Posts Tagged ‘cyber’

U.S. Weaponizes Its Criminal Courts in Fight Against China and Huawei

January 18, 2019

Pursuit of theft charges against Huawei is the second recent case where prosecutors have built criminal allegations on civil litigation

Why China's Huawei Matters

Why China’s Huawei Matters
Chinese telecom giant Huawei has long caused tension between Washington and Beijing. WSJ’s Shelby Holliday explains what the company does and why it’s significant. (Photo: Aly Song/Reuters)

The federal pursuit of theft charges adds pressure on Chinese tech giant Huawei Technologies Co. by further involving the criminal-justice system in the fight against China’s alleged encroachment on intellectual property.

It is the second case in four months where federal prosecutors have built criminal allegations on civil litigation, risking uncertain outcomes as a verdict isn’t guaranteed.

The Trump administration wants to use indictments, along with export controls and other policy tools, as part of an arsenal to counter Chinese theft of trade and technology secrets, which U.S. officials increasingly view as part of national security, The Wall Street Journal has reported. That has meant a more aggressive effort to convert corporate squabbles into criminal charges.

The federal investigation, first reported by The Wall Street Journal, into whether Huawei stole trade secrets from U.S. business partners arose from civil lawsuits, including one in which the Shenzhen-based company was accused of misappropriating robotic technology from wireless-network operator T-Mobile US Inc.

In November, the U.S. said it indicted two companies in China and Taiwan on charges of stealing semiconductor-design secrets from Idaho-based chip maker Micron TechnologyInc., based almost entirely on litigation that Micron had filed in California courts a year earlier.

In both cases, the entry of federal prosecutors ratcheted up global attention and the stakes in what had until then been less noticed civil filings.

China said Thursday that it was concerned that a closed civil case was being reopened. “We have serious suspicions about the true motives behind it,” a Foreign Ministry spokeswoman said. “If they are politicizing this case, this does not comport with the rules on fair and free competition and breaches the spirit of the rule of law.”

In the Huawei case, the jury didn’t award T-Mobile any damages in a claim of misappropriation of trade secrets and didn’t find Huawei’s alleged actions in that claim “willful or malicious”—an outcome that raises the risk that a criminal case on broadly similar terms may not deliver the verdict prosecutors want, attorneys say.

“In a civil case, you need to prevail on a preponderance of the evidence, whereas a criminal case you need beyond a reasonable doubt, a much stricter burden of proof,” said Christopher Neumeyer, an attorney specializing in intellectual property for Taiwan-based Duane Morris & Selvam. “If you can’t prevail in a civil case, how are you going to win a criminal case?”

Huawei declined to comment. The Chinese and Taiwanese companies in Micron’s case say they plan to fight the charges. Fujian Jinhua Integrated Circuit Co. said in a statement that it isn’t guilty. The Taiwanese firm, United Microelectronics Corp. , said it has 15 years of experience in making the kind of chips whose technology it has been accused of helping Jinhua to steal.

Chinese telecom giant Huawei has long caused tension between Washington and Beijing. WSJ’s Shelby Holliday explains what the company does and why it’s significant. (Photo: Aly Song/Reuters)

Prosecutors pursuing the pair of tech-related cases may be taking cues from a playbook set a year earlier, when a Wisconsin jury found Chinese wind-turbine maker Sinovel Wind Group Co. guilty of stealing technology from its former U.S. supplier, American Superconductor Corp.

Attorneys say the Sinovel ruling was a landmark in using federal courts to go after Chinese companies for tech theft. Like Micron and T-Mobile, Massachusetts-based American Superconductor had tried first to take the Chinese company to court on its own—in that case, by filing suit in Beijing in 2011. That litigation went nowhere. The U.S. court ruled Sinovel must pay $59 million in fines and restitution to the American firm.

High-profile prosecutions are part of a range of weapons the U.S. can call on to shape global perceptions of China’s state-corporate behavior, as well as China’s perception of how its options might be dwindling, attorneys and analysts say. Other tools include sanctioning exports and redefining “emerging technologies” as a national security concern.

“The U.S. will pursue critical Chinese companies in any form possible,” said Alicia Garcia Herrero, chief economist at investment bank Natixis . “The U.S. is aiming at creating a kind of sinking feeling for China. That is, no matter what China does, there will still be new angles for the U.S. to contain it.”

On its part, Beijing has sought to allay concerns in a series of pronouncements and other policies, even before the recent escalation of litigation. President Xi Jinping in July 2017 at a financial work conference said that intellectual property infringers would “pay a heavy price,” a remark analysts describe as unusual for the occasion. And last month, dozens of government agencies vowed in a coordinated announcement tougher punishments against such wrongdoers.

“If you can’t prevail in a civil case, how are you going to win a criminal case?”

—Christopher Neumeyer, attorney specializing in intellectual property

The U.S. may have more tech companies it could pursue. In December, the Justice Department indicted two Chinese nationals on charges of hacking and stealing technology and other business secrets from more than 45 companies in at least a dozen U.S. states and from government agencies. The U.S. hasn’t charged any companies involved in the allegations.

In a speech accompanying the December indictments, Deputy Attorney General Rod Rosenstein said one advantage of using the justice system is that it makes it difficult for China to feign ignorance when faced with a barrage of detailed allegations and corroboration.

“Exposing these actions through the criminal-justice system is a valuable tool,” he said.

But should prosecutions go awry, China may find itself with a trump card—and justification for retaliation. For some analysts, a central question remains.

“Is there really a reasonable determination that this is an appropriate case, or is it just a political thing?” Mr. Neumeyer said. “I don’t know how much of it is careful legal strategy and how much of it is tit for tat.”

Write to Chuin-Wei Yap at

Appeared in the January 18, 2019, print edition as ‘U.S. Steps Up Legal Pressure On Firm.’


Former US Diplomat in China Says Trade War Nearing End

January 16, 2019

Andy Rothman thinks domestic issues on both sides lead to increased motivation to make an agreement — However, not everybody thinks an agreement is imminent.

Rothman was head of macroeconomics and domestic policy office of the US Embassy in Beijing.

