Yesterday, the House subcommittee on Oversight and Investigation held a hearing about U.S. intellectual property (IP) and cyber espionage. There were four testifying witnesses: the Honorable Slade Gorton from the Commission on the Theft of American Intellectual Property; the Honorable Dr. Larry Wortzel, Commissioner for U.S.-China Economic and Security Review; Mr. James Lewis, senior fellow and director for Center for Strategic and International Studies; and Ms. Susan Offutt, chief economist at the Government Accountability Office. The focus of the hearing was on cyber espionage and intellectual property and paid special attention to recent actions by China. One point that the witnesses drove home was the IP theft has negative impacts on both national security and the economy. IP intensive industries account for roughly 20% of the jobs in the U.S., and these are the jobs that are at stake with IP theft.
According to Wortzel, as technology progresses and is increasingly interwoven into our everyday lives, we have become more dependent on network infrastructure and the associated technologies, which keep us constantly connected. Unfortunately, US commercial ventures and to a lesser extent our federal and military networks require increased protection from cyber-attacks and IP theft.
Cyber-attacks are not necessarily only present in virus attacks or website crashes, but the theft of materials protected in the US by patents, copyright, and trademark laws are attacks in the form of cyber espionage. The threat of cyber espionage continues to grow, and its affects are becoming increasingly pernicious in our day-to-day lives. These attacks can exclusively occur via technological means when hackers steal information from companies or military compounds, and can also occur when an employee in company A convinces an employee in company B to reveal trade secrets or provide access to the company’s network.
Dr. Wortzel asserts that the Chinese government and the People’s Liberation Army (PLA) is actually encouraging and maybe even subsidizing cyber espionage and theft. According to Wortzel, the PLA is actively stealing U.S. military secrets and trying to interfere with our critical infrastructure such as energy grids or traffic light controls. Cyber espionage is occurring in not only federal ventures like NASA, but also in commercial companies such as Coca-Cola. In 2012, NASA discovered an Internet protocol address from China trying to access their network. In 2009, Coca-Cola was close to acquiring a Chinese beverage company, but their network was hacked and the acquisition languished.
Reasons for the Theft:
Lewis in his testimony makes the case that that there are four major reasons why China has a tendency to steal IP from the US and Europe. For China or economically depressed countries, (1) there is the desire or need to catch up on technologies and theft is the most surefire way to do so. (2) In particular, the influence of communism and Mao Zedong has not contributed to a history of strong Intellectual Property rights in China. (3) Some cyber espionage and other protectionist policies are due to the need to keep the communist party on top and with some semblance of legitimacy and relevance. (4) Finally, the Chinese are afraid that they are physically and mentally incapable of developing their own technology. These are contributing factors as to why other developing countries may steal intellectual property as well.
The 2012 report from the IP commission estimated that IP theft costs the US around $300 billion per year. In fact, in 2011 the U.S. International Trade Commission said that if China improved their IP protection laws to be similar to the US we would see an increase of $107 billion in sales and 2.1 million jobs.
However, it is difficult to quantify the effects of cyber espionage and IP theft for two reasons. The first predicament is the notion that a company, particularly a for-profit or government contractor, does not want to advertise that they have been hacked in order to maintain the business’s ability to receive contracts and to maintain brand-image. As a result, a significant amount of cyber espionage goes unreported. Second, it is hard to grasp how problematic cyber theft is because the methodology for measuring the loss in jobs, GDP, or profits is extremely variable. Even if someone illegally downloaded a movie from the internet, it is not a guarantee that the same individual would have bought the movie if it wasn’t available illegally online. This means that there are imperfect substitution rates.
In fact, Lewis states that his current estimate for the effect of IP theft is actually less than 1% of GDP. However, according to the Bureau of Economic Analysis (BEA), 2012 GDP was roughly $15.7 trillion, consequently, 1% of GDP would be $157 billion, a smaller estimate than the IP Commission reports. However, one of the problems with gaging this number is under reporting if $157 was reported and therefore on the low side, there is no telling how much is actually lost. Furthermore, there is a lag on technology theft (if it is complex) of up to ten years. This lag essentially implies that even stolen IP will become obsolete before China or other countries can use it.
Even though Lewis states that a $1 stolen does not equal a $1 gained, cyber espionage is still devastating to the economy and IP intensive industries. One of Lewis’s main concerns is the fact that China’s cyber espionage accounts for more than all of the other cyber espionage activities of all other countries combined.
As indicated by Dr. Offutt these values are unable to account for aggregate information over time. For example, counterfeiting and piracy affects industries in multiple and interconnected ways. A counterfeited product is not verifiably the same quality as the original product and this would lead to watering-down a brand name, increases mistrust in product. This could lead to fewer people purchasing the product which would lead to less funding for R&D, and eventually would lead to a loss of jobs at a firm. Consequently, even if Lewis’s estimate of 1% of GDP is correct there are potential exponential losses in the long-run.
The US cannot enter into direct trade or cyber warfare with China simply because our economies, infrastructures, and governments are too interconnected to be able to harm and dis-incentivize China from stealing US IP without causing undue harm to US national security or our economy.
One way to minimize IP theft is for US companies (for-profit and public) to develop better firewalls and other protection mechanisms to make their trade secrets, patents, and copyrights more difficult to steal. According to Wortzel this can be as simple and inexpensive as remembering to change network passwords and as complex and expensive as purchasing protective software and hardware for $50K+.
The US along with Europe also needs to continue to promote IP rights and laws with the Chinese and find ways of incentivizing China to not steal. One idea developed in the IP Commission Report is to create interest groups in China that defend, encourage, and promote IP laws and protections at the firm and state level. Another way to demonstrate how pervasive this issue is becoming is to irrefutably demonstrate that China is stealing IP and that it has direct, negative impacts on consumers and producers of IP and related technologies.