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U.S.-China Trade and Technology

Tech War: The United States’ Whole-of-Government Approach to China is a Force Multiplier*

May 7, 2019 | Author: Hdeel Abdelhady

The continuing confrontation between the United States and China over trade and technology has put Chinese technology companies in the spotlight, particularly large, international firms like Huawei and ZTE. As stated in MassPoint’s writings and presentations, the U.S.-China trade balance is neither the most strategically significant nor substantively complex of the issues on the negotiating table. Nor are tariffs. Rather, the race to dominate future technologies like artificial intelligence and 5G underpins the most complex legal and policy issues between the two nations.

Some members of the Trump Administration have held firm to demands that China make “structural” changes, such as reforming laws and practices that facilitate “forced technology transfer.” (See MassPoint’s infographic depicting the wide range of U.S.-China issues from the U.S. perspective). Other Administration officials are reportedly more interested in securing near-term trade concessions, such as commitments from China to purchase more U.S. goods, like agricultural products. Whatever the outcome of trade talks in the near term, it is unlikely that the United States will scale back efforts to counter China on technology, because the United States has committed to a government-wide response to China on the technology front.

Across the executive branch and in Congress, U.S. officials have taken issue with the manner in which China is advancing its technological development objectives, which China has outlined, most notably, in the Made in China 2025 plan. The FBI Director articulated prevailing concerns when he stated that that “we’re deeply concerned about American innovation ending up in the wrong hands, including by nation-states like China, intent on stealing the fruits of our research, our economic investment, our development, and our hard work for their own gain.”  Indeed, U.S. officials have labeled as “economic aggression” and “economic espionage” a range of legal and illicit behaviors attributed to Chinese government and private actors as problematic, such as technology acquisitions, forced technology transfer, IP theft, “academic espionage,” and influence operations in the United States. While the identification by U.S. authorities of such issues is not a new development—to be sure, these issues predate the Trump Administration and the concerns they illustrate are bipartisan—the United States’ response to China’s “economic aggression” has recently become more coordinated and aggressive.

United States Whole-of-Government Approach to China’s “Economic Aggression”

The U.S. government has adopted and is implementing a “whole-of-government” strategy to counter China. The whole-of-government approach entails a range of legal and policy measures to curb China’s access to U.S. technology, by lawful and unlawful means.[1] These measures include, but are not limited to: (1) stricter curbs on foreign investment in U.S. technology; (2) restrictions on exports of “emerging technologies” like artificial intelligence; (3) exclusions of Chinese firms from U.S. government and private supply chains through company bans; (4) prosecutions of intellectual property theft; (5) measures to counter “academic espionage” in American academic and research institutions; and, (6) sanctions enforcement.[2] In addition, U.S. authorities have increasingly focused on Chinese government “influence operations” in the United States, and are considering measures to counter Chinese influence, such as by requiring parties representing or associating with the Chinese government to register under the Foreign Agents Registration Act  (the Confucius Institute has been singled out for such treatment, as has China’s Thousand Talents program).

While the aforementioned legal and policy tools to counter China’s “economic aggression” are not new or, on their face, specific to China, their force has been multiplied by the fact that they are being coordinated and deployed as part of a whole-of-government strategy. This is significant as the government-wide strategy: (1) harnesses an array of legal, policy, political, and diplomatic resources in furtherance of a common objective and (2) is institutionalized and therefore less susceptible to the influences of near-term domestic or international political developments. Thus, as indicated below, if the United States and China reach a favorable trade deal, that development—even if concessions are made by one or both parties to advance near-term goals (such as to influence the stock market or appeal to influential constituencies)—is unlikely to materially alter whole-of-government efforts, particularly measures designed to counter what U.S. officials view as conduct that threatens the United States’ technological assets and leading position.

Legal Encirclement: The Whole-of-Government, Whole-of-Law Approach in Action

As discussed in a prior MassPoint update, the Department of Justice announced last year an initiative to combat China’s “economic espionage” (the “China Initiative”). The China Initiative’s components include measures to counter IP theft, such as by trade secret theft prosecution. The prosecution of IP theft is by itself a potent legal tool. But applied as part of a whole-of-government strategy in tandem with other legal and policy measures, the impact is multiplied.

