US to bring more hacking cases

But the bigger news may be the ultimate impact of the cases on international trade. Quoted in Foreign Policy, John Carlin, the head of the Justice Department’s National Security Division, discussing the future direction of the US case against China on the cyber-theft issue:

Carlin promised last week that more espionage cases are coming, and officials have said the next targets could be Russian hackers. In his 2012 interview, Carlin said that the United States might also prosecute employees of a corporation. “Whether it is a state-owned enterprise or a state-supported enterprise in China, if you can figure out and prove that they’ve committed the crime, charging the company means they can’t do business in the U.S. or in Europe,” Carlin said. “It affects their reputation and that then causes them to recalculate: ‘Hey, is this worth it?'”

Imagine what globalization will begin to look like if particular enterprises are barred from trade with the US. This, I suppose, is an unintended consequence. But for now in the US there are no voices crying out for the virtue of free trade, as much as there are voices calling out for enforcement of rules, and not just rules around hacking. The vibe has changed since the late 1990s on free trade. These sorts of cases will probably just fuel the anti-freetrade crowd.

US China cyberwar: Did Obama flag a cyber conflict with China in his foreign policy speech?

Not quite. But Obama certainly offered clues on the future direction of a cyber conflict with a country like China.

As the US methodically ratchets up the pressure on China’s cyber-trade secret theft, the recent indictments, handled by the FBI and the Department of Justice, are just one step in a likely series of actions. If China’s intellectual property theft is the threat to US economic well-being that the White House claims it is, then Obama just left the door open to cyberattacks to counter the Chinese actions.

In describing his vision for how the US and the military “should lead in the years to come” Obama explains:

The United States will use military force, unilaterally if necessary, when our core interests demand it — when our people are threatened, when our livelihoods are at stake, when the security of our allies is in danger. In these circumstances, we still need to ask tough questions about whether our actions are proportional and effective and just. International opinion matters, but America should never ask permission to protect our people, our homeland, or our way of life.

Later in the speech, discussing the behavior of states, Obama lays it out: “We have a serious problem with cyber-attacks, which is why we’re working to shape and enforce rules of the road to secure our networks and our citizens.”

The key phrases here are “core interests” and “when our livelihoods are at stake”. The issue of online trade secret theft is critical for the US, especially for its economy relative to China’s. For years, China the emerging industrial giant has used foreign technology acquired through trade agreements or otherwise to build its industries and lift millions out of poverty. Now, the US in weak-growth mode and facing years of competition from across the Pacific, has to shore up its competitive economic advantages. One of the biggest US economic advantages is in the area of innovation, technology and design. The ability to ensure US inventions benefit US businesses – and not foreign ones – is critical to the US’s long-term economic prospects. My bet is that this would qualify as a core American interest.

The reference to a “serious problem with cyber-attacks” is all about China. Plainly. And working to shape and enforce rules brings to mind the recent sharing of the US cyber policy with the Chinese themselves. Despite the laudable gesture, which speaks volumes about the policy-making apparatus in the US and China, China is probably too internally divided for it to make a difference.

To give a sense of the growing centrality of cyber-defense to the US, West Point soldiers are increasingly being educated in the sphere – which means the US is thinking long-term about the cyber defense, with generals likening the cyber realm to what the sky is for the air force, or what the sea is for the navy.

More broadly, Obama’s use of the “core interests” is interesting, too. Rather than a Kennedyesque speech of “pay any price, bear any burden, meet any hardship,” the core interests argument now reflects the new age we’re in. The US’s biggest rival, China, has expanded its use of the “core interest” justification in recent years in explaining its actions. I read this as an American response. Regarding foreign policy in general, but cyber defense it particular, core interests gives the US a lot of latitude in act, another reason to watch this area in the future.

China-US cyber espionage dispute: the fallout continues

There are some who would describe management consulting firms as one of biggest boondoggles in US capitalism, so there is an irony that American ones are being cut off from China’s state-owned-enterprises in retaliation for the indictments of the Chinese hackers.

report in the FT says Boston Consulting Group, McKinsey & Co, and the firm formerly known as Booz & Company (Strategy&) may all be effected.

All snickering aside, presumably these companies would offer China’s SOEs practical advice on the kind of reforms that would make them more market responsive. SOEs in their current form are a hazard to the longer-term health of China’s economy because of their poor efficiency, transparency and allocation of resources.

China’s decision to cut these ties brings to mind the Western sanctions on Russia. It also brings to mind Russia’s warnings that all sanctions boomerang. If the long-term effort to reform the SOEs becomes longer because of a lack of help in reorganizing them, the decision to banish US consulting firms may come back to haunt China.

