SinoTech: Department of Justice Launches Initiative to Address Chinese Economic Espionage

The United States government is taking on a new and aggressive campaign against Chinese agents accused of industrial espionage. In the week before his departure as attorney general, Jeff Sessions announced a “China Initiative” to support the Department of Justice’s “strategic priority of countering Chinese national security threats.” The initiative, which was rolled out on Nov. 1, takes a wide-ranging view of potential Chinese interference including everything from “trade secret theft cases” to threats from non-traditional collectors. Assistant Attorney General for the National Security Division John Demers will lead the program, which is comprised of Assistant Attorney General for the Criminal Division Brian Benczkowski, five U.S. attorneys, an FBI executive, and Justice Department officials. Fierce rhetoric accompanied the launch, with Demers stating, “China wants the fruits of America’s brainpower to harvest the seeds of its planned economic dominance. Preventing this from happening will take all of us here at the Justice Department.”

Sessions unveiled the initiative while announcing the unsealing of an indictment in San Francisco against parties involved in the alleged theft of trade secrets from Idaho-based Micron, a semiconductor manufacturer. The grand jury charged Fujian Jinhua, United Microelectronics Corporation (UMC), and three Taiwanese individuals with violations of the Economic Espionage Act and conspiracy to violate the Economic Espionage Act. Micron is the “only United States-based company that manufactures [dynamic random-access memory] DRAM” circuits; the defendants allegedly conveyed trade secrets to the Chinese government, which has identified DRAM development as a “national economic priority.” DRAM chips are used in many electronics to provide high-capacity storage at relatively low cost. Sessions called the defendants’ actions a “brazen scheme” and a “grave threat to our national security.” And as discussed in our last SinoTech post, the Commerce Department has banned chip component sales to Fujian Jinhua.

The rollout of the China initiative came just days after the Justice Department unsealed another indictment, filed in the Southern District of California, against 10 Chinese nationals, alleging violations of the Computer Fraud and Abuse Act in a conspiracy to steal “aerospace data.” Under the direction of Jiangsu Provincial Ministry of State Security (MSS) operatives, Chinese employees at foreign aerospace technology firms allegedly “deployed malware” and facilitated “computer intrusions.” The operation reportedly began in January 2010 with a hack compromising Los Angeles-based Capstone Turbine and ran for “at least five years.” The unsealing of the indictment follows the extradition from Belgium of Xu Yanjun, a senior officer with the Chinese MSS, last month. The Justice Department similarly accused Xu of obtaining “trade secrets” from “aerospace companies in the United States and throughout Europe.”

Trade War Continues Despite High-level Talks

Top American and Chinese defense and diplomatic officials met in Washington on Nov. 9 for the U.S.-China Diplomatic and Security Dialogue. In a press meeting following the exchange, both sides affirmed the constructiveness of talks and the need for coordinated approaches to issues such as North Korean denuclearization. Secretary of State Mike Pompeo told reporters that “the United States is not pursuing a policy of Cold War containment with China.” Despite the mutual recognition of the utility of continued “military-to-military dialogue,” however, the meeting offered few solutions for getting the relationship back on track. Chinese officials had postponed the talks, originally meant to be held in Beijing last month, after the State Department approved a $330 million arms sale to Taiwan.

The joint dialogue was but one example of a spate of recent high-level talks between American and Chinese officials. Last Wednesday, Chinese Politburo member Yang Jiechi met with U.S. national security adviser John Bolton at the White House in a bid to reduce bilateral tensions. The next day, President Xi Jinping and Chinese Foreign Minister Wang Yi received former U.S. Secretary of State Henry Kissinger in Beijing. Chinese officials have cast these talks as laying the groundwork for the “meeting plus dinner” scheduled between Presidents Trump and Xi at the upcoming G20 summit in Buenos Aires. At the Nov. 9 press meeting, for example, Yang Jiechi highlighted the importance of increasing communication with the United States in order to “make good preparations for the [G20] summit.”

