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[Commentary Abstracts][Commentary Menu][Commentary No. 46 Economic Espionage (II)]


COMMENTARY No. 32

a CANADIAN SECURITY INTELLIGENCE SERVICE publication


Economic Espionage

May 1993

Unclassified

Editors Note:

In this discussion of economic espionage, Mr. Samuel Porteous, a Strategic Analyst in theAnalysis Production Branch of CSIS, raises several questions which indicate why the issue is, according to a recent statement from the CIA, "the hottest current topic in intelligence policy". For example, is foreign government involvement a prerequisite before a domestic intelligence service can act? How does the proposed GATT agreement on intellectual property affect the options, and obligations of signatories involved in such activities. Is government defence of certain interests in the private sector analogous to a subsidy? As the author concludes, the answers to many of these questions depend on a government's attitude toward international economic competition.


Disclaimer: Publication of an article in the COMMENTARY series does not imply CSIS authentication of the information nor CSIS endorsement of the author's views.


Introduction

The era when traditional security relations overshadowed economic concerns has passed. Accelerating economic interdependence and international competition have emerged as major sources of tension and potential conflict among world powers. In an environment characterized by rising unemployment and industrial displacement many countries now consider economic decline, relative poverty, and the social unrest they breed as primary concerns.

In this uncertain environment, developed countries eager to maintain their standards of living, and developing countries equally determined to improve their own, are under pressure to use whatever means they have to improve their productivity and ensure their economic security. One such means is economic espionage. It is, according to CIA Director R. James Woolsey, "the hottest current topic in intelligence policy".

Background

Extent of the problem

Amid estimates of billions of dollars in losses and press accounts of foreign intelligence services spying on companies, the heads of the FBI and CIA, in a joint address to a congressional committee in 1992, warned that about 20 nations were suspected of engaging in economic espionage in the USA. Other officials identified these countries as including Russia, China, North Korea and Vietnam, and admitted that some countries otherwise considered "friendly" were engaged in these activities as well. Similar conclusions have been drawn with regard to economic espionage activity in Canada and other developed countries.

Economic espionage can be described as clandestine or coercive attempts by foreign entities to obtain commercially or policy relevant economic information. Recent reports of this activity demonstrate the extent of the problem.

Recent Examples of Attempts to Obtain Economic Information

Impact

Although some spectacular incidents have found their way into media reports, analysis of the overall economic impact of economic espionage has been impeded by industry's reluctance to discuss the issue in detail. In fact, the General Accounting Office—the investigative arm of the American Congress—had to abandon its plan to study the extent and impact of foreign government spying on American companies when it became clear firms had little desire to discuss the matter. There are a number of reasons for this corporate reticence. Apart from an instinctive aversion to discussing problems with outsiders, firms fear disclosure could result in retaliation by foreign governments. They also have to consider the possibility that any information revealed might be leaked and undermine shareholder confidence.

Despite these obstacles to a formal calculation, business and government representatives generally agree that the cost of economic espionage activities to individual firms and the economies that host them runs in the billions. This view is supported by Marshall Phelps, a vice-president of IBM, one of the few companies to estimate publicly the financial damage they have suffered from economic espionage. Speaking before a committee of the American Congress investigating the issue, he stated "governments seeking to bolster national industrial champions" have contributed in a significant way to the billions of dollars IBM has calculated it lost as a result of the theft of proprietary information.

The magnitude of the potential losses is further demonstrated by the following. In 1985, the French government clandestinely obtained information from the Indian government on military procurement. They reportedly obtained the details of a rival American firm's offer during the final phase of negotiations on the sale of new jet fighters. This information once transferred to a French firm supposedly gave it the edge needed to win the deal; in the process, the American firm lost a billion-dollar contract. Clearly, it would not take too many incidents of this nature to convince a country of the threat posed by economic espionage.

Government Defence of Private Sector Entities

The potential threats posed by the activities of foreign entities engaged in offensive economic espionage lead most observers to agree that intelligence services have a legitimate role in defending against it. Even a defensive role for intelligence services, however, raises several difficult issues.

The Necessity of Foreign Government Involvement

If intelligence services are to play an increased role in defending private sector entities against economic espionage, they will require a clear mandate as to what they are defending against. The key question is whether a foreign government must be involved either in conducting or facilitating the economic espionage before the domestic intelligence service would be justified in acting. This would be a comfortable requirement from the point of view of intelligence services since they typically conceptualize and direct their activities in terms of nation states. The alternative is to regard economic espionage conducted by any foreign entity from either government or the private sector as sufficient cause for intelligence service involvement.

