- The Washington Times - Wednesday, February 20, 2013

Obama administration officials seemed to go out of their way to downplay the notion that the policy is aimed at troublesome China while unveiling a strategy Wednesday to respond to the theft of U.S. trade secrets.

Officials, including Attorney General Eric H. Holder Jr., described for industry executives and others at the White House a plan to beef up enforcement of international agreements to protect U.S. firms from the theft of intellectual property, often via cyberattack. The framework includes more diplomatic confrontations with nations stealing trade secrets and better coordination with American industry.


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But in spite of a report this week, the latest of many to single out the Chinese military as being behind cyberthefts against more than 100 U.S. companies, administration officials walked gingerly on the subject of China.

China “is a country that does pose serious problems, but there are other countries as well,” said Undersecretary of State Robert D. Hormats. “We’ve had similar conversations with Russia and other countries,” including India.

Mr. Holder said the threat is growing because of rising American prosperity — and advances in technology are making it easier for thieves to steal.

“A hacker in China can acquire source code from a software company in Virginia without leaving his or her desk,” Mr. Holder said. “With a few keystrokes, a terminated or a simply unhappy employee of a defense contractor can misappropriate designs, processes and formulas worth billions of dollars.”

President Obama signed an executive order Feb. 12 calling on federal agencies to develop voluntary cybersecurity standards for sensitive parts of the private sector and to share more intelligence with them about cyberthreats. The House and Senate have tried to pass cybersecurity legislation in the past year but have failed to resolve privacy fears and concerns from business about excessive regulation.

There is a great deal of uncertainty surrounding the exact scale of trade secrets theft, according to scholars.

Estimates of the scale of the problem vary widely, and many are produced by security companies with a vested interest in making the problem look as bad as they can.

Enforcement risks

“Here’s the problem,” said Martin C. Libicki, a cyberwarfare researcher at the Rand Corp., a think tank with historic links to the U.S. military. “Is this a billion-dollar-a-year issue or a trillion-dollar-a-year issue, or something in between?”

“You have to balance the benefit you might derive from addressing the problem aggressively against the risks that approach entails,” said Mr. Libicki. The principal risk in this case, he said, was that tit-for-tat economic measures might spiral into a trade war.

Mr. Libicki also cast doubt on what he said was a “zero-sum model” of global trade and intellectual property transfers.

“There are a lot of legitimate, legal ways that we are transferring technology to China,” he said, noting as examples that there were 150,000 Chinese students in the United States, and that most big U.S. companies had manufacturing operations there, often owned by or with local partners.

“Legal and moral issues aside, from an economic point of view, there is no difference between licit and illicit technology transfer,” he said.

Both kinds of technology transfer would make China more prosperous, which in turn could be good for U.S. businesses by growing their potential markets there. U.S. consumers might benefit from cheaper, Chinese-made versions of patented products. Even the victimized companies might benefit in the long run, Mr. Libicki argued, if they were “forced to innovate.”

“There are all sort of offsets … all sorts of second- and third-order effects” that have to be considered when trying to measure the costs of intellectual property theft, he said.

“Their theft from us is a positive-sum proposition,” he said. “They gain more than we lose.”

Major threat

Intellectual property includes research and plans for new products, company logos or trademarks, and original artistic creations such as songs, books and movies. The theft of intellectual property can involve cyberintrusions, aimed at stealing data on a company’s computer network, but it also can mean the manufacture of counterfeit goods such as knockoff luxury consumer items or even the pirating and illegal sharing of movies and music.

The U.S. government has for many years said it regards intellectual property theft, especially by foreign states or state-owned companies, as a major threat to the nation’s competitiveness, and thereby its economic and national security. Since the passage of a 1996 law criminalizing economic espionage, the Justice Department has brought more than a dozen prosecutions against foreign state-related entities targeting U.S. trade secrets.

Former officials say the cases are challenging to bring because prosecutors must prove that the thieves were linked to a foreign government.

The DuPont case

One of the largest such cases — and the first, government officials say, to directly target a foreign government entity — involved a Chinese plot to steal a secret chemical process from E.I. du Pont de Nemours and Co., the chemical giant better known as DuPont.

The process, which DuPont scientists have refined and developed over 50 years, makes a white pigment, titanium dioxide (TiO2), for which there is a $17 billion annual market. DuPont controls 20 percent of it, largely thanks to its secret technology.

Last year, five individuals and five companies were charged in federal court in California with conspiracy and economic espionage crimes in relation to the alleged plot. The five firms are all members of the Chinese state-owned Panang Group of companies.

One of the individuals, an American named Tze Chao who had been an engineer at DuPont for 36 years, pleaded guilty last March.

“Pangang Group employees, in asking me to provide DuPont trade secrets to them, overtly appealed to my Chinese ethnicity and asked me to work for the good of the PRC,” he wrote in a plea agreement, referring to the People's Republic of China.

Chao is cooperating with investigators, who say Walter Lian-Heen Liew and Christina Hong Qiao Liew — a Northern California couple Mr. Chao worked for — were paid $20 million to steal the secrets. The other two people charged are another former DuPont scientist, Robert Maegerle, who has pleaded not guilty, and a Chinese executive of the Pangang Group thought to be at large in China.

The five companies have declined to enter pleas, arguing that prosecutors must go through the Chinese legal system to serve the indictments.

Procedural barriers like that are why some remain cautious about such prosecutions.

“The level of evidence required is quite high,” said Michael DuBose, an executive with global security firm Kroll and a former federal prosecutor.