What is it?

The governing statute, 18 U.S.C. § 1831(a), defines economic espionage as the stealing, conveying, or accepting of trade secrets, “intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent.” Individual violators of § 1831 are punishable up to $500,000 and 15 years in prison and organizations are punishable up to $10 million. “Trade Secrets,” are defined in § 1839 as any information where the owner of the information has taken measures to keep it secret and the information derives independent economic value from being unknown or easily accessible.

President Clinton stated upon signing the 1996 EEA, the Act ameliorated the “antiquated laws that have not kept pace with the technological advances of modern society.” In a hearing before the House Committee on the Judiciary, Subcommittee on Crime, expert in the field R.J. Hefferman commented on the “antiquated” laws the President referred to, saying that prior to the EEA, the law was simply, “sufficient to prosecute most thefts of corporate property because most corporate property was tangible.” The relevant statute before 1996 was 18 U.S.C. § 1905, the Trade Secrets Act, which did not apply to private sector employees and provided only minor sanctions.  Hefferman continued, “Likewise, national security laws were sufficient to prosecute theft of classified government information.” In United States v. Hsu, the court further pointed out the other relevant statutes before 1996 were, “drafted at a time when computers, biotechnology, and copy machines did not even exist and industrial espionage often occurred without the use of mail or wire.” (Internal quotations omitted).

Even in 1996 enough corporate property had shifted from material to intangible that the necessity for new legislation was clear. Hefferman points out a 323% increase in intangible property from 1982-1992, putting the annual losses to American industry at $24 billion in 1996. Former FBI Director Louis Freeh noted that at the time the EEA was passed, “eight foreign countries have been ‘extremely active’ in using bribery, theft, and other techniques to provide trade secrets to domestic companies,” and the FBI was investigating at one point more than 800 cases of economic espionage.

Why does it matter?

Earlier this year in a report to the Senate Select Committee on Intelligence, Director of National Intelligence James Clapper had focused the list to China, Russia, and Iran as areas of major concern in this field. Director Clapper warned that the growing practice and reliance on cloud data processing and storage coupled with the “dramatic rise and increase in depth and complexity” of these nations will make this issue a prominent one in the immediate future. He also noted that, “owing to market incentives, innovation in functionality is outpacing innovation in security, and neither the public nor private sector has been successful at fully implementing existing best practices.” Additionally the US-China Economic and Security Review Commission published a detailed report with Northrop Grumman which stated that the Chinese, “have adopted a formal Information Warfare strategy called ‘Integrated Network Electronic Warfare’ that consolidates the offensive mission for both computer network attack and Electronic Warfare under the People’s Liberation Army General Staff Department’s the Department of Electronic Countermeasures.”

What’s wrong with the current situation?

The public and private sectors are at odds with who should be responsible for the prosecution and realistically the implementation of the EEA. The Office of the National Counterintelligence Executive (NCIX) stated, “The private sector alone lacks the resources and expertise to thwart foreign efforts to steal critical American know-how. This is in large part because counterintelligence is not a typical corporate function, even for well-trained and well–staffed security professionals.” Juxtapose with this statement from a corporate crisis management firm: “Economic espionage must be fought in the trenches one company at a time, and it is incumbent upon all at-risk companies to take steps to identify and protect important trade secrets and other intellectual property.” Whether there is a viable efficient solution remains to be seen, but presently this intersection between corporate and national security interests will continue to encourage progress.

What does the future look like?

The future must be a coordinated effort from both the public and private entities of the United States. The FBI lists six steps for businesses to help in the effort to protect the nation from economic espionage: 1. Recognize there is an insider and outsider threat to your company. 2. Identify and valuate trade secrets. 3. Implement a proactive plan for safeguarding trade secrets. 4. Secure physical and electronic versions of your trade secrets. 5. Confine intellectual knowledge on a “need-to-know” basis. 6. Provide training to employees about your company’s intellectual property plan and security. Clearly this is the first echelon of defense and the FBI and broader Intelligence Community seems to be committed to this prevalent aspect of national security. As the NCIX 2009 Strategy states, “the counterintelligence community must act jointly to understand, confound, manipulate, and thwart these threats, which exceed the ability or resources of any single U.S. agency or department to overcome. When necessary, we will disrupt these activities through arrest and expulsion.” As recent as December 2011, Assistant Attorney General of the Criminal Division Lanny A. Breuer reported the conviction and 87 month prison sentence of Kexue Huang for, “stealing valuable trade secrets from two American companies and disseminat[ing] them to individuals in Germany and China.” United States strategy will likely continue to evolve and adapt to the changing threat of economic espionage, and it will take increased cooperation between the Intelligence Community and public sector. American strategy may well be summed up by General Lewis B. “Chesty” Puller, USMC: “We’re surrounded. That simplifies our problem.”

