Economic Espionage Poses Major Peril to U.S. Interests : Spying: But officials are reluctant to use intelligence resources to help American firms compete globally.

The emerging nation, cash-rich but technologically poor, is shopping for a national telecommunications system and an American company is in the thick of the bidding. Not only is the contract worth several billion dollars, but the winner will have a leg up on future work for that country--and for its equally affluent neighbors.

But the U.S. firm is narrowly underbid by an overseas rival. Another case of American business failing the test of international competitiveness? Not this time. The winner undercuts the U.S. bid because it has confidential information from the intelligence service of its own government, a longtime American ally.

That, according to a former high-ranking U.S. intelligence official, is a thinly disguised account of an episode that actually happened and remains shrouded in secrecy. “If I gave you the specifics,” the former official said, “I could go to Leavenworth.”

And such episodes represent what some American intelligence specialists think will become one of the most difficult problems facing the United States as the Cold War focus on military security subsides: the rising importance of economic intelligence.

Carried on with all the sophisticated techniques spawned by half a century of East-West conflict--electronic eavesdropping, satellite photography, undercover moles and paid informants, as well as computerized reviews of data gleaned from the public record--economic intelligence could become a major and highly controversial element in global competitiveness.

“Aggressive acts of espionage pursued by foreign governments--at times in collaboration with their intelligence services--to steal private American commercial secrets to serve their own national interests are a clear indication of this threat,” said Sen. David L. Boren (D-Okla.), chairman of the Senate Intelligence Committee.

Boren has begun a series of closed discussions of the problem with Sen. Sam Nunn (D-Ga.), chairman of the Senate Armed Services Committee, and other members of that panel. And both the CIA and the FBI have taken the first tentative steps toward formulating new strategies for protecting American firms against foreign espionage.

Beyond defensive measures, however, lies the more difficult question of how far this country should go in carrying out economic intelligence operations of its own. Most experts say that having spies steal specific secrets from foreign companies and hand them to American firms is out of the question. But a host of more general possibilities remains.

U.S. satellites, for example, now routinely gather data on crop production, weather and other factors affecting economic strength. Should mechanisms be developed to funnel such data to American business strategists engaged in global trade? Should the nation’s vast electronic intelligence apparatus also monitor business communications, looking for evidence of collusion among foreign competitors and other unfair trade practices? Should the government track the flow of money--as it now does in the war on drugs--or keep watch on overseas construction projects and other elements of economic activity?

Behind such questions is the growing conviction among economists and some foreign policy experts alike that economic strength may become more critical to national security than more advanced missiles and other artifacts of the superpower arms race.

The time has come for “a thorough discussion” of whether U.S. intelligence agencies should become more active in helping the United States compete in the world economy, said Victoria Toensing, onetime chief counsel of the Senate Intelligence Committee and former deputy assistant attorney general in the Justice Department’s criminal division.

“The problem is, we’re not ready for this,” said Toensing, who now is a defense lawyer specializing in white-collar crime. “We still have a hard time resolving what appears to be a conflict between an open democracy and a secret intelligence-gathering operation.”

For the moment, the focus is on defensive measures, in part because the United States has not adopted the pattern of direct partnership between business and government in international competition that prevails in Japan and much of Western Europe.

Although U.S. officials are reluctant to discuss specific instances in which supposedly friendly foreign intelligence agencies have spied on U.S. businesses, examples are beginning to come to light.

The most recent disclosure occurred earlier this month when Pierre Marion, former head of France’s intelligence agency, told of creating a unit to gather information about secret technology and marketing plans of private companies around the world.

U.S. officials confirmed reports that the French had tried to recruit sources of information inside overseas offices of Texas Instruments and International Business Machines Corp. to help Compagnie des Machines Bull. The partly government-owned French computer firm said it was not involved in any industrial spying.

The official French spying, U.S. officials contend, has extended to Air France flights, on which, they maintain, hidden listening devices have been planted and other steps taken to pick up useful economic information from business travelers. Air France denies that it has any knowledge of such activities.

Leigh Weber, a former U.S. intelligence official, said that most economic intelligence gathered by foreign governments comes from electronic eavesdropping that picks up telephone calls, fax transmissions and even open-air conversations. Because of U.S. law and customs, American intelligence agencies do not pass on information they inadvertently come across to domestic companies that might stand to gain or lose from it. Foreign intelligence agencies feel no such inhibitions.

“So many big American companies feel they’ve gotten burned this way,” Weber said. These days, American companies operating overseas “feel it’s foolhardy not to have somebody sweeping their conference rooms for bugs.”

While U.S. companies keep such counterintelligence efforts secret, the threat of electronic monitoring has produced a huge surge in the use of electronic security companies, Weber said.

Further, unlike the situation in the United States, intelligence gathered by operatives for Japanese multinationals “is shared with the trading companies’ executives, business partners and the government,” said Herbert E. Meyer, former special assistant to the late CIA Director William J. Casey. “The information moves around.”

Meyer, in his book “Real World Intelligence,” said that every branch office of every Japanese trading company “operates like an information vacuum cleaner, sucking in information . . . and even gossip.”

Sen. John W. Warner (R-Va.), a senior member of the Senate Intelligence Committee, sees the United States “being encircled by economic competition.” Unlike the situation in security and military matters, “we have no friends and no sharing in this area,” he said.

Warner has called for a reorganization of the CIA to shift personnel and equipment once devoted to military and political intelligence operations against the Soviet Union “to quickly pick up--and I emphasize quickly--the capabilities needed to defend this country in economic security.”

