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In recent years, there has been a notable shift among certain Western politicians, media outlets and think tanks regarding their perspective on China’s developmental trajectory. The once-popular theory of an imminent Chinese collapse, famously asserted by Gordon G. Chang over two decades ago, has finally begun to lose traction. But there is still a lingering reluctance to acknowledge China’s sustained ascent, prompting the emergence of a new buzzword: “Peak China.”

As the second-largest GDP globally for 15 consecutive years, China’s economic landscape has naturally witnessed expansion alongside moderated growth rates, a phenomenon well-recognized in economic theory. In the context of China’s status as a super-large economy, fluctuations in economic indicators are intrinsic to its growth trajectory. To characterize these indicators as evidence of a prolonged economic recession is a stretch.

Growth slows, risks abound, but economic and financial collapse can be avoided

China’s economic performance has been stellar over the past three decades, with remarkable and persistent high growth that lifted the economy from low-income to upper-middle-income status. Measured at market exchange rates, China’s GDP was $18.3 trillion in 2022, 73 percent of the GDP of the United States and 10 times more than the 7 percent of US GDP it registered in 1990. China’s per capita income is now roughly $13,000, approximately 17 percent of US per capita income—compared with less than 2 percent in 1990. Over the past decade and a half, China has been the main driver of the world’s economic growth, accounting for 35 percent of global nominal GDP growth, while the United States accounted for 27 percent.

In 2018 Xi Jinping shattered longstanding norms within the regime’s inner circle. In positioning himself to rule for life, Xi created enemies among the ruling elite, who were already deeply displeased by his politically motivated anti-corruption campaign. Xi now confronts profound threats from senior members of the elite. His central task is to survive them. To do so, I argue, he will craft a foreign policy that embraces diversionary aggression. That is, he will initiate international conflicts in order to build the sort of public nationalism that makes it difficult for elites to challenge him. The result will be a more aggressive, destabilizing, and unpredictable foreign policy.

China’s “rise” is among the great challenges of the 21st century, in part because China’s domestic politics compel risky behavior on the international stage. Xi’s attempts to consolidate power have made diversionary foreign policy more likely, but China’s political system itself incentivizes this behavior. Indeed, my research suggests that diversionary aggression may account for as much as 40 percent of all conflict that the Chinese government initiates with the United States.

Common refrains regarding the strategic significance of China’s theft of U.S. intellectual property (IP) include concerns of immediate economic losses—with estimates ranging from $250 billion to $600 billion annually—and a potential longer-term threat of disincentivizing innovation investments. However, a focus on these consequences obscures the true strategic intent of China’s cyber-enabled IP-theft campaign.

During its long march to a “moderately prosperous society” and global technological supremacy, China has encountered significant hurdles.1 In 2010, for example, after years of significant economic growth, the Chinese Communist Party (CCP) leadership publicly expressed concerns about a slowing economy and social unrest—conditions Chinese leaders associated with the middle-income trap.2 The historical consequences of failing to address these areas could put at risk both the CCP’s’ legitimacy and China’s great-power status. As part of a multifaceted strategy to mitigate the middle-income trap and stave off impending calamity, China launched a campaign of cyber-enabled theft of U.S. IP. Evidence of successfully re-innovating illicitly acquired IP was arguably behind President Xi Jinping’s confident exclamation in 2015 that growth would average 6.5% from 2015 to 2020, a target necessary for keeping the middle-income trap at bay.3 Although the United States attempted to abate cyber-enabled IP theft through diplomacy, statecraft failed, resulting in a lost opportunity to shape the rise of China when its economy was in a vulnerable state.4

There is little question that the world has grown to a level of such economic interdependence that events in any single part of the world are likely to have global repercussions. Indeed, the two largest economies in the world—the United States and the People's Republic of China—remain extensively connected (PDF), even as they also remain geopolitical rivals. The level of interdependence between the United States and PRC may have decreased slightly, but the degree of dependence between the two countries remains at a level where “decoupling” is simply impractical. For example, the PRC remains highly dependent on exports to the United States and others for revenue; it also controls the processing and, in some cases, the production of critical minerals used in effectively every commodity that requires rare earths, or copper, or nickel, or cobalt at any point in the production process. The potential damage from a trade disruption between China and the United States might well be extensive—both economically and socially—on both sides.

It's tempting to think that such interdependence has reached a level in which armed conflict between these two rivals has grown to be something beyond irrational, into the realm of the unthinkable. Wouldn't the terrible costs of war cause both nations to seek every other means before resorting to armed action? Unfortunately, history gives us little reason to be confident that peace is inevitable simply because the degree of interdependence is strong. Trading partners in fact sometimes do go to war (PDF) with one another. Indeed, by the logic of interdependence, World War I should never have occurred. Interdependence did not always prevent war in the past, and it is safe to say that it probably will not assure a peaceful future.