The practice of counterfeiting has been a marketplace problem for centuries. Whenever an original product has a marketable value, there will likely always be those who seek to attain the superior value of the original attached to an inferior, imitated product. Thus, it should come as no real surprise that in today’s economic marketplace, counterfeit goods currently compose an estimated 5-7% of world trade and about $600 billion USD annually in illicit goods.

Last month, the US government uncovered counterfeit component parts that had been installed on military aircraft and in the nation’s ballistic missile defense systems. The common origin in both instances? China. In our technological world, products today truly are as strong as their weakest link. One can imagine that a simple electrical malfunction caused by a defective, counterfeit part within an aircraft’s computer system at 25,000 feet could have dire consequences for passengers and bystanders alike. Or if a multi-million dollar missile defense system fails to fire due to the failure of a part that costs less than a cup of coffee. Naturally, this is cause for concern, but we must avoid the knee-jerk impulse to react as legal avenues exist to adequately address these intellectual property (IP) violations and issues.

ANALYSIS:

U.S.-China Relations Act of 2000 (22 U.S.C. § 6901)

Under the U.S.-China Relations Act of 2000 (22 U.S.C. § 6901), the United States has a viable mechanism for addressing issues with China as a trade partner. Specifically, 22 U.S.C. § 6902 provides that it is the policy of the United States “to pursue effective enforcement of trade-related and other international commitments by foreign governments through enforcement mechanisms of international organizations and through the application of United States law…” Further, 22 U.S.C. § 6931 requires that the United States monitor China’s compliance through “an annual review” focused on China’s terms of accession to the World Trade Organization (WTO). As a result, the United States Trade Representative’s (USTR) office has produced and provided annual reports to Congress since 2002. Although the 2010 report concedes that Chinese enforcement of IP laws require greater attention, it recognizes that ongoing bilateral discussions between US and Chinese agencies led to “positive results.” As a result of these discussions, the Chinese agreed in December 2010 to a six-month campaign to enhance enforcement against an assortment of IP infringements. The 2010 report also has exclusive sections that focus directly on IP Rights (IPR). As a nation on the “Priority Watch List,” China is also included on the USTR’s “Special 301” Report that focuses on global IPR protection and enforcement issues pursuant to Section 182 of the Trade Act of 1974.

When bilateral discussions between the United States and China fail to reach a resolution, the United States can formally file a dispute with the WTO in order to hold China accountable to WTO rules. In using this mechanism, the United States has brought several dispute actions to the attention of the WTO. One such recent success centered on a dispute between the United States and China on IPR enforcement of copyrights and trademarks. As noted in the 2010 report, the United States sought to challenge deficiencies in China’s legal regime related to IPR enforcement. The WTO panel found in favor of the United States on two of its three claims including one that China was deficient in the “handling of border enforcement seizures of counterfeit goods.” As a remedy, China agreed to take measures in order to comply with the ruling. In the aforementioned instance of the counterfeit parts in United States military aircraft and ballistic missile defense systems, the United States is likely already following this framework. In essence, the counterfeit goods that entered the United States defense product stream are the goods that already fall under the umbrella of the U.S.-China Relations Act of 2000. As a result, the IPR infringement has been identified and compliance monitored.

CONCLUSION:

The United States must endeavor to protect the integrity of defense-centric goods and overall safety of the end user as well as the integrity of the market in which the goods proliferate. Counterfeit goods from China that enter the United States defense product stream undoubtedly pose a serious and significant risk to national security. However, the United States must avoid a knee-jerk, politically motivated reaction related to the origin of the counterfeit goods and instead move to open lines of communication to better influence the regulation of intellectual property laws abroad pursuant to the U.S.-China Relations Act of 2000. Through continued bilateral dialogues with the Chinese government, the United States can work towards cooperation and mutual beneficence in IPR enforcement.

Photograph obtained from www.gizmodo.com.

Image available from the BBC.