My former colleague Peter Cai at the China Spectator argues that the dispute “will be disruptive to the beneficial process of globalization of technology and standards” potentially leaving Americans and Chinese companies trapped in their own markets.

“We cannot afford to have technological tribalism in a globalised economy, especially a damaging fight between China and the US. Businesses should be wary of protectionist policies enacted in the name of national security. The growing trend of paranoia will hold back the development of technology globally and make the world a less connected place.”

Yet, globalization is plainly in retreat anyway. China is stronger now and no longer needs the constant flow of Western technology to grow. Western economies are facing ever-growing inequality linked to the globalization process of the past few decades.

Globalization has allowed big companies to arbitrage their labor costs and shift production and profits to whatever country is the most welcoming, all over the head of legitimate governments and civil society. This corporate power in the West has triggered a strong populist political backlash.

Already, the Balkanization of the internet is happening. China has the Great Firewall. Russia wants bloggers who get more than 3000 hits a day to register. Even the US indictments of the Chinese hackers seem to mark an inflection point following the Wild West era of the Internet. So it’s only natural that with the Balklanization of the Internet comes the Balkanization of technology to some degree, hence “technological tribalism”.

It’s interesting that in the kind of services the US management firms provide, the US actually ran a trade surplus with China in 2012 of $17 billion. But in goods, of course, there is little to stop the torrent of Made-in-China products pouring into the US.

The bigger question for the US is how profitable US-China trade is.

AP writes: Trade in goods between the U.S. and China last year hit a record $562 billion. American companies earned nearly $10 billion last year in China, another record. American direct investment in China exceeds $50 billion.

To put these figures in perspective, General Motors (which is very active in China) had an adjusted EBIT in 2013 was $8.6 billion in 2013. Google’s net income in 2013 was $3.4 billion.

If AP is correct, that means earnings to US companies from the $122 billion in goods exported to China was just over the amount of the total profit for GM in 2013. Meanwhile, in 2013, the US imported $440 billion of goods from China, leaving the US with a trade deficit of some $318 billion with China, according to the US Census Bureau.

The goods forming that trade deficit help the US enjoy “Always Low Prices” which seem to go hand-in-hand with “Always Low US wages.” It doesn’t necessarily add up to the most robust kind of trade situation from the US perspective, particularly given the large and growing barriers for US companies active in China. So this tit-for-tat response from China is really not the end of the world by US corporate standards.

International Space Station: Now what, NASA?

There is a defensive ring to the NASA administrator Charles Bolden’s claim that Russia’s decision to pull out of the ISS won’t have an impact of the success of the station.

Bolden said no one country, including Russia, is “indispensible” in keeping the ISS in use. Yet, undoubtedly there are some hard questions being asked in Washington and Houston about the future of the ISS.

As space analyst Dr Morris Jones points out, this is a crucial period for the future of global space programs

This period when NASA is weak in vehicle infrastructure is the most strategic window to launch a blow to NASA’s space program. Russia would certainly understand this. NASA needs some crisis planning right now. It’s almost certain that there’s a lot more talk happening behind closed doors than we know.

The biggest risk is that the US, in a pinch, will choose to put resources into maintaining the status-quo with the ISS. NASA will be tempted to do this so it’s not embarrassed when and if China has its space station Tiangong-3 or Heavenly Palace aloft, scheduled for 2023. That would follow NASA’s current embarrassment of no longer being able to launch its own astronauts into space – a problem to persist until 2017 at the earliest.

But if NASA focuses too many resources on maintaining the status quo of the ISS, it will likely delay a serious stab at putting astronauts on Mars.

As the dynamics of space competition reshape along the lines of new geopolitical rivalries, the US will need to think long and hard about how it can show leadership in space. The clearest way is a manned mission to mars. This is not a new idea. My 1980 World Book Encyclopaedia set includes a detailed graphic on what a mission to Mars would look like. NASA engineers and planners fully expected to head to Mars after the successful Apollo program to the moon.

But NASA’s interplanetary budget became a victim of the budget issues of the 1970s, when a recession and the gas crisis were in full swing. Not only was the budget cut but the momentum slowed and the nation’s attention began to drift from space programs.

It will be interesting to see if the pressure NASA is coming under from the Russians and Chinese produces the will to push on to the next planet. Recall that the catalyst for the Russian to announce the ISS pull-out began with a move in the US to break the monopoly Boeing and Lockheed Martin have on military satellite launches. Any credible disruptor force to the cozy space industry in the US could unleash the kind of competition that benefits the overall program. But the main thing is for the US space program not to focus on the short-term need at the expense of the long-term strategy.