Mexico exports to China

The following is a guest post by Adrián Cisneros Aguilar.* A Spanish language translation is directly below the English version.

Jorge Guajardo, Mexico’s former Ambassador to China, recently published an opinion piece titled “Dejemos a China por la Paz” [“Let’s Leave China for Good”], which was quickly and enthusiastically retweeted by Jorge Castañeda, former Mexican Minister of Foreign Affairs and one of the leading shapers of Mexican foreign policy.

When I read the article, I was shocked by Guajardo’s profound lack of understanding about the Mexico-China bilateral relationship, and his overall negativity. To be sure, China’s rise has created problems for Mexico. But it has also created opportunities, and we must be clear-eyed about both.

Guajardo, at the end of his piece, asked Mexicans to “defend our interests, clarify the lies [and] promote the truth.” This response is my effort to do exactly that.

1. Guajardo claims it is useless to partner with China because “China protects its markets [by] preventing entry of Mexican products [and] even if China were to open its markets, there is little market for what Mexico exports.” This is a gross exaggeration. The Mexican Ministry of Agriculture has been working to expand Mexico’s agricultural exports to a number of countries and as a result of negotiations last year Mexico is now exporting pork and dairy products to China.

The larger problem is that many Mexican companies lack the size or sophistication to meet Chinese demand, both in terms of quality and quantity. Mexican exports to the U.S. have long faced similar problems, but it has been far easier for them to find a U.S. buyer who will accept smaller quantities and/or varying quality.

Indeed, the inability to meet foreign markets’ demand is so prevalent that one of my company’s main services is to gather several companies (usually SMEs) in the same industry, train them as a group, and then enable them to sell their products, as a group, in Asia (usually China). This collective approach enables these companies to enter large markets with the confidence they can meet market demand while minimizing their exposure. Our success with this approach further underlines the short-sightedness of Guajardo’s comment. It’s also worth noting that this approach is in line with the Mexican Ministry of Economy’s policy to develop Export Networks [Redes de Exportación or Redex].

2. Guajardo argues that Mexico and China have no future in cooperation because they are in fact competitors since both countries are export-oriented manufacturing economies that primarily sell to the U.S. and to Europe. For years, scholars and businesspeople from Mexico and China have offered opinions and action plans to alleviate imbalances in the Sino-Mexican economic relationship. Full disclosure: this issue is near and dear to my heart as it was the subject of my doctoral dissertation in China. There are in fact many ways in which China and Mexico in fact economically complement each other, including the following:

  • China’s demand for Mexico’s resources and raw materials;
  • the appreciation of the RMB, which has increased labor costs in China, making it more attractive for foreign manufacturers to relocate their facilities to Mexico to serve the North American market (“nearsourcing”);
  • the recent Mexican energy and telecommunications reforms, which widely opened these sectors to foreign investment;
  • the opportunity to decrease the Mexico-China trade deficit by having Chinese companies manufacture in Mexico via value-added investments, thereby creating jobs and transferring technology and know-how; and
  • China and Mexico’s common membership in economic blocs that could easily allow the creation of regional value chains and enactment of supportive policies.

3. Guajardo wrongly contends that lack of demand for Mexican products in China is the reason for Mexico’s enormous trade deficit with China. First of all, Chinese demand for Mexican products is slowly increasing. But the reason for the relatively low demand by China for Mexican products is not so simple as that Chinese people don’t want or need Mexican products. I have already discussed the inability of Mexican companies to meet Chinese demand. Another reason is that China has many more barriers to market than the U.S., from geography to language to regulations. But perhaps the biggest problem is Mexican companies too often believe China wants only cheap products and then fail to realize that to sell effectively to China they need to understand and cater to Chinese buyers. More than once I have heard Mexican companies say their marketing plan is to label their product as being Mexican, thereby capitalizing on China’s desire for foreign, exotic fare. This limited vision is self-defeating, because it fails to take the Chinese market seriously. China’s consumers are becoming more sophisticated and more demanding of original, high quality products. To succeed in China, Mexican companies need to meet the real life needs of the China market.

Yes, there is resentment in Mexico toward China because of the flood of Chinese imports that have displaced local manufacturing (especially in the textile, footwear, and toy industries). But as Guajardo’s piece suggests, this feeling is not so much anti-China as it is anti-globalism. And it must be acknowledged that at least some Mexican companies brought this on themselves by shifting manufacturing and/or sourcing to China in an effort to maximize short term profits.

In my second and concluding part of this series, I will discuss Guajardo’s proposed solution – which is even more misguided than his analysis – and offer my own advice on how Mexico and its companies can should profitably deal with China.

*Adrián Cisneros Aguilar is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalisation services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University.

 

Jorge Guajardo, ex-Embajador de México en China, publicó recientemente un artículo de opinión intitulado “Dejemos a China por la Paz”, el cual fue rápida y entusiásticamente retuiteado por Jorge Castañeda, ex-Secretario de Relaciones Exteriores y uno de los principales diseñadores de la política exterior mexicana.

Cuando leí el artículo, quedé impactado por la profunda falta de comprensión de la relación de México con China exhibida por Guajardo, así como por el tono negativo de sus opiniones en general. Cierto, el ascenso de China ha ocasionado problemas a México. Pero, también ha traído oportunidades, y debemos ser bien conscientes de ambos.

Al final de su artículo, Guajardo nos pide a los mexicanos que “[d]efendamos nuestros intereses, aclaremos las mentiras, promovamos la verdad.” Pues bien, esta respuesta es el esfuerzo de un servidor para hacer precisamente eso.

1.  Guajardo contende que es inútil buscar asociarse con China porque los chinos “…protegen sus mercados impidiendo la libre entrada de productos mexicanos [y] aún si lo abrieran, hay poco mercado para lo que nosotros exportamos.” Ésta es una grave exageración. La Secretaría de Agricultura, Ganadería. Desarrollo Rural, Pesca y Alimentación (SAGARPA) desde el año pasado ha trabajado bastante para aumentar las exportaciones de productos agroalimentarios mexicanos a nuevos países y, como resultado de estas labores, México ya exporta derivados de carne de cerdo y lácteos a China.