Image result for Andy Rothman, pictures, bloomberg
PUBLISHED : Wednesday, 16 January, 2019, 1:03pm
UPDATED : Wednesday, 16 January, 2019, 1:21pm
South China Morning Post

A former US diplomat and China strategist has added his voice to the growing chorus of experts who believe a short-term resolution to the trade war can be reached within months.

Andy Rothman, who spent 17 years in the US foreign service, focused on China, and is now an investment strategist, thinks a deal could be struck by the summer, with domestic issues leading to increased motivation on both sides to make an agreement.

China is facing an economic slowdown that is beginning to show up in regional growth data, while the US stock market has been under-performing, as the long-running federal government shutdown continues.

China’s Vice-Premier Liu He is set to visit Washington before the end of the month, as both sides look for some good news, as challenging economic data continues to rain in.

Rothman was head of macroeconomics and domestic policy office of the US Embassy in Beijing. In the 1990s, he was involved in US efforts to negotiate China’s accession to the World Trade Organisation. He expects the current negotiating deadline of March 1 to be extended.

“Now that a negotiation is seriously underway, there is no reason for the US to go back and put more tariffs in place, as long as progress is being made towards a deal,” he said. “It is rare that a trade negotiation gets finished on time and President [Donald] Trump can extend the deadline.”

In this respect, he agreed with Robert Zoellick, former US Trade Representative under president George W Bush and former World Bank president who also told the South China Morning Post this week that a deal could be struck.

Zoellick said that such a deal would be “transactional” and implied that it would not address long term structural issues in the Chinese economy.

Rothman, however, thought that some significant changes could be achieved within months.

In an interview in Hong Kong this week, he said that a deal might include better market access for American companies in China; better protection of intellectual property (IP) rights; and an agreement by Beijing to stop requiring American companies to transfer technologies to their Chinese partners.

Rothman, who now works for investment company Matthews Asia, which has US$27.4 billion in assets under management, suggested that these changes would also benefit the Chinese economy.

For one, better market access for foreign companies would likely improve the competitiveness of Chinese firms, he said.

“China’s WTO accession led to foreign competition, which in turn helped Chinese companies become more efficient and innovative,” Rothman said.

The period of WTO negotiations that led to China’s accession in 2001, Rothman recalled, led to foreign companies like General Motors selling more cars in China than in the US. However GM’s success also strengthened China’s automotive industry, as Chinese car makers subsequently improved their own models.

Rothman also claimed that China’s economy suffers because of IP theft, with many Chinese companies stealing from each other. This has prevented China from developing strong software, music, film and pharmaceutical sectors.

Accusations of technology theft by China are not new. Rothman recalled that former US president Barack Obama raised a similar issue with his Chinese counterpart Xi Jinping in 2015.

Obama said he and Xi reached a “common understanding” on curbing economic cyber espionage, with the two leaders agreeing that neither government would knowingly support cyber theft of corporate secrets or business information. The agreement stopped short of any promise to refrain from government-to-government cyber spying for intelligence purposes.

“The US would like the Chinese government to follow the American practise of spying solely for government purposes instead of having the Chinese government stealing technology from foreign companies to give to Chinese companies for commercial reason,” said Rothman.

However, the Trump administration says there has been renewed Chinese hacking over the past two years.

Rothman said that since Xi had previously made an agreement with Obama to end state-sponsored espionage attacks on US corporate secrets, it should be relatively straightforward for him to resume that agreement with Trump, especially since China is also facing pressure from other nations to change its behaviour.

“Xi understands this is not just an American problem. German companies do not like this and Japanese companies do not like this. In the end this is not a sustainable way for Chinese companies to grow,” he said.

President Xi understands that other countries including Japan and Germany also believe that China should develop its own technology or license technology properly for the sustainable growth of Chinese industries, Rothman said.

Eliminating such hurdles would set the framework for the longer-term US-China relationship, Rothman said.

However, not everybody thinks an agreement is imminent. Many believe that nothing of substance can be agreed between the world’s two largest economies within three months, including Tommy Wu, senior economist at Oxford Economics, a research house, who said yesterday: “We are unlikely to see negotiations completed before March 1, but because of the progress expected to be made in these talks, the US is likely to postpone the tariff hike again.”

Is China Really Cheating?

January 16, 2019

The evidence of Chinese malfeasance on trade, technology and intellectual property is a lot thinner than most people assume.

Estimates of the cost of Chinese IP theft are dubious.   Photographer: Brent Lewin/Bloomberg

Repetition breeds reality. Such is the case with allegations the U.S. has leveled at China in their budding economic Cold War. Across the American political spectrum, it’s now taken for granted that China forces U.S. companies to transfer critical technology in order to do business on the mainland, engages in rampant hacking and theft of intellectual property, and massively and unfairly subsidizes its high-tech industries — all of which contributes to fears that the country poses an existential threat to America’s prosperity.

Like many longtime observers of China, I’ve been getting more than my fair share of airtime over the past several months. Typically, the interview starts with a false premise followed by a loaded question: “Everyone knows that China is stealing hundreds of billions of dollars a year in U.S. intellectual property. Isn’t it high time for America to stand up to its greatest economic threat?”

But, what exactly does “everybody” really know? This assertion is drawn from the findings of the “IP Commission Report” co-chaired by two renowned public servants, former Director of National Intelligence Adm. Dennis Blair and former Utah governor Jon Huntsman Jr., now ambassador to Russia. In 2017, the commission estimated that intellectual-property theft cost the U.S. economy somewhere between $225 billion and $600 billion annually, an exceptionally broad range. Stolen trade secrets are thought to account for 80-90 percent of the total, the remainder being counterfeit and pirated hardware and software.

When it comes to stolen trade secrets, though, there’s a problem. There’s no hard data to support the estimates. The IP Commission rests its case on a 2014 study by PricewaterhouseCoopers LLP and the Center for Responsible Enterprise and Trade, which itself relies on dubious “proxy modeling” — in essence, coming up with statistical guesstimates using available data on nefarious activities such as narcotics trafficking, corruption, occupational fraud and illicit financial flows. While these are problematic features of any nation, it takes a rather large leap of faith to convert this information into the 1-3 percent of GDP that the IP Commission claims is lost to theft of intellectual property.