And Robert M. Gates, President Bush’s choice as director of central intelligence, said at his Senate confirmation hearings that the CIA and the FBI should mount “a very aggressive program” to prevent foreign intelligence services from planting “moles” in American high-tech companies and rifling “briefcases of our businessmen who travel in their countries.” Steps in that direction are under way.

“There is evolving a more flexible approach (at the FBI) designed to protect national secrets, including technological and economic information, from any country that would target it--not just former Communist bloc countries,” said Acting Atty. Gen. William P. Barr.

R. Patrick Watson, deputy assistant director of the FBI’s intelligence division, which has the primary mission for counterintelligence in the United States, notes that this calls for developing a different intelligence base than that mustered against the Soviets.

He said that, although the FBI does not necessarily view itself as “the police department for corporate America,” it will seek to block intelligence efforts directed against U.S. interests by foreign governments.

This job can be tricky when the agency is up against a longtime friendly nation, the FBI counterintelligence official said. “That’s a different problem for us” from the “fairly simple one” of countering a country identified as an enemy. That kind of investigation “has to be coordinated with other interests of the U.S. government,” he said.

There is widespread resistance, however, to taking the next step and asking U.S. intelligence agencies to engage in activity that might help American companies compete abroad.

“The CIA does not and will not engage in industrial espionage,” said Mark Mansfield, a CIA spokesman, echoing comments by Gates and recently retired CIA Director William H. Webster.

Gen. William Odom, former director of the National Security Agency, the super-secret arm of U.S. intelligence that monitors worldwide telephone, radio and other electronic communications, said that handing out corporate secrets is completely impractical.

“It would be impossible to get the intelligence-collection guidance that could make it effective,” Odom said. The only way to know what to collect for a firm would be to sit “in the proprietary chambers of the firm you’re trying to help.”

Aside from that problem, how would U.S. intelligence decide which firm to give an electronics secret? Odom asked. “Would you have an auction?”

Giving it to several firms makes it unlikely that the intelligence collector’s sources and methods could be protected.

“As it leaks, our ability to collect it dries up,” Odom said.

But stealing from a foreign firm to strengthen a U.S. company could be sketching the issue in an extreme way.

Odom notes that the intelligence community “has a legitimate role in supporting all aspects of U.S. government policy-making--military, foreign policy, economic policy, environmental policy or any other kinds of policy. That’s completely legitimate.”

Odom distinguishes that activity from “trying to use intelligence-collection efforts to save the semiconductor industry in this country, or to turn the automobile industry around.”

Yet, although veterans of the intelligence community reject any role in industrial espionage, there is no doubt that the CIA is redirecting its collection and analysis of economic information.

A planning task force set up by Webster two years ago turned its attention first to international economics and recommended “some adjustments in the subjects that we emphasize and some improvements in the information management systems that we use to facilitate our analysis,” an agency spokesman says.

After interviewing economic policy-makers and consultants on the likely trends in international economics, the agency called for greater focus on three principal areas--resources, trade and technology.

“These appear to be the areas where CIA can make the greatest contribution in the 1990s,” an agency spokesman said.

Beyond that, the spokesman refused to comment.

Herbert Meyer, who in addition to assisting Casey served as vice chairman of the National Intelligence Council during the Ronald Reagan Administration, argues that “a fundamental change in our legal structure and culture” would be required before the U.S. government could start helping American industry with foreign economic intelligence.

While the United States for 45 years has focused its intelligence effort on external military threats, many U.S. trade rivals have divided their spy efforts between military threats and economic competitors.

“They’ve made it an explicit policy to help local companies, often companies that are partly government-owned,” Meyer says.

Japan is often cited as the leading example of a country where it is difficult to discern the line between government and private activity.

Pat Choate, whose book “Agents of Influence,” criticizes the competitive tactics of Japanese lobbyists in the United States, said Japanese industrial companies work hand-in-glove with their government in collecting and analyzing data on U.S. competitors.

Representatives of Japanese companies in the United States absorb information on all aspects of American business, sending it back to their home office, and, in turn, to the trade ministry, MITI, Choate said. The ministry then analyzes the data and channels it to other concerns.

“It’s virtually impossible to tell the difference between government information and private information,” Choate said. “Their interests are one.”

Toensing likens the reluctance to let U.S. intelligence assist U.S. business to the Foreign Corrupt Practices Act’s criminal prohibition against Americans paying money to foreign officials to “make things go more speedily,” even when that is established custom in a particular country. “It’s not unsound policy, but the problem comes because only American companies have to comply,” she says.

Former CIA Director Webster and Gates see some kinds of economic intelligence as helpful in illuminating the “playing field” on which the United States must compete.

“One of the problems that we’ve wrestled with for at least a dozen years is how to take some of this information that we gather, that in essence practically falls into our hands, and make it useful to people,” Gates said at his confirmation hearing.

“And the honest answer to you, sir, is that we can’t find a way. We’ve tried for 10 years or more to find a way to get it into the hands of U.S. business, and we can’t find a way to (do) that (so it) does not somehow get all tangled up in the law, in advantaging one company over another,” said Gates, now Bush’s deputy national security adviser and former No. 2 official at the CIA.

“I’ve concluded that we ought to content ourselves with supporting the government and trying to inform government policy about the practices of foreign governments, rather than trying to get into economic espionage or industrial espionage and that sort of thing.”

Choate, on the other hand, argues that U.S. reluctance to engage in economic spying makes it unusual among the industrial powers.

“We’re the last ones to think this kind of thing is unusual,” he saids. “We’d be very naive not to focus on it.”

Staff writer Robin Wright in Washington contributed to this story.