Diane C. Snyder
February 10, 1997
I pledge my honor I did not violate the Honor Code in writing this paper.
The end of the Cold War has caused an evolution in the definition of national security. During the Cold War, the threat of the Soviet Union was the focus of national security, and intelligence efforts were concentrated in monitoring it. Now, in the post-Cold War "new world order," national security is seen more in terms of economic strength and vitality than in terms of pure military capability.
Furthermore, threats to our economic well-being abound. In the "global economy," no longer is there any practical or useful distinction between national economic relations and international economic relations. Most national economies, like that of the United States, are no longer islands where domestic preferences alone dictate outcomes. For example, the devaluation of the Mexican Peso in late 1994 sent United States financial markets into disarray.
Economic crime and corruption now drain an estimated $260 billion a year out of U.S. based companies as well as $140 billion in overseas operations. Right now there are 23 countries engaged in economic espionage against United States targets. These countries steal ideas, giving them, or in some cases selling them, to their domestic companies, which, in turn, use these ideas to create goods that compete against U.S. companies. This is flat out industrial espionage against the United States. The three chief offenders are Russia, which, according to the Defense Intelligence Agency is preparing an economic spying blitz, Japan, which basically stole the United States market share in the microchip industry in the early 1980's, and France, a strong diplomatic ally that is very aggressive in its espionage efforts, having been known to deploy agents to search the briefcases of United States businessmen. The number of industrial espionage cases under investigation is skyrocketing. The FBI is currently investigating about 800, twice the number it was in 1994.
So, the danger to economic well-being provided by worldwide shocks and the proliferation of industrial espionage conducted against the United States, along with simple facts such the recent decline in America's ability to compete in certain key industries and chronic trade deficits, all support the recommendation that the United States expand its economic intelligence capabilities in the post-Cold War era, both on the offensive side and the defensive side.
On the offensive side, the United States should adopt a more aggressive macro-level economic intelligence policy. Clandestinely obtained economic intelligence can help governments decide anything from whether to raise interest rates, to what position to take in contentious trade negotiations. Also, analysis of both clandestine and open source economic information can help the United States identify emerging markets, an important intelligence function as we try to reduce trade deficits.
This paper does not recommend fighting industrial espionage with an industrial espionage plan of our own. It is against United States policy to conduct industrial espionage. Those that argue for a change in the policy should keep in mind that a United States industrial espionage plan would be akin to fighting fire with fire. There is a reason why we are targets - we have the most advanced technology. The secrets we would be stealing may have already been stolen from us. The gain would be minimal, while the diplomatic and even life risks would be substantial.
On the defensive side, the intelligence community (IC) should continue its efforts to improve counterintelligence, alerting the FBI to cases of trade secret spying in the United States. The recently signed Economic Espionage Act of 1996 is a step in the right direction. The problem with this legislation, which for the first time makes trade secret theft punishable by law, is that it is called the Economic Act instead of the Industrial Act. This act protects trade secrets, which are what governments conducting industrial espionage desire. An economic espionage law would not be justifiable for the United States because macro-level economic espionage is an established function of our intelligence agencies. The blurring of these terms, very common in the discussion on the roles of economic intelligence, must be avoided because it can be quite misleading.
The United States should also continue its efforts to level the economic playing field, alerting foreign governments of their knowledge of unfair bids. This practice often results in at least a partial awarding of a contract to an American firm.
A reason why the Brown Commission recommends that the IC should decrease the level of economic intelligence is that the government tends to duplicate what is available from open sources. The government should keep an eye on open sources and avoid duplicating basic information, but open sources cannot serve as a replacement for government intelligence. Government intelligence can serve as a useful "second engine," confirming and disclaiming what is out there, and also providing new insights through its clandestine collection capabilities. Also, the CIA should continue to be the IC's main provider of economic intelligence, as there is not justifiable reason for moving the CIA's resources to another department.
Economic intelligence has the potential to improve our economic-well being, and the post- Cold War Era, where economic challenges are replacing military challenges, is the appropriate time for the government to invest more resources in this intelligence capability.
This paper will attempt to analyze relevant arguments on the role economic intelligence should play in the post-Cold War era.
Before discussing the role of economic intelligence in the post-Cold War era and taking up issues for reform, this paper will define some critical terms. According to A Consumer's Guide to Intelligence (1995), a handbook prepared by the Central Intelligence Agency's (CIA) Public Affairs Staff, economic intelligence is "intelligence regarding foreign economic resources, activities, and policies including the production, distribution, and consumption of goods and services, labor, finance, taxation, commerce, trade, and other aspects of the international economic system." The Council on Foreign Relations' Making Intelligence Smarter, a report prepared by an independent intelligence task force, states that economic intelligence involves questions such as trade policy, foreign exchange reserves, the availability of natural resources and agricultural commodities, and "virtually any aspect of another country's economic policy and practices." Garth Hancock of the Center for Trade and Commercial Diplomacy at the Monterey Institute for International Studies offers this definition: "policy or commercially-relevant economic information, including technological data, financial, commercial, and government information, the acquisition of which by foreign interests could, either directly or indirectly, assist the relative productivity or competitive position of the economy of the collecting organization's country."
For the United States, it is important to keep in mind that only the intelligence community (IC), which is composed of 13 intelligence agencies within the government, has the right to conduct clandestine collection and analysis of the categories of economic information described above. So, espionage falls under the intelligence umbrella. This paper will discuss economic espionage and industrial espionage. These terms are sometimes carelessly used interchangeably, even by the Executive branch (a recent example will be discussed in section VI). They are not the same thing, as one is acceptable government policy and the other is not.
Economic espionage is "clandestine or illicit attempts by foreign interests to assist their economic interests by acquiring economic intelligence." In October of 1995, Japan voiced concern that the CIA was bugging the conversations of Japanese negotiators during trade talks with the United States. It was reported that the U.S. government had eavesdropped on Japanese auto executives and officials during high-level trade negotiations over possible tariffs on Japanese luxury cars. It appears that reports based on the tapped conversations were given to U.S. trade representative (USTR) Mickey Kantor in order to give the Americans an advantage in the negotiations. This is a classic example of economic espionage. This clandestinely collected intelligence was not intended to advantage United States companies. The United States was not acting on behalf of General Motors. Rather, the information was in the national interest, intended to give the United States an advantage in the negotiations. For years, economic data, collected by the National Security Agency's (NSA) electronic intercepts of international communications and human spies directed by CIA case officers, have been used to help U.S. policymakers determine economic trends in foreign countries and support U.S. negotiators in bilateral and multilateral trade talks.
