U.S. Must Cut Off Chinese Firms That Profit From Stolen American AI

The evidence of Chinese intellectual property theft emerged in federal court, but the U.S. government turned to sanctions to punish the companies that received the illicit files. On October 19, the State Department sanctioned five China-based entities connected to Linwei Ding, the former Google engineer convicted by a federal jury in January of stealing more than 1,000 files on Google’s artificial intelligence (AI) hardware and software infrastructure. The Google case is part of a longstanding pattern of Chinese intellectual property (IP) theft for strategic gain.

The case also shows the amplified impact of the coordinated usage of economic statecraft tools. The Department of Justice prosecution established Ding’s criminal liability, while the State Department sanctions target the Chinese firms that benefited from the stolen IP, restricting their access to funds and property in the United States.

Developed by Google, Smuggled to China

In 2023, while still employed as a software engineer by Google, Linwei Ding founded Shanghai Zhisuan Technology with the stated aim to “replicate and upgrade” Google’s 10,000-card supercomputing cluster. The system links 10,000 AI chips into a single supercomputer and is critical to running large-scale AI data centers.

As Zhisuan’s CEO, Ding secured seed funding from the Chinese startup incubator MiraclePlus in exchange for a 7 percent stake in a MiraclePlus-affiliated venture fund. The October 19 State Department designations targeted Zhisuan, MiraclePlus, two MiraclePlus-managed venture funds with indirect Chinese government ownership, and one of their subsidiaries for theft of trade secrets under the Protecting American Intellectual Property Act (PAIPA).

Familiar Pattern, Evolving Tactics

In 2020, then-FBI Director Christopher Wray called Chinese IP theft “one of the largest transfers of wealth in human history.” It costs the U.S. economy an estimated $225 billion to $600 billion annually, and U.S. intelligence agencies attribute up to 80 percent of economic espionage cases to China. Technology firms are the primary target, accounting for one-third of incidents.

Nearly a decade ago, experts with the Pentagon’s Defense Innovation Unit warned that Chinese companies not only use nominally legal means like joint ventures with foreign firms to misappropriate IP but also engage in industrial espionage and cyber-enabled data theft. Chinese telecom giant Huawei has allegedly done so, with indications of theft by employees, breaches of joint venture confidentiality, and an incentive program rewarding IP theft. A federal trial of the company began last month, as federal prosecutor Taylor Stout alleged “the entire business operated through a pattern of theft, lies and cover-ups.”

As technology has advanced, China’s IP theft tactics have also evolved. A U.S. government advisory in September accused China-based AI firms of carrying out industrial-scale distillation attacks against U.S. AI firms, a method that entails systematically querying U.S. models to train competing ones.

Protecting American Innovation Against China

Beyond the direct losses, IP theft distorts markets by letting thieves compete without bearing the costs of research and development and by discouraging companies from investing in new technologies.

China understands these stakes and is strengthening protections for its own IP to safeguard strategic assets and incentivize innovation by Chinese firms. Washington must do the same.

Coordinating economic statecraft actions amplifies their impact: prosecution punishes the thieves, while sanctions target the firms that profit from the theft. The executive branch should continue this approach and, should the ongoing Huawei case end in a guilty verdict, consider following a similar pattern by sanctioning Huawei subsidiaries and officers under PAIPA.

The Commerce Department should also add the Chinese firms behind distillation attacks on leading U.S. AI companies to its Entity List, which restricts their access to U.S. exports. In addition, the U.S. government must update customs architecture to address modern trade challenges. Specifically, Washington should close the customs enforcement gaps that let Chinese firms illegally obtain cutting-edge AI chips and servers through foreign partnerships. Prevailing over China in the technology domain requires organizing government structures to protect American innovation.

Susan Soh is a research associate for the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD). Annie Fixler is the director of the Center on Cyber and Technology Innovation (CCTI) and a senior fellow at FDD. For more analysis from the authors, CEFP, and CCTI, please subscribe HERE. Follow FDD on X @FDD, @FDD_CEFP, and @FDD_CCTI. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.