The Market for Spies

The Cold War may be over, but espionage apparently is still thriving. Now, however, it’s economic espionage. Former FBI and CIA officials have stated that “we’re finding intelligence organizations from countries we’ve never looked at before” and that foreign intelligence agencies of traditionally friendly countries “are trying to plant moles in American high-tech companies and search briefcases of American businessmen traveling overseas.” Suggested U.S. responses include such drastic measures as high import tariffs or economic sanctions against countries whose governments spy on U.S. businesses. Before taking such heavyhanded actions, the U.S. government needs to acquire more information about what other governments are doing and develop a better understanding of how these activities affect the well-being of the United States.

Wall Street Journal reporter John Fialka’s War By Other Means is an attempt to establish a baseline of information about economic espionage against the United States. The book concentrates on the efforts of the Soviet Union (and later Russia), Japan, and the People’s Republic of China, and also looks at the activities of Taiwan, South Korea, Israel, France, and Germany. The Soviet Union is credited with the most systematic economic espionage campaign in history, spending nearly $1.5 billion annually in the 1980s to obtain sensitive civilian technology. According to the CIA, most of this technology was stolen from the United States.

France has increased its intelligence budget by nearly 10 percent since the end of the Cold War. Fialka effectively tracks French espionage against IBM, IBM’s request for assistance from the FBI, and the unprecedented joint efforts of the FBI and CIA to track down French moles in IBM’s headquarters. In this case, the FBI delivered protests to Paris after French intelligence was found to be operating against IBM, Corning, and Texas Instruments. Although it is clear that France is engaged in espionage against U.S. companies, it is difficult to determine just how much the French have gained from their “intelligence-for-profit” activities.

The book devotes a great deal of attention to China’s activities in the United States, detailing its efforts to obtain the night-vision scopes used by U.S. M-1 tanks as well as more sophisticated missile guidance systems. China is procuring advanced military technology and equipment from countries such as Israel and Russia, but Fialka provides no evidence that China is coordinating its economic espionage with other countries in order to improve its access to high-technology equipment.

Fialka has put Japan on his list of leaders in economic espionage even though Japan has no large government intelligence bureaucracy. He reports that the Japanese do most of their economic spying with private funds and with the help of the Ministry for International Trade and Industry. Noting that there are more than 200 Japanese R&D companies in the United States (more than twice the number of any other country) and nearly 30,000 Japanese students attending U.S. universities, Fialka describes this presence as a “military-style campus intelligence system” without providing evidence that such a system exists. This is typical of the book’s glib overstatements.

Fialka also tends to obscure or exaggerate the value of economic espionage to those countries that rely on it, particularly in the case of the former Soviet Union. He agrees with the CIA that as a result of Soviet economic espionage, the United States and other Western nations were in effect “subsidizing the Soviet military buildup.” The Kremlin certainly had a long history of successful spying on Western industries, but Fialka does not explain why the Soviets were not able to keep up with the pace of Western technology and why the country ultimately dissolved because of its economic backwardness. He also fails to explain why China’s military backwardness has not been corrected by economic espionage. Similarly, the value of French, German, and Japanese intelligence operations is far from clear in Fialka’s book, and the author makes no attempt to examine just how much any of these countries has gained from its clandestine activities.

Overreacting

Fialka is correct in calling attention to the problem of economic espionage, but his recommendations for solving the problem are diffuse. He would like to introduce more powerful encryption systems to protect U.S. banks and corporations, comparing the situation to protecting vital secrets in wartime. Fialka even favors limits to the openness that exists in this country, which has been the key to much of our economic success. He wants to repeal the Freedom of Information Act, which he believes is used “primarily as a window on U.S. businesses by their competitors.” He would clamp down on immigration and find ways to limit the contacts of U.S. CEOs with companies in China until the United States “can sort out which companies are part of China’s military and gulag system and which are not.” If U.S. intelligence agencies cannot figure it out, Fialka recommends imposing punitive tariffs on all imports from China. Not only are these suggestions excessive, but Fialka never explains what gulags have to do with economic expionage.

In referring to the need to mobilize U.S. intelligence agencies to protect the U.S. economy, Fialka cites their poor track record in this area. The greatest concentration of analytical experts on international economic issues in the federal government resides not in any of the executive departments but in the CIA. In fact, the ranks of CIA analysts contain about as much economic expertise on international problems as can be found in all the executive departments of the government put together. Nevertheless, CIA analysts completely missed the economic collapse of the Soviet Union in 1991 and that of the communist states of Eastern Europe in 1989. Fialka correctly observes that the intelligence agencies “have not covered themselves with glory” in the economic area.

Fialka makes no attempt to analyze the serious debate within the intelligence community about the roles and missions of intelligence organizations in coping with spying on U.S. companies. Admiral Stansfield Turner, CIA director in the Carter administration, believes in emulating the active intelligence programs directed against our companies; Robert Gates and R. James Woolsey, more recent directors of the agency, recognize a role for the CIA in responding to economic challenge but oppose providing U.S. businesses with intelligence that would give them a competitive advantage. The legal implications of CIA spying on commercial organizations would have to be explored in any event, particularly clandestine collection against a foreign-based division of a U.S. company.

Cold War mindset

Finally, Fialka’s book suffers from trying to turn the problem of economic espionage into a major issue for U.S. national security. One of the major public policy problems in the Cold War era was the tendency to label issues such as communism, terrorism, and Islamic fundamentalism as vital national security threats. Fialka’s call for laws to deter espionage, curb immigration, and increase encryption by banks and utilities is reminiscent of a Cold War mindset.

The current competitiveness of the U.S. economy suggests that the thesis of this book is grossly overstated. The U.S. economy is showing greater stability, with low inflation and joblessness, than at any time in nearly three decades. The success of high-technology industries, the increased globalization of business and finance, and the deregulation of many industries have produced a flexible and competitive economy, with no sign of the inflationary, speculation-driven boom that has preceded almost every U.S. recession since the end of the Second World War. Last year’s federal deficit was the smallest recorded since Ronald Reagan’s first year in the White House. Restricting U.S. openness to the world economy, as Fialka advocates, would put this success at risk. And if economic espionage is not the serious problem that Fialka believes it to be, his cure could do more harm than the disease.

There is no mention of international agreements as an antidote to government-backed commercial spying or economic espionage. The United States could pursue such agreements in a number of ways, such as a single treaty that any country could sign, with each signatory pledging not to use its intelligence services to spy on any of the others for commercial gain. Other approaches could include multilateral agreements, particularly between the United States and its strongest allies. These agreements would limit the potential for conflict by providing a formal and predetermined means of response if one of the signatory countries is suspected of spying. This would eliminate the need for unexpected antagonistic economic reprisals. These agreements could contain provisions for cooperative measures against nonsignatories that use their intelligence services against the businesses of signatory countries. Such provisions could include substantial intelligence sharing and retaliatory actions such as trade restrictions and diplomatic protests.

The policy community needs a balanced book on the subject of economic espionage, not one that refers to the so-called “attack on the American economy” as a “time-lapse Pearl Harbor.”