China’s Silicon Valley power play

Chinese officials have summoned top American tech executives to Seattle for a forum on Wednesday in a show of force that could make the Obama administration’s standing in Silicon Valley appear weak by comparison.

Beijing moved up the date of the annual event to coincide with President Xi Jinping’s U.S. visit and reportedly pressured major Silicon Valley players to send their chief executives to what is normally an annual summit for midlevel management, threatening regulatory scrutiny if they didn’t comply.

“It’s not really voluntary,” said Atlantic Council Senior Fellow Jason Healey, a former director of cyber infrastructure protection at the White House. “They are absolutely expected to be there, and be there in force.”

Business groups and Silicon Valley say they have no choice but to show up. Despite China’s rampant commercial espionage and onerous regulations for foreign firms, the Asian superpower’s market is too powerful to pass up.

“It’s not about policy,” said Bay Area-based venture capitalist Ray Rothrock. “It’s about business.”

Indeed, the reported guest list is a who’s who of American business leaders. The tech sector will be well represented by the chief executives of Amazon, Apple, Mi­crosoft, IBM, Google and Face­book. Other heavyweights, like Warren Buffett, General Motors CEO Mary Barra and Walt Disney Company CEO Robert Iger were invited and are expected to make the trip.

“U.S. companies have lots of conflicting interests,” said Adam Segal, a Chinese cyber policy expert and senior fellow at the Council on Foreign Relations. “While they want the cyber hacking to end, they also do a huge amount of business in China and they want that to continue and grow.

“They’re being pulled in both ways,” he added.

The U.S. and China are increasingly interlocked economically.

According to the Commerce Department, U.S. investment in China last year topped $60 billion. The same year, two-way trade between the countries surpassed $600 billion, up from a paltry $2 billion in 1979. The Asian power’s massive market trails only the U.S. in gross domestic product, and is more than double the next closest economy, Japan.

Though heading into a tense state visit, the political leaders of both countries cannot ignore the unbreakable economic ties that bind them.

“Together, China and the United States account for one-third of the world economy, one-fourth of the global population, and one-fifth of global trade,” President Xi said in a written interview published Tuesday in The Wall Street Journal. “If two big countries like ours do not cooperate with each other, just imagine what will happen to the world.”

Many are comparing Wednesday’s event to a much-touted White House cybersecurity conference in February, during which President Obama took his cyber pitch to Silicon Valley and was met with mixed reactions and some notable absences.

The heads of Google, Facebook and Yahoo declined invitations to the White House Summit on Cybersecurity and Consumer Protection at Stanford University, which many took as a protest of the government’s surveillance programs and stance on encryption. Apple chief Tim Cook agreed to speak, but nearly overshadowed Obama with his impassioned plea for total digital privacy through robust encryption.

Experts suggested that the Chinese “arm-twisting” of American companies to show up could serve as a telling barometer of China’s relative power over the tech industry.

“It’s going to be fascinating to see which companies, if any, do a similar thing to Xi, who has certainly been worse for cybersecurity and cyber freedoms than anything Obama has done,” Healey said. “Either that means the companies are being hypocritical or it means that Xi is better at using hard power and soft power to force them into showing up.”

Many in Silicon Valley see two different forces at play, though. U.S. companies have leeway to express displeasure with Washington that they don’t with Beijing. In China, it’s simply understood that entering the market means navigating an opaque regulatory landscape and making small compromises.

Rothrock, who also heads his own security firm RedSeal, recalled a technology company with Chinese backers and locations in the Bay Area and China. After some time, Chinese investors opened a direct competitor to the firm in Southern California using technology believed to have been pirated from the American company.

While these anecdotes frustrate the tech community, many throw up their hands. To walk away in protest would mean lost opportunity.

“That old cliche,” Rothrock said. “Keep your enemies closer.”

Seattle is also an almost unprecedented opportunity to hear directly from the highest Chinese regulators at a time of intense uncertainty over a slate of new laws that threaten to restrict the Internet economy in China and lock out foreign tech firms.

“It has been a very closed regulatory regime and so this is the first time that feels to some extent like it’s being opened much more publicly,” said Matthew Prince, CEO of Internet performance and security firm CloudFlare.

In July Chinaapproved a national security law that requires certain technology within the country to be “secure and controllable,” an undefined stipulation that critics say could force U.S. firms to turn over intellectual property or encrypted data.

Beijing is now pressing companies to sign a controversial pledge promising to store Chinese user data within the country and essentially comply with the national security law. The document could also open companies’ source code up to intrusive inspections.

Prince said he will be reading the tea leaves in Seattle closely. CloudFlare’s second largest market is China and the company recently inked a major deal with Internet giant Baidu — the “Chinese Google” — to speed service for Chinese websites and allow foreign websites to load more reliably within China.

Despite this large footprint in the country, “we’re not meeting with Chinese regulatory officials regularly,” Prince said. “A lot of this is, ‘Oh my gosh, they’re engaging for the first time.’”

The Seattle conference could also have a spillover effect on Xi’s official state visit later in the week.

President Obama is expected to address a slate of Chinese cyber behavior his administration finds unacceptable, including concerns that Beijing is forcing American tech companies to compete under unfair regulations.

Experts suggested that China’s handling of the recent pledge will determine the temperature of his meeting with Obama. If Lu Wei, who oversees cybersecurity and Internet policy in China, tries to pressure companies into agreeing to the document’s vague conditions, Xi may lose any negotiating power China gained by hosting the conference in the first place.

“I think they can expect to get an even greater reaction from the president,” said Claude Barfield, an international trade policy scholar at the American Enterprise Institute.

Barfield noted, however, that Beijing has a vested interest in not rocking the boat too much before Xi’s visit, given the looming threat of U.S. sanctions over hacking and China’s desire for the meetings to go well.

The Obama administration has said it will wait until after Xi’s visit to take action, but officials insist the penalties are still very much on the table.

“We are prepared to take some countervailing actions to get their attention,” Obama vowed last week.