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* U.S. report says theft of secrets occur inside and outside China
* Urges China to investigate instances
* China rejects allegations of trade secret theft
By Doug Palmer
WASHINGTON, May 1 (Reuters) - The U.S. Trade Representative's office criticized China on Wednesday for failing to stop the growing theft of American trade secrets that are the lifeblood of U.S economic might, in the latest sign of Washington's frustration.
"Not only are repeated thefts occurring inside China, but also outside of China for the benefit of Chinese entities," USTR said in its annual report on countries with the worst records of protecting U.S. intellectual property rights.
"The United States strongly urges the Chinese Government take serious steps to put an end to these activities and to deter further activity by rigorously investigating and prosecuting thefts of trade secrets by both cyber and conventional means," the report said.
On Thursday, China's Foreign Ministry restated its earlier dismissals of allegations that it was engaged in such theft and of cyber attacks.
"This is an old question, not a new one," ministry spokeswoman Hua Chunying told a daily briefing in Beijing.
"Groundless accusations will not be helpful to resolve these issues, so parties concerned should make fewer accusations, sit down in a constructive spirit with all relevant parties to talk about these issues."
U.S. corporate victims of trade-secret theft have included General Motors, Ford, DuPont, Dow Chemical, Motorola, Boeing and Cargill as well as lesser-known companies.
A target company can see the payoff from research investment evaporate as a result of corporate espionage and lose market position, competitive advantage and efficiencies.
The White House in February rolled out a strategy to address the growing problems, which occur both through cyber attacks and older methods such as a disloyal employee stealing trade secrets on the job and selling them to a rival company.
President Barack Obama's administration said its weapons would included trade policy measures like USTR's annual intellectual property rights report, working with like-minded countries and possible new legislation.
While U.S. officials insisted the strategy was not aimed at any particular country, a White House report lists 17 cases of trade-secret theft by Chinese companies or individuals since 2010, far more than any other country.
Two senior Democrats recently urged USTR to use the annual intellectual property rights report to designate China as a "priority foreign country" because of trade secret theft.
That would initiate a process that could lead to sanctions on Chinese goods if U.S. concerns were not addressed.
The U.S. trade office stopped short of that action. But a senior U.S. trade official, speaking on condition he not be identified, said that remained an option, as did the possibility of bringing a case at the World Trade Organization.
"We remain resolved to use all the appropriate trade policy tools now and in the future to contribute to the administration-wide response to that problem," the official said.
The USTR on Wednesday pinned the designation of "foreign priority country" on Ukraine, the sole country to be branded in this way, on grounds that it failed to protect U.S. copyrights.
The USTR report, meanwhile, accused the Chinese government of failing to take the issue seriously.
"Conditions are likely to deteriorate as long as those committing the thefts and those benefiting continue to operate with relative impunity, frequently entering into unfair competitive relationships with their victims.
"Too often, Chinese authorities view trade secrets cases as routine commercial disputes, rather than as serious violations of law," the report said.