China attorneysIn the original post in this series, Getting Money Out of China: It’s Complicated, I wrote about how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.”

That has turned out to be no exaggeration. That post has already had nearly 8,000 views and over the weekend, I alone received four reporter queries and nearly a dozen e-mails from people asking for help to get money out of China. I assume that were I to survey my firm’s China attorneys they would report something similar. But as I noted in part 2 of this series, most of the requests deal with purchasing single family homes in the United States and “slapping together 3-5 single family homes and calling it a fund is not likely to make a difference with the Chinese government allowing money to leave!”

In part 2, I discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. In part 2, I looked at legitimacy. In this post, I will examine the “benefit to China” element.

There is no doubt in my mind that a key element to money leaving China is simply whether the Chinese government wants the money to leave for its intended purpose or not. Nothing scientific here and it is more art than science, but based on my experience and my conversations and my gut feelings, I would rank the likelihood of the Chinese government approving your deal in roughly the following ways.

  1. Near certain the money will leave deals. We have many clients who sell their products and their services to China for less than $10 million at a time, using China-centric contracts, and I cannot recall a single instance where any of them have had any trouble getting paid. These are real deals with real contracts with real parties with real pricing and it is pretty clear China so recognizes these and has little to no problem with them. These are the deals that help keep China businesses running smoothly. For what you need to do to make your contract work on these deals, check out Selling Your Product or Service Into China: The Contract Basics.
  2. It depends deals. Technology licensing deals fit into this category. The Chinese government wants its companies to acquire Western technology, but it is not clear that it wants its companies to pay too much for this technology, especially if a denial of payments will mean the Chinese company can pay less. For more on what is involved in doing a China technology transfer deal, check out Three Myths of China Technology Transfers and China Technology Transfers: The Relationship and Deal Structure Myths.
  3. It really really depends deals. Chinese companies investing in Western companies. Yes, you can read about this or that Chinese investment deal getting done, but you should know that many of these deals do not involve money going from Mainland China to the West: they involve money going from Hong Kong to the West. In trying to determine the odds of your deal going through the first question to ask is from where the money will be coming. If your Chinese counter-party has $200 million in an HK bank account and your deal is for $150 million, then what the Mainland will say about your transaction obviously becomes less important. But if you are counting on the money coming from the PRC, the nature of your business could well be determinative. If the investment is going to be in real estate, your odds are not good because it is difficult to argue how a Chinese company sending $150 million to the United States to buy a couple apartment buildings there will benefit China. But if the investment is going to give the Chinese company access to a technology needed or desired by China, the odds just went way up.
  4. Are you kidding me deals. We are not aware of a single instance where the Chinese government has said, “yes sure, go ahead and send that $5 million so you can buy a luxury condo in Vancouver or New York.” Sorry.

Determining whether money can come in on a specific deal — even when it is legitimate and the contract is good — is more art than science and nobody can get it right every time. For this reason, our advise is always to assume that getting the money will be difficult and act accordingly. We give this advice even for our lowest risk clients: the product sellers. See Payment Terms When Selling TO China: Possession Is Ten-Tenths Of The Law. This means setting up your deal to reduce your risk of not getting paid and to reduce your risk if you fail to get paid.

What are you seeing out there?

 

Chinese lawyers
Getting money out of China. It is super complicated.

In yesterday’s post, Getting Money Out of China: It’s Complicated, I wrote about how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.”

That has turned out to be no exaggeration. That post has already had nearly 5,000 views and despite it being the weekend, I alone have received two reporter queries and at least a half dozen e-mails from people asking for our help to get money out of China. I can only assume that were I to survey my firm’s China lawyers that half dozen number would be at more than a dozen. Again, though, most of the requests deal with the purchasing of single family homes and, people, slapping together 3-5 single family homes and calling it a fund is not likely to make any difference with the Chinese government allowing money to leave!

In this post, I will discuss the three factors the Chinese government uses to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. In this post, I will address “legitimacy.” In subsequent posts, I will address the other factors.

By legitimacy we mean exactly that. If a China company needs a $5 million dollar piece of industrial equipment for its factory and it pays $5 million for that industrial equipment, the deal will almost certainly go through. My law firm has a number of U.S. and European clients who sell this sort of equipment and for whom we have drafted contracts that work and none of these clients have reached out to us with any problems. Nor has any other company selling such equipment legitimately.