Despite its current hostility towards foreign IP, Russia has been part of the global market for decades, beginning its modern-era protection of IP rights following the Soviet Union’s collapse.26 Legislation such as the 1992 Law on Trademarks, Service Marks, and Designations of Origin as well as the Patent Law sought to stabilize the Russian economy after it underwent a turbulent restructuring.27 Moreover, the government authorized the creation of the Russian Agency for Patents and Trademarks (Rospatent), a federal body established to grant and register IP designs and trademarks.28 Rospatent aimed to foster cooperation with its counterparts in other countries.29

In addition to bolstering its IP protections during the early 1990s, the Russian government committed to several international treaty regimes on the matter, including the Berne Convention for the Protection of Literary and Artistic Works.30 After Putin’s rise to power, the Russian government enacted several amendments bolstering IP protections to ensure legal clarity and boost foreigninvestor confidence.31 These amendments were eventually transferred to the Civil Code in 2006.32 This was a critical step in demonstrating Moscow’s intent to obtain membership in the WTO—a feat that was accomplished several years later under the Obama administration as part of the United States’ “reset” in relations with Russia.33 Upon joining the WTO, Russia became bound to the Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS).34 The TRIPS agreement details member-states’ standards for enforcing IP rights in administrative and civil actions, including detailing the subject matter eligible for protections, the minimum duration of the protections, and the scope of rights.35

Pursuing arbitration through multilateral means is another route available to Western companies.105 When Russia became a World Trade Organization (WTO) member-state, the EU Trade Commissioner, Karel de Gucht, voiced the hopes of other member-states in voicing the expectation that Russia would adhere to international trade rules and standards.106 It is easy to view such statements as wishful thinking in light of Moscow’s aforementioned treatment of businesses in the context of its war in Ukraine.107 At the time, though, most governments saw Russia’s accession to the body as a positive development.108 After all, Russia had become legally obligated to follow the provisions of the General Agreement on Tariffs and Trade (GATT), the WTO’s foundational text.109 By binding itself to the treaty regime, Russia assured fellow member-states that it would grant other signatories’ imports treatment “no less favorable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale.”110 As part of its mission to ensure that trade between nations flows in a predictable and free manner, the GATT upheld the principle of most-favored nation treatment; under Article I of the GATT, countries cannot discriminate between their trading partners under most circumstances.111 Similarly, Article IV of the TRIPS Agreement provides that advantage or immunity given to nationals in one country with respect to protecting their IP shall be given unconditionally to nationals of all other Members.”112

In addition to the GATT and the TRIPS agreements, other applicable multilateral agreements govern IP protections.113 These agreements include the 1967 Convention Establishing the World Intellectual Property Organization, the 1883 Paris Convention for the Protection of Industrial Property, and the 1952 Universal Copyright Convention.114 Each of these international treaties include provisions for dispute arbitration, and mechanisms facilitating member-states resolving issues of concern with fellow signatories amicably instead of taking unilateral action.115

Republican China hawks have a problem. They're eager to sell us on the notion that China is, as old GOP hand Newt Gingrich puts it, "the greatest threat to a free America that we have faced in our lifetime." Gingrich pins China's ascendancy on its "totalitarian system, extraordinary organization, and immense population," brushing aside the economic liberalization and market reforms initiated by former leader Deng Xiaoping—which ushered China out of Maoist isolation and into the global market—as mere smoke and mirrors, a "40-year-long propaganda campaign" masking the "real China."

This presents a quandary for the hawks. If they argue that China's meteoric rise is indeed the fruit of its "totalitarian system and extraordinary organization," does that mean they'll have to eat their words on the virtues of free enterprise and stop scoffing at socialist economies? Could it be that China has cracked the code on making a centrally planned economy thrive, a feat unseen elsewhere?

In terms of outright theft of IP, China’s infractions are anything but unique: It is just one of 36 violators listed in the 2019 Special 301 Report by the Office of the U.S. Trade Representative (USTR). Historically, rapidly growing emerging market economies tend to be cited as they transition to higher income levels. For example, decades ago Japan, South Korea, and Taiwan were each perennial Section 301 violators until they reached a per capita GDP of about $20,000-$25,000. Many countries have followed this blueprint, but China draws special attention because of its size and its top-down, state-led model.

