(Source: AFP/Getty Images)
America's top tech firms are seeing sales bans, service disruption, and government-supported piracy

Google Inc. (GOOG) is back in the doghouse with China, but this time it's not over internet censorship and anonymity.  Quite to the contrary, China's government is increasingly adopting a threatening posture towards top tech firms such as Google, Apple, Inc. (AAPL), and Microsoft Corp. (MSFT) over accusations that the U.S. National Security Agency spied on Chinese citizens and Chinese businesses.
I. Don't Spy on Me
The top two print mouthpieces of the China's ruling party lambasted American tech firms in editorials this week, calling for "severe" punishments.  The pieces -- written in the state-owned English language newspaper China Daily and the Chinese language People's Daily -- called upon Chinese electronics companies to work together to strengthen security against intrusions.
Writes People's Daily editor Liang Jun Bianji:

U.S. companies including Apple, Microsoft, Google, Facebook, etc. are all coordinating with the PRISM program to monitor China.  To resist the naked Internet hegemony, we will draw up international regulations, and strengthen technology safeguards, but we will also severely punish the pawns of the villain. The priority is strengthening penalties and punishments, and for anyone who steals our information, even though they are far away, we shall punish them!

The sharply worded criticism is an ironic twist for the U.S., whose government regularly accused China's military of commercial and military espionage efforts.  Some members of the U.S. Congress in late 2012 suggested a nationwide commercial ban on smartphones and routers from Chinese companies, including ZTE Corp. (SHE:000063) and Huawei Technologies Comp. (SHE:002502).

Chinese protesters
Protesters decry NSA spying on Chinese and American citizens, in a protest in Hong Kong.
[Image Source: AFP]

The effort was condemned by many within the U.S. -- and abroad – as people felt the proposed ban on Chinese goods was overly paranoid, protectionist, and anti-capitalist.  The justification by the proponents of the ban was that Chinese equipment could be used to one day spy on Americans.  But at the time, a report from the White House concluded that Chinese OEMs did not appear to be currently engaging in such spying.  Only last year did China and the rest of the world experience the ironic twist -- the U.S. apparently knew China wasn't spying because it was loading malware into Chinese electronics and exploiting the holes in the firmware itself.
In essence the U.S. is believed to already have been doing exactly the kind of digital attacks on China that members of Congress concluded China might one day use against America.  What is largely unknown is if Google, Apple, and others actually played a role in any domestic and international sabotage and spying efforts.
The threat isn't just hollow rhetoric.
The Chinese government and top Chinese businesses have already started to purge their networks of U.S. software and components, terminating or winding down contracts with Oracle Corp. (ORCL), International Business Machines, Corp. (IBM), and Cisco Systems Inc. (CSCO).  And this week Google and Apple reportedly began to experience disruptions in their web services in China, likely due to government interference.
Experts suggest that while the move could hurt China both in securing manufacturing contracts and in terms of cost of goods and services, the biggest impact may be felt by the American tech industry.  Getting shut out of the world's largest electronics market could cost American firms tens of billions of dollars or more.

Cisco China
Cisco is among the top American firms losing Chinese contracts. [Image Source: Suzhou China]

Google chief legal officer David Drummond pled in his company's defense this week, stating:

We cannot say this more clearly - the (U.S.) government does not have access to Google servers - not directly, or via a back door, or a so-called drop box.  We provide user data to governments only in accordance with the law.

Apple, meanwhile, pointed the press to an April statement by CEO Tim Cook to ABC News.  In that inteview he stated:

Much of what has been said isn't true. There is no back door. The government doesn't have access to our servers. They would have to cart us out in a box for that.

It's quite possible both sides are right.  According to the documents released by NSA contractor-turned-leaker Edward Joseph Snowden, the U.S. government does most of its data collection by intercepting and modifying device shipments or by tapping into oceanic data cables.  Either approach would not constitute a backdoor on the server itself, but would potentially give the NSA access to the data of Chinese users of these services.
II. Prodding the Sleeping Dragon
Tensions between the nations reached a boiling point after the U.S. Department of Justice charged five Chinese military officers with hacking U.S. companies to steal trade secrets.  The move was basically a publicity stunt by the U.S. government -- the officers in question are reportedly part of a Chinese military cyberwarfare unit (Unit 61398) stationed in Beijing, China.  China refuses to even consider the possibility of extradition and has harshly criticized the U.S. for the pointless charges.

Eric Holder
U.S. Attorney General Eric Holder charged five Chinese military officials with hacking earlier this month. [Image Source: Bloomberg]

A statement by China's Foreign Ministry condemned the charges, commenting:

It is widely known that the U.S. has for a long time been using its advanced technology and infrastructure to perpetrate large scale theft of secrets and eavesdropping against foreign political leaders, enterprises and individuals.

From WikiLeaks to the (Edward) Snowden incident, the U.S. hypocrisy and double standards have been abundantly clear. The Chinese PLA has been a serious victim of this kind of behavior from the U.S. Statistics show that in recent years the PLA's international internet terminals have suffered a large number of attacks. IP addresses show that a large number of those attacks come from the U.S.  China demands that the U.S. give a clear explanation of its internet theft of secrets and eavesdropping on China and immediately cease such activities.

The Obama administration's decision to prod China already appears to have brought serious economic consequences as it was shortly after the charges that the Chinese government ratcheted up rhetoric and restrictions against American firms.
Many top U.S. services have been banned in the past several months.  Facebook, Inc. (FB) has been blocked by Chinese censors.  And China last month announced its decision to "ban" Microsoft's Windows 8 from government networks.

Windows 8 in China
Former Microsoft Windows President Steven Sinofsky announces Windows 8 at an Oct. 2012 launch event in China. [Image Source: EPA]

China is expected to rely on a mixture of pirated U.S. software and local offerings as it transitions away from U.S. hardware, software, and services.

China workers
U.S. companies rely on China for cheap manufacturing. [Image Source: Southern Weekly]

For American tech companies it's a tough position.  The Obama administration appears to stand firmly behind ongoing NSA spying efforts, target both Americans and foreigners, including the Chinese.  At the same time tech companies have little means of punishing China, as many of them are heavily invested in and overly reliant upon Chinese manufacturing.  

Sources: China Daily, People's Daily, Reuters

"Intel is investing heavily (think gazillions of dollars and bazillions of engineering man hours) in resources to create an Intel host controllers spec in order to speed time to market of the USB 3.0 technology." -- Intel blogger Nick Knupffer

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