Pero, el problema de fondo aquí es que muchas empresas mexicanas carecen de la envergadura o la sofisticación necesarias para satisfacer la demanda de China, tanto en términos de calidad, como de cantidad. Por mucho tiempo, las exportaciones mexicanas a EE.UU. se han enfrentado con problemas parecidos, pero ha sido mucho más fácil para ellas hallar a un comprador estadounidense que acepte cantidades menores de producto y/o una calidad variable.

En efecto, la inhabilidad de las empresas mexicanas de satisfacer la demanda y los estándares requeridos por los mercados internacionales es tan común que uno de los principales servicios ofrecidos por mi empresa es agrupar varias empresas (normalmente, PyMEs) que pertenezcan a la misma industria, capacitarlas/sofisticarlas y entonces facilitarles vender sus productos en grupo en Asia (en China, por lo general). Este método colectivo les permite a estas empresas incursionar en grandes mercados con la confianza de que pueden satisfacer la demanda del mismo, mientras minimizan sus riesgos. El éxito que hemos tenido con este método reafirma la poca visión del argumento del ex-Embajador. Y cabe señalar que nuestro método es acorde con la política de la Secretaría de Economía de desarrollar Redes de Exportación (Redex).

2.  Guajardo argumenta que “[e]n China no hay nada para México”, pues de hecho, son competidores que “…[han] encauzado [sus] economías hacia la exportación de manufactura…ambos [compitiendo] por los mercados más grandes, Estados Unidos y la Unión Europea.” Por años, académicos y empresarios de México y China han emitido opiniones y planes de acción para compensar los desequilibrios en la relación económica bilateral. Y para que lo sepan, esta cuestión me es especialmente importante, siendo incluso uno de los temas que toqué en mi tesis doctoral en China. Existen de hecho muchas maneras en las cuales China y México se complementan económicamente, entre ellas, las siguientes:

  • La demanda china de los recursos y materias primas de México;
  • La apreciación del yuan chino, la cual ha incrementado los costos de la mano de obra y de personal en ese país, volviendo más atractivo para los fabricantes extranjeros reubicar sus instalaciones en México para atender al mercado norteamericano (“nearsourcing”);
  • Las recientes reformas energética y de telecomunicaciones, las cuales han abierto consierablemente estos sectores a la inversión extranjera;
  • La oportunidad de disminuir el déficit comercial con China al invitar a sus empresas a fabricar en México a través de inversiones de valor agregado, creando así empleos y transfiriendo tecnología y know-how; y
  • La participación, tanto de México como de China, en los mismos bloques económicos y organismos internacionales, lo cual fácilmente permitiría la creación de cadenas regionales de valor y la promulgación de políticas de apoyo.

3.  El ex-Embajador Guajardo sostiene erróneamente que “México tiene un déficit comercial enorme con China. En pocas palabras, los chinos no compran lo que nosotros vendemos.” Además de que la demanda china de productos mexicanos está aumentando lentamente, la razón de la relativamente baja demanda de productos mexicanos en China no es tan simple como decir que los chinos no quieren o necesitan nuestros productos. Ya he mencionado la inhabilidad de las empresas mexicanas para satisfacer la demanda china. Otra razón es que el mercado chino tiene muchas más barreras que el estadounidense, de la lejanía al idioma a la legislación. No obstante, el mayor problema radica en que las empresas mexicanas muy frecuentemente creen que China desea sólo productos baratos, sin darse cuenta que para vender en China de forma efectiva deben comprender y atender a los consumidores chinos. Más de una vez he escuchado a empresarios mexicanos decir que su plan de mercadeo consistirá en etiquetar su producto como “netamente mexicano”, capitalizando así el deseo de los chinos por comida extranjera, exótica. Esta limitada visión de las cosas los pone en desventaja de antemano, ya que no toma al mercado chino con la seriedad debida. Los consumidores chinos se están volviendo más sofisticados y exigen cada vez más productos originales y de alta calidad. Así, para tener éxito en China, las empresas mexicanas necesitan escuchar las necesidades cotidianas reales del mercado de ese país.

Sí, existe un resentimiento en México hacia China debido a la proliferación de importaciones chinas que han desplazado a la industria nacional (especialmente a la textil, de calzado y la juguetera). Pero, como señala el mismo artículo de Guajardo, este sentimiento no es tanto en contra de China como en contra de la globalización en general. Y debe reconocerse que, al menos en algunos casos, han sido las mismas empresas mexicanas las que han causado dicha proliferación al reubicar la fabricación y/o la proveeduría de sus productos a China, en un intento de maximizar sus utilidades en un corto plazo.

En mi segundo y último post, hablaré de la solución propuesta por el ex-Embajador Guajardo –la cual es más equivocada que sus mismos argumentos- ofreciendo mis propias sugerencias sobre cómo México y sus empresas podrían sacar partido de sus tratos con China.

Adrián Cisneros Aguilar es el fundador y Director General de Chevaya (驰亚), una empresa de servicios de internacionalización para Asia-Pacífico. Adrián es Doctor en Derecho por la Universidad Jiao Tong de Shanghái y Maestro en Derecho Internacional y Chino por la Universidad de Wuhan.

China employment lawyerAt the beginning of every year, our lawyers receive hundreds of emails from both employees and employers (clients and non-clients) doing business in China. The questions often involve employees who want to change jobs or employers who are having a hard time understanding China’s employment laws.

Unfortunately, we can rarely provide instantaneous answers to their questions. In addition to the complexity of Chinese law at the national level, there are seemingly endless legal twists and turns at the local level as well.

