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CONTRIBUTOR BIO
AMY HOLMES is a fourth year Political
Science major graduating in June 2019.
She will graduate with a Pre-Law
concentration and French and Global
Politics minors. At Cal Poly, Amy is the
Executive Editor of Paideia, Political
Science Club President, a member of the Pi
Sigma Alpha honors society, and a member
of the Phi Alpha Delta pre-law fraternity.
Originally from England, Amy grew up
in Yucaipa, California. Her academic
interests in international affairs stem from
her international upbringing. She studies
intellectual property law and international
affairs, and this fall she will move on
to law school. Amy’s personal interests
include baking, reading, and traveling.
By Ethan Gunnlaugsson
138
Abstract
Growing in frequency in recent years, theft of United States intellectual
property by China has become a serious concern for the US government.
This theft impacts many areas of US life including increased cost of goods,
difculty participating in international trade, and increased national security
concerns. This paper looks at three areas of intellectual property theft: patent
theft, copyright theft, and trade secret theft, using specic examples of each.
In examining each of these examples, we discuss the implications of this
theft for US citizens as well as the relationship between the United States
and Chinese governments. This paper concludes that Chinese intellectual
property theft has a signicant negative impact on the relationship between
China and the United States and should be curtailed appropriately by both
governments.
Introduction
In the fall of 2018, the United States announced that it was launching
a campaign against China’s continued economic attacks through intellectual
property theft.
1
The new initiative, called the China Initiative, by the US
Government combines ongoing efforts by the FBI and Justice Department
into one cohesive unit, with a goal of combating trade secret theft.
2
By
heavily analyzing foreign investments into ‘sensitive technologies’ such as
those within the telecommunications sector, the US government believes that
they can locate the sources of the most dangerous intellectual property theft
1 Ellen Nakashima, “With new indictment, U.S. launches aggressive campaign to
thwart China’s economic attacks,” The Washington Post (November 1, 2018).
2 “Attorney General Jeff Sessions Announces New Initiative to Combat Chinese
Economic Espionage,” speech, Ofce of the Attorney General, Washington D.C.,
November 1, 2018).
Intellectual Property Theft and its Impact on the
US-China Relationship
Amy Holmes
139
threatening the US today. This initiative “sends a clear message to Beijing
that Chinese economic espionage — whether by cyber or human means —
will not be tolerated.”
3
The China Initiative will focus on US trade secret
protection overseas, by ensuring that there are adequate protections both
domestically and internationally. Domestic protection is reasonably secure,
but international security, especially in nations such as China, is weak and
leaves other countries at risk of theft.
4
The formation of this initiative represents continuity over time.
Intellectual property disputes have been a signicant issue between
the United States and China.
5
For instance, the Trade-Related Aspects
of Intellectual Property Rights agreement (TRIPS) of the World Trade
Organization, formed in 1995, introduced countries to many issue areas of
intellectual property.
6
The TRIPS agreement requires all member nations of
the World Trade Organization to adhere to minimum standards of intellectual
property rights within their home nations in order to better protect global
rights and laws.
7
Since the formation of TRIPS in 1995, the United States has
led twenty three dispute cases against China alone.
8
One of the purposes of
the TRIPS agreement is dispute settlement, however, this settlement option is
geared more toward country-based disputes rather than individual disputes.
In more recent years United States citizens have been increasingly ling
intellectual property claims against Chinese citizens and companies within
US courts in an attempt to assert their dominance over Chinese companies.
While intellectual property theft has been prevalent for years, it has increased
signicantly in more recent times, with China being one of the biggest
perpetrators.
9
The implications of the China Initiative on US technology and public
policy will likely be substantial. As technological innovation continues to
progress, intellectual property rights and their protection will also become
more prevalent. Intellectual property theft hurts many aspects of US life
including consumer health & safety, economic stability, and national
3 op. cit., fn. 1.
4 Ibid.
5 World Trade Organization, “Disputes by Member,” World Trade Organization.
6 World Trade Organization, “TRIPS: An Overview,” World Trade Organization.
7 Ibid.
8 op. cit., fn. 4.
9 Ofce of the United States Trade Representative. 2017. 2017 Special 301 Report.
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security.
