Secrets, Secrets: The Trump Administration and Chinese Intellectual Property Theft

Monday, February 11th, 2019 at 6:13 pm by Conor Mercadante

On January 28, 2019, federal prosecutors announced a slate of criminal charges against Huawei, China’s largest smartphone company and the second-largest vendor of smartphones in the world.  Among other allegations, the indictment accused Huawei of stealing trade secrets from an American competitor, T-Mobile.  The charges mark just the latest step in an escalating effort to stop the theft of American intellectual property by Chinese companies, one that has gained steam since President Donald Trump took office in January 2017.  As the Trump administration navigates the broader complications of its relationship with China, it must not relax its attempts to combat the economic threat posed by trade secret theft.

The Problem: Theft of American Trade Secrets by Chinese Companies

The theft of intellectual property by international actors represents a massive threat to the American economy.  In 2017, the Commission on the Theft of Intellectual Property estimated that intellectual property theft inflicted a cost of somewhere between $225 billion and $600 billion annually on the American economy, with China the primary culprit.  The scale of some individual instances of theft can be downright staggering—in one notable case, a Chinese company stole as much as $8.75 billion in microchip technology from Idaho-based Micron.

According to U.S. law enforcement officials, China has long targeted American intellectual property as a way to boost its own domestic companies and sustain the country’s economic growth.  The Chinese government’s role in this campaign seriously complicates matters, as the complex combination of private actors and state assistance can make the threat difficult to combat.  “Beijing relies on an army of domestic computer hackers, traditional spies overseas and corrupt corporate insiders in U.S. and other companies” to carry out intellectual property theft, forcing American officials to play defense on a large number of fronts.

The Past: America’s Pre-Trump Approach to Trade Secret Theft

In 1996, President Bill Clinton signed the Economic Espionage Act (EEA), which sought to crack down on the theft of American trade secrets by establishing two new criminal offenses.  Federal prosecutors, however, only invoked the statute in 96 cases between 1996 and President Barack Obama’s inauguration in 2009.  The Obama administration significantly ramped up this effort.  From 2009 to 2016, federal prosecutors brought 69 criminal trade secret cases, for an increase of 20% over the preceding 13-year window.  China was often the target of these prosecutions—in 2015, 71% of trade secret cases featured Chinese defendants.

The United States also attempted to combat trade secret theft in ways beyond prosecutions.  In 2016, Congress passed the Defend Trade Secrets Act, which created a civil remedy to parallel the EEA’s criminal penalties.  Moreover, the Obama administration reached a cybersecurity agreement with the Chinese government in 2015 that included a bilateral promise to stop the theft of intellectual property from one another.  This diplomatic solution marked a promising step forward, although President Obama warned that the agreement’s words must be “followed by actions.”  Initially, China appeared to live up to its promise, as in the months after the agreement, Chinese commercial hacks of American companies dropped by roughly 90%.

The Present: The Trump Administration’s Approach to Trade Secret Theft

Since 2016, however, Chinese trade secret theft has once again increased at an alarming pace.  In response, the Trump administration has thus far maintained the Obama-era push for more prosecutions regarding trade secret theft, bringing nine such cases in 2017.  That initial surge was followed by a number of high-profile indictments, including the Micron and Huawei cases, as well as a pair of cases involving Chinese employees working on Apple’s self-driving car technology.  Additionally, in November, former Attorney General Jeff Sessions announced a new “China Initiative” aimed at countering Chinese intellectual property theft through increased investigations and prosecutions.

Perhaps more significantly, however, the Trump administration has generally adopted a more antagonistic posture toward China, both tonally and substantively.  Throughout his campaign, then-candidate Trump lambasted China’s trade relationship with the U.S., identifying intellectual property theft as a key issue.  In office, President Trump has, for better or worse, acted upon that rhetoric, citing trade secret theft as one reason for his continuing trade war with China and the $200 billion in tariffs he slapped on the country.

The Future: Remaining Trade Secret Challenges Facing the United States

Because President Trump’s trade war with China is ongoing, and the Department of Justice’s new initiative is just months old, it remains largely unclear if the administration’s approach to the trade secret issue has yielded any positive results.  A November report by the Trade Representative’s Office indicated that thus far, Chinese intellectual property thefts show no signs of slowing down.  Moving forward, a pair of key issues will likely feature prominently in any effort to combat this problem.

First, enforcement remains a significant challenge, as American officials struggle to hold Chinese companies and nationals accountable for their crimes.  The drawn-out extradition process that faces officials in the separate fraud prosecution of Huawei executive Meng Wanzhou provides just one example of such challenges.  The new DOJ initiative has included steps to address this problem, including relaxed service requirements for criminal indictments involving foreign companies, a move that has been critical in the Micron case.  Moreover, the Trump administration is beginning to pull levers beyond the DOJ, like utilizing Commerce Department export controls, to raise the pressure on Chinese offenders.

Second, the United States’ strained geopolitical and economic relationship with China means that trade secret theft is just one aspect of a far more complicated problem that the Trump administration must resolve.  The Chinese government’s outrage at the Huawei indictment only confirms the fragility of the broader situation, and some worry that China might retaliate by detaining Americans or bringing its own indictments against American companies.  As a result, there is concern in some corners that President Trump might be willing to relax his stance regarding trade secret theft, or even drop charges in certain cases, to secure a grander trade bargain with China.

Such a move would be a grave mistake that would normalize unacceptable behavior from an important trading partner.  While tariffs are almost certainly too blunt an instrument to resolve the intellectual property theft crisis, steps like the DOJ initiative seem, at least at first glance, to represent real progress toward holding China accountable.  Any larger economic agreement with China should include stricter, not laxer, treatment of trade secret theft, as well as real assurances from the Chinese government to fight the problem at home and stiff consequences for failing to do so.  In the meantime, the Trump administration must provide federal prosecutors the support necessary to continue to pursue cases like the Huawei indictment.

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