Chinese targeting and misappropriation of U.S. technology has increasingly been identified as a threat to U.S. prosperity, competitiveness, and national security. However, the scope and nature of the problem is not yet widely understood. Moreover, the long term commitment of the U.S. government to addressing the problem has been questioned. This teleforum features leading experts on the issue who will assess the nature and scope of the problem, the tools the U.S. government has to address it, and the adequacy, costs and benefits of using these tools.
Mark Cohen, Director and Senior Fellow, Berkeley Center for Law and Technology, University of California at Berkeley
David R. Hanke, Partner, Arent Fox LLP
Andy Keiser, Principal, Navigators Global
Moderator: Prof. Mark F. Schultz, Professor of Law, Southern Illinois University School of Law
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Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Intellectual Property Practice Group and International & National Security Law Practice Group, was recorded on Thursday, June 13, 2019, during a live teleforum conference call held exclusively for Federalist Society members.
Wesley Hodges: Welcome to The Federalist Society’s teleforum conference call. This afternoon’s topic is on “Chinese Misappropriation of U.S. Technology: Assessing the U.S. Response.” My name is Wesley Hodges, and I’m the Associate Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the experts on today’s call.
Today, we have a very accomplished panel to discuss this topic. And leading us as moderator is Professor Mark F. Schultz, who is Professor of Law at the Southern Illinois University School of Law, who is chair of our Intellectual Property Executive Committee in the practice groups and Executive Director of the Global Trade Secret Council. After our speakers give their opening remarks, we will have a Q&A for the audience, so please keep in mind what questions you have for this subject, for one of our speakers, or for something related to the call today. Thank you very much for sharing with us today. Professor Schultz, the floor is yours.
Prof. Mark F. Schultz: Thank you so much, Wes. I will briefly introduce the topic and then introduce our panelists. Over the past 30 years, the Chinese economy has achieved unprecedented economic growth, lifting hundreds of millions of people out of poverty. The Chinese government aspires to do even more, becoming an economic and technological leader. It’s Made in China 2025 policy is a blueprint to transform China into a high-tech powerhouse that dominates advanced industries like robotics, advanced information technology, aviation, and new energy vehicles. These achievements and ambitions are not a problem in themselves. It’s the right of every country to seek a better life for its citizens. And economic growth and innovation are the surest path to do so. Indeed, the whole world benefits.
However, in pursuit of these goals, it is widely agreed that the Chinese government has violated international norms, including facilitating, tolerating, and participating in the misappropriation of intellectual property. For several years, surveys of business leaders have identified China as the source of the greatest threat to proprietary and confidential business information. In many instances, Chinese state-owned enterprises have conducted this misappropriation. In fact, the Chinese people’s Liberation Army has been identified as a notorious source of cyber espionage, resulting in U.S. prosecutors indicting PLA officers under the Economic Espionage Act.
In addition, U.S. businesses have long complained that access to the Chinese market comes with string attached, namely, the so-called force transfer of key technology to local partners. While the governments of the U.S. and other countries have long complained about these issues, attempts to remedy the problem have not really proven effective. The Trump administration has made remedying this issue a priority, and it has emerged as the centerpiece of a trade dispute between the U.S. and China. In 2017, the U.S. government initiated an investigation under Section 301 of the Trade Act into China’s unfair trade practices. The resulting report accuses China of disregard for intellectual property, discrimination against foreign firms, and use of preferential industrial policies to bolster Chinese firms.
Since then, the Trump administration has shown itself willing to deploy a wide variety of potential remedies, including, of course, tariffs, but also investment review, export controls, and certain national security remedies. Still, though, many believe that the scope and nature of the problem is not yet widely understood or properly or well documented. Moreover, the effectiveness and appropriateness of the remedies chosen has been questioned. Moreover, also, the long-term commitment of the U.S. government to addressing the problem has been questioned. This teleforum features leading experts on the issue who will assess the nature and scope of the problem, the tools the U.S. government has to address it, and the adequacy costs and benefits of using those tools.
So our first speaker is David R. Hanke. He’s a partner at the law firm of Arent Fox. Dave is a go-to national security lawyer for domestic and foreign companies navigating the Committee on Foreign Investment in the United States. That’s abbreviated as CFIUS, and you’ll hear it referred to as CFIUS throughout this call -- and it’s implementation of the Foreign Investment Risk Review Modernization Act, which is abbreviated FIRMA, which you will also hear referred to throughout this call.