10
When countries like China illegally replicate US goods, they
may do so using unsafe or hazardous materials, and they may also fail to
ensure that the consumer will be able to safely use these products. When
DVDs, CDs, and other multimedia are pirated and re-distributed, the
consequences for those involved in the original production are incredible.
Nearly every person involved in the creation of that media is harmed
economically, through what could be prevented with proper enforcement of
intellectual property laws. It was estimated in 2007 that music theft alone
amounts to losses of over $15 billion annually.
11
With the popularization
of streaming services, such as Spotify and Pandora, the economic losses to
the music industry alone are staggering. While music theft is a large issue,
it is minuscule in scale to the issues of patent, copyright, and trade secret
theft. One of the most concerning aspects of intellectual property theft is the
threat it poses to national security. Many of the technologies developed for
national security purposes are protected by trade secret laws.
12
Trade secrets
are extremely vulnerable to theft through hacking, international investment,
and intra-industry job changes.
13
The China Initiative plans to focus on
these issue areas to protect US intellectual property on a global scale.
14
This initiative will likely result in litigation between China and the US over
intellectual property and more in-depth procedures for global protection
of intellectual property. The growing battle between China and the United
States over technological and economic power leads me to ask this research
question: How does intellectual property theft impact US – China relations?
To illustrate the impact of intellectual property theft on US – China
relations, this paper will use qualitative methodology in the form of case
study research. These case studies will examine different instances of
Chinese theft of US intellectual property through patents, copyrights, and
trade secrets.
10 Ibid.
11 Stephen E. Siwek, “The True Cost of Sound Recording Piracy to the U.S.
Economy,” Institute for Policy Innovation: Center for Technology Freedom (August
2007).
12 “International Trade and Finance: Overview and Issues for the 115th Congress,”
Congressional Research Service (March 5, 2018).
13 Ibid.
14 Op. cit., fn. 2.
Amy Holmes
141
Case Study: Patent Theft
According to claims by the Ofce of the United States Trade
Representative (USTR), China has been repeatedly denying U.S. patent
holders the intellectual property rights that they are entitled to, as declared by
the TRIPS agreement.
1516
The statement by the USTR alleges that China has
enacted policies that accord less favorable treatment to foreign intellectual
property rights holders than Chinese citizens.
17
China has repeatedly
promised the United States that it will work toward curbing the intellectual
property theft that occurs within its borders and has repeatedly failed to keep
those promises. Chinese domestic intellectual property rights declarations
include provisions that prohibit imported technologies from “restricting a
Chinese party from improving the technology or from using the improved
technology.”
18
These provisions are one of many that promotes Chinese
intellectual property theft. When expanding into international markets,
business owners and their innovation teams have expectations that their
technologies and intellectual property will be safe and remain protected
regardless of where the information is taken to.
19
However, China has proven
that this is not the case within its borders.
In 2014 Segway Inc. creator of the self-balancing transportation
system also known as Segway, led a complaint through the United States
International Trade Commission alleging patent infringement by China-based
Ninebot Inc.
20
Segway claims that Ninebot and their associated companies
infringed upon four of Segway’s US patents, including the patent for their
then unrivaled “yaw control” which allowed for the balancing of the device
while the passenger was onboard.
21
There were three Chinese manufacturers
of these self-balancing scooters mentioned in the complaint, all of which
were believed to have infringed upon at least one of the patents, and most
15 Glenn Hess, “U.S. Files Complaint Over China’s Patent Policies,” American
Chemical Society (April 2, 2018).
16 op. cit., fn. 5.
17 “USTR requests consultations with the government of the People’s Republic of
China,” (press release, Ofce of the United States Trade Representative, 2018).
18 Ibid.
19 Brian T. Yeh, “Intellectual Property Rights Violations: Federal Civil Remedies and
Criminal Penalties Related to Copyrights, Trademarks, Patents, and Trade Secrets,”
Congressional Research Service (May 27, 2016).
20 Segway Inc. v. Ninebot Inc, et al., United States International Trade Commission,
(2014).
21 Ibid.
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of which were believed to have infringed upon all four mentioned patents.
These devices were manufactured in China and then imported into the United
States where they were sold for prot.
