Mutual Suspicion Mars Tech Trade With China
By
and PAUL MOZURFEB. 27, 2015
BEIJING — At an elegant guesthouse here recently,
’s top Internet regulator entertained ambassadors and diplomats with platters of tempura and roast on a spit, unusual lavishness in an era of official austerity in China, to celebrate the Chinese New Year.
But the graciousness came with a warning: Foreign companies had to behave if they wanted to stay in China’s $450 billion technology market.
In Washington on the same day, more than two dozen American tech industry executives and trade association officials gathered at an emergency meeting at the pre-Civil War building of the Office of the United States Trade Representative. They told the deputy trade representative it was time for the United States to get tough with Beijing.
The stern words at the dueling gatherings underscored how a routine trade disagreement had quickly escalated into a complex political fight. On Friday, the battle lines became even clearer when a top United States official criticized China for the new regulations on American tech companies.
Photo
The Qianjiang New City under construction in Hangzhou, China, in September. Beijing has told foreign companies to behave if they want to be a part of its $450 billion technology market. Credit Qilai Shen for The New York Times
The conflict has escalated sharply for months. Now, it pits a confident Chinese leadership, alarmed by evidence of online espionage by the United States, against an awkward alliance between the Obama administration and Silicon Valley — which itself is wary of Washington but is also salivating over the huge Chinese market.
What makes this trade dispute different from others is that traditional concerns of market share and
have become intertwined with the thornier issues of national security and espionage.
“We are at a bad point in a triangular drama,” said Peter F. Cowhey, dean of the School of International Relations and Pacific Studies at the University of California, San Diego. “The Chinese government is suspicious of American spying, and it wants to advance Chinese leadership in digital markets,” said Mr. Cowhey, who is a former director of the University of California Institute on Global Conflict and Cooperation and a former counselor for the United States trade representative. “Washington suspects the worst of Chinese commercial policy and is equally suspicious of Chinese digital espionage.”
The latest chapter in the dispute began when China said American tech companies had to submit to invasive audits and create back doors into hardware and software. The Chinese say the rules are a matter of national security, necessary to protect state and business secrets.
The rules, which will go into effect in coming weeks, apply only to banking technology for now but are expected to spread to other sectors. Other proposed regulations in China, like an antiterror law still in draft form, go even further and could force tech companies to hand over encryption keys — the passcodes that help protect data from prying eyes — to the Chinese government.
The tech companies say the new rules and the proposals are untenable. But their hands are somewhat tied.
The companies have called on the Obama administration for help, a move made with hesitation. Silicon Valley companies are also leery of the Obama administration’s using their technology for espionage, particularly after the spying revelations made public by Edward J. Snowden, the former American intelligence contractor.
Those same revelations may also be limiting the administration’s options — hobbling its ability to tell China to stop taking the same liberties with technology that the United States has taken.
The companies, and some in the American government, argue that China’s moves are not primarily about national security. Instead, executives and trade groups say, China is mostly trying to strengthen its domestic tech industry by blocking competitors.
The Obama administration has used that argument to pressure Beijing. This month, four cabinet officials, including Treasury Secretary Jacob Lew and Secretary of State John Kerry, sent a letter to their counterparts in Beijing, requesting the immediate suspension of the banking measures, according to an official who has seen the letter but would speak only on the condition of anonymity.
Michael Froman, the United States trade representative and also a signatory of the letter, said on Friday that the new rules violated China’s trade commitments.
“The rules aren’t about security — they are about
and favoring Chinese companies,” he wrote in a statement. “The administration is aggressively working to have China walk back from these troubling regulations.”
Still, in many ways, China seems to hold all the cards. China has twice as many Internet users as the United States, a market expected to account for half of all information technology spending globally in 2015. Its industrial policy gives the government strong control over the economy. And its own tech companies are growing in size and capability.
American companies — eager to do business in the expanding market — are divided on how to deal with the Chinese, a weakness China has cannily exploited over the last decade.
Just a few years ago, the companies had a tacit agreement not to give in to demands that they store data in China. In 2012, Microsoft capitulated, cooperating with a local company to store data in China and help its customers meet local legal requirements. Soon after, IBM, Amazon and Apple followed suit.
A similar pattern played out in other areas, too. In each case one foreign firm accedes to a new, stricter regulation — at times providing technical expertise to Chinese partners. Soon, foreign rivals, worried about missing out, do the same. And in the long term, the local Chinese companies become competitors to their former foreign partners.
“The Chinese go to each company and say, ‘Look, don’t oppose this and we’ll give you special treatment,’ ” said James Lewis, a senior fellow at the Center for Strategic and International Studies.
Uncertain when a rival might cave to China’s demands, most American tech companies have engaged in a delicate high-wire act, working hard to stay in Beijing’s favor while pushing the United States government to voice their grievances.
During a November visit to China, Obama raised concerns about an antimonopoly investigation into Qualcomm, the large semiconductor company. But when Qualcomm was fined nearly a billion dollars by Beijing under the antimonopoly law this month, the company’s president practically thanked China, saying “we appreciate” the Chinese regulator’s “acknowledgment of the value and importance of Qualcomm’s technology and many contributions to China.”
In previous disputes, China has tempered policies after the tech industry made enough noise. But analysts say this time is different. President Xi Jinping is tougher than his predecessors, they say, and he has taken a personal interest in the country’s tech security.
“People have to realize there is a new sheriff,” said Christopher Johnson, senior China analyst at the Center for Strategic and International Studies in Washington.
The documents released by Mr. Snowden, including some indicating that the American government planted surveillance code in some telecommunications exports, have also emboldened Chinese leaders. An American tech industry official said China’s top Internet regulator, Lu Wei, has often claimed the moral high ground in feisty encounters with Americans.
Mr. Lu perhaps gained more ammunition this month, when a Russian security firm reported that the United States had found a way to permanently embed surveillance and sabotage tools in the computers and networks it targets.
China also argues that the United States has engaged in restrictions similar to those pursued by the Chinese. The American tech official said that Mr. Lu cites the instructions by Gary Locke, then secretary of commerce, to Sprint Nextel in 2010 to not buy equipment from Huawei, the Chinese telecommunications equipment maker, because of security concerns.
One potential option to help defuse the situation, said Jon M. Huntsman Jr., a former American ambassador to China, is trying to tie the technology trade issues to broader trade talks between the countries. The Obama administration is in the middle of negotiating a bilateral investment treaty with China that covers industries like financial services and energy but not technology.
“There needs to be a pathway to develop rules of the road,” Mr. Huntsman said. “These are complicated issues.”
Correction: February 27, 2015
An earlier version of this article gave an outdated title for Peter Cowhey. He is the former director of the University of California Institute on Global Conflict and Cooperation, not the current one.
Jane Perlez reported from Beijing and Paul Mozur from Hong Kong.