That’s the most sweeping overhaul of CFIUS in 40 years, as well as new export controls on emerging and foundational technologies under the Export Control Reform Act of 2018. He has assisted large multinationals, early stage tech companies, and venture capital firms on various CFIUS issues. Prior to joining Arent Fox, he spent over 12 years on Capitol Hill. He also served on activity duty in the U.S. Army for three years as a JAG officer in the 101st Airborne Division and was deployed to Iraq for 11 months in support of Operation Iraqi Freedom.
Our second speaker will be Andy Keiser, who is a Principal at Navigators Global. Andy served 14 years on Capitol Hill for former House Intelligent Committee Chairman Mike Rogers, as Senior advisor to the Committee’s Chief of Staff and Legislative Director, handling all national security and energy and commerce committee policy issues. He was also Deputy National Security Senior Advisor to the pre-election phase of the Trump for America transition team where he prepared and advised the transition’s policy personnel and agency action teams on all aspects of the national security portfolio.
The third speaker will be Mark Cohen. Mark Cohen is currently Director and Senior Fellow at the Berkeley Center for Law and Technology at UC Berkeley, where he leads the Asia IP project. Mark is widely recognized as one of the leading American experts on Chinese intellectual property. He previously was Senior Counsel of China in the Office of Policy and International Affairs at the U.S. Patent and Trademark Office. He’s also served such functions as the Director of International IP at Microsoft. He’s been Of Counsel to Jones Day’s Beijing office and Senior IP attaché at the U.S. Embassy in Beijing from 2004 to 2008. In total, Mark has over 30 years of private, public sector, in-house and academic experience in China and transition economies, with a focus on technology, trade, and intellectual property policy. And with that, I will happily hand this over to our distinguished panel and ask David Hanke to begin our discussion. David, take it away, please.
Wesley Hodges: Well, professor, I apologize. But it looks like we have a bit of a technical difficult, and Dave dropped off the call. But in the meantime, perhaps we should move first with Andy.
Prof. Mark F. Schultz: Andy, please take it away.
Andy Keiser: Sure. Happy to, gentlemen. Nice to be on with you this afternoon. Thanks to all listening in on this very timely, of course, topic. So I thought I would start with a bit on the scope and the nature of the threat. So I was on the Intelligence Committee and was Chief of Staff to the Chairman when the first 2012 report was issued on Huawei. And why do I mention that? Well, a lot of this misappropriation of IP comes, of course, from cyber-enabled espionage. So I’m going to focus my remarks on that threat -- the scope of that and then the robust U.S. response in recent years and the efficacy of those efforts.
So first of all, the scope. So it’s important to keep in mind -- I think sometimes in Washington people think Huawei has essentially been put out of business or they’re on the ropes or we don’t have a public walking around with Huawei phones in their hands, for example, like you see in much of the rest of the world. Well, that reality masks the real situation globally, which is Huawei is the largest telecommunications infrastructure provider on the planet. And they’re the second largest supplier of handheld devices, behind Samsung, in the world. So it’s a major company with its tethers in every corner of the globe. They control vast market share in places like Asia, Africa, getting into South America. And there’s a bit of a contention going on in Europe. And then, of course, they’ve largely been kept out of North America, primarily the U.S.
So why does that threat matter? Well, Huawei is the primary infrastructure provider for 5G. So going into a sort of digital economy of the future in an environment that they control the pipes which the information run on -- that powers that economic growth and sort of industries of the future is a real threat. So what they’ve been able to do to date -- repurposing, stealing intellectual property, sending that back to China aggressively, as laid out in the 23 count Department of Justice indictment that I’ll get into a little bit later. It gives you some sense for why this is a threat and the scope of what we’re talking about.
And of course, 5G will power things like smart cities, automated vehicles, telemedicine on down the line. If you’re a national security person like me, you also probably -- and Dave probably believes this is also enabling Huawei to allow the Chinese government to have a massive collection platform by which they could obtain all kinds of information about us, about our habits, about our interests, and the threat that that presents from a national security perspective is vast. Now on sort of the U.S. response -- so here in Washington there’s largely been created in the last five years, I would say, a pretty overwhelming bipartisan concern about these Chinese telecommunications giants.
And in response, Congress has acted. There was a ban in the National Defense Authorization Act last year that prohibited, essentially, any U.S. -- and federal funding from going to companies that us Huawei equipment, which is sort of a de facto ban, largely, because, obviously, all the large telecommunications providers would fall into that category of doing business with the U.S. government, which was robust. The FCC proposed rules to initiate a similar ban from folks who take the Universal Service funding, which also, essentially, gets at every U.S. telco provider that way. So that’s kind of a double squeeze.