The commission’s estimates of how much of this loss to attribute to China are even more dubious. They come from the U.S. Customs and Border Patrol (CBP), which reported $1.35 billion in seizures of counterfeit and pirated goods in 2015. Another model — this one constructed by researchers at the OECD — was used to convert this to a U.S. total. Then 87 percent of that was attributed to China — 52 percent from the mainland and 35 percent from Hong Kong. With no direct tally available for pirated software, once again a “model” (from the Business Software Alliance) was used to impute 61 percent of that total to Asia Pacific.

Meanwhile, no attempt was made to quantify the Chinese share of stolen trade secrets, which, as noted above, accounts for the bulk of the overall estimate of America’s IP losses. The bottom line: The only thing “everybody knows” about China’s alleged IP theft from the U.S. comes from flimsy evidence derived from highly dubious models.

Unfortunately, an equally suspicious approach was used to support the case leveled by the U.S. Trade Representative (USTR) in the so-called Section 301 report published last March and used to justify America’s tariff war against China. The heart of the USTR’s case is that companies are forced to transfer technology when they enter into mainland joint ventures.

Within the JV structure, a voluntary contract between two parties, it’s hardly shocking that U.S. and Chinese partners share talent, strategies, operating systems, process designs and, yes, production technologies in their collective efforts to build a new business.

But, even the USTR confesses it has no hard evidence to prove that this sharing is forced — the essence of the allegation. Buried on page 19 of the 182-page USTR report is the admission that “transfer policies and practices have become more implicit, often carried out through oral instructions and ‘behind closed doors.’” Here, following the highly questionable precedent of the IP Commission, the USTR also rests its case on proxy surveys conducted by the U.S.-China Business Council, in which 19 percent of respondents claim they’ve been forced to transfer technology to their Chinese partners. Curiously, in the council’s latest survey (conducted in 2018), 99 percent of respondents saw no deterioration in IP protection over the past year.

Bias even creeps into the evidence on cyber-attacks presented by the USTR. While there have been reports of very recent cyber incursions by state-sponsored Chinese hackers, most of the allegations documented by the USTR predate a September 2015 cyber accord signed by Presidents Barack Obama and Xi Jinping.

Finally, while state-sponsored industrial policies (such as “Made in China 2025”) are alleged to be a unique and unfair effort by China to dominate leading-edge industries such as artificial intelligence, little mention is made of similar industrial policies long supported by JapanGermany, and even the U.S. through its Pentagon-centric R&D program. Nor is there any effort to provide serious economic analysis of the outsize U.S.-China bilateral trade imbalance — the political lightning rod in the trade battle — as but one piece of America’s multilateral deficits with 102 nations that have long afflicted a savings-short U.S. economy.

China is far from perfect and must be held accountable for verifiable economic transgressions. But America’s case against China is based on anecdotes and shaky evidence that don’t stand up to serious scrutiny. As a trade war now morphs into a cold war, the current U.S. administration would be wise to stop relying on such “alternative facts” to wage its battles.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

China Is a Dangerous Rival, and America Should Treat It Like One

January 15, 2019

Enough with the endless talks and handshakes. We need to untie the American economy from China.

By Derek Scissors and Daniel Blumenthal

Mr. Scissors and Mr. Blumenthal are experts on China at the American Enterprise Institute.

The Trump administration has been clear about its view of China. A 2017 national security strategy document called China a “revisionist” power attempting to reorder international politics to suit its interests. It’s difficult to think otherwise given Beijing’s military buildup, its attempts to undermine American influence and power, its retaliations against American allies such as Canada, and its economic actions.

How to respond is more controversial. After years of unsuccessful talks and handshake deals with Beijing, the United States should change course and begin cutting some of its economic ties with China. Such a separation would stop intellectual property theft, cut off an important source of support to the People’s Liberation Army and hold companies that are involved in Chinese human rights abuses accountable.

Image result for Xi Jinping, at G20 dinner with Donald trump, pictures

This will be no easy task. Some industries will have problems finding new suppliers or buyers, and there are entrenched constituencies that support doing business with China. They argue that any pullback could threaten economic growth. But even if American exports to China fell by half, it would be the equivalent of less than one-half of 1 percent of gross domestic product. The cost of reducing Chinese imports is harder to assess, but there are multiple countries that can substitute for China-based production, none of them strategic rivals and trade predators.

The United States economy and its national security have been harmed by China’s rampant theft of intellectual property and the requirement that American companies that want to do business in the country hand over their technology. These actions threaten America’s comparative advantage in innovation and its military edge.

Even uncoerced foreign investment in technology can strengthen the Chinese military-industrial complex, especially since the Communist Party has moved, since President Xi Jinping took office in 2012, to a defense industrial policy that translates in English to “civil-military fusion.” In practice, many Chinese and foreign “civilian” companies serve as de facto suppliers for the Chinese Army and its technological-industrial base. Residents and visitors are subject to constant visual surveillance, and a nascent “social credit program” in which disobedience to party dictates is reflected in credit scores, which could affect everything from home purchases to job opportunities. These forms of social control often use technology developed by Western companies.

The United States should make major adjustments to its economic relationship with China. Comprehensive tariffs, which harm American consumers and workers unnecessarily, are not the right reaction. But neither are admonishments to “just let the market work.”

The scale of China’s industrial-policy distortions, technology thievery and efforts to modernize its army are too significant for such superficial responses. The American government must intervene in the market when it comes to China, although that intervention should be limited to areas that are genuinely vital to national security, prosperity and democratic values.

For example, the United States government should impose sanctions on the Chinese beneficiaries of intellectual property theft and coercion, in cooperation with our allies. This was the legitimate target of the United States trade representative’s original inquiry in August 2017 under Section 301 of the Trade Act of 1974, but the policy steps chosen — tariffs — focus on the trade deficit instead of loss of intellectual property.

