China-US Relations

Written by Jared Schulman

Relations between the world’s two largest economies have been notably “colder than usual” for the past several years. Perhaps it can be chalked up to an economically motivated sibling rivalry or to purely competing business interests, yet more likely to blame, however, are growing concerns over cyber defense and national security.

In what appears to be a Cold War of the Wires, the U.S. and China have become locked in a technological battle for commercial and state secrets that rivals 1950’s James Bond-era espionage. Today however, instead of MI6, the KGB, and the CIA, the hostile parties are deep-web hackers operating through loose back channels with even more loosely supervised government bodies.

This makes today’s passive aggressive fight for guarded information potentially even more dangerous than those of past years. Modern cyber attacks are intentionally decentralized, and claiming responsibility for them is antithetical to their intention – to gather classified, non-public information anonymously.

Even more unsettling, however, is that the cost of launching a cyber offensive is inconsequential compared to the payoff, which can be tremendous and highly damaging to the opposite party.

But when did the U.S.-China relationship become so soured? For years, the White House was Tiananmen’s greatest ally on and off paper, aiding in most aspects of development, trade, and commerce.  However, over the past five years, the People’s Republic has set out to be increasingly self-sufficient as evidenced in the most recent “Five Year Plan” – the Party’s half-decade agenda.

For current Premier Xi Jinping, this has meant shifting China’s foreign defense and trade policy from a fairly laissez-faire stance to a more forceful one open to confrontation. This move also comes on the heels of the Party’s efforts to “rebalance” the economy.

What we’ve observed therefore is a paradigm shift in China’s presence on the international scale. Once the world’s factory, known as an economic heavyweight, China has shown its intention to be a direct power challenge to traditional global hegemons, namely the U.S., Germany, the UK, and Russia.

And while in the Asiatic sphere this might mean naval exercises in the South China Sea or a scrambling of fighter jets over disputed Pacific islands, for the U.S. the implications are quite different. Simply put, China has picked a battle over commerce and innovation with the U.S., instead of a more traditional primal territorial battle as it currently has with its neighbor Japan.

This U.S. conflict emerges in tandem with the rise of successful Chinese tech companies like Xiaomi and Alibaba Group (NYSE: BABA), which are flipping China’s traditional competitive advantage on its head. These companies rely on innovation and advanced ideas for their success, whereas in years prior, successful Chinese companies have been defined by their economies of scale and inexpensive labor inputs.

In the same vein, we see Chinese financial institutions like Industrial and Commercial Bank of China (ICBC) becoming some of the largest in the world by deposits. What all this means for the US is that China is building up a commercial capability to attack traditionally “Western-monopolized” industries.

Now and continuing into the near future, this situation will lead to never before seen policy questions for our nation’s leaders. Government should be keen to consider how continued cyber-attacks will affect US trade policy, and should attempt to develop appropriate and commensurate retaliation protocols for cyber warfare sponsoring states.

It will also be critical for those in Congress to draw a clear line on when and how to respond to commercial hackings, the likes of which have plagued even multinational giants like SONY and JP Morgan Chase in recent years.

Looking at the big picture, however, the U.S. needs to approach the situation calmly. This is only a Cold War because both sides have chosen to be relaxed. Too brash an Executive Order or Act could start a fire from an ember. Moreover, taking into account China’s weakening economic growth, it remains to be seen whether her cyber security and foreign policy threat represents a sustainably worrisome hot point or a brief moment of chest puffing.

Regardless, cyber security is a structural change to the foreign policy landscape that will not cease to be an issue. Even if China is bluffing, care should be taken now to safeguard the nation from more frightening threats tomorrow. This could be our warning call.