For example, one of our regular blog readers asked about issues related to volunteering for a company that was not his employer. He worked for a U.S. Wholly Foreign-Owned Enterprise (WFOE) and had a residence permit. His questions included:

  • Do I need a certificate or other documentation to allow me to volunteer at the company one day a week?
  • Do I have to ask my current employer for permission to volunteer at another company?
  • If the company decides to start paying me for my work, would that interfere with my relationship with my existing employer?

Another asked whether her employer was justified in terminating her while she was three months pregnant and gave her two months severance. She wanted to know whether her employer was within its rights and whether she should sue it.

Though these sorts of emails may seem to pose straightforward questions, here’s just a sampling of the information our China employment lawyers would need before being able to provide any meaningful guidance:

  • We’d need to know the name and location of his employer and run a conflict check on that company.
  • Since employment laws in China often vary greatly from city to city, simply understanding the laws in an unfamiliar city can require extensive research.
  • A key aspect of understanding local laws and regulations is actually discussing them with the appropriate governmental authorities.
  • The specific contract with the employer would also have to be reviewed in detail.

As you can see, there’s almost no such thing as an easy question when it comes to labor laws in China.

Our firm’s Dan Harris wrote an article for Forbes Magazine last year on China’s Hourly Work Week: Think Locally, explaining how something as seemingly simple as the 40-hour workweek trips up employers that don’t take the time to learn the ins and outs of local employment laws. Do your research before making employment moves and don’t make the mistake of believing it will be easy.

 

US-China trade warTo say that my law firm’s international trade law team has been busy lately would be like saying the Great Wall of China is long. They have been crazy busy because the United States has gone wild with trade case against Chinese companies and their U.S. importers — and against other countries and their importers as well.

If you import products from China, listen up.

US Importers of Record are liable for antidumping and countervailing duties tied to the product they import. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form.

Under US Antidumping, Countervailing Duty and Customs laws, the Importer of Record must exercise reasonable care in importing products and in filling out Customs forms. The Importer of Record must correctly state a product’s country of origin and also whether Antidumping and Countervailing duties apply to the imported product. A knowingly false statement on a Customs form constitutes criminal fraud.

If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference, plus interest. Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China because the United States treats China as a non-market economy country. Since China is a non-market economy country, the U.S. Commerce Department refuses to use actual China prices and costs to determine whether a Chinese company is dumping. All this makes it nearly impossible for U.S. importers to know whether it is bringing in dumped goods. See Don’t Get Crushed When You Import.

In the last week or so, the Trump trade war has escalated big time with new U.S. antidumping and countervailing duty cases being filed against Mechanical Tubing, Tool Chests and a new Section 232 National Security case against all Steel imports. These trade cases move and at warp speed and that means that if your company shows up as the producer or the importer on any of these cases, you have no time to waste. A brief summary of each of these three cases follows.

 1. Cold-drawn mechanical tubing from China, Germany, India, Italy, Korea and Switzerland. On April 19, 2017, ArcelorMittal Tubular Products, Michigan Seamless Tube, LLC, PTC Alliance Corp., Webco Industries, Inc., and Zekelman Industries, Inc. filed Antidumping and Countervailing Duty cases against hundreds of millions of dollars of cold-drawn mechanical tubing from the six countries in 2016.  The petition alleges antidumping duties ranging as follows:

  1. China: 88.2% – 188.88%
  2. India: 25.48%
  3. Italy: 37.23% – 69.13%
  4. Germany: 70.53% – 148.32%
  5. Republic of Korea: 12.14% – 48.61%
  6. Switzerland: 40.53% – 115.21%

The cold-drawn mechanical tubing covered by the complaint is used to produce numerous different products in the United States, including auto parts and machinery.

The United States International Trade Commission (ITC) will conduct its preliminary injury hearing on May 10, 2017 and US importers’ liability for countervailing duties on imports from China and India will start on September 16, 2017, and Antidumping Duties will start on November 15, 2017. Antidumping and countervailing duty orders can last for 5 to 30 years. These sorts of duty orders can and often do mean the end of U.S. imports and sales for many of the named companies, especially those that do not fight the cases against them from the very beginning.

2. Tool chests from China and Vietnam. On April 11, 2017, Waterloo Industries Inc. filed Antidumping and Countervailing Duty cases against hundreds of millions of dollars of imports of certain tool chests and cabinets from China and Vietnam. The ITC will conduct its preliminary injury hearing on May 2, 2017 and US importers’ liability for countervailing duties on imports from China and Vietnam will start on September 8, 2017 and for Antidumping Duties on November 7, 2017.  

3. National Security Section 232 case against steel imports from many countries, including China. On April 20, 2017, President Trump announced a new trade investigation of steel imports under section 232 to determine if tariffs should be imposed because increased steel imports pose a threat to national security. If the United States Department of Commerce determines that steel imports are a threat to national security, President Trump will be empowered to levy high tariffs and quotas on imports of steel products from various countries. Under Section 232, the Commerce Department will investigate the potential national security threat posed foreign steel entering the U.S. market and then issue its findings and recommendations  to the White House. Once Commerce completes its review President Trump will have 90 days to decide whether to accept or reject its recommendations and to impose trade restraints, including tariffs or quotas on steel imports.

If your company has been named in any of these three cases and you want to avoid having to pay massive duties and/or just walk away from the U.S. market for five to thirty years, you need to start organizing your defense NOW.

China LawyersWe created a China Law Blog Group on LinkedIn to provide a spam-free forum for China networking, information and discussion. We are nearing 11,500 members and the number and — most importantly — the quality of our discussions continues to increase as well.

We have had some great discussions, as evidenced by their numbers (discussions occasionally get more than one hundred comments) and their substance. Our discussions range from the practical (“how do I open a China bank account” or ”what do I need to do to comply with China’s new work visa policies for foreigners” or “what are you hearing about China’s crackdown on xyz?”) to the ethereal (“when will China surpass the West in innovation?”)

