How Trump’s Tariffs Disrupted a Fragile Cyber-Peace

(Bloomberg Opinion) -- In the run-up to Saturday’s crucial meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the Group of 20 meeting in Argentina, the U.S. is signaling that cyberespionage will be a crucial part of its grievances against China. The basic complaint is that while both China and the U.S. try to hack each other’s national security apparatus, China also attacks private U.S. companies for the benefit of its own enterprises.

The American allegation of asymmetry is accurate — but it’s also starting to seem outdated and more than a little hypocritical.

The U.S. has no compunctions about stealing foreigners’ private business data or information when the U.S. intelligence community considers it useful for national security.

The difference is that the U.S. government has long had a policy of not passing along intelligence gleaned from foreign companies to the American private sector.

That’s because of an old-fashioned free-trade ideology that considers government assistance to private companies a violation of the level economic playing field between internationally competing businesses.

In practice, the public-private divide has never been so sharp in the U.S. The government has always contracted much of its national security work to private companies. And Trump further blurred the line by claiming private business as a component of national security when imposing steel tariffs.

In other words, as Trump has moved away from free trade in favor of tariffs, the argument against cyberattack are eroding.

China, for its part, has never entertained the idea that there’s a meaningful difference between business and the government. As a communist country, it has long defined its national security interests to include the economic advancement of Chinese companies.

Some of these are state-owned enterprises, bringing those companies narrowly into the ambit of the Chinese government. Others are formally private — yet the Chinese Communist Party considers those just as important to advancing China’s interests.

Trump’s focus on cyber isn’t new, nor are the arguments he’ll be using. In fact, Trump is following President Barack Obama, who induced Xi to sign an agreement limiting cyberattacks three years ago.

That agreement was path breaking. It resulted from Obama making a strategic decision to place cyberespionage at the center of his China negotiations. It reflected Obama’s free-trade orientation — and it required China to promise to act according to free-trade principles on cyberespionage if it wanted to keep benefiting from liberal international trade rules.

Recognizing Obama’s priorities, China entered the deal.

Xi understood that like other international agreements that purport to regulate otherwise secret conduct, the deal could always be ignored.

For the end of Obama’s term and the beginning of Trump’s, cyberattacks from China appeared to decline.

Once Trump began to put into practice his confrontational tariff policy toward China, Xi reacted. Since then, China seems to have stopped respecting the agreement, and cyberattacks are back up.

China’s shift can be understood in simple game-theory terms. The attacks are relatively inexpensive and asymmetrically help China while hurting the U.S. That’s partly because U.S. companies are still more advanced in creating intellectual property than are their Chinese competitors. It’s also because the U.S. doesn’t pass on Chinese business secrets to U.S. companies.

It only makes sense for China to stop or reduce cyberattacks if China is getting something from the U.S. in return — like relatively open trade, which China needs.

Trump’s attempt to change the U.S.-China trade balance by raising tariffs has the potential to hurt China. So in response, Xi logically returned to the cyberattacks. It costs him, and China, little to violate the agreement made with Obama.

And if Trump wants to demand that the attacks stop, he’ll have to provide incentives — such as backing down from some of his tariff threats.

All this raises what should be an obvious question: If you can’t beat them, why not join them? If China won’t stop hacking U.S. businesses for economic advantage, maybe the U.S. should start doing the same.

The reason not to lies in the roots of the liberal international trade regime as the U.S. created it in the decades after World War II.

At the core of the free-trade system is the belief that private companies in different countries should compete on equal terms in open global markets.

If one government helps its businesses, whether by tariffs, subsidies or providing information stolen from foreign competitors, that distorts the free market. It gives the company an unfair advantage over its competitors.

In turn, that unfairly given advantage distorts market outcomes. That’s economically inefficient, at least under classic free-trade principles. It’s ultimately bad for competitiveness and consumers.

With his tariff strategy, Trump has substantially undermined this free-trade ideology. If you asked him, he would probably have no problem with the idea of stealing secrets from the foreign competitors of U.S. companies and giving them to American private businesses.

But even under Trump, the U.S. hasn’t completely abandoned free-trade ideas. Trump’s redone NAFTA deal, now called the USMCA, is still basically a free-trade deal among the three North American partners.

And U.S. trade with most Asian and European partners remains on free-trade terms.

Given this reality, the U.S. has strong incentives not to tell the world that it’s going to start helping U.S. businesses by giving them stolen secrets from foreign competitors.

Unfortunately, that leaves the U.S. vulnerable to China’s policy on cyberattacks. If Trump wants them to stop, he will have to do better than make a free-trade argument that they’re unfair. He’ll have to make some concessions on his illiberal movement away from tariffs.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Feldman is a Bloomberg Opinion columnist. He is a professor of law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “The Three Lives of James Madison: Genius, Partisan, President.”

©2018 Bloomberg L.P.