Five Chinese Military Officers Indicted. Now What?

by Richard J. Ellings
May 22, 2014

NBR’s president Richard J. Ellings discusses the implications of the recent indictment of Chinese military officials for cyberespionage and suggests that more needs to be done to protect U.S. intellectual property.

By Richard J. Ellings

President, The National Bureau of Asian Research

May 22, 2014

While the country has been distracted by other issues, from Snowden to Ukraine, the theft of American intellectual property has gone unabated. International IP theft is insidious and rampant. It is one of the major issues facing our economy. What America does best – innovation – is at stake. Millions of jobs, percentage points of GDP growth, and a sustainable economic recovery are at stake. Our capacity to stand strong internationally – our competitiveness, our defense industry – is at stake.

Obviously five high-profile indictments have a very limited chance by themselves of stopping the epidemic of IP theft. They do have the advantage of publicity, but they must be backed up by serious and concrete U.S. policy that is based on real leverage. The Report of the Commission on the Theft of American Intellectual Property was issued last year. It garnered front-page coverage then and coverage around the world since. Sponsored and published by NBR, it still contains the best and most comprehensive set of recommendations available. Many of those recommendations are grounded in the leverage available to the United States due to the richness and openness of our market.

A few of the options available include: (1) more comprehensive seizure of imported goods that have content derived from stolen IP; (2) for U.S. government procurement, more aggressive enforcement of existing law to eliminate through serious penalties counterfeit goods, or content of goods, in the supply chain; (3) denial of the use of the American banking system to the most dangerous, proven violators; (4) requiring listed companies to disclose IP violations to the Securities and Exchange Commission; and (5) amendment of the Economic Espionage Act (EEA) to enable a right of private action by companies that are victims of international trade secret theft. That’s the short list. Senators Chris Coons and Orrin Hatch are leading an effort to amend the EEA; many other members of Congress are working on various aspects of the challenge.

The advantages in all these recommendations are that they hinge on points of real leverage, are not aimed at any particular country, and are doable. In addition, even though the market rewards innovation in cybersecurity, further collaboration between the U.S. government and American private sector in developing cyber defenses and identifying attackers ought to be encouraged.

Is it a mistake for the Justice Department to single out China in its indictments? No. That is apparently where the evidence is clear, and that is the country that is by far the most aggressive in this arena. China has an industrial policy of stealing IP that goes back forty years and an aggressive cyber policy of stealing IP that goes back at least eight years, since the introduction in 2006 of the so-called “indigenous innovation” policy. The People’s Liberation Army (PLA) unit devoted to this nefarious activity began operations in Shanghai that year. Moreover, an implication of the details revealed about PLA officers allegedly at the keyboards is that the U.S. government knows who above these officers is complicit—and for that matter can figure out who around the world is up to this kind of criminal behavior. There may be some deterrent effect there.

However, indictments of people beyond the reach of the U.S. government inflict no direct penalties on state-sponsored or any other violators, and are thus not likely to put much more than a tiny dent in the problem. The benefits of stealing IP will continue to far outweigh the costs. Therefore, many in China and elsewhere will conduct business as usual, albeit more stealthily. And “China Inc.” and perhaps other countries will retaliate in ways that do inflict pain on American companies.

It is imperative the administration pursue a strategy that is based on real leverage and with an end game that is thought through. Otherwise, this high-profile legal action will fail to mitigate IP theft.