There has been a massive and coordinated international diplomatic effort -- everything from the intelligence community to the Secretary of State kind of on down to pressure allied governments to exclude Huawei from their networks going forward, particularly in 5G. And of course, this intellectual property theft is a core component of that concern that gets raised. Most recently in the news, the Trump administration issued an Executive Order which began an International Emergency Economics Powers Act, IEEPA, process that gives the Commerce Department 150 days to make a determination whether or not -- it’s written broader than this, but the outcome is likely to find that Huawei and ZTE are national security threats and that the import of their products should be suspended into the U.S.
On the same day that that Executive Order was issued, the Commerce Department also did something perhaps more significant, which was to add Huawei to their entity list, which bans U.S. companies from largely doing business with Huawei. You saw the disruption with Apple and Google servicing their handsets. There have been public reports that chip providers are likely not going to be able to supply the Chinese telecoms with equipment, which will at least have a temporary negative impact. Commerce did issue essentially a stay of that execution, we’ll say, until August of this year, particularly focused on the ability of those components to obtain patching software and other sort of technical upgrades.
That’s kind of a broad overview of the threat as we see it -- how that ties into sort of the broader conversation on misappropriation of IP and then the U.S. response and where that is headed.
Prof. Mark F. Schultz: Thanks, Andy. David, have you been able to rejoin us?
David R. Hanke: Mark, can you hear me?
Prof. Mark F. Schultz: Yes, we can. Please take it away.
David R. Hanke: Sorry about that. So Andy talked on kind of a more granular level about the telecom threat. I want to pull back a little bit and talk at kind of a higher level about the threat and then just give kind of a quick overview of some of the tools that I see as available to address the IP threat issue. And I come at this mainly from a national security angle because of my background. But at the outset, I want to quote my friend Eric Chewning over at DOD, who says that we need to, quote/unquote, accept reality regarding China. I think that’s the right way to look at it. And the start premise here, really, is that, today, China poses the single greatest threat to long-term U.S. national security. Of course, we’ve seen projections about its economy overtaking the U.S. economy within 10 or 11 years.
I think when that happens that certainly going to embolden China to continue, if not accelerate, what it’s already been doing. But U.S. technological edge is steadily eroding. And on the current trajectory, I think, China’s going to overtake the U.S. as the leading military superpower if we don’t do something about it. It’s really not a question of if, just sort of a question of when. I would commend the recent DNI report called “Foreign Economic Espionage in Cyberspace”—it’s unclassified; it’s online—“2018.” It talks about China, Russia, and Iran as three of the most capable and active cyber actors. There’s some very good information in there.
When DNI Coats testified before the Senate Intelligence Committee, where I used to work, in January of this year at the Worldwide Threats hearing, he said, quote, during the past two decades, the U.S. lead in S&T fields has been significantly eroded, most predominantly by China, which is well ahead in several areas according to an analysis of Western journal publications. I think that’s really important context for talking about this issue. There was another recent event where the Director of Counterintelligence at DSS, whose name is Bill Stephens, spoke at a public even in April. He basically said that -- talking about the NSS and some related policy documents, he questioned is there a strategy to actually secure the innovation upon which these strategies ultimately turn? He said, “If there is, I’m not sure I know of what it might be.” 16.19
Now, that’s an unfortunate reality, I think. So just a quick overview of the tools that are available to address the problem. I think it’s clear in looking at the track record, the 2015 agreement between President Obama and President Xi was not the way to go. Signing unenforceable agreements and hoping that those are honored is not an effective way to address the problem. In looking at these tools, we need to look at the goals. The goals need to be deterring the theft of U.S. IP by these bad actors and reducing their ability to monetize the stolen IP. So the tools that are on the table that I see -- there are about six of them I want to point out. And I’ll just gloss over a couple of these because I think Mark’s going to drill down a little further.
But first criminal prosecution -- the Justice Department really deserves a lot of credit for their recent China initiative. But I think the track record shows that criminal prosecution by itself is not a very effective tool against IP theft because the offenders are unlikely to ever really face U.S. justice. And then, we have tariffs and the 301 investigation. It’s a really blunt instrument. I’ll let mark dissect that one because there’s a lot to talk about. Next, we have the exclusion of imports. Andy talked about the Executive Order on Chinese telecom. I think that is going to result in the exclusion of certain imports. Short of the Executive Order, what you really have is the International Trade Commission Section 337 process where companies can initiate an investigation.
Really, this is used for patent infringement type cases. These are large companies that have the ability to weather an 18-month -- 24-month process -- two big companies fighting against each other. That can also result in excluding imports, if people can wait that long. But it’s probably not exactly well-equipped for the current situation.
