The Second Most Important Story Of The Day

Big market moves have a way of obscuring important events that occur the same day, and that’s exactly what happened on Wednesday. The US Department of Justice unsealed charges against a Chinese Ministry of State Security operative named Yanjun Xu for “conspiring and attempting to commit economic espionage and steal trade secrets from multiple US aviation and aerospace companies.” Xu was extradited to the US from Belgium yesterday. This is not one of those hollow indictments with the accused thousands of miles away.

The DOJ press release on the arrest further stated: “This case is not an isolated incident. It is part of an overall economic policy of developing China at American expense.” It went on to say, “This unprecedented extradition of a Chinese intelligence officer exposes the Chinese government’s direct oversight of economic espionage against the United States.” Strong words, and certainly a case that would have gotten more press if markets hadn’t stolen all the headlines today.

All this is important for two reasons. First, security experts are warning that the Chinese will become more aggressive in their cyber warfare efforts in retaliation for the arrest. There was a détente of sorts after Presidents Obama and Xi agreed to cease economic hacking in the fall of 2015. President Trump’s shift in posture towards China apparently made the Chinese rethink that. So expect to hear a lot more about China hacking through the end of the year.

Read more here, with a link to the full indictment: https://www.zdnet.com/article/arrest-of-top-chinese-intelligence-officer-sparks-fears-of-new-chinese-hacking-efforts/

The second issue is the importance of understanding cyber warfare more generally. This is a brand new chapter in both nation-state and rogue group geopolitics. As we discussed briefly a few days ago, there are no established norms or longstanding government policy on the issue.

We want to take a moment to once again recommend New York Times reporter David Sanger’s excellent book “The Perfect Weapon” (link to purchase on Amazon below). From his last chapter, a few points to give you the gist of his narrative:

• Cyber warfare capabilities are spread around the world. Impoverished nations like North Korea and pariahs like Iran have them. Its not just the US, Russia and China.

• No country has a playbook for how and where to use cyber, or how to respond to attacks. Every situation is different, which makes crafting a response somewhat ad hoc and unpredictable.

• While national security professionals bristle at the idea of giving up information, countries like the US need to call out foreign actors directly when they attack the US. That is apparently happening more now, as today’s announcement shows. What happens next, however, is unclear.

• The world needs to set some norms around cyber warfare, at least when it comes to the safety of ordinary civilians.

The upshot of the book, which is becoming more relevant by the day, is that cyber warfare has no real rules and every country sees the opportunities and challenges differently. Add that unpredictability to the current state of play between the US and China, and you get an important (and underappreciated) macro risk factor.

Click to buy on Amazon: https://www.amazon.com/Perfect-Weapon-Sabotage-Fear-Cyber/dp/0451497899