An example case is that of United States v. United Microelectronics Corp., a criminal case for Economic Espionage Act violations against a Chinese state-owned enterprise,  Fujian Jinhua Integrated Circuit Company (Fujian) and a Taiwanese company and individual nationals of Taiwan, alleging theft of DRAM IP from Micron Technology, Inc.[3] The indictment in the DOJ case, filed on September 27, 2018, was made public on November 1, 2018, concurrently with the DOJ’s announcement of the China Initiative.

Just two days before the indictment was announced, on October 30, 2018, the Commerce Department added the Chinese state-owned enterprise, Fujain, to the Entity List—a list of parties subject to U.S. export licensing requirements additional to those set forth in the Export Administration Regulations (EAR) administered by the Department of Commerce. Pursuant to the EAR, Commerce determined that Fujian posed “a significant risk of becoming involved in activities that could have a negative impact on the national security interests of the United States,” justifying tightened controls on exports, reexports (to third countries), and in-country transfers (from one party to another in a single foreign country) by, to, or involving Fujian. Commerce now requires a license for the exports to Fujian of all EAR-controlled items, with a presumption of export license denial.

The Microlectronics-Fujian case is illustrative of the whole-of-government/whole-of-law approach, as a DOJ-led criminal case was accompanied, and its force multiplied by, an export control enforcement action that is likely to sever Fujian Jinhua from the U.S. technology supply chain (primarily from U.S.-source items subject to the EAR). (Two related cases are pending: a DOJ-led civil case and a separate civil case brought by Micron prior to the DOJ’s actions).[4]

A Trade Deal is Unlikely to Alter the Whole-of-Government Approach, Absent Enforceable Agreement on “Structural” Issues Pertaining to Technology 

Accounts of the progress on and potential outcome of U.S.-China trade talks have changed frequently since talks began in earnest. Just in the past week, prospects for a trade deal that encompasses “structural” elements—or any trade deal—have dimmed, according to news reports (and this could, of course, change anytime). But the fate of current U.S-China trade talks is not likely to alter the United States’ whole-of-government/whole-of-law approach to China on technology, given the government-wide commitment to and bipartisan support for the approach. U.S. laws can and likely will continue to be enforced in furtherance of the U.S. strategy to combat China’s “economic aggression” in the technology space. This is significant. As cases like those involving Fujian, ZTE, and Huawei have demonstrated, U.S. laws and the unmatched ability of the United States to enforce its laws domestically and extraterritorially give the United States a decisive advantage in the ongoing tech war with China.


Hdeel Abdelhady is Founder and Principal at MassPoint Legal and Strategy Advisory PLLC and teaches a law school course on the Regulation of Foreign Access to U.S. Technology.


NOTES

*This post is an abbreviated version of an earlier MassPoint publication having the same title.

[1] As has been well-covered in the media, the United States’ is also lobbying allied and other nations to restrict China’s access to or participation in technology, such as by urging other nations to exclude Huawei from 5G development and infrastructure.

[2] These restrictions, with the exceptions, for example, of the exclusions of specific Chinese firms from U.S. government procurement and the DOJ’s initiative to combat China’s economic espionage, are not, as a legal matter, expressly or only aimed at China. In practice, however, restrictive measures have or likely will impact Chinese entities more than others, particularly in the near term. With that in mind, non-Chinese foreign investors, exporters and importers, and other actors in the commercial and academic/research spaces should adapt to the changing legal, enforcement, and policy climate in the United States.

[3] The DOJ case was preceded by a civil case filed by Micron. The whole-of-government/whole-of-law response also includes a government-private  component where, as in the Micron case, the Department of Justice mines civil actions involving targeted conduct—e.g., trade secret theft by Chinese or other parties of interest—and brings related civil cases and/or criminal prosecutions. The recent indictment of Huawei for, inter alia, the theft of trade secrets from T-Mobile is another example. In addition, the DOJ China Initiative includes building the capacity of the private sector (and academia) to understand, detect, and cooperate with government with regard to the economic and academic espionage.

[4] The DOJ’s civil suit seeks to enjoin certain of the Microelectronics defendants from certain transfers of allegedly stolen trade secrets and derivative products manufactured by Microelectronics or Fujian.

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