Welcome to Chimerica

If you are looking for a catchphrase to describe current realities, I would go with Chimerica not "cyber cold war."  One current reality is that Avatar is more popular in China than Confucius (the movie that is), another reality is the trade deficit

 

And the combination of the trade deficit with the federal budget deficit is troubling. But these are economic issues. During the Cold war there was neglible trade and cultural exchange with Russia. Constrast this with reality that China already represents 10% of global trade and the linked nature today's global supply chains (from Zach Karabell):

Its capital and ideas in motion in a way that national statistics do an extremely poor job of encapsulating. The much vaunted trade deficit figure of $200-300 billion a year assumes that every dollar of trade with China is a dollar that leaves the United States and goes to China. But if 15% of that trade deficit is Walmart sourcing its good from China, a lot of that money doesn't go to China, it goes - yes to Walmart, it goes to people working on the port of Long Beach offloading the goods, it goes to Burlington Northern Railroad which Warren Buffett just bought the rest of, shipping those goods thoughout the country. It doesn't all go in that direction

Its not even clear where things are made. If GE makes a washing machine at a plant in northern China with polymers and plastics made in Malaysia and circuit boards produced in Taiwan and some cloth that was sourced from Cambodia with initially having been grown in Texas that then gets assembled partly in a plant in southern China and then gets shipped to a plant in northern China via Hong Kong (where it then counts as a Chinese export to Hong Kong and a Hong Kong export to China) and then it gets sent to the United States - where was that thing made? By a company whose shares trade on the New York Stock Exchange

So when we here terms like "cyber cold war" you really have to ask to what end with this serve either party when things are so closely linked - and by the way there are trillions in dollars in trade. What is the payoff for either party? As Michael McConnell head of NSA under Bush said the Chinese "political leadership is principally focused on creating new jobs inside the country," Of course, they are. Have you ever tried to feed 1.3 billion people? 

So is there an existential national threat? James Fallows talked to some more spooks and tried to find out:

This led to another, more surprising theme: that the main damage done to date through cyberwar has involved not theft of military secrets nor acts of electronic sabotage but rather business-versus-business spying. Some military secrets have indeed leaked out, the most consequential probably being those that would help the Chinese navy develop a modern submarine fleet. And many people said that if the United States someday ended up at war against China—or Russia, or some other country—then each side would certainly use electronic tools to attack the other’s military and perhaps its civilian infrastructure. But short of outright war, the main losses have come through economic espionage. “You could think of it as taking a shortcut on the ‘D’ of R&D,” research and development, one former government official said. “When you create a new product, a competitor can cherry-pick the good parts and introduce a competitive product much more rapidly than he could otherwise.” Another technology expert, who serves on government advisory boards, told me, when referring to the steady loss of technological advantage, “We should not forget that it was China where ‘death by a thousand cuts’ originated.” I heard of instances of Western corporate officials who arrived for negotiations in China and realized too late that their briefing books and internal numbers were already known by the other side. (In the same vein: I asked security officials whether the laptops and BlackBerry I had used while living in China would have been bugged in some way while I was there. The answers were variations on “Of course,” with the “you idiot” left unsaid.)

And of course its even possible that other countries bug telephone calls, emails and so on. So what we are left with an economic issues. Zach Karabell describes in Superfusion just how Chimerica came to be joined at the hip, almost unbeknownst to anyone because we were focused on 9/11, Iraq, subprime whatever. Competition is one thing, but there is a deep linkage in Chimerica that simply wasn't remotely present in the real Cold War

So national trade statistics do a very bad job at capturing those realities. They also do a bad job at capturing capital in motion. I want to do a brief thought experiment, the numbers I am going to give are not actual but they are representative.

One of the only sources of growth from about 2003-2008 that Wall Street investment banks saw other than creating mortgage backed securities was the possibility of doing loan and underwriting in China. Because by the World Trade Organization China had to allow these to come in. So around 2003, Morgan Stanley seeing the potential to do lots of underwriting business of dynamic new Chinese companies that want to list their shares or former state-owned Chinese enterprises that are reformed enough that they can turn to Western capital markets for an infusion of capital, Morgan Stanley decides to invest $5 billion in one of China's banks.

One of the Chinese banks takes that $5 billion and disperses a series of loans. To government sponsored projects, to build roads, rail, urban infrastructure to create a competitive domestic economy, and some to build some factories. Those factories then may make some goods that get exported to the United States. So Morgan Stanley gives $5 billion to a Chinese bank that then gives $5 billion to a variety of projects including companies that then sell goods to the United States. Americans then buy $5 billion of goods, based on that $5 billion of funding, which leads to $5 billion of reserves built up in China. China then needs to do something with those reserves, because its got to close currency account, and it invests $5 billion with the US Government. 

Come to the fall of 2008, when the financial systems is imploding, Morgan Stanley like the rest of the investment banks, needs money, because it needs to survive. So it turns to the US Government for an infusion of capital, so they don't go out of business. The US government gives Morgan Stanley $5 billion, but of course where is that money going to come from? It floats some issues of treasury notes to the public, which it does, and the major foreign buyer of those treasury notes is China. So the government of China buys $5 billion of US Treasury notes in order for the US government to give Morgan Stanley $5 billion which in turn gives $5 billion to Chinese banks so the Chinese banks can give money to Chinese factories who can then sell goods to the United States and then create currency deposits in China so that China could then loan the US government money in order to bail Morgan Stanley out.

Come the spring of 2009, Morgan Stanley needs to pay the government back, because it doesn't like owing the US government money so it decides to issue shares to the public in order to pay the US government back $5 billion and then on a Sunday so people wouldn't notice the largest buyer of that issuance is the government of China in the form of the Chinese investment corporation. So the Chinese investment corporation gives Morgan Stanley $5 billion so that Morgan Stanley can give $5 billion back to the US government so the US government can service the loan to the Chinese government which it lent it $5 billion. It lent it $5 billion because those factories that Morgan Stanley gave $5 billion to have produced a series of products that it can sell to American consumers.

So please don't talk to me about cyber cold war, much of the world's security works through federation, not firewalling, these economies and the people who depend on them are joined at a deep, structural level - this Chimerica - love it or leave it.

Comments

[Marcus Ranum]

And of course its even possible that other countries bug telephone calls, emails and so on.

It strikes me as really weird that the US simultaneously postures about the Chinese bugging every communication that they sensibly can - while we're getting constant revelations about NSA spying on US citizens, cell phone companies accepting warrantless surveillance, border-crossing laptop searches, and the FBI requiring providers to maintain increasingly detailed logs of where people go.

Is it that the mountain in our eye is so big we can't see if the other guys have a mote in theirs?