22
Instead of pursuing legal channels,
this dispute was settled by Ninebot Inc. purchasing Segway Inc. in order
to gain access to the original patents, and therefore no longer be liable for
infringement.
23
Events like the Segway case are more common than one would think,
however enforcement of these infringements is not always feasible. A United
States-based company may have patent protection domestically, and in some
other countries, but receiving a patent in China is a more difcult process.
The application for a patent must be submitted in Chinese, which can often
to lead to incorrect translations, resulting in vital aspects of the patent being
excluded from the application.
24
Often times there are technical terms used
in English that do not translate to Chinese, and instead of nding an alternate
means of communicating the idea, the translator will leave the section out
entirely. The enforcement mechanisms in China are also problematic. As
mentioned earlier, international patents are given signicantly less protection
than those led with the Chinese government.
25
China has also been known
to restrict access to the Chinese market unless a company agrees to turn over
their intellectual property to the Chinese government for their unrestricted
use.
26
China produces approximately 62% of the world’s counterfeit goods,
and when China is set to include Hong Kong, that number jumps to over
80%.
27
The lack of enforcement and continued manufacturing of counterfeit
goods severely harms the relationship between the United States and China.
United States-based companies are less likely to look toward China as a
production center, as these companies do not want to risk losing intellectual
property protection or face the issue of unenforceable infringement within
China. The United States also faces signicant battles in allowing Chinese
goods into the US market when they may be patent infringing or counterfeit
goods.
22 Ibid.
23 Jack Linshi, “Why This Chinese Startup Just Bought a Company Americans Love
to Ridicule,” Time Magazine (April 15, 2015).
24 EU China IPR Helpdesk, “Guide to Patent Protection in China,” China IPR SME
Helpdesk (2018).
25 European Commission, “Report on the protection and enforcement of intellectual
property rights in third countries,” European Commission (February 2, 2018).
26 Ibid.
27 Ibid.
Amy Holmes
143
Case Study: Copyright Theft
Copyright protects expressions xed in a tangible medium. Many
literary works, including scholarly articles, are protected by copyright.
28
Registration is not required for copyright protection both domestically
and internationally, though it is recommended. Despite there being no
full and complete registry of copyrighted works, there are still alleys
for litigating infringement. China is one of the biggest perpetrators
of copyright infringement and piracy in the world, despite its alleged
commitment to preventing and prosecuting these crimes.
29
China has been
placed on the Priority Watch List by the United States for its “widespread
infringing activity, including trade secret theft, rampant online piracy and
counterfeiting, and high levels of physical piracy and counterfeit exports to
markets around the globe.”
30
Computer software is one example of a copyrightable material that is
extremely vulnerable to theft. Many companies choose not to register their
software for copyright protection due to the secretive nature of their source
code. Source code is the proprietary code behind a computer software, and
often includes comments on how the software works.
31
While registration
of the copyright is not required, it increases the likelihood of succeeding in
litigation. In China, this process is made signicantly easier if the owner of
the copyright has previously registered it. However, the registration system in
China requires that owners provide extremely detailed information regarding
the material to be copyrighted.
32
Once the information is submitted, it is
entered into a database which the Chinese government alleges is used
only in the event of litigation.
33
However, it is suspected that the Chinese
government looks at the registrations and choosing to pursue infringement on
those that look to provide the most economic incentive.
34
The theft of United State intellectual property becomes increasingly
28“What Does Copyright Protect?” US Copyright Ofce.
29 Grant Clark, “What’s Intellectual Property and Does China Steal It?” Bloomberg
(March 22, 2018).
30 op. cit., fn. 9.
31 Merriam-Webster, “Source Code,” Merriam-Webster Dictionary (1965).
32 EU China IPR Helpdesk, “How to File a Copyright Registration in China,” China
IPR SME Helpdesk (2018).
33 Ibid.
34 Paul Goldstein, “Intellectual Property and China: Is China Stealing US IP?”
Stanford Law (April 10, 2018).
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144
concerning when defense technologies are involved. Many of these
technologies may not be registered due to the protection of sensitive
materials but are still vulnerable to theft through other measures. Copyright
theft has become increasingly perpetrated through digital hacking.
