US President Donald Trump has delayed the application of additional tariffs on Chinese imports citing “substantial progress” in addressing the US demands for structural reform in the Chinese economy. This is the third article in a five-part series looking into these demands, which are the conditions for ending the trade war. 1. What is the US demanding of China? A key part of the tension between the United States and China revolves around American allegations of widespread Chinese cyber intrusion and cybertheft. In March 2018, the Office of the United States Trade Representative (USTR) issued a Section 301 report accusing China of using cybertheft and cyber intrusions into the commercial networks of US companies to steal trade secrets that serve its strategic economic objectives. This developed on the long-standing complaints of successive US administrations, as well as other US allies; one year earlier, China had implemented its controversial cybersecurity law, which demands security checks of technology products supplied to the Chinese government, and requires foreign companies to store their data within China. That triggered widespread concern about foreign firms’ data security. The concern intensified in late 2018 when China expanded its cybersecurity regulation by authorising police to physically inspect businesses and copy information that might “endanger China’s national security”. In November, the USTR issued an updated report stating that not only had China failed to stop cybertheft since the issuance of their initial report, but they had actually increased the frequency and sophistication of such acts. In addition, US officials claimed that China violated a 2015 cybertheft accord signed by then-US President Barack Obama and President Xi Jinping. ‘This must stop’: China accused of ‘huge hacks to steal trade secrets’ A source close to China’s commercial espionage activity told the South China Morning Post that the US had exaggerated the state connections of the hackers in question. “Some of these hackers are veteran militants, some are private sector employees. They were just handling defence contracts from the state. The US is deliberately exaggerating their official background to use it as a bargaining chip in the trade talks,” said the source, who wished to remain anonymous due to the sensitivity of the subject. 2. What has happened so far? While espionage between nations dates back centuries, the US’ accusation that China is using state-led cybercrime to steal commercial secrets from private companies is a more recent development. In December 2018, the US Department of Justice charged Zhu Hua and Zhang Shilong, who worked for the Chinese company Huaying Haitai Science and Technology Development, with conspiracy to commit computer intrusion, wire fraud, and aggravated identity theft. Zhu and Zhang are accused of being members of a computer hacking group known as Advanced Persistent Threat 10 (APT10) or Stone Panda, which allegedly collaborated with the Chinese Ministry of State Security’s Tianjin State Security Bureau. The indictment said Zhu and Zhang targeted intellectual property and confidential business and technology information in at least 12 countries, with more than 45 technology companies and government agencies in the US alleged to be among their victims. “It is galling that American companies and government agencies spent years of research and countless dollars to develop their intellectual property, while the defendants simply stole it and got it for free,” said Geoffrey Berman, US Attorney for the Southern District of New York in December. “As a nation, we cannot, and will not, allow such brazen thievery to go unchecked.” China has denied all charges and in response, the Chinese Foreign Ministry accused the US of “fabricating facts” and said the indictment against the two Chinese nationals was “completely vile”. It is an “open secret” that the US has long been engaged in cybertheft, the ministry said. Zhu and Zhang continue to be wanted by the Federal Bureau of Investigation. 3. What is China doing to address this? So far, it appears China has done very little to stop cyber intrusion and cybertheft. Recent reports show that Chinese cyber intrusion has risen back to historically high levels and taken on a more sophisticated manner. The New York Times reported on February 18 that Chinese hackers have recently launched “aggressive attacks” against US business and government agencies, attempting to steal “trade and military secrets” from Boeing, GE Aviation and others. Chinese officials and state media outlets have shown no moderation of their rhetoric, vigorously hitting back against all accusations of Chinese cyber illegalities. Foreign Ministry spokesman Lu Kang said US accusations of Chinese cybertheft are “due purely to ulterior motives”. The Global Times , China’s nationalist tabloid, mounted a sharp counter-attack, flipping the accusation on the US. “Despite western rhetoric, China is always a victim of foreign government-backed cyberattacks,” the paper wrote. US’ hacking claims fabricated, says Beijing as Chinese duo face charges In November last year, the US gave China a list of more than 100 demands to end the trade war, including putting an immediate end to cybertheft. China responded with a list of about 140 concessions, which was described by US President Donald Trump as “not acceptable” as responses to “four or five” important issues were not included. 4. Can China meet US demands? Nick Marro, an analyst at The Economist Intelligence Unit said a deal on cyber intrusion and cybertheft between China and US is, at best, “uncertain”. “In theory, Xi and Obama came to an agreement on this issue in 2015, although it's clear that the US feels China hasn't lived up to this commitment. The crucial part of any deal will be enforcement, but this will be tricky because China doesn't have a great track record, historically,” Marro said. “The easiest solution would be another type of cooperation framework or memorandum of understanding, but we've seen this multiple times before, and clearly this hasn't convinced the US that the issue has been resolved. “A stronger deal would involve some type of compliance framework, where specific penalties would go into effect upon violation. But it could be difficult to agree on what constitutes a violation, and China could reject any monitoring mechanism as infringing on its sovereignty.” If taken to the utmost degree, the US could link tariffs or sanctions directly to cyber activity from China. “China could agree that all persons – government officials, military personnel and private individuals – will be extradited to the US for prosecution if indicted,” said Steve Dickinson, a trade lawyer working in China for Harris Bricken. “All companies and Chinese government agencies and military organisations will be compelled to accept US jurisdiction.” Dickinson added that all monetary awards against Chinese companies and individuals in this situation would be enforced by the Chinese courts. “If not enforced, penalties would be tariffs and bans on exports of critical technology such as semiconductors, power turbines to all Chinese companies, without distinction,” he said. Tech sector hopes to focus US attention on China’s cybersecurity law However, most think that this is unlikely, given that many of these practices are allegedly woven into China’s industrial strategies. “Abandoning this strategy is too politically costly for Chinese leaders, particularly because they have emphasised these goals for several years as integral to the country's development,” said Economist Intelligence Unit analyst Marro. Brock Silvers, managing director at the Hong Kong-based private equity firm Kaiyuan Capital, added: “The US is asking for painful concessions, and seems determined to obtain them. “China has weak negotiating leverage, but has signalled its general unwillingness to yield further.” Part four in the series will look at US demands concerning state subsidies.