China Technology: Making Western Companies Reveal Trade Secrets – or Just SOP in High-Tech Global Arms Trade?

18 May 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

In many ways, China can be summed up in the same way screenwriter William Goldman famously said about getting movies made in Hollywood: nobody knows nuthin’.

18 May 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

In many ways, China can be summed up in the same way screenwriter William Goldman famously said about getting movies made in Hollywood: nobody knows nuthin’.

18 May 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

In many ways, China can be summed up in the same way screenwriter William Goldman famously said about getting movies made in Hollywood: nobody knows nuthin’.

But we did notice a few weeks ago what seemed a most intriguing story in the New York Times that

a) never seemed to get a follow up, and

b) never showed up on any searches despite the many different formulations we used to try to discover more about it.

Given the repetitive din of the global media society, this would be surprising in any case, but here it seems especially so,

because it concerns China’s rather blatant attempts to discover the, literal, inner workings of advanced Western military technology,

and, given the Asian genius for reverse engineering, to help itself in a very direct way to the top levels of Western technique

without having to spend a huge amount of time, money or energy developing it themselves. [br]

On April 30, a Friday, we read the following:

[quote]

China is expected to issue regulations on Saturday requiring technology companies to disclose

proprietary information like data-encryption keys and underlying software code

to sell a range of security-related digital technology products to government agencies.

[/quote]

Now this seems rather amazing, doesn’t it ???

Especially since the MOST active Chinese companies in general, those in high-tech even more, and those in security-related high-tech above all,

are either highly indirectly or directly controlled by the Chinese government.

So this means any high-tech Western company involved in the security field that wants to sell in the ever-growing Chinese market

is going to have tell the Chinese government directly significant elements of proprietary information like basic software algorithms and data encryption keys.

You would think this would be rather controversial on all sorts of levels.

But we had a hell of a problem finding out more about this situation, except in one piece in a relatively obscure website, even though two full weeks have past since then –

and yet it’s still almost impossible to find out

a) IF that regulation was, in fact, imposed,

b) what the immediate effects HAVE been, and

c) what practitioners in that highly secret and profitable field think the effects WILL be.

So let’s “mine” the little bit of information we DO have to see what this is all about:

[quote]

But they said it remained unclear how vigorously Chinese officials would enforce the new rules,

which already are watered down from a sweeping proposal first raised in 2007.

[/quote]

So obviously the Chinese had tried something like this before, and been rebuffed.

But a lot has changed since 2007, above all at the level of global political economic power,

and China has become MUCH more a player to be reckoned with than it was barely three years ago.

[quote]

Both the American and European technology industries have contended that the rules are unworkable and that they amount to trade protectionism.

[/quote]

Which of course is standard rhetoric for any new governmental rules about technology transfer,

as we know from the whole battle with China over the fast-growing Indian telecom market,

where, surprisingly, China is and has been a major player.

But what follows is clearly serious for all the players involved.

[quote]

One concern is that the rules will allow the leak of crucial foreign technologies to Chinese competitors who are seeking to build a technology industry on a par with the West.

The European Union’s chief trade official, Karel De Gucht, said in a visit to Beijing this week that the rules had “no real base in reality,” and urged the Beijing government to overhaul them.

[/quote]

Now this is notable on two accounts: first, the chief trade official of the EU is directly involved in this situation – which indicates its gravity –

and second, he has so few cards to play that all he can come up with is the weak-kneed “no real basis in reality”,

when, of course, it’s PRECISELY the basis “in reality” that is so disturbing to the high-tech security industries involved,

not to mention the governments that support them.

[quote]

The regulations, set to take effect on Friday, largely affect sales of network routers, smart cards, firewall software and other products involved in protecting digital data.

They would require software and equipment from both Chinese and foreign companies to meet new technology standards before being certified for sale to government agencies.

To be certified, companies apparently would have to give government-connected testing laboratories encryption algorithms, software source code and design specifications

that, for many of the products, are regarded as sensitive trade secrets. [br]

[/quote]

Whoa, this is some SERIOUS business here.

And it raises once again the question of why there hasn’t been ANY follow-up in ANY major Western media,

with the exception of a few small, specialty websites that we’ve already noted.

Or is the subject just SO explosive that all concerned have agreed to bury it – after all, it DID appear on a Friday –

so it could be “hidden in plain sight,” in true economediatic fashion ???

