In 2012, the director of the National Security Agency warned that intellectual property theft cost the US $250 billion per year, much of it attributable to China, in what he diplomatically called the “greatest transfer of wealth in history.” Since then, the problem has only gotten worse. According to a 215 page investigation of China’s trade practices published by the US Government’s Trade Representative office (Appendix C, p. 9), “while precise quantification is difficult… the commission estimates that Chinese theft of American intellectual property currently costs between $225 billion and $600 billion per year.” $600 billion! That’s more than I spend at Whole Foods in a decade.
A 2017 NY Times op-ed described what is involved: “Intellectual-property theft covers a wide spectrum: counterfeiting American fashion designs, pirating movies and video games, patent infringement and stealing proprietary technology and software…. Perhaps most concerning, China has targeted the American defense industrial base… Chinese agents have gone after the United States’ most significant weapons, such as the F-35 Lightning… and the Patriot missile system… and [even] stolen documents related to… the F-15 fighter and… the Space Shuttle.”
However, as explained in a recent Chicago Tribune article, “Beijing typically doesn’t dispatch spies on missions of commercial espionage. Rather, it encourages Chinese who study and work abroad to copy or steal technology and rewards them when they do.”
One example quoted in the article was based on a federal prosecution now in progress: “The Chinese tech giant Huawei… was obsessed with a T-Mobile robot nicknamed Tappy that could detect problems in cellphones by mimicking how people use them… T-Mobile was letting Huawei engineers into the Tappy lab to test their phones. In 2013, according to [a recent Federal] indictment, a Huawei engineer spirited a Tappy robot arm out of the lab in a laptop bag.”
The impact of intellectual property theft is widespread. Last March, a CNBC survey of members of its “Global CFO Council” that found that one out of every five companies said “Chinese companies have stolen their intellectual property within the last year.”
Some experts believe that this type of industrial espionage is an inevitable cost of doing business in China. After all, it is the world’s fastest growing market, with 2.4 billion potential customers.
And Chinese experts have argued that emerging economies have always stolen intellectual property. For example, when the US was a rising power in the 1900s, Pillsbury stole technology from European companies to “[process] carloads of wheat and oats… into flour and cereals.” (p. 157, The Hundred Year Marathon)
Some believe, as the title of one article put it, that China’s Record on Intellectual Property Rights Is Getting Better and Better. “Trade, foreign investment, licensing, international research collaboration, cross-border movement of experts, collection of open-source material, imitation, reverse engineering, and, yes, theft have all contributed to China’s technological progress. Most of these activities are legitimate and voluntary and have clearly benefited U.S. business interests.”
Similarly, a thought provoking article published two weeks ago entitled The New China Scare: Why America Shouldn’t Panic About Its Latest Challenger argued that “among U.S. companies doing business in China, a recent survey found that intellectual property protection ranked sixth on a list of pressing concerns, down from number two in 2014…. Why this shift from 2014? That year, China created its first specialized courts to handle intellectual property cases. In 2015, foreign plaintiffs brought 63 cases in the Beijing Intellectual Property Court. The court ruled for the foreign firms in all 63.”
Let’s see. A $600 billion per year problem, and 63 court cases. It is easy to conclude that most companies that are interested in breaking into the Chinese market are reluctant to sue their future partners. Should we see the intellectual property theft “glass” as 2% full or 98% empty?
American experts now trying to negotiate a trade agreement with China certainly believe there’s a problem. The same article notes that Peter Navarro, Trump’s top trade adviser, sees “the theft of our intellectual property… [as] issue number one in the United States’ trade dispute with China.”
So how are the trade negotiations going, when it comes to this issue? Here’s a hint. Last June, the intellectual property issue almost led to the Chinese walking away from the table. “State Council adviser Shi Yinhong says America’s insistence on strong intellectual property protections is asking too much of Beijing… Chinese officials have started to think ‘no deal is better than a bad deal’ as the gap between the two sides continues to widen.”
But then, last week, President Trump tweeted in his inimitable fashion that the US is “Getting VERY close to a BIG DEAL with China.” How was the intellectual property theft issue addressed in this “Phase One” China trade agreement? Few details are available, and nothing has been signed yet. When the New York Times reported last Sunday on what’s known so far about that deal, it was mainly about Chinese promises to increase its purchases of US goods by at least $200 billion over the next two years in return for tariff reductions. There were no specifics on intellectual property and the article’s title did not offer much room for hope: “China’s Hard-Liners Win a Round in Trump’s Trade Deal.”
Of course, even if Phase One does little or nothing about intellectual property theft, there could be a Phase Two or Phase Eleven agreement that does address US concerns about intellectual property theft. Which would lead to the question of whether China would actually abide by any agreement it signs. Their track record so far reminds me of Rosie Ruiz.
Details of China’s past non-compliance appear in a definitive report from the US Trade Representative’s office. Its summary concludes that (p. 7): “The evidence adduced in this investigation establishes that China’s technology transfer regime continues, notwithstanding repeated bilateral commitments and government statements.”
Perhaps the Chinese trade delegation subscribes to tactics from Sun Tzu’s “The Art of War,” especially his idea that “All warfare is based on deception.”
So what should US companies and government representatives do? Mostly these days they seem to either ignore the problem or wave their hands about it, as in the Bloomberg Businessweek cover headline seven years ago (March 19, 2012): “Hey China! Stop Stealing Our Stuff.”
But nobody seems to know how to make this happen.