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New Cold War? China-USA Economic Espionage War Escalates

Boeing, a target of economic espionage
Boeing, a target of economic espionage
Chen Qin

BEIJING - Less than six months ago, U.S. Under Secretary of State Robert D. Hormats gave an exclusive interview to Caixin, in which he said that one of the most important tasks in US-China relations was to define differences on intellectual property rights protection and find common solutions within the next six months.

On Feb. 20, the White House released a strategy paper outlining an approach for protecting the trade secrets of U.S. companies. “Emerging trends indicate that the pace of economic espionage and trade secret theft against U.S. corporations is accelerating,” said the report, noting that “cyber intrusion activity” targeting trade secrets in particular posed a threat to American businesses.

According to the strategy paper, the U.S. will put in place five measures to protect its trade secrets: 1. Focusing diplomatic efforts to protect trade secrets overseas and applying diplomatic pressure. 2. Helping private industry to protect trade secrets by supporting and promoting best practices. 3. Enhancing domestic law enforcement operations. 4. Improving domestic legislation. 5. Promoting public awareness.

Although the White House has denied this strategy paper is aimed at China, its content and timing of release indicate otherwise. In the 141-page paper, China appears on 31 pages, sometimes as often as 14 times per page. An annex from the Department of Justice described 20 economic espionage and trade secret criminal cases between Jan. 2009 and Jan. 2013, 17 of which involved China.

Regarding timing, a week before the strategy paper was published, President Obama released an executive order on “Improving Critical Infrastructure Security.” The day before, U.S. cyber security firm Mandiant Corp had published a 74-page report tracing cyber attacks on U.S. companies to China. And recently, several mainstream newspapers including the New York Times and the Washington Post claimed to have been attacked by Chinese hackers.

Earlier, Douglas H. Paal, a former Director of Asian Affairs of the U.S. National Security Council and present vice president for studies at the Carnegie Endowment for International Peace, told Caixin that last year the U.S. House of Representatives had held hearings about the ongoing cyber attacks and had introduced draft legislation. In his February 2013 State of the Union address, President Obama said that “the rapidly growing threat from cyber-attacks” was a top priority.

Cold war mentality and ulterior motives?

The White House strategy paper suggested strengthening legislation by increasing the maximum statutory maximum for economic espionage from 15 years in prison to 20 years. The paper also recommended increasing sentencing guidelines for the theft of trade secrets, including “trade secrets transferred or attempted to be transferred abroad.”

It also said it would seek, through trade negotiations such as the arrangements via the Trans Pacific Partnership (TPP), new provisions on trade secret protection.

China and the U.S. have been fighting about industrial espionage and intellectual property for a long time now. So why is the U.S. making these high profile moves now? Tao Jingzhou, managing partner for the Asian practice of U.S. law firm Dechert, told Caixin: "The technological leadership of the United States ensures its position as a world leader. Its companies are the driving force behind its technological innovation. Protecting their industrial and technological secrets is protecting the U.S.’s most fundamental interests."

There are striking similarities in the Department of Justice’s 17 economic espionage and trade secret cases involving China. The protagonists are Chinese nationals or ethnic Chinese engineers and researchers who completed their master or doctoral degrees in prestigious U.S. colleges. They joined large U.S. companies and worked for years to reach senior level positions. They then used these positions to steal trade secrets contained in drawings, designs, software code and chemical formulas to use as bargaining chips to obtain new jobs, create their own companies, or obtain teaching tenures at Chinese universities.

The one who spent the longest time working in a U.S. company is Dongfan Chung, a former Boeing engineer. He was convicted of charges of economic espionage and acting as an illegal agent of the People’s Republic of China, stealing technology and trade secrets including information related to the Space Shuttle program and the Delta IV rocket between 1979 and 2006. In 2010, at age 74, Chung was sentenced to 188 months – 15 years – in jail.

According to the U.S. Department of Justice, the industries with a high incidence of espionage are car manufacturing, chemical industry and electronics, as well as the IT sector. Companies targeted by economic espionage included the Ford Motor Company, General Motors, DuPont, Valspar, Motorola and the CME Group.

Every time an espionage case comes to light, it always triggers heated discussions in the U.S. media. China's Foreign Ministry has on several occasions refuted accusations of Chinese participation in economic espionage saying the accusations were "fabricated and with ulterior motives." China has asked the U.S. to abandon its Cold War mentality, respect objective facts, and stop these groundless accusations.

U.S. Trade Representative Ron Kirk has openly stated that the problem of trade-secret theft in China was a factor in the decision by some U.S. companies to move operations back to the U.S. "You know it's one thing to accept a certain level of copyright knock-offs, but if you're going to take our core technology, then we're better off being in our home country," Kirk told Reuters.

A copying country?

At a more macro level, Robert D. Hormats says China’s accession to the WTO has been good for China and for the world – but just as China insists that others abide by WTO rules, doing so is also in Beijing’s interests. But one of its difficulties, he says, is for China to enforce the rules of the global economy. "If some of the measures China takes are deemed to be against the interests of foreign affiliates in China, this will have a negative impact on China and its open trade system.”

Douglas H. Paal says that the U.S. has always had intellectual property issues with emerging countries. In general as emerging countries develop, their own intellectual properties need protection and intellectual theft decreases, as was the case with Japan and South Korea. "However, there is a greater problem with China. There is a long way to go in intellectual property protection and incentives, as well as combating infringement," he says.

So how to resolve the China-U.S. dispute on this issue? U.S. Assistant Secretary of State for Economic and Business Affairs, Jose W. Fernandez, told Caixin that the U.S. would continue to put the emphasis on protection of trade secrets and intellectual property in its dealings with Asia-Pacific and Chinese authorities. "It is important that we engage in meaningful dialogue with China so that both sides can agree on common standards."

Tao Jingzhou believes the Chinese government will probably have to enforce sanctions on the theft of trade secrets and most possibly link intellectual property protection to local officials' political performance. "China-U.S frictions on the theft of intellectual property have only just begun unfolding. China will be forced to become a truly innovative country instead of a copying country."

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