35
Chinese
citizens hack into computers and networks located in the United States and
take valuable information off of them without the owner of the material
or computer ever knowing.
36
Effective countermeasures to this theft have
proven difcult to implement due to the advanced hacking capabilities of the
Chinese citizens, as well as the lack of consequences within China to deter
citizens from committing these crimes. After negotiations with the United
States in 2018, China has once again, committed to strengthening their
intellectual property protections. It has also ensured the United States that it
will increase the consequences of intellectual property theft, however, it will
be at least a year before the results of these measures are seen.
37
Copyright theft, piracy, and counterfeiting impact many areas of the
United States life, however, the national security aspects of these incidents
are some of the most dangerous. Counterfeiting, which is a form of copyright
infringement, can have extremely dangerous results. Pharmaceutical
counterfeiting is one of the most dangerous forms of copyright infringement
for American citizens. Counterfeit drugs may be created using hazardous
or toxic materials that do not serve the purpose of the original drug and
may cause life-threatening results. Counterfeit medications make their way
into the hands of United States citizens through online pharmacies which
are becoming increasingly difcult to regulate.
38
Chinese servers often host
these pharmacies and post drug prices that are extremely appealing to US
consumers. Mechanisms to detect these counterfeit pharmaceuticals are not
foolproof, as the Food and Drug Administration cannot have access to every
pill that enters into the United States.
39
Copyright infringement has a signicant impact on the relationship
between China and the United States. Theft of source code could have
serious implications for the national security of the United States and
35 op. cit., fn. 9.
36 Ibid.
37 Wayne M. Morrisson, “Enforcing US Trade Laws: Section 301 and China,”
Congressional Research Service, (December 3, 2018).
38 Temple University, “Combating Counterfeit Pharmaceuticals from China,” Science
Daily (July 17, 2017).
39 Ibid.
Amy Holmes
145
the power battle between China and the US. The counterfeiting of
pharmaceuticals could have major ramications if these drugs lead to the
death of an American citizen. Basic piracy leads to signicant economic
losses for the United States and has the potential to alter the entertainment
industry immensely. While China continues to promise that they will
improve the protections for intellectual property rights within its borders,
they have repeatedly fallen short of their targets, and it will be years before
the newest round of promises begins to have an effect. The relationship
between China and the United States depends on China improving its
protections and preventing or discouraging these thefts in the rst place.
Case Study: Trade Secret Theft
In 2013, Micron Technology, an American company that produces
semiconductor devices, including dynamic random-access memory (DRAM),
bought a Taiwanese chip maker and created Micron Memory Taiwan, an
Asia-based offshoot of their main corporation focused on building DRAM.
40
DRAM is considered an old technology in the US, but prior to the formation
of MMT, it had never been produced in China.
41
According to an indictment
by the US Department of Justice, the President of MMT left soon after the
purchase and moved to another technology company. The new company then
set up an over $700 million deal with Jinhua, a Chinese government-owned
company, and began producing DRAM around 2016, a rst for China.
42
It
was fairly clear to Micron, as well as the Department of Justice, that the
President of MMT had taken valuable trade secrets learned during his time at
MMT and used them in his new position.
43
Events such as these are caused by weak laws and enforcement in other
countries. According to a CRS report on the Protection of Trade Secrets,
a company’s ability to protect its trade secrets is diminished, sometimes
completely, by weak rule of law and ineffective or non-existent enforcement
of intellectual property rights.
44
Theoretically, this is where a global system,
such as TRIPS, should come into play for the protection of IP rights in
40 Adam Rogers, “US Accuses Chinese Company of Stealing Micron Trade Secrets,”
Wired Magazine (November 1, 2018).
41 Ibid.
42 United States of America v. United Microelectronics Corporation, et al., CR 18 465,
(2018).
43 Ibid.
44 Brian T. Yeh, “Protection of Trade Secrets: Overview of Current Law and
Legislation,” Congressional Research Service (April 22, 2016).
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foreign nations. However, China has continually violated its promises to
the US to curb IP theft occurring from within its borders.
