International trade and cyber conflict: Decomposing the effect of trade on state-sponsored cyber attacks

Abstract

A state’s decision to engage in cyber operations has important implications for its trade. Successful cyber espionage could yield valuable trade secrets that could boost domestic production and spur economic growth. On the other hand, uncovered cyber operations could invite devastating sanctions that retard economic development. In spite of this, the nexus between trade and cyber attacks has received little attention in the literature. In this article, I explore how a state’s trade relations affect its propensity to engage in cyber attacks. I develop a theoretical framework that links the composition of a state’s trade to its deficit in proprietary information relative to other states. I decompose trade into its inter- and intra-industry components and show that while inter-industry trade is associated with higher incidence of state-sponsored cyber attacks, intra-industry trade has the opposite effect. I also show that these effects are non-monotonic, varying by the share of inter- or intra-industry trade in total trade. The results also show that states that have a heavy concentration of high-tech industries such as aerospace, computers, and pharmaceuticals have a higher propensity to engage in cyber espionage operations. These results are robust to a variety of controls and specifications.