Industrial espionage is the "use of, or facilitation of, illegal clandestine, coercive or deceptive means by a private sector entity or its surrogates to acquire economic intelligence." Note the use of "private sector." The government does not support illegal tactics by business to steal the secrets of their competition abroad. Nor will government intelligence agencies conduct espionage against foreign firms to advantage United States firms. Simply put, it is against United States policy for the government to conduct industrial espionage.
Rep. Bill Richardson (D-NM) drew the line between economic espionage and industrial espionage in a CNN interview on November 4, 1995. When asked about his specific notions on what economic intelligence ought to include, he replied:
I do think you have to be very careful. I don't think there is any problem, for instance, in us knowing what Japan's advanced position in a trade negotiation is going to be. I think that's very legitimate and our intelligence capability is actually becoming quite good at that. Where I think you have to draw the line is, for instance, are we going to, through tax payer resources, be the ones that provide General Motors state secrets that we know exist that we took from a Japanese auto company? I think you have to draw the line.
A Role for Economic Espionage
However, in some instances, economic espionage has aided the profit of the private sector. Examples include the restoration of the United Fruit Company's holdings in Guatemala, the ouster of Mohammed Mossadegh in Iran to protect a U.S.-British oil company, and the overthrow of Salvador Allende in Chile at the urging of ITT and others. However, according to Boston University professor and former CIA analyst Arthur Hulnick, in these cases "the main mission was the protection of U.S. national security as determined by the White House. The enrichment of private stockholders was a secondary issue."
Past examples show that economic espionage efforts by the United States have directly helped United States business. The difference is that this help results from efforts to "level the economic playing field." For example, in 1993 the CIA found that France had bribed Brazil to land a $1.4 billion radar contract. The CIA then told the State Department, which complained to Brazil. Note that this is the appropriate procedure; the CIA, which is not a policymaking body, informs State, which is. In the end Brazil gave the contract to Ratheon, an American company. In 1990, Indonesia was considering competing bids from AT&T and a Japanese consortium. Intelligence reporting indicated that Indonesia was about to give the contract to Japan, partly because Japanese officials were promising that such a decision would mean more foreign aid from Tokyo. This intelligence was brought before Bush administration officials, and they urged Indonesia to reconsider. Ultimately the contract was divided between American and Japanese bidders. The CIA claims that in 1994 alone it uncovered 51 such cases involving contracts worth $28 billion. In the 17 months prior to April 1994, the CIA alerted policymakers about 72 times to specific cases where U.S. firms were being disadvantaged to win approximately $30 billion in contracts. With regards to detecting bribes and saving contracts, former Director of Central Intelligence (DCI) James Woolsey claims "we are very good at it."
In each of these cases, economic espionage helped a specific American firm. In Brazil, Ratheon benefitted; in Indonesia it was AT&T. The definitions seem to imply that we employed industrial espionage. However, government intelligence was not acting on behalf of a specific private industry; AT&T did not meet with the CIA and discuss plans to spy on Indonesia. Instead, economic intelligence was used to warn policymakers that the playing field was not level; France and Japan each had an advantage in the bids because they were coercing the respective foreign governments. The end result of this process happened to be the profit of the private sector. Even if the United States was awarded only a portion of the contract, as in the Indonesian example, or the contract had gone to another country, the intelligence effort would have been a success. The point is fair competition, not advantage for an American firm. The United States' economic intelligence effort should continue to keep up the good work and identify unfair "playing surfaces" abroad.
The refrain is familiar: with the end of the Cold War and superpower confrontation, nations now rely on economic, rather than military, means of enhancing their power and security. So, the argument goes, the intelligence agencies should shift their focus from combating communism to enhancing the United States' economic stability, as economic stability is a means of preserving national security.
Is it reasonable to assume that the end of the Cold War has caused an evolution in the definition of national security? This is the fundamental question. The National Security Act of 1947, which created the CIA and the DCI, states that the duty of the CIA, under the direction of the National Security Council (NSC), is to "correlate and evaluate intelligence relating to the national security, and provide for the dissemination of such intelligence within the Government using where appropriate existing agencies and facilities." Therefore, if economic intelligence is not related to national defense, the CIA should not concern itself with economics.
The end of the Cold War has brought about an emphasis on the connection between economic stability and vitality and national defense. University of Kentucky political science professor and former Navy intelligence officer William Warner writes, "With the strategic confrontation which characterized the Cold War substantially abated, if not altogether ended, there has been a worldwide revival of the traditional mercantilist notion that economic power is the fundamental component of national power." He points out another "highly salient attribute" of the post-Cold War "new world order," the fact that "national security" is now seen more in terms of economic strength and vitality than in terms of pure military capability. Hancock notes how the definition of national security has evolved in the post-Cold War era, as it now incorporates national economic health and industrial strength. He and other commentators have remarked how the language of international trade has become increasingly militaristic in nature. For example, industries are "under siege," markets are "captured" and "surrendered."
President Clinton has also come to terms with the relationship between economic vitality and national defense. In a 1994 White House document, President Clinton explicitly stated just what his administration expected from U.S. intelligence with regard to protecting or pursuing U.S. economic interests. "In order to adequately forecast dangers to democracy and to US economic well-being (emphasis added), the intelligence community must track political, economic, social, and military developments in those parts of the world where U.S. interests are most heavily engaged and where overt collection of information from open sources is inadequate."
Economic well-being is mentioned alongside "dangers to democracy." The use of intelligence to ward off "dangers to democracy" has been the function of the intelligence community since its inception. Of course, the "danger to democracy" in the Cold War era was Soviet communism. Now, economic health is a more focal concern. Therefore, it appears that economic security will no longer be construed narrowly within the confines of traditional views of national security - that is, strictly tied to the country's defense and foreign policies. It is a growing security concern and warrants the support of the intelligence community. This is why it is especially surprising that only one of the five commissions on intelligence reform in the post-Cold War era recommended that economic analysis be given a higher priority.