The group’s diversity is its greatest strength. We have a large contingent of members who live and work in China and many who operate businesses there. Our LinkedIn Group also has many members who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and from other countries within Asia. Many of our group members are China lawyers (both inside and outside China and both in-house and with private law firms) but the overwhelming majority are not. We have senior personnel from large and small companies and a whole host of junior personnel as well, again, both within China and outside China. We have professors and we have students of all levels. This mix helps inform, elevate and enlighten the discussions.

Perhaps of most importance is how we block anything and everything that resembles spam. We have become so proficient at this that virtually nobody even tries any more to inject spam into any of our discussions. Many of our members have commented on how much they appreciate our vigorous no-spam policy. I assure you that will never change or even moderate.

If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to check out our China Law Blog Group on LinkedIn and join up. The more people who do join our China Law Blog LinkedIn group, the better our discussions. Don’t be shy; click here and join us!

And if you are a Facebook person, we can accommodate you there as well and I urge you to check out our rapidly growing China Law Blog Facebook page. Our focus there is on anything and everything that is China relevant. Our goals with our Facebook page are to entertain and to educate and to highlight issues that for various reasons we cannot discuss elsewhere; our Facebook page most certainly does not shy away from controversy. It also most emphatically covers more than just China law and China business. We post on China politics and diplomacy, China culture and history, China travel and tourism, China food and fashion. We post on pretty much anything we find interesting that day. And we give a lot of rope to the comments and that means we sometimes (like just this morning) get complaints about them from our readers. But we are of the view that you are big kids and recognize that it is not our role to protect you from what others might say. We are rapidly approaching 17,000 “likes” of that page (and growing at approximately 1,000 a month) so so we must be doing something right. Anyway, please check out our Facebook page too, by clicking here.

And last and least, after a three year hiatus, I went back on Twitter and I even every so often post on there as well. Click here for that.

China employment lawyerTo understand China’s labor and employment laws, one fundamental premise to understand is that an employer and an employee are not considered equal parties under the law. The law provides the employee with more protections because it’s presumed that the employer is the more powerful party. A lot of employers (Chinese or foreign) do not understand this. Among other things, two important rules that stem from this premise should be noted:

  1. Many China employment laws cannot simply be contracted away.
  2. Employers (NOT employees) bear the burden of many things under China employment laws.

I talked about #1 before, so I will discuss #2 today. To give you an example, let’s consider a hypothetical based on a question our China employment lawyers regularly get asked. A China employer hired an employee about 13 months ago. The employer kept asking the employee to sign a written employment contract and the employee refused to cooperate. The employer thinks it is the employee’s fault for her not having a written contract. Can the employer now terminate the employee?

To be clear, when we receive this type of question from prospective clients, we need to first make sure there is no conflict of interest. And we really can’t even start to answer this question without gathering up more facts. However, for purposes of the discussion here, I am going to assume a lot of things, and just to name a few here:

  • the parties are in a pro-employee jurisdiction;
  • the employee is not the head of the employer’s Human Resources department nor is she otherwise in charge of making sure all employee agreements are duly executed;
  • the employer did not document its efforts in asking the employee to sign a written contract;
  • there is truly no written document between the parties that can be deemed an employment contract for purposes of China’s labor laws;
  • there is no legal ground to terminate the employee.

Before I give my analysis, here is a super quick review of the law: China employers must have written employment contracts with all of their full-time employees. If an employer goes more than one month without having a written employment contract with an employee, the employer will be required to pay the employee double the employee’s monthly wage and immediately execute a written employment contract with the employee. If the employer goes more than one year without having a written employment contract, it will be deemed to have entered into an open-term employment arrangement with that employee and is required to sign a written contract with her to the same effect.

So, what has the employer done wrong? The below is an non-exhaustive list:

First, it did not deliver a notice of its intent to execute a written employment contract within 1 month after the employee’s commencement date. The burden is on the EMPLOYER to remind the employee that the parties need to enter into an employment contract before it is too late. The employee does not have this burden. If all the employer did was to ask her orally, it does not meet the legal requirements. The fact that the employee acted in bad faith by refusing to cooperate (assuming the employer can meet its burden of proof on this) is generally not going to be relevant.

Second, it did not terminate the employment relationship by the end of the first month, but instead retained the employee without a written contract. The employer may argue that it tried and that it had no way to force its employee to sign a legal document. Though true, the employer should have terminated the employee before the one-month period elapsed. And by termination, I mean it should have issued a formal written notice stating the reason why it had to terminate the employee in accordance with Chinese law.

Third, the employer still has no written contract in place for its employee. The employee has been converted to an open-term employee by law because she has been employed for so long without a proper written contract. Once her status has changed to becoming an open-term employee she has essentially become a lifetime employee and the employer must immediately execute an employment contract reflecting the new open-term employment arrangement. Failure to do so will subject the employer to legal and regulatory risks.

Finally, because there has never been an employment contract, the employer has failed to fulfill its obligation to maintain the employee’s employment contract on file for two years after employee departure. This means that even if the employer can find a legally permissible ground to terminate the employee (unilateral termination is probably not a good idea here), the employee’s termination will likely cause problems for the employer. An audit by the labor authorities will turn up this issue and the employer will likely face penalties for this noncompliance.

Bottom line: Oftentimes employers think they have done everything they are supposed to do with their employees but they haven’t. At least not according to China employment laws. And blaming employees for employer shortcomings is virtually never a solution because the Chinese authorities and courts will not side with you. Still think you are in compliance with China’s employment laws? Maybe you need to think again.

 

 

 

 

China WFOE complianceWhen I was in high school, a friend got a job at a liquor store, and was often asked to work there by himself. Soon enough, word got around and (human) nature took its course, as the store became extremely popular with a certain segment of the school. My friend hadn’t sought or even anticipated this sort of attention; he was 16 years old and just wanted some extra cash. But when the store got cited for multiple infractions, it came as no surprise to anyone. As my friend observes to this day, “What sort of business owner lets a teenager run a liquor store by himself?”

