China is still getting away with the theft of intellectual property. They’re just being more stealthy about it. For this reason, the Section 301 tariffs that were designed to punish China for its breach of IP agreements, need to be amplified, opposed to weakened – as some members of Congress are proposing.
On Thursday, the U.S. China Economic and Security Review Commission held a hearing titled “China’s Cyber Capabilities: Warfare, Espionage, and Implications for the United States”, and while much of the panelists discussed the topic in the framework of cybersecurity and the Pentagon’s role, the main takeaway was that China continued to use internet intrusions for trade secrets.
The U.S. should not give tariff exclusions for importers, especially those that are not using those imports to manufacture anything here. Moreover, the U.S. should implement the full Section 301 duties, as CPA Chairman Zach Mottl called for on February 10. This includes the so-called List 4 items, valued at $300 billion.
China’s miss of the Phase One trade deal import target can arguably be chalked up to the pandemic. But its ongoing IP theft is another matter and should weigh on Washington when making changes to China tariffs.
Last month, FBI Director Christopher Wray highlighted the threat to intellectual property and U.S. economic security from Chinese activity, noting that “it’s reached a new level – more brazen, more damaging than ever before, and it’s vital that all of us focus on that threat together.”
“Whatever makes an industry tick, they target: source code from software companies, testing data and chemical designs from pharma firms, engineering designs from manufacturers, personal data from hospitals, credit bureaus, and banks.” – FBI Director Christopher Wray, Ronald Reagan Presidential Library and Museum, Simi Valley, California, January 31, 2022
Neil Jenkins, Chief Analytic Officer from Cyber Threat Alliance, told the Committee in his opening testimony that China’s ”Made in China 2025” plan was a useful guide to the industries China will target for intellectual property theft. This includes information technology, robotics, aerospace, biopharmaceuticals, medical, electrical, farming, rail, new energy vehicles, and green technologies.
“Prior to the 2015 Obama-Xi agreement, Chinese activity was relatively loud from a cybersecurity perspective,” said Jenkins. That 2015 agreement was hardly an agreement. President Obama referred to it simply as a “common understanding”.
Jenkins said that prior to that “understanding”, China would use spearphishing emails to target entities across nearly every critical infrastructure sector. Chinese government agencies were going after data.
Today, Chinese actors “concentrate on lower-volume but more- sophisticated, stealthier operations collecting strategic intelligence to support Chinese strategic political, military, and economic goals,” Jenkins told the Committee. They have transitioned away from spearphishing and often use harder-to-detect tactics, techniques and procedures such as software vulnerabilities, living-off-the-land binaries, dual-use tools like Cobalt Strike, and exploitation of network devices and web-facing applications.
“They also have been seen leveraging supply chain vulnerabilities and targeting third-party providers, such as Managed Security Providers, to gain access to their eventual end targets,” Jenkins said.
Depending on the target, the information collected is then used to help China climb the developmental ladder on advanced technology, gene therapies, and other new economy sectors faster than most.
In 2017, teams of hackers connected to the Chinese Ministry of State Security had penetrated Hewlett Packard’s cloud computing service and used it as a launchpad to… plunder reams of corporate and government secrets for years in what U.S. prosecutors say was an effort to boost Chinese economic interests. The hacking campaign, known as “Cloud Hopper,” was the subject of a U.S. indictment in December 2018 that accused two Chinese nationals of identity theft and fraud. Prosecutors described an elaborate operation that victimized multiple Western companies but stopped short of naming them. A Reuters report at the time identified two: Hewlett Packard Enterprise and IBM. The IP theft ensnared at least six more major technology firms. – “Inside the West’s Failed Fight Against China’s ‘Cloud Hopper’ Hackers” by Jack Stubbs, Joseph Menn and Christopher Bing, June 26, 2019, Reuters.
Dakota Cary, Research Analyst at the Center for Security and Emerging Technology at Georgetown University said China has no plans of stopping IP theft.
“There is an existing mandate for firms to support Chinese intelligence collection,” Cary said. “The Chinese government has made clear in recent months that the CCP rules…and companies will just obey.”
He mentioned one company in particular as an open door to state-sponsored hackers — Qihoo360. The private sector tech company was listed on the NYSE on March 28, 2011 and delisted on July 18, 2016.
Qihoo360 founders squeezed out U.S. shareholders in mid-2016 at a valuation of $9.3 billion because they had plans to list in China instead. In February 2018, they relisted Qihoo on the Shanghai Stock Exchange at a valuation exceeding $60 billion, a 550% return. Qihoo’s chairman personally made $12 billion, more than the entire company was claimed to be worth 18 months earlier.
UBS and Citi were its lead underwriters helping to get them started in their sophisticated investor scheme.
“Despite the 2015 U.S.-China Cyber agreement in which both countries agreed to refrain from stealing intellectual property, China has been flagrantly violating the agreement over the last eight years,” said Winnona DeSombre, Research Fellow at the Atlantic Council and at the Harvard Belfer Center.
Xu’s purpose was to hand that technology over to a Chinese aircraft manufacturer.
“The 2015 agreement initially resulted in intellectual property being stolen at a slower observable rate,” she said. “This is no longer the case.”
IP theft was the reason for the Trump administration’s use of Section 301 of the Trade Act of 1974, which made sense as WTO rules offered little remedy for technology theft. But Section 301 is a broad statute that can be used for many forms of unfair trade. Section 301 allows tariffs based on another country denying a benefit under a trade agreement, or any “unjustifiable” action that “burdens or restricts” U.S. commerce; or “unreasonable” and “discriminatory” action against U.S. commerce. Section 301 tariffs are reviewed by a Committee inside the USTR’s Trade Policy Staff Committee (TPSC). It is this group that ultimately reviews Section 301 tariff exclusions and makes recommendations to the TPSC regarding potential actions under Section 301.
At the hearing, DeSombre recommended the Department of Commerce or Treasury add Chinese institutions connected to cyber operations to the Entities List, or sanction them. This would ban them from using U.S.-produced operating systems and microprocessors, which Chinese firms rely on. CPA also urges the expanded application of capital markets sanctions, whereby companies who have export or other restrictions placed on them for national security and foreign policy reasons (i.e., being placed on the Entity List or other watch lists) are prohibited from having their shares traded in U.S. markets and having access to U.S. capital in their home markets.
“China has used stolen intellectual property in violation of international agreements,” CPA Chairman Mottl said in the February 10 statement. Now that it is clear China’s Phase One trade deal targets were missed, and the U.S. China Economic and Security Review Commission is saying IP theft continues, Section 301 tariffs should be expanded, he said. “The 301 tariffs for products covered under Lists 4A and 4B should snap back to their original levels.”