China Industrial Policy Seeks to Steal 'Crown Jewels' of U.S. Tech

White House exposes Chinese economic aggression

Xi Jinping
Getty Images
June 19, 2018

China's government is using a multi-pronged strategy to systematically steal advanced American technology as part of economic aggression against the United States, according to a White House report.

The report, based in part on declassified intelligence from the Pentagon and intelligence agencies, provides some of the first public details on China's industrial policies that have produced the world's second largest economy, often at the expense of American companies.

"The Chinese state seeks to access the crown jewels of American technology and intellectual property," says the report, made public Tuesday night.

China's economic strategy involves obtaining and utilizing technologies and know-how gathered from around the globe through a combination of state-sponsored theft, cyber attacks, violations of U.S. export controls, and counterfeiting and piracy.

However, most of the Chinese economic aggression has taken place in the United States or against American companies doing business in China.

China's economic aggression was defined by the White House as six behaviors: Theft, forced tech transfer, evasion of export controls, export restraints on raw materials, information-harvesting, and acquisitions.

Key American technologies targeted by the Chinese include artificial intelligence, blockchain know how, robotics, high-tech manufacturing, and high-tech shipping.

In dealing with American companies in China, Beijing has resorted to coercive and intrusive regulatory controls designed to force tech transfers from companies—based on promises of access to the Chinese market.

In the United States, China employs some of the hundreds of thousands of Chinese nationals studying and working at universities and research institutes to gain access to cutting edge technology and send it back to Chinese firms.

State-backed Chinese companies also are buying up American companies and hiring scientists and experts as part of the systematic program of economic aggression, the report said.

The 36-page report, "How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World," was produced by the White House Office of Trade and Manufacturing Policy. The office has been spearheading President Trump's policy of forcing China into changing its unfair trade and economic policies.

The report comes as the president announced on Monday he will add an additional $200 billion in tariffs on Chinese goods beyond the $50 billion announced last week. He announced the new tariffs after China retaliated by imposing $50 billion in tariffs on U.S. goods.

"China apparently has no intention of changing its unfair practices related to the acquisition of American intellectual property and technology," Trump said in a statement. "Rather than altering those practices, it is now threatening United States companies, workers, and farmers who have done nothing wrong."

The White House report is based in part on a Pentagon study produced by the Defense Innovation Unit Experimental, known as DIUx, that concluded, "the scale of the [Chinese economic] espionage continues to increase."

The report stated that U.S. national laboratories at Los Alamos in New Mexico and Livermore in California that are engaged in advanced defense research have allowed Chinese nationals to work there and obtain valuable information.

China has gained hypersonic missile technology from one U.S. laboratory. The ultra-high speed missiles are a priority for Beijing that seeks hypersonic weapons to defeat American missile defenses.

"Law enforcement efforts alone cannot keep up with (or adequately deter) a state-sponsored campaign of theft," the White House report said, noting that China's government has failed to cooperate with U.S. investigations of economic theft.

The theft program is supported by China's Ministry of State Security (MSS), the civilian spy agency that has deployed at least 40,000 intelligence officers abroad and 50,000 on the mainland, the report said.

The MSS spies are augmented by more than 100,000 personnel in People's Liberation Army cyber command that the report said has been fully operational since 2013.

China's cyber espionage effort involving the theft of American trade secrets costs the United States between $180 billion and $540 billion annually, the report said.

An example of China's violation of export laws was the case of Chinese national Amin Yu who was prosecuted for using shell companies to transfer U.S. systems and components for underwater vehicles to Harbin Engineering University in China from 2002 to 2012.

China's systematic counterfeiting and pirating of U.S. goods costs American companies as much as $600 billion annually.

To force the transfer of foreign technologies and intellectual property to Chinese competitors, Beijing uses a variety of means.

They include foreign ownership rules that require tech transfers; administrative approvals and licensing; security reviews; imposition of technology standards that provide "backdoor Chinese access to source codes," the report said.

"China uses security reviews to force foreign enterprises to disclose proprietary information," the report said. "At risk are source codes, encryption algorithms, and other sensitive IP."

Other methods are the forced research and development designed to facilitate tech transfer, the use of Communist Party committees, and placement of Chinese employees inside management at foreign joint ventures.

China also engages in large-scale open-source intelligence collection to gain access to American economic secrets.

"Large cadres of Chinese state actors engage in systematic, large-scale, open-source collection operations," the report said. "They exploit foreign science and technology information to acquire foreign technologies and intellectual property and thereby gain competitive advantage by circumventing the costs and risks of indigenous research."

Chinese science and engineering students in the United States "frequently master technologies that later become critical to key military systems, amounting over time to unintentional violations of U.S. export control laws," the report said.

The report identified China's Huawei Technologies, which has been identified as a national security threat by the Pentagon, as partnering with the University of California-Berkeley on artificial intelligence and machine learning programs that have military applications.

"Chinese state actors are strategically building research centers in innovation centers and hubs like Silicon Valley and Boston," the report said, noting the Chinese Internet firm Baidu created an institute in California to compete with Google, Apple, Facebook, and others in artificial intelligence.

China's strategy of gaining technology includes six lines of effort, according to the report.

They include protecting China's domestic market from competition and imports; expanding China's share of global markets; controlling core natural resources globally; dominating traditional manufacturing industries; acquiring key technologies and IP; and capturing emerging high-tech industries.

Peter Navarro, director of the White House Trade and Industrial Policy Council, called the president's actions against China "courageous and visionary."

"China has targeted America's industries of the future, and President Trump understands better than anyone that if China successfully captures these emerging industries of the future, America will have no economic future, while its national security will be severely compromised," Navarro told reporters on Tuesday.

Navarro said Trump has given China many chances to change its aggressive behaviors and promised action if Beijing failed to curb the activities.

Multiple negotiations failed to remedy two major problems, he said, the need to reduce the United States' $375 billion trade deficit with China, and China's continuing effort to steal critical American technology by any means necessary.

"It is important to note here that the actions President Trump has taken are purely defensive in nature," he said. "They are designed to defend the crown jewels of American technology from China's aggressive behavior."

Trump, Navarro said, is attempting to prevent China from controlling a list of technologies outlined in a Chinese government report called Made in China 2025.

"What are these? Advanced rail and shipping, aerospace, agricultural machinery, artificial intelligence, augmented and virtual reality, biotechnology, blockchain development, business application software, electronics, new-generation I.T., new materials, new energy vehicle, precision farming, robotics, and satellite communications," he said.

"These are the future of the world and of America, and China cannot have 70 percent of production of these industries by 2025."

Published under: China