Stealing Western Secrets

China and Russia have been stealing western IP for decades. What should America do going forward?

“University of Texas professor Bo Mao, prosecutors say, took proprietary technology from an American Silicon Valley start-up and handed it over to a subsidiary of Huawei, the Chinese telecommunications conglomerate.

But what makes the case against Mao particularly noteworthy is how he was accused of carrying out the theft: By using his status as a university researcher to obtain the circuit board under the guise of academic testing.”

NBC

When we think about foreign spies, we usually construct a vivid image of men in black – wearing nondescript suits and sunglasses – in a rush for their surreptitious meetings somewhere in Mayfair or Soho. But in conversation, people never seem to consider the spies on the west coast. They definitely exist, but Californian spies go relatively unnoticed – not because there is a dearth of action – but because the fight is over intellectual property (software or biotechnology worth billions of dollars). In other words, the fight isn’t for nuclear weapons, but rather for this deep esoteric knowledge often pioneered by technology giants.

In fact, the FBI conducts over 20% of its counterintelligence-related intellectual property cases in the Bay Area, albeit unsurprising given the intimate (read: incestous) relationships that form between the research institutions, venture capital firms, and early-stage startups. However, the problem goes deeper than corporate espionage, the seeds are rooted in the university system – how protective are American universities of their IP and why hasn’t more been done to curtail the spread of IP theft, especially between America and China? More importantly, what does this mean for the future of trade across the world?

Techno-Espionage

While this behaviour has gotten even more egregious, here are a few cases where spies have been caught (these merely scrape the surface):

“'To see what is in front of one's nose needs a constant struggle” as George Orwell once proclaimed. American taxpayers pay billions of dollars to fund frontier research in biotech, aerospace, and computer science only to witness American universities playing fast and loose with their security. Upon complaints from outsiders, administrators respond by calling said accusers ‘racist’ for making light of this one-sided IP theft. What universities miss is that IP theft isn’t about race; it’s fundamentally a matter of national security – I laud the men and women who work incessantly to make America safe.

Certainly, the FBI has a point: China and Russia think orthogonally to that of the United States in their goals for technology. We open-source our research; we allow immigrants to work with our very best professors while permiting them to start a business with their groundbreaking discoveries and we pay exceedingly well for top-talent regardless of one’s orientation. None of this is true in China; whatever technology discoveries they steal will be used to further the persecution of ethnic minorities.

So, how should western countries protect their secrets?

The two main foreign intelligence operations that exist in Silicon Valley are run by Russia and China. The former operates in a highly clandestine format: creating venture capital firms like Rusnano USA, owned by the Russian government, ingratiating their members into the tech elite, whose main goal is access to American military technology.

“The only time there was a collective sigh regarding Russia, like maybe things have changed, was under Gorbachev,” said LaRae Quy, an ex-FBI member conducting counter-intelligence on China and Russia. “We even put in a big ‘Going Out Of Business’ sign in the Palo Alto squad room.”

Ironically, perhaps the best way to spot Russian spies would be to pay attention to how they talk about the future: anyone who was bullish on nanotechnology in 2005-2015 couldn’t have been very good as a venture capitalist.

But, for all the bluster behind the 2016 election, is Russia a threat even if they steal some of our secrets? Not so much. Oil excavation is the cornerstone of the Russian economy – it’s not one that is geared toward technological innovation. Furthermore, now that our oil supply is overwhelmingly in abundance and the Suadi’s have written off OPEC – it’s unclear as to what sector will keep Russia afloat. To any astute statesman, the best Russia can do is act as a nuisance. I suspose that’s for better or for worse.

However, as I’ve noted before in the Sober Thought Experiment, China is a different story for two reasons:

  • American elites profit off capital inflows from China – we can’t expect them to take action until the very moment they stop profiting from the Middle Kingdom. This is the basis of the Lucas paradox; why is capital flowing from poorer countries (China) to a richer country (America) on a GDP-per-capita basis? Fortunate chinese elites want to invest their money in LA and Vancouer real estate, raising prices across the board. What does this mean for the average westerner?

  • The CCP wants to repair their century of humiliation – anything they can do to carve out a wider and more powerful niche for themselves is the top priority. Of course, when leaders feel like they have nothing to lose, they’re at their most dangerous and irreverent to the status quo.

I’m reminded of Alex Karp’s adage when discussing China – America will win if we bring our A+ game, we don’t stand a chance if we bring our C game. That’s all the more relevant when our universities are feeding the CCP our best-kept technological and political secrets.

The American Firewall

Is free-trade unfailingly better for the world?

That’s a question that has cleaved the economic community in two. Some proclaim: “of course, it must be – that’s Ricardo’s theory of comparative advantage. Free trade is always good because some countries are more efficient at producing certain goods than others, thus they can make it cheaper and consumers everywhere have more disposable income. Oh, and it has brought two billion people out of poverty in China!”

However, those economists conveniently forget free trade’s barbaric negative externalities. Let’s take a look at a few:

  • The last decade has seen inequality levels explode all over the world. Why is this the case? Globalization, as a result of neoliberal proponents, has permitted the free flow of capital mostly into low-yield generating assets, most of which is owned by elites, and left to hibernate. This is the Davos class whereby one is a direct beneficiary of cheap money, monopolistic business, and political subsidies from your friends in government.

    The middle class everywhere viscerally grasps how drastically the pendulum swung in the last decade. “Success,” Naomi Klein, a journalist for the Guardian, wrote, “is a party to which they were not invited, and they know in their hearts that this rising wealth and power is somehow directly connected to their growing debts and powerlessness.” Trickle-down economics hasn’t worked in practice.

  • In every developed country, a chasm has opened between those who benefit from trade and those who don’t. The classic example of this is Thatcher’s England where in an effort to modernize England’s industry, the once-pervasive coal-miners lost everything while the financiers reaped all the rewards. We even saw this with the parts of America that flourished with China’s entry into the WTO ( the coasts). Indeed, this is a key reason why productivity levels have exponentially risen over the last 50 years, but the median wage has remained stagnant (and, in fact, dropped when we observe its purchasing power below).

  • Finally, eastern countries like China with managed trade policies have profited more than their emerging Latin America, Africa, or MENA counterparts; in fact, it could be said that the latter has been hurt by this period of globalization. As the Asian Tigers were able to industrialize first, they could reduce the cost of their exports (as China did with currency manipulation) so that developed nations would offshore their manufacturing. Once industry leaves, it takes a Herculean effort to bring them back.

    Yet, can’t we see how myopic this decision was? Hundreds of thousands of Americans are dead because we couldn’t mobilize our medical supply-chains to help those with the coronavirus – China has even admitted to holding back PPE materials from the US.

The perils of free trade haven’t hithertho been hidden – the consequences of such actions were pondered well in advance by those in power. “Beware the quiet man,” as the saying goes, “For while others speak, he watches. And while others act, he plans. And when they finally rest, he strikes.”

We must respond to this thievery of our IP appropriately; the consequence of a tepid western reaction will allow China to continue wreaking havoc. Our Panglossian elite are ignorant of how power works – a structured technocratic bureaucracy like the CCP can surely surmise how to destroy us. Their first step, though, is in stealing our secrets and in wielding them to outmaneuver and surpass us.


What’s New?

  • Last week, I spoke to Dryden Brown, the CEO of Bluebook Cities. He’s currently building a new city in the Mediterranean and we chat about the zero-to-one problem he’s trying to solve, why charter cities are a geopolitical necessity in the 21st century, and why the west needs a new ontology.

Check it out 👇

Cities of the Future feat. Dryden Brown

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