Those who favour requiring foreign government involvement as a necessary condition for intelligence service action argue that the primary justification for involvement is the destabilizing effect a foreign intelligence service, with all its resources, brings to the competition between businesses. In this view the damage foreign government economic espionage does to the level playing field merits bringing in the domestic intelligence service to even the odds. Company-to-company industrial espionage, foreign involvement or not, is simply part of the rough and tumble of the business world, and intelligence services should not get involved.

This, however, may be easier said than done. While tidy in theory, the strict requirement of foreign government involvement becomes rather messy in practice. In many cases it is difficult to determine if the principals involved in an economic espionage operation are being directed or facilitated by a foreign government.

Another problem with a strict focus on foreign government involvement is that it ignores the important issue of the potential impact of the particular economic espionage operation involved. Arguably, the activities of large multinational corporations, rich in intelligence resources, may be more of a threat to a country's economic security than clumsy attempts by tiny, under-resourced entities that happen to be nation states. The growing influence and global reach of some of these organizations puts them on a par with all but the most powerful nations. For example, Pfizer Corporation and the group of multinationals it organized to have intellectual property issues addressed in the GATT had more influence on the intellectual property provisions of the Dunkel Draft of the Uruguay Round than all but a handful of states.

The case for the prerequisite of foreign government involvement is further weakened by the fact that intelligence services already involve themselves in certain matters regardless of the presence of government. In most cases, terrorists are neither directed nor supported by foreign governments, yet governments feel no qualms about involving their intelligence services in this area: the impact of terrorist activities is deemed sufficient to warrant attention by domestic intelligence services. Governments struggling with this issue will have to determine whether potential economic losses and their ramifications are to be equated in priority with the physical security of their citizens.

Straining Old Alliances and Creating New Ones

Traditionally, intelligence services operated in a world of nation states neatly divided into camps of allies and adversaries. In the diplomatically difficult realm of economic espionage, however, this comfortable distinction no longer applies. On the field of economic espionage one's potential adversaries could well be one's military and political allies. To the extent a country's economic interests diverge from its military or political interests, economic espionage forces intelligence services, like modern corporations, both to compete and co-operate at the same time. This potential conflict between a nation state's commercial interests and the military and political interests it shares with its allies explains some of the trepidation and resistance intelligence services have demonstrated when faced with the issue.

Re-thinking and realigning potential adversaries in this manner also has the potential to undermine traditional intelligence-sharing networks. In a world where business must no longer take a back seat to Cold War ideology, and where unfair trade practices are seen by some as the economic equivalent of an act of war, commercially valuable intelligence may be shared much less freely within military and political alliances.

It is interesting to speculate whether the traditional intelligence-sharing networks that deal in military and political matters will soon find their parallels in economic intelligence- sharing networks. At the onset these networks would most likely encompass regional economic agreements, such as the EC and NAFTA. In the near future, it is conceivable that the UK would share more economic intelligence with fellow EC members than it would with Canada or the United States. On the other hand, the USA would be more likely to share its economic intelligence with its fellow FTA and NAFTA members.

Given that the EC is the most mature and comprehensive of these regional agreements, it is likely pressures for any changes of this nature would first arise within the EC structure. Certainly in the area of international trade negotiations, this intelligence- sharing split between North America and the EC is already present.

As time passes, however, even economic intelligence-sharing networks based on regional trade groupings may seem too rigid. Nation states, and perhaps even some discrete economic zones within these states, may turn to more time-limited, goal-oriented tactical alliances necessitating more fluid economic intelligence alliances.

In either case, new and strengthened alliances based primarily on economic interests will test the durability of older military and political alliances. It seems inconceivable that a military or political alliance would not be weakened if the countries involved were members of separate competing economic intelligence-sharing networks representing rival trade groupings. In this context the emergence of China as one of the major engines of economic growth for both Asia and the world and the ultimate nature of its relationship with Japan bears watching.

Stateless Corporations and the Containment of Benefits

Almost every analysis of economic espionage raises the issue that intelligence service involvement may be a waste of resources, given the "stateless" nature of multinational enterprises (MNEs). Adherents to this view see no logic in a nation state assisting MNEs, as they have no commitment to any particular country and will simply use any defence they are provided or any information they receive to optimize the productivity of their global network. The result is that any benefits the nation state derives by providing intelligence or protection to MNEs will be purely incidental.

