Critical Analysis: Economic Espionage and International Law

Economic espionage involves a state’s attempts to covertly acquire trade secrets held by foreign private enterprises. Many countries have long considered economic espionage important to national security and economic development. Several economic trends have escalated the risk and prevalence of trade secret theft, including the globalization of trade and interconnected supply chains, the growing important of innovation and information technology to competitiveness, and the rise of overseas markets as a critical source of production and economic opportunity. Advancements in technology, increased mobility, rapid globalization, and the anonymous or pseudonymous nature of the Internet create growing challenges in protecting trade secrets. This is a cause for concern in countries worldwide, and is increasingly a point of contention in diplomatic and trade relations between countries. General Keith Alexander has said that the bleeding of industrial information and intellectual property via cyber espionage represents the “greatest transfer of wealth in history.”

Firms feel that China poses one of the highest threats of IP theft

Firms feel that China poses one of the highest threats of IP theft

Worldwide, cyber espionage cost an estimated $1 trillion in expenses last year alone. On average, trade secrets are worth two-thirds of a company’s information portfolio. For knowledge-intensive industries, trade secrets are worth even more—up to 70 to 80 percent more, on average. Intellectual property theft costs American companies $250 billion annually, while cyber crime rings in at more than $338 billion total. That means, on a yearly basis the annual theft of intellectual property from U.S. businesses is worth nearly the same amount as the current value of exports to Asia. A European Commission study shows that over the past ten years, approximately twenty percent of responding European companies has experienced at least one attempted or successful theft, and nearly forty percent of responding companies believe that they are more at risk in the past ten years than ever before. In 2007, Japan’s Ministry of Economy, Trade, and Industry conducted a survey of 625 manufacturing firms and found that more than thirty five percent of those responding reported some form of technology loss. South Korea approximates economic espionage damage has more than tripled from 2004 to 2008. Sixty percent of these victims are reported to be small- and medium-sized businesses. Germany’s Federal Office for the Protection of the Constitution appraises the value lost by German companies to be between $28 billion-$71 billion annually due to foreign economic espionage. Economic espionage also costs Germany between 30,000 and 70,000 jobs per year. A Canadian report claimed in 2010 that eighty six percent of large Canadian corporations had been victimized, and that cyber espionage against the private sector had doubled in the past two years. The United Kingdom estimates that attacks on computer systems, including industrial espionage and theft of company trade secrets, cost the private sector $34 billion annually, of which more than forty percent represents theft of intellectual property such as designs, formulas, and company secrets.

There is no international treaty specifically governing economic espionage. The desire to combat economic cyber espionage confronts a lack of international law on espionage and economic espionage. Although a victim country could assert that spying violates the principles of sovereignty and non-intervention, state practice has accepted state-sponsored espionage such that these appeals are not serious claims. International trade law, however, does provide a minimum for protection of trade secrets as an intellectual property right. In particular, trade negotiations and dialogues can offer effective means to elevating the importance of trade secrets protection, raising global standards, and promoting more effective deterrence. Under the World Trade Organization’s (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), WTO members are required to protect intellectual property rights, which include trade secrets. TRIPS Article 39 requires WTO members to protect undisclosed information that is secret, is commercially valuable because it is secret, and has been subject to reasonable steps to be kept secret. The TRIPS Agreement also requires that members make available civil judicial procedures concerning the enforcement of any intellectual property right covered by the Agreement. Also, TRIPS allows  “criminal procedures and penalties to be applied in other cases of infringement of intellectual property rights, in particular where they are committed willfully and on a commercial scale.” Aside from failing to enforce its own laws, a government may be pursuing an “indigenous innovation policy,” in which tech handovers are a prerequisite to market entry. For example, the Chinese government has measures and policies that condition market access or investment in China on the transfer of intellectual property from foreign to domestic entities.

Global firms feel that the threat of cyber espionage and trade secret theft are higher coming from China, Pakistan, Russia, and India than from the rest of the world because of corruption and inadequate protections for intellectual property. According to a survey by the U.S. International Trade Commission (ITC), only 0.6 percent of U.S. firms that reported material losses due to trade secret theft between 2007 and 2009 in China pursued any trade secret misappropriation proceedings in China due to imprecise standards, a lack of deterrent penalties, and a host of procedural difficulties. Only an average of thirty percent of trade secret cases brought in Shanghai Higher People’s Court reach conclusions and fewer than half of those result in findings of infringement. The most troubling form of economic espionage is state-sponsored espionage that obtains information from private-sector companies located outside their territories.

Even if there were a clear rule that a victim could show was being violated, the victim nonetheless has to establish the identity of the responsible party. WTO cases have yet to involve accusations against government-sponsored espionage, so the difficulty of doing so is untested, and therefore unpredictable. It is not clear that a WTO member could satisfy this burden by relying on evidence from private-sector entities such as The Mandiant Report and without revealing counter-intelligence means and methods. This is why the state privilege justification of “national security” can sometimes be a bigger burden than a benefit. It is invoked often, and the public has no way of determining the feasibility of the claim. The general public has no idea what their government is doing in the name of national security because it is classified. Therefore, challenging a government’s cyber espionage is particularly difficult because a government will be reluctant to hand over classified information that can be used as evidence against it, and it will claim national security as the basis for withholding such information. Additionally, a government’s participation in spying sends the message that economic espionage is acceptable and lawful in that country, which companies think means that there can be no state responsibility under international law.

The U.S. is currently negotiating two major trade agreements. The Trans-Pacific Partnership Agreement (TPP), which involves 11 other countries in the Asia-Pacific region, and The Trans-Atlantic Trade and Investment Partnership (T-TIP) with the EU both afford opportunities for cooperative advancements in the protection of trade secrets that would help to establish a stronger and more uniform standard worldwide. The U.S. has also been talking with China about a Bilateral Investment Treaty, which allows equitable standards, a better market access for investors, and a forum for dispute resolution between countries. These kinds of talks are definitely a step in the right direction, but it is going to take more than that to establish a norm workable on a widespread level. Time is not something that the economy can afford though, with the ever-increasing expenses caused by escalating cyber snooping and violations of intellectual property rights.

Katelynn Merkin is a 2L at the University of Denver and staff editor on the Denver Journal of International Law and Policy

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