U.S. Turns Up Heat On Costly Commercial Cyber Theft In China

American companies that do business with China make good money. They also lose a lot of money there to cyberthieves, who routinely hack into the computers of the U.S. firms and steal their trade and technology secrets.

China’s theft of U.S. intellectual property has gotten serious enough in recent months to warrant President Obama’s attention and prompt a series of visits to Beijing by senior members of Obama’s Cabinet. A new Pentagon report on Chinese military developments adds to the U.S. complaints. The report says some computer intrusions carried out by hackers in China “appear to be attributable directly to the Chinese government and military.”

A recent survey by the American Chamber of Commerce in China, which represents more than a thousand U.S. businesses there, turned up widespread concern about the loss of intellectual property. Twenty-six percent of those responding to the survey reporting somebody stealing business data from their computers, and 42 percent said the problem is getting worse.

“They know they’re under attack,” says Greg Gilligan, the group’s chairman. “They just don’t know who’s attacking.”

The problem of data theft is well known among U.S. companies operating in China. American businessmen have long complained that their laptops are hacked, their emails intercepted, and their technology and negotiation plans compromised. But with more than a billion Chinese as potential customers for American goods, the temptation to do business with China has been irresistible.

“For the last 15 or 20 years, companies have been willing to make the bet,” says Adam Segal, a China expert at the Council on Foreign Relations. “[Their attitude is], ‘We know we’re going to lose our technology in China, but being in the China market is so important that we’re going to take that bet.'”

Organized Effort To Target U.S. Firms

The U.S. cybersecurity firm Mandiant identified a cyber unit of China’s People’s Liberation Army as the likely culprit behind much of the industrial espionage directed against U.S. companies. Mandiant researchers said the PLA unit is systematically taking intellectual property — technology blueprints, manufacturing secrets, negotiation plans — from the U.S. companies it targets.

The Mandiant finding certainly caught the attention of Gilligan, a leader among U.S. businesses operating in China.

“The salient point of that report was [the statement] that there is some organized effort by some group attacking business interests,” Gilligan says. “This is not government to government. It’s not military to military. It’s [someone] attacking the economic interests of United States companies.”

A classified National Intelligence Estimate earlier this year concluded that cyber-espionage from China is now threatening U.S. economic competitiveness. The concern is that if Chinese businesses can steal U.S. technology, they can blunt the one big advantage U.S. companies have in the global economy, which is their capacity to innovate. It is that spirit that explains the emergence of U.S. companies like Microsoft, Apple or Google.

Such companies, business experts say, have been far less likely to originate in China, because the business culture in China does not favor creativity. But they can always steal the products of U.S. creativity.

“There are certainly some companies that are seeing [intellectual property theft] as part of a strategy for becoming more competitive internationally, taking innovation from somewhere else and incorporating it in their products,” says Robert Hormats, the U.S. undersecretary of state for economic growth, energy and the environment.

“We want to make the Chinese know that we regard this as a threat to our most innovative companies, and are very serious about insisting that they stop it. Because if this lasts too long, a lot of innovation is gone from American companies,” Hormats says.

Turning Up The Pressure

The United States and China cooperate in some important areas, such as energy and environmental issues. Cybersecurity, Hormats says, is not one of those areas.

“This is an area that damages the relationship and undermines confidence,” Hormats says. “In fact, this has become a major source of mistrust in the relationship.”

Chinese authorities say they are as much a victim of cyberattacks as U.S. firms are, and they deny there is a state policy of industrial espionage. But U.S. officials aren’t convinced.

In March, President Obama’s national security adviser, Tom Donilon, warned of “serious concerns about sophisticated, targeted theft of confidential business information and proprietary technologies through cyber intrusions emanating from China on an unprecedented scale,” and he called on China to “take serious steps” to investigate and halt such activities.

A few days later, Obama made that same request in an introductory phone call to China’s new president, Xi Jinping. Later that month, Treasury Secretary Jacob Lew raised the cybersecurity issue during a visit in Beijing. He was followed in April by Secretary of State John Kerry and the chairman of the joint chiefs, Army Gen. Martin Dempsey.

Undersecretary Hormats also visited the Chinese capital. His message reinforced what other senior U.S. officials were saying: The United States is running out of patience and wants China to end its cyber-espionage now.

“Having a prolonged dialogue is not our goal,” Hormats says. “A dialogue that leads to results, that’s our goal.”

If the cyber-espionage continues, Hormats say, the Obama administration will consider possible punitive actions.

“We’re having discussions within our government to figure out how to respond,” he says. “Our hope is that the Chinese will take action, but we’re certainly considering various options that we will take if that doesn’t work.”

Will Losses Ultimately Outweigh Profits?

The Obama administration has already signaled that it will step up the investigation and prosecution of trade secret theft when the parties responsible can be identified and held accountable. Attorney General Eric Holder listed several such cases during a White House event in February. Each of the examples he highlighted involved a loss of intellectual property to China.

Some hawkish members of Congress want to deny U.S. visas to anyone in China found to be stealing economic secrets. That would hurt Chinese who want their children educated in U.S. universities. Congress could also punish China by imposing new trade restrictions.

If all else fails, and Chinese cyberwarriors continue to steal secrets from American companies, the U.S. military’s Cyber Command could intervene in defense of the targeted U.S. firms, hacking back into the Chinese computers and deleting the stolen data.

So far, virtually no one in the U.S. government is ready to endorse that approach, although the “offensive” option is favored by some private cybersecurity firms.

Segal at the Council on Foreign Relations can imagine a point where U.S. companies in China are so penetrated and have lost so many of their secrets to their Chinese rivals that they no longer have an advantage in the Chinese market and simply call it quits.

“Either the Chinese catch the U.S. companies [in innovations], or the cost from the theft becomes so burdensome that the U.S. companies decide that it’s not worth it any longer,” Segal says.

The situation is not yet that bad. In fact, the American warnings may have had at least a temporary effect. Security sources say the Chinese army unit most associated with cyber-espionage backed off a bit following the high level U.S. visits to Beijing.

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