China’s addiction to intellectual property theft

How much has China stolen? Hint: It’s much more than US$50 billion

President Trump just announced US$50 billion worth of tariffs and other penalties on China for its theft of intellectual property (IP), technology, and trade secrets. The administration says this theft has cost the US economy billions of dollars in revenue and thousands of jobs. These assertions of loss are correct.

Until recently, the United States probably lost between US$20 billion and US$30 billion annually from Chinese cyber espionage. This does not count the losses from traditional espionage. The cumulative cost may reach US$600 billion, since this kind of espionage has been going on for more than two decades.

Government-sanctioned theft is a boon to China’s businesses

Any estimate has to take into account that some stolen IP cannot be turned into products, making the loss in these instances zero. In other cases, however, the victim company suffers revenue losses for years to come. Chinese companies are getting an illegal “subsidy”— they can spend less on R&D, since they can access US research. The range of Chinese economic espionage, from simple household goods like wooden furniture and house paint to the most advanced high-tech products, is part of the explanation for China’s rapid growth.

Cyber espionage accounts for a majority (but not all) of IP theft. To summarize how we arrived at this figure, the United States lost roughly US$100 billion annually to cyber crime in the decade before the Barack Obama–Xi Jinping agreement renouncing commercial cyber espionage. Roughly a third of this was due to IP theft (the other two-thirds reflect losses from financial crime and recovery costs). China accounts for a majority of economic cyber espionage against the United States (perhaps three-quarters of the losses are from Chinese spying).

The ripple effects of serial theft

For some companies, the cost of Chinese IP theft can be fatal (when combined with other business problems). There is also an effect on employment. Research by the International Trade Administration and the European Union found that that US$1 billion in exports created roughly 6,000 jobs. Chinese IP theft reduced US exports, meaning the United States could have lost thousands of jobs annually. “Lost” is an inaccurate term, since the “net” employment loss can be smaller if workers displaced by IP theft find other jobs. But these new positions can pay less, since IP theft can shift employment away from high-paying jobs.

China has sought to acquire US technology by any means, licit or illicit, since Deng Xiaoping opened China to the West. Espionage and theft were part of this, but so were forced technology transfers or mandatory joint ventures as a condition for doing business in China. China’s development in automotive, aircraft, information technology, high-speed trains, and defense industries all benefitted from espionage. Many US companies yielded to these forced transfers, calculating that the immediate benefit of access to China’s market outweighs the eventual loss. After 30 years, those chickens have come home to roost.

Globalized theft of epidemic proportions

Companies also calculated that they could shield their most valuable technologies and that the technologies would have moved to a new generation by the time the Chinese were able to enter the market. These strategies were partially successful, but they worked better when China was less developed. Now that it is the second-largest economy in the world, what was tolerable before is no longer acceptable.

Sometimes you hear the arguments that the United States stole technology in the nineteenth century when it was growing and that China is only doing the same. But these arguments are feeble. In the nineteenth century, it was possible to steal a book, but with digital technologies, you can steal the entire library. The United States was a net contributor to the world stock of knowledge in the nineteenth century, and its innovations spread to other countries, given the absence of international IP protections.

Breaking China’s addiction to IP theft

In the nineteenth century, countries recognized that inadequate protection for IP hurt global economic growth and disincentivized innovation (people invest less in innovation when their work can simply be stolen). In response, they created a series of agreements to protect IP and trade in the international market. China routinely ignores these agreements, subsidizing its own growth at the cost of global innovation. China has become a country that can innovate, but it is unwilling to give up the crutch of economic espionage and will never do so unless it is pressed.

We can take issue with the style of this administration in confronting China, and we can worry that it has not thought carefully about how to deal with the inevitable Chinese retaliation or how to construct a path for China and the United States to come to a new accord on trade. China will not change its behavior absent external pressure, and pushing back against the constant drain from Chinese IP theft is long overdue.

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