Trade secret theft severely undercuts US industry

US is dealing with ongoing intellectual property theft by Chinese agents
Image: Quentin Sokolow / The Burn-In

One of the main reasons that the Trump administration launched its trade war against China is its assertion that the Asian superpower doesn’t adequately enforce copyright law. Washington maintains that Sino firms regularly steal the innovations of American companies without repercussions.

While some critics have argued that the U.S.-China trade war is politically motivated, it’s undeniable that firms based in the Asian nation regularly steal the intellectual property (IP) of their American rivals.

Indeed, FBI Director Frank Wray told The Washington Post that there are a “thousand-plus” active investigations into the theft of American trade secrets by Chinese agents. For example, on Monday, a federal jury found Shan Shi guilty of stealing engineering plans from his former American employer.

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Prosecutors argued that the Chinese-born naturalized American intended to use Trelleborg Offshore’s proprietary information in his new firm. Notably, it is owned by a Sino corporation. Shi emphatically denied allegations that he acted on behalf of the Chinese government. Notably, the federal jury acquitted him on charges of committing economic espionage.

Nevertheless, Shi was convicted of stealing syntactic foam designs from Trelleborg and using them to make knockoff products for a Chinese firm. Prosecutors made the case that Shi’s Sino employer intended to sell the foam to the Chinese navy and civilian companies.

Shi’s lawyers plan to appeal his conviction, which carries a maximum sentence of 15 years.

Though American authorities were able to crack down on one incidence of Chinese economic espionage, the broader problem is vast and seemingly intractable.

The Impact of Chinese Economic Espionage

According to a CNBC report, 30 percent of U.S. corporations agree with the view that China is a hotbed of IP theft.

CNBC surveyed the members of its Global CFO Council to gain a better understanding of the current marketplace. One question on the survey asked if the executives thought that Chinese firms stole their organizations’ proprietary information. Of the survey respondents, 69.6 percent couldn’t answer that query definitively. However, the other 30.4 percent believe Chinese companies have stolen their IP.

CNBC found that seven out of 23 North American-based CFOs assert that their firms had their IP stolen by Chinese rivals. However, the survey indicates that the rate of international corporate espionage has recently increased sharply.

According to the survey, 4.3 percent of CFOs believe that Chinese IP thieves victimized their organizations in the last six to 10 years. Furthermore, 4.3 percent of survey respondents think that their companies had their innovations stolen in the past two to five years. Moreover, 21.7 percent of the executives questioned believe that Sino corporations have misappropriated their firms’ IP in the last year.

Last year, The U.S. Trade Representative released a report on the impact of Chinese IP theft on American industry. The agency found that Sino economic espionage costs the U.S. economy between $225 billion and $600 billion every year.

Tech Sector IP Thefts

Though the CNBC survey didn’t break down its respondents by industry, it’s worth noting that there’s been a rash of high profile thefts of American IP by Chinese operators.

Last January, the U.S. Department of Justice indicted Xiaolang Zhang for attempting to bring Apple’s autonomous vehicle schematics to China’s X-Motors. That same month, Chinese IBM employee Jiaqiang Xu received a five-year prison sentence for trying to deliver the company’s proprietary code to a department of the Chinese government.

In December 2018, Canadian authorities took Huawei CFO Meng Wanzhou into custody while she was staying in Vancouver. The U.S. government asked Canada to have her arrested for extradition to the U.S. The Justice Department indicted Meng on charges of selling technology to Iran and stealing trade secrets from T-Mobile.

Similarly, American tech startup CNEX Labs accused Huawei executive Eric Xu of attempting to steal its IP in May.

Furthermore, Guangzhi Cao, an ex-Tesla staffer, was sued by his erstwhile employer for committing corporate espionage. The electric carmaker argued that Cao uploaded Autopilot source code to his iCloud and brought it with him to his new job at Chinese manufacturer X-Motors. In July, the engineer admitted to copying Tesla’s IP, but he denied being a corporate spy.

X-Motors told The Verge that it did not direct Cao to steal any foreign company’s proprietary information. However, critics have pointed out that the company’s electric vehicles and X-Pilot self-driving program are uncannily similar to Tesla’s products.

As with Shi’s trade secret theft, Beijing apparently played no active role in the economic espionage. But as the above-listed incidents show, Chinese companies don’t need government inducement to steal American IP.

Enforcement, Not Tariffs

On its face, the Trump administration’s effort to curb Chinese economic espionage by launching a trade war makes sense. By creating a financial disincentive to import Sino goods, the federal government has retaliated against Chinese firms that disregard IP law. Moreover, Washington’s sanctions against accused trade secret thief Huawei have acted as a warning to other infringing tech firms.

In reality, the trade war has hurt American industry more than it’s helped it. Outgoing Trump administration economic advisor, Gary Cohen, explained that the conflict raised overhead costs for U.S. manufacturers. Indeed, market analysts have noted that proposed electronics tariffs will make mobile devices more expensive for U.S. consumers. Furthermore, American chipmaker Micron had to lay off staff because it lost access to one of its Chinese buyers.

As such, the Trump administration should consider adopting a new strategy in regards to its trade relations with China. President Trump should press Chinese President Xi Jinping to crack down on Sino companies that steal U.S. trade secrets. Doing so would help American companies thrive by requiring Chinese firms to pay to license the IP they need.

Furthermore, if Beijing moved to penalize foreign economic espionage before it began, local corporations would have an incentive to innovate rather than steal. That outcome is preferable because it would drive international competition instead of sabotage on a global scale.