Despite the recent string of talks, however, the trade war continues apace. On Friday, White House trade adviser Peter Navarro cautioned against hopes for a “quick end” to the trade war, citing continued “trust issues” with China. The Trump administration is set to increase its 10 percent tariff rate, applicable to $200 billion worth of imported Chinese goods, to a rate of 25 percent by Jan. 1. As the Trump-Xi G20 meeting approaches, the U.S.-China trade conflict remains as sharp as ever.

Wuzhen conference stutters even as Chinese internet norms gain traction

The Fifth World Internet Conference kicked off in the eastern Chinese city of Wuzhen on Nov. 7, 2018, with far less fanfare than has ushered in past conferences. Last year, headliners included CEOs from top foreign tech companies such as Google and Apple, and in 2015 Xi Jinping delivered a keynote address. This year, however, only one foreign executive addressed the opening ceremony and Xi Jinping sent in written remarks. While the deteriorating U.S.-China trade relationship may have deterred American tech leaders this year, despite the lackluster attendance in Wuzhen, China’s global influence over internet policy has arguably never been greater.

The Cyberspace Administration of China (CAC), China’s main internet regulator, and the Zhejiang provincial government have hosted the Conference annually since 2014. It helps showcase China’s rising digital clout and efforts to promote a vision of “cyber sovereignty” in global internet governance. That vision emerged again this year, with Huang Kunming, the head of the Chinese Communist Party’s propaganda department, stating, “We should adhere to the principle of respecting cyber sovereignty, respecting every individual country’s right to choose its own development path for cyberspace.”

This year’s conference, however, also displayed some more ominous aspects of what cyber sovereignty might entail. For example, companies including Tencent discussed cooperation with the Chinese government on counterterrorism, despite the ongoing crackdown on members of the Muslim Uighur ethnic minority in Xinjiang.

Some of the high-profile executives chosen to speak at the conference have also encountered tribulations while navigating the capricious world of Chinese cybersecurity regulation. Steve Mollenkopf, the CEO of U.S. semiconductor manufacturer Qualcomm, spoke at the opening ceremony even though this July, his company’s proposed $44 billion acquisition of Dutch semiconductor manufacturer NXP was halted after China’s State Administration for Market Regulation failed to rule on antitrust considerations by the required deadline. Similarly, Tencent Chairman Ma Huateng (Pony Ma) stated at the conference that, “The Chinese economy is a vast ocean. Storms cannot disrupt it … It’s not just an opportunity for China, but for the entire world.” However, Tencent, a major player in internet gaming, recently lost nearly $200 billion in market value following a months-long freeze on game approval by the State Administration of Radio and Television.

Nonetheless, the diffusion of Chinese norms surrounding cyberspace as a result of events like the Wuzhen conference appears effective. Freedom House’s recently released 2018 Freedom on the Net report emphasized how “a cohort of countries is moving toward digital authoritarianism by embracing the Chinese model of extensive censorship and automated surveillance systems.” The report describes both tightening domestic controls a as part of the implementation of the Cybersecurity Law of the People’s Republic of China beginning in June 2017, as well as how Chinese practices have begun to spread abroad. Chinese authorities have hosted seminars and other events to share information on social media and internet policy with 36 out of the 65 countries in Freedom House’s rankings and Chinese firms have set up digital infrastructure in at least 38 of the countries. Such interactions may have inspired recent cybersecurity restrictions introduced in countries such as Tanzania, Uganda and Vietnam.