Next is CFIUS, which is sort of my bread and butter. So screening inbound foreign investments for national security risks -- the process is quite effective in the investment context. Previously, until August of last year when Congress enacted FIRMA, which Mark alluded to, it was really just limited to mergers and acquisition type activity. And I think more relevant for this call FIRMA expanded the aperture for CFIUS to look at things like venture capital, which is, I think, more -- it pertains more to the topic at hand here: intellectual property theft.
Because whether it’s through the actual venture capital investment closing or whether it’s through sort of the process by which foreign investors scout potential venture capital, intellectual property theft and the transfer of that kind of knowledge and trade secrets can happen in those contexts. So bringing CFIUS in is really fully appropriate.
Export control -- so Andy alluded to the entity list, which is part of the export control system. And we’re talking, of course, about restricting the export of transfer of dual-use technologies. When it comes to China, the export controls in recent years have been really fast and loose, and they haven’t kept pace well with technological advancements. They really haven’t struck the right balance between controlling technology and allowing our companies to thrive.
But I think using the entity list is fully appropriate because we are talking about unauthorized transfers of technology. And that’s what the export control system is all about. They have used it, I want to point out, twice in the context of IP theft. First, we had the Micron case where they put Chinese company Fujian Jinhua on the entity list. They pointed back to the DOJ indictment from late last year in which Fujian Jinhua was indicted for the theft of trade secrets, among other things. But the Commerce Department did not, itself, talk about IP theft as a basis. They just kind of pointed to the indictment. And then, similarly, the Huawei entity list action also pointed to the theft of trade secrets from the U.S. company T-Mobile. But it did so kind of indirectly by pointing back at the indictment.
I think the most effective tool that has not been used, but it needs to be discussed, is economic sanctions. And the Treasury department has very robust authorities, both under IEEPA but more specifically under Executive Order 13694, which I believe is from 2014 thereabouts. And that pertains to cyber-enabled intellectual property theft and other malicious cyber-enabled activity. It gives the Treasury Secretary the authority to sanction IPCs. It’s only been used, to date, to address the 2016 election interference by the Russians. I think it should be looked at for addressing IP theft. It’s perhaps a more surgical and more effective tool. And then, there’s Section 1637 of the FY15 National Defense Authorization Act, which is pretty similar. That actually pre-dates the executive order. But that has also not been used by the Executive Branch.
And then, lastly, public naming and shaming would probably help deter IP theft, but there’s been a reluctance to use that outside of the entity list context and perhaps other limited contexts. So I think I’ll leave it there and turn it over to Mark.
Prof. Mark F. Schultz: Okay. Mark Cohen, please take it away.
Mark Cohen: Great. Thank you. Thanks for having me here to join the conversation. So I’m an IP guy. I’m not a national security guy. I’ve been following IP developments in China for some decades; although, I’ve had my fair share of export control type issue, etc., over the past. This is a very interesting moment in time because some of the issues I had labored over 10, 20 years ago, particularly about involving licensing of technology, tech transfer, China’s industrial plans, the utility and quality of Chinese legal system, have been brought front and center. So I have this kind of feeling that my babies have been orphaned to me now. But on the other hand, I’m not so sure they’ve been well-managed. Even terms like IP theft—the issue I first want to drill in a little bit on—probably wildly misunderstood.
It’s developed a meaning unique to itself, as well as forced tech transfer. Because they’re poorly defined terms. IP theft, if you looked at congressional testimony ten years ago, it was about trademark counterfeiting and copyright piracy. When we filed a WTO case against China in 2007 to deal with IP theft, it was about criminal counterfeiting and piracy, not even software piracy was included, certainly not trade secrets and certainly not anything involving patents or cyber espionage or some of these other things we’re dealing with. I think when we talk about IP theft, we’re really talking about a sense that China is gaming the system, engaged in a range of unfair activities, whether or not they’re classically IP related issues.
But it would be wrong, and I think it would give the U.S. government, in fact, way too much credit to say that we’ve been involved in these issues for a long period of time. We waited 17 years to file a case on China’s licensing regime. It was called the Administration of Technology Import/Export regulations that China finally amended. And there were a bunch of onerous previsions that apply to foreigners that kind of mandated a forced technology transfer. That was a 17-year wait. A number of other provisions -- issues that we’re dealing with now have long been out there.
In fact, if you go back to a 1988 document from a defunct agency called the Office of Technology Assessment, you’ll see that they talked about the problem of U.S. companies -- they say, quote, “Although most U.S. firms approach the China market with the intent to sell products, many find they must include tech transfer if they wish to gain access to the China market.” That’s 1988. That agency was dissolved under the contract with America from Newt Gingrich, and nobody really paid that much attention to the fact that companies were being forced to transfer technology at whatever magnitude, willingly or unwillingly in the case of cyber espionage and the like.