The discussion about economic intelligence and national security must be put in perspective. Most economic issues may not directly threaten national security in the traditional sense. This traditional sense is the threat of the Soviet Union launching nuclear missiles towards American cities. The fact is that American students are no longer doing air-raid drills in the classroom. The first order threat of Soviet nuclear and ideological invasion no longer exists. In its place are "second-order" threats; terrorism, global organized crime, information warfare, and threats to economic stability. We will not all immediately perish if OPEC cuts back its oil exports. However, we will have to make sacrifices, as the experience of the 1970s shows. International economic trends do matter, especially in the post-Cold War era. Warner points out another highly salient attribute of the post-Cold War era: "There is no longer any practical or useful distinction between national economic relations and international economic relations. In other words, most national economies, like that of the U.S., are no longer islands where domestic preferences alone dictate outcomes."
The most recent notable support for this assertion is the Mexican peso crisis of 1994-1995. The devaluation of the Mexican peso in the winter of 1994 caused a severe financial panic in Mexico. Washington quickly developed a package of international economic assistance for the Mexican government. This included the provision of up to $20 billion from the Treasury's Exchange Stabilization Fund (ESF) and nearly $18 billion in loans from the International Monetary Fund (IMF). This expenditure was 2000 percent larger than any such previous ESF commitment. The IMF loans were the largest in the institutions fifty-year history and amounted to more than 700 percent of Mexico's quota in the Fund. The consequences are still being played out, as the Mexico is experiencing an acute recession, and, more importantly for this paper, "there is no ease in sight for American creditors." The crisis was also seen as the reason for the slowdown in the U.S. economy and the 10% decline in the U.S. dollar in early 1995.
The Mexican case has clear implications. National Defense University research fellow Lt. Colonel Jeffery Wright writes, "Economic or political developments in one country, one region, or one industry have worldwide implications, now more and more rapidly transmitted throughout the world. Such developments, even rumors of such developments, can send financial markets on a roller coaster ride."
The Soviet Union is another example of the relationship between economics and national security. The Soviet Union did not collapse as the result of a weak military and the threat of military might. A failed internal economy provided fuel for the Soviet failure. The Soviet Union collapsed despite the fact it had a strong military, if not at least in part as a result of the unbalanced governmental attention to military needs. The Soviets provide a useful reminder as intelligence agencies sort out their post-Cold War priorities: true national security rests on a strong economic foundation, not mere military might.
So, the linkage is clear. Economic strength and vitality do have an effect on national security, especially in the post-Cold War "new world order." During the Cold War, intelligence had to concentrate on Soviet nuclear capability and the spread of communism because a nuclear attack could destroy our nation whether we were in a boom or a depression. Now, the Soviet threat has abated, and, as Hancock points out, a neo-mercantilist world order where economic competition takes on the language of military competition is in place. So, intelligence in support of economic policy is needed.
The national security discussion has thus far focused on "offense," our need for economic intelligence in the post-Cold War era. What about our "defense?" The United States is a prime target for economic and industrial espionage. Section V will further detail this problem. Should the acquisition of economic intelligence by foreign interests become a national security concern? After all, foreign acquisition of our economic intelligence has the potential to jeopardize jobs, research and development, investments, relative productivity, competitiveness, and economic growth.
In some cases, the connection between economic intelligence and national security is pretty stark. The General Accounting Office (GAO) recently counted 54 U.S. defense contractors whose parent companies are owned by foreign companies. This is a phenomenon that some executives accept as part of the "globalization" of world trade, the so-called "global" economy in which we now live. Borders are fading away and legal concepts that were once regarded as intimately sovereign are not as important as they used to be. The companies the GAO surveyed were involved in 657 classified contracts valued at $5.4 billion, but the value, in security terms, extends far beyond that because these companies handle what amounts to the "crown jewels" of our defense technology. They make products such as the computer software that guards nuclear- tipped missiles. They do the maintenance work on the Pentagon's Worldwide Military Command and Control System, the computerized mastermind that manages U.S. war plans. They produce flight controls for the B-2, the F-117, and the F-22 - the nation's frontline strike aircraft. In fact, the work that some of these contractors do is so secret that they could not tell the GAO what they did or for which military or intelligence agency they did it.
Fortunately, government leaders today recognize the threat of economic and industrial espionage. Allan Goodman, dean of Georgetown University's School of Foreign Service and former presidential briefing coordinator for the DCI during the Carter administration, says that today's leaders know the "overwhelming" importance of the economic dimensions of national security. In a July 11, 1995 speech DCI John Deutch said "the maintenance of the economic security" of our nation is "of critical importance to all Americans." President Clinton showed his commitment to combating the economic threat to national security on October 11 of this year by signing the Economic Espionage Act of 1996. This legislation mandates the protection of trade secrets and is aimed at helping federal authorities crack down on industrial espionage as practiced both by foreign nations and by foreign or domestic companies. In a statement on the Act, President Clinton said, "Economic espionage and trade secret theft threaten our Nation's national security and economic well-being."
The intelligence community undertakes the mission to collect economic intelligence, analyze it, and furnish a finished product for policymakers. Members of the IC involved in this mission are the CIA, the State Department, and the Treasury Department. In addition, the Department of Defense's National Security Agency (NSA) and the FBI are involved in economic intelligence. The NSA's focus is intercepting communications, while the FBI concentrates on tracking down those spying on American firms.
The CIA and Economic Intelligence
The member of the IC most involved in the collection and analysis of economic intelligence is the CIA. Phillip Zelikow, associate professor of public policy at Harvard University's John F. Kennedy School of Government and former director for European security affairs on the staff of the National Security Council, says
The greatest concentration of analytical experts on international economic issues in the federal government resides not in any of the executive departments but in the CIA. It is even possible that the ranks of CIA analysis contain about as much economic expertise on international problems as can be found in all the executive departments of the government put together. Within the agency therefore the economic mission looms large: about one-third of its analytical talent concerns itself with economic issues of one kind or another.
Work on economic affairs takes place within the CIA's Directorate of Intelligence (DI). Within the DI is the Office of Transnational Security & Technology Issues (TSTI), the Directorate's economic office. The TSTI has the broadest responsibility of any office within the CIA. It covers economic issues such as sanctions monitoring, economic negotiations support, foreign efforts to unfairly aid their business firms to compete with U.S. firms (leveling the field), and questionable foreign financial practices.