Rather than across-the-board tariffs, Chinese companies receiving stolen or coerced intellectual property should not be allowed to do business with firms in America or, with our allies’ cooperation, in Europe and Japan. The United States should also intervene to halt foreign investment in any technology that assists the Chinese Army or contributes to internal repression and limit the access to global markets of any Chinese company that is tied to human rights abuses and army modernization.

Taking these actions would require an enormous amount of intelligence collection by American security agencies as well as crucial information from American companies. The latter is difficult to obtain: Out of fear of Chinese retribution, the foreign business community will cooperate only if there is a clear, bipartisan and long-term commitment by the American government.

While the United States must act unilaterally if necessary, the cooperation of allies such as Japan, Germany and Britain would make these steps more effective. Such countries have their own interests in China. Imposing sanctions in the name of national security on the European Union and China, as the Trump administration has threatened, would unwisely give them common cause.

Previous efforts to assert America’s influence against China, such as the discarded Trans-Pacific Partnership, did not push back effectively on Chinese economic aggression. Working with allies to directly address China’s malfeasance would.

All this means putting China at the top of American international economic priorities and keeping it there for years, without overstating or overreacting to trade disputes with our allies.

The administration has demonstrated some good instincts on China, but it must not be distracted by the next round of Beijing’s false economic promises. Protecting innovation from Chinese attack makes the United States stronger. Hindering the Chinese security apparatus makes external aggression and internal repression more costly for Beijing.

China is our only major trade partner that is also a strategic rival, and we should treat it differently from friendly countries with whom we have disputes. If Washington wants the global free market to work, it must intervene to blunt Beijing’s belligerence.

Derek Scissors (@DerekScissors1) is a resident scholar at the American Enterprise Institute, where Daniel Blumenthal (@DAlexBlumenthal) is the director of Asian studies.

Follow The New York Times Opinion section on FacebookTwitter (@NYTopinion) and Instagram.

A version of this article appears in print on , on Page A23 of the New York edition with the headline: Treat China Like the Danger It Is.

Why Trump’s America is rethinking engagement with China

January 15, 2019

The more aggressive US approach is part of a strategic shift that goes well beyond the trade war

Image result for china, map, flag

By Demetri Sevastopulo in Washington

When Donald Trump sat down to dinner with Xi Jinping last month at the G20 summit in Buenos Aires, the US president did not know about the diplomatic bomb that was about to explode. At about the same time, police in Canada arrested a Chinese telecoms executive after an extradition request from Washington.

The detention of Meng Wanzhou, chief financial officer of Huawei, was extraordinary because the US justice department had not told the White House about the warrant to arrest the daughter of the founder of the telecoms group, one of China’s most successful and influential companies.

Donald Trump and Xi Jinping at a dinner meeting on Dec. 1 Photographer: Pablo Martinez Monsivais/AP

But the importance of the arrest went well beyond the immediate circumstances. It is the most striking symbol yet of the dramatic deterioration in relations between China and a US that is increasingly suspicious of Beijing’s motives and actions. Reinforcing the rupture, the US several weeks later charged two Chinese nationals with conducting a global hacking campaign to assist the Chinese intelligence services.

While the trade war has received the most attention, the economic tussle is part of a much more profound shift in the US that has seen Washington reverse important elements of the strategy of engaging with its Asian rival that was first introduced more than 40 years ago by Richard Nixon.

East meets West.  Photographer: Bloomberg/Bloomberg

Support for this change in approach has a broad base in the US. Officials across the US government have become significantly more hawkish towards China— over everything from human rights, politics and business to national security. At the same time, US companies and academics who once acted as a buffer against the harshest views are now far less sanguine.

“China has for some time underestimated the extent to which the mood in the US has shifted,” says Hank Paulson, the former US Treasury secretary. “

The attitude that they would implement reforms at a timetable that made sense to them missed the fact that this was no longer sustainable if they wanted the US to keep its markets open to them. And the US business community now supports a harder line.”

Hank Paulson at the Bloomberg New Economy Forum in Singapore on Nov. 7.
Photographer: Justin Chin/Bloomberg


While Mr Trump likes to describe China’s president Mr Xi as his friend, his White House signalled a major shift away from China when it labelled the nation a “revisionist power” in its December 2017 National Security Strategy.

In October, Mike Pence, vice-president, hammered home that message in a speech at the Hudson Institute that charged China with a litany of offences — from political repression at home to coercive diplomacy abroad. The rhetoric has been matched with action.

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U.S. Vice President Mike Pence at the Hudson Institute,  October 4, 2018

In the South China Sea, the US Navy is now conducting frequent freedom of navigation operations to push back against Chinese sovereignty claims over disputed reefs and islands. Meanwhile, the justice department created a “China initiative” task force to crack down on espionage.

While Ms Meng was arrested for allegedly helping her telecoms company violate US sanctions on Iran, US officials have long worried that Huawei could help China spy on rivals.

Those concerns escalated last year, culminating in the US convincing its Five Eyes intelligence-sharing partners — Canada, Australia, New Zealand and Britain — that they needed to take a much tougher line on Huawei, according to one person familiar with the situation.

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While concerns about China have risen in parallel with its emergence as a rival to the US, Washington has concluded that it has underestimated the speed at which it has caught up with the US in terms of technology — particularly technology with military applications.

Dennis Wilder, former head of China analysis at the CIA, says that as the US war on terror has receded in urgency, intelligence and national security officials have now woken up to the fact that China was using a “whole-of-society” approach to collecting intelligence, and that the openness of the west to Chinese scientists, students and business people had become an “Achilles heel”.

“The Chinese intelligence operations were astoundingly successful in providing the military and other state-owned enterprises with the secrets to enable technological leaps that could only be possible with the theft of advanced critical technology from the US, Japan and Europe,” Mr Wilder says.

Mr Trump and his trade war have done a lot to change the mood but many experts say China would have faced a harsher climate regardless of whether he had won the 2016 election. One of the few areas where Democrats and Republicans are united is over the need to adopt a tougher stance towards Beijing.