We have a real deficit of knowledge on this issue. I’m really gratified that the folks on the security side—DOD and others—are looking at this because of its impact on our industrial prowess, our ability to innovate. But it hasn’t really filtered very much well throughout USG. Go to any embassy in the world and ask any commercial service officer, “Who’s in charge of promoting technology transfer or understanding how tech transfer works in a given country?” And you’ll find nobody. We’re the largest legitimate technology exporter in the world. We have very limited handles over what actually happens in the tech transfer arrangement. Trade secrets also kind of relate to USG engagement on IP issues, including IP issues in China.
So that’s kind of -- we need a little bit of humility on some of these issues, even though I’m gratified that we’re picking up -- the three big agencies that engaged in tech issues in China, other than from the defense side, OTA—Office of Technology Assessment. They had about 180 officials working in Congress, providing advice on the importance of technology in policy making—disbanded. Office of Science and Technology Policy – defunded on China engagement. Technology Administration under the Department of Commerce also defunded. We really are left with very little in terms of engaging China on these issues.
The other thing is—and most people seem to be unaware of this—is that, while we’re pressuring China on issues like IP theft and force technology transfer, China has actually ramped up significantly in the past two to three years, before President Trump, on its IP enforcement environment. The 301 report in particular failed to use both -- failed to recognize both the improvements but also failed to use some of the data that’s out there about some of the deficiencies of the system. But to give an idea -- a sense of the magnitude of China’s IP environment, the Chinese patent office is bigger than the next 20 patent offices combined. Last year, the amount of IP litigation in China increased by a magnitude that is probably about four times the total amount of IP litigation in the U.S.
Although we complain about all the state-owned efforts to deal with IP theft in China, if you lined up every individual inventor in China, everyone who is not affiliated with a company and filed a patent at the Chinese patent office, it would be about equal to the number -- total number of U.S. patent applications of all types in the United States from whomever. So this is a huge system. It’s not purely state-oriented, far from it -- huge growth. And by the way, if you looked at the data on who wins and who loses in the Patent Office, if you look at the 2014 data -- and there’s some selection bias issues. I’m not going to sugarcoat it. But if you look at the data as published, the likelihood of winning a patent dispute in China, as a foreigner, is higher than as a domestic entity -- so an 84 percent win rate compared to an 80 percent domestic win rate. And that’s probably also higher than the win rate in the United States.
The data can be criticized. There’s lots of problems with it. And there are also indications of bias in certain areas not picked up by the 301 report. But there is a lot going on, some of it that predates the 301 report.
So where does that get us, in a sense? We have all these great initiatives, whether it's CFIUS, export controls. And I fully support all of them. In fact, I think most of them were long overdue, just like we should have addressed some of the licensing issues and trade secret issues a long, long time ago. The tariffs certainly have gotten China’s attention, but we really haven’t been able to engage in a way with China to address what is really the biggest institutional problem, which is that you have a state-mandated approach to intellectual property.
You have intellectual property as part of state plans. You have incentives and other market disruptions. And you have a lot of state inspired, as well as perhaps state mandated trade secret theft. And I would suggest that the state inspired trade secret theft is probably an order of magnitude higher than the state mandated. That is you have a national plan. You want to acquire a particular technology. And people say, “Gee. If I can make this seven nanometer semiconductor, I’m going to be recognized as a hero.” And they go ahead and figure, “Gee, it’s easier to steal it than to pay for it or to engineer it over the long term.” So that’s kind of a pervasive problem. That’s a problem that is inherent in China’s WTO excision. In fact, the preamble to the TRIPS Agreement, which governs IP, says that IP is a private right -- something that was inserted in there, apparently by the Hong Kong delegation. But China has hardly lived by that.
I agree with Andy and others about we need to ramp up on things like Section 337, export controls, CFIUS. But we also have to recognize that intellectual property, at least from the U.S. perspective and the Western perspective, if you will, is primarily a private right. It’s not up to the U.S. government to enforce intellectual property. It’s up to the U.S. government to insist that there’s a fair system and that there’s transparency. And we don’t have 100 percent transparency in China. But we have gone pretty far. In fact, there’s been some great data driven analyses, for example, of bias in China’s patent system that was totally ignored in the 301 investigation, including bias in standards of essential patents, like 5G technology and the ability to get patents granted if you’re a foreigner.
A lot of what we’re seeing around security efforts have a real potential to undercut collaboration with China. That may be a price we have to pay -- but also Chinese who will become U.S. citizens who are working at laboratories, whether in the U.S. or in China. And we may end up hurting ourselves more than we anticipate. Of course, the classic example of that is the Dr. Qian Xuesen, former professor at Caltech, who during the McCarthy period was blacklisted and ultimately went back to China and helped launch Chinese nuclear and missile programs. We may be creating many people of that ilk if we’re not careful in how we pursue criminal, trade secret, and other investigations and we don’t encourage those people who are loyal and have something to contribute to remain. That could be a significant problem.
