“Acting against Chinese IP theft is a rare area of bipartisan support in U.S. trade policy, and the SECRETS Act provides a chance for U.S. policymakers and the Biden administration to take a stand against such parasitic practices by enacting a new law.”
Intellectual property (IP) theft, especially of trade secrets, remains a significant threat to advanced U.S. industries, global competitiveness, and national security. It is foundational to the U.S. trade dispute with China, given state-sponsored efforts to steal as much American know-how as possible. Yet, instead of new laws and regulations, the United States has relied mainly on tariffs in an indirect effort to convince China to curb these illegal practices.
That is, until now. As Congress and the Biden administration prepare to finalize competitiveness bills and set the country’s annual defense budget, they have an opportunity to advance another bill that will benefit American businesses and workers by combatting the Chinese threat to U.S. industries—the SECRETS Act, introduced last summer by Sens. John Cornyn (R-TX), Chris Coons (D-DE), and Todd Young (R-IN).
Trade Secrets and Tech Companies
Trade secrets are exactly what the term suggests: a broad range of proprietary data, information, lists, know-how, processes, etcetera that is not common knowledge in a particular industry and is kept secret by the organization seeking protection. For example, the recipe for Coca-Cola is a famous trade secret. These are often the result of costly research and development (R&D). Thus, they are central to a firm’s tech leadership. Trade secret protection offers companies large and small alike significant advantages over competitors and can last in perpetuity, so long as the item remains a secret. However, if a competitor reverse engineers or unilaterally develops the same knowledge in good faith via its own R&D efforts, the original innovator no longer enjoys the trade secrets protection. Once the secret is out, the advantage and protection are lost.
Trade secrets protection is especially vital to advanced tech firms, given they’re in a fierce global race for innovation advantage. Their trade secrets often stem from increasingly costly and complicated R&D operations and years (often decades) of operating experience. If lost through cyber or employee theft, this allows a less-advanced firm to (unfairly) catch up. There is a significant difference between applying available knowledge to further innovation and profiting at the expense of a competitor.
The China Threat
State-sponsored theft of trade secrets and other IP is a key part of China’s industrial development strategy. China’s predatory efforts show a complete disregard for U.S. and international IP laws, as well as the trade commitments it made to other nations through the World Trade Organization. For China, anything goes if it advances the country’s overarching goal of helping Chinese firms catch up to U.S. competitors’ products and technologies. Not only that, but Chinese companies regularly avail themselves of IP protection in the United States and elsewhere around the world, yet American companies are routinely rejected for or stripped of such rights in China.
Once trade secrets are stolen, foreign, state-sponsored entities can reap the benefits of American workers’ efforts and undercut American businesses. This leads to reduced innovation, job losses, and economic and competitive disadvantages for U.S. industries. Firms injured by IP theft face lost export and licensing markets and unfair competition in the United States and global markets.
A study by the Commission on the Theft of American Intellectual Property estimates that Chinese IP theft has cost the United States $225 billion to $600 billion a year. A 2019 poll of corporations on the CNBC Global CFO Council indicated approximately 1 in 5 North American-based corporations were victims of IP theft from China-based companies. In 2011, Sinovel’s theft of American Superconductor’s IP resulted in the U.S.-based company’s annual revenue being reduced by $100 million; meanwhile, Sinovel greatly profited from this theft, becoming a global leader in wind turbine manufacturing less than five years later. Chinese IP theft affects a range of U.S. firms. China is not just targeting innovation and R&D. They’re going after cost and pricing information, internal strategy documents, bulk personal data—anything that can give Chinese firms a competitive advantage. USTR’s investigation into China’s acts, policies, and practices related to technology transfer, IP, and innovation has all the evidence policymakers should need to take more decisive action.
The SECRETS Solution
The SECRETS Act creates a powerful new, non-tariff measure to deter state-backed IP theft by judiciously combining the U.S. government’s law enforcement, intelligence, and trade apparatuses. This rapid-response mechanism prevents companies who export goods to the United States from profiting off state-backed theft of American IP. Since blanket tariff policies can harm the economy, the approach focuses on a case-by-case basis.
The Act would essentially provide a rapid and effective means of preventing physical or digital products made using stolen trade secrets from entering the U.S. market. It fulfills a longstanding recommendation of the Commission on the Theft of American Intellectual Property to create a rapid response, deterrent mechanism to trade secret theft by a foreign government. The legislation creates a new, ex parte civil action for firms to take when they believe they’ve been the victim of trade secret theft by a foreign power. The Act does this by creating a new section of the Tariff Act of 1930 “to provide procedures for national security exclusion from the United States of articles or components of articles that contain, were produced using, benefit from, or use trade secrets misappropriated or acquired through improper means by a foreign agent or foreign instrumentality, and for other purposes.”
The legislation would also create a special investigative committee to help expedite relief for victims of trade secrets theft (which is essential given the need for the mechanism to be quick for it to be useful to trade secret owners). The new Interagency Committee on Trade Secrets (hereafter the Committee) consists of the Director of National Intelligence (serving as the sole ex officio, nonvoting member), Secretary of the Treasury, Secretary of Homeland Security, Secretary of Commerce, Attorney General, Intellectual Property Enforcement Coordinator, United States Trade Representative, or other agency heads or executive officers as deemed appropriate by the President. The Committee, acting as the prosecutor, reviews complaints from the Attorney General or U.S. trade secret owners (under penalty of perjury), with an in-depth analysis provided by the Office of the Director of National Intelligence. Should the Committee determine the allegations are substantiated enough to proceed, the U.S. International Trade Commission (USITC) would review the case. If the USITC determines the product in question more likely than not entails a trade secret stolen by a foreign sovereign power, the USITC can order the exclusion of the product from the U.S. market. The President has final say over the USITC’s decision, and market exclusion lasts until the USITC determines the conditions leading to its decision are no longer valid. Interested parties can also petition for modification or rescission of exclusionary orders.
The ex parte process closes off avenues for foreign governments like China to abuse the U.S. court system to keep America’s doors open to the import of products made from stolen trade secrets. This legislation is also key because it offers a rapid solution to a problem that frequently spirals out of control very quickly. Products will be excluded from the U.S. market within 60 days of issuance of a National Security Exclusion Order. Traditional remedies through the U.S. court system or the International Trade Commission take on average between 30 and 18 months, respectively. Meanwhile, most pilfered trade secrets are used to replicate products within 6 to 12 months.
Time for Action
Acting against Chinese IP theft is a rare area of bipartisan support in U.S. trade policy, and the SECRETS Act provides a chance for U.S. policymakers and the Biden administration to take a stand against such parasitic practices by enacting a new law. The United States must make every effort available to safeguard its workers and innovation leadership. Therefore, Congress and the Biden administration should support this bill and its goal of better protecting U.S. national security and American businesses and workers. Ideally, the SECRETS Act will also become a model for U.S. trading partners to enact similar legislation to provide better collective defense of the trade secrets central to tech leadership.