Are China’s policies making the nation more secure, or isolating it from the rest of the world?

Cyber security is a topic that has been making waves in international media over the past year. The issue has drawn increasing attention since the beginning of 2015, with much of the focus on recent policy developments that have been coming out of China.

The current trend in China has been the closing off of certain sectors of the domestic economy to foreign suppliers of information technology (IT) products in response to cyber security concerns. This is a worrisome development for every business—foreign and domestic—but perhaps the biggest concern is for the Chinese economy overall.

Restricting foreign IT products

The belief that ‘shielding’ certain, purely commercial sectors of the economy from foreign products will somehow increase national security is a mistaken one. Such policies breed insularity and impair legitimate commercial activities by curtailing the ability of companies to procure the best IT solutions in the global marketplace. If implemented such restrictions could in fact—contrary to intentions—weaken China’s cyber security and thus be detrimental to China’s economic development going forward.

These policies also greatly increase costs for all companies, particularly those with global operations and IT systems as it will be difficult—or in some areas virtually impossible—to integrate Chinese systems with those in the rest of the world.

“This will set China’s tech sector back and makes it non-competitive, as competition drives innovation. Meanwhile EU companies will continue to compete globally and innovate as the competition between them is so fierce,” commented Jörg Wuttke, President of the European Chamber, adding, “At the same time, the whole tech system in China will be less secure as Chinese products will likely be more easily compromised. This is a global problem – governments should quit requiring ‘back doors’ and companies globally need to push for tech integrity and tech system safety.”

Furthermore, such policies might run counter to China’s World Trade Organisation (WTO) commitments. Although the WTO sees scope for the curtailing of certain sectors of a country’s government procurement due to national security concerns, as per the Agreement on Government Procurement (GPA) (to which China has not yet acceded), it is fundamentally opposed to across-the-board cordoning off of sectors.

International trade statistics conclusively show the extent to which China’s IT sector has benefited from increased integration into the global IT infrastructure since the country’s accession to the WTO.[1] The fact that China’s global share of IT exports increased from only about two per cent in 1996, to 30 per cent in 2012, pays testament to that.

This current drive is reminiscent of the so-called ‘indigenous innovation’ of previous decades, and for the IT sector’s ‘old China hands’ alarm bells are ringing.

Internet restrictions

Similarly gloomy sentiment holds for China’s Internet restrictions, too. Limiting which websites or servers can be accessed has a deeply negative effect on the normal day-to-day operations of businesses. It hampers their ability to undertake research and conduct e-commerce transactions, and naturally this has an adverse effect on their productivity.

In having these Internet restrictions in place—and now even increasing them—China is doing its economic development in the 21^st Century a great disservice. Economic growth in China will no longer be the ‘bricks and mortar’ growth of the previous decades, but will increasingly be driven by innovative, digital businesses, as is the case in advanced market economies such as the European Union and the United States.

In sum, these trends are also highly detrimental to China’s stated intention of attracting and retaining research and development (R&D) investment – research talent is deterred from locating to China because these restrictions prevent them from effectively carrying out their work.

The European Chamber polled its member companies in June 2014 (100 respondents), and again in February 2015 (106 respondents), on the issues of cyber security and Internet restrictions. The findings showed that foreign business in China is concerned about IT and cyber security. Below are some of the key findings from the 2014 survey; key findings from the 2015 survey can be seen on page nine. Both surveys can be downloaded in full from the European Chamber’s website:

June 2014 survey:

• 80% of respondents are concerned about the security of their company’s IT systems in China.
• 53% of respondents are more concerned about their IT systems in China than in other parts of the world.
• 71% of respondents said the inability to access certain web pages in China negatively effects their business.
• 87% of respondents said the Internet speeds in China negatively effects their business.

Whenever the topic of cyber security comes to the fore, concerns are raised and tensions are ratcheted up a notch. This time around, it is likely that the matter will remain in the public’s focus for a while. The European Chamber is closely monitoring developments and gathering as much information as possible in order to make an informed judgement, and we will seek to address these issues on behalf of our members whenever the right opportunity presents itself.

[1] Global imports of information technology goods approach $2 trillion, UNCTAD figures show, United Nations Conference on Trade and Development (UNCTAD), 12^th February, 2014, viewed 12^th March, 2015 http://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=692.