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2 CS-Related Barriers to Trade and Investments: Historical Perspectives, Contemporary Developments and Fundamental Concepts

2 CS-Related Barriers to Trade and Investments: Historical Perspectives, Contemporary Developments and Fundamental Concepts

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78



4 Cybersecurity’s Effects on International Trade and Investment



espionage and argue that such acts can be viewed “at best a subsidy to wellconnected domestic companies, at worst theft on a par with piracy” (Schweizer

1996).

Governments across the world are gearing up to respond to the increasing threats

of CS. In 1996 the U.S. Congress passed the Economic Espionage Act (EEA): “The

impetus for the EEA was the end of the Cold War. Suddenly, the U.S. found that the

greatest threat to its well-being had changed from military opposition to economic

competition. Considering itself to be a world leader in industrial innovation, the

U.S. decided to ensure homegrown secrets of its native corporations would not be

made available through theft and espionage to foreign competitors” (Grosso 2000).

Likewise, the EU member nations outsourcing to countries that are not certified as

data secure are required to follow stringent contractual obligations.



4.3



A Typology of Barriers to Trade and Investment

Associated with CS



A trade barrier is defined as any restriction imposed on the free flow of trade and

investment. Barriers to trade and investment can be direct as well as indirect and

can be attributed to the home country or the host country. Direct barriers to trade

and investment are legal inflow and outflow restrictions of goods, services and

capital. Indirect investment barriers, on the other hand, include factors such as the

availability of information, differential accounting standards, concern related to

investor protection, liquidity risk, macroeconomic instability, and political risk

(Nishiotis 2006). In this section, we first develop a 2 Â 2 typology of CS-related

barriers to trade and investment (Table 4.1).

As noted earlier, the EU’s strong data privacy laws prevent date movement by

EU-based firms to many non-EU economies such as India, which is a direct barrier

imposed by the home country. Some examples of such barriers are presented in

Cell II.

Critics have been concerned about some Western companies’ compliance with

cyber-control measures in authoritarian regimes, which have led to indirect barrier

to trade and investment in the home country (Cell III). For instance, Yahoo and its

Chinese subsidiary faced at least two major lawsuits by Chinese dissidents, who

claimed that the company helped Chinese authorities by handing over e-mails and

other information, which led to a prison sentence of a plaintiff. In the first lawsuit,

Yahoo settled with the plaintiffs out of the court in November 2007. A second group

filed a different lawsuit in the U.S. under the Alien Tort Claims Act of 1789 and

additional U.S. and international laws. The use of the act in democracy and human

rights related cases is arguably new in U.S. courts (Nystedt 2008). Commenting on

backlash faced by Yahoo, due to its Chinese subsidiary’s censorship in China and

the act of providing user information to the Chinese government officials, J. Nolan



4.3 A Typology of Barriers to Trade and Investment Associated with CS



79



Table 4.1 Some examples of direct and indirect barriers related to CS in the home country and the

host country

Direct

barrier



Indirect

barrier



Home country

[Cell I]

• The EU Data Protection Directive: illegal to transfer EU citizens’ personal data

to jurisdictions outside the EU that do not

provide an “adequate level of protection”.

The EC has recognized nine economies—

Andorra, Argentina, Canada, the Faeroe

Islands, Guernsey, Isle of Man, Israel,

Jersey, Switzerland, and Uruguay—that

meet the standards set by the Directive.

• FISMA: CSPs are required to keep

sensitive data belonging to a federal

agency in the U.S.



[Cell III]

• Lawsuits faced by Yahoo in the U.S.

• Amnesty International’s accusation that

Google, Microsoft and Yahoo violated

the Universal Declaration of Human

Rights by agreeing with Chinese government to censor the Internet.



Host country

[Cell II]

• Concerns raised by China, Russia and

the U.K. regarding security risks in

Microsoft products

• Trade and investment barriers faced by

Lenovo in the U.S. and by Huawei in

India, the U.S., Australia.

• U.S. businesses are required to implement new data privacy practices due to

EU restrictions.

• The EU’s investigation indicated that

Google operated in Europe without

meeting privacy standards. In 2012, EU

regulators demanded Google to revise

online privacy policy. They indicated the

possibility that Google’s compliance

with national privacy laws may be tested

in Ireland, Belgium and Finland where

its data centers are located (O’brien

2012).

[Cell IV]

• Google’s withdrawal from China due

to risks related to IPR protection and

user information.

• January 2013: Gus Hosein, head of

U.K.-based NGO Privacy International,

declared that U.S. surveillance and spying agencies’ possible access to EU citizens’ data stored in US companies’

clouds is “an irreversible loss of data

sovereignty.”



commented that “. . . the court of public opinion is less concerned with the artificial

legal distinction between.. parent companies and . . . subsidiaries” (Nolan 2009).

