President Trump has been arguing since the campaign trail that the U.S. tech industry needs to move its global supply chain home. He got fresh grist for his case Thursday from a bombshell Bloomberg Businessweek report on Chinese hacking.
The magazine’s new cover story details how the Chinese government reached into almost 30 American companies, including Apple and Amazon, and potentially infiltrated U.S. military and intelligence agencies by planting tiny microchips on hardware later incorporated into core tech infrastructure here.
Apple and Amazon issued specific, categorical denials of central elements of the story. The report nevertheless sent shock waves through foreign-policy circles and the business world. Supermicro, a San Jose-based company that enabled the scheme the story describes by using Chinese subcontractors to assemble servers, saw its value tank by 41 percent on Thursday.
The report is sure to exacerbate U.S.-China tensions already on the rise. Vice President Pence took aim at China in a Thursday speech, accusing the superpower of “using trade, diplomatic overtures and military expansion to spread its influence, and he called on American business leaders, academic scholars and journalists to counter Beijing’s campaign,” The Washington Post’s David Nakamura and Anne Gearan report. “Top White House aides have said the administration is developing new policies to mark a turn in the bilateral relationship away from cooperation in many areas and toward outright competition.”
The Trump administration also used the new proposed trade pact with Canada and Mexico to escalate its confrontation with China. The deal includes fine print punishing a country that cuts a deal with a “nonmarket” economy, a provision trade watchers agree is targeted at China. “This provision may signal a more protracted trade dispute with China going forward,” Deutsche Bank wrote in a research note on Thursday, noting the Trump administration appears increasingly inclined to impose tariffs on the remaining $267 billion in Chinese imports. “The next batch of tariffs will likely have to include consumer electronics, which will impact large US consumer tech companies.”
Staff members work on the production line at the Foxconn complex in Shenzhen, China. (AP Photo/Kin Cheung, File)
“Over the decades, the security of the supply chain became an article of faith despite repeated warnings by Western officials. A belief formed that China was unlikely to jeopardize its position as workshop to the world by letting its spies meddle in its factories. That left the decision about where to build commercial systems resting largely on where capacity was greatest and cheapest. ‘You end up with a classic Satan’s bargain,’ one former U.S. official says. ‘You can have less supply than you want and guarantee it’s secure, or you can have the supply you need, but there will be risk. Every organization has accepted the second proposition.’ ”The companies came out forcefully against the report. In a statement, Apple said: "Over the course of the past year, Bloomberg has contacted us multiple times with claims, sometimes vague and sometimes elaborate, of an alleged security incident at Apple. Each time, we have conducted rigorous internal investigations based on their inquiries and each time we have found absolutely no evidence to support any of them. We have repeatedly and consistently offered factual responses, on the record, refuting virtually every aspect of Bloomberg’s story relating to Apple. On this we can be very clear: Apple has never found malicious chips, 'hardware manipulations' or vulnerabilities purposely planted in any server." For its part, Amazon issued this statement from its chief information security officer: "At no time, past or present, have we ever found any issues relating to modified hardware or malicious chips in SuperMicro motherboards in any Elemental or Amazon systems. Nor have we engaged in an investigation with the government." (Amazon CEO and founder Jeff Bezos also owns The Post.)
But even setting aside the details of the Bloomberg story, the Trump administration has already charged Beijing with orchestrating a broader campaign to steal American technological knowhow. In a little-noticed report published over the summer, the National Counterintelligence and Security Center — an arm of the Director of National Intelligence — charged the Chinese government with using “cyber espionage to support its strategic development goals — science and technology advancement, military modernization, and economic policy objectives. China's cyberspace operations are part of a complex, multipronged technology development strategy that uses licit and illicit methods to achieve its goals. Chinese companies and individuals often acquire U.S. technology for commercial and scientific purposes. At the same time, the Chinese government seeks to enhance its collection of U.S. technology by enlisting the support of a broad range of actors spread throughout its government and industrial base.”
A woman passes by a ZTE building in Beijing. (AP Photo/Ng Han Guan)
Senior administration officials have been debating whether to level sanctions against Chinese companies found to be mounting cyberattacks as a more targeted response than the tariffs the administration has slapped on Chinese imports. “The plan being discussed would use an Obama administration executive order that allows the U.S. to impose sanctions on individuals or entities engaging in ‘malicious cyber-enabled activities,’” Bloomberg News reported last month. “But it has sparked a heated debate among administration officials, with Treasury Secretary Steven Mnuchin, who has jurisdiction over the potential sanctions, said to be blocking the effort, the people said.”
Andrew Grotto, who served as senior director of cybersecurity policy in both the Obama and Trump administrations, tells me the government has “tools available to both punish the actors allegedly involved and send a signal to the marketplace about that risk” of interfering with U.S. supply chains. For one, assuming the Bloomberg report checks out, he said the Commerce Department could use the same authority it tapped to sanction Chinese telecom giant ZTE to punish the subcontractors involved in implanting the spy chips.