Lindsey Ford, a former Pentagon official under Barack Obama, says US military officials started to become much more concerned about China in the second half of his administration, when it appeared that Mr Xi was abandoning the “hide and bide” low-profile approach espoused by former leader Deng Xiaoping.

This was most striking in the rapid land reclamation in the South China Sea, where it installed weapons systems on some islands despite Mr Xi having pledged to Mr Obama in 2015 that China had “no intention to militarise” them.

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U.S. President Donald Trump with his guest Xi Jinping at Mar-a-Lago, April 2017

Ms Ford says the South China Sea activity was “the clearest signal that the game seemed to have shifted and that China’s own calculations about how much risk it was willing to accept . . . was no longer the same”.

At the same time that its navy has become more assertive, China has developed weapons-related technologies at a much faster pace than many US analysts once thought likely. Underscoring how the gap between the US and China has shrunk, General Paul Selva, vice-chairman of the joint chiefs of staff, warned in June that “if we sit back and don’t react, we will lose our technological superiority in 2020”.

The Pentagon is also concerned about the vulnerability of its military supply chains because of components made in China. Washington is raising red flags about activities aimed at stealing US technology — whether via Chinese nationals working in American university labs or cyber espionage.

One person familiar with the situation says US officials realised how much more vigilant they needed to become when they discovered just how much similarity there was between the Chinese J-20 stealth fighter jet and the American F-35. To tackle the threat, the US has significantly stepped up the vetting of Chinese nationals who apply to study sensitive subjects in America.

Christopher Wray, FBI director, last year warned Congress that US universities were naive about the potential for Chinese nationals to collect intelligence on their campuses.

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John Demers, assistant attorney-general for national security at the justice department, says 90% of economic espionage cases against the US in the past seven years have involved China © Bloomberg

John Demers, head of the justice department’s China Initiative, recently told the Senate judiciary committee that 90 per cent of economic espionage cases over the past seven years involved China. When the US charged the hackers in December, it said Beijing had breached a 2015 deal that neither nation would steal intellectual property for commercial advantages.

The US is also concerned about China trying to recruit American spies. In his testimony, Mr Demers said the justice department had an “unprecedented” three cases against former US intelligence officers accused of spying for China. In May, the US charged a former CIA operative named Jerry Lee with illegally possessing secret information.

The CIA believes he provided Beijing with details about its spying operation in China. One person familiar with the situation says his actions dealt a catastrophic blow to the CIA’s network — as many spies were arrested or executed.

Mike Pence, US vice-president, has hammered home the American message that China is a ‘revisionist power’ © AP The US also believes that two suspected Chinese cyber attacks — one in 2015 on the Office of Personnel Management which maintains government employee records, and another later on the Marriott hotel group — were part of an operation designed to help China identify covert US intelligence operatives in the country.

As the US strikes a tougher tone, China is losing constituencies that once helped balance the more hawkish views in security circles. US academics who were seen as friendly to China are becoming warier as Beijing cracks down on human rights — such as the mass detention of Uighurs in Xinjiang, failures to follow through on economic pledges, pressures on US scholars to toe the party line and moves backwards in terms of political reform.

“People I’ve known for decades have given up on China,” says Susan Shirk, chair of the 21st century China Center at the University of California San Diego.

“There’s a widespread view in the academic community that the overreaching China has done both domestically and internationally is hard-baked into the system and that there’s no hope of getting them to adjust their behaviour to our interests and values.”

A turning point that alarmed Washington came in late 2017 when Mr Xi did not name a successor at the Communist party’s 19th congress. He also pledged that China would become a fully modern economy by 2035 — picking a date that some saw as another sign that he intended to remain in power following his second five-year term. In a further sign of centralising power, the National People’s Congress approved last March a change in the constitution to remove the two-term limit on the presidency.

More recently, Mr Xi reignited concerns that he was moving backwards on promised reforms when he used a speech commemorating China’s economic opening 40 years ago to stress the primacy of the party. “No one is in a position to dictate to the Chinese people what should or should not be done,” he said in December. One senior US administration official says China has misread the change of mood in the US, adding that “even more disturbingly, they just don’t care”.

The official says the fact that Mr Xi’s speech had focused on “the growing role of the Communist party in every aspect of economic, political and personal life in China” suggested that Beijing was not taking the US concerns seriously.

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F-35B stealth fighter

“I don’t see signs of a course shift by the top leadership,” says the official. “I never thought China would aspire to be a Jeffersonian democracy or espouse the western liberal order,” says Mr Paulson.

“I always thought the Communist party would be paramount, but I didn’t see the clock being turned back.” Ms Shirk says a major reason for the growing US backlash is that the business community has “really soured on China”. “Right now, it is totally out of balance because the national security concerns are completely dominating the process and the business community isn’t resisting,” she says.

Ryan Hass, a former White House official now at the Brookings Institution, says many US companies had “promise fatigue”. While many did not agree with the approach Mr Trump was taking on trade, they wanted him to be tough on China on market access and were “trying to use Trump’s instincts for disruption [to] their advantage”.

“The Chinese leadership has promised for years that reform was around the bend and then you see things like President Xi’s speech where he emphasised the central role of the party,” says Mr Hass. “Members of the business community see the Trump administration as an opportunity for the US to rattle the cage in Beijing.”

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Former state department official Susan Thornton says the wider relationship with China is being ignored inside the administration © Bloomberg

Susan Thornton, the top Asia official at the state department until last summer, says many of the grievances had existed for years but Mr Trump was giving them impetus because there was no one inside his administration who was weighing those concerns against the broader China relationship.

“There is no one imposing discipline right now. Everybody has now got a hunting licence. It is open season on China,” says Ms Thornton. One reason the Chinese may have been blindsided by the changing US approach is that Mr Trump rarely raises security issues.

“Trump never brings up any of that stuff in meetings with the Chinese,” she says. “He won’t bring up Taiwan or the South China Sea, or nuclear missiles or arms control, or espionage.”

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The new era of US-China decoupling Just before New Year,

Mr Trump tweeted that he had spoken to his Chinese counterpart and that there had been “big progress” on trade.

