Chinese IP theft is a massive drag on the U.S. economy and is zero-sum with U.S. national security.

[Megan; Megan Gates is the senior editor at Security Management covering emerging cybersecurity threats and trends, banking and finance, cultural properties security, executive protection, and legal issues related to the security profession. Additionally, on Fridays she covers breaking news security incidents with analysis from practitioners or individuals impacted as part of the publication's Today in Security articles. Gates is also the editor-in-chief of the magazine's tech supplement, Security Technology; “An Unfair Advantage: Confronting Organized Intellectual Property Theft”, 1 July 2020; https://www.asisonline.org/security-management-magazine/articles/2020/07/an-unfair-advantage-confronting-organized-intellectual-property-theft/]

She has received numerous awards for her writing, including the ASBPE 2022 Stephen Barr Award for Feature Writing and a 2021 APEX Award of Excellence for Technical and Technology Writing. In addition to being published by Security Management, ​her work's been featured in Reuters, USA TODAY College, The Springfield Business Journal, The Cedar Rapids Gazette, Celebrate Arkansas Magazine, and The Joplin Globe.​ ​​​​​​​​​She holds a Bachelor's of Science in Journalism with a minor in Film Studies from Missouri State University.

“American companies invest heavily in advanced research and cutting-edge technology. Trade secret theft is detrimental to our national security and free-market economy,” said Melissa Godbold, special agent in charge of the FBI Oklahoma City Field Office—which handled Tan’s case. “It takes profits away from companies and jobs away from hardworking Americans. The sentencing of Hongjin Tan underscores the FBI’s commitment to protecting our country’s industries from adversaries who attempt to steal valuable proprietary information.” While the facts of Tan’s case are unsettling, they are not entirely unusual. The FBI has more than 1,000 intellectual property (IP) theft cases open involving individuals associated with the People’s Republic of China. And those thefts have cost the United States nearly $500 billion a year, says William Evanina, director of the National Counterintelligence and Security Center (NCSC). “We’ve never seen the likes of economic espionage that we’ve seen in the past 24 months,” he explains. “And a majority of that has come from the Communist Party of China.”

