Sideshow: The Real Cyber Threat Is the Theft of IP for Economic Advantage

The uproar about Edward Snowden and snooping by the US National Security Agency have obscured more economically urgent concerns about what the NSA's chief termed 'the greatest wealth transfer in history.'

He was referring to the theft of intellectual property from the US by the Chinese and others. Recent estimates in Forbes of the value of the IP stolen are as high as $300 billion annually.

Given the fragility of the global economy, sums of that magnitude take on new significance. The cost can be measured in lost jobs, declining competitiveness and a decline in potential benefits from innovations whose essence may no longer be realized by those who created it.

Economic espionage has been a fact of business life for centuries. It's impact in the 19th century - to say nothing of that in medieval Italy or ancient China and India - may have been even greater than it is today because of that era's smaller base. Awareness, now more fully raised, is half the battle. Figuring out what to do about it when the source of the theft is also an important trade partner, is the current challenge.

We sense that the US knows more than it is telling and doing more about it, as well. The issue from a strategic and public policy standpoint is how to manage the crisis while efforts behind the scenes struggle to limit the damage. There is, at some point, a limit to how much one can successfully steal, especially if the implication is that those doing the stealing are incapable of creating any real comparable value on their own. It would seem, in this regard, that investing in the education and training of a nation's workforce so that they can continue to generate new ideas is the best insurance against the loss of existing ideas. JL

Mark Anderson comments in the Financial Times:

A successful IP theft or protection strategy can mean jobs lost and gained, middle classes destroyed and created and military power shifted.

The world has recently been rattled by two unexpected exposures. First, Mandiant, the cyber security specialist, managed to identify – down to the physical address – a Chinese army unit responsible for the theft of foreign intellectual property. Second, via Edward Snowden, the Booz Allen Hamilton contractor turned leaker, a lens has been turned on to the extent of the National Security Agency’s practices of spying and privacy invasion. China is doing its best to conflate IP theft with the NSA’s listening. But aside from the use of internet tools to further their ends, these programmes and issues are otherwise unrelated. One represents the international theft of inventions as part of a national business model; the other is intended to promote national security. There is no evidence yet of any kind that the nations implicated by Mr Snowden in snooping have used their systems to undermine the economies of other nations or to gain a competitive commercial advantage.
The US and its allies have generally employed spies because they are charged with protecting and defending their countries against aggressors. Their success, in broad terms, is measured by a reduction in successful attacks. Certainly, they can and do escape accountability and become overzealous. But countries steal IP for baser, less defensible reasons: to make money and to gain an international economic advantage against their competitors. In the post-information age, the global economy is driven by technology, and IP is its primary asset class. Wealth is the result of invention, and those individuals, companies or countries desiring wealth must obtain it by either inventing or stealing those inventions. Nations in this new information economy find themselves in one of two businesses: robbing others’ “information banks” or protecting their own.

Japan was the first post-second world war practitioner of this new “information mercantilism”. The country’s real growth in wealth came during the 1970s – in part from the theft of other nations’ IP. This activity included the transfer of secrets surrounding the design and manufacture of at least four leading US technologies: television, DRAM memory chips, video recording and playback, and speciality steel production – which resulted in legal action under the US Trade Act against the country.
The results of the theft were immediate and dramatic: within a few years, these industries did not exist in the US, and Japan dominated these huge sectors of the world economy. Since that time, South Korea has adopted and refined this model, pushing Japan aside in the same industries. It uses the same recipe: it steals IP and improves upon it, has a weakened currency to favour exporters, uses government support to grow inside protective domestic barriers and then wipes out global competitors. China is the latest info-mercantilist, enlarging and improving on this model, and scaling it far beyond anything seen to date.

The competitive benefits of this model are obvious: no at-risk research and development costs, with capital deployed more effectively. They also get the “fast follower’s” advantage in only parasitising winning products. The contest between these two models is redefining the global economy today, as the inventors fall behind the thieves. This has led, in the words of NSA director General Keith Alexander, to “the greatest transfer of wealth in history”.

The continuing destruction within the telecoms equipment sector is a case in point: the inventing companies Motorola and Nortel were both victims of Chinese IP theft programmes. Jin Hanjuan, a former Motorola employee, was convicted in a US court for theft of secrets after she was caught boarding an aircraft to China with a one-way ticket and more than 1,000 company documents. Nortel has since discovered that Chinese hackers were inside the company’s network for perhaps nine years, reading executives’ email and other corporate documents. Alcatel-Lucent and Nokia Siemens Networks are now in dire straits.

So it is essential that the west works together to guard its IP. A 2012 report by the US Bureau of Economic Analysis notes that “the entire US economy relies on some form of IP, because virtually every industry either produces or uses it”.
IP protection is rightly a top priority with the US and select EU countries. So the fact that the transatlantic trade treaty negotiations between the US and EU, which will cover this issue, may be delayed by European concerns about the NSA’s behaviour is troubling: the two are not related.
If the inventing nations do not work to protect their most important resource because they are concerned about overzealous security agencies, they will be committing an act of enormous self-harm.