Chinese agents successfully hacked some of America’s top technology companies. What does this mean for the global trade war?

Chinese intelligence agents successfully hacked some of America’s top technology companies using a tiny microchip, according to Bloomberg News.

“The attack by Chinese spies,” says Jordan Robertson and Michael Riley for Bloomberg, “reached almost 30 US companies, including Amazon and Apple, by compromising America’s technology supply chain, according to extensive interviews with government and corporate sources.”

I want to put this information into the broader context of the global trade war in which we are currently involved. It’s apt now to call it a war, as the US has recently fought trade battles on four fronts –Canada, Mexico, the EU, and China.

Our trade with each of the four countries breaks down like this: $581 billion with Canada, $557 billion with Mexico, $717 billion with the EU, and $635 billion with China. Recently, three of the battles have stopped. The United States-Mexico-Canada Agreement (USMCA) closed the Canada and Mexico rifts. We’re on pause with the EU right now. That translates into $1.85 trillion from these three out of a total $2.5 trillion. So, we’ve just solved about 75% of our trade and tariff disputes. Arguably, things have gotten much better on three of the four fronts in this global trade war.

Now, the trade battle has been carefully crafted by the White House. The US knows it can’t win fighting China, the entire EU, Mexico, and Canada all at the same time. So, what Trump has done is triage these battles. He has brought Mexico and Canada back into the fold. NAFTA is gone, replaced by the USMCA. We also have an agreement not to fight with the EU, which is seeking reduced tariffs.

So, now we’re fighting on just one front.

With this new report on the Chinese hack, things seem to have gotten much worse with China. Remember that this trade war is not about the US buying fewer Chinese can openers and T-shirts; it’s about intellectual property (IP) and cybersecurity.

I’m often leery of reports like this one. I look at the source and carefully consider whether there is a political slant or angle. But here, we’re talking about Bloomberg, as in Michael Bloomberg, who’s a New York Democrat. Still, Bloomberg has been a reputable, bipartisan source for financial news.

It’s worth noting that there is debate over the details of the hack. But still, based on their years of research and the number of people interviewed, I believe the story is credible.

This hacking scandal is the most significant supply chain attack on American products of all time. The source of the hack is the once multi-billion-dollar company SuperMicro, maker of specialty motherboards and servers.

China, Amazon, and Apple all deny the hack occurred, but 17 different people have confirmed the attack, many of whom are familiar with the impacted companies, and some of whom are former Amazon and Apple insiders.

What happened here was a seeding attack – where malicious hardware was “seeded,” or put into, some of the most prominent servers in the world made by SuperMicro. This hack was traced back to four SuperMicro manufacturing plants in China, where the investigation confirmed that the People’s Liberation Army (PLA) went to these plants and forced the seed chip into motherboards. The chip they used is the size of half a grain of rice, about the size of the nose of Abraham Lincoln on a penny.

Remember what Director of the National Economic Council Larry Kudlow has explained about the crux of the trade fight with China – our main beef with this country is the theft of US IP. This theft occurs when US companies do any sort of business in China and are pushed to enter into “joint ventures” whereby the Chinese government gains control of 51% of the companies’ IP.

Also, remember that about 75% of all phones are still assembled in China and 90% of PCs. Now consider that this hacked technology has impacted the Department of Defense, the Navy, Congress. It’s that big.

What does the Chinese hacking scandal mean for the global trade war? China has run through every stop sign on security compliance, fairness and IP. If you ask me, this most recent attack will embolden President Trump to take an even harder line against China.

Overall, even in light of the fact that we are in a tougher spot now with China, the overall trade war is no worse. In fact, it’s legitimate to think of the war as having gotten better.

Will the on-going trade fight slow US economic growth? I highly doubt it. I think we could at some point see inflation, primarily if we return all of our sensitive manufacturing from China to the US. But I doubt that will happen.

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