* Trade secret theft costs $300 billion, 2.1 million jobs
* China responsible for 50 percent to 80 percent of theft
* U.S. responses to date too slow for growing problem
By Paul Eckert
WASHINGTON, May 22 (Reuters) - Theft of trade secrets, chiefly by China, costs the U.S. economy $300 billion a year and must be fought with sanctions as tough as those used against terrorism and drug trafficking, an advisory panel said on Wednesday.
The Commission on the Theft of American Intellectual Property said U.S. responses so far, using the World Trade Organization and government talks, have not kept up with the fast growth of trade secret theft by cyber and traditional methods.
"The scope of the problem requires stronger action, involving swifter and more stringent penalties for IP theft," said the non-partisan commission's report, compiled by former senior government, military and industry leaders.
The panel recommends making the president's national security advisor the chief policy coordinator of an all-out U.S. drive to protect intellectual property and punish theft.
Intellectual property thieves should be hit with a mix of banking sanctions, bans on imports and blacklisting in financial markets, said the commission, which has shared its 89-page report with Congress and the Obama administration.
"The banking system has a very well-developed system of denying the ability to change money for companies and other organizations that either support terrorism or are involved in drug activities," said former U.S. Director of National Intelligence Dennis Blair, a co-chairman of the commission.
"It's a killer sanction for a company that's attempting to go international," he told reporters in Washington.
CHINA STANDS OUT
China accounts for between 50 and 80 percent of intellectual property theft, said the report, which also cites India and Russia as other problem countries, based on data from customs seizures and other trade figures.
"National industrial policy goals in China encourage IP theft, and an extraordinary number of Chinese in business and government entities are engaged in this practice," it said.
President Barack Obama could help the issue "get traction" by raising it in his meeting with his Chinese counterpart, Xi Jinping, in California in early June, said former U.S. Ambassador to China Jon Huntsman, also a commission co-chairman.
"The president sets the priorities for the U.S.-China relationship, and this clearly would have to be at the top of our economic agenda," he said.
Leaving it to bilateral economic talks like July's Strategic and Economic Dialogue would continue unproductive "jaw boning" while the problem gets worse, Huntsman added.
MOST THEFT HAPPENS INSIDE U.S.
Other recommended responses include immediate confiscation of goods containing stolen intellectual property and making respect for IP rights a condition for investing or listing shares in the United States.
The commission recommends beefed-up protections to make U.S. data less vulnerable to hackers, as well as enhanced measures such as "water marking" or "beaconing" that allow companies to identify stolen files and make them inoperable.
But it stops short of calling for what panel member Craig Barrett, former chairman and chief executive of Intel Corporation, described as "the nuclear option" of authorizing counter attacks against hackers, citing legal questions and fear of collateral damage.
The report recommends committing more resources to investigating and prosecuting cyber-theft of trade secrets, but says intellectual property stolen via the Internet is only a portion of theft.
"Much of it occurs the old-fashioned way," through copied or stolen hard drives, bribing or planting of employees, tapping of phones, pirating of software and the reverse engineering of products, it said.
While credible reports have emerged of Chinese army hackers raiding U.S. government and industry computers, the report said, "In reality, most IP theft is committed within American offices, factories, and even neighborhoods and homes."
Beyond the $300 billion in economic losses, equal to the annual value of U.S. exports to Asia, the United States loses some 2.1 million jobs each year to IP theft, Huntsman said.
Intellectual property theft through actions ranging from software piracy to patent or trademark infringement to cyber-espionage also depresses research and development spending and stymies future innovation, the commission said.