Work on economic intelligence now extends beyond the TSTI. Many analysts are concerned with economic developments in particular regions on a day-to-day basis. These analysts are employed in five regional offices within the DI - the Office of African and Latin American Analysis (ALA), the Office of East Asian Analysis (OEA), the Office of European Analysis (EURA), the Office of Near Eastern and South Asian Analysis (NESA), and the Office of Slavic and Eurasian Analysis (OSE).
The total number of analysts working on economics throughout the DI has been fairly steady since the 1970s at about 250-270 professionals. The end of the Cold War and the new interest in economic intelligence has surprisingly not had a dramatic effect on the number of analysts devoted to the task. Also, the quality of the CIA's effort has been undermined by the turbulence in the assignment of these analysts. Groups of people are moved from one hot topic to another. Talented economic analysts are in demand in the private sector. They are hired away from the CIA to do lucrative private work. Twenty percent turnover a year among trained economists is not uncommon.
The CIA's main sources of economic intelligence are, in order of importance, open sources and clandestine reports. When asked about the role open sources plays in economic intelligence, former intelligence insider Robert Steele, the CEO of Open Source Solutions, Inc. (OSS), a clearinghouse for discovering and evaluating open sources, systems, and services, cites the March 1, 1996 report of the Commission on Intelligence. The Commission says, "in some areas, such as economic analysis, it is estimated that 95% of the information now utilized comes from open sources." Open sources may range from official statistical publications, newspapers, radio broadcasts, and trade publications to IMF country studies. The major provider of open source material within the CIA is the Foreign Broadcast Information Service (FBIS), which is administered by the Directorate of Science and Technology. FBIS monitors, selectively translates, and reports on a large and growing volume of information from radio, television, newspapers, magazines, journals, commercial databases, books, and underground, or grey, literature. FBIS products address a wide variety of subjects for a broad array of consumers, including producers of finished economic intelligence within the DI, formulators of economic policy, and researchers and scholars working in academia.
The CIA is unwilling to reveal how much it relies on open sources for economic information. This reluctance is a result of the fear that Congress will not allocate resources to experts who just "read the newspapers." The fact is that the CIA does rely heavily on open sources. However, these available documents and transcripts are useless without high-quality information processing. In general, the CIA does more to aggregate and interpret open-source literature than any other government agency. They have the tools to do so; the Agency has developed new computerized means of sorting through open-source data that are unrivaled in the U.S. government or even the private sector.
Clandestine information is data obtained without either the knowledge or consent of foreign governments. It can come from three categories of intelligence. Imagery intelligence (IMINT) involves satellite pictures. For example, if the United States were interested in Iraqi oil reserves, satellite images of Iraq's oil fields could help this intelligence effort. The intelligence community also collects economic information through signals intelligence (SIGINT). Intercepting communications is the concern of SIGINT. An example of how SIGINT supports economic intelligence is the bugging of private conversations of Japanese trade officials. The NSA collects, process, and reports SIGINT to the intelligence, policy, and operating elements of government. The final means of collection is human intelligence (HUMINT). HUMINT includes CIA officers in the Directorate of Operations (DO) stealing secrets, or a foreign national working for the United States doing the same. The way in which the United States found out that France was bribing Brazil in the competition for the radar contract is classified. However, one possible way is that a French or Brazilian official was actually working for the United States and provided this information to American intelligence.
To support its economic intelligence mission, the CIA set up an interdepartmental Economic Intelligence Committee (EIC) in 1952. This committee is responsible for advising and assisting the DCI in the production of foreign economic intelligence and providing support to agencies charged with formulating US international economic policies.
State, Treasury, and Minor Players
Within the Department of State's Bureau of Intelligence and Research (INR) is the Directorate for Analysis. Within this Directorate is the Office of Economic Analysis. The Office of Economic Analysis relies on "overt" intelligence reports from American embassies and consulates. These reports are written by State Department economic officers.
The State Department used to be a major provider of economic intelligence. However, in 1961 the INR, faced with severe budget constraints, cut out the majority of its economic research in order to maintain its capabilities for political analysis. The CIA picked up most of State's economic responsibilities. Thus, State is a secondary player in economic intelligence processing. Furthermore, the economic situation of State has recently been deteriorating. Few economic officers in the State Department are trained economists. The entry examination process for the Foreign Service is almost "obsessively" neutral with regard to specialized qualifications. Though mid-career economic training has improved, the State Department "does not always prove to be an interested and critical audience that adequately develops and rewards outstanding systematic work and analytical talent." Zelikow goes on:
Instead economic officers are often burdened by low priority, even trivial requests related to State's own lack of coordination and parochialism in the economic field...The total number of economic officers in the Foreign Service actually declined between 1985 to 1992 by 7.5 percent, from 931 to 861 (about 600 of them overseas). Limits on the deployment, training, and tasking of overt collection and analysis by State's economic officers are one of the most important constraints on the potential of economic intelligence work.
The third member of the intelligence community involved in economics is the Department of the Treasury. Treasury provides Embassy economic reporting through State Department channels to members of the IC and to other U.S. Government agencies concerned with international economic policy. Treasury employs fewer officials than State (400 American staff overseas worldwide) and has a narrower focus. However, their economic analysis and reporting are more highly regarded than State's.
Although not formal members of the intelligence community, the Commerce Department and the Department of Agriculture do provide some economic intelligence to policymakers. Commerce and Agriculture each employ about 250 Americans overseas. However, these two agencies have a very minor role in the economic intelligence community as Commerce does little mainstream reporting and Agriculture concentrates on only one sector.
The CIA, Treasury, and State Departments are the principal collectors, analysts, and disseminators of economic intelligence, with the CIA leading the way. The CIA publishes two major finished products specific to economic intelligence. One is the Daily Economic Intelligence Brief (DEIB). The DEIB is a compilation of articles on current significant economic issues prepared five days a week. It is tailored to meet the needs of senior economic policy officials at the Cabinet or deputy level. The Economic Intelligence Weekly (EIW), published weekly by the DI, provides analyses of major foreign economic developments and trends. This publication is for top and mid-level policymakers.
Other finished intelligence products may also contain relevant economic information. The FBIS produces daily reports in eight different volumes, each pertaining to a specific region (West Europe, East Europe, Central Eurasia, East Asia, Near East, South Asia, China, Latin America, and Africa). These volumes include translated media coverage of economic news as well as political, sociological, and military news. Another example is the CIA Regional Reviews. Although not specific to economics, these periodic assessments provide economic information, along with political, military, and social information. Also available is the CIA's World Factbook, which contains basic economic statistics on every country in the world.
