Smart legal policy will stop China’s intellectual property theft, not protectionism

In its goal to rewrite the rules of the global order to its advantage, China has decided that taking other people’s ideas and inventions beats coming up with your own.

A report by the Boston cybersecurity firm Cybereason details how Chinese hacker groups like APT 41 and individual workers have acquired proprietary data from dozens of European multinationals on anything from military equipment blueprints to drug formulas for depression, obesity, and diabetes medication.

In one egregious instance, the Dutch giant ASML, the largest European tech company and a global leader in the vital semiconductor industry, caught a Chinese worker stealing the patent behind their one-of-a-kind lithography machines.

EU policymakers like Trade Councillor Helene Juramy have every right to be alarmed about these forced technology transfers. Instruments like trademarks, copyright, or patents should bestow limited rights over ideas, assure creators that they will reap the full benefits of their hard work, and thus encourage more of them to contribute. States are believed to be guarantors, ensuring that everyone (including states themselves) follows the same rules. 

By contrast, China’s actions risk undermining the entire IP rights system and depriving all Europeans of a better and more secure future. Suppose ASML cannot trust its product is safe. In that case, it will stop investing in new manufacturing techniques. This single act would scupper the EU’s ambitions of becoming a semiconductor superpower via the Chips Act and drive the sector into another crisis. Unsurprisingly, the estimated costs of Chinese fraud and lost economic opportunities via IP theft are in the trillions of euros. 

Concerning as the situation may be, though, the EU must resist calls for protectionism. The example of the United States is a lesson that the suggested cure is worse than the disease. In 2018, Donald Trump’s administration invoked Section 301 of the 1974 Trade Act, authorizing the president to take action against IP theft as an unfair trade practice and apply import tariffs on $300 billion worth (or €280 billion) of Chinese goods. Ultimately, the United States International Trade Commission found that Section 231 taxes raised prices for Chinese imports in vital industries like semiconductors and computer equipment by 25% and increased all US prices by 0.2% in 2021. American Action Forum data put the total consumer cost of import duties at $48 billion (equivalent to €49 billion). Far from getting China to play fair, tariffs make life worse for importers and consumers, who will be left footing higher bills.

Instead of self-destructive protectionism, decision-makers in Brussels are better served by a targeted approach that pays closer attention to how China acquires European IP. While media and political discussion emphasize a strict divide between “legal” and “illegal” methods, the reality is that China has been so successful because it has exploited the gray zone in between. A recent article by the Consumer Choice Center details a prevalent tactic called third-party litigation: Chinese firms fund plaintiffs embroiled in IP lawsuits to acquire patents and other trademarked knowledge for the People’s Republic. Despite the practice starting in Australia and the United States, it is quickly making its way to Europe, where prominent firms like Erso Capital raised €460 million last year alone from unknown third-party sources. 

EU officials need to ensure that China can never exploit such legal loopholes. The European Commission should follow the Parliament’s recommendations (entitled “Responsible funding of litigation”) and introduce a provision for third parties to disclose their funding to judicial or administrative authorities. On the other hand, the New Product Liability Directive must be amended to remove unbounded discovery so no one can swipe confidential information and sensitive trade secrets about the other party while in court. 

Meanwhile, the EU should consider direct legal and administrative action in the more egregious cases of outright spying beyond the 2018 trade dispute with China at the World Trade Organization. 

These policies will help safeguard IP innovation from naked Chinese ambition in the EU without throwing the proverbial IP baby out with the bathwater.