I was reminded of this story when I read the news that Disney had terminated Meng Dekai, International Special Project Director in China, upon discovering that he had signed numerous unauthorized deals for new Disney projects in provincial cities that few people outside China have ever heard of, including Zhengzhou, Hefei, and Baotou.

Meng had been at this since at least 2009, and in addition to signing deals on behalf of Disney, it came out that Meng had also formed a number of companies with names similar to Disney’s Chinese name and registered a number of trademarks that were similar to those registered by Disney.

It’s unclear what Meng’s master plan was. Yes, Disney knockoffs are rampant in China, notwithstanding the Chinese government’s one-year campaign (tied to the opening of Shanghai Disneyland last year) specifically designed to combat counterfeit Disney products. But it’s one thing to sell knockoff Mickey Mouse backpacks at a mall in Nanchang, where you could clear out in a day if you had to. It’s quite another to build and operate a theme park. Even if Meng received massive kickbacks from the local governments, it’s hard to imagine how he expected to get away with this. It’s also hard to understand why government officials of these lesser-known cities bought the snake oil Meng was selling.

When the China practice group at my firm saw this story, we just shook our heads ruefully, because this is the same problem, writ large, that we see all the time when companies go to China. Once companies have established a presence in China (e.g., a WFOE), a foundational question is: how are they actually going to do business in China, and who will have the authority to act on their behalf?

We regularly conduct audits of firms’ China operations, and the disconnect between the parent company and the WFOE can be shocking. We regularly turn up everything from FCPA violations to employees who cannot be terminated because they were engaged without written contracts to company seals that have been missing for years. And pretty much once a month, we hear from an American or a European company that has just learned (usually via an anonymous email) that one of its employees (usually a trusted senior employee) is secretly operating a competing business on the side. Sometimes though there’s no bad intent on behalf of the Chinese employees; it’s just that there’s no clear oversight and they are operating the “Chinese way.” This is a recipe for disaster, even under the best circumstances. And if you’ve got someone untrustworthy holding the reins in China, things can go from bad to worse in a hurry. See also China Compliance: Don’t Rely on Your China Staff and China Compliance: Don’t Rely on your China Staff, Part II.

Many foreign companies are in a quandary because of personnel or geography or both: they want to have one of “their” people managing operations on the ground, but none of “their” people are willing and/or knowledgeable enough to move to China. And so they end up delegating authority to a Chinese employee who is unprepared and/or unwilling to manage the operations in accordance with the parent company’s wishes.

It’s an awkward situation, and made worse by the quirks of Chinese corporate law, which require every WFOE to decide three things:

  1. the identity of the legal representative, a person with the ability and obligation to act on behalf of the WFOE;
  1. the identity of the general manager, a person who is in charge of the WFOE’s day-to-day operations; and
  1. the location of the company seal, a physical artifact that makes a document legally binding on the WFOE.

The most efficient solution is to appoint a single person as the legal representative and general manager, and have that person be resident in China and in possession of the seal. But this solution places a tremendous amount of authority with a single person, and many foreign companies are understandably reluctant to do so unless they have someone in China that they trust implicitly. As a result, the typical solution is that the legal representative is an employee of the parent company who lives outside China but is tasked with overseeing Chinese operations, the general manager is a Chinese national who lives in China, and the seal is held by a trusted third party in China like an accountant. Yes, it’s as inefficient as it sounds, but it’s usually better than the alternatives. Many of these problems have their genesis when the WFOE is formed without any legal advice on how to handle (and mitigate) these three decisions.

I don’t know what sort of contracts Mr. Meng signed on behalf of Disney, but they better hope he didn’t have access to the company seal and wasn’t the legal representative of the Disney entity he was representing. Right now, this story is just bad publicity, but it may end up costing them millions. And (because every good China Law Blog post ends with a moral) it’s also an instructive story for every company operating in China. How much do you really know about what’s going on in your Chinese office?

international Trade lawyersEmboldened by President Trump’s promise of tougher enforcement of U.S. trade laws, a fresh wave of new antidumping and countervailing duty (AD/CVD) petitions were filed in March by domestic U.S. industries seeking relief from imports. The petitions cover five products (silicon metal,  aluminum foil, biodiesel fuel, wire rod, and carton closing staples) from all over the world from Argentina and Australia, to the UAE and UK. And of course, China. These petitions will trigger 25 separate AD/CVD investigations at the Department of Commerce.

However, one of President Trump’s first executive orders was to freeze hiring of any new or replacement federal government employees.  If this hiring freeze continues, the Department of Commerce (DOC) may not have enough manpower to administer all these new AD/CVD cases. The DOC already has about the same number of on-going investigations that must be completed, along with an even bigger number of administrative reviews of all the existing AD/CVD orders that are still in effect. For each case, a DOC case analyst and attorney must draft and issue multiple rounds of questionnaires, review the responses and comments submitted, analyze all the issues raised, calculate AD/CVD margins, and draft decision memoranda.  All these necessary tasks require a certain minimum amount of time to be completed. Without reinforcements, the expanding new case load threatens to stretch the DOC trade remedy team well past a reasonable or manageable work load.

Nine U.S. Senators have already asked President Trump to lift the hiring freeze for trade enforcement personnel at a variety of agencies such as DOC, Customs and Border Protection, USTR, and Department of Justice. They specifically noted that these agencies have been tasked with more extensive trade enforcement responsibilities, but the hiring freeze would have the effect of reducing the resources available for such enforcement.

Since the hiring freeze does not apply to military personnel or those deemed essential to security, maybe President Trump will find trade enforcement is essential to national security or carve out some other exception to allow new hires for the DOC and other trade related agencies.  But if the DOC cannot hire enough personnel to administer cases properly, then perhaps it will develop leaner and meaner ways to handle these new AD/CVD cases. That is the fear of the international trade lawyers at my law firm and elsewhere, and it should be the fear of any company, Chinese or otherwise, that finds itself caught in the crosshairs of an AD/CVD petition.