The previous section should shed some light on the relationship between economic intelligence and policy. Economic intelligence products are intended to aid government officials in their formulation of economic policy. The consumers of finished intelligence include the White House, Congress, the Department of State, the Department of Treasury, the Federal Reserve, and the Department of Labor.
Economic intelligence can affect policy in many ways. The cases where intelligence notifies top officials that bid competitions are being skewed in favor of a foreign country is one example. Here, intelligence and policy have worked well together, saving United States industry billions of dollars. Clandestinely obtained economic intelligence can help governments decide anything from whether to raise interest rates, to what position to take in contentious trade negotiations. Canadian Security Intelligence Service strategic analyst Samuel Porteous says, "Providing this type of information to economic policymakers and other government decision-makers is a generally acknowledged function of Western intelligence services."
This paper has discussed how the intelligence and policymaking process should work. Now, the paper will analyze how it actually works. As noted above, when discussing instances where intelligence warns government about unfair bid competitions, the relationship is solid. President Clinton has attempted to make sure the relationship works. In the 1994 statement cited above he went on to say, "Economic intelligence will play an increasingly important role in helping policymakers understand economic trends. Economic intelligence can support U.S. trade negotiations and help level the economic playing field by identifying threats to U.S. companies from foreign intelligence services and unfair trading practices." The Clinton administration has created a National Economic Council (NEC) in the White House, and these days CIA analysts personally brief senior officials of the NEC, Treasury, Commerce, and the Office of the United States Trade Representative. Without a doubt, economic intelligence, particularly when clandestinely collected, often catches the eye of top government officials. As former NEC deputy director Bowman Cutter put it: "I could get most of what I want from the English Nikkei or the Financial Times, but I don't have time to read those. If intelligence can glean the high points for me, terrific. If it can add nuggets from secret sources, so much the better." The effort to personally brief economic officials must continue, especially in light of the fact that the Cold-War is over and economic security has moved into the mix of prime national security concerns.
However, as Porteous points out, there are problems of "poor communication and coordination between intelligence services and economic departments." In a telephone interview on November 25, Britt Snider, the former Staff Director of the Aspin-Brown Commission, was asked what departments were dissatisfied with their intelligence products. Snider did not name specific departments. However, when the interviewer asked if Treasury, Commerce, and the Office of the United States Trade Representative were among the displeased, Snider said "yes."
Intelligence scholar Earnest May, who has analyzed issues surrounding intelligence involvement in economic issues, argues that "despite the existence of liaison offices located within the U.S. Departments such as Treasury, commerce, and the office of the special trade representative, the U.S. National Security Council does not have a history of dealing well with economic issues." This is a problem that must be corrected because if economic intelligence is to support national security, the IC must be in tune with the NSC, and vice versa.
Porteous alludes to another problem of coordination and communication that stems from the secretive nature of the United States intelligence operation. He says, "Because intelligence services tend to operate on a 'need to know' and containment basis to protect sources and methods, even senior officials of major departments may not be able to speak with authority on what exactly the intelligence services provided, to whom they did so, and what value the information might have had."
The Clinton administration has recognized the coordination problem. In the 1994 statement cited above, Clinton indicates a desire on the part of the White House to
develop new strategies for collection, production, and dissemination (including closer relationships between intelligence producers and consumers) to make intelligence products more responsive to consumer needs; . . . [and to revise] long-standing security restrictions where possible to make intelligence data more useful to intelligence consumers.
The document also calls for better coordination between overt and covert collection. Similar conclusions on consumer-producer relations have been reached in the various reform commissions. It remains to be seen what impact these calls for coordination will bring. The NEC is a step in the right direction, as it is intended to be the economic equivalent of the NSC. However, even the effect of this innovation is not yet clear.
The discussion will now turn to outlining the problem of economic espionage by foreign countries within and against the United States. This topic merits discussion because the implications are important when discussing whether the intelligence community should devote itself or steer clear of "economic" issues.
According to Louis J. Freeh, the director of the FBI, investigations show 23 countries engaged in economic espionage against United States targets. These countries steal ideas, giving them - or in some cases selling them - to their domestic companies, which, in turn, use the ideas to create goods that compete against U.S. companies. This is flat-out industrial espionage against the United States.
This espionage is costly. Industrial crime and corruption now drain an estimated $260 billion a year out of U.S. based companies as well as $140 billion in overseas operations. And the number of cases is increasing. According to the American Society for Industrial Security (ASIS), cases of industrial espionage directed at United States industries have grown 260 percent since 1985. Freeh recently testified that the FBI is currently investigating some 800 cases, twice the number it had . . . in 1994!
Russia has recently shifted its intelligence focus to industrial espionage. The KGB has re-organized its scientific and technological support to intelligence into a new spy agency, the SVR. The SVR concedes it has adopted economic and commercial intelligence as one of its priorities. The Defense Intelligence Agency (DIA) reports that Russia is spying on the United States from a large electronic listening post in Cuba. This post, located in Lourdes, is stealing valuable economic secrets and is supporting economic espionage against U.S. banks and businesses. The DIA says that Lourdes will be used to "support the Russian economy," and is the largest Russian electronic spying site in the world. On October 7, Bill Gertz reported in The Washington Times that the SVR was planning a spy blitz focusing on collecting U.S. and Western European economic secrets. Intelligence officials familiar with the CIA report outlining the SVR plan said privately that Russian "economic spying is already intensive and would pose fresh security challenges if increased."
The Need for Precision
The articles reporting on Russian economic espionage cited above should be more precise in the use of terms. Not once was "industrial espionage" used to describe Russian practices. However, Russia is clearly intending to conduct industrial espionage - Gertz even alludes to this in the October 7 article. He cites an August report by the National Counterintelligence Center, an interagency counterspy group, which outlines the economic intelligence goals of Russian Security Council chief Alexander Lebed. The report said, "Lebed will seek to allow Russian intelligence services to cooperate with major domestic production and financial enterprises, citing the experiences of France, Germany, Japan, and China - which have proved efficiency of such cooperation for raising the competitiveness and technology potential of the domestic economy." "Cooperation" with "domestic production" and "financial enterprise." Trying to copy Japan and France, whom both Hancock and Warner specify as the leaders of industrial espionage within the United States. Sounds like industrial espionage. Yet, the term does not appear.