There’s a little bit of dumbing down around IP and trade secret issues in the administration today. Trade secret cases are difficult. We’ve had a lot of dismissals of trade secret cases from DOJ. A Temple University professor, a meteorologist in Ohio, and even the case involving T-Mobile and Huawei, which DOJ launched, was after a civil jury found, yes, it was trade secret infringement. But there was no damages. Huawei, perhaps institutionally, likes to steal technology. But T-Mobile was not harmed at all because, apparently, Huawei had a superior technology than that which it had misappropriated from T-Mobile -- which kind of shows the utility of entity lists and other mechanisms when you’re dealing with bad actors who really strive to avoid your U.S. jurisdiction. I think the Micron-Fujian Jinhua case is an excellent example of that and perhaps Huawei -- certainly ZTE, which has avoided U.S. export controls and reexported to Iran and god knows where else.
I think it’s really important, also, though that, when we get fired up about innovation and technological threats, that, first of all, we need to invest in our own technological prowess, STEM education, etc. And we’re really not doing that at a level to really be competitive. That’s the first thing and perhaps the most important thing. In addition, we’ve had some weaknesses in our own IP system, which may also be driving investment overseas. It's cutting off supply chains. It has a lot of pain associated with it. Perhaps we’ll be able to navigate through that. But fundamentally, I think that one of the real problems with the current moment and current strategies is that we’re not looking at sometimes the advantages of windows instead of walls and understanding what another country or company is doing in order to solicit information.
And we may be misestimating sometimes the technological prowess of a country like China. China has a huge IP system. It has a huge talent pool. And there’s a lot of reports out there about the technological threat from China. But you have to dive deeper into it. For example, just to give a very short snippet of this in AI, if you look at AI scientific publications, yes, China’s currently number one. If you exclude articles where China -- if you look at citations and if you exclude articles where Chinese authors cite to themselves, you’ll find that the U.S. and the UK are number one and number two.
A lot of the data that China generates about itself is highly unreliable because this is a country that generates patents and generates scientific publications as part of state plans. It doesn’t mean that it’s at a high quality. So the threat, to me, from China in certain areas may be overstated. Unfortunately, I rarely see articles that really delve into some of the issues at a deep enough level that we can parse out where the threat is greatest and where the U.S. clearly retains a technological edge.
Prof. Mark F. Schultz: Thank you, Mark. Let me ask a couple of follow up questions. One question I have is this is really a big-picture, strategic question. A number of remedies, such as the tariffs, as well as the May 15 Executive Order that targeted -- basically declared a national emergency to invoke legal authority to secure the telecommunications supply chain -- these sorts of remedies have been criticized as, perhaps, creating a problem with diminishing returns, namely that, right now, they’re premised on the fact that we have -- that these kind of remedies give the U.S. government some leverage over China because Chinese companies are sensitive to their ability to both sell into the U.S. market but also, crucially, to obtain components for their products.
But there’s a concern that we’re going to hasten, perhaps, a de-Americanization of the global electronic supply chain. That, in fact, some would say that it is the administration’s goal to promote something called decoupling, where we make our economies less dependent on one another -- or less interdependent with China. But we may end up in a place where we actually have less leverage, that we’re less integrated with the global economy and that we may be forcing some of our trading partners to make a choice between U.S. technology and Chinese technology. And we may not come out the winner. Does this seem a valid concern to you, and is there a better way to strike a balance, if it is a valid concern? If anyone would like to comment on that.
Mark Cohen: Well, I’ll jump in it first, Mark, because I think, before you launch a tech trade war, you should probably be assessing your technological prowess and advantages and where you want to land. I think many people—and increasingly more people—are saying this should be a Sputnik moment. It has not been. The U.S. actually have very little to gain in this fight over, for example, 5G, with the exception of Qualcomm and some chip suppliers. Base station competitors are in Scandinavia. Cellphone suppliers are mostly -- other than China and Korea and a little bit in Taiwan. So this is more a national security issue where, I guess, considering cost and benefits factor a lot less into it.
But it seems like it would make a lot of sense to look at where we need to go. And if we are going to decouple and develop our own native technologies in some of these areas as we have had in the past, that requires a concerted effort with universities, with corporations, etc. I think folks are saying, for example in 5G, that it may look like what some folks now call the splinter-net. China has its own internet, its own Amazons and Googles, etc., and operates in its own kind of ecosystem, which it’s trying to bring overseas. We may end up with the same result in 5G and IOT and other areas. I think we’re going to see, inevitably—and I think it’s certainly already happened—a duplication of research, as companies are denied export licenses or cannot collaborate or collaboration becomes too challenging.
