Last Sunday, the House Intelligence Committee issued a 50-page report warning U.S. companies and the world of the potential dangers of doing business with China’s two telecommunication superstars, Huawei Technologies and ZTE Technologies. The companies are ranked as the world's number two and number five producers of telecommunication equipment. Due to persistent security concerns, the Committee investigated the two companies’ connections to the Chinese Communist Party (CCP).
The report identifies Huawei and ZTE as national security threats that undermine U.S. political and economic interests. The principal concern about the companies is thethreat of cyber-espionage and cyber warfare maneuvers, stemming from risks of malware added to the telecommunication equipment the companies sell, as well as possible collaboration via cyberspace with the People’s Liberation Army on intelligence activities.
The decision to label Huawei and ZTE as national security threats will have major implications for U.S.-China relations in both the political and economic terms. This move will hurt China’s desire to become a high-tech, knowledge-based economy, while adding to tensions between the U.S. and China. At the same time, this event highlights a major change in American approaches to cyber relations with China, as America has previously been hesitant to confront these issues.
The Committee’s report is based on a year-long investigation led by Representative Mike Rogers (R-Mich.) and Representative C.A. “Dutch” Ruppersberger – the Chairman and Ranking Member of the Committee – which was prompted by another report released by the Office of the National Counterintelligence Executive (ONCIX) on Chinese and Russian industrial cyber espionage on American industries. The report is concerned with the potential malware that could be added to Huawei and ZTE’s equipment to facilitate cyber espionage and conduct cyber operations to collect intellectual property and electronic intelligence from U.S. partners through partnerships with and purchases of U.S. companies with desirable technologies.
There is no hard evidence that Huawei Technologies or ZTE Technologies have a compromised or complicit relationship with the Chinese government. But intelligence agencies (including Chris Johnson in the 60 Minutes video below), former State Department officials (like Jim Lewis), and cyber security experts in the private sector (including James Mulvenon, a former hacker and currently a security consultant) have all pointed to the fact that the CCP has a great deal of control over the Chinese economy. The CCP has leverage through internal branches of the party inside companies like Huawei and ZTE, and legal options to pressure company executives to make compromises (including adding malware and giving access to traffic it handles through its equipment) to further the CCP’s goals. These abilities compromise the national security of the U.S. and others who allow these companies to operate unchecked.
Fear about the security concerns posed by Huawei (and, to a lesser extent, ZTE) is rising across the world, as noted by The Economist.
The U.S. government is particularly attune to these specific threats, as it noted all associated security concerns in a 2011 report on the national security implications of Chinese investment in the U.S. market, as well as Chinese partnership with U.S. informational and communication technology companies.
The report makes five telling recommendations that explain where U.S. policy is headed regarding bilateral cyber relations with China, the motivations behind these policies, and the potential repercussions of these recommendations.
First, the report recommends that federal agencies and contractors be required to exclude all Huawei and ZTE products for any and all projects they were involved in, especially those working with “sensitive systems.” In a nutshell, Huawei, ZTE, and all other Chinese companies found to be untrustworthy by Congress will be blacklisted from doing any business with the U.S. government
Second, private U.S. network providers and systems developers are “strongly encouraged” to seek other telecommunications equipment makers for their needs. In other words, the U.S. government has declared Huawei and ZTE to be untouchable businesses for any U.S. company, which effectively stymies any hope of the two getting a foothold in the U.S. market.
Third, “unfair trade practices” of the Chinese telecommunications sector should be investigated by the U.S. Congress and agencies in the Executive Branch given the level of support given by state capitalism provided by Beijing. This recommendation is, by and large, an economic calculation.
Four, all Chinese companies will need to “become more open and transparent” to operate both the public and private sectors in America. This is another way of saying that Chinese companies need to prove that they are free of undue influence from the Chinese government to have any significant business in America.
Lastly, the report recommended that Congress should draft further legislation to craft and institutionalize laws that require a close review of suspect Chinese investment and activities in the U.S. when these activities involve critical infrastructure.
The Chinese government, as reported by The Chinese Daily, have responded by stating, through the Ministry of Foreign Affairs, that it “strongly opposes” the Committee’s report on grounds that it “used national security as an excuse for blocking Chinese companies from fair competition in the U.S. market.”
This response is akin to how the Ministry of Commerce responded when Australia banned Huawei from making a bid on its National Broadband Network earlier this year, a move met by equally strong protest from the Chinese government. The Chinese spokesperson called the move “unjust” and complained about the discriminatory nature of the Australian government in much the same way Huawei complained when the U.S. blocked its deal with 3COM and 3LEAF and banned it from bidding to build Sprint’s 4G network in the U.S.
Chinese cyber operations are nothing to sneeze at. Telecommunications technology has become a critical area of development for China, something the U.S. government has been aware of for some time through the research conducted by the USCC. The USCC has also made it clear that the telecommunications sector is of particular concern considering the close connection between the PLA – the principal institution behind Chinese cyberwarfare and cyber espionage – and the Chinese telecommunications sector.
The fear, in a nutshell, is that the PLA’s literature and U.S. intelligence on cyber warfare, according to Timothy Thomas of the Foreign Military Studies Office, suggest that China has put a great deal of faith and resources into this asymmetric tool to gain an upper hand against the U.S., to strengthen itself with intellectual property and intelligence, and to put into place a spy network and other cyber warfare preparations to counter superior U.S. conventional military power.
This is a watershed moment for U.S.-China cyber relations, as the U.S. government has been silent about its concerns for some time, especially when it comes to confronting foreign states engaged in cyber espionage and operations against America. China may retaliate by limiting or halting exports of rare earths to America, a potentially harmful tactic of economic warfare, as a message to America about the country's willingness to play hardball. At the same time, we must consider the very real threat China's cyber power poses, and the country's ambition to gain a strategic advantage over America.
While the significance of the unmistakably blunt act of banning of China’s rising superstars is fairly evident, we still do not know if this will be a trend in U.S. policy, or if this act will lead to a more open confrontation with the Chinese on cyber issues. We do know that this issue is far from being over, and that we’ll see the reverberating consequences when the new crop of Chinese leaders take the reigns of power in the coming weeks.