WHERE DO WE STAND?

There’s a lot of food for thought in the director of the NSA’s recent testimony before Australia’s parliament. It focuses on the narrow question of Chinese telecom Huawei’s position in Western markets, but expands from that to cover many deep questions about how Western nations should deal with China’s rise.

(http://www.afr.com/p/national/transcript_interview_with_former_KnS7JDIrw73GWlljxA7vdK)

It is clear that the primary goal of the Chinese Communist Party (CCP,) like all organizations holding political power, is to continue in power. Self-preservation is an understandable impetus for human action. The good news is that the CCP, after Deng’s reforms of the late 1970s and 1980s, sees rising living standards, and not the exportation of ideology, as the best way to retain legitimacy among the Chinese people. Inevitably, however, living standards cannot rise indefinitely. The most economically advanced nations of the world can expand, at most, 2-3% per year, in favorable conditions. China’s rise as an economic powerhouse expanding at 7, 8 or even 10% a year comes from starting from a very low base and getting rid of the ideological self-inflicted wounds which held them back for so long. As they inevitably move from simply putting cheap labor to work into the higher realms of economic activity, their growth will slow. How can the CCP maintain its legitimacy, if it is unable to provide what it promised to its citizens?

AERO AND SPACE: TWO (SOMEWHAT) SEPARATE WORLDS

Industrial spying is the lazy man’s way to achieve results cheaply. Stealing someone’s better idea – and putting it on the marketplace at less cost than the originator – is a form of rent-seeking which carries little costs (so far.) The problem is that it does not build up the capacity to innovate in the future. In this sense, China may steal or spy their way to economic growth for a while more, but they will be unable to actually compete with Western economies, which more closely follow the capitalist credo of fair economic competition, with its emphasis on innovation, whether building a better mousetrap or better commercial jet.

Two examples of Chinese endeavor illustrate this neatly: their space program and their attempts at creating a commercial aviation industry. The Chinese space program follows the American NASA model quite closely, and has had similarly spectacular results. It would be quibbling to say that they benefitted unduly from American and Soviet experience in the field of manned space flight. Putting men and women into space and returning them safely is no small feat. When one considers the complexity of spaceflight – millions of components and events needing to take place correctly and in time – the Chinese success is extremely impressive. However, a well-funded governmental space agency with clear goals and political support is a very different animal from a commercial endeavor, which operates in an entirely different universe of costs and benefits. Here the Chinese experience shows the weaknesses of their system.

Off hand, I cannot think of a single commercial aviation program which followed its projected schedule to completion. In space exploration a government may throw more resources at a problem, whether in terms of engineers, funding and/or materials, provided the political support exists. This is not the case when creating airliners from scratch. If an aircraft cannot create a profit, it is de facto not going to be a successful commercial venture. This is where China’s industrial spying actually hurts them in the long run.

It is a fundamental issue: to create value you must first create the capacity to create value.

Aircraft engineers may steal blueprints (or, nowadays, CAD/CAM files) to see how a competitor has built an aircraft, but that says nothing about how the teams of engineers, accountants and managers solve the problems which inevitably arise when going from the drawing to the finished product.

SOME HISTORY

An example from the dusty past: the US created the B-29 bomber during WWII. This weapon was far in advance of any other aircraft of the time (even allowing for the German’s creation of swept-wing jets.) It was a complex project, larger than any other comparable aircraft. Its performance in terms of range, payload and speed stood in a class of its own. One of these aircraft was in a raid over Japan towards the end of WWII, when it suffered engine problems and was unable to return to its base. It was forced to land in the Soviet Union. The Soviets were supposed to return all allied aircraft promptly, but in this case they stalled American requests for its return. On Stalin’s express orders they disassembled it instead, copied all the pieces, and made a copy, called the Li-4. However, the stories of Soviet’s problems with creating a copy that functioned as well as the original were many. The copy did not carry as heavy a bomb load, or fly as fast or as far.

In any case, by the time the Cold War started in earnest, the US was already working on aircraft that were far more advanced, from the B-36 through the swept-wing B-47 to the B-52; a design so successful it is still in service today. Did the Soviets gain an unfair advantage from stealing? Yes. Not just the Li-4, but even the MiG-15 of Korean War fame benefitted from Western technology. (In the MiG’s case, it was the British, who sent four of their very most advanced end-of-war jet engines to the Russians. Why? Misplaced goodwill is the kindest explanation.)

But the Russians did not, could not, create the same type of industrial base which would lead instead of follow. There wasn’t the back-and-forth between military and commercial endeavor which produces advances in both fields. While surely there were many talented, intelligent people within aviation in the Soviet Union, the society as a whole did not reward initiative and innovation. This is why the CCP’s current, similar, strategy of stealing their way to success is problematic for them.

MORALITY? IN AEROSPACE?

Spying on one’s enemies has a moral range, just like any human endeavor. If you know that someone wants to harm you, trying to prevent this is a clear prerogative of action. Outright theft, blackmail and other dark arts are more problematic.

It is not naive to claim that political control as an all-encompassing end in itself precludes success in other fields. This is the barrier that the CCP will run up against time and again: as spying and copying is rewarded, other endeavors are devalued. Yet it is those other things, innovation and initiative, which create value and ensure true competitiveness between states, economies and corporations.

In the long run I am certain this analysis is correct. However, as the saying goes, in the long run we’re all dead. What to do now, in the present, when we’re being harmed by this Chinese strategy?

