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Witnesses, Lawmakers at House Hearing On IP Theft, Cyber Espionage Take Aim at China

Thursday, July 11, 2013
By Natasha Dhillon

The tone was set early during a July 9 hearing in front of a subcommittee of the House Committee on Energy and Commerce. “From defense contractors to manufacturers, no American company has been immune from the scourge of Chinese intellectual property theft,” Rep. Tim Murphy (R-Pa.), chairman of the Subcommittee on Oversight and Investigations, said during his opening remarks.

For the next two hours lawmakers and witnesses took turns both reiterating and expanding upon Murphy's opening comment. The takeaway from the hearing, titled Cyber Espionage and the Theft of U.S. Intellectual Property and Technology, was that China's wholesale engagement in cyber espionage and IP theft poses a significant threat to U.S. commercial interests. The extent of that threat, and what can be done about it, however, was the subject of considerable disagreement.

A Pervasive and Costly Threat

The first witness, Slade Gorton, a former senator from Washington who was a member of the Commission on the Theft of American Intellectual Property, discussed the impact of intellectual property theft on the United States.

In May, the IP Commission, as Gorton's group was called, released a report that quantified the impact of intellectual property theft and espionage on the U.S. economy. Gorton testified that the IP Commission estimated that the American economy loses a minimum of $300 billion a year due to intellectual property theft. The report also suggested that China was responsible for up to 80 percent of international IP theft.

James A. Lewis, of the Center for Strategic and International Studies, noted that Chinese cyber espionage and intellectual property theft is so pervasive that every Fortune 500 company has been a target of Chinese hackers.

Questions Remain About Breadth of IP Losses

The $300 billion estimate was repeated by nearly all of the handful of lawmakers. Indeed, both Murphy and Rep. Fred Upton (R-Mich.), Chairman of the Full Energy and Commerce Committee, included the figure in their opening statements. At least one of the witnesses, however, was not convinced of the accuracy of that estimate.

Susan Offutt, a chief economist at the Government Accountability Office's Applied Research and Methods division stated in her written testimony that “quantifying the economic impact of counterfeit and pirated goods on the U.S. economy is challenging primarily because of the lack of available data on the extent and value of counterfeit trade.”

Offutt was asked if she thought the $300 billion figure was accurate. She said:

The work that we did suggests that an estimate that is based on the application of a rule of thumb--about the proportion of an industry's output that is vulnerable or lost to intellectual property theft--is not reliable. … It is based on first the notion that one third of our economic output comes from intellectual property intensive industries. That probably tells you what is at risk. But the application of the 'rule of thumb'--which is that six percent of that output is lost [to IP theft]--we don't find any basis for believing that to be an accurate number.

Possible Solutions

Gorton said that there are both defensive enforcement procedures and policy steps that the United States can take in the short term, but “those alone will never solve the problem.” Indeed, Gorton said that any domestic initiatives were bound to come up short absent a concerted effort on China's behalf to play a meaningful role staunching IP theft and cyber espionage within its borders. “We need China to value IP,” he said.

He suggested the use of interest groups in China and said that when “interest groups within China see that weak IP protections are harming them, then we will finally be able to solve the problem.”

Lewis presented a strategy focusing on public disincentives for Chinese hacking, closer coordination with U.S. allies, and improved cyber defenses to make U.S. companies stronger. However, he agreed that an effective solution required more than domestic reform and said “the best strategy, the one that has the best chance of success, is to create with [U.S.] allies a global standard for responsible behavior and then press China to observe them.”

Larry M. Wortzel, of the China Economic and Security Review Commission, believed that the “president already has an effective tool that he has not used.” He was referring to the president's authority under the International Emergency Economic Power Enhancement Act, which would allow the president to “investigate, regulate, and freeze transactions and assets, as well as block imports and exports in order to address the threat of cyber theft and espionage.”

Building on his point that trade restrictions provide an effective solution, he said the recently introduced Deter Cyber Theft Act (S. 884)(89 PTD, 5/8/13),which would allow the president to impose trade restrictions to protect intellectual property rights, was a solution to explore.

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