crisis and recession of 2008, analysts have been predicting that the U.S. and China would eventually come to blows over trade issues—and it’s interesting that many of the firms being hacked were also those that had approached the WTO about Chinese trade violations.

It will also be interesting to see how the Chinese respond to the Justice Department indictments; needless to say there’s no way they’ll be handing over any hackers and they’ve already pulled the plug on a cyber-espionage working group with the U.S. that was supposed to address some of the tensions between the two countries. One thing you can count on, says Conference Board China economist Andrew Polk, is that the slow growth, increasingly nationalistic environment in the Middle Kingdom is going to “make it tougher for foreign firms to do business there.” As if it was ever easy.

 

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser