U.S.-China Commercial Espionage will Crush Prospects for Technology Cooperation

Technology has become a new battlefield in US–China relations. But it could also be an arena for immense cooperative possibility if the framework underpinning two-way technology flows is fair, equitable and reciprocal. There should be no space to secure under-handed advantages via cyber-enabled intellectual property (IP) theft. Fair competition and technology cooperation are two sides of the same coin.

In this regard, the course of US–China trade and investment relations in the decade ahead could well hinge upon two events set just hours apart at the turn of November 2018.

On 1 November, US Attorney General Jeff Sessions announced the establishment of a China Initiative within the Department of Justice to combat Chinese economic espionage.

US accusations of China’s state-linked, cyber-enabled economic theft are as long-standing as China’s ‘indigenous innovation’ plans, starting with the 2005 Medium-and-Long Term Science and Technology Development Plan. In the early 2010s, an unprecedented wave of top-dollar outbound investments into firms in the United States and Europe was accompanied by a less-virtuous endeavour to gain unauthorised access to commercially-valuable proprietary information — including trade secrets — in a number of high-value manufacturing sectors.

To put a stop to this theft, former US president Barrack Obama extracted a commitment from President Xi in September 2015 that China would refrain from cyber-enabled IP theft for commercial advantage.

Judging that the 2015 commitment was not being honoured, Sessions and his successors have — since 1 November 2018 — brought a string of trade-secret theft cases against Chinese state-linked and private actors. The most recent case concerns Huawei’s alleged conspiracy to steal T-Mobile USA’s intellectual property.

Mere hours before Sessions announced the China Initiative, Donald Trump placed a call to Xi Jinping after a months-long hiatus, kicking-off the most productive phase of negotiations since US­–China trade tensions erupted in March 2018.

China wants to perpetuate a symbiotic high-technology trade and investment relationship with the United States. The dynamism of China’s domestic innovation system is based in large part on US-owned core technologies. That Washington’s foreign acquisitions and export control rules do not exclude Chinese innovators from acquiring these technologies abroad or working them at home is the key driver of President Xi’s readiness to level China’s tilted foreign investment regime and facilitate fair and reciprocal access for US businesses in the 90-day trade truce talks.

Both sides formally continue to treat these two tracks — law enforcement and negotiation — separately.

While this separation may be true as a matter of form, the two are intertwined. The indictments, and targeted embargoes imposed subsequently, against Chinese technology companies under the China Initiative could well cancel out the technology-sharing privileges that flow from a successful 90-day truce talks agreement. Effectively, that which Donald Trump allows on one hand, his Justice Department could just as easily take away with the other (even if Trump nominally enjoys the legal authority to override the Department).

In early November 2018, the US Justice Department charged Fujian Jinhua, a state-owned memory chip manufacturer and prospective national champion, with trade-secrets theft. The Commerce Department simultaneously imposed an embargo on US sales of software components to the company. Lacking access to critical imports, the company stands today on the brink of a production shut-down. Although latest reports suggest that a bilaterally negotiated effort may rehabilitate Fujian Jinhua, the threatened crippling of the company foreshadows the intertwining of negotiation and law enforcement that will characterise US–China high-technology interactions in the years ahead.

The Fujian Jinhua example is also a cautionary tale of the blowback that Chinese businesses could suffer from suspicions — and aspersions — of illicit state-enabled commercial gain. The less China resorts to such cyber-linked tactics and the more liberal and reciprocal its foreign investment and mergers and acquisitions regime become, the more likely that US administrations will continue to draw their ‘national security’ perimeter narrowly and facilitate the two-way intercourse in these civilian cutting-edge and foundational technologies.

The US law enforcement-on-steroids strategy against China’s technology theft is not without its risks.

A jury in 2017 dismissed T-Mobile USA’s allegation in the aforementioned Huawei civil case that the Chinese company’s actions were ‘wilful and malicious’. Now, the Justice Department intends to make those charges stick in a criminal case where the required burden of evidence is higher.

As late as spring 2018, the US State Department — the agency monitoring Beijing’s compliance with the 2015 Obama–Xi cyber commitments — had not cited any specific violation. With the trade war now underway, the Justice Department slaps a new Chinese trade theft case every other day, in turn inviting charges of politicisation. It is not sufficient to conclude that because players ‘associated’ were involved that the Chinese government too was involved; state intent and action must be shown.

It is also somewhat hypocritical for Washington to sermonise against state-linked actions intended to produce a commercial gain at a time when the full weight of the government has been thrown behind an orchestrated, and failing, campaign to skew private markets by discouraging whole countries — not just companies — from embracing Huawei’s 5G telecoms equipment.

At the end of the day, the bottom line is immutable: China’s state-linked cyber espionage for commercial gain must absolutely end. A rupture in the US–China trade, investment and IP relationship is too dear a price to pay for its continuance.