45
This lack of
enforcement then leaves it the US to seek out and attempt to prosecute theft
occurring overseas. When the theft is perpetrated by a general company with
no government ties, the US refers to it as trade secret theft. However, when
the theft involves another government, such as the Micron case, it becomes
economic espionage.
46
Trade secret theft is one of the most dangerous aspects of IP theft,
due to its prevalence in national security. The Trump administration has
recently banned certain government agencies from using devices produced
by Chinese manufacturers amid fears that they may contain backdoors that
provide access to US government networks.
47
Many of the technologies
developed with national security in mind are protected by US trade secret
laws. They are extremely vulnerable to theft through hacking, international
investment, and as seen in the Micron case, persons switching jobs within
the same eld. This is likely why the Trump Administration is focusing so
heavily on trade secret theft and economic espionage. While the Micron
case gives us a great example of employment risks, one of the largest risks
to national security comes from foreign investment.
48
When technology
companies begin their marketing process, they are eager to break into the
Chinese market. However, China selectively grants market access to foreign
investors in exchange for the transfer of technology, often protected by US
trade secret laws. This results in what some may think is trade secret theft,
but is actually a legal mechanism for gaining access to US intellectual
property.
49
According to a study by PriceWaterhouseCoopers and the Center
for Responsible Enterprise and Trade, the economic losses stemming from
trade secret theft alone amount to between one and three percent of US GDP
annually, or roughly 350 billion dollars a year.
50
The difculties in nding
and prosecuting those involved in this theft are what result in the losses being
so signicant.
45 op. cit., fn. 8.
46 Charles Doyle, “Stealing Trade Secrets and Economic Espionage: An Overview of
the Economic Espionage Act,” Congressional Research Service (August 19, 2016).
47 Catalin Cimpanu, “US Bans Exports to Chinese DRAM Maker Citing National
Security Risk,” ZDNet (October 28, 2018).
48 op. cit., fn. 10.
49 op. cit., fn. 8.
50 PwC & CREATe.org, Economic Impact of Trade Secret Theft: A Framework for
Companies to Safeguard Trade Secrets and Mitigate Potential Threats (February 2014).
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One of the reasons that China is so prevalent in the theft of US intellectual
property is that they have no incentive to crack down on it. The theft benets
its economy, and likely directly benets the Chinese government. This is why
it is vital that the US takes steps to prevent the theft in the rst place. Once it
is in Chinese hands, the only remedies are punitive and cannot compensate
for the losses caused to US companies. While US companies can sue in the
United States, and the government as a whole can choose to pursue dispute
settlement through TRIPS, neither of these methods have proven successful
in deterring Chinese trade secret theft.
So, what? Implications of Research Findings
Intellectual property theft has a profoundly negative impact on the
relationship between China and the United States. It causes the United States
to look more closely and more suspiciously at foreign investment, potentially
limiting funding options for US-based companies. Intellectual property theft
also amounts to signicant economic losses for the United States each year.
These impacts go beyond just the penalties and losses of the theft. In order
to combat theft, the US must put forward more than just the threat of the
company being sued. In recent months, the US government has threatened
sanctions against China due to its rampant theft.
51
While sanctions may
offer some temporary relief, they will not be a lasting solution, as retaliatory
sanctions that further harm the US economy are often placed in response.
China and the US have a deep trade relationship. China is the United
States’ largest trade partner, exchanging over $636 billion in goods in 2017
alone.
52
China’s intellectual property theft could severely damage this trade
relationship, leaving both countries struggling to nd the goods they need
to continue life as usual. My research ndings show that there is a desperate
need for increased intellectual property protection within China, as well as
better global mechanisms for protection. There should be more of a focus
on preventing and prosecuting Chinese intellectual property theft while
also focusing on maintaining a positive and workable relationship with
China. China needs to own up to its thefts and work to ensure it is providing
adequate protections for international and domestic intellectual property,
51 Jenny Leonard & Shawn Donnan, “Trump Administration Weighs Hacking
Sanctions on Chinese Entities,” Bloomberg (September 7, 2018).
52 Sarah Gray, “These are the Biggest US Trading Partners,” Fortune Magazine
(March 8, 2018).
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while also ensuring that the theft that occurs in its nation is neutralized and
effectively reprimanded.
Amy Holmes