China staged massive naval military exercise in South China involving over 100 ships and 1,800 troops.   The drillsinvolved a beach front exercise, amphibious sweeps, mine sweepers, and subermarine chasers off shore.  The exercises occurred close to the Spartly Islands near Vietnam.

According to the Chinese paper, the Global Times, 40 countries observed the exercise which was codenamed Jialog-2000.   The Chinese claim the exercise is part of an annual exercise.  “This is basically a routine military exercise but it is also based on the current combat situation in the South China Sea,” Li Jie, a Beijing-based naval expert, told the Global Times yesterday.  However, the exercises were likely meant to be a display of force and show of growing presence in the Pacific Ocean.  China has claimed an Exclusive Economic Zone beyond the internationally recognized 200 nautical miles, and wants to express claims over islands that Japan and Vietnam also lay claim. 

Image available from the BBC.

China is certainly trying to build its fleet to try to be on par with the U.S. naval capabilities.  China still has room for growth. “In no way is the Chinese navy on a par with the United States – or even Japan,” said Bates Gill, an expert on the Chinese military. Despite a gap between other naval sources, China can more aptly express it territorial and economic claims through a greater naval presence. China is has been recently infuriated by U.S. attempts to get involved in the Senkaku/Diayou island dispute and the $6.7 billion the U.S. pledged to give to sell to Taiwan in weapons.  The naval exercises are likely partially motivated as much by the U.S. action as anything else.

Image available from ABC News.

The dispute between China and Japan certainly needs to be resolved.  China has ceased high level talks with Japan on regional coal and fishing cooperation due to the Diayou/Senkaku islands dispute.  Japan and many other Asian countries would be willing to have the U.S. to become involved in solving regional sovereignty disputes with China. “The region fears being dominated by a rising China,” said Ernest Bower, an analyst at the Center for Strategic and International Studies in Washington.  “The solution? Invite the Americans to join. This gives the rest of Asia the balance they want.”  However, the U.S. would likely seek a resolution siding with Japan because of closer ties to the country and that Japan probably has the upper hand in terms of international law, due to continued peaceful occupation.  China would also fear that any U.S. involvement may hint at deciding on Taiwan, which China continues to claim as part of its territory.

U.S. interests may be best served by continuing to remain neutral on the issue and not offering to mediate the dispute.  Any role as mediator would simply further anger China and would be seen as the U.S. seeking to become unnecessarily involved.  If the mediation would in the end give the islands to Japan then U.S.-China relations would become even more icy.  The U.S. wastes a great deal of its political capital with China by trying to become involved in the dispute, which would better be preserved for discussions on currency exchange or the expansion of the the Chinese naval fleet.  The U.S. should suggest the Diayou/Senkaku issue be resolved by submitting the issue to the an international tribunal or another arbitrator.  At a minimum, the U.S. could refrain from making public remarks about the dispute.

Image available from american.edu.

Image available from globalsecurity.org.

In early September, two Japanese Coast Guard vessels attempted to intercept a Chinese fishing vessel near the Diaoyu/Senkaku islands.  The three vessels collided, causing damage to all three.  The Japanese arrested the captain and crew of the Chinese vessel and seized the allegedly aggrieved vessel.   After the incident China demanded the unconditional release of the vessel.  “We demand Japanese patrol boats refrain from so-called law enforcement activities in waters off the Diaoyu islands,” the spokeswoman for China’s Foreign Ministry, Jiang Yu.  Japan attempted to play down the political controversy.   “We will handle the matter firmly in accordance with the law,” Yoshito Sengoku, chief cabinet Secretary said.   “It is important that in Japan we not get overly excited.”  Eventually the crew and the captain were released after political posturing on both sides, and heavy pressure put on by China.  However, several legal issues remain unresolved relating to the incident itself, mainly to see who will pay the damages to the vessels.  Also, it is unresolved if a damages should be imposed on Japan for an unlawful imprisonment or on the Chinese vessel for illegal fishing.  There is of course the deeper controversy of who owns the islands.

