Confrontation with China over cyber spying carries risk

The Obama administration is considering whether to use economic sanctions to retaliate against China for allegedly hacking into and spying on U.S. companies, but aggressive measures risk sparking a trade war with an important economic partner.

Last week, the White House unveiled a strategy aimed at fighting the theft of trade secrets. Among other steps, the administration said it will use "trade policy tools" to pressure other countries to stop hacking U.S. companies and to enforce intellectual property laws.

The policy document was not focused on China, but referred to numerous examples of the Chinese stealing sensitive business information from U.S. companies to use for their own products.

Mike McNerney, a cybersecurity consultant and former Defense Department official, said the Chinese government is engaged in a massive campaign to steal the innovations of U.S. companies.

"We don't hack into a Chinese company and steal their [intellectual property] and give it to Google or Apple or Ford. We view that as out of bounds," he said.

Just one day before the administration announced the policy shift, the security firm Mandiant released a report detailing evidence that an elite military unit of Chinese hackers, the People's Liberation Army Unit 61398, has been continuously hacking U.S. companies and government agencies.

The analysts wrote that since 2006, the Shanghai-based hackers have stolen data from at least 141 companies across 20 major industries, including critical infrastructure sectors like energy and telecommunications. At least 115 of the companies were in the United States.

China has denied the accusations.

McNerney said the use of economic sanctions to punish cyber espionage would be "groundbreaking" and would demonstrate the seriousness of the United States to confront the problem.

"I do think China will take these actions very seriously," he said.

But McNerney warned the sanctions would have to be well-tailored or they could escalate tensions between the nations.

"There's always the possibility of triggering a reciprocal response. The reality is China is the second largest economy in the world," said David Fagan, a Washington-based attorney who works on cybersecurity and trade issues. "We have to be very careful in how we manage that economic relationship."

A policy analyst for a business group said that the business community supports a "sustained effort to reign in China on what is regarded, across the board, as abhorrent behavior."

But the policy analyst explained that China is a critical market for American businesses.

"Companies are very unhappy about Chinese cyber espionage, but so many companies are heavily invested in exporting to China," the analyst said. "This is a balancing act for the administration and the business community."

In the plan unveiled last week, the White House said only that it would use trade policy tools to "increase international enforcement against trade secret theft to minimize unfair competition against U.S. companies." The document did not specify what kinds of trade restrictions the White House is considering.

"The Administration will continue to act vigorously to combat the theft of American trade secrets that could be used by foreign companies or foreign governments to gain an unfair commercial advantage over U.S. companies," White House Intellectual Property Enforcement Coordinator Victoria Espinel said in a statement.

The business group analyst said the administration could restrict certain exports or imports. The United States could also cut off visas for Chinese citizens, companies or academic institutions.

The analyst said that one option is to invoke Article 21 of the World Trade Organization, which would allow the United States to ignore international trade agreements in the interest of national security.

But the analyst warned that invoking the provision would be an extreme step that could prompt retaliation from China and could create a precedent for other countries to adopt protectionist policies in the name of national security.

"Those are not steps that the business community would support," the analyst said. "That's a very slippery slope."

McNerney acknowledged that sanctioning China over cyber spying carries some risk, but he argued it is safer than other options, such as using military force.

"They're stealing so much of our [intellectual property], it's already almost like an economic sanction on their part," McNerney said.

China is unlikely to completely abandon its cyber espionage program, McNerney said, but he expressed hope that trade sanctions and diplomatic pressure will force them to at least scale back their operations.