“We’re not ever going to be able to separate our supply chain from China,” Grotto says. “It’s not feasible. But we should think about this from the standpoint of risk mitigation” and find ways to continue “to put pressure on the Chinese government to play more fairly.”
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
White House chief economic adviser Larry Kudlow at the White House in Washington on Oct. 2. (Pablo Martinez Monsivais/AP )
Fed's Quarles defends central banks' independence. Reuters: “Federal Reserve Vice Chair Randal Quarles said on Thursday the world’s central banks, including the Fed, risked ‘quite bad’ outcomes if they let themselves be influenced by political considerations. ‘The outcomes of central banking, particularly in monetary policy, but also in financial regulation, can turn out to be quite bad if they are too subject to the political pressures of the moment,’ Quarles said at a community banking conference in St. Louis.”
— Initial jobless claims dip. Reuters's Lucia Mutikani: “The number of Americans filing for unemployment benefits fell to a near 49-year low last week, pointing to sustained labor market strength, which should continue to underpin economic growth . . . Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 207,000 for the week ended Sept. 29, the Labor Department said on Thursday. That reversed the bulk of the increase from the prior week when claims were boosted by Hurricane Florence, which slammed North and South Carolina in mid-September.”
Expecting a healthy jobs report. Goldman Sach's Jan Hatzius on the September jobs report, in a Thursday note: "We expect a strong September employment report overall, with a decline in the unemployment rate, firm average hourly earnings, and a pickup in the underlying pace of payroll growth despite a temporary drag from Hurricane Florence... We estimate that nonfarm payrolls increased 175k in September, compared to consensus of 184k. While we believe the underlying pace of job growth likely accelerated from the 185k average pace this summer, our forecast reflects a temporary drag of around 33k from Hurricane Florence, which struck the Carolinas during the payroll reference week.
From Pantheon Macro’s Ian Shepherdson: "In the wake of the ADP report released Wednesday, we moved up our payroll forecast to 150K from 100K, but we've now taken a closer look at the post-Florence path of jobless claims. As a result, our final estimate for today's headline number is 170K... Whatever happened to September payrolls, we have no hesitation in saying that the trend remains very strong, with no weakening in sight."
— Stocks slump. WSJ's Saumya Vaishampayan, Christopher Whittall and Akane Otani: “U.S. stocks tumbled Thursday, dragging major indexes to their biggest declines in months, as a selloff in government bonds reverberated around the world. The S&P 500 shed 0.8% and notched its biggest loss since June, while the yield on the 10-year U.S. Treasury note—a bedrock for global financial markets—hit its highest level in more than seven years. The rout was a fresh reminder to investors of the nine-year bull market’s vulnerability to interest-rate shocks.”
President Trump at the White House in Washington on Oct. 4. (Susan Walsh/AP)
— Graham sought tariff relief for companies. The New York Times's Jim Tankersley: “Senator Lindsey Graham of South Carolina has been one of the biggest proponents of [Trump’s] crackdown on China, welcoming tariffs on Chinese imports while conceding that they will raise costs for American businesses and consumers. . . . But behind the scenes, Mr. Graham has been working to help chemical and textile companies in his home state avoid the pain of Mr. Trump’s trade war. . . The senator has written seven letters to the United States trade representative on behalf of companies seeking tariff relief — more than any other member of Congress has penned. Four of those seven received at least some of the relief they were seeking.”
— JPMorgan: Dispute with China is here to stay. CNBC's Tae Kim: J.P. Morgan is getting less optimistic about the trade conflict between the U.S. and China. The firm lowered its rating for Chinese equities to neutral from overweight, predicting the escalating trade war between the countries will affect China's economy next year. ‘A full-blown trade war becomes our new base case scenario for 2019,’ emerging market strategist Pedro Martins Junior said in a note to clients Wednesday. ‘There is no clear sign of mitigating confrontation between China and the US in the near term.’ ”
- “Key Republicans signal satisfaction with FBI report, increasing confirmation odds for Kavanaugh.” The Post's John Wagner and Seung Min Kim.
- “Brett Kavanaugh op-ed: 'I was very emotional,' the judge writes in the Wall Street Journal.” The Post’s Eli Rosenberg.
- “The rise and the reckoning: Inside Brett Kavanaugh’s circles of influence.” The Washington Post's Marc Fisher, Ann E. Marimow and Michael Kranish.
"At both hotels, the Trump Organization told investors that it did have some good news: In recent months, their losses had been cushioned, partly by new customers from overseas. Both hotels noted an influx of visitors from Saudi Arabia.
