Chinese Intellectual Property Theft: One Tough Problem To Solve

President Trump’s trade negotiators are heading back to Beijing this week – hoping to move closer to sealing a deal.  One almost feels sorry for them.

Getting the People’s Republic of China (PRC) to buy more American soybeans and pigs is easy.  Getting Beijing to stop (and not just promise to stop) stealing intellectual property (IP) is hard – almost akin to Kim Jong Un giving up his nuclear weapons. 

A U.S. trade lawyer commented:  “We can raise tariffs, have high-level meetings, sign memoranda of understanding & eternal friendship – but they (PRC) will not change.  Their policies favoring theft of intellectual property (IP) 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.”

In other words, from China’s perspective “it works.”

Yes, American authorities have charged and even prosecuted a number of Chinese for IP theft – especially in recent years.  But in the context of the PRC’s 30+ year “trade offensive” these aren’t even “light casualties” – so why should Beijing stop?

Keep in mind that this isn’t about foreign companies voluntarily (even if unhappily) handing over technology and know-how as the price of entry into the huge and presumed to be lucrative China market.

It isn’t Beijing’s fault if foreigners behave insensibly.

Stealing Intellectual Property

But what we are talking about is stealing IP.  Methods include cyber theft, employees stealing proprietary information for their own “start-ups” or being hired away by Chinese companies.  There is also classic espionage – where Chinese government agents target people with access and recruit them.  And don’t forget simple “self-help” IP theft of the sort where Chinese were caught in Iowa cornfields stealing genetically modified corn samples.

Several instructive examples include IP theft cases U.S. prosecutors recently brought against a Chinese state-owned company, Fujian Jinhua Integrated Circuit Corp., for stealing technology secrets from American chipmaker Micron Technology, and another criminal case accusing Huawei of stealing T-Mobile’s intellectual property. 

And for evidence of PRC government involvement, the October 2018 arrest of a Chinese Ministry of State Security (MSS) agent on charges of attempted theft of jet engine technology from GE Aviation is an eye opener.

Even Apple and Tesla, both companies with high hopes for the PRC market, have recently filed suit against employees and former employees alleging Chinese-inspired technology theft. 

Who Else is Stealing IP?

To be fair – it’s not just the Chinese.  The French were known in the 1980’s and 1990’s for being “light fingered” when it came to foreigners’ microchip technologies, and American companies frequently accuse each other of “misappropriating” trade secrets and IP.

IP theft (by whatever name) has been going on for centuries.  In the 1200’s Venetian glassmaking technology was a closely guarded secret (and rivals wanted it).  Indeed, one imagines IP larceny began when the first humans started having “good ideas.”

In Asia, back in the 1970’s through the early 1990’s the Japanese were considered the leading IP thieves. Then the South Koreans came along – with the Japanese and Americans as prime targets.  The ROK President reportedly even instructed his intelligence services to go after foreign technology to help the country recover from the 1997 financial crisis.

And during this period Taiwan made a name for itself for IP thievery – and not just against America, but to the point that the ROK even complained about its semiconductor companies being targeted.  The recent Micron case includes a Taiwan company working in league with the Chinese company to target the American chipmaker.

As for the PRC, once it righted itself after Mao’s death and opened its economy it undertook IP theft with aplomb – both in China and overseas.  Understandably, if one overlooks the moral aspects, Beijing saw it as a way to speed up economic development.

And the Chinese don’t just steal from the Americans.  Japanese companies have been thoroughly victimized – with one major industrial company’s computer servers reportedly “cleaned out” a few years ago.  The Europeans have also been “hit.”  And ROK’s Samsung recently sued individuals who handed over the Korean company’s new bendable screen technology – developed over six years and for $130 million.

What’s the incentive for the PRC to stop?  Not much.   The U.S. and other countries have never applied any real punishment. 

Indeed, China has gone from a standing start in 1980 to become the world’s second largest economy.  Why change something that is working?

The Cost To America?

How much does this cost the Americans?  A 2018 US Trade Representative report estimated that Chinese IP theft costs the American economy between $225-$600 billion annually.