In Other News

• President Xi Jinping criticized “law of the jungle” and “winner-take-all” approaches to trade in a speech opening the China International Import Expo in Shanghai on Nov. 5. The speech was widely viewed as a challenge to President Trump ahead of the two leaders’ meeting on Dec. 1. The U.S. government snubbed the Expo, and most European countries dispatched “lower-level ministers.” China Daily reported that the Expo generated a transaction volume of $57 billion. The Financial Times, however, reports that in the lead-up to the Expo, Beijing had “pressured companies to announce large purchase orders” as a “political task.”
• China also hosted the International Aviation and Aerospace Exhibition from Nov. 6-11 in the southeastern Chinese city of Zhuhai. State-owned enterprise CASC (Chinese Aerospace Science and Technology Corporation) unveiled its CH-7 unmanned aerial vehicle, a drone that can fly at “roughly the speed of a commercial jet airliner.” CASC was just one of a slew of companies that displayed drones at the airshow; over 350 Chinese companies have entered the drone market, developing unmanned vehicles for functions ranging from “crowd control” to “sea-floor mapping.” And in a public display of cooperation, Russia and China inked a number of deals and “unveiled a mock-up” of a wide-body civil jet.
• At the end of last month, the Beijing Internet Court heard its first ever case. The Chinese firm Bytedance Ltd., currently the world’s “biggest privately backed startup” and creator of the video app TikTok, has alleged that Baidu’s “Huopai” app allows users to share and download videos to which TikTok holds exclusive rights. Bytedance is seeking over $143,000 in compensation for copyright infringement. The Internet Court holds hearings via video call and accepts filings electronically. China has opened Internet Courts in Hangzhou, Beijing and Guangzhou.
• In a longform published on Nov. 11, the Sydney Morning Herald detailed a complex Chinese governmental “foreign interference operation” that targeted the United Nations. The piece focuses on Sheri Yan, a “queen of the Australian-China social scene,” who channeled illicit payments to UN diplomats through an NGO. In July 2016, Sheri Yan was sentenced to “20 months in prison” for paying more than “$800,000” in bribes to John W. Ashe, the 68th President of the U.N. General Assembly. According to the article, a report by the Australian Security Intelligence Organization on Beijing’s foreign influence operations served as the basis for a U.S. national security report, which in turn informed Vice President Mike Pence’s comments about Chinese influence operations in an Oct. 4 public speech at the Hudson Institute.

Commentary & Analysis

On Lawfare, Michael P. Fischerkeller and Richard J. Harknett discuss the importance of tacit bargaining and persistent engagement for U.S. cyber operations strategy. A new episode of the Lawfare Podcast explores the risks cyber attacks pose to financial institutions and what can be done to address them. The Cyberlaw Podcast is also chock full of China news, including a reexamination of whether China Telecom hijacked the Border Gateway Protocol for internet routing (at 1:47), a discussion of the Justice Department’s recent indictments (at 25:41), and new reports about compromised CIA communications that revealed many of its intelligence sources in China (at 11:27).

The 100th anniversary of the end of World War I led many commentators to contemplate the risk of another great war. James Holmes considers parallels between present-day Asia and WWI Europe for Foreign Policy, while Graham Allison of Harvard’s Belfer Center for Science and International Affairs describes the “toolbox of precautions” needed to avoid a conflagration between the U.S. and China. More broadly, Evan Medeiros, Thomas Wright, David Lampton, and Susan Thornton consider whether U.S. and Chinese interests will prove “fundamentally incompatible” at a debate hosted by Brookings and the Paul Tsai China Center at Yale Law School. Meanwhile in Bloomberg, Former Vice Minister of Foreign Affairs Fu Ying identifies the steps both the U.S. and China must take to correct course in the bilateral relationship. For the Council on Foreign Relations, Elizabeth Economy examines how the Trump administration should sell its new China policy. Also at the Council on Foreign Relations, Brad Setser argues that a Chinese commitment to increasing imports—particularly of manufactured goods—would be a step toward ameliorating trade tensions.

Commentators also delved into questions about the trajectory of technology relations with China. At CSIS, James Lewis advocates for a new informal grouping to collaborate on countering Chinese espionage and William Alan Reinsch describes the divergent visions for the internet held by policymakers in Brussels, Beijing, and Washington. For New America, Elsa Kania and Rogier Creemers offer a translation of Chinese media coverage of a Politburo study session led by Xi Jinping on the role of AI in China’s development. Finally, on the ChinaEconTalk podcast, Matt Sheehan discusses the history and future of Google in China, while a Bloomberg feature dives into the company’s attempts to reenter the Chinese market.