Hacking Case Adds to Trump's China Campaign and Trade Deal Risks

(Bloomberg) -- The Trump administration has added the latest piece to a growing campaign against China’s state-led efforts to steal U.S. technology.

But by doing so less than three weeks after President Donald Trump and Chinese leader Xi Jinping agreed to a fragile trade truce, it has also illustrated just how complicated renegotiating the most important economic relationship in the world will be.

Administration officials say the charges brought Thursday against two Chinese hackers known collectively as “Advanced Persistent Threat 10’’ point to how brazen China has become in its efforts to vacuum up American know-how and how hard it will be to change what some see as institutionalized Chinese behavior.

Zhu Hua and Zhang Shilong, U.S. prosecutors said, conspired with security officials in China to infiltrate 45 U.S. companies and government agencies as well as firms in a dozen other countries. China’s Foreign Ministry said the government has never participated in or supported individuals in stealing commercial secrets.

The U.S. accusations are “baseless,” spokeswoman Hua Chunying said, and the charges against its citizens should be immediately withdrawn “so as to avoid serious damage to bilateral relations.”

‘Cautiously Optimistic’

Treasury Secretary Steven Mnuchin, who has been leading economic talks with China for much of this year, on Thursday insisted the new charges wouldn’t impede the ongoing trade negotiations, which have lately been focused on arranging another round of high-level face-to-face talks in January. “I’m cautiously optimistic that we will continue to be able to work through these issues,’’ he told Fox Business Network.

Mnuchin, however, also hinted at a reality the administration has been wrestling with in recent weeks. Even before Thursday the administration was trying to insulate its trade talks from Chinese outrage over the Dec. 1 arrest in Canada at U.S. law enforcement’s request of a senior executive at Huawei Technologies Co., China’s largest telecommunications company.

The tariffs introduced this year on $250 billion in Chinese imports and the resulting trade talks were not about just getting China “buying soybeans and buying energy, although they clearly will buy a lot more of both,’’ Mnuchin said Thursday. “This is about protecting U.S. technology.’’

‘Comprehensive Deal’

Much has been made about the rivalries between perceived China trade doves in the administration such as Mnuchin and more hawkish members including John Bolton, the national security adviser, and Robert Lighthizer, the U.S. trade representative now leading the negotiations.

Mnuchin, according to two people familiar with the deliberations, blocked the imposition of tougher financial sanctions against people and companies linked to the new Chinese hacking case. A Treasury spokesman declined to address the issue directly, but said: “We don’t comment on sanctions actions or deliberations. But it’s important to note that these issues are not related to trade.”

But the biggest tension currently may be between the administration’s own competing priorities. With financial markets wilting in part over worries over the impact of Trump’s trade war with China on what looks like an increasingly fragile global economy, the president has looked increasingly eager to strike a deal since his Dec. 1 dinner with Xi in Buenos Aires, which resulted in a 90-day truce. “China wants to make a big and very comprehensive deal. It could happen, and rather soon!’’ he tweeted last weekend.

At the same time, the administration has made clear that it is proceeding with plans to increase pressure on China on a number of fronts.

Broader Campaign

In launching the hacking charges Thursday, officials said they were part of a broader campaign being mounted against Chinese misbehavior.

Among the targets of a new Justice Department “China initiative” launched quietly last month are Chinese spies in U.S. research labs and “unregistered agents seeking to advance China’s political agenda’’ in the U.S. Also listed on a fact sheet handed out to reporters were efforts to “better address supply chain threats” linked to “the telecommunications sector, prior to the transition to 5G networks.”

Huawei wasn’t named. But U.S. officials have labeled it a major component in China’s efforts to control 5G technology.

Analysts said trying to keep trade talks and other issues separate may be a difficult contortion to keep up for the Trump administration, especially with the president willing to bust past taboos and link things in a way his predecessors have not. He himself has linked the Huawei case to a possible trade deal.

“This is a small slice of the trade and economic issues that we are talking with the Chinese about,’’ said Bonnie Glaser, a China export at the Center for Strategic and International Studies in Washington. But “I think it is ultimately difficult to keep things separate.’’

‘Exactly Parallel’

The message to China contained in Thursday’s move, which was backed by allies such as the U.K., was that “we have other levers that we can pull,’’ Glaser said. And Trump “probably feels that a good businessman pulls whatever lever he can to get an advantage over the other side.’’

But there’s also an uncomfortable reality: The U.S. and China have been here before.

In 2014, the Justice Department charged five Chinese military hackers for economic espionage for infiltrating the computer systems of companies including the U.S. Steel Corp. and Westinghouse Electric Co. “This 21st century burglary has to stop,’’ one prosecutor announcing the case said at the time. Those charges resulted in a 2015 agreement between China and the Obama administration to halt cyber attacks on commercial targets.

That background means the latest hacking charges may well end up being shrugged off in Beijing, said Derek Scissors, a China expert at the American Enterprise Institute.

“These are exactly parallel to the Obama indictments: Necessary criminal justice actions that put no economic or political pressure on China at all,’’ he said. “They mean nothing. And by nothing, I mean nothing. It’s easy to compartmentalize when there’s nothing in one of the compartments.’’

--With assistance from Tom Schoenberg.

To contact the reporter on this story: Shawn Donnan in Washington at sdonnan@bloomberg.net

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Robert Jameson, Malcolm Scott

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