The United States is calling China to account for its hacking efforts at companies like U.S. Steel (X +0.00%). This is more than just a public relations stunt, especially for a country like China that takes its public image very seriously. What kind of consequences could this U.S. move have?
Who cares about a loser?
Why hack a steel mill that's lost investors over $25 a share over the last five years? Seriously, five consecutive years of red ink suggests that U.S. Steel isn't a big threat to China. But taking a look at why U.S. Steel is bleeding helps explain the allure.
The steel industry is in the midst of a supply glut. That's left prices weak, and companies like U.S. Steel complaining that foreign competition has been selling steel products into the U.S. market at prices below the cost of production. Such dumping is often prevalent from countries where the government has a big hand in industry. Like China.
(Source: EPA)
U.S. Steel has been involved in a number of trade cases in the steel industry to try to stop dumping. One of note was a 2009 case against China over tubular steel used in the oil and gas drilling industry. U.S. steel makers won that case, getting levies of nearly 90% imposed on Chinese imports.
U.S. steel makers have since brought a similar case against other countries. Although not tied to China, there are close links. For example, there's the concern that Chinese steel is going to other countries before being sold in the United States. Or, just as bad, Chinese exports are forcing other countries to dump their steel into the U.S. market.
The pot and kettle are both black
While the goal of China's alleged hacking is currently unknowable, getting a handle on U.S. Steel's trade case plans is certainly a solid reason for what U.S. Attorney General Eric Holder has called, "economic espionage." And U.S. Steel's computers were hardly alone in this, since the accusation involved a total of five U.S. companies.
China, however, has already called the bluff, basically saying that the U.S. is doing the same thing. In fact, the very public black eye involving U.S. spying on the leaders of supposed allies makes clear that the United States is about as pure as yellow snow when it comes to this type of stuff. And then there was the Stuxnet computer worm that helped delay Iran's nuclear ambitions—it was supposedly a U.S./Israel collaboration.
(Source: Dagmar, via Wikimedia Commons)
These examples aren't an effort to suggest we shouldn't be doing such things, just that China has a valid point. And this case raises tensions with the giant nation at a time when tensions are already running high. For example, China is openly feuding with U.S. ally Japan over control of a series of islands that just happen to have natural gas reserves around them.
A pound of flesh
Even if the U.S. government is right in bringing this suit, you have to wonder who loses. It's hard to believe that the five accused hackers will ever see the inside of a U.S. courtroom, so this is definitely about making a statement. But China can do that, too.
For example, the country just announced that it is banning the use of Microsoft's (MSFT +0.00%) Windows 8 on government computers. In an ironic twist the country is claiming that security concerns are to blame. However, if China actually jettisons Microsoft-based computers the software maker could miss out on an important upgrade cycle in the country.
Industry watcher Canalys explained to Bloomberg that, "China's decision to ban Windows 8 from public procurement hampers Microsoft's push of the OS to replace XP, which makes up 50 percent of China's desktop market." Piracy concerns aside, Microsoft looks like it just got dragged into a fight that it didn't start.
Change is hard
Chinese relations with the United States are destined to be difficult. This indictment is just one example of what will be ongoing tension between an up and coming global player and the current heavyweight. However, companies from U.S. Steel to Microsoft could easily get caught in the middle. Watch this public spat and pay close attention to the exposure, direct and indirect, you have to China in your portfolio.
