A China-US tech war will cost the world dearly

The escalating cyber dispute between Beijing and Washington is resulting in a string of protectionist policies that will have serious consequences for the development of technology around the world.

Beijing has ordered its state-owned companies to cut ties with American consulting firms like McKinsey and Boston Consulting Group out of concern that they may leak state and trade secrets to American spooks, according to the Financial Times.

This news came just a few days after the American Justice Department publicly indicted five serving Chinese military officers on alleged corporate espionage charges. The unprecedented US move is part of a broader strategy to hit back at China’s growing cyber-attacks on American companies as well as government agencies.

It is the first time the US has charged foreign government officials with cyber espionage. Most analysts and commentators see the move as a sign that Washington will take a more confrontational approach with Beijing over cyber espionage.

The Washington Post reports the change of heart and strategy comes from the White House after years of fruitless pleas and negotiations with Beijing. “The message was sent from the president himself, one senior official said.

“This was something that was very important and he wanted options to push back on the theft of intellectual property by the Chinese.”

The Americans are at pains to draw a distinction between cyber espionage targeted at commercial entities and cyber spying for national security reasons. Washington is conscious of Edward Snowden’s damaging revelation of the NSA’s global surveillance program.

The Chinese are not only annoyed but cynical about American’s decision to air China’s dirty laundry publicly. Beijing’s top envoy to the US made his cynicism clear in an interview with CNN. Ambassador Cui Tiankai said “it’s really amazing some people still believe they have the moral high ground and credibility to accuse others, if we consider the Snowden revelations.”

The escalating cyber dispute between Beijing and Washington will have serious consequences for American and Chinese technology companies operating internationally. It is well known that Chinese tech giant Huawei is firmly secluded from the United States on national security grounds and the Chinese company has more or less given up its dream of operating in the US as well.

The Snowden revelations and the American accusations of Chinese cyber espionage are also sounding alarm bells in Beijing about its own vulnerabilities.  Chinese cyber experts are calling on the government to scrutinise American equipment makers and services providers more carefully.

A major Chinese telco quietly replaced its American-made backhaul network in a province with Chinese gear. Expect this to happen more frequently. Though Beijing has not officially banned American firms from selling goods and services in China, it has dropped hints about its preferences to Chinese companies.

“While a formal document hasn’t been issued, in the future we will try to buy IT equipment from domestic brands such as Lenovo,” said a person familiar with technology purchases at one of China’s big state-owned banks, according to Reuters.

American technology companies like IBM and Cisco, bitter rivals of Huawei, are coming under ever-greater pressure in China due to a backlash against the country in light of Snowden’s revelations. Cisco said its revenue dropped 10 per cent in the final quarter of 2013. IBM also reported a 22 per cent decline in revenue in China, leading to a 4 per cent decrease in quarterly profit. 

American and Chinese technology companies are fast becoming the collateral damage in a cyber war between the two countries.  It comes at a time when American companies are desperate to grab a bigger slice of the Chinese market and Chinese companies like Alibaba, Huawei, and Lenovo are expanding aggressively overseas.

The rising protectionist tide in two of the world’s largest economies is likely to be mutually destructive. American companies may become increasingly marginalised in the world’s fastest growing market and, at the same time, American consumers and companies are denied the benefit of cheaper Chinese-made telecommunication gear.

The dispute between these two super powers will be disruptive to the beneficial process of globalisation of technology and standards, making future diffusion harder and less predictable. If this trend persists, American and Chinese companies may find themselves trapped more and more in their home markets without access to each other’s 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. 

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