The Cold War Sideshow Includes Economic Espionage with Chinese Characteristics

Reuters
August 25, 2020 Topic: Security Region: Americas Tags: ChinaTradeEconomyCold WarNational Security

The Cold War Sideshow Includes Economic Espionage with Chinese Characteristics

Chinese economic espionage is one of the most comprehensive and sophisticated campaigns of its type that any great power has embarked upon. An effective response must be closely tailored to avoid unintended side effects.

Export controls on high-tech goods to China serve at least two purposes for the United States in its tech war with China. First, the export controls may strangle Chinese ICT firms that the United States believes have benefited from unfair trade practices (including economic espionage). Second, they can make it more difficult for China to rely on proxies to steal U.S. industrial secrets. Given the perceived efficacy of export control in countering China’s “economic blitzkrieg” against the United States, there are now discussions on expanding such controls against China.

As Milton Friedman likes to say, however, there’s no such thing as a free lunch in public policy. Export control against China comes with costs. American industry, for instance, fears that export controls would simply drive Chinese consumers into the arms of foreign rivals. But there are deeper reasons why export control is a weapon that the United States needs to wield carefully.

Importantly, export controls are likely to suffocate third parties in Asia and Europe—if not U.S. firms—before strangling the Chinese firms that profit from economic espionage. Chinese high-tech firms enjoy access to preferential loans, state subsidies, and a massive domestic market. High-tech firms elsewhere do not enjoy such buffers that would shield them from the disruptions of compliance with U.S. export controls, which can be incredibly costly. Take the example of TSMC, the world’s largest semiconductor foundry that has recently pledged to build a new 5-manometer foundry in Arizona. On July 17, TSMC announced that it would stop supplying chips to HiSilicon—a subsidiary of Huawei that contributes to about 15 percent of TSMC’s revenue—in order to comply with new U.S. export regulations. In terms of revenue loss, the cost for TSMC to comply with just one U.S. export control is around $5 billion.

Crucially, ICT firms will become more vulnerable to Chinese economic espionage as they bear the costs associated with US export controls. If they go under due to the collateral damages associated with the export restrictions, then they would release large numbers of engineering talents for “private” Chinese firms to recruit. Even if those third parties do not go under, then they could still become more vulnerable to takeovers by Chinese firms armed with large state-supplied coffers as their profit dwindles due to their losing the Chinese market. Furthermore, the third parties will have fewer resources to retain, let alone compete for, top engineers after the collateral damage of export bans. Meanwhile, Chinese firms can roll out the red carpets to attract personnel who would bring industrial secrets with them to China. Lastly, these ICT firms could be forced to surreptitiously assist Chinese firms in circumventing the bans or stealing U.S. IPs, as in the UMC-Jinhua case. In brief, the export restrictions could actually undermine U.S. national security by facilitating Chinese economic espionage.  

Nonetheless, we do not argue that the United States should abandon export controls. Instead, the United States should appreciate the collateral damages associated with its new export control regimes and implement appropriate policies to mitigate them. One short-term remedy is to “compensate” high-tech firms affected by the new U.S. export regimes with subsidies. The recent bipartisan proposal to aid the semiconductor industry with $22.8 billion could serve such purpose (by subsidizing TSMC’s U.S. operations, for instance), in addition to spurring domestic chip production. The long-term remedy is to bring ICT firms in U.S. allies closer to the U.S. technological ecosystem through regulatory alignments and trade deals, which would reduce the cost of complying with U.S. export control regimes targeting China. Indeed, recent analyses from both CSIS and Heritage both argue that the time for a U.S.-Taiwan trade agreement is now ripe given that Taiwanese ICT firms bear a strategic importance in the US-China tech war.

Chinese economic espionage is one of the most comprehensive and sophisticated campaigns of its type that any great power has embarked upon. An effective response must be closely tailored to avoid unintended side effects. 

Stephen Tan was senior partner of Baker McKenzie where he was Co-Head of both Technology, Media & Telecommunications and International Trade & Commerce Practices for the Asia-Pacific region, having previously been a partner in K&L Gates (Asia Region). He was a fellow at the Brookings Center for East Asia Policy Studies in 2018, and is currently Managing Director of International Policy Advisory Group, LLC.  

Dr. George Yin is a Research Associate at the Fairbank Center for Chinese Studies at Harvard University and a Visiting Assistant Professor of the Department of Political Science in Swarthmore College.  

Yin would like to thank Philip Hou (Swarthmore ’22) for his research assistance toward this piece.