This article appeared in the Fall 2012 issue of The International Economy.

Question:

Is cyber security rapidly becoming the new cold war? As computer hackers, both state-sponsored and independent, seek illegal access to vital industrialized world networks for finance, utilities, and national security, to what extent could this new cold war disrupt the flow of global trade and finance? Do industrialized world governments need to rapidly transform their military capabilities, spending less on boots on the group and more on fingers on the keyboard?

Barfield Response:

In answer to the question, certainly governments need to beef up their cybersecurity capabilities. As for the exact balance between this and boots on the ground, I leave those complicated decisions to defense experts.  Rather I’d like to put the spotlight on implications for US trade and investment policy—and on our fraught relations with the People’s Republic of China.  Information and communications technology (ICT) occupies a no mans land between national security imperatives and international economic policy—and requires disparate and even conflicting calculations of US national interest.  And at this point, attempts by US government agencies to define the national interest in ICT are confused and contradictory.

Specifically, the US vociferously espouses a policy of open inward investment as programs such as Washington’s USA Invest attest.  According to an Asia Society report, the PRC will have upwards to a trillion dollars to invest abroad by the end of the decade; and a good portion may come here, boosting jobs and the economy.

Yet US officials have on notable occasions rebuffed attempts by a major Chinese telecoms company—Huawei—to invest and/or obtain contracts in this country.  In several instances, this has been done through ex parte interventions that belie the rule of law and due process we preach to the Chinese.  Recently, the chairman and ranking members of the House Intelligence committee, after a year-long investigation, issued a scathing indictment of the company, stating that Huawei (and its sister company ZTE) pose national security threats to the US and warned US companies not to do business with them if they valued US national security..  Though they referred vaguely to classified information, the report itself presented no evidence that either company had spied for the PRC or secretly spiked their equipment with so-called Trojan horses.  This led the Economist newspaper bitingly to conclude that the investigation seemed “written for vegetarians.  There is not much meat in it.”

Then on October 17, a Reuters team, broke the story that the White House had conducted a much more extensive investigation—enlisting US intelligence agencies and interviewing a thousand telecoms buyers.   The headline: “White House review finds no evidence of spying by Huawei.”   One investigator told Reuters: “We knew certain parts of the government really wanted” evidence for active spying.  “We would have found it if it were there.”  The White House refused to confirm or deny the details of the story—which nevertheless is almost certainly true in most detail.

With the election over and fears of being “soft on China” less urgent, the Obama administration should quickly move to bring some clarity to US investment and security policy for telecommunications.  It could declare the entire telecoms industry off limits to foreign investors (a bad idea but an option).  It could not, however, simply exclude Chinese companies alone without running foul of bedrock WTO rules for non-discrimination.   It could establish less draconian rules for telecoms investment and contracting by all foreign companies.  On this course, it would admit that given the fact that the US market cannot be sealed off—and that Huawei and ZTE operate in 150 other countries—the time has come to allow Chinese companies into the US telecoms market, while mandating stepped up cybersecurity operations by both the private sector and government agencies.