Initiative in IP Protection: Silicon Valley's Role in U.S.-China Relations
By Ben Makarechian
In 2016, foreign investment from Chinese entities seemed poised to bring a steady stream of economic benefits to California. Chinese investment was fueling growth in Los Angeles’s real estate markets, transforming the city’s skyline with commercial developments and providing demand for luxury housing. These benefits fostered optimism about the future of the two countries’ economic relationship. However, the good feelings of the time also contributed to the risks of engagement in the technology industry, which had been occurring since the 1970s, being overlooked.
While China had been looking to develop its technological capabilities by investing in U.S. companies and acquiring their advanced products, the pace of this investment increased in the mid 2010s, with investment from the Greater China region (China, Hong Kong, and Taiwan) surging in 2015 to 9.9 billion, over four times the amount from the previous year. This increase coincided with the Chinese Communist Party’s (CCP) launch of its “Made in China 2025” 10 year economic development plan, which focused on improving the country’s high-tech manufacturing capabilities through IP acquisition, among other tactics. Additionally, in 2016, fears about a potential devaluation of the Yuan incentivized Chinese corporations and wealthy Chinese nationals to increase investment in the U.S. to convert their assets into dollars. Some heralded this moment as the arrival of China as a permanent force in global investment. Today, however, technological exchange between the world’s two largest economies has largely halted in the wake of restrictions on investment and export controls implemented by both the U.S. and China.
Advocates for such restrictions have cited China’s status as the world’s principal violator of intellectual property (IP) laws and the unique relationship between its public and private sectors as justification for their implementation. These two traits combined threaten both U.S. national security and U.S. business interests. To address these two threats, Silicon Valley companies must begin taking responsibility for the defense of their own intangible assets and ensure that they approach their analysis of the risks and rewards of doing business in China with a clear view of the implications of their decisions.
The twofold threat of Chinese IP theft
The CCP’s interest in technological engagement with the U.S. is not surprising given its long held belief that technological advancement is the key to China’s economic growth and political rise. In a recent essay, Tanner Greer, director of the Center for Strategic Translation, a non-profit focused on interpreting CCP press releases in the context of American foreign policy, outlined the roots of the CCP’s fixation on technological development. One root is the CCP’s belief that humanity is in the midst of a “new round in techno-scientific revolution and industrial transformation,” or that the current suite of emerging technologies, including artificial intelligence, advanced semiconductors, and quantum computing, will bring about changes to society akin to those of the industrial revolution. According to Greer, the CCP is convinced that the country emerging as the leader in these transformative technologies will assume a hegemonic position in global politics. This belief has informed the CCP’s long held policy of prioritizing technological growth over adherence to international economic norms. China’s disregard for intellectual property rights, and its engagement in large scale, state-sponsored IP theft, are direct results of this policy.
Commenting on the state of IP laws in China, Glenn Chafetz, the director of 2430 Group, a non-profit specializing in combatting state-sponsored IP theft, stated, “The government of the People's Republic of China has wonderfully specific and rigorous laws to protect IP… they simply don't enforce them.” Highlighting the threat IP theft poses to private business interests, Chafetz adds that the problem is likely more severe than companies realize, as only a fraction of IP espionage operations, successful or unsuccessful, are detected: “I would think that you're looking at a factor of 50 or 100 times more than what companies report, and that is supported by [the 2430 Group’s] conversations with the companies themselves.” The discrepancy between reports and occurrences of IP theft makes it difficult to quantify the exact cost borne by the U.S. economy, but the cost of reported IP theft has been estimated to be as high as $600 billion annually, and Chafetz estimates the actual cost, factoring in unreported instances of theft, is closer to $5 trillion.
In addition to imposing heavy costs on private businesses, China’s IP theft also has national security implications. The latest generation of consumer technology is unique in that it has extensive dual-use applications, meaning its products can be applied in both military and commercial contexts. These dual-use applications have led some to label U.S.–China technological competition a “tech arms race.” Examples of dual-use technologies include artificial intelligence, which has the potential to drastically reduce the time and manpower required to deploy lethal force in combat situations, and advanced semiconductors, which are vital for running AI models and advanced missile guidance systems.
