People who paid close attention during the 2016 presidential campaign will likely recall then-candidate Donald Trump’s frequent assertions that the trade relationship between the United States and China was one-sided in favor of China. A significant part of his argument was that, in addition to a trade deficit, China frequently stole the intellectual property of United States companies.1
As president, Trump has made addressing the United States’ trade relationship with China and other nations a key aspect of his administration, and this includes curtailing IP theft and holding China accountable through the use of economic and trade tools such as tariffs.
A United States Trade Representative, Robert Lighthizer, was appointed to investigate just how much IP theft was costing the U.S. economy. At the end of his seven-month-long investigation, Lighthizer and his team estimated the ultimate impact on annual GDP to be between $225 billion and $600 billion.2
The Commission on the Theft of American Intellectual Property came to a similar conclusion in their 2013 report, estimating the cost of IP theft to American businesses to be approximately $300 billion annually.3
All U.S. businesses and citizens are right to be concerned about IP theft. Companies who operate in China know this better than most due to that nation’s joint venture policy for certain sectors. Essentially, if any foreign energy, auto or telecommunications company, whether from the U.S. or another nation, wants to do business in China, they are forced to form a “joint venture” with a local Chinese company. This, of course, would require the foreign company to do things like share manufacturing processes or IT infrastructure strategies with the Chinese partner.
This strategy is particularly effective for China as they have historically gone out of their way to make moving manufacturing to their nation desirable thanks to business-friendly policies. Apple, for example, is in the process of opening research and development centers in Chinese cities. To comply with Chinese policies, they’ve had to partner with Chinese firms to establish China’s first iCloud data center.
Both Microsoft and Amazon have already expanded their massive cloud computing businesses to China and had to adhere to the same local partner guidelines.
In addition to this relatively transparent form of IP transfer to China, there’s also ample evidence of illicit IP theft.
In 2015, the FBI said they had monitored and observed a 53 percent increase in IP theft from U.S. businesses. The FBI had surveyed 165 domestic companies, and half reported they had been on the receiving end of either economic espionage or IP theft. Nearly all instances – 95 percent – were perpetrated by or associated with China.4
There have been many blatant examples of Chinese companies using patented U.S. technology. Chinese telecommunications company ZTE was using technology patented by American firm Vringo for years without paying the company any licensing fees. When Vringo sought restitution, they claimed Chinese courts were essentially colluding with ZTE to ensure there would be no serious repercussions for the unlicensed use of their technology.
There’s also the well-documented theft of DuPont’s titanium dioxide (TiO2) manufacturing process. The commonly used compound is responsible for ultra-white coloring in everything from car paint to Oreo cookie filling. Although other companies produce TiO2, none of them have a process quite as efficient as DuPont’s, which is how the company turned TiO2 into a $2.6 billion business. Chinese manufacturers account for about 25 percent of global TiO2 demand, but the process China used to create the compound was significantly less efficient and more hazardous than DuPont’s process.
This led China to utilize what was essentially an economic spy, Walter Liew, to steal the process from DuPont. During his 2014 trial for economic espionage, a charge for which he was convicted and sentenced to 15 years in prison, prosecutors laid out in detail how Liew and his Chinese handlers went about stealing DuPont’s secret recipe for white over the course of 14 years.5
On September 25, 2015, Chinese President Xi Jinping told then-President Barack Obama that China would cease its cybertheft of U.S. IP, a practice China often denies but is widely believed to actively pursue. The agreement did not prohibit cyber spying, just the theft of IP.
CrowdStrike, a California-based cyber-security firm that counts many Fortune 500 companies among its clientele, monitors, notifies and stops just such cyber thefts and attempts at cyber espionage. They claim that the very next day, September 26, 2015, they stopped an attempted IP cyber theft by “China-affiliated actors.”6
What Is the Federal Government Doing in Response?
In March, the Trump administration announced the first rollout of tariffs targeted at China. The initial action imposes tariffs on up to $60 billion of Chinese imports. The administration’s explicit rationale for the imposition of tariffs was China’s licit and illicit taking of U.S. IP.
Congress took action on the issue in April 2016 with the Defend Trade Secrets Act, which was passed in the House with an overwhelming 410-2 victory and unanimous approval in the U.S. Senate.
That bill gave companies the ability to file suit in federal court for damages relating to the theft of intellectual property and trade secrets. Before the passage of the Defend Trade Secrets Act, companies could only file suit for IP theft in state courts, which didn’t carry the same weight and was inconsistent due to the diversity of state laws pertaining to intellectual property.
Would Your Business Benefit From Guidance on Protecting Your IP?
Your business, like many others, likely possess proprietary information and customer data that must remain protected. If you would benefit from guidance on anything from IP protection to tax and financial issues, consider contacting American Continental Group (ACG), a Washington-based bipartisan government affairs and strategic consulting firm. We strive to provide clients in a truly diverse array of sectors with premiere subject matter expertise, influence and guidance in all government affairs matters.