For example, DOC may now try to decide more cases based on applying total adverse facts available (AFA), after finding the respondent exporter or producer to be non-cooperative because their questionnaire responses are deemed untimely or inadequate. Making this sort of finding will allow the DOC to avoid crunching all the submitted sales and cost data to get AD/CVD margins that often are not that high (particularly for non-Chinese market economy cases). This will give the DOC the highest AD/CVD margins possible with the least amount of work if the exporter/ producer gives up or is given a death blow.

Even if a respondent survives the questionnaire process and avoids a total AFA determination, the DOC now can generate higher AD/CVD margins by applying a new trade law provision which allows it to find a “particular market situation” justifying an upward margin calculation adjustment. This is what Peter Navarro, head of the newly formed National Trade Counsel, recently urged Secretary of Commerce Wilbur Ross to do in an on-going administrative review of Korean OCTG oil drilling pipe. In that case, Navarro and the domestic pipe producers wanted the DOC to make a “particular market situation” finding the Korean pipe producers benefited from subsidies embedded in their purchases of Chinese steel. Navarro relied on a “logical” presumption that the Chinese steel subsidies of 60% found in a prior unrelated case would be passed through to benefit the Korean pipe producers to generate a margin of at least 36%. Navarro’s back of the napkin calculation lacked even a napkin to support the calculation. Respondents in that case complained that Navarro’s email was an unprecedented intervention and an overt suggestion that DOC calculate a politically acceptable but factually unsupportable AD/CVD margin.

U.S. AD/CVD cases have long had a reputation for being more objective and fact/data intensive than those conducted by most other countries. But if political pressure and personnel limitations push DOC to make more arbitrary AFA determinations or politically motivated findings of a “particular market situation” U.S. trade remedy cases will soon lose any advantage of perceived objectivity or credibility. The Department of Commerce already has significant discretion to weigh the record evidence and make judgment calls favoring the domestic industry. But at least those judgment calls have been based on an analysis of specific record evidence. The new “particular market situation” provision appears to give DOC even more discretion to make adjustments based only the thinnest of factual basis. This shift towards a more politically-driven AD/CVD process may result in the Department of Commerce issuing higher margins in the short term, but over the long term, the AD/CVD process risks losing significant credibility. Trade remedy cases, by definition, are intended to be remedial, not punitive. DOC’s AD/CVD process is supposed to determine the “fair” normal value for subject imports. If DOC’s definition of a “fair” export price is not factually or legally based, but is instead arbitrarily determined by politically influenced adjustments, an exporter or US importer has no way to determine whether or how their pricing should be adjusted in order to be deemed “fair” by DOC.

What this means in real life for Chinese companies sending products to the United States, and to those who import products made in China, is that they need to be even more careful not to run afoul of U.S. AD/CVD laws and pricing. And when tagged for any AD/CVD violation, it is more critical than ever that they respond quickly and with as many facts as they can muster, thus making it harder for the DOC to make quick and random and financially deadly decisions.

china employment lawyerIn China, it is common for employers to deliver an offer letter to a potential employee stating the employer’s intent to enter into an employment relationship with that employee. An offer letter is typically a 1-2 page document and it usually proposes the employee’s work title, responsibilities and duties, work location, wages, employee benefits, and term of employment.

As more and more Chinese companies are hiring foreign high level executives, our work representing expats on their employment contract negotiations has soared. Five years ago, our China employment lawyers did maybe one or two of these a year and now we commonly have one or two of these sorts of representations going at any given time. What we have learned from them is that Chinese companies tend to be incredibly one-sided and sloppy in the way they handle their employment relationships.

When retained by an executive expat, the first thing we usually do is review their offer letters. And one of the first things we notice — nearly every single time — is that the Chinese company is proposing to hire the expat executive on illegal terms. In other words, pretty much every offer letter we see calls for an employment contract/employment relationship that would violate China’s labor and employment laws. And if you are wondering how or why this is so often the case, let me tell you: if you are the foreign employee and you are working on an illegal contract, you are setting yourself up for big problems and those big problems will 99 times out of 100 end up hurting you and benefiting your employer. In other words, these Chinese employers are acting illegally for a reason: it is a great way for them to gain permanent leverage over you.

The following represent three incredibly common mistake/illegalities we see in not just offer letters but also employment contracts and employer rules and regulations when our China labor lawyers represent executive expats in their employment negotiations with Chinese companies, along with my comments on why they matter.

1. In accepting this offer, you certify that you understand that your employment will be on an at-will basis. Quoting a phrase popular in China, I shall repeat important things three times (重要的事情说三遍), so here goes: China is not an employment at-will jurisdiction, China is not an employment at-will jurisdiction, China is not an employment at-will jurisdiction. Termination of a China-based employee generally requires cause. Chinese employers put this in their documents because this can cause their foreign employees to believe they can be fired for “good reason, bad reason, or no reason at all” even though they cannot. See China’s Labor Laws: The Cultural Disconnect Goes Both Ways. And even though China is not an employment at-will jurisdiction, just having this in the employment documents gives the employer some basis for justifying its termination should it ever be sued for that.

2. During the first six months probation period… The Chinese employer puts this in the documents but does not mention anything regarding the proposed term of employment. Without there being any proposed term of employment there is no way our China employment lawyers can determine whether the proposed probation period complies with Chinese law, and that is exactly how the employer wants it. Six months is the longest probation period even allowed under Chinese law, but unless the proposed term of employment is three years or longer, the proposed six-month probation period violates the law. When we see a provision like this (and we see this provision all the time) is push back and say, well if you are calling for a six month probation period, the employment term is three years and we ask that you please write that in the documents. At which point the potential employer says, no, we were thinking of a one or  two year employment term and then we get them to reduce the probation period accordingly, to the benefit of our expat executive client.