These observations, however, miss the point that enterprises striving after profit were never expected to put the interests of their investment jurisdiction over their own. In the view of the adherents of a defensive role for intelligence services in economic espionage, a company that provides jobs and adds value to the domestic economy is worth protecting, regardless of its stateless character. Further, in protecting these companies it could be argued that the nation is also protecting its investment climate which could be injured if it became known that the country was relatively lax in its vigilance against economic espionage and thus posed a greater risk for investors with something to lose.

Where the new regional trading arrangements and the intelligence sharing networks they may spawn come into this argument is on the issue of containment of benefit. Current trade patterns seem to demonstrate that the significant activities of most MNEs, including research and development, are regionally based as opposed to globally distributed. This indicates that any benefits a MNE derives from defensive or offensive economic espionage are likely to be contained within its home region rather than benefit another part of the world. Arguably then, economic intelligence-sharing networks built on regional trade groupings could provide these regionally focused MNEs with intelligence and be relatively certain that any benefits the corporation derives would remain largely within the regional trade grouping. Sharing within the economic intelligence network would be supported by the belief that the economic fortunes of each member nation rose and fell with those of the region.

Offensive Economic Espionage to Assist the Private Sector

While admittedly raising some interesting conceptual issues, the case for defending a nation state's economic security from the threats presented by economic espionage directed against the private sector seems, at least grudgingly, accepted. Views on the desirability of offensive economic espionage to assist the private sector, however, are much more fervently divided.

Arguments Against Offensive Economic Espionage

Just Another Form of Government Intervention?

To many, particularly in North America, government intervention to assist domestic industry is invariably ill-advised. Opponents argue that the "intelligence" provided to private sector firms as a result of offensive economic espionage is analogous to a subsidy; the litany of what is wrong and inefficient about subsidies in general is then invoked to criticize the practice of economic espionage.

They further argue that by participating in this activity, governments can be accused of creating market imperfections instead of correcting them, rewarding duplicity instead of innovation, favouring inefficient producers over consumers and wrongly perceiving international competition as a threat to national security rather than a necessary and welcome component of economic development.

This new form of government aid, namely economic espionage, would be welcomed by declining industries and uncompetitive businesses. As readily as these industries accepted government subsidies and other forms of protection, they would welcome, and form pressure groups to obtain, government-acquired information and other services available from the intelligence community. The long-term result for the national economy is likely to be the same as other failed attempts at industrial policy: uncompetitive domestic producers would gain at the expense of consumers and taxpayers. Scarce resources would be misallocated, and weakened uncompetitive industries would become even more dependent on the state.

Alienating Allies

Further to the arguments above, those who oppose offensive economic espionage make the point that nations engaging in this activity risk seriously disturbing relations with their allies. This becomes an even greater concern with the end of the Cold War, for while the United States, for example, might once have countenanced economic espionage by its allies in the interests of solidarity in the face of the Soviet threat, this willingness has disappeared along with the Soviet Union. This may explain to a certain extent the recent American inclination to name or leak the names of some offending friendly states.

Further evidence of an increasingly hostile environment for practitioners of economic espionage can be drawn from the international trading régime. The current Dunkel Draft of the proposed GATT agreement envisages setting up an enforcement mechanism to ensure that member states adhere to the draft's proposed intellectual property provisions which, among other things, enshrine the protection of trade secrets—often the target of economic espionage. Significantly, public authorities and officials will be exempt from liability to appropriate remedial measures for some breach of the agreement only if their actions were taken in "good faith". Economic espionage is rarely conducted in good faith.

While the Dunkel Draft may present a new risk to a nation engaging in offensive economic espionage, its potential impact on the activity is uncertain. The GATT is a trade agreement and the Uruguay Round's purpose is to deal with trade issues. The sensitive nature of the subject may make countries reluctant to engage intellectual property provisions to address economic espionage issues. If the international community wished to deal explicitly with the issue of economic espionage, it might be preferable to negotiate a code dealing directly with the subject at the OECD.

Arguments for Economic Espionage

Strategic Trade Policy and Economic Espionage

Not everyone views government-sponsored economic espionage as a wasteful allocation of resources. In fact, drawing on strategic trade policy (STP), a relatively new and increasingly popular view of economic relations, it could be argued that the case against economic espionage is based on an antiquated and simplistic view of the world economy and how it operates.

According to STP, the existing patterns of international trade reflect temporary advantages as much as or more than any permanent underlying advantage of the exporting countries. These temporary advantages include those stemming from imperfect competition, economies of scale and advantages in cumulative experience or technological advances. Given that many of these advantages are knowledge-based, they are, to a certain extent, transferable from one nation to another.