And that will also be a cost, not only on China, but also certainly on the U.S. I don’t think this has been well thought through. I’m not sure what the economic benefits are to the U.S. in many of these areas -- the range of areas -- not only collaboration, talent, supply chain disruption. I could see where there could be a balance. But at the same time, I think we’ve created tremendous incentive—and it’s going to be interesting to watch—for China to more aggressively pursue its indigenous innovation programs. First thing out of the box is Huawei says, “Gee. We have an operating system that we can launch. We’ve been developing secretly. So we’re no longer dependent on Android.”
And of course, over the past year or two, they’ve had their own CPU, as well. And that’s certainly going to accelerate even further. TSMC says, “Yeah. We can do whatever -- seven nanometer chips for Huawei. We have technology that’s not U.S. dependent.” And so we’re going to see a lot of money, a lot of talent, a lot of pressure around China going on its own. And the U.S. doesn’t have a counterstrategy. So we could find ourselves in a weaker position. I think we really need to reach out to our allies and partners to see how we can navigate this.
Prof. Mark F. Schultz: Thank you. Any other comments from the panelists on that topic or anything else?
Andy Keiser: I figured Dave and I were chomping at the bit for this point. Which is to say I think a very objective, legitimate argument could be made that, since China’s opening in 1979, multiple administrations have led a policy towards increased integration. And where has that gotten us, right? You have a Chinese president who clearly has consolidated power, has used that power not to bring openness or change but to bring a new sense of authoritarianism -- a presidency for life, a crackdown in Hong Kong, a million Muslims in reeducation camps. So I think you’re right.
This decoupling train seems to have left the station. But the idea that less integration is going to be problematic for U.S. policy in China, I’m not certain of. I think there largely is a consensus here in Washington, bipartisan, that our policy of if we just trade more with China, if we just integrate more, it’s going to bring some kind of democratic or open reforms. And pretty hard to say that policy hasn’t been a failure over those last -- since 1979, in my view.
David R. Hanke: Mark, I was just going to chime in on the strategy point. Whatever the objective was of the China policy in this administration, it’s a pretty significant undertaking to try to address some of these issues. And I think key elements that may have been missing—or maybe were at least initially missing—really were better collaboration and cooperation with allies, whether it’s in Europe, whether it’s other parts of Asia, whether it’s South America, Africa. Having them on the same page and on our side on this would have been very helpful. And in a lot of cases, we’ve poked them in the eye in various ways, which has been, I think, counterproductive.
And another element -- I think Mark Cohen alluded to this, another element of a good strategy would have been boosting our own spending on technology so that we’re not just protecting but we’re doing what key folks in the Pentagon called the duel strategy of protect and promote. We’re not just protecting what we’ve got. We’re also promoting our own technology -- the development, promoting our companies. They’ve taken some steps recently on that, which I think are very good. The TCM, the Trusted Capital Marketplace, at DOD, which I think is an idea that’s just getting off the ground, should have been done a while back. So those things are really key parts of any strategy going forward, too.
Prof. Mark F. Schultz: So it sounds like -- one thing we’re hearing is that whatever the assessment of the threat and its sophistication, that the administration policy so far has lacked multilateralism, as well as a sufficient focus on promoting our own technological prowess. If we harken back perhaps to the Cold War history, those were two things that were certainly part of our policy when we were in a military cold war, as opposed to an economic cold war -- that we made sure we had our allies lines up and we tried to promote our own prowess. Would that be an accurate assessment that we need to be thinking more broadly, in terms of our strategy?
Mark Cohen: Yeah. Mark, I think that’s right. And Brian Cline, who I served with at the Embassy, wrote an article in the South China Morning Post, I think, yesterday about this Cold War analogy. And he made the point—and I agree with it—that if that’s where we’re headed, we’re much less prepared for it than we were in the 1950s. China has been developing all sorts of asymmetrical weapons and strategies, cultivating, sometimes quietly, competitive technologies, disruptive technologies. And of course, we’ve alienated our allies, etc. So I hate that three-letter word ‘war.’ But if we are headed into some kind of increasingly confrontational environment, we need massively to think about promoting our technological edge and work with our allies.
Prof. Mark F. Schultz: Okay. Well, I realize that we should really give our audience a chance to ask questions. So let me hand this back over to Wes to open the question queue.
Wesley Hodges: Well, thank you so much, Mark. It looks like we do have one question in the queue. Here is our first audience caller.