Just to repeat. Chinese company needs $5 million in industrial equipment to make its factory run better, the Chinese government will almost certainly allow the money to go through. Why then do we get so many calls and emails from U.S. and European (usually for us, German or Italian or Spanish) companies who are not getting paid for their industrial equipment sales? Two reasons. Bad contract and an appearance or a reality of illegitimacy. I will save the contract aspects for a later post and address just the legitimacy element in this one.

Here are the situations where we have seen problems on what should be a routine equipment purchase:

1. The foreign company is selling the $5 million piece of equipment for $8 million. Come on. If you have sold your $5 million piece of equipment to China five times in the last year for $5 million and now all of a sudden you are selling it for $8 million, the Chinese government is going to assume that you have some sort of side deal with your Chinese buyer to funnel some large portion of the $3 million extra to a bank account held by the owner of your Chinese buyer in your home country. When we have been armed with evidence to the contrary (perhaps you have added all sorts of bells and whistles to the $5 million machine, for example), the odds are good on your eventually getting the money out. But if you are in fact planning to push over the $3 million or so extra to your Chinese friend, the odds are not so good that the money will ever leave China.

2. The foreign company is selling the $5 million piece of industrial equipment to an advertising agency in China. Come on.

3. The foreign company selling the $5 million piece of industrial equipment has never sold anything to China previously and the Chinese company buying the $5 million piece of industrial equipment has never previously bought anything similar from overseas before. If your deal is truly legitimate, you ought to be able to prove it and you ought to be able to get paid. If your deal is really just a scam, your odds are really more. Note: our China lawyers love taking on the former type of matter but we will not take on the later.

4. The foreign company selling the $5 million piece of industrial equipment is wholly owned or largely owned or even partially owned by an ethnic Chinese. Call it discrimination or call it whatever else you want, but we often see deals involving ethnic Chinese on the foreign side held up to much greater scrutiny by the Chinese government. I first wrote about this Chinese government criteria back in January of this year, in Getting Money Out of China: What The Heck is Happening?

Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

Things were a lot better in January and this criteria has only become more real. There are various completely legal things that can be done to alleviate this problem and improve your odds on this one, but it would be better for our firm’s clients that I not mention them here.

Bottom Line: When I wrote yesterday’s post on getting money out of China, I envisioned a two, maybe a three part series. The deluge of questions I have received just since then has convinced me that this issue is too pressing, too important, and too multi-dimensional to be contained in a series that short. This seems to be THE big issue right now and we plan to write on it until we have exhausted it. So keep your questions coming.

China attorneysFor the last few months, I alone have been averaging a call or email a day from someone inquiring about getting money out of China. I had three phone calls and one email on this topic yesterday (and woke up to two more such emails this morning), and they run the gamut.

Two of yesterdays calls were highly typical. One was from a realtor wanting to know how the Chinese buyer of a two million dollar house could get her money out of China to pay for it. The other was from the General Counsel of a large housing construction company with essentially the same question, but more general.

I try to make the single house purchase calls as short as possible and I do that by spewing out the following as quickly as I can:

China law forbids anyone from sending out of China more than USD$50,000 in any given year without government approval and it is virtually impossible to get this approval to buy a house overseas. So the odds are overwhelming that we will not be successfully in helping this person get more than $50,000 out of China and we are not going to help in getting the money out illegally. There are sometimes some legal workarounds, but for us to know if there are any in this case, we would need to be retained and we would need to know a lot more facts. And doesn’t it make more sense for your buyer to retain her own Chinese attorney in her hometown since she is Chinese and this is an issue of Chinese law?

Our China lawyers have been hired on single purchase house deals, but only by sellers who want to use our services to justify getting out of the deal with their Chinese buyers because they now have a higher offer on the table and they are tired of waiting. This makes sense.

My phone calls with the real estate company and the home building company lawyers last a few minutes longer. I tell those callers the same thing about the law, but I also tell them that in light of this, they should consider requiring larger initial nonrefundable deposits from overseas buyers.