In a world where country specializations often depend on technological advances, and certain industries can earn excess profits and generate positive externalities, proponents of STP argue that governments can and should act to take advantage of these strategic environments. According to STP, this can be done by providing government assistance through properly targeted subsidies to domestic firms deemed strategic. By lowering their costs in this manner, governments theoretically allow these firms to provide more of these excess profits or externalities that benefit the country as a whole. The European consortium, Airbus, is often presented as a successful example of strategic trade policy.

Proponents of economic espionage argue that the provision of valuable economic intelligence could provide strategic industries with the equivalent of a subsidy. The intelligence provided through economic espionage would lower the firm's costs and thus potentially result in increases in market share and consequential benefits for the domestic economy.

A country's economic structure and attitude towards government involvement in the private sector would be key factors in the success of any policy advocating economic espionage. A country with a long tradition of state involvement in industry is not likely to view the sanctity of the free market as too great an impediment to economic espionage. A strategic trade policy that embraced economic espionage would be most likely to be adopted in a country where government and industry have close links, and there are companies considered to be "national champions".

Where national champions are unavailable, however, a government wishing to engage in offensive economic espionage may be able to rely on consortia through which intelligence, like subsidies and lucrative procurement deals, can be channelled. In this way, difficult distributional problems that would plague any government program that had to determine which company among many should receive intelligence would be avoided.

It should be noted that while strategic trade policy can be used to present the theoretical case for including the use of economic espionage in a country's strategic trade policy, there are in practice complicating factors. It has been recognized that when several countries engage in strategic trade policy—or by extension, economic espionage—in competition with one another, they all might end up worse off. A "prisoner's dilemma" scenario exists where interests of governments partly conflict and partly coincide, and the pursuit of self-interest under free competition does not result in a collectively optimal result.

Economic Espionage: Relatively Inexpensive and Fair Game

Another perceived advantage of economic espionage is its potential cost effectiveness. A few well directed operations could allow cash-strapped nations to achieve the same effect as a large cash subsidy for the relatively low cost of an economic espionage operation.

There is some evidence to support this argument. In published reports, Russian officials have claimed to have saved Russian companies millions of dollars in developmental costs. French operatives have also been quoted as saying just a few economic espionage operations netted benefits for France that more than paid the cost of running the French intelligence service. Of course, these claims and others are difficult to evaluate. Yet they do indicate a perception within some intelligence services and the governments that direct them of the benefits to be derived from economic espionage.

In this context it must be remembered that economic espionage is not just about complex leading-edge technology. It also concerns subjects as seemingly mundane as efficient plant layouts and bid information. Often this simpler form of intelligence pays surer and more immediate dividends than the procurement of a technology one may or may not understand and may or may not be able to use. Obtaining information on a competitor's bid, for example, would provide a company with a decided advantage over its competitors. For these reasons countries that recognize economic espionage is unlikely to contribute to a sustained competitive advantage may still engage in the practice for its potential short-run benefits.

These countries are also little troubled by the moral ramifications of their work. To them, economic security is like military security: what you are prepared to do to obtain one, you must be prepared to do to obtain the other. Those who draw a distinction between acceptable practice with regard to traditional security concerns and acceptable practice when dealing with economic security concerns are labelled as naive.

The former head of the French intelligence service, Pierre Marion, summed up the attitude of countries that engage in economic espionage against their military and political allies: "We are really allied. But in the economic competition, in the technological competition, we are competitors; we are not allied." This view is echoed by Stansfield Turner, intelligence director during the Carter administration: "If economic strength should be now recognized as a vital component of national security, parallel with military power, why should America be concerned about stealing and employing economic secrets?"

Outlook

Increased involvement in economic security and consequent interaction with the private sector will present intelligence services with many new challenges. The decision as to whether this is desirable, however, will be made outside the intelligence community. While most governments can be expected to favour some form of economic counter-espionage, attitudes towards offensive economic espionage are more ambiguous. Participation in this controversial activity will likely be determined less by a defensive reflex than by the government's attitude towards international economic competition. Governments that view international trading relationships as adversarial, akin to a military contest, could be attracted, despite its attendant complexities and pitfalls, to the practice of offensive economic espionage. Those who see international economic competition as just another, albeit necessary, component of economic development that both benefits consumers and keeps domestic producers competitive would be less likely to engage in this practice.

In this way the question of economic espionage—and by extension, economic security—can be seen as part of the current debate on the nature of international economic relationships. A nation's attitude toward economic espionage can, perhaps to a large degree, be determined by its response to one question: Are economic competitors enemies?


The views expressed herein are those of the author, who may be contacted by writing to :

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ISSN 1192-277X
Catalogue JS73-1/32


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