[quote]

In interviews, American industry officials argued that the rules not only sought details well beyond what was needed to certify the products,

 but that there were few safeguards to protect the proprietary information from outsiders.

“Even if you’re not talking about the really sensitive stuff, it’s not clear yet how product information will be protected or secured while it is running through the testing process,”

John Neuffer, a vice president at the Information Technology Industry Council, a trade group based in Washington, said in a telephone interview.

“China asks for companies to go through testing labs that are essentially state-owned, government-owned,” he said.

“That’s the sensitive part.”

[/quote]

Again, this would seem to be really explosive stuff.

And yet not only was it buried on a Friday / Saturday, there hasn’t been any follow-up –

I mean, even the Goldman Sachs Christmas Eve stuff got HUGE numbers of comments,

and was, eventually, integrated into mainstream discourse about what the company was doing.

Here, at least so far, we haven’t been able to find a thing.

[quote]

The regulations are part of a long-running argument between Western technology companies and the Chinese government over the West’s access to Chinese markets.

[/quote]

Hmmmm, so a long-running argument between the Chinese government and high-level Western technology companies is, somehow these days, NOT major news?

What the hell is going on here ???

[quote]

In the last month, China averted another dispute by rolling back a second plan

aimed at giving Chinese companies an advantage in government technology purchases.

[/quote]

So yet another aspect of this situation is the attempt of the Chinese government

to give local companies a significant price advantage over their Western competitors –

whose high-level technological trade secrets the government ALSO wants access to

in order to let them into the ever-more significant and growing Chinese domestic high-tech security market.

And this is not news?

Again, what is going on here ???

As so often with the New York Times, the real agenda of the article doesn’t come until the last third or so,

or, if it’s really explosive, the last three or so paragraphs – and this is certainly true here as well: US companies

[quote]

also worry that the disclosure rules will enable Chinese competitors to copy Western technology.

[/quote]

Gee, what a surprise.

[quote]

When the 2007 certification proposal was first introduced, some Chinese officials cast it as part of a broader campaign

to help the nation’s computer-technology companies gain ground against more advanced Western competitors.

In negotiations, Chinese officials have argued that the United States imposes similar disclosure requirements on many advanced technologies.

[/quote]

Which, on first glance, seems quite reasonable indeed.

[quote]

Mr. Neuffer and others said, however, that except for some military and national security technologies,

American certification procedures are far less rigorous

and are conducted in testing labs independent from the government.

[/quote]

And maybe that’s the catch with the lack of media excitement right there.

To be sure, the Chinese government is deeply involved, both directly and indirectly with its security industry.

But, of course, so is the United States’.

So maybe the reason this seemingly explosive story isn’t getting such big play is that

it’s nothing new in the world of government / high-tech relations:

perhaps the Chinese are simply copying their American cousins,

since the vague phrasing “except for some military and national security technologies”

is almost EXACTLY what THIS article is supposed to be covering.

Now, it may well be true that the testing labs in the US are, in SOME way, independent of the government.

But it’s hard to imagine that, when it comes to really cutting-edge technology in critical areas that such “independence” is really respected very rigorously by all concerned.

We could be wrong, of course, but that little kicker at the end kind of puts everything that comes before into at least a bit of question.

At the same time,

[quote]

In Beijing, an American industry expert who has negotiated with the Chinese government on the issue said that

most American companies were likely to abandon sales to the Chinese government rather than turn over trade secrets.

That expert declined to be named because of the sensitivity of the talks with the Chinese.

[/quote]

Then finally comes a potentially significant COMMERCIAL reason

many American companies would be so unwilling to reveal their trade secrets to the Chinese government –

and it has NOTHING to do with China.

[quote]

American industry officials also have argued that the new rules would gut their technology exports,

because few other nations would purchase technology whose essential security secrets had been shared with the Chinese government.

[/quote]

And maybe that’s the MOST important reason of all – agreeing to the Chinese conditions, which don’t sound THAT different from America’s for similar technologies –

would hurt the ability of those same high-tech security firms – aka Arms Dealers  [Merchants of Death] – to sell to other countries.

And if you doubt this is a high-stakes issue, go check out The International, with the always excellent Clive Owen –

the rare film that actually discusses these issues in intelligent and meaningful terms.

David Caploe PhD

Chief Political Economist

EconomyWatch.com

President / acalaha.com