US helpless against China’s IP theft

President Donald Trump’s negotiators are hoping to seal a trade deal with Beijing. One almost feels sorry for them.

Getting China to buy more American soybeans and pigs is easy. Getting Beijing to stop stealing intellectual property (IP) is hard – almost akin to compelling Kim Jong Un to give up his nuclear weapons.

“We can raise tariffs, have high-level meetings, sign memoranda of understanding and eternal friendship, but [China] will not change,” a Washington-based US trade lawyer with some 30 years of experience in the field told Asia Times.

“Their policies favoring theft of intellectual property on an industrial scale have contributed to the greatest wealth transfer since the Iranian-Arab creation of the OPEC cartel raised the price of energy to the West.”

American authorities have charged and even prosecuted a number of Chinese for IP theft. But in the context of China’s 30+ year trade offensive, these aren’t even light casualties. So why should it stop? From China’s perspective, it works.

The China challenge

This issue is not the same as foreign companies voluntarily – albeit unhappily – handing over technology and know-how as the price of entry into the huge China market. This is pure theft.

Methods include employees stealing proprietary information from firms for their own startups, or employees with special knowledge being hired away by Chinese competitors. There is “self-help” IP theft of the sort where Chinese were caught in Iowa cornfields stealing genetically modified corn samples.

And there is cyber theft and even classic espionage – where Chinese government agents target people with access and recruit them.

US prosecutors brought a case in November 2018 against a Chinese state-owned company, Fujian Jinhua Integrated Circuit Corp, for stealing technology from American chipmaker Micron Technology.

Another criminal case is pending, accusing Huawei of stealing T-Mobile’s IP. Even Apple and Tesla, companies with high hopes of China markets, have faced trouble with employees and former employees carrying out China-inspired technology theft and have filed lawsuits or brought in the FBI.

Chinese government involvement is also clear. In October 2018, a Chinese Ministry of State Security (MSS) agent was arrested on charges of attempted theft of jet engine technology from GE Aviation.

China has benefitted from a curiously relaxed attitude from successive US administrations, and also by Western companies taking it on the chin so as not to anger Beijing and thus be barred from the Chinese market.

Some major companies – such as Boeing, Pratt & Whitney, General Electric, Rolls Royce – don’t seem to grasp that once a company sets up in China, it is putting its technology and know-how at risk.

Western attitudes have been marked by condescension – typified by an American aerospace company boss stating in the early 1990s that he didn’t mind giving away technology since his company would “always be ahead of China.”

Historic issue

China may now be the highest-profile IP thief, but is hardly unique. France was notorious in the 1980s and ’90s for being light-fingered when it came to overseas chip technology, and US companies frequently accuse each other of misappropriating IP.

It has been going on for centuries. Medieval Venetian glassmaking technology was a closely guarded secret. The US industrial revolution was not solely the result of purloined British technology – America’s industrial might would have developed regardless. But obtaining IP allowed faster development.

The issue truly came to the fore in East Asia, from the 1960s onward. Stable governments and societies, educated, disciplined work forces, access to foreign markets and investment capital were all key to Asia’s stunning economic rise in the second half of the 20^th century. But so was IP theft.

From the 1970s through the 1990s, the Japanese were considered the leading stealers of IP. Then came the industrial rise of South Korea – with Japanese and American IP prime targets. Taiwan found itself accused of IP theft, not just by the US, but even by South Korea, which complained that its semiconductor companies had been targeted.

The recent Micron case included a Taiwan company working in league with the Chinese company to target the American chipmaker.

However, these Asian export powerhouses were US allies and there were multiple points of leverage the US could bring to bear. That is not the case with China.

Moreover, their IP is now in the firing line. Mitsubishi Heavy Industry’s computer servers were attacked in 2011, by hackers believed to be from China. Samsung recently sued individuals who handed over the company’s new “bendable screen” technology – developed over six years and at a cost of $130 million – to a Chinese firm.

The ‘leap over stage’

After Mao’s death and the shifting of its economy toward an industrialized capitalist model, China undertook IP theft both at home and overseas. In fact, Beijing saw it as a way to speed up economic development.

In the 1990s, the US National Counterintelligence and Security Center was warning US companies of the problem from China and why they were doing it: “To leap over stages” is the Chinese phrase.

IP theft can enhance “regular” technological development. Huawei, for example, invests huge amounts in research and development. But the US Attorney’s case filing also describes an internal company competition with prizes for employees who could steal the best IP.

There is little incentive for China and Chinese companies to stop, as the US and other countries have never applied any real punishment. This partly explains how China has surged from a standing start in 1980 to become the world’s second-largest economy.

And it is costing America. A 2018 US Trade Representative report estimated that Chinese IP theft costs the American economy between US$225 billion and $600 billion annually. As that figure shows, experts differ on how to calculate losses from IP thievery. But even at the low end, this is massive money.

China is able to rapidly commercialize technologies in its huge domestic market. These can then be exported overseas, invariably undercutting competitors’ prices, thanks to cheap financing and government subsidies and assistance.

IP theft is not only a commercial issue. It is contributing to China’s military build up. China has been particularly successful in obtaining stealth, naval and aviation technologies. A recent internal US Navy review lamented that the service and its contractors were “under cyber siege” – with PRC hackers, including government hackers, as prime culprits.

Can Washington hit back?

Even if Washington can reach an agreement with the PRC, enforcing it will be a challenge.

Besides changing local laws to specifically protect IP rights, China has floated the idea of special “IP courts” to swiftly adjudicate disputes. But this raises the question of the credibility of the Chinese court system.

So-called “snap back” sanctions are under discussion – whereby Washington can reimpose sanctions if Beijing does not live up to its promises. These, however, could prove difficult to implement.

Beijing may offer promises of cooperation – that foreigners have accepted for years, such as China’s 2015 promise to stop hacking American companies – while continuing to build up economic might and resilience to future sanctions.

Some Washington players get it. The American trade lawyer, who was strongly opposed to China’s WTO entry, offered some ideas – which may well be gaining traction in the administration.

Tariffs, he noted, were a blunt weapon that grabbed Beijing’s attention, but the question now is how to institutionalize and focus counter-measures. “If we modify US domestic trade law, using an apt analogy to criminal law – to bar ‘the fruits of the poisonous tree’ – it should be possible to block the higher-value ‘Made in China’ products from sale in the American market,” he suggested.

Given that modus operandi have been widely identified – from forced technology transfer to cyber hacking, from infringement of patents and copyrights to outright theft of trade secrets, he said: “The products from such methods – either fully finished products, or more importantly down to the smallest components of a larger non-infringing assembly – should be barred from US markets after a brief administrative hearing.”

The private sector needs to be fully empowered. “While enforcement is currently done by US Customs, an additional avenue of redress could be created for the victim companies to bring a private right of action against any US re-seller of such an infringing product,” he advised. “The goal should be to bar all products containing stolen intellectual property from the US marketplace.”

While IP theft is not new, the scale of Chinese IP theft is. Washington’s team has a stern task ahead.