China’s Rise

The expansion of China’s economy followed the opening of the country in the 1980s and the growth of its middle class. The Chinese Communist Party also laid out strategic goals for the groundwork that would allow it to one day take a dominant position in producing advanced technologies to ensure its national security and global economic position. To achieve these goals, China invested in human capital, infrastructure, and research within its own borders and abroad. It became a major investor in technology firms and promoted research and study at foreign institutions. China also weakened internal regulatory barriers for businesses—which allowed domestic firms to flourish—along with creating subsidies to build national champions. “China’s leaders want to move away from a dependence on foreign technology, so that China moves up the production value chain and is no longer just the assembler of other nations’ intellectual property,” wrote James Lewis, senior vice president and director of the Center for Strategic and International Studies’ (CSIS) Technology Policy Program, in an analysis of China’s economic and trade practices. “Since the 1980s, China has sought to build a strong technology base and has made repeated efforts to achieve this. The primary motivation is to enhance China’s security and national power.” A prime example of this is China’s aviation sector, which originally relied on Soviet-based manufacturers. When China opened its economy, other nations moved to partner with China to produce a better-quality product. “Part of the requirement imposed on them for market access was coproduction, where Chinese aviation companies worked with Western aircraft firms to make parts for Western commercial aircraft or help assemble them,” Lewis explained. “Coproduction, over 20 years, taught Chinese companies essential production know-how, and the quality of Chinese aircraft has improved markedly.” This improvement, in turn, might encourage the Chinese government to pressure domestic airlines to buy these Chinese-made products while also imposing barriers for foreign firms to compete in its market. “Chinese policy is to extract technologies from Western companies; use subsidies and nontariff barriers to competition to build national champions; and then create a protected domestic market for these champions to give them an advantage as they compete globally,” Lewis explained in his research. “Huawei is the best example of a globally dominant Chinese company built along these lines, but there are others. A senior Chinese official once remarked that if China had not blocked Google from the China market, there would be no Baidu,” one of the largest Internet and AI companies in the world. While much of China’s ability to acquire technology and intellectual property was done through foreign direct investment, it also has carried out a broad cyber espionage campaign—beginning in the 2000s and continuing today. “The Chinese discovered that the Internet gave them unparalleled access to poorly secured Western networks,” Lewis explained. “Cyber espionage is accompanied by collection efforts by human agents, both in China and in other countries, but the most rewarding collection programs have shifted from human agents targeting Western facilities located in China to cyber espionage.” China has also engaged in a campaign of commercial espionage, targeting Western companies at an extremely high rate. “They’re not just targeting defense sector companies,” said FBI Director Christopher Wray at the U.S. Department of Justice’s China Initiative Conference in February 2020. “The Chinese have targeted companies producing everything from proprietary rice and corn seeds to software for wind turbines to high-end medical devices. And they’re not just targeting innovation and R&D. They’re going after cost and pricing information, internal strategy documents, bulk [personally identifiable information (PII)]—anything that can give them a competitive advantage.” One example is the massive Equifax breach that compromised data on nearly every American and several thousand Canadians. Along with the charges of violating the Computer Fraud and Abuse Act, the U.S. Department of Justice also charged four members of China’s People’s Liberation Army (PLA) with trade secret theft for allegedly acquiring Equifax’s data compilations and database designs. “Unfortunately, the Equifax hack fits a disturbing and unacceptable pattern of state-sponsored computer intrusions and thefts by China and its citizens that have targeted personally identifiable information, trade secrets, and other confidential information,” said U.S. Attorney General William Barr in a statement. China has repeatedly denied that it was involved in any way in the Equifax breach and data theft. China’s Foreign Ministry Spokesman Geng Shuang told the Associated Press that China is committed to “firmly oppose and combat cyberattacks of any kind” and that its institutions “never engage in cybertheft of trade secrets. “According to the U.S. intelligence community and the FBI, China has also targeted hospitals and research institutions to obtain insights into their work and provide it to domestic institutions. In a virtual conference hosted by the Aspen Institute in April 2020, FBI Cyber Division Deputy Assistant Director Tonya Ugoretz said the Bureau has seen increased reconnaissance and cyber intrusions of the U.S. healthcare sector and research institutions to gain insight into how they are addressing the coronavirus pandemic—especially organizations that have made announcements about their COVID-19 research. “There are certainly good reasons for those institutions to tout the work they’re doing and educate the public on the work they are doing,” Ugoretz said. “The sad flip side is that it kind of makes them a mark for other nation-states that are interested in gleaning details about what exactly they’re doing—and maybe even stealing proprietary information those institutions have.” This type of activity did not begin as the coronavirus was spreading, but has been occurring for some time, Evanina says, and is related to China’s Thousand Talents Plan. The plan, issued in 2008, incentivizes individuals engaged in research and development in the United States to provide that knowledge to China in exchange for salaries, research funding, lab space, and more, according to a U.S. Senate Homeland Security report. Recently, the former chair of Harvard University’s Chemistry and Chemical Biology Department, Dr. Charles Lieber, was arrested and charged with making a false statement to law enforcement when he allegedly lied about being involved with the Thousand Talents Plan. In his role at Harvard, Lieber received more than $15 million in grant funding from the National Institutes of Health and the U.S. Department of Defense for his research into nanoscience. The grant funding required him to disclose significant foreign financial conflicts of interest, such as funding from foreign governments. “Under the terms of Lieber’s three-year Thousand Talents contract, Wuhan University of Technology (WUT) paid Lieber $50,000 per month, living expenses of up to 1 million Chinese Yuan, and awarded him more than $1.5 million to establish a research lab at WUT,” according to the U.S. Department of Justice (DOJ). “In return, Lieber was obligated to work for WUT ‘not less than nine months a year’ by ‘declaring international cooperation projects, cultivating young teachers and PhD students, organizing international conference[s], applying for patents, and publishing articles in the name of’ WUT.” Lieber allegedly told investigators in 2018 that he was not asked to participate in the Thousand Talents Program, but he was unable to say how China categorized his work, according to the DOJ. These kinds of partnerships, intrusions, and thefts show that while China is interested in obtaining intellectual property and trade secrets, it also needs to understand the business process to be able to use them. “It does little good to steal intellectual property if you do not have the expertise to use it, and until recently, this was true for much of China’s espionage in advanced technology,” Lewis explained. “What has changed in the last decades is that China has realized that acquiring ‘know-how’ is more important than acquiring IP. In many cases, China now has the money and the skill to use much of the IP it has acquired licitly or illicitly.”

Mitigating the Threat

While China’s ability to acquire intellectual property and trade secret information is concerning for its economic impact, it also has ramifications for its adversaries’ national security. In its 2020–2022 national strategy, the NCSC included countering the exploitation of the U.S. economy as one of its strategic pillars. “Adversaries use front companies, joint ventures, mergers and acquisitions, foreign direct investment, and talent recruitment programs to gain access to and exploit U.S. technology and intellectual property,” the strategy said. “They also influence and exploit U.S. economic and fiscal policies and trade relationships.” While costing Americans billions of dollars, this transfer of knowledge “harms U.S. economic, technological, and military advantage in the world,” the strategy explained. “It puts at risk U.S. innovation and the competitiveness of American companies in world markets.” And that activity is not limited to the United States alone; members of the NATO alliance are seeing similar attempts by China to acquire intellectual property and business processes, particularly in the energy sector, says Evanina, who also acts as the chair of counterintelligence for NATO. One of the major challenges in mitigating the threat, however, was a lack of awareness from the private sector about China’s activity.