Chafetz emphasizes that the national security threat persists whether theft is conducted by corporate or government actors. He describes the distinction between the private and public sectors in China as a misnomer due to the extensive coercive power the CCP holds over China’s corporations and citizens and its disregard for the rule of law. Paraphrasing a quote from China’s 19th party congress, he states “Xi has described the Communist Party of the East, West, North, and South of China, and in that assertion, he is accurate.” Stolen semiconductor designs can both fuel corporate profits at the expense of American firms and advance Chinese military capabilities without requiring the CCP to invest in its own research and development.
Business leaders in China have a different outlook. According to Wang Jing (王静), the VP of Public Policy and Government Relations for SAIC-GM, General Motors’s joint venture with a Chinese automaker, China has made substantial progress in its enforcement of IP laws : “About 10 years ago, when cellphone technology was in its infancy, I knew of technology companies in Shenzhen that literally had product divisions dedicated to copying American technology. Today, it’s very hard to find something of this sort.”
It is important to note that SAIC-GM is the product of a (now removed) CCP requirement that forced foreign automakers seeking Chinese market access to set up joint ventures with domestic firms. These partnerships have been shown to facilitate technology transfer to domestic firms, which are able to further develop their product and compete with foreign firms with the aid of government subsidies and a regulatory system that heavily favors them. Wang and SAIC’s perception of the issue may differ from GM and other American companies.
Taking responsibility for defense
Regardless of the trajectory of China’s enforcement of intellectual property laws, concrete action can be taken to address the problem today. The first step in curbing IP theft, according to Chafetz, is for American companies to start playing a role in their own defense: “The FBI simply doesn't have the resources to protect every single company in the United States from IP theft.” Chafetz urges companies to develop policies about their own IP and begin educating employees about what information is protected and how to keep it from falling into the hands of a competitor or another adversary.
Next, Chafetz suggests companies make a greater effort to account for losses due to IP theft when weighing the benefits of operating in China: “Companies have a very good idea of the rewards that they obtain from doing business with China, but they don't have a similarly good idea of their losses [due to the low visibility of IP theft].” According to a report by IP merchant bank Ocean Tomo, IP accounts for 90% of the total value of S&P companies. Says Chafetz, “If you're not tracking [your company’s IP] and competitors are stealing it, you're essentially subsidizing their R&D.”
Although facilitating economic interaction with China in non-critical sectors is an important means of stabilizing its relationship with the U.S., it would be foolish to ignore the national security implications of increased technological exchange. Additionally, private companies must stop turning a blind eye to the costs they bear when their intangible assets are stolen. The first step is for Silicon Valley companies to begin taking responsibility for their own defense. Companies can implement new policies quickly and without increasing diplomatic tensions between the U.S. and the CCP. Washington can support these companies by passing laws that make it easier for these companies to defend themselves and even allow them to seek compensation when they are attacked, but companies first have to address their own IP vulnerabilities and do more to raise awareness about the issue. The U.S. should always be searching for shared goals to pursue with China to ease tensions, however, it must also clearly signal its opposition to behaviors it deems inappropriate.
Ben Makarechian is a 4th-year undergraduate student at the University of Virginia’s Batten School of Leadership and Public Policy, majoring in public policy and international economics and minoring in Chinese. He is currently a Junior Fellow at the Pacific Council for International Policy. Originally from Los Gatos, California, his interest in US-China relations stems from the five years he spent living in Singapore and was deepened during the two months he studied Chinese in Beijing during the Summer of 2024. His writing about China has been published in UVA’s Virginia Journal of International Affairs.
The views and opinions expressed here are those of the author(s) and do not necessarily reflect the official policy or position of the Pacific Council.