3. During the probation period, the Company will have the right to terminate your employment with or without cause. Also not legal. Since the probation period is part of the term of employment, the probation period also cannot be treated as employment at-will. Chinese employers put in provisions like this for the same reasons they put in provisions trying to get their potential employees to believe that their entire employment term will be at will and for the same reason they regularly write in an overlong probation period: to gain leverage over their expat employee.

A bit of context may be helpful here. We have represented a number of Chinese companies in their United States and European (mostly Spain and Germany) operations and, almost without exception, they tend to be wary of hiring foreigners. Rightly or wrongly they view foreigners as overpaid and spoiled and they particularly do not like having to pay a foreigner $300,000 for a job they view as similar to one for which they are paying $150,000 to a Chinese citizen in China. This sort of thing causes all sorts of tension within the company and it is not unusual for foreign hirings not to work out because of this. I know this is probably an exaggeration, but it seems like the rare case where there is not someone powerful within every Chinese company that has hired an expat who is scheming to make the life of the expat miserable from day one, in an effort to drive the expat out of the company. Chinese companies know that their history with expat hiring and retention is poor and the above sort of terms are their way to prepare in advance for what the expat leaving, which they see as nearly inevitable. Our job as lawyers representing expat executives is to get them documents that will make it as difficult as possible for their Chinese employers to terminate them and to make it as lucrative as possible for the expat executives should such a termination occur.

And offer letters are important no matter what the employment contract eventually says, especially since so many China employment contracts expressly incorporate the terms of xyz offer letter. Of at least equal importance though is that the negotiations over the terms of your offer letter will set the stage for the negotiations over your actual employment contract. And if you agree to offer letter terms that tell your China employer that they can push you around, they will obviously expect you to agree to those same terms and additional similar terms in the employment contract itself. On the flip side, if you show your potential China employer that you know the score and you won’t be bullied, you have set yourself up for receiving an appropriate and maybe even favorable employment contract down the road.

China trademark registrationFor many years, China has sought to wield the sort of “soft power” that comes naturally to many other developed nations: power not from military or economic might, but from having ideas and cultural exports that are popular in other countries. China has no shortage of ideas or culture, but few people outside China are interested in either, with the notable exception of Chinese food.

Most people outside China can’t name a single Chinese brand. Not one Chinese brand! It’s sad, but perhaps not that surprising. I’ve seen a range of explanations, usually some variation on the following: China doesn’t understand foreign markets; China doesn’t care about foreign markets; China can only copy products, not create them; and China’s authoritarian government stifles creativity. All of these explanations have some element of truth, but aren’t the whole truth. And though China hasn’t broken through on the world stage yet, to many observers it’s only a matter of time.

In fact, it may have already happened. The hottest thing in popular music is the app musical.ly, which allows users to create and share a 15-second video of them lip-syncing to a popular song. As a recent Rolling Stone headline put it, musical.ly has become “too big for pop to ignore,” and it is not only a way for existing pop stars to connect with their fans but also a platform for new stars to emerge. The app has more than 133 million users worldwide, is massively popular in the US (the company claims half of all US teens are users), and is a serious rival to Snapchat, Twitter, and Instagram. And it is 100% Chinese, developed in Shanghai by two Chinese programmers who returned to China after working in California.

Did the founders of musical.ly crack the code, or just get lucky? It’s too early to tell, but thus far the one place where musical.ly has launched and failed to catch on is … wait for it … China. Meanwhile, do the millions of American teens using musical.ly know it’s a Chinese app? Do they even care? My guess is that very few know, and even fewer care. And that’s just the way China should want it. Only when Chinese products are accepted on their own merits can they form the basis for soft power.

Meanwhile, musical.ly waited until September of last year to file for trademark protection in China, which is about two years too late considering that the app was launched in 2014. Luckily for them, no trademark squatters filed in the interim; a bit shocking to me, but perhaps that’s the upside of not being successful in China. I’m not sure if it’s gratifying or discouraging to see Chinese firms make the same mistakes as foreign firms when it comes to trademarks in China, but I’m leaning toward the latter. Especially when the Chinese firms are backed by VC money and represented by multinational law firms. What are they thinking?

United_Airlines_Boeing_737-800;_N12216@LAX;10.10.2011_622ge_(6414422745)

By now just about everyone knows about the Chinese-American doctor who was forcibly removed from a United Airlines airplane. To say this has been a PR mess for United Airlines would be an understatement. It has been a worldwide disaster. America is angry. China is outraged. The video has gone viral. Full disclosure: I started my legal career in Chicago at the law firm that back then (and I think still does) represent United Airlines and I have been a Platinum 1K (the highest tier) at United Airlines since as long as I can remember and I generally like the airline and I generally defend it.

What does this have to do with your China business? Everything.

Let me explain.

If you run any sort of business, you need to be prepared for major problems and you need to have a plan in place for dealing with those problems. Your plan must include how to prevent the problem from occurring, how to mitigate the problem if it does occur, and, sometimes most importantly, how to apologize for the problem when it does occur. If you do not have such a plan in place, your China business is at risk, and let me tell you, China poses major risks. Why is that? Because China has ~1.5 billion people and a large chunk of those people are on the internet and what happens in China or with China does not just stay in China, and vice-versa.

Let’s analyze what United did wrong and how you can do better. First off, United should have prevented the problem in the first place, and I am not talking about better algorithms that might have prevented the overbooking situation, though that certainly would not hurt. No, I am talking about how (based on what I have read) United was willing to offer only $800 to get passengers off the plane once it had become clear there was an overbooking situation. Why didn’t United just keep raising its bumping reward until it got voluntary takers? You can’t tell me that it would not have gotten more passengers off that plane had it kept raising its offer. I have to believe that it had it been willing to spend another $700 per passenger it would have had sufficient takers. United needed to get four passengers off that plane. Do you think paying another $2800 total will have killed them? What do you think this debacle is going to cost United in cancelled or never-booked flights? I’m just wildly guessing, but I’d say more like $2.8 million than $2800. Not to mention the inevitable lawsuits which will cost them another ~$2.8 million in attorneys’ fees and payouts and additional bad and lingering publicity. Does United not give enough authority/discretion to its employees to solve problems like these?