It is in society’s interest to support the broad dissemination of knowledge, but the creation of knowledge requires incentives to innovate. When determining appropriate rules for IP, governments have to keep in mind that protections simultaneously spur creativity and inhibit the flow of knowledge. To find the right tradeoff, they must take stock of their country’s innovative capacity, consider international norms and standards, weigh wide access to knowledge against incentives to invent, and seek common ground between the short-run interests of firms and the long-run interests of society as a whole. As a country evolves from a net acquirer of IP to a net innovator, its calculations change, and strong protections are more attractive.

It is not surprising then that hackers and proponents of digital-age corporations such as Napster, Facebook and Google find the stealing of IP and denying the genuine creators of content royalties a natural course of events in the same way as those who support open access. These tendencies are related to other web-based social malaise such as not respecting the private nature of data collection or the interference in the outcomes of elections. This has led to the founder of the world wide web Sir Tim Berners-Lee to battle ‘digital dystopia’ and call for greater regulation and certain standards to be instituted. In November 2019 he proposed through his World Wide Web Foundation a Contract for the Web that would stop election interference by foreign powers, hate speech, abuse of privacy and disinformation.4

As my Managing Cyber Risk in the Financial Sector book noted, when planning to mitigate cyber risk the centre of the enquiry should not be prevention based on statistical modelling or solely on IT packages but on the human-based variables. Hackers cannot steal IP or alter GPS systems connected to ship navigation without human ignorance/error, collusion, grudges, greed, malice and geo-political imperatives. Therefore, it is important to understand not only how the technology works, such as the multi-connections of Internet of Things (IoT) devices that allow through interconnectivity so many more ways for hackers to exploit the weaknesses in so many connections to enter the cyber system, but also it is essential to understand the human motivation for the hacking. It is also crucial to look internally in an organisation to find those with a motivation to carry out cyberattacks to undermine the system without being caught. In an increasingly complex world and particularly with cyberwarfare, we must assess the motivations of the very human global players behind the cyberattacks. Likewise, in a company it is essential to train staff and customers as well as managers in SME supply chains. Those that supply goods to the larger companies are the weakest links because of their lack of human resources. Larger companies are usually the best prepared to counter cyberattack because of an abundance of resources, both human and technological due to economy of scale.

There are numerous different ways of illegally acquiring trade secrets, such as:

Former Employee Theft: A former employee with access to sensitive company information may make a copy onto a USB drive before leaving the company. This could include proprietary software code, customer databases, or manufacturing processes.

From a technical perspective, Blockchain does not support anonymity. ¥ Steven R. Gordon, Professor of Information Technology Management at Babson College, 7 points out, “[h]aving data disperse throughout the Blockchain presents its own privacy concerns, because public Blockchain transactions are pseudonymous and users can take steps to hide their identity, but ultimately anonymity is not guaranteed.”'*® Blockchain is vulnerable to breaches of transactional privacy because any unscrupulous user can relate your “pseudonym® (your public key code) to your account address by analysing information about relevant transactions. Once an individual’s address is known, it is also possible to identify the details and value of all transactions made from that address.'*’ For companies, transaction records may also reveal trade secrets. Steven R. Gordon concludes “[t]heoretically, yes, Blockchain can solve data privacy issues, but practically, no.” '** While “anonymisation technologies” including Dash, Monero and Zcashare in development, 151 these tools are still in their infancy. Significant concerns remain over Blockchain’s ability to protect privacy and data.'>

WASHINGTON — Today, the U.S. Department of the Treasury published a 2024 Non-fungible Token (NFT) Illicit Finance Risk Assessment. The risk assessment explores how vulnerabilities associated with NFTs and NFT platforms may be exploited by illicit actors for money laundering, terrorist financing, and proliferation financing.

The assessment finds that NFTs are highly susceptible to use in fraud and scams and are subject to theft. The report determines that illicit actors can use NFTs to launder proceeds from predicate crimes, often in combination with other methods to obfuscate the illicit source of proceeds of crime. It also found little evidence of the misuse of NFTs by terrorists or proliferators, in contrast to fraudsters, to date.

U.S. observers have long complained that Chinese firms steal intellectual property (IP) from American companies, universities, and research institutions.¹ Most of these complaints stress that the government of the People’s Republic of China (PRC) directs this theft. Other analysts focus on military applications of the theft. Both arguments are true, but presume that the problem’s ultimate source is policy. It is not. The fundamental source of the problem is China’s political system. The current Chinese political, legal, economic, and business structure disincentivizes innovation in favor of acquisition and imitation both domestically and internationally. IP theft is not simply a longstanding Chinese government policy; it is an inherent feature of the Chinese Party-State-Economy. Therefore, addressing the problem is far more challenging than most American policy makers and business leaders understand. This essay is for anyone who wants to defend U.S. IP from theft. My intention is to help Americans understand the origins, character, and scope of the threat, as well as some possible mitigations. Sadly, no comprehensive, effective, short-term solution exists.

