Trump ups the ante in fight against China’s flagrant IP theft

The Trump administration is advancing a groundbreaking attack — if it is sustained — on Beijing’s unceasing theft of American intellectual property (IP).

Dealing with China’s adamant refusal either to cease the pilfering or even to admit that it is occurring is central to any strategy to confront and beat back a system that is undermining the United States’ competitive advantage in key technology sectors.

{mosads}The independent Commission on the Theft of American Intellectual Property has estimated that the cost to the U.S. economy could run as high as $600 billion annually. The commission singled out China as the leading culprit in purloining trade secrets, computer software and patented technology.

In the past, without admitting guilt, China has pledged to rein in IP theft. Famously, President Xi Jinping promised President Barack Obama in 2015 that the Chinese government would not pass along to Chinese companies any technological information it gleaned from normal espionage operations.

According to U.S. intelligence agencies and private cybersecurity firms, activity stemming from Chinese government or government-directed groups did lessen in the months following the informal pact. But beginning in late 2016 and increasing over the past two years, cyberattacks (to steal IP) originating from China have ticked up steadily.

Intelligence experts now believe that Beijing decided several years ago to throttle a good deal of freelancing activities by outside groups and groups loosely controlled by the People Liberation Army. Control of economic espionage was taken over the Ministry of State Security, which organized a much more sophisticated, targeted set of economic espionage operations.

Against this background and the larger U.S. struggle to curb a myriad of Chinese protectionist practices, including the public vow (the Made in China 2025 plan) to replace key foreign technologies with domestic sources within the next decade, on Nov. 1 the Department of Justice (DOJ) launched the “China Initiative.”

The most important element in the initiative is the determination to mount a series of cases exposing both the Chinese government and Chinese companies as culprits in stealing U.S. technological advances protected by IP rules. As a DOJ official stated: “This is just the beginning … we will redouble our efforts to safeguard America’s ingenuity and investment.”

A few days before the China Initiative announcement, the DOJ indicted 10 Chinese spies with direct connections to China’s Ministry of State Security. They were charged with attempting to steal underlying designs for advanced turbofan engines used in U.S. and European commercial jets.

The operation, which spanned from 2010-2015, consisted of a series of hacks into both French and U.S. companies.   While most of the alleged culprits will never see jail time, the significance of the indictments lies in evidence presented of direct ties to the Chinese government.

In a second indictment, disclosed on Nov. 1, the DOJ charged that the Chinese semiconductor company Jinhua Integrated Circuit Co., Ltd. had conspired with employees of a Taiwanese company, United Microelectronics Corporation, to steal trade secrets concerning DRAM chip designs from Idaho-based Micron Technology.

DRAM technology is central for data storage for computers, mobile devices and other electronics. Jinhua is a startup government-owned company that has been given some $5 billion in subsidies for future competition with Micron, the world’s leading semiconductor company.

In, addition, the U.S. government upped the ante in the campaign against Beijing’s flagrant and persistent IP theft operations by also banning the sale of parts and components by U.S. companies to Jinhua. 

Jinhua, like other Chinese semiconductor companies, is still deeply dependent on U.S. suppliers for key machinery. The U.S. action will at least temporarily cripple its drive to open a large new semiconductor plant in the coming months.

Finally, last week the Trump administration for the first time publicly accused Xi Jinping of breaking the promise to cease passing along the fruits of economic espionage directly to Chinese companies.

In a speech to the Aspen Cyber Summit, Rob Joyce, senior adviser for cybersecurity strategy at the National Security Agency, charged that Beijing had gone “well beyond the bound of the agreement” made with President Obama.

All of this should make for interesting discussions when President Trump and President Xi met at the upcoming Group of 20 summit.

At a minimum, Trump should confront Xi with clear evidence of continued IP theft, sponsored by Chinese government agencies — and also clearly warn him of stiffer retaliation and sanctions against Chinese companies in the future.

Claude Barfield is a resident scholar in international trade policy at the American Enterprise Institute.