Business Spectator (Australia)

Kerry’s Mandate for a Cyber-China Crackdown

Senior Fellow

A few days before Christmas, Beijing formally congratulated Senator John Kerry on his nomination as America's next Secretary of State, following Hilary Clinton's decision to formally resign from the job in March. At the Chinese Ministry of Foreign Affairs press conference, spokeswoman Hua Chunying declared that China is "ready to work with the US side to push forward the Sino-US cooperative partnership to score more progress".

Beijing knows that Kerry will be a formidable Secretary of State. After all, he has been the Senator from Massachusetts since 1985 and was the Democratic presidential candidate against George W. Bush in 2004. The current chairman of the powerful Senate Foreign Relations Committee, he is one of the elder statesman of the Democratic Party and (like Hillary Clinton before her appointment) has considerable influence and standing. So he will be influential in shaping the second term Barack Obama administration's China policy. But, Beijing is wondering: What kind of issues he will focus on? My guess is Kerry (with Obama's full endorsement) will come down hard on Chinese activities in the cyber realm. And Beijing will be on the defensive and angry.

If we go back a few years to the first year of the Obama administration in 2009, the president held out the olive branch to China. Under strict instructions from her commander-in-chief, Secretary Clinton's first visit to Beijing was notable for the pre-visit press interview in which she meekly declared that human rights in any form would no longer be on the agenda.

It is now widely acknowledged by both Republicans and Democrats that Obama's earlier dealings with China in late 2009 ended in not just failure but humiliation for the then new president. For example, in his November 2009 visit to China, Beijing blocked news courage of his public speech despite earlier pledges to the White House that it would be widely broadcast throughout China. During the Copenhagen climate change talks in December 2009, Obama was only granted access to lower-level officials without the power to negotiate any deals on behalf of China. Only at the last minute was Obama granted an audience with Chinese Prime Minister Wen Jiabao, who then subsequently stonewalled any points of agreement that could lead to a deal. Indeed, insiders within the first term Obama administration have said on a number of occasions that the Copenhagen meeting decisively changed Obama's viewpoint on the possibility of meaningful cooperation with China on many important issues, and hardened the president's stance towards its largest trading partner in Asia.

A hardened Obama offered new freedom for Secretary of State Clinton to follow her instincts, which were always hard and tough on a number of issues with respect to China. From 2010 onwards, and helped along by increasingly assertive Chinese behaviour in the East China and South China seas over maritime disputes with a number of countries, Clinton was at the forefront of American attempts to openly convince Asian allies that Washington 'was back' in Asia – as if it ever left! The result was Obama's strategic, economic and moral 'pivot' back to Asia, with Clinton leading the policy and rhetoric of America's regional reengagement. One part of this 'pivot' was a greater willingness to challenge China on a number of issues such as its current and trade policies, and poor human rights record.

If confirmed by the Senate as expected, incoming Secretary of State Kerry will inherit this policy platform and will not seek to change it. The question is more how he will seek to add to it, and in particular, which issues he will want to persuade the president to push China on.

My guess is that cyber-security and espionage will be at the top of the list. Why do I think so? There are a number of reasons.

First, Kerry has already strong personal and professional interest in this issue. In February 2012, and as chairman of the Senate Foreign Relations Committee, Senator Kerry openly announced that he would raise the issue of Chinese trade theft with Xi Jinping on the putative president's first official visit to America. The particular issue was the American Superconductor Corporation, a small wind-energy company in Massachusetts that lost over two-thirds of its revenues after a Chinese partner with Chinese Communist Party links enticed one of its employees to steal the technology of the American company and reproduce it back in China.

Significantly, Senator Kerry deliberately made a broader issue of the particular instance of intellectual property theft, declaring that:

"It's a very clear and, in our judgment, egregious, palpable demonstration of the practice that we are deeply concerned about… but it's not the only one. There are so many things: cyber-attacks, access-to-market issues, espionage, theft…"

Second, cyber-attacks and cyber-espionage efforts against American companies originating from China have been going on for some time. But the instances of these have been rising rapidly and exponentially, as have the sophistication and coordination of the attacks. Until recently, American and international firms were reluctant to make too much a fuss about it, fearful that their access to the Chinese market would be restricted. (Hence, we have seen international firms complain about Russian cyber activities but not Chinese ones since Russian markets are far less important.)

The difference now is that the scale and frequency of these cyber-attacks and cyber-espionage activities originating from China have become impossible to ignore. American industry and intelligence agencies are beginning to quantify the value of the data stolen from firms as being in the hundreds of billions of dollars. As a November 2011 report by Washington's National Counter-Intelligence Executive agency puts it, China is "building its economy" on "US technology, research and development, and other sensitive forms of intellectual property".

An increasing number of America private firms that once believed that criticism of China was unproductive and not constructive to the trade relationship now firmly want Washington to take up the cause. These firms are now pushing the Obama administration to pressure Beijing on clamping down on these issues, and Kerry will be a more than willing advocate on these issues. Additionally, a number of influential economic and industry experts within the Obama administration are telling the president that cyber-espionage and intellectual property theft does far more damage to the American economy and issues such as China's currency policies are a sideshow and a distraction. The strong and growing evidence is that the Obama administration is listening.

Finally, a number of foreign governments of industrialised countries in the region – Japan, South Korea and Australia to name a few – are also experiencing increasingly intolerable rises in cyber-espionage activity originating from China. Indeed, over the past year, David Irvine (head of ASIO and Australia's spy chief) has been periodically warning that businesses need to accept the reality of these cyber activities, much of which originates from China. It was reported that there were reports of at least 5000 such attacks in the first six months of 2012 alone – and these were only those that were reported. The point is that the Obama administration will find supportive capitals throughout the region should it decide to push Beijing on these issues.

Note that all governments that are capable of it engage in cyber espionage against other governments for political and military reasons. But the issue here is cyber espionage against private firms for the commercial gain of state-owned-enterprises – a very different matter.

Several years ago, Beijing's response was to deny that such cyber activity originating from China was occurring as frequently and with the level of sophistication that foreign governments claimed. With the evidence that it is indeed the case so incontrovertible, Beijing's current response – often angrily and forcefully proffered – is that it is not state agencies or state owned entities engaging in these activities, and that it neither has the knowledge of who is perpetrating these crimes or how it can stop it.

The problem is that this response is becoming less credible for foreign governments and firms given the level of domestic cyber control and monitoring within China. In some of his recent comments as a senator, John Kerry has said as much.

As chairman of the Senate Relations Committee, Senator Kerry has already raised the issue with Xi Jinping. The same conversation between the American Secretary of State and Chinese president will have far more consequences.