The U.S.-China game of cyber chicken could derail Silicon Valley

If China and America don’t end their crazy spying-tinged trade war, billions of dollars in technology sales will evaporate

train crash derail

There's a funny scene in "Blazing Saddles" when Cleavon Little, playing the black sheriff, puts a gun to his head and says to a crowd that was about to lynch him: "One move and the [expletive] gets it."

U.S. President Barack Obama and Chinese President Xi Jinping are enacting a similar scene -- only it isn't funny. I don't think the two presidents are about to blow up the planet, but they are in danger of blowing up the trillion-dollar world market for information technology.

Obama has tolerated, if not encouraged, the NSA's huge data hacking programs, and Xi, whose nation has also engaged in cyber espionage for more than a decade, now insists that U.S. tech companies put backdoors in their software and share their encryption keys if they want to operate in China.

This espionage-tinged trade war could get seriously out of hand

This is beginning to take on the color of an old-fashioned trade war, with China discovering the joys of protectionism and both countries making impossible demands on, in this case, technology vendors.

U.S. companies, including cloud vendors, have already lost substantial amounts of overseas business as foreign clients decide it's too risky to buy products like routers and servers that may have built-in backdoors. Now we learn that the CIA has been bugging iPhones and iPads -- or at least trying to. Perhaps it's no surprise that China has been instructing its government agencies to favor homegrown vendors over Western merchants. 

It's hard to gauge the true losses from such avoidance of American tech products -- it's certainly easy to toss out a huge number and get attention. Plus, other economic trends are affecting U.S. trade, such as the soaring value of the U.S. dollar.

But the economic cycle will not take care of the demands for and secret installation of backdoor access to technology products on its own. In fact, the situation will get worse. If China and the United States can demand backdoors and keys, why can't India, Brazil, or any other country with a sizable market for IT products insist on the same privilege?

What a mess.

Apple's China dilemma is Silicon Valley's dilemma, too

Doing business in China requires the skills of a diplomat and the balance of a tightrope walker. The ruling Communist Party is so closely tied to the rising capitalist elite that it can be hard to tell the two apart. And bribery at high levels is a national pastime.

Businesses that don't play ball with the Party quickly find themselves out in the cold, and the lure of China's billion-strong consumer market makes it very tempting to sacrifice principle for profit.

Apple's sales to China doubled to nearly $16.1 billion in the fourth quarter, as it sold more smartphones in China last quarter than any of its rivals, according to a report from Canalys, a market researcher.

Protecting that huge revenue stream has put Apple in a very difficult position. Apple is being pushed hard by the Chinese government to help China spy on its own citizens. And it's being damaged by the NSA's continued attempts to use American technology to gather intelligence on China.

Earlier this week, The Intercept reported that researchers working with the CIA have conducted a multiyear, sustained effort to break the security of Apple's iPhones and iPads, according to top-secret documents leaked by Edward Snowden.

The report also claims that U.S. government researchers created a version of Xcode, Apple's software application development tool, to create surveillance backdoors in programs distributed on Apple's App Store.

Snowden's leaks have generally proven to be accurate, but even if this report is incorrect, the doubt it generates has the potential to greatly damage Apple's business in China (and beyond) and, in fact, the business of all American tech companies. If the U.S. government is doing this to Apple, it's an easy bet it's doing the same to Microsoft, Google, Cisco Systems, IBM, Intel, Hewlett-Packard, Oracle, VMware, and so on.

China's outrageous threats to and demands on tech companies

China is already hitting back. Reports late last month said that key providers, including Cisco, Apple, Intel, and McAfee, have been dropped from the Chinese government's list of authorized suppliers.

The number of foreign companies on the list has fallen by a third, and the number of vendors selling security-related products has dropped by half. Two years ago, Cisco had 60 items on the list, but it now has none.

China has a legitimate beef with NSA backdoors being built into the products it buys. But it's also clear that this move has plenty to do with the Chinese government's desire to protect its domestic suppliers. As a result, 2014 was a very tough year for U.S. vendors selling products in China, as the Chinese government took punitive actions unrelated to security against Qualcomm, Microsoft, and others.

Meanwhile, the Chinese government has been pressuring Apple and other U.S. vendors to cooperate with its surveillance agenda. New rules going into effect this month require tech companies to hand over source code, submit to audits, and build deliberate backdoors into both hardware and software products. Those demands are focused now on companies that supply domestic banks, but a proposed counterterrorism law would apply to nearly all foreign tech companies doing business in China.

China's state-run media claims that Apple has already agreed to Beijing's demands. Apple has said it won't comment on the claim but consistently has said that it never "worked with any government agency from any country to create a backdoor in any of our products or services."

Apple is, however, storing Chinese user data in China, which could enable government surveillance, a move other companies have rejected. Apple claims the practice is benign.

Doing business in China is going to get increasingly difficult, I suspect, and some U.S. tech companies will have to reevaluate their efforts in that huge market.

A dangerous game of cyber chicken

My larger concern is the effect of this crazy game of cyber chicken on the global IT market.

This is a mess. Protectionism and cyber espionage are coming together to form an ugly storm that is battering the IT industry.

Unchecked, Obama and Xi could shoot themselves in the head and take a lot of jobs, dollars, and renminbi -- not to mention citizens' privacy -- down with them.

Copyright © 2015 IDG Communications, Inc.

How to choose a low-code development platform