Precision is important because it forms a basis for discussion of reform. Gertz is not wrong. The use of "economic espionage" is correct because industrial espionage is a form of economic espionage. However, he is not being precise enough. He is not the only one who blurs the terms. Sam Perry's piece, Economic Espionage: The Corporate Threat, would have been more precise if "industrial" replaced "economic" in the title and in certain instances throughout the article. These are just two examples among many. Countries are conducting industrial espionage against us. However, in retaliation government intelligence cannot conduct industrial espionage against them; we are restricted by law and by the American democratic traditions of separating publicly funded intelligence and the private sector, and respecting the private property of foreign nations. However, we can react by formulating a more aggressive economic espionage policy, using the government's unparalleled IMINT and SIGINT technology to look at the resources and listen in on the conversations of our "enemies." If these countries are just doing the economic espionage that we have traditionally done, then a more aggressive policy would not be proper. It would just increase diplomatic strain if by chance we were caught. So, when describing economic espionage in the United States, officials, journalists, and academics should use "industrial" when firms are being infiltrated by foreign intelligence.
France and Japan
France and Japan were mentioned above as the leading infiltrators against American firms. France's spy agency, the Direction Generale de la Securite Exterieure (DGSE) , aims its effort at the same U.S. technology that is of interest to the SVR: computers, aerospace, and production tools and processes. The DGSE's specialty is infiltrating spies into U.S. and foreign offices of high-tech U.S. multi-national corporations. In 1993, a French government document listing as worthwhile targets two dozen U.S. companies - including Boeing, IBM, and Texas Instruments, was leaked to newspapers. The French are aggressive. Former CIA director Richard Helms says, "They [the French] have admitted to me in private that they go through the briefcases of visiting businessmen."
Russia and Japan are not exactly our strongest diplomatic allies. However, France and the United States are military and political allies. Should allies be spying on each other? According to Pierre Marion, director of French intelligence from 1981 to 1982, "Even during the Cold War, getting intelligence in economic, technological, and industrial matters from a country with which you are allied . . . is not incompatible with the fact of being allied." In the post-Cold War era, Marion says, "The competition in terms of technology and commerce and industry is stronger than it was during the Cold War. There should be more emphasis put on that, and on industrial espionage." The French government admits that it directly passes stolen secrets to French-owned corporations. Intelligence on the private sector for the private sector; France, a Western nation with a democratic system of government, has a view of economic intelligence that is the polar opposite of the American stance.
In Japan, the Japanese Secret (Intelligence) Service works with the Ministry of International Trade and Industry (MITI) and the Japanese External Trade Organization (JETRO) to collect information on United States firms. Both organizations disseminate collected information to Japanese industry and business. It is estimated that 80 percent of Japan's intelligence efforts, which are directed towards Western Europe as well as the United States, focus on industrial espionage, especially high-tech developments and trade secret.
Japan delivered the United States its greatest hit in the microchip industry. Beginning in the late 1970's, the Japanese government and its companies were determined to take on this industry. The results were astounding. The CIA estimates that 70 percent of the base-line data for the microchip was gathered by Japanese economic intelligence. By 1988 Japan held 85 percent of the market for one megabyte memory chips, while the American share had swindled to 8 percent.
Why We Are Targets
Germany, Switzerland, the former Yugoslavia, South Korea, Israel, China, the Netherlands, and Belgium amongst others have also been identified as carrying out similar industrial espionage activities. Why are we such a prime target? For one, the global economy has not only internationalized American business methods and processes, it has showcased American technology. Warner writes, "Everybody wants it and tries to get it one way or another. Most nations - friend or foe - have either used American technology as a springboard to economic development [France, Japan, etc.], or become 'hooked' on it for their very survival [the former USSR]."
Warner also claims the "openness" of American society and the "relatively non-coercive" character of its political institutions affect the success that foreigners have had in conducting economic and industrial espionage. He writes:
A mass of commercial and technical information is routinely published and otherwise available on virtually any subject of interest to a foreign entity. Where the specific facts are not published in detail, the likely source of the information is. An open society such as the United States provides more opportunity for getting information through open sources. It also provides superb cover for clandestine or illegal activities contrived to steal restricted data, particularly from private business which rarely have sophisticated defense measures in place. Further, civil liberties under the U.S. constitutional system, particularly the presumption of innocence, as well as the absence of a centralized investigative and law enforcement authority, unquestionably inhibits totally effective apprehension of spies.
So, the picture should be clear. The United States is a victim of industrial espionage, with a considerable cost to United States business. Fortunately, the IC has focused most of its recent reform in counterintelligence.
The Aspin-Brown Commission on intelligence reform correctly recommends that the IC sustain its renewed emphasis on counterintelligence efforts. In the economic area, former DCI Robert Gates announced that the CIA was giving particular priority to counterintelligence methods designed to detect commercial "moles," and to counter bugging and other covert surveillance of U.S. businesspeople abroad by foreign intelligence agencies. Zelikow asserts that "the U.S. intelligence community is committed to counterintelligence operations against foreign operations, both directly and in lending assistance to American business." According to former director of the National Security Agency (DINSA) and Deputy Director of Central Intelligence (DDCI) Admiral William Studeman,
If we had any certain evidence that someone was essentially targeting an American company, the community would essentially go to that company and actively inform them that they are being targeted and also might provide them with some kind of advice on how to enhance their security or at least make recommendations about how technically or from a policy point of view reduce their vulnerability.
Government statements and the published work of investigative journalists have disclosed that some agents have recently been "caught in the act" of industrial espionage. For example, in May 1993 the CIA provided a graphic demonstration of its new policy when it warned American aerospace companies scheduled to exhibit technology at the Paris air show that the DGSE had targeted them for espionage at the show."
These examples are worth commending, and there may be many more that are not out in the open. However, the fact is that in the time since Gates' announcement, the number of industrial espionage cases has sharply increased. So, the bottom line results of the "renewed" counterintelligence efforts remain to be seen. The rhetoric is there. Now the number of cases and the amount of money lost must decrease. The Economic Espionage Act of 1996, signed into law October 11, is the most recent positive step. This legislation mandates the protection of trade secrets, and is aimed at cracking down on industrial espionage by making trade secret theft a federal crime. Individuals caught stealing secrets can be sentenced up to 10 years in prison and a fine up to $250,000. Organizations committing such an offense can be fined up to $5 million. The backing of federal law can only help the counterintelligence effort. The ramifications of the Act should be closely monitored.
