Report My Signal- Professional Matters

China's Economic Espionage

Why It Worked in the Past But It Won't in the Future

James A. Lewis

November 13, 2012

 

Mao Zedong believed that revolutionary fervor could overcome technological backwardness. But when more pragmatic leaders took power in Beijing, they found that China lagged so far behind the West that the country risked permanent second-class status.

Mao’s successor, Deng Xiaoping, launched China’s rise by reforming the economy and opening the country to the West. With this opening, however, came a long-running, state-sponsored espionage program to acquire advanced technology and accelerate the growth of China’s civil and military industries. And when Western companies first went into China, they believed that the damage from espionage was tolerable, part of the cost of doing business in the world’s fastest-growing market, and that they could “run faster” to create new technologies, thereby minimizing any loss. But what was tolerable when China was a developing economy is no longer acceptable when it is the second-largest economy in the world and a potential military competitor.

China is not the only country to use economic espionage, but it is the most aggressive. In key industries -- telecommunications, aerospace, energy, and defense -- the strategy has worked well. Now, the new Chinese leadership risks seeing the boost from spying undercut both China’s international leadership and its quest for indigenous innovation. 

HOW THEY DO IT

China’s efforts combine official collection programs with the efforts by individuals, companies, and civil agencies. This reflects China’s broad approach to foreign intelligence gathering -- instead of relying on officers under official cover, China uses businessmen, researchers, and students to assemble information. The targets include contracts, merger and acquisitions plans, and above all, technology.

There are dozens of cases. The efforts are bold and ambitious -- a single program once targeted dozens of companies, foreign governments, and Tibetan activists. Google lost search technologies that helped its Chinese competitor. Chinese spies sat on Nortel’s networks for years, harvesting data until the company went out of business. Spies hacked into U.S. nuclear labs and stealth research centers. When Germany helped build China’s high-speed trains, it found its own design dumped for an indigenous product that looked remarkably similar. Coca-Cola, planning to acquire a Chinese firm, suddenly saw its networks hacked for business information -- what the head of Britain’s MI5 called “normal business practice” for Beijing. China's government, which has spent billions to control the Internet, cannot argue that it is unwitting of these acts. In fact, it supports them.

Companies that are victims often conceal their losses; many are not even aware of what has been taken. Estimates of losses to businesses from espionage range up to a trillion dollars, but these are based on anecdote, extrapolation, and bad math. Whatever the dollar loss, economic espionage shifts the terms of engagement in China’s favor and accelerates programs as diverse as stealth fighters and automobile parts. 

Serious as it may be, this is not an existential threat or a “death by a thousand cuts.” To make use of stolen technology, the information must be accurately translated from English to Chinese (no easy task) and then given to someone with the necessary skills and an industry ready to apply it. For China, there has been a lag of many years between successful acquisition through espionage and the production of competing products, both military and civil. One troubling trend is that the time it takes to turn stolen technology into a product is decreasing as China’s ability to absorb and utilize technology improves.

Espionage is a two-way street. Washington spies on China, but it does not steal technology. Despite what the Chinese believe, the United States is not the only country to complain. Germany’s Chancellor Angela Merkel (along with U.S. President Barack Obama) raised the espionage issue with China’s President Hu Jintao. The British, French, German, Canadian, Japanese, Indian, and Australian security services have all warned their companies and researchers about the risk from China.

The National Counterintelligence Executive’s 2011 report to Congress on industrial espionage publicly identified China (as well as Russia) as the leading threats for economic espionage, noting that of the seven cases litigated in 2010 under the Economic Espionage Act of 1996, six involved China.

China lists several reasons why it should not be held accountable: It is still a poor and developing country, the West owes it for imperialism and the “century of humiliation,” and after all, the United States did the same thing in the nineteenth century. All of these excuses can be dismissed. China is no longer poor. The United States was not responsible for European imperialism. To argue that the United States should not object to espionage by China, as we were guilty of doing the same to Britain, is inane. In a manner of speaking, the United States stole books; China steals libraries.

Perhaps most important, in the nineteenth century the United States was a net contributor to the global stock of knowledge, with its citizens creating steamboats, the telegraph, the cotton gin, and countless other inventions that nations freely copied. China has made no such contributions. The biggest change is that there was no agreement then to protect intellectual property. The experience of the nineteenth century led countries to conclude that weak protections hurt innovation and trade, and they began a century-long sequence of negotiations (the first treaty was signed in 1883) that culminated in the 1994 Agreement on Trade-Related Aspects of Intellectual Property Rights. The United States observes these treaties; China does not. 

SOME STATESMANSHIP IS IN ORDER

China’s national strategy to acquire technology illicitly from Western companies handicaps its own development. Beijing’s economic plans have for decades emphasized the need to build indigenous high-tech industries and reduce dependence on foreign producers. Pilfering Western technology is a crutch that keeps China from moving up the “value chain” and becoming a nation of innovators. There is a puzzling lack of faith in China’s own strengths. Its companies and inventors will do better if they compete fairly, if China embraces a global approach rather than “techno-nationalism.” But without outside pressure, Beijing has concluded that now is not yet the moment to tame the decades-old effort to pilfer technology.

Obama reportedly raised espionage with Hu’s successor, Xi Jinping -- a good start that needs to be followed by action, which could range from simple steps such as denying visas or ejecting attachés to threatening new restrictions on cooperation and trade. There are precedents from the Reagan, George H.W. Bush, and Clinton administrations. In the 1980s, Washington and its allies discovered a massive Soviet economic espionage program. They took a number of dramatic steps in response, tightening trade relations, expelling Soviet diplomats, and employing disruptive covert measures. In 1992, then secretary of state, suggested to a close ally that it reduce its collection activities or face reprisals; when it at first ignored his warning, he took penalizing steps. In the mid-1990s, the director of the Central Intelligence Agency went to a European ally and also suggested that it reduce collection activities or face reprisal.

In each case, the level of espionage declined after the United States intervened. These were not law enforcement actions. Arresting and trying spies is part of an effective response, but quiet diplomacy, reinforced with a little pressure, works better. 

Another approach would be to treat economic espionage as a trade issue and hold China to its World Trade Organization commitments. But trade policy is timid and legalistic. Those who oppose action against economic espionage include companies with significant interests in China that, with reason, fear retaliation by Beijing. People worry that the Chinese have too much leverage and that the United States is handicapped in objecting. It is actually the other way around -- they need us as much or more than we need them, and the United States will have most of the world on its side, given how many countries have suffered. 

Economic espionage lies at the heart of the larger issue of China’s integration into the international system -- the norms, practices, and obligations that states observe in their dealings with one another and with the citizens of other states. A failure to hold China accountable for espionage undermines efforts to bring Beijing into the fold. In the end, any peaceful rise requires that China play by the rules, even if it seeks to change them, rather than pretend they do not apply.