If the group of islands belongs to Japan then under Articles 55-60, 63, and 74-75 of the United Nations Law of the Sea Convention Japan actions were perfectly legal and in keeping with a costal state’s right to enforce fishing and other economic rights in its Exclusive Economic Zone.  However, if China owns the islands then Japan’s actions are unlawful under the Law of the Sea Convention.  In a perfect world Japan and China would resolve the conflict by submitting the dispute to international court.  However, this is unlikely and the pressures of international law may at a minimum be able to allow the conflict to be resolved peacefully in keeping with Chapter VII of the United Nations Charter.  China and Japan could examine the possibility of either creating a bilateral agreement similar in nature to the 2002 Declaration of Conduct of Parties in the South China, or jointly exploring and developing the disputed area.  (See generally Dai Tan, The Diaoyu/Senkaku dispute: Bridging the cold divide, 5 Santa Clara J. Int’l L 134. (2006)).    This “split the baby” approach would be difficult for the Chinese nationals to swallow, but may be their best option due to Japan’s continued control of the Diaoyu/Senkaku islands.

"New Sanctions on Iran" - Original Photo: REX FEATURES Modified Photo: Author

The U.N. Security Council yesterday voted for “tough[,] . . .  smart and precise” sanctions upon Iran’s rogue Government in hopes of stemming their Nuclear weapon ambition. With a 12-2 vote (notably Turkey & Brazil, having a nuclear fuel deal in place with Iran, being the “Nays”) a watered down sanction was passed.

While parts of the sanctions have “voluntarily provisions” they were needed to have China’s support. Victor Gao, director at the China National Association of International Studies,a government think-tank, states that it allows a legal justification for any actions specified in the resolution by each country. China strongly stating that it still supports a “diplomatic approach” as the best approach. One would due well to wonder what China’s interests (read as oil) are in not being tougher on a rogue government with nuclear weapons ambitions.

On the opposite side, reports have already come in criticizing Israel for leaning on China to accept the resolution by outlining not only classified information of what nuclear weapons Iran is developing but also what a preemptive strike upon Iran by Israel would look like to China’s oil supplies.

While some reports criticize this, some are ignoring the public acknowledgment by Israel. It does not deny the message which outlined (1) what Iran’s nuclear ambitions are and (2) what the outcome would be. In doing that Israel reminded China that their rise to world power is not yet complete. It is still crossing that tight rope line to world power status. China still needs to take into account the nations around it and possibly consider not just the repercussions but it’s responsibility in supporting rogue nations. A war between Israel and Iran would seriously disrupt China’s oil consumption with devastating economical results. It is noteworthy to pause here and ask if this “message” is financial leveraging or financial terrorism between states?  Either way it has been happening behind closed doors between nations for years. Israel on the other hand, isn’t hiding anything.

Israel is also free from what the U.S. cannot do. Influence from the U.S. on China is intrinsically hampered by it’s foreign debt to China (much like the London-U.S. debt-selling threat in the Suez Canal or the U.S.-China threat to “stop spending money”). Israel, though, does not have that problem and has the luxury of having its voice “heard” by the rising Asian Lion.

In the end, how strong or weak are these voluntary provisions? It will still need to be seen as the U.N. nations prepare to implement the sanctions. Brazil and Turkey’s nuclear fuel deal with Iran has already been wiped out automatically by the sanctions. But whether the sanctions are in fact “like a used handkerchief for [Iran] . . . and should be thrown into a waste bin . . . [t]hey cannot hurt Iran”  is yet to be seen. (quoting Iranian President  Mahmoud Ahmadinejad)

Read More:

Aljazeera – A New Round of Sanctions

Aljazeera – Iran Threatens To Revise IAEA Ties

CNN – U.N. Votes To Slap New Sanctions On Iran

Aljazeera – Israel Shakes Down China

The postponement of the report avoids an immediate and direct confrontation with China over its manipulation of its currency, the yuan.  China has pegged its value relative to a dollar at a rate that causes it to be as much as 40% undervalued.  This causes Chinese goods to be much cheaper on the global market and many U.S. lawmakers and economists point to it as a major cause of the United States’ trade deficit with China.

U.S. officials have long insisted that China allow its currency to float more freely on global currency exchanges so its value would be more reflective of actual market forces.  China has resisted easing its currency manipulation for years.

In the meantime, Treasury Secretary Geithner says delaying the report and pursuing the upcoming meetings among world financial officials “are the best avenue for advancing U.S. interests at this time.”

Read more at The Washington Post and The Wall Street Journal.

Read more at the WSJ and the WP.

The Congressional Defense committees will take up the $708.2B FY 2011 DOD budget proposal later this summer.

To read more, please go to the New York Times.