U.S. President Donald Trump waves while walking on the South Lawn of the White House in Washington, D.C. (Photographer: Michael Reynolds/Pool via Bloomberg)

Trump Advisers Weigh Hacking Sanctions on Chinese Entities

(Bloomberg) -- The Trump administration is considering imposing sanctions on Chinese entities caught stealing U.S. intellectual property via cyber attacks, three people familiar with the matter said.

The plan being discussed would use an Obama administration executive order that allows the U.S. to impose sanctions on individuals or entities engaging in “malicious cyber-enabled activities.” But it has sparked a heated debate among administration officials, with Treasury Secretary Steven Mnuchin, who has jurisdiction over the potential sanctions, said to be blocking the effort, the people said.

If the administration chooses to go ahead it could seize or freeze the assets of Chinese companies caught stealing U.S. firms’ intellectual property. It could also ban them from doing business with American companies.

The ongoing debate highlights how the Trump administration has been looking at raising the pressure on Beijing via measures beyond tariffs, all of which are part of what officials see as an existential innovation war with China.

The administration is preparing to proceed with new tariffs on some 6,000 products from China that account for $200 billion in annual trade which President Donald Trump said would be imposed “soon.” He also on Friday threatened to hit a further $267 billion in imports from China with tariffs “on short notice,” adding to $50 billion already in place. Together, they would exceed the value of all imported Chinese goods last year, worth $505 billion.

New Powers

Beyond that, officials have been considering how to apply new scrutiny to Chinese investment with legislation signed into law in July giving new powers to the Committee on Foreign Investment in the U.S., the inter-agency panel that can block foreign buyers from acquiring American companies if they are considered a threat to national security.

Under that same legislation, the Commerce Department has also been charged with updating the list of products subject to export controls to better protect industries seen as strategic such as artificial intelligence and robotics. A spokesperson for the department on Friday said it was still working on that list.

China insists it has fulfilled its commitments under World Trade Organization rules and protects the intellectual property rights of foreign firms. Beijing has also said any U.S. trade sanctions will be met with proportionate retaliation.

Trade Hopes

Some in the administration continue to hold out hope of a negotiated end to the trade battles between the world’s two largest economies.

White House economic adviser Larry Kudlow on Friday said the two sides were still engaged in “constant communications.” In an interview with Bloomberg Television, he raised the possibility of a meeting between the U.S. and Chinese presidents on the sidelines of the United Nations general assembly meeting this month in New York or later this year at the Group of 20 meeting in Argentina. "I’ve never known President Trump not to want to talk," Kudlow said.

China hawks in the administration, however, appear for the moment to have the upper hand in the internal debate on trade and continue to advocate increasing the pressure on China -- specifically with respect to IP theft.

The people familiar with the administration’s internal discussions over using cybersecurity sanctions against Chinese entities said U.S. Trade Representative Robert Lighthizer, a longtime hawk on China, was one of the advocates for using the measure.

Emergency Law

A spokesperson for Lighthizer declined to comment on Friday. Lighthizer has pushed for unilateral measures on China before, when he urged Trump to expand restrictions on Chinese investment by using an emergency law.

His agency’s Section 301 report alleged that China’s IP and tech transfer policies are causing multiple billions of dollars in damage to U.S. companies.

A spokesperson for Mnuchin didn’t respond to a request for comment. The Treasury chief has won some of the internal battles on China before. Trump in June sided with Mnuchin and U.S. lawmakers when he decided against applying an emergency law to curb Chinese investment in the U.S. and instead threw his support behind the legislation to tighten investment restrictions and expand the list of critical technologies subject to export controls restrictions.

Companies ‘Frustrated’

The U.S. business community has continued to express angst over the Trump administration’s tariffs on Chinese imports and has been pushing for it to use more creative measures.

“We remain frustrated the tariffs do little to address the semiconductor industry’s real problems with China, especially IP theft,” said John Neuffer, chief executive officer of the Semiconductor Industry Association. “We welcome creative efforts by the government to embrace a more muscular stance when it comes to IP enforcement. Let’s not forget that without IP, the modern American economy would wilt, so it must be protected.”

Andrew Grotto, who helped draft the original executive order while serving as a cybersecurity adviser in the Obama administration, said it could be an effective tool to crack down on Chinese cybertheft of commercial secrets. But the powers it grants to impose sanctions have only been used a few times until now, he said, in part because it required evidence that any hacking was done for commercial reasons rather than as part of a broader espionage effort.

That was done, he said, so that the U.S. could not be accused of using such cybersecurity sanctions as a tool of economic warfare, he said. But if there is evidence that a state-owned Chinese companies was carrying hacking attacks for commercial gains, then "I would be supportive."

©2018 Bloomberg L.P.