IP theft is endemic to the Chinese political-economic system internally as well as externally. Therefore, to fully comprehend the threat and why it is impossible to eradicate, U.S. policy makers and business leaders must understand the massive incentives all Chinese companies face to steal IP. I start by examining those incentives, which stem from the PRC’s Party-State system. Next, I explain why that system discourages innovation, despite the frequently articulated contrary intentions of Chinese leadership. Third, I outline the connection between lack of innovation and IP theft. Finally, I conclude with recommendations for the U.S. government and private sector.

China competes unfairly in international trade, it has long-standing policies to extract intellectual property (IP) from Western companies, and its companies often show scant respect for IP protection. Confronting China over these practices is long overdue, but the central issue is not IP theft but the unfair treatment of U.S. companies in China.

Calculating the value of intellectual property is difficult. One way is to estimate what stolen IP would fetch on the market if offered for sale or licensing. Companies can value their intellectual property by estimating the income it produces or is expected to produce. The most common error is to value IP at what was paid to develop it. The real value (and hence the cost of IP theft) is how much a product made with the IP will fetch on the market. If I spend a billion dollars to develop a square car tire, its market value is zero, not a billion, and the loss from IP theft is zero. Similarly, if I steal IP and can’t figure out how to make a product with it, the loss from the theft is zero.

A subcommittee has been created by the Russian authorities to regulate the use of foreign intellectual property in Russia without the consent of patent holders, state-affiliated news outlet RBC reported on Thursday.

The move follows instructions issued to the government by Russian President Vladimir Putin in February to set up a structure to regulate the granting of permission to use foreign intellectual property in Russia without the consent of the patent holders as the country continues its drift away from the rules-based international order.

This week, Russia announced that any patents belonging to firms who have pulled out of Russia can be stolen by Russian businesses. I expect this will effectively expand to any business not doing business in Russia and may even eventually include businesses who haven’t yet exited. Over the short term, this will allow Russian suppliers to attempt to make up for the loss of U.S., UK, and EU goods ranging from food to microprocessors. But long term, this is going to create a hard barrier for both companies foreign to Russia moving back into the country and for goods in Russia to move out. And in response, countries impacted by this law may move to invalidate patents held by Russian companies as well.

Let me explain.

This totalitarian system, along with its other more pernicious consequences, also discourages and depresses innovation, which in turn encourages IP theft. Jeremy Haft exhaustively catalogs the failures of most businesses in China to innovate. Most of what Americans think is made in China is merely assembled in China. For example, the Chinese do not make the iPhone; they assemble American, German, Taiwanese, South Korean and Japanese components for a Taiwanese company located in China. Per Haft, Chinese companies lack the skills to manufacture those components independently. Many of the smaller Chinese companies that do try to innovate at U.S. levels find their work appropriated by larger, better politically connected Chinese companies. This is not to say that the Chinese do not innovate. They clearly do. The point is that they innovate less than they could because of the negative incentives the Party-State imposes. Innovation is simply too risky, too expensive, and too time consuming compared to theft.

Aside from the well-founded, ever-present fear of appropriation by better connected rivals, four other factors also conspire to discourage innovation in China, especially within small companies: (1) the requirement to pay bribes as protection; (2) a political culture that values deference and hierarchy; (3) the Chinese government policy of subsidizing SOEs; and (4) lack of capital for small and medium sized companies.

But the case is not nearly as strong as the report makes it out to be. For starters, because Chinese firms are not starved for capital – thanks to China’s chronic savings glut – gaining access to foreign technologies is their main motivation for trying to attract direct investment from abroad. Under WTO rules, they are free to seek technology transfer from their foreign partners on a commercial and voluntary basis.

Fortunately for China, foreign firms have been more than willing to enter its market, not least because of its preferential treatment of direct investment. In fact, for decades, foreign and domestic firms alike have willingly accepted China’s “market access for technology” strategy, which required foreign investors to “import” advanced technology in exchange for entering the Chinese market.

Speculation about the on-and-off U.S.-Chinese trade talks centers on whether the two sides will eventually settle for a truce or push for a “complete deal,” which U.S. President Donald Trump remains adamant he will obtain. Any grand bargain will require progress on a key structural issue: intellectual property (IP) rights. According to some reports, Chinese IP theft has cost the United States $225 billion to $600 billion a year. No wonder, then, that getting China to better protect IP is a point of rare consensus among both the White House and the Democratic leadership.

But history tells us to be cautious; Washington’s demands are unrealistic. Countries do not enact strong IP rights systems until their ability to innovate at home displaces reliance on outside knowledge. The United States’ own centurylong drift toward strong protections is a case in point.