Matthew Kinch: Hello, how’s it going? My name is Matthew Kinch. I go to law school in Boston, Massachusetts. So I thought it was great to get a wide array of different people from different backgrounds on this call. The question I have for you all today is has there been any type of international community that—similar to the U.N.—that has addressed this issue and has made any substantial leaps towards resolving this problematic issue that we’ve been seeing?
Mark Cohen: Matthew, this is Mark. You mean the IP issues or the security?
Matthew Kinch: Both. More near the security issues because I’m sure the United States aren’t the only ones having these issues.
Mark Cohen: Let me just briefly say, on the IP side, that we did file one IP related case against China. The Trump administration did. And last year, China reformed some of the laws that were the target of that case. That, by the way, just for the record, was only the second intellectual property case that we filed in China against China since China joined the WTO. So it’s not like there’s this record of highly aggressive U.S. actions and disappointment with the WTO. There probably were some other cases that could have been brought. But I’ll leave the rest to my colleagues.
Andy Keiser: I’m happy to at least start—this is Andy—on the security side. So broadly, in getting allied countries to crack down on China, for lack of a better phrase, I’d say we’ve had mixed success. There have been some success stories, and I would actually disagree with the view that there’s been no strategy. Whether or not it’s taken the right priority or has maintained the right consistency is another question. But we’ve created an Indo-Pacific strategy by bringing India more into the fold as a check on China. We’ve probably developed the closest relationship with the Japanese, who have changed their constitution to get more engaged on defense issues. Vietnam is very concerned about Chinese aggression in the South China Sea. The Australians have been probably more forward leaning than in decades past. So I’d say the success has been mixed.
On 5G and telecom, in particular, let’s see. Japan, Australia, New Zealand, and essentially the U.S. have all formally banned Huawei and ZTE from their 5G buildouts. The UK, Germany, Canada are already all -- 50 percent of their network today is Huawei, so they are in a bit of a different position. And that decision is still up for grabs.
As far as progress that the Chinese have made, interesting to note that Italy is the first and only, thus far, country to sign on to China’s one belt and one road, which includes a lot of these technologies we’ve been discussing today. So I’d say mixed, but certainly a priority from certain corners of the government, particularly the security side.
David R. Hanke: I think the question is a good one. This is Dave chiming in. I think with regard to multilateral cooperation, I think really what would be appropriate, if we’re really going to take on China, would be sort of a modern-day NATO for the Asia Pacific, just for starters. And there’s really been nothing of that sort yet. There is this loose arrangement called the Quad between the U.S., Japan, Australia, and India that I think is around 10 years old or so. But I think there’s been a little bit of reluctance on the part of some of the members to be too vocal or too forward leaning.
And the Chinese have really excelled in I think disincentivizing, shall we say deterring sort of multilateral -- other regional nations in their neighborhood from getting too active, including Asian. So I think hopefully that can change in the future. But to date, there’s really nothing of that sort.
Prof. Mark F. Schultz: And I’ll note that there is still, on this issue, a lack of really multilateral cooperation to change norms. My friend Roy Kamphausen, who’s a senior vice president at the National Bureau for Asian Research -- Roy has advocated something modelled on the Wassenaar agreement on export controls for conventional arms and duel use goods and technology. So in this area, we need something like the Wassenaar agreement to deter IP theft where corp governments in the private sector share more information -- create a standard space development to list -- a standard space list of bad actors, more transparency of operations, voluntary participation in threat focused information sharing.
We just don’t have mechanisms like this. We aren’t looking at intellectual property and proprietary information as a strategic issue, currently. We do on a piece by piece basis. But we really haven’t built a discussion with our allies around it. We haven’t really started creating global norms that point out what’s unacceptable with respect to state-sponsored economic espionage and the like. So yes, we have some global norms on this issue, but I think we need more international cooperation. We’re still early days on that point. So I think that would be -- that sort of response advocated by Roy Kamphausen would be an answer to the caller’s question.
Wesley Hodges: Wonderful. Thank you. Well, seeing no questions from the audience, Professor Schultz, I turn the mic back to you for any closing thoughts from the panel.
Prof. Mark F. Schultz: I’d like to thank our panelists for their time. This was a really interesting discussion and quite helpful and I think one that we will perhaps revisit in various ways in months and years to come. So thank you all for sharing your expertise. It’s much need in these days to understand this very complex issue and relationship. So thank you.
Wesley Hodges: Well, on behalf of The Federalist Society, I would like to also thank our experts for the benefit of their very valuable time and expertise today. We welcome all listener feedback by email at email@example.com. Thank you all for joining. This call is now adjourned.
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