The problem with the Economic Espionage Act is that it is the Economic Espionage Act. Macro-level economic espionage against the United States, such as bugging a meeting of the Federal Reserve's Open Market Committee, is not covered in the law. The reason is that our government supports the use of intelligence for collecting secrets on the actions of foreign central banks; in other words, our government supports macroeconomic espionage. Since we do macroeconomic espionage, when we catch someone bugging the Fed meeting, we quietly ask them to leave. The same holds true on the foreign side. Since they do economic espionage here, when we are caught, the "rule" is to quietly dismiss the spies from the country. That is why everyone was up in arms when word leaked that five CIA operatives were dismissed from France in 1995 for collecting intelligence on world-trade position and telecommunications and audiovisual policy. Since our policy is to not engage in industrial espionage, the creation of this law outlawing trade secret theft in America is justified. In President Clinton's statement on the law, not once does he mention industrial espionage, even though he makes it clear that this law is intended to protect the sensitive information of American businesses. "Trade secrets . . . are essential to maintaining the health and competitiveness of critical industries operating within the United States," he says. Even the President is guilty of blurring terms. If the law were called the Industrial Espionage Act, the intent would be much clearer. Economic Espionage is not a federal crime; however, one of its categories is. If baseball were made a crime, would we call it the Anti-Sports Act of 1996? Reforms that can go into effect right away are 1) start separating economic and industrial espionage in discussions about protecting national security, and 2) rename the Economic Espionage Act of 1996 the Industrial Espionage Act of 1996 because its current name is very misleading.
The first reform issue that this paper will wrestle with is the appropriate response by the government to the problem of government-supported industrial espionage against the United States. One's gut reaction may be "throw away the old law and our tradition of respect for intellectual property; we should be aggressive and shift the Cold War intelligence resources to the industrial sector." Although this conclusion seems just, it is fundamentally flawed.
First off, according to Admiral Studeman, "We do not see a big market for industrial espionage. Most American companies are not looking for this kind of competitive advantage derived in this fashion." John Hayden, Corporate Vice President of Boeing Aircraft, testified before Congress that Boeing does not need the U.S. intelligence agencies to acquire technological or economic information. The most common reply by U.S. business to the threat of foreign intelligence efforts seems to be "we can invent faster than you steal."
Secondly, Studeman mentions the problem of evenhandedness. To which companies will government provide the intelligence? "If it's a piece of aerospace information, do you provide it to Boeing and not to McDonnell Douglas or to McDonnell Douglas and not Grumman or Grumman and not Gulfstream?" Government should not be in the business of favoring one company over another.
Third, keep in mind why France, Japan, and the others are spying in our country in the first place. The reason is that we have the goods; our trade secrets are valuable and in worldwide demand. What would we gain from stealing French trade secrets if they stole those secrets from us in the first place? Sources have indicated that the monetary gain from industrial espionage would be minimal. During an August 1993 hearing, Dr. Mark Lowenthal, former Congressional Research Service specialist and now House Permanent Select Committee on Intelligence (HPSCI) Staff Director, argued against providing such intelligence assistance to U.S. companies.
"I do not believe that a persuasive case has yet been made that U.S. competitiveness requires large scale aid from the intelligence community. To a very large degree, many of the economic problems we face at home and abroad are not responsive to increased intelligence information flowing from government to business."
Therefore, not only is the "industrial espionage" policy unrealistic because of prevailing laws and traditions, it would probably not be worth the economic costs and the risks of being caught. When Admiral Stansfield Turner, the DCI during the Carter administration and the only DCI to ever come close to recommending an industrial espionage plan, gathered together seven senior agency officials to discuss the possibility of this plan, they rejected his ideas. One of them told him, "Agents will risk their lives and perform dangerous missions for their country. But they won't do the same for IBM and General Motors."
The United States government prohibits industrial espionage. When a DCI was thinking about changing this tradition, his employees reacted negatively, and correctly so. The primary risk to lives and the secondary risks of hurting diplomacy and "coming up empty" are not worth taking. So, to recommend an industrial espionage policy as reform for the post-Cold War era is akin to recommending "fighting fire with fire." For this reason, and because of a lack of demand and practical problems, prohibition of industrial espionage should continue.
Now, this paper will turn to questions of how to go about reforming economic intelligence in the post-Cold War era. The above sections conclude that economic intelligence can help national security, and now is the time for the IC to concentrate on economic intelligence, given that resources no longer have to be concentrated on the Soviet Union's military capabilities and that we are living in an increasingly competitive global economy where economic shocks in one country can affect the our economic health. The question is where the intelligence should come from.
The CIA has had the most success in collecting economic intelligence. However, some argue that a "Cold War agency" such as the CIA, created at the "dawn of the grand era of anti- communism," should not be involved in post-Cold War economic issues. Proponents of this view say that the United States does need more economic intelligence, and a "very different and much less secretive organization to collect, analyze and disseminate economic information." They also argue that economics is too important to rely on a scandal-ridden government agency for vital information. Rob Norton writes, "Is the CIA the outfit you want [collecting economic intelligence]? The answer is no. The CIA in the past two decades has in fact become an agency so troubled and compromised that it seems to have created a culture of failure. If it were one of your employees, you'd fire it. If it were an automobile, you'd junk it. If it were a dog, you'd put it to sleep."
So, if the CIA is not the place for economic intelligence, what is? Many say open sources in the private sector.
In its early days, the CIA was one of the few organizations that could carry out good international economic analyses; it had unique data and expertise. Now, many organizations throughout the world gather economic information and provide analysis - Dow Jones, McGraw-Hill, Dun & Bradstreet, to name just a few. Even so, many experts argue that the intelligence community should increase its efforts at providing economic intelligence (claiming trade policy is more important in the post- Cold War era), without explaining just what the intelligence community can do that hundreds of thousands of economic and financial analysts around the world cannot do better .