And now let’s talk about the “apology,” which I intentionally put in quotes because it really was more of an airline-speak statement.
China contingency planAccording to Psychology Today (which is what I always use when I am playing psychologist), you only get one chance to make an apology without sounding excessive. Therefore, you need to nail it with your one chance. And United Airlines most certainly did not. Let’s break down this apology.

  • It starts out saying this is an upsetting event to all of us here at United. Really? This is nearly the equivalent of saying, you having to witness your mother dying really makes me feel bad. Why is United focusing on how this has impacted United rather than on how it impacted its own passengers? Not smart.
  • I apologize for having to re-accommodate these customers. Really? I did not have sexual relations with that woman. When you apologize, you should personalize it and humanize it. This “apology” fails on all accounts. It does not constitute an apology for the way a passenger was dragged off a plane nor does not apologize for United having overbooked the flight. It is in the passive voice; rather than say I apologize for our having…., it makes it seem as though United had no choice but to do what it did. But United did have a choice as it could have paid more money to get passengers off. This is a classic non-apology. And what the heck does re-accommodate mean anyway? Is this airline-speak, because it sure as hell isn’t the way the normal people I know speak. Using industry buzzwords is a classic way to create distance and yet this is a time when United should be doing everything it can to reconnect with its customers.
  • “Our team is moving with a sense of urgency to work with the authorities and conduct our own detailed review of what happened. Your mother froze in the cargo hold, but don’t worry, we will move with a sense of urgency to work with others to review what happened. What the heck does this even mean? 1. Why say “sense of urgency” instead of just “urgency.” Another example of trying to create distance. Why talk about working with others? Why say “to review what happened” instead of to determine and report back on what happened. Most importantly, you are the CEO of United Airlines, have you not watched the video? Isn’t there enough there to say that the situation was handled poorly? Should he not at least have referred to what happened?

Now as a lawyer I know that an apology constitutes an admission that can be used against you in a court of law, but surely Munoz could have said something more clearly and more compelling than this. Munoz just really never takes responsibility for the problem. He never takes ownership of it. And don’t think apologies don’t matter. Many years ago, I spoke at a terrific lawyer conference on the cutting edge of law. I remember one of the speakers (I apologize because I do not remember his name) gave a great talk on crisis management and he used MLB pitchers Roger Clemens and Andy Petitte as the examples. Both Clemens and Petitte had been accused of using performance enhancing steroids. Clemens vigorously denied having done so and essentially accused those who said otherwise of being liars. Petitte pretty much immediately owned up to his mistake: I used them, I should not have, I am sorry, it will not happen again. How many baseball fans know Clemens used steroids and dislike him for having done so? Way more than with Petitte. I can hear this crisis management speaker saying “Munoz should have emulated Petitte here.”

Our China lawyers often have to deal with PR imbroglios. The below are some of the following:

1. A client makes a product that many consumers would not want others to know they use and it has its Chinese manufacturer ship this product direct to the consumer who orders it and when the order goes out an email from the Chinese manufacturer goes out saying that the product has been shipped. This email appears to come from our client and usually — of course — this email goes out only to the one person who ordered the one product. But one day it inadvertently went out to every single person who had ever ordered the product and it went out to all of these people in the “to” line so that everyone else could see everyone else’s email address. We and our client immediately went into overdrive and sent out an email apologizing for the problem, owning up to it, assuring that it would never happen again, and offering a substantial discount on any future orders within the next year. This apology email went to one person at a time and it went out within 15 hours of the incident. Our client got hundreds of responses back to its own email and almost all of those responses were appreciative of how quickly and decisively it had acted. They got a few emails from people saying that they would never buy from our client again, but that was it.

2. Many years ago, a company that made ultra-high end outdoor equipment at prices about double of any of its competitors came to us because its Chinese manufacturer had sold product that our client had rejected as defective — let this be a lesson as to why your China manufacturing contract should clearly provide exactly what happens to rejected product. Anyway, the defective product had found its way to the United States and many many buyers of it had come to our client to ask for a replacement per our client’s 100% replacement guarantee. Our client said that the defective products were not theirs and they were right as the defective products were actually counterfeits. Our client wanted us to research its legal obligations to replace the defective product. My response to them was as follows: Look, we can charge you a lot of money to legally support your decision not to replace the defective equipment, but might you not be better off paying to replace it and maintaining your great reputation than paying us to fight against replacement and perhaps irreparably harming your reputation. The client said “umm” and that they would get back to me on how to proceed. They chose to replace and I have always thought that was a wise decision.

I could go on and on with real life examples but it would be a lot more productive for you to create your own worse case scenarios for your own business. 

Back in the golden age of China blogging, Will Moss (now the Director of Reputation Management at Intel) had a terrific blog called ImageThief, that focused (at least sometimes) on China public relations. He did a post once on how foreign companies need to prepare beforehand for their China PR disasters and I saved the key lines from that post and I repeat them to you below now:

Be prepared to respond fast. Silence often equals guilt in the eyes of the public. Have an issues management kit that anticipates possible crisis scenarios in place beforehand. Don’t rely on guidance from overseas headquarters.

Pay close attention to the tone of public communications. Address concerns. State positions. Don’t condescend or talk down to Chinese audiences.

Get everybody on the same page. Limit public comments to the minimum number of spokespeople and throttle unauthorized communication.

Brief employees so they know what is expected of them and how to respond to media queries, ambushes, etc.

For consumer brands, ongoing monitoring of the Internet is a good idea. Internet scandals are often flashes-in-the-pan, but they can erupt into the mainstream. It’s better not to be caught by surprise.

Great advice isn’t it? And it applies worldwide.

What are your thoughts?