FORTUNE — President Obama has far more to lose than pride over Brazilian President Dilma Rousseff’s decision to call off her state visit to Washington amid allegations that the NSA has spied on her and Brazilian oil giant Petrobras (PBR). The revelations of alleged economic espionage risk undermining the Obama Administration’s attempts to protect U.S. companies from trade secret theft.
Despite the NSA’s denial, documents leaked by Edward Snowden have led to accusations that the NSA’s monitoring of foreign countries and companies has gone far beyond security-related surveillance. These allegations come at a particularly crucial time in international trade negotiations.
The U.S. is pushing for stronger trade secret protections and anti-economic espionage legislation and enforcement around the world. Just this month, the U.S. Chamber of Commerce unveiled a proposal aimed at creating tougher rules regulating the theft of trade secrets within the context of the Trans-Pacific Partnership (TPP), a sprawling trade pact under negotiation by a wide range of Pacific Rim nations. The Chamber points out that — unlike the U.S. — Canada, Australia, Malaysia, and Singapore have no explicit laws criminalizing the theft of trade secrets, and Peru and Mexico impose only short sentences relative to those available in the United States — from 10 to 15 years under the Economic Espionage Act.
On the European front, American firms are lobbying negotiators to seek stronger trade secret protections in the EU-U.S. Transatlantic Trade and Investment Partnership (TTIP) negotiations. At home, Congress is debating the expansion of the Economic Espionage Act to include a civil cause of action (Private Right of Action Against Theft of Trade Secrets Act of 2013), motivated by the fear of foreign nationals stealing U.S. secrets. (Here is the Congressional report.)
The U.S. has a strong interest in anti-economic espionage protections. But it faces two critical challenges. First is the shifting international perception that the U.S. is not the target but the predator. The second is that trade secrets law has expanded definitions of secrecy and unlawful economic competition in ways that make it hard to draw the lines between the actual unethical behaviors we want to prevent and competitive practices that should be encouraged in free markets.
Although the Iron Curtain came down over 20 years ago, the FBI’s official website bluntly states that “the Cold War is not over, it has merely moved into a new arena: the global marketplace.” The U.S. government estimates that every year, billions of dollars are lost to foreign and domestic competitors through bribery, cyber intrusions, theft, dumpster diving, wiretapping, targeting and recruiting insiders working for U.S. companies to divulge confidential information, and numerous other tactics. In passing the Economic Espionage Act, Congress stated that for years foreign nations and their corporations had been seeking competitive advantages by stealing secrets from American companies. The Act, while applying equally to Americans and non-Americans, has been applied most vigorously against foreign nationals, such as Chinese scientists who send back information they’ve acquired at American institutions.
The message was that foreign companies were playing dirty in the global race for innovation. But now surveys show that the U.S. is right up there with China among the nations other countries most fear will still their secrets. The U.S. government is thus in the uncomfortable position of needing to convince the world it can play by its own rules. The recent allegations make that an uphill battle.
The second problem with the administration’s zealous advocacy to export U.S. trade secrecy around the world is that we’ve dramatically expanded the scope of what is deemed confidential proprietary information as well as the kinds of behaviors that are deemed unlawful. Petrobras (PBR) President Maria das Graças Foster testified before the Brazilian Senate that, for the most part, the data the NSA collected was public. She called the revelations about NSA monitoring “very disturbing” and “embarrassing” but claimed not to be too worried about what may have been revealed.
In so doing, Foster demonstrated a nuanced and wise understanding about what companies should try to keep secret and what they should leave in the open. The smartest businesses prefer to play it straight and, at the same time, understand the benefits of transparency. So too should governments. Too often, however, companies (and governments) err on the side of secrecy in ways that inhibit economic growth and innovation.
Trade secrets are confidential information vital enough to afford economic advantage to a competitor. Traditionally, trade secrets have been limited to product-related information: formulas, recipes, design plans, and production techniques. Over the years, however, the scope of protection expanded to include information about research methods, marketing strategies, advertising campaigns, business plans, payroll and profit data, customer satisfaction surveys, quality control data, customer and supplier lists, contract expiration dates, and pricing schemes. This long catchall list has led to almost every former employee or contractor being at risk of allegations of trade secret misappropriation. This is a classic problem of overregulation. By expanding protections to include information better left unshielded, you divert attention from efforts to prevent justifiably protected secrets while at the same time inhibiting the economic growth associated with the freer movement of ideas.
If every scientist that uses the skills she acquired throughout her career to start her own company risks getting sued for trade secret theft — and if even an individual’s skills can be deemed company secrets protected by law — then protecting trade secrets becomes self-defeating. We will spend an extraordinary amount of time and money trying to halt the engines of economic progress while those secrets in most need of protection will go unwatched in the confusion.
Orly Lobel is the Don Weckstein Professor of Law at the University of San Diego and founding faculty member of the Center for Intellectual Property and Markets. Her latest book is Talent Wants to be Free: Why We Should Learn to Love Leaks, Raids, and Free-Riding.