Steel Trap: How to Stop Chinese Steel from Selling State Secrets

By EO Editorial Board
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Published: 2009-07-20
Cover Editorial - EO print edition no. 428
Translated by Paul Pennay
Original article: [Chinese]

The case of the four Rio Tinto employees suspected of stealing state secrets is far from over and the nature of the state secrets that they are accused of stealing is still not public knowledge.

However, according to the information that is publicly available - Shanghai's National Ministry of Security has confirmed that the four employees were detained on suspicion of stealing China's state secrets - we can be sure of the fact that the case involves sensitive information.

In the process of conducting commercial negotiations, it's not unusual for a participant to want to get a better idea of the cards that the people across the table are holding.

The gathering of  business intelligence through legal means, especially if it can lead to commercial gain, is common practice in business transactions. But of course, bribing, taking part in under the table dealings and theft are all illegal.

Rio Tinto's employees are suspected of committing such crimes, they are thought to have paid bribes in order to obtain information. Furthermore, this information was not of a regular commercial nature and has been described as consisting of "national secrets."

According to Rio Tinto, the behaviour of their detained employees were "in accordance with Rio Tinto's strict and publicly stated code of ethical behaviour", if this is not simply an example of prevarication, it's a sign that Rio Tinto still does not understand "China's national situation."

The reason why the price negotiations that determine China's long-term iron ore contracts are being treated as "state secrets," has a lot do with the current structure of China's steel industry.

Most of China's large steel mills are state-owned enterprises (SOE), including Anshan Steel, Baosteel, and Wuhan Steel, all of which are central SOEs under the direct control of the State Council's State-owned Assets Supervision and Administration Commission (SASAC).

China Iron & Steel Association (CISA) has led negotiations in the latest round of the annual iron ore price talks. By acting as the sole representative of China's steel mills, CISA has been playing a role that benefits the common interests of China's state-owned steel industry.

In theory, the interests of China's SOEs are connected to those of each Chinese citizen. Because of this, up to a certain extent, their interests can also be seen as relating to the concept of the national interest. According to current state secret laws, organizations like CISA and a few of the large SOEs, sometimes have the right to define something as a secret.

But, this argument, which equates the interests of large SOEs with the larger idea of broader national interest, has very little to do with what's going on at China's small and medium-sized steel mills.

No matter what the outcome of iron ore negotiations, domestic small and medium sized steel companies are still required to purchase goods from these large central SOEs according to the market price.

Therefore, the outcome of iron ore negotiations bears little relation to the profits of China's smaller steel producers. Even if  negotiated price of iron ore declines, these smaller mills will still find it difficult to receive any direct benefit.

As these "secrets" and "interests" do not have a direct connection to the profits of a large majority of these smaller enterprises, naturally, the secrets previously referred to, are not something that these businesses view as being valuable "commercial secrets."

Similarly, their motivation to actively "protect secrets" is also comparatively low, as is any kind of desire to protect the so-called "national interest."

This problem has persisted for a while now and CISA has repeatedly criticised a few businesses for "not considering the national interest, by  importing  goods on a large scale during certain crucial stages of the (iron ore) negotiations" and thereby placing negotiators in a weaker bargaining position.

Therefore, if during this last round of price negotiations, China really was determined to achieve an outcome that was truly in the national interest, they undoubtedly required the cooperation of not only these small and medium sized steel mills but also that of iron ore traders.

To strengthen these smaller mills motivation to protect both commercial secrets and the national interest, it was essential that the "state secrets" of CISA and the large-scale SOEs, truly became the "business secrets" of the industry as a whole.

If there's no business profit at stake, then there's also no business secrets that need to be protected.

Given the monopoly nature of the trade in long-term negotiated iron ore imports - a situation where the large traders and the large steel mills are the ones whom year after year gain profit from lower iron ore prices but do not share these profits with other businesses - there's no way of linking the interests of a large number of domestic enterprises with CISA's interest in protecting "national secrets."

If China really wants to protect the national interest and get a positive outcome in the iron ore price negotiations, it needs to give small firms an interest in the outcome.

If they don’t have a commercial interest in a positive outcome for China, they can’t be expected to protect the commercial secrets of the steel industry.

If our goal is to make sure that the benefits are shared across the industry, we need to carry out reform of China's iron ore trading system.

The government should take a step back and at the same time increase the decision making power of business.

After this, a greater concern with "business secrets" will naturally begin to emerge.


Only in this way will business become more vigilant and active in relation to protecting business secrets. And only in this way will China's national interests be maximized in the process of negotiating long-term iron ore contracts.