US-China tech exchange strained over hacking accusations

China on Thursday announced it would vet major IT products for security threats

The U.S.' escalating feud with China over hacking charges could end up hurting IT suppliers in both countries, as suspicions and eroding trust threaten to dampen the tech exchange between the two nations.

On Thursday, China fired off the latest salvo in the dispute and announced it would vet major IT products sold in the nation for security dangers. Companies whose products don't pass the inspection process would be blocked from the market.

The news followed what's been a tense week between the U.S. and China on the long-standing issue of cyberattacks, which both nations accuse each other of. On Monday, the U.S. indicted five members of the Chinese military for allegedly hacking into U.S. companies to steal trade secrets.

China, however, is demanding the U.S. withdraw the accusations, calling them fabricated. Whether or not it's connected to the security disputes, the nation has also begun banning at least some government purchases of Microsoft's Windows 8, without saying why.

China's recent moves have analysts concerned the it is erecting trade barriers against U.S. IT suppliers. But Chinese officials have been recently elevating cybersecurity to the top of their agenda. Not only has the U.S. been repeatedly hacking China, they claim, but former National Security Agency contractor Edward Snowden has been leaking the evidence.

"The U.S. attacks, infiltrates and taps Chinese networks belonging to governments, institutions, enterprises, universities and major communication backbone networks," reads a Monday report from China's state-controlled Xinhua News Agency. "Those activities target Chinese leaders, ordinary citizens and anyone with a mobile phone."

In taking action, China's President Xi Jinping in November formed a government commission to improve national security. In March, he assembled another high-level committee to tackle cybersecurity matters.

"Xi Jinping is personally taking control of overall Internet policy and regulations, a sign of how crucial this is to China's sense of national security," said Duncan Clark, chairman of technology consultancy BDA.

While China claims such moves are for the sake of security, tighter regulations risk blocking U.S. IT suppliers from the market. The Chinese government has long favored supporting domestic IT vendors, but the cybersecurity concerns could accelerate its push away from foreign technology, according to analysts.

"Unlike in the past, China is not so dependent on U.S. vendors such as Cisco or IBM," Clark said. "With companies such as Huawei, ZTE and others, China has grown its own capabilities in telecom equipment, networking and security."

It hasn't helped that the leaks from former U.S. government contractor Edward Snowden have put further suspicion on U.S. technology companies, said Matthew Cheung, an analyst with Gartner. Cisco, Juniper Networks and Microsoft have all been used by the U.S. for spying activities, according to the leaks. In response, China's new vetting system for IT products could pave the way for a surveillance agency similar to the U.S. National Security Agency, but meant to monitor foreign enterprises, he added.

Analysts, however, don't expect China to do away with U.S. technology anytime soon. U.S. vendors still have a strong foothold in the market. Furthermore, China's alleged hacking of U.S. companies for trade secrets hasn't stopped, Cheung said.

But the greater worry is what the continued mistrust between the U.S. and China will do to industry players. The recent escalation could be political posturing, but past interference in technology markets has had detrimental results for companies involved.

This happened in 2012, when a U.S. congressional committee declared that the Chinese companies Huawei Technologies and ZTE were security threats due to their alleged ties with the Chinese government. The committee then advised U.S. tech companies to source their networking gear from other suppliers. Neither company's networking business in the U.S. has been the same since.

China's own vetting system could be seen as potential payback, one that could help local industries and maintain national security. But even so, it may do little to generate trust for Chinese IT products, Cheung said. "Just because China says that they are vetting their IT systems, doesn't mean they really are," he added. "They could be implementing their own NSA-like monitoring equipment for other nations."

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