July 23, 2017

Foreign Affairs Is Wrong: China’s Economic Espionage Has Worked in the Past and Will Continue To Do So In The Future

Foreign Affairs recently published a short piece by James A. Lewis on Chinese economic espionage, entitled China’s Economic Espionage – Why It Worked in the Past But Won’t in the Future. Apart from not offering anything new, the article erroneously claims that “statesmanship” should be the preferred method of dealing with this issue and that law enforcement is relatively unimportant. Among other things, the article argues that the Chinese will cease engaging in economic espionage if the United States “holds China to its World Trade commitments” and that it is not in China’s long-term interests to steal U.S. proprietary information.

The article begins by correctly asserting that while China is not alone among nations in using economic espionage, it is the “most aggressive.” China’s “efforts combine official collection programs with the efforts by individuals, companies, and civil agencies. This reflects China’s broad approach to foreign intelligence gathering – instead of relying on officers under official cover, China uses businessmen, researchers, and students to assemble information. The targets include contracts, merger and acquisition plans, and above all, technology.”This statement is consistent with my own empirical findings based on a review of the Economic Espionage Act (“EEA”). Since Congress enacted the EEA in 1996, the federal government has obtained approximately 125 EEA indictments. More than 30 percent of all of the prosecutions involved Chinese citizens or naturalized U.S. citizens originally from China. In addition, the defendant, in slightly less than 30 percent of the total EEA prosecutions, misappropriated the trade secrets to benefit the Chinese government, an existing Chinese company or to start a company there.

The trend of a China connection is also increasing. Since 2008, the government has indicted 50 cases under both sections of the EEA, and approximately 40 percent have a China connection. In 2010, six out of the seven cases that were adjudicated under the EEA involved a link to China. Further, seven of the nine prosecutions that the government has brought under Section 1831 involve an allegation of Chinese government involvement.

This does not mean that an entity of the Chinese government was charged in each case, but that the defendant(s) acted to benefit an entity associated with the Chinese government. Indeed, as described above, in February, the government unsealed an indictment charging, for the first time, a company controlled by the Chinese government, the Panang Group, and a number of individuals violated Section 1831 by stealing and attempting to steal trade secrets from DuPont.

The Foreign Affairs article also notes that China no longer has excuses, if it ever did, for resorting to economic espionage  (it is poor and developing country, the West owes it for a century of imperialism and the U.S. did the same thing in the 19th century).

Where the article breaks down is in claiming that China’s economic espionage prevents it from “becoming a nation of innovators.” The article argues that “[t]here is a puzzling lack of faith in China’s own strengths. Its companies and inventors will do better if they compete fairly, if China embraces a global approach rather than ‘techno-nationalism.’ But without outside pressure, Beijing has concluded that now is not yet the moment to tame the decades-old effort to pilfer technology.” The article offers no evidence to support this view, nor does it take into account that until China catches up, it is far cheaper for that country to engage in economic espionage than to “compete fairly.”

I agree that outside pressure must be exerted to force China to stop engaging in economic espionage but not because China will do better if “they compete fairly.” This is not a zero sum game. By stealing U.S. trade secrets, China is freeing up additional resources that are being used to get ahead. Pressure must be put on China but not for the author’s reasons.

The author suggests that the solution involves a mixture of diplomacy and trade sanctions and law enforcement should take a back seat. In particular, the author suggests that the U.S. should consider denying visas or ejecting attaches and holding China to its World Trade Organization commitments would cause China to play by the rules. While these are good suggestions, law enforcement also has a very important role to play. As the article indicates, much of Chinese economic espionage is not officially state sponsored, but involves individuals acting to benefit Chinese companies. U.S. government actions targeting the Chinese state is likely to have little impact on these non-state actors. The best way to deter non-state individuals from engaging in economic espionage is to increase the odds that such persons will be caught and when caught will be severely punished. This means that the Justice Department must substantially increase the number of EEA investigations and prosecutions and, Congress must increase the penalties for defendants convicted of violating the EEA.

Chinese economic espionage presents a risk to the continued health of the U.S. economy. There is no simple answer to dealing with this problem. The U.S. government must confront the Chinese government on a state level and seek to hold the Chinese accountable. However, law enforcement must become more active in this area. In addition, U.S. companies also must play a more active role in protecting their own trade secrets. Only by using a combination of methods, will the U.S. be successful in better protecting its critical intellectual property which is key to the country’s future economic vitality.

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