But the landscape has changed so dramatically that most China experts believe the relationship will become much more rocky even if there is an agreement on trade. “I am cautiously optimistic that President Trump will be able to declare a trade victory and end the tariff war,” says Mr Paulson.

“But there will still be so many intractable economic and security issues that this will continue to be a very fraught relationship.”

Huawei Spy Case Sets Up a New Warsaw Pact

January 14, 2019

With many developed markets effectively closed, and China already in the bag, the company is looking elsewhere.

East meets West.  Photographer: Bloomberg/Bloomberg

Poland just handed the U.S. a gift in its case against Chinese telecom-equipment giant Huawei Technologies Co.

Yet this development won’t halt Huawei’s global advance. Rather it will deepen the global split between those who trust the company and those who don’t.

On Friday, Polish authorities said they arrested a Huawei employee and a former Polish security agent, accusing both of spying for China. Authorities also pointed out that the case was against two individuals, not the company itself.

Huawei promptly fired the staff member and has been consistent in its denial of espionage allegations.

U.S. lawmakers are among those making the point that even if Huawei doesn’t want to engage in espionage, it operates at the behest of the Chinese government. Huawei gets 51 percent of its revenue from China, where telcos are government-controlled.

The deepening cleavage between Huawei proponents and detractors means the company will likely strengthen its focus on the business at hand – selling smartphones and communications equipment.

With many developed markets effectively closed to Huawei, and China already in the bag, the company is looking elsewhere. Developing Europe, Africa and Asia are lush pastures.

The Middle East and Africa, for example, are home to 1.3 billion mobile connections – almost equal to the population of China. Latin America and Eastern Europe combined provide the same amount, according to data compiled by Bloomberg Intelligence.

The Chinese company’s smartphones have surpassed 15 percent share in Saudi Arabia, the United Arab Emirates, Mexico, Colombia and South Africa, Huawei said in its 2017 annual report. Ethiopia, Nigeria, Kenya and Namibia are among nations on its client list for telecommunications equipment, while Middle East markets account for five of at least 22 commercial 5G contracts Huawei has signed to date.

Some of these are places that could benefit from Chinese foreign aid, or at the very least might be unable to resist it. Markets, that if not for Beijing’s generosity, might not have been able to afford miles of new highways, big expensive shipping ports, or high-speed communications networks.

With Huawei determined to push forward alongside Beijing’s broader globalization effort, it’s likely this Polish case will further split the world into Chinese and U.S. hemispheres. This could leave some in the middle left to decide on which side they want to live.

And it makes Warsaw once again the unwilling center of a global divide.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Fake News: Americans are now using disinformation tactics on one another

January 13, 2019

Dezinformatsiya has gone native, and it will get worse

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LinkedIn co-founder Reid Hoffman 

Russian internet trolls worked overtime in 2016 to inject disinformation into American elections. A year later, as news reports now reveal, Democratic operatives, some funded by LinkedIn co-founder Reid Hoffman, tried out these same tactics to boost Senator Doug Jones in Alabama. Russia’s online dezinformatsiya has gone native, and it will get worse.

There’s no evidence that Mr. Jones—who beat Republican Roy Moore by 1.6 points—knew about this deceit operation. Its small scale means it probably didn’t affect the final outcome. Still, the details are vexing. Project Birmingham, as it reportedly was called, ran on $100,000 of Mr. Hoffman’s money.

Mr. Hoffman has since apologized, saying he didn’t know how the funds were being spent. But imagine the media and political backlash if Charles Koch had funded such an operation. Democrats would already be calling for public hearings, if not hangings.

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Charles Koch


A post-election debrief, quoted by the Washington Post, describes several prongs of attack. The project “planted the idea that the Moore campaign was amplified on social media by a Russian botnet.” As evidence of success, it cites a newspaper headline saying Mr. Moore was “flooded with fake Russian Twitter followers.” A Facebook page aimed at Alabama voters posted conservative content to gain their trust, then sprinkled in anti-Moore messages, while promoting a GOP write-in candidate as an alternative to Mr. Moore.

A separate effort, which according to the New York Times received $100,000 from unnamed Virginia donors, tried to link Mr. Moore to alcohol prohibition via “Dry Alabama” pages on social media. Also, there are reports that fake conservative Facebook pages, again using Mr. Hoffman’s money, pushed the Democratic ballot lines last year during tight Senate elections in Texas and Tennessee.

What to do about all this? Mr. Jones sent the Federal Election Commission a letter Wednesday urging an investigation “to determine if any federal election laws were violated and, if so, to impose the maximum penalties.” But lying in elections generally isn’t illegal, so long as the spending on it is properly disclosed and reported.

Social-media websites have stepped up their efforts to ferret out this kind of abuse. After 2016, Facebook tightened the rules around political advertising. The user must now send in a copy of his ID, and Facebook physically mails him a security code, which is a barrier to secret Muscovites.

Much of what’s at issue here, however, isn’t advertising. Political operatives set up social-media pages, attracted audiences, and then inserted anti-Moore ideas. Facebook prohibits this kind of “coordinated inauthentic behavior” and has closed five accounts related to the Alabama operation. Yet the initial deception is enabled by the internet’s core features: anonymity and user-generated content.

Setting up a new Facebook page—even one categorized as a “News & Media Website”—takes about 15 seconds. Such openness is often a feature, not a bug. It lets people build online communities, and helps businesses market their products at low cost. Last year Facebook began asking pages with “a large U.S. audience” to confirm the “primary country location” of their managers. Maybe further steps can be taken, even if there’s no way to verify every politically tinged page from here to Honolulu.

One way to discourage such shenanigans is to put election spending back in the hands of candidates and political parties. Hard donation limits, meant to cure the appearance of corruption, have shunted money to outside groups, which are far less accountable. Would Mr. Hoffman have funded these high jinks if he were able to write the Jones campaign a $100,000 check? Our guess is probably not.


Beyond that, there’s a serious need for renewed public skepticism, especially on social media. In the internet’s early days, the prevailing attitude was that you shouldn’t believe everything you see online. But now the public is used to reading digital newspapers, and Wikipedia has eaten the library reference section. Too many people are credulous about whatever information happens to float by—whether it’s malicious or merely intended as satire.