Google’s withdrawal from China can be explained as the result of an indirect

barrier associated with CS in the host country (Cell IV). In 2008, Google’s CEO

said that his company would work with Chinese universities, starting with Tsinghua

University, on cloud-related academic programs. The country’s unfavorable environment from the CS standpoint, however, led to Google’s withdrawal from China.

In a 2009 report, Google noted that it had discovered an attack on its infrastructures

that originated in China (Information Warfare Monitor/Shadowserver Foundation

2010). The company further noted that the attack was part of a larger operation that

infiltrated the infrastructures of at least 20 other large companies.



80



4 Cybersecurity’s Effects on International Trade and Investment

Perceived closeness to

the state in the home

country

The degree of alliance

/animosity between the

home and the host

countries

Environment to protect

IPR and innovation in

the home country

Stricter data privacy

regulations than

home/host country



Political espionage

related concerns in

the host country



Economic espionage

related concerns in

the host country



Host country’s trade

and investment

barriers



Concern that foreign

companies would

have inferior CS

capability



Home country’s trade

and investment

barriers



Concerns related to

CS breach in

foreign countries



Fig. 4.1 Causes and mechanisms associated with CS-related barriers in trade and investments



4.4



Causes, Mechanisms and Consequences Associated

with CS-Related Barriers to Trade and Investments



We focus on the direct trade and investment barriers related to CS in this section.

The framework developed in here explains how the characteristics of and relationship between the home and the host countries under consideration and the focal

firm’s perceived relationship with the home country government give rise to various

CS-related concerns, which lead to trade and investment barriers in the home

country and the host country. In Fig. 4.1 we depict this framework graphically.

As discussed above and presented in the boxes at the right side of Fig. 4.1, trade and

investment barriers are imposed by the home as well as the host countries.

Broadly speaking, as the three boxes in the middle show, CS-related barriers to

trade and investment encompass at least three categories of concerns: political

espionage, economic espionage, privacy and security of citizens’ information.

Regarding the concerns about political espionage, according to a 2007 report of

the U.S. FBI, 108 countries had developed offensive cyber-warfare capabilities.

Likewise, with the decline of military confrontation, increasing salience of economic competition in recent years in global affairs, spying for high-tech secrets

with commercial applications has grown (Schweizer 1996). Finally, countries

across the world are concerned about protecting their citizens’ information privacy,

which lead to various barriers related to trade and investment.



4.4 Causes, Mechanisms and Consequences Associated with CS-Related Barriers to. . .



81



The rest of this section is devoted to the characteristics of and relationship

between the home and the host countries and the focal firm’s perceived relationship

with the home country government (left boxes).



4.4.1



Perceived Closeness to the State in the Home Country



Nations want to minimize the possible risk of foreign companies spying for their

home country government. A picture that emerges when looking into the arguments

associated with CS-related trade and investment barrier is that a firm’s perceived

closeness to the state in its home country is positively associated with the barrier it

is likely to face. For instance, due to U.S. lawmakers’ concern regarding Huawei’s

“deep ties” with the Chinese military, its proposal to buy 3Com was given “elevated

attention” and put through a 45-day investigation, beyond the standard 30-day

review conducted by CFIUS (Karnitschnig et al. 2008). A concern for foreign

governments was that its overseas offices spy for China (The Economist 2005).

One of the founders of Huawei, Ren Zhengfei, was a PLA officer. According to

Rand Corporation, the PLA is a customer of Huawei, a “political patron” as well as

a “research and development partner” (Cha 2008). Bain and Huawei were willing to

sell the 3Com unit that handled the government security contracts, but that was not

enough to assuage the committee’s concerns (Karnitschnig et al. 2008).

Similarly, Lenovo’s connection to the Chinese government was one of the

biggest roadblocks faced in its acquisition of IBM’s PC division. Although Lenovo

moved its headquarters from Beijing to New York, some U.S. lawmakers argued

that the deal could lead to a transfer of IBM’s advanced technology and other

corporate assets to the Chinese government (Kessler 2006). The issue surfaced

again in 2006, when critics challenged Lenovo’s sale of 16,000 desktop computers

to the U.S. State Department. Politicians and some commentators drew attention to

the potential national security implications of placing Chinese computers into

government offices. They argued that the company’s connections to the Chinese

government could pose a security risk (McCarthy 2006).



4.4.2



The Degree of Alliance/Animosity Between the Home

and the Host Countries



Nations differ in their CS goals and orientation, which has led the formation of a

number of alliances. Most well-known CS-related barriers are established to control

trade and investment of firms from countries that belong to a different alliance. This

aspect is evident from the barriers faced by Chinese firms in Australia, India and the

U.S. and Microsoft in China and Russia. A high degree of animosity between China



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