A general view of the Golden Gate Bridge and the skyline of downtown San Francisco on Feb 6, 2016. (Kirby Lee-USA TODAY Sports)
— HSBC expands. Reuters: “HSBC has hired seven new bankers to expand its power, infrastructure and real estate businesses as part of a global push to serve clients across these industries, the investment bank said in a release on Thursday. It also reshuffled investment banking roles with a handful of internal appointments . . . HSBC hired Christian Hepp from Jones Lang LaSalle as global co-head of real estate, and Giulio Hoffmann as managing director for power, utilities & renewables from Macquarie. They will both be based in London.”
— Trimming CEO tenure. WSJ's John D. Stoll: “John Flannery spent 25 years working his way into striking distance of the top job at General Electric Co. Then, he spent the next four winning a succession dance-off with four rivals. His prize was a paltry 14 months as chief executive. . . . We tend to celebrate long tenure, but there is evidence that boards are becoming less patient, and that’s a good thing. Researchers, studying a decade’s worth of financial and share-price performance of hundreds of large-cap companies, found that the ‘optimal tenure length’ is 4.8 years. Xueming Luo, a professor at Temple University’s Fox School of Business and one of the authors of a widely cited 2012 study, said CEOs are most effective in the initial years because they are more open to outside opinions and less risk-averse. ‘The search for external knowledge tends to end,’ he told me this week.”
MONEY ON THE HILL
House Ways and Means Committee Chairman Kevin Brady (R-Tex.). (Reuters/Joshua Roberts)
https://t.co/2d4HGmAxOB via @WSJ. This is dangerous. Once Democrats abuse this law to make public @realDonaldTrump tax returns, what stops them from prying/making public YOUR tax returns for political reasons? Who is next? #AbuseOfPower #EnemiesList— Rep. Kevin Brady (@RepKevinBrady) October 4, 2018
— Sanders seeks raise for McDonald's workers. Bloomberg's Leslie Patton: "McDonald’s Corp. shares dipped as Senator Bernie Sanders called on the fast-food chain to follow in Amazon.com Inc.’s footsteps and boost its minimum wage. 'If McDonald’s raised the minimum wage to $15 an hour and respected the constitutional rights of your workers to form a union, it would set an example for the entire fast food industry to follow,' the Vermont Senator wrote in a letter to the company’s chief executive officer, which he posted to his Twitter account on Thursday... Sanders’ letter to CEO Steve Easterbrook follows news this week that Amazon will offer $15 an hour in November to more than 250,000 current employees, along with 100,000 more seasonal workers -- drawing praise from the Democratic lawmaker himself. 'I have zero doubt that other major corporations will follow suit,' Sanders said in an interview with Bloomberg News on Tuesday. He said Walmart Inc., Target Corp., the fast-food industry, and airlines in particular need to raise pay."
— Musk taunts the SEC. The Post's Drew Harwell and Renae Merle: "Tesla chief Elon Musk on Thursday taunted federal regulators a few days after reaching a settlement with them over accusations of fraud, alleging they had sued him last week to help his enemies. 'Just want to [say] that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!' he tweeted, a jeering reference to the Securities and Exchange Commission, whom he’d settled with five days earlier. The SEC declined to comment. Tesla did not immediately respond.
"Musk doubled down on the tweet shortly after. 'Why would they be upset about their mission? It’s what they do,' he said of the SEC. The mocking tweets again raised doubts that the company could rein in its eccentric celebrity billionaire, who pushed the company further into chaos in August when he tweeted that he had the 'funding secured' to take the electric-car company private."
The tweet drew a lot of reaction on Twitter, unsurprisingly. From former NYSE president Thomas Farley:
From the SEC/Tesla settlement: “Tesla will put in place additional controls and procedures to oversee Musk’s communications.”— Thomas Farley (@ThomasFarley) October 4, 2018
How’s that going?
there are a bunch of people replying to elon musk begging him to stop tweeting because every time he does, they lose all their money. pic.twitter.com/uKfmlZmBbS— mmmmm, breens 🧟♂️ (@isaiah_kb) October 4, 2018
— The midterm bump. From the WSJ's Allison Prang and Akane Otani: "As U.S. stocks trade near all-time highs, some investors are betting the nine-year bull market will get its next jolt from an unexpected catalyst: the midterm elections... A robust economy and stock market tend to bode well for the president’s party hanging on to control of Congress, minimizing the chances of an abrupt shift in policy. But even when the president’s party loses seats in Congress, history shows stocks have tended to rise."
Here's the evidence:
- The American Enterprise Institute hosts a panel discussion titled: “Must the Federal Reserve crimp the recovery to normalize interest rates?”
- Senate Banking Committee hearing on cryptocurrency and blockchain on Oct. 11.
— A 2015 New Yorker cartoon by Alex Gregory:
Senators react to FBI report following Kavanaugh investigation:
Melania Trump visits school in Malawi receiving U.S. aid:
Aerial footage shows Utah's un-be-leafable fall foliage: