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2 CS-Related Barriers to Trade and Investments: Historical Perspectives, Contemporary Developments and Fundamental Concepts
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
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.
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
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
Table 4.1 Some examples of direct and indirect barriers related to CS in the home country and the
• 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.
• 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.
• Concerns raised by China, Russia and
the U.K. regarding security risks in
• 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
• The EU’s investigation indicated that
Google operated in Europe without
meeting privacy standards. In 2012, EU
regulators demanded Google to revise
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
• Google’s withdrawal from China due
to risks related to IPR protection and
• 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
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.
4 Cybersecurity’s Effects on International Trade and Investment
Perceived closeness to
the state in the home
The degree of alliance
/animosity between the
home and the host
Environment to protect
IPR and innovation in
the home country
Stricter data privacy
related concerns in
the host country
related concerns in
the host country
Host country’s trade
Concern that foreign
have inferior CS
Home country’s trade
Concerns related to
CS breach in
Fig. 4.1 Causes and mechanisms associated with CS-related barriers in trade and investments
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. . .
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).
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).
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