Industrial spying is nothing new. In recent times France and Israel, putative American allies, aggressively attempted to acquire American knowledge through subterfuge (for quite separate reasons.) France was desperate to acquire its own nuclear deterrence in the sixties, but as a medium-sized power it did not have the resources of the US or Soviet Union. Israel… well, God wants them to have everything, apparently. In any case, that spying did not seem to be as all-encompassing as what China is trying to do presently. Even if, as posited earlier, this is a counter-productive strategy for the Chinese themselves in the long run, it causes real and true harm to the US now.

What to do? It would behoove us to disentangle this challenge from abroad from what we do to ourselves. America will not succeed as a surveillance state. To an individual company, or indeed, an individual innovator, it matters little whether the threat of theft of intellectual property comes from some anonymous Chinese IP address, from the American government itself, or indeed an American-based competitor. Robust protection of property rights is the prerequisite for any economic success. The suspicion, if not outright paranoia, of spying does immeasurable harm to economic planning, from future investment to innovation.

The collision of the security and economic spheres is based on their very real difference in world-view. Security, put bluntly, does not, indeed cannot, create value. It can only preserve it (leaving aside control of raw materials such as oil, steel, etc.) Economic growth can only come from creating value (leaving aside cases of monopolies or political machinations.)They are two different world views which can be summed up as threats versus possibilities.

DO WE FOLLOW OUR OWN RULES?

Two examples: a decade or so ago a Chinese oil company attempted to purchase outright the American oil company Unocal. From a Chinese perspective this was a clear and straightforward issue of acquiring future oil supply for its industries. This was blocked by congress, looking at it through the narrow, misguided prism of national security. Unocal could by no means be perceived as a company which has access to state secrets or could plausibly pose a threat to us, if owned by a rival power, unless we were, in fact, at war.

By blocking this acquisition we showed Chinese leadership that our words do not match our deeds; that although we profess to believe in a free market, we do not follow our own rules, and that Chinese self-interest, even when clearly identifiable as non-threatening and understandable, does not stand a chance when confronted by American parochialism. From there to Huawei’s attempts to penetrate Western markets, and thus have access to Western intelligence, is a pretty clear line, albeit across economic sectors from commodities to intellectual work. Still, if we do not allow fair competition, then why should the Chinese try to play by our rules?

Obviously telecoms switchers and routers have the capacity to intercept information, which is a completely different animal than having access to raw materials such as oil, but this Chinese perception of unfairness was a completely self-inflicted American wound in some respects. Blocking Huawei from US markets is understandable and necessary. But both sides must be allowed to play the game fairly in the first place to compete. It would have been in our national security interests to allow China to purchase Unocal and its reserves, showing that we do allow competition. Then our protestations at attempts of industrial spying when it came to actual, real, questions of national security in the information arena would have a weight which, from the Chinese perspective, they lack.

China may still have pursued their current large scale intelligence-gathering, but a more moderate initial reaction to Chinese attempts to acquire US companies which were not actually matters of national security would have given pause to the more aggressive elements within their leadership and provided cover for those Chinese who realize modernization and growth must come from within rather than external theft, to say nothing of our own bargaining position.

YES, THE REAL WORLD CAN BE UNPLEASANT, AND YET…

It would be insane to think that security is completely unnecessary. However, it is equally counter-productive to put the cart before the horse and claim that security trumps economics. In certain historical eras where existential threats and the possibility of annihilation were real, whether due to ideology, religion or other real or perceived differences, that may have been the case. But the genius of the American age is that competition between countries has been, and continues to be, primarily economic and not military. WWII was won in the factories of Detroit and Long Beach as much as on the beaches of Normandy, Iwo Jima or in Stalingrad. Contrast this with the European age of the 19th century, where military might stood supreme and ended with the carnage of WWI.

Is China the aggressive new power compared to the current US hegemon, as was Germany in 1900 towards Great Britain?

Probably not. Germany and Britain competed in arenas which bear some resemblance, but do not mirror, those between China and the US today. America is a service economy, which still manufactures some things. China is a manufacturing economy, which is not yet a true creator or incubator of services and intellectual innovation. This is surely not because Americans are inherently smarter, but that the trajectory of economic development is not neatly overlapping. Therefore, it is worrying that China seems to be sending its best minds into security and spying rather than into economic innovation. This makes sense for preserving the CCP at the apex of power, but not for becoming a better competitor to the US in more advanced fields. As an American it is infuriating to see actions that could help our own economy be punished by this indirect tax on innovation. It is difficult to say exactly what steps should be taken. The internet system (Today’s primary means of spying) is an American creation which is apparently being turned back on us. This is legitimate cause for concern.

Can the entire internet be changed from its basis of trust (one computer accepts that a data packet that says it comes from a certain computer, does, in fact come from this computer and not from an imposter,) and if so, how?

Smarter minds than mine have surely wrestled with this question, but so far it seems the system in place cannot change that fundamental, exploitable, flaw. Instead, we apparently must all become adept at recognizing Trojan horses, worms, one-days and all the rest of the disheartening lexicon of online subterfuge. However, not out of any misplaced sense of cheap patriotism, but in recognition that our system truly has created an economic system which seems more successful than the alternatives, we should, at the very least, ensure that suspicion of internet misuse does not originate from our own government. The trust that existed at the dawn on the internet age, whether digital or human-based, is dead and buried. Something needs to take its place, but with an important caveat: security may be necessary, but if it kills what it was meant to protect, it is worse than no security at all.