The danger will grow as computers get better at doctoring audio and video. Recently AI researchers created fake footage of President Obama, which showed him speaking the words of impressionists.

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The effect isn’t perfect. But it’s analogous to watching “Toy Story” in 1995 and considering the future of digital animation. Text-to-speech programs have gotten scary good at mimicking specific voices. Perhaps it’s only a matter of time before this stuff is weaponized: a clip surfaces, say, purporting to show a politician using a racial slur.

Censorship and regulation—the federal Department of Social Media—isn’t the answer. That would put politicians in control of political speech. It will be up to voters, as it always has been, to separate false and misleading claims from the truth.

Appeared in the January 12, 2019, print edition.


Widely cited study of fake news retracted by researchers

Huawei Warnings May Bring Chinese Retaliation, Czech Leader Says

January 11, 2019
Pro-Chinese Czech President says report puts economy at risk
Western governments debate whether company is security threat
Photographer: Greg Baker/AFP via Getty Images

China is preparing a reprisal against the Czech Republic after authorities there issued warnings about Huawei Technologies Co. and risks it poses to the country’s security, President Milos Zeman said.

Czech President Milos Zeman arrives for a summit in Brussels on 25 May, 2017
President Milos Zeman

Zeman, who has named Chinese government-linked officials as advisers and tried to promote his country as a potential investment gateway to Europe for Beijing, was responding to a report from the National Cyber and Information Security Agency issued last month. The report, which advised against using Huawei and ZTE Corp. software and hardware, would undermine the Czech economy, he said.

Signage is displayed atop a ZTE Corp. building in Beijing.

Photographer: Gilles Sabrie/Bloomberg

“Some members” of the Czech government have information that China will take “retaliatory steps,” Zeman said late Thursday in an interview on Barrandov TV. He cited investments by Volkswagen AG’s Czech unit, Skoda Auto AS, in China and an agreement with PPF AS with Huawei about building a 5G wireless network as potential targets for reprisals.

Read more: Germany Prioritizes 5G Network Security as It Mulls Huawei Risks

Western governments are worried that Huawei’s systems could be used by Chinese intelligence to gather data. On Friday, Poland arrested a Huawei employee and a former Polish security agent and accused them of spying for China.

Germany is also weighing whether to restrict the role of Huawei in building the country’s future telecom infrastructure. Australia and New Zealand have banned Huawei equipment from participating in planned 5G networks, and the head of British MI6 said last month the government needs to decide whether to ban the company.

Zeman, whose position is largely ceremonial, said the Czech report contained no proof that would justify the warnings and that it had resulted in a “serious” threat for economic interests in China.

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Czech Prime Minister Andrej Babis Meets Angela Merkel In Berlin

At the same time, Prime Minister Andrej Babis said his government has no information that China is preparing sanctions against Prague because of the report, the CTK news service reported. The premier noted that the cyber security office should explain how it arrived at its conclusions.

Poland arrests Chinese Huawei exec, Pole on spying charges

January 11, 2019

Poland’s Internal Security Agency has arrested a Chinese businessman and a Pole on suspicion of espionage, officials said on Friday.

The operation that resulted in the arrest of the two suspects had been underway for a long time and was planned with care, said Maciej Wasik, deputy head of Poland’s special services.

Wasik said that the Chinese suspect was a businessman working for a major electronics corporation and that the Pole was “known in circles associated with cyber-business affairs.”

The Huawei logo

He said “both carried out espionage activities against Poland,” but did not identify them.

A spokesman for the agency, Stanislaw Zaryn, said the two were arrested on Tuesday.

Polish state TV, which is close to the government, identified the Chinese man as Weijing W., saying he was a director in Poland at Huawei, the Chinese conglomerate that produces telecommunications equipment and consumer electronics.

State TV identified the Pole as Piotr D., and said he was a former high-ranking employee at the Internal Security Agency, the agency that investigates spying and terrorism

If convicted, they could face up to 10 years in prison.

FILED UNDER           

Pentagon: U.S. Military Logistics System Not Ready for War With China or Russia

January 10, 2019

The strategic American military system for moving troops, weapons, and supplies over long distances has decayed significantly and needs rapid upgrading to be ready for any future war with China or Russia, according to a report by the Pentagon’s Defense Science Board.

A special task force on survivable logistics evaluated the military’s current airlift, sealift, and prepositioned equipment and supplies and found major problems with supporting forces during a “high-end” conflict.

“Since the end of the Cold War, the United States has not fought an adversary capable of the catastrophic disruption of military supply chains and deployment of personnel and materiel,” an unclassified summary of the report states.

By Bill Gertz

“As a result, the [joint logistics enterprise] has suffered neglect and chronic underfunding relative to other DoD priorities.”

Additionally, the ability of strategic competitors to threaten military supply lines has increased with new and advanced weapons and missiles, as well as “gray zone” capabilities such as cyber attacks and space warfare.

“Competitors and adversaries have already disrupted commercial logistics information technology systems,” the report said. “Military and commercial networks are at risk.”

“Conflict against a strategic competitor will demand a dispersed and survivable logistics structure and robust IT systems capable of not only defending against cyber-attacks, but also safely sharing logistics information across military and commercial elements,” the report said.

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U.S. Army M1A1 Abrams tanks sit parked at a secured compound at the Besmaya Combat Training Center, Iraq in 2011

The task force concluded that a logistics system for the military that can survive a future war will be essential for continued American power projection and for readiness to deal with threats from China and Russia.

“Without a demonstrably resilient and survivable logistics capability, U.S. deterrence will suffer and the ability of the U.S. military to operate globally will be at stake,” the report said.

The report warned that American military readiness in recent decades “has severely decayed” as the result of budget cuts, misaligned funding priorities, a lack of incentives to protect the defense industrial base, and insufficient wargaming.

The task force urged reversing course immediately to address one of the highest priorities of recently departed Defense Secretary Jim Mattis who sought to rebuild military readiness in pursuit of more lethal forces.

The 29-page report was made public in November and is the executive summary of a longer, classified study.

