The Slow Drain on America (Part II): Espionage, China, and American Business

Previously I addressed America’s increasing awareness of the associated risks in cyber and digital systems, yet so many commercial businesses still lack hardened security programs capable of protecting sensitive information. Espionage between nation-states has taken a popular new form over the last decade and civilian America is slow to understand this new phenomenon of spying tactics. Commercial businesses and government has fallen in love with the advantages of new technology but due to the preference of ease of data that tech brings, many still hesitate to address this new set of problems and vulnerabilities our technology systems present. The reality is today that cyber-crime and cyber-espionage are big business opportunities for individuals and nation-states. This new form of espionage is affecting the economic and political relationships between countries and has changed the shape of modern warfare to become full of sneaky and canvassed attacks; many times going completely unnoticed by victims who are uneducated on the underlying goals of the attacker.

Where is the largest part of the “cyber drain” coming from?

A formidable threat to the strength and competitiveness of the U.S. economy is China, but what the American population largely does not understand is the Chinese strategic objectives behind draining U.S. business data and industry IP.

China sees cyber warfare as a valid form of international business and military competition, and is pursuing what it calls “information dominance.” Mandiant recently traced many of the U.S. attacks to a Shanghai office building that likely is the home of the People’s Liberation Army’s cyber warfare unit.

These low-grade types of commercial cyber attacks are also increasingly originating from other countries like Russia, Taiwan, Turkey, and North Korea, many of the most notable and damaging recent intrusions have been traced back to China. So far, perpetrators of Chinese cyber attacks have been able to carry out their thefts of both military and economic secrets at virtually no cost.

Many countries engage in economic espionage using cyber, but the Chinese are by the far the worst actors. A report generated by the Office of National Counterintelligence Executive stated, “the People’s Republic of China is the world’s most active and persistent perpetrator of economic espionage, hundreds of billions in American R&D have been stolen by the Chinese government in this continuing assault on our economy, and America’s competitive edge will continue to erode until and unless our government defends our national interest by taking effective countermeasures.” I encourage U.S. businesses not to wait for Uncle Sam to provide their needed cyber protection; it will not come swiftly and likely not sufficiently.

It is important to note that not just the largest companies are vulnerable, the greatest increase has been in attacks towards small to medium sized businesses. Recently an industry report noted a U.S. furniture company with 100 employees had designs stolen and it was reported that six months later, the Chinese were shipping furniture back to the states at half the prices, quickly the company was out of business. Whether dumping steel or stealing secrets, the motive for the Chinese is the same: keep their economic engine running, and maintain stability at home while simultaneously undermining the economic power of the United States.

Researchers at the Center for Foreign and National Security Policy at the Heritage Foundation said, “The Chinese bet the farm on this (stealing secrets) because they have virtually no R&D. The only way for them to keep up with western economies is to steal. They take everything, then sort through what they have and discard what they don’t need.” To put the R&D issue between our two countries into perspective, per capita, the China R&D expenditure is $248.16 compared to the United States expenditure of $1,275.64. Clearly the Chinese are relying on someone else’s R&D rather than their organic efforts. Chinese companies have already been sued for stealing DuPont’s proprietary method for making chemicals used in plastics and paints.

What Does Oil have to do with Cyber?

It is also important to note the play that China’s economic growth rate has and the meaning for other nation’s behind their continued expansion. Industrial growth in China also requires a high level of energy consumption to fuel their continue the growth; China currently does not have an excess of energy resources rather they barely have enough each year to meet their high demand. The Chinese GDP has experienced massive expansion over the past two decades, the annual GDP growth rates in China have varied increases from 3.8% to 15.4%, and averaged in recent years around a 6.8% increase. These are staggering growth rates but equally staggering is the amount of energy sources required to fuel their continued growth. China is the primary driver for increased energy demand through 2020, their consumables largely are comprised of coal, oil, gas, and other resources. A concerning point should be recognized, China has not yet secured an adequate energy resource supply for their future expected demand. This deficit of an energy supply could have drastic results if left unfilled; China’s leadership will not sacrifice their GDP to fall by much due to a mere lack of required energy supply. A greatly reduced GDP could have devastating results across China’s economy and further act as a domino effect in continued declines; this option is not one that China is willing to consider and thus is taking more extreme measures to increase their energy resource supply. The energy required for China to produce commodities for global consumption and to sustain their high GDP rate could be considered a “Red Line” issue for China in the future. These demands have motivated China to get more savvy at methods for meeting their future energy demands and supplementing their economic development; stealing information and IP is a good fit for helping to meet future needs.

Faulty economic and media reports still circulate suggesting China doesn’t hold similar resource deposits as the U.S. and Canada, therefore Chinese motivations to partner are altruistic to simply garner good investments. Reports from China’s Ministry of Land and Resources and assessments by Oil & Gas Journal have estimated China actually holds 24.6 billion barrels of proved (a high degree of confidence to be commercially recoverable) oil reserves. How much is technically recoverable? China itself does not have the necessary technology required to recover deep or off-shore reserves nor can they successfully conduct horizontal drilling recovery without the western companies who developed these capabilities and currently possess this crucial drilling and recovery information.

We see the ongoing territorial disputes in the East China Sea, South China Sea, Spratly and Paracel Islands which hold large-scale oil and gas fields. China is in a ‘full court press’ to desperately secure resources for their future energy demands.

It is interesting also to note that China’s total oil and liquids production has risen over the past 20 years, similar to their rate of cyber and corporate espionage. As China’s production and supply deficit worsens, in comparison to their increasing consumption rate–we will also see China’s motivations and tactics proportionately increase.

Chinese oil firm Cnooc aggressively pursued overseas deals with Canadian and American oil producers, which resulted in their expanded resource base. However, these Chinese companies investing in U.S. and Canadian crude are equally concerned with acquiring the technology and know-how out of these deals as they are concerned with the promise of sending some of that oil home.

How Much Is China Costing America?

Today, cyber-attacks are costing businesses $400 billion to $500 billion + annually; 71% of data breaches now target small businesses and 60% of small businesses that have experienced a data breach are out of business within one year post breach. The national crime prevention association reports in 2015 that 45 percent of all U.S. businesses have reported losses specific to intellectual property theft. These thefts of digital information cost U.S. companies $250 billion a year. The 2014 reports from the Center for Responsible Enterprise and Trade and PricewaterhouseCoopers (PwC), estimated that trade secret theft cost the U.S. and other advanced economies between 1 percent and 3 percent of their GDP on average each year. Intellectual property thefts do not discriminate; they threaten all major industries, medium, and small businesses alike.

It’s recognizable that the proliferation of counterfeit products on the market is directly proportionate to the reduced strength of the U.S. economy. Companies lose profits, the demand for work is decreased, employees lose their jobs, and then consumer spending drops.

It is time for citizens to wake up to the increasing trends and compounding impacts of low-grade cyber theft in America. It is critical to understand the global motivations and chameleon tactics being used, via technology systems, to rob our economy of jobs and global competitiveness.

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