Remarks former Federal Reserve Vice-Chairman Alan Blinder:
By the time I went into the government [January of 1993 as a member of President Clinton's Council of Economic Advisors], the Cold War was over and the CIA, along with the rest of the intelligence community, saw that economics was becoming important. So, they began to search for customers. However, most of what policymakers want is already in open sources, which is not to the comparative advantage of the CIA and other intelligence agencies. So, we should downsize the CIA's economic capabilities.
Why not use Robert Steele's OSS service? "I consult," says Steele. "My primary clients are government consumers of intelligence who are fed up with poor intelligence support from the secret services, and now want to do their own intelligence using open sources." What is wrong with government using the Economist Intelligence Unit (EIU), a publishing and advisory firm that provides up to two-year economic forecasts and other analyses on 180 different nations? For example, in March the EIU placed the Philippines ahead of other investment sites in Asia- Pacific, and predicted economic expansion into the year 2000. The government can use this information as it looks for emerging markets to offer American goods and services.
The Role of Government
The fact that the private sector provides sound economic analysis should not be ignored, and the government should be take full advantage of what those outside of Washington are doing. The IC should also avoid duplicating tasks adequately done by others. However, that does not mean that the IC should abandon its economic mission. Zelikow offers four sound reasons why government should remain in the economic intelligence business.
First, the government can decide whether the collection or interpretation of the information is a public service that the private sector will not provide. There are certain kinds of information for which there is little market demand but significant public need. An example Zelikow provides is North Korea. America needs to better understand this economy, but it offers little interest to either the private sector or the multi-lateral financial institutions. Other examples of "gaps" in private-sector coverage of economic issues that justify public concern are the export efforts of the Ukrainian arms industry and the finances of the Cali cocaine cartel. U.S. government production of such intelligence is an expenditure in the public interest.
Second, the U.S. government has unique intelligence collection capabilities that can be applied to some economic questions. Washington has invested enormous sums of money in systems deployed, from outer space to the bottom of the sea, to record imagery, communications and other electronic emissions, and many other "detectable physical phenomena." Private citizens cannot afford to do most of these things, and would go to jail for doing some of the them. Private citizens have also not established an international network of liaisons and have not been trained in the craft of clandestinely gathering economic secrets.
Third, there may be issues or questions for which the U.S. government does not wish to rely solely upon available outside sources of information, as this information can be biased. The marketplace produces information in response to commercial interests, and these interests may not coincide with what the government has defined as the public interest. As Zelikow points out, the mining industry might not be an objective source on the question of whether the United States needs to enlarge its strategic stockpile of manganese. Also, outside information may be deliberately skewed. The Soviet Union never accurately reported its defense spending. The CIA can challenge reports of Iraq's GNP statistics by hiring economists to assess the numbers and provide a true forecast. The NSA can bug conversations in Iraq in the hope of uncovering evidence of foul play.
Zelikow explains how the Mexican crisis starkly illustrates the dangers of relying on Wall Street for economic intelligence. The Treasury Department, a major policymaking body, attempted to assess the situation by the "occasional call to someone at Bear Sterns or elsewhere on Wall Street." Most Wall Street firms did not want to lose clients, so they explained in detail why devaluation of the peso would not happen. When the crisis broke, the investment community reacted with emotion rather than insight. They "trusted statements of Ivy-League educated Mexican officials; they had difficulty visualizing a catastrophe; and many firms had large sums of money tied up in the country or were marketing debt to their clients." Even Steele says, "I would never rely on Wall Street for economic information."
Finally, Zelikow says "the U.S. government may want to mold information to suit its own special requirements." He provides a hypothetical situation where a policymaker wants a forecast for Japan's economic future. The EIU's latest country report provides such a forecast; however, the information does not take into account the newly announced changes in Japanese fiscal policy, and the policymaker cannot afford to wait another six months for the next report. The CIA can immediately take up the task and produce a forecast in a timely fashion.
Government can also act as a "second engine." The EIU forecasts Mexico's GDP for the next two years. Economic forecasting is an inexact science; the CIA can shed light on this estimate by providing one of its own. If they differ, which one is right? The CIA can do a third analysis, to see if this one is similar to any of the two, and so on. If they continue to differ, the CIA should be able to call on a committee of economists taken from academia, the private sector, and other government agencies to help settle the dispute.
So, government should be involved in economic intelligence. Now, what about the view mentioned above, that the CIA, a secretive "Cold War" agency with a history of scandal, should not be involved. Proponents would argue that Treasury or State should be the main providers of economic intelligence.
This view is wrong. First of all, to repeat a point made earlier, 'The greatest concentration of analytical experts on international economic issues in the federal government resides in the CIA." The CIA also has unprecedented HUMINT personnel, many left over from the Cold War. In the post-Cold War era, the new missions for this personnel can be in the economic realm as well as in the narcotics, terrorism, and perhaps non-traditional realms (environment, health).
Second, intelligence in the State and Treasury Departments has been a secondary concern, with the result being lower quality intelligence. Intelligence should be a secondary concern in these agencies - after all, they are policymaking bodies. A persistent proponent will recognize that the CIA has superior resources, but will then go on to say that these resources should be transferred to Treasury and State. This stance misses two crucial points.
First, there are costs involved in moving and reorganization. Why should the public have to bear this cost when economic intelligence is just moving to a different and not necessarily better place? Second, there is a danger when vital economic intelligence is being done within an economic policymaking body such as Treasury. The danger is that the intelligence will not be objective. If I am providing intelligence for the Secretary, and the information I produce does not gel with his views, my job may be in trouble. So, I may abandon my analytic instincts and try to produce intelligence pleasing to him. The public will be paying for distorted information.
In conclusion, the crux of the IC's economic intelligence production should continue to reside in the CIA.
The numbers will dictate whether economic intelligence in the post-Cold War era is a success. Have businesses continued to gain money as a result of intelligence efforts to "level the playing field?" Alternatively, are the cases where foreign governments use bribery to win contracts abroad decreasing? Is the money lost as a result of industrial espionage decreasing? In the same light, are the cases of industrial espionage in America decreasing?
Above are the tangible measures for success. However, in the case of our competitiveness and our trade deficits, economic intelligence's role cannot really be measured. If we increase our competitiveness and strengthen our trade position, can we credit economic intelligence? Maybe. If we do not, can we blame intelligence? Again, maybe. However, the potential public benefit that economic intelligence can provide offers reason enough for a more aggressive policy.
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