Craig Fields, chairman of the Defense Science Board, said the future of warfare is changing rapidly and the Pentagon will need to adapt quickly to deal with conflict conditions less favorable to the United States than in the past.

“Survivable logistics is the key enabler underpinning all U.S. military power,” Fields said. “Without the ability to provide our soldiers, sailors, airmen, and marines with the resources needed to win on the battlefield, the development of advanced tactics and technologies will not have the opportunity to matter.”

Retired Army Gen. Paul Kern and retired Air Force Gen. Duncan McNabb, co-chairmen of the task force, said logistics problems need urgent attention.

“The task force found significant shortfalls that, if left unaddressed, will put at risk U.S. ability to project power and sustain the fight against a strategic competitor,” they said in a foreword to the report.

The generals said one major need is increased information security for logistics networks.

“Military and commercial networks are susceptible to espionage, manipulation, and attack by adversaries,” they stated. “Logistics data is neither as accessible nor used as efficiently as it should be. Technological solutions to these problems already exist, or will exist in the near future. The DoD must adopt them quickly.”

In 2012 and 2013, Chinese military hackers broke into computer networks at the Transportation Command, the command in charge of most logistics, and stole valuable information that could be used in a war to disrupt U.S. troop and equipment deployments.

A Transportation Command spokesman did not directly address the findings of the report.

“We are continually assessing and improving DoD’s ability to project power globally, which remains our nation’s comparative advantage, providing multiple options to our national leadership and multiple dilemmas to potential adversaries,” said Navy Capt. Kevin Stephens.

The task force report urged modernizing the logistics “mobility triad” to bolster warfighting capabilities.

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“The mobility triad, which includes sealift, airlift, and prepositioned assets, is plagued by readiness issues and shortages that must be addressed in order for the United States to defeat a strategic competitor,” the report said.

The study noted that commercial ships and vessels used for logistics have been shrinking for decades and will decrease by 50 percent from current levels by 2033.

A Civil Reserve Airlift Fleet, a key element of the logistics system, is part of the logistics system used to move troops and bulk air cargo in war time.

However, both the air fleet and sealift commercial ships have not been tested in war games to determine how they would survive a large-scale conflict involving the shootdown of aircraft by missiles and fighters or transport ships sunk by submarines.

“Accounting for attrition, [anti-access, area-denial] threats, and risks to commercial civilian airmen and mariners requires wargaming and solutions,” the report said.

Anti-access and area denial weapons include advanced, precision-guided missiles, air defenses, fighter aircraft, submarines, and asymmetric warfare capabilities such as cyber attacks and anti-satellite missile strikes. Taken together, the weapons could prevent the U.S. military from mobilizing, communicating, and moving forces during a major conflict.

Additionally, the Pentagon’s current policy of storing weapons and equipment overseas closer to potential front lines does not meet the current demands of the Pentagon’s new national defense strategy. Prepositioning plans need to be updated, the report said.

Such stored equipment and weapons also are vulnerable to attack in the earlier stages of a conflict.

“The use of deception and ‘hiding in plain sight’ by our adversaries should be considered,” the report said. “Opportunities exist to leverage commercial networks and vessels for DoD prepositioning.”

The report urged the Air Force and Navy to develop new tactics, techniques and procedures with U.S. flag carriers for convoy operations, such as long-range maritime patrols, to protect mobility forces and secure air and sea lanes against high-tech threats.

Image result for airlift, c-17s, photos

The Joint Staff and Transportation Command also were urged in the report to develop new and innovative plans for long-range distribution of warfighting assets, such as mobile basing, airships, joint high-speed vessels, autonomous barges, and precision air drop capabilities.

To solve transport shortage problems, the task force urged re-opening production lines for more cargo aircraft to better protect against loss in war. The panel also recommended bolstering the service life of commercial fleets.

Better preparations are needed for moving forces in a major conflict and the Army and Marine Corps should develop better prepositioning systems at sea and on land.

One option recommended by the task force is to put an infantry brigade combat teams aboard roll-on/roll-off ships and related equipment on other ships and on land to support the both the European Command and Indo-Pacific Command.

To save money, more roll-on/roll-off transport ships are needed, and used foreign ships that cost around $25 million should be purchased instead of building new U.S. ships that would cost up to $850 million each.

The task force emphasized the need to bolster logistics systems and supporting industrial base in the United States as a first step in preparing to wage war.

“If the homeland industrial base, electrical grid, or any other critical infrastructure is compromised, military forces will not be able to arrive in theater on time or at all,” the report said. “Therefore, it is critical that attention to survivable logistics begin at home.”

The report urged the Pentagon to use artificial intelligence and machine learning to bolster military logistics using predictive analysis, demand forecasting, production scheduling, anomaly detection, and supply-chain optimization.

To counter cyber attacks, the task force urged developing the use of blockchain technology that allows digital information to be shared but not copied.

A blockchain-like test infrastructure for military logistics would enable the Pentagon “to evaluate potential offensive and defensive cyber applications of blockchain-like technology and other distributed database technologies,” the report said.

Ed Timperlake, a former Pentagon logistics official under President Ronald Reagan, said the task force report and its recommendations show the strategic brilliance of the Defense Science Board.

“As President Reagan’s principle director of mobilization and requirements, an office eliminated during the Clinton administration’s ‘peace dividend’ years, failure in logistics can not only limit the ability to fight a peer-to-peer war but can mean the difference between victory and defeat,” Timperlake said.

Dakota Wood, a defense analyst at the Heritage Foundation, said the report on military logistics weaknesses was not surprising.

“Logistics is the poor step child of the military,” Wood said adding that logistics systems often are short-changed in administration and congressional budgeting processes. Fighters and warships often get more budgetary attention, he noted.

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For example, vital KC-135 aerial refueling tankers were built beginning in the 1950s and their replacement, the KC-46 has faced repeated development delays.

The Defense Science Board “is saying that if you want to be effective in war we do not have the material capacity to sustain that initial combat power surge and sustain that over time,” Wood said. “And it’s going to take a long time and a lot of investment to get to where we need to be.”