Written Testimony of Stephen Hsu;
CEO, Safeweb
Before the U.S. China Economic and Security Review Commission
January 18, 2002 Public Hearings on
WTO Compliance and Sectoral Issues
Mr. Chairman and members of the Subcommittee: Thank you for this opportunity
to share my views on this important subject. Before beginning my remarks, let
me briefly introduce myself. I am currently a professor of theoretical physics
at the University of Oregon. In 2000, I co-founded an Internet privacy and security
company called SafeWeb, Inc. SafeWeb develops leading-edge security and encryption
software that is used by corporations, government agencies and individuals to
protect important information in transit over the Internet.
SafeWeb is backed by several venture capital funds, including In-Q-Tel (), the
CIA venture fund. In 2001 our servers secured over 1.5 billion Web transactions
with 128-bit encryption. One of our software products, called “Triangle
Boy” is deployed in a worldwide network used by tens of thousands of people,
particularly in the PRC, to evade local government censorship of Web activity.
This network is supported in part through a pilot project with the U.S. Voice
of America. Next month, SafeWeb will launch a new product, called the Secure
Extranet Appliance (SEA), which enables secure remote network access by employees
and partners via any Web browser. I believe it will find broad deployment by
private companies as well as government agencies.
Let me begin my testimony with some comments on China’s future economic
and technological potential. China is already a strong competitor in low to
medium value added industries ranging from textiles to light manufacturing and
low-end electronics. However, many will surprised at the speed with which China
develops capabilities in areas such as semiconductors, advanced networking and
telecommunications equipment, computer components and perhaps even software
development. An abundance of aggressive and well-educated Chinese engineers
and entrepreneurs are in place to benefit from knowledge transfer and capital
flows from abroad. Technology and capital will come not only from America, Europe
and Japan, but from China’s own “renegade province”, Taiwan.
Taiwanese companies, which account for 60% of world laptop production, 79% of
world motherboard production, and are the second largest buyers of semiconductor
manufacturing equipment (after the United States, but ahead of Japan), have
already begun investing in production and even R&D capacity in China. Over
300,000 Taiwanese entrepreneurs are living in Shanghai alone, and several multi-billion
dollar chip fabrication plants already under construction there. WTO will only
hasten these trends, as it lends clarity and predictability to the business
environment.
However, as China transforms itself into a formidable world economic competitor,
it will itself face tremendous internal challenges. With its ascension to WTO,
China’s inefficient state-owned enterprises (SOEs) will come under enormous
pressure. Inevitable large scale restructuring will lead to unemployment and
loss of social benefits for many workers. The state is well aware of this, and
will presumably choose its battles carefully in protecting certain industries
as much as possible. However, there will be many losers in the reorganization
of China’s economy, particularly among peasants and among older workers.
Among the former group, there are already millions of migrant workers living
illegally in cities like Beijing, where they are relegated to the lowest forms
of labor. The likely result of this misery and inequality is widespread social
unrest, which the government will undoubtedly act brutally to suppress. Many
experts estimate that China must maintain economic growth rates of roughly 7-8%
just to keep unemployment and other social problems within tolerable bounds.
An extended period of lower economic growth could lead to social instability,
and perhaps even the collapse of the current government.
Let me now turn to the impact of the information revolution on this complex
and rapidly changing country. Currently in China there are approximately 120
million mobile phone users -- more than in the U.S.! While this only amounts
to 10% of the population, we can expect that within 5 years a much larger fraction,
perhaps a third, will have mobile phones. Currently, about 30 million Chinese
use the Internet. This number is also increasing rapidly, perhaps doubling on
a yearly timescale. Within 5 years so-called 3G (third generation) wireless
technologies will be in place, which allow Internet access over a mobile phone.
Therefore, between fixed-line and wireless access, it is very likely that within
five years a critical mass – perhaps 30-50% of the Chinese population,
comparable to the current U.S. fraction -- will have some form of Internet access!
Five years is quite a short time, and I think it is very important that we think
through the implications and prepare for this eventuality now.
What are the implications of widespread Internet access? An optimist would argue
that the Internet (and telecommunications in general) enables individual freedom
of expression and freedom of information. Both of these freedoms are crucial
underpinnings of democracy and the rule of law. They are in short supply today
in China, and one might argue that they are crucial to China’s continued
economic, social and political development.
While there is no denying that the Internet generally enables free expression
and communication, a careful analysis reveals that governments can indeed exert
substantial control over the medium. (For a domestic example, one might ask
the founders of Napster whether the Internet is beyond government control.)
Local Internet Service Providers (ISPs), in the U.S. as well as in China, can
easily log the behavior of individual users, such as what sites they access
and what information they download. These logs are available to state security
forces and are easy to search using simple software running on inexpensive hardware.
In China, the Ministry of Information Industry (MII) and State Council Information
Office (SCIO) have now deployed the infrastructure to block access to offending
Web sites which are hosted outside of China. Well-known examples of blocked
sites are those of CNN, The New York Times and VOA, but the sites that the Chinese
government are most concerned about are Chinese language sites such as ChineseNewsnet.com,
which provide translated international news stories.
The example of the school explosion in Jianxi province provides an interesting
example of the future promise and current limitations of the Internet in China.
In March 2001 chat rooms were closed down following the posting of comments
accusing the government of covering up an explosion in a school in Jianxi province.
The Western press, alerted by the chat room information, reported that primary
school children were forced to make firecrackers in order to subsidize the school's
income. In contrast, Premier Zhu Rongji claimed that a suicide bomber set off
the explosion. Villagers contradicted Zhu and the official media in chat rooms
and on bulletin boards. Criticism focused on the level of spending on education
and the government's handling of the tragedy. Eventually, the government retracted
the original story and Zhu came as close to a public apology as any politician
in recent Chinese history.
This example makes clear the power of a free Internet in the hands of concerned
citizens, and the quandary faced by any totalitarian state that craves the economic
and technological benefits of the Internet while fearing its democratic potential.
One can only imagine the problems that the Chinese government will face when
30-50% of the population has Internet access. Yet, in the future the government
may have the capability to track down individuals who post critical comments
and punish them, thereby stifling dissent.
One important technological consideration in this discussion is the widespread
availability of encryption technology. Every modern Web browser has the capability
to encrypt data with ciphers sufficiently powerful that even national intelligence
agencies cannot decrypt the content. These capabilities were included in browsers
to enhance e-commerce capabilities, over the objections of U.S. intelligence
services. SafeWeb’s Triangle Boy software exploits the encryption capability
of browsers and creates a distributed network which allows individual users
in China to access the entire Web through an unbreakable encrypted channel.
Currently, it is used approximately 100,000 times per day despite vigorous efforts
on the part of Chinese security forces to hunt down and block access to the
network. As a small venture-backed company, SafeWeb does not have the resources
to further develop this network, since it does not generate revenues. However,
we are eager to see the technology in the hands of a stable entity such as the
U.S. government. The cost of further developing and deploying this technology
can be measured in millions of dollars, but I believe that this is a small cost
compared to the possible benefits.
For a price far less than the cost of a single fighter jet, the U.S. can ensure
that in the event of a future spy plane incident or diplomatic impasse, the
Chinese people will have access to more that just the official government version
of the events.
Thank you, Mr. Chairman, for this opportunity to speak.