But what is so different about Chinese IP theft?  Put simply, the scale and scope of the effort and government support for IP theft as a matter of national policy.  China is able to target a huge range of industries and technologies – and rapidly commercialize them in China’s domestic market – aided by advanced manufacturing capabilities.  Then they can launch overseas, invariably undercutting competitors’ prices – helped by cheap financing — and government subsidies and assistance.  With time and effort, Chinese firms seem capable  of dominating key industries worldwide.

And IP theft isn’t just about building up Chinese companies.   Economic power translates into political power for a country that views the United States as an adversary, if not an enemy.

IP Theft Contributes To A Strong Chinese Military

Towards this end, IP theft contributes to the PRC military build up that seeks to drive the U.S. out of Asia – for starters.  China has been particularly successful obtaining stealth, naval, and aviation technologies.  A recent internal U.S. Navy review lamented that  the Navy and its contractors are under cyber siege – with PRC hackers (including government hackers) as prime culprits.  )

Is IP theft to credit for Asia’s economic growth over the last 45 years? 

Not entirely, but it helped.  As important were stable governments and societies, educated, disciplined work forces, access to foreign markets, and investment capital – either domestic or foreign.

The same goes for the U.S. industrial revolution of the 19th Century.  It was not solely the result of purloined British technology.  America’s industrial and economic might would have developed regardless.  But obtaining IP (by whatever means) allowed faster development – and combined with local ingenuity (not only Yankees have it) allowed the economy to develop more rapidly and even “leap over stages” (to use the Chinese expression). 

IP theft can enhance “regular” R&D.  Huawei, for example, invests huge amounts in research and development.  But the U.S. Attorney’s case filing also describes an internal company competition, with prizes for employees who could steal the best IP from other companies or elsewhere. 

China has also benefitted from a curiously relaxed attitude from successive U.S. administrations towards Chinese IP theft, and also by American companies “taking it on the chin” so as not to anger the PRC government and thus lose out on chance for involvement in the Chinese market.

One also detected a certain condescension – typified by an American aerospace company boss stating in the early 1990’s that he didn’t mind giving away technology since his company would “always be ahead of China.”  

And some major companies still seem to want to make things easy for the PRC.  Boeing, Pratt & Whitney, General Electric, Rolls Royce, and many others don’t seem to grasp or care that once a company sets up in the PRC it is putting its technology and know-how at even greater risk. 

Enforcing A Deal

Even if Mr. Trump’s people can come to 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.  Does anybody want to try their luck in a Chinese court?  So-called “snap back” sanctions are also discussed – whereby the Americans reimpose sanctions if China doesn’t live up to its promises.  This sounds good but is hard to implement.

And timing matters in this effort to force China to behave.  Expect the PRC to create the illusion of cooperation – for which foreigners have fallen for years, while building up the PRC’s economic might and resilience to future sanctions.

The Trump Administration Approach

There are Trump Administration officials who well understand this game and know that until Beijing feels real pain, IP theft will continue – no matter what agreement is reached.

An American trade lawyer offered some ideas in the “real pain” department.

He noted:  Tariffs were a good blunt weapon to get their attention, but the question now is how to “institutionalize” and focus countermeasures for the long competition ahead.   

He suggested:

“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 the PRC products” from sale in the American market.  

The modus operandi  PRC now uses can easily be identified – from “forced technology transfer….to cyber hacking…to infringement of patents & copyright…and outright theft of trade secrets.”

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.  

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 reseller of such an infringing product.

Since the US reseller (the Wal-Mart and Amazon type companies) are US corporate citizens, they have a right to administrative due process – however, the first finding of theft by a PRC company in an administrative hearing should be dispositive in all subsequent tribunals.  The goal should be to bar all products containing stolen intellectual property from the US marketplace.”  

IP theft is nothing new.  But facing it on a Chinese scale and from an adversary that can “operationalize” the fruits of larceny so effectively – both economically and militarily – is something America hasn’t seen before.  And it is devilishly hard when the PRC sees IP theft as a necessary component of its national prosperity and power.

Beijing will makes promises as it always does.  Changing its behavior will be the hard part.  And unless the PRC feels pain, it won’t.

One wishes Mr. Lighthizer and Mr. Mnuchin well. 

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