Obama Approaches Chinese Cybersecurity Issue With Carrot, Not Stick

But Chinese President Xi Jinping is told continued hacking will sour relationship with the U.S.

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U.S. President Barack Obama meets Chinese President Xi Jinping at the Annenberg Retreat at Sunnylands in Rancho Mirage, Calif., on June 7, 2013

Under bipartisan pressure to take steps to address rampant Chinese economic hacking, President Barack Obama has carved out a careful path to avoid souring his relationship with Chinese President Xi Jinping.

As the two leaders’ informal two-day summit concluded in the California desert, American officials asserted on Saturday that the cyber-enabled economic threat is now at the core of the U.S.-China relationship. With members of Congress of all stripes calling for aggressive action against hacking, Obama took a more reserved path, telling Chinese leaders that the practice is now one of the main impediments to expanding relations between the two countries.

Chinese officials have long refused to acknowledge the widespread and well-documented hacking. Xi declined to answer a U.S. reporter’s question on Friday asking whether he had acknowledged to Obama his country’s role. He noted a sharp uptick in news coverage of cyber issues, saying, “This might give people the sense or feeling that cybersecurity as a threat mainly comes from China or that the issue of cybersecurity is the biggest problem in the China-U.S. relationship.”

(MORE: Hack Attack: China and U.S. Trade Barbs Over Cyberwarfare)

“He was remarkably dismissive,” says Christopher Johnson, a former China analyst for the CIA and the Freeman Chair in China Studies at the Center for Strategic and International Studies.

But National Security Adviser Tom Donilon, the Administration’s China point man who delivered the U.S.’s first public rebuke of China on economic hacking earlier this year, said regardless of the statements of Chinese leadership, it is now clear to Chinese leaders that they can’t evade the issue. “It’s quite obvious now [that] Chinese senior leadership understand clearly the importance of this issue to the United States and the importance to the United States of seeing a resolution to this issue,” he said. Donilon told reporters after that Obama laid out his concerns about the theft of U.S. intellectual property in specific terms to Xi.

(MORE: Putting China’s ‘Hacking Army’ Into Perspective)

The issue is of increasing concern for American corporations. Scott Paul, president of the Alliance for American Manufacturing, told USA Today last week, “There has to be some consequence for China’s pervasive cyberhacking and theft of commercial and military secrets.” General Keith Alexander, the director of the National Security Agency, said last year that China’s attempts to steal corporate intellectual property has led to “the greatest transfer of wealth in history,” citing the computer-security firm Symantec’s estimate that U.S. companies lose roughly $250 billion annually because of IP theft.

In February, the cyberintelligence firm Mandiant published a report detailing extensive hacking by a unit of China’s People’s Liberation Army that had gathered proprietary information from more than 100 major companies. Senior Administration officials said Obama would hold China accountable for attacks emanating from its borders.

But Obama didn’t threaten any specific penalties against China for continuing the practice, other than weaker diplomatic and economic ties. U.S. and Chinese officials have agreed to hold regular working-group meetings to deal with the cybersecurity issue, though American officials admit there is no quick fix to the problem. Johnson tells TIME that American officials can’t truly hope to bully Chinese leaders into dialing back the practices. “It would blow up the summit,” he says. “This can only be solved over the long term.”

Obama and Xi met for nearly eight hours over two days, including a 50-minute stroll on Saturday morning around the pristine 200-acre (80.9 hectare) Sunnylands estate hosting the summit. Later the pair, joined by aides, extensively discussed cybersecurity issues as part of a wider discussion about economic interests and the potential for cooperation between the two nations, officials said.

(MORE: Inside Sunnylands, the Luxe California Estate Where Obama Met Xi)

Donilon said Obama made it clear to Xi that the cybersecurity issue threatens their pursuit of a “new model of major country relationship” with the U.S. One of Xi’s priorities at the summit was to earn recognition for China as a superpower while developing deeper ties to the U.S. Xi’s domestic economic reforms would be great aided by American investment and assistance, which Obama said would suffer if China didn’t control its cybertheft.

“The President … asked that the Chinese government engage on this issue and understand that if it is not addressed, if there continues to be this direct theft of the United States, then this was going to be a very difficult problem in the economic relationship and was going to be an inhibitor to the relationship really reaching its full potential,” Donilon said.

It’s hard to have “a comprehensive partnership at the same time that you have large-scale theft under way,” he added.