Then there are the near daily emails from people who think that they have come up with THE solution for getting money out of China. These emails propose things like bitcoin, loans, company to company transfers and various other things, far too often with a tone that they have discovered the one method that can trump Chinese government restrictions and would I just confirm this for them. It was one of those that spurred me to write this post:

What’s the best way for a Chinese investor to send RMB out of China to the U.S.? We are setting up this transaction as a services deal from corporation to corporation.

That’s it. No explanation of the parties involved in the deal. No explanation of the deal itself. No explanation of the money involved. Not even really a question; just a statement as to how they are going to do the deal, and essentially a request that we bless it. Here is my standard response to these kinds of emails:

There is no way I can even come close to answering your question on the best way for a Chinese investor to get RMB out of China without knowing, at the bare minimum, the following:

1. The nature of the transaction.
2. The nature of the parties (a lot more than just their structures).
3. The histories of the parties.
4. The location of the parties.
5. The nationalities and even the ethnicities of the parties (especially the receiving party).

In our experience all of these things (and a whole host of other things) are factors in whether the Chinese government will allow money to leave. If you think just doing it corporation to corporation will get the money out, the odds are overwhelming that you will end up being sorely mistaken

The more legally interesting calls — and the ones on which our China lawyers can often help — come from Western companies facing the following sorts of situations:

  • Western company selling some really expensive item (usually a piece of industrial equipment) to a Chinese company and the money isn’t leaving China.
  • Western company waiting for funds to arrive on an IP licensing deal.
  • Western company waiting for funds to arrive from a Chinese company which is supposed to be investing into the Western company.
  • Western company waiting for funds in payment of services provided.

In part two of this series, I will set out the framework our China attorneys believe the Chinese government uses in deciding when money leaves and when it does not and start analyzing how China treats the various situations it sees from the list above. Most importantly, we will set out what exactly you can and should be doing to increase the odds of money leaving China.

 

China Law Team
By Li Feng, in the China Daily (bit.ly/2gFMaDa)

During the recent presidential campaign, President-Elect Donald Trump said “we can’t continue to allow China to rape our country” and vowed to aggressively fight back against China’s unfair trade practices. Trump promised his trade agenda would:

  • Declare China to be a currency manipulator
  • Impose a 45 percent tariff on all Chinese imports into the U.S.
  • Abandon/ renegotiate “bad” trade agreements such as the Trans-Pacific Partnership (TPP), and
  • Use the full arsenal of US trade laws against Chinese unfair trade practices.

The above proposed trade actions raise many legal and policy questions. Can a President Trump really do those things? Should he do those things? Will such actions achieve anything? Pundits, academics, lawyers, and ultimately U.S. judges will eventually weigh in on these questions for real, but China is not going to wait for the resolution of these questions. If the United States engages in some or all of the above Trump-proposed actions, China will no doubt retaliate with its own actions.

In this post I discuss three fairly likely ways China will respond to any attempts by a Trump administration to “get tough on China.”

1. China AD/ CVD Actions. Few realize that China has already initiated its own antidumping (AD) and countervailing duty (CVD) actions against companies from the United States and other countries. Having been on the receiving end of the bulk of AD/CVD actions worldwide, China has incorporated into its own AD/CVD procedures some of the most effective techniques and practices from the AD/CVD investigations conducted by the U.S., EU, and other jurisdictions on Chinese companies. For example, China’s AD questionnaires have burdensome and comprehensive sales and cost data requests, similar to, and even in some cases, exceeding US practice. China’s AD/CVD margin calculation methodologies are as non-transparent as the EU’s margin calculations. China has even copied many of the annoying administrative practices of the US and EU, such as giving only limited extensions, disregarding national holidays, and insisting on burdensome filing requirements, like requiring all documents filed be fully translated into Chinese. It’s no accident that my law firm’s trade team works so closely with our China law team.

Most of China’s AD/CVD actions have so far been largely symbolic and usually initiated in response to specific U.S. actions against China. Though many of China’s AD/CVD cases have involved well-known companies (Corning, Dupont, Tyson Foods, and Cadillac, to name some), most have had only limited economic impact. However, more recent China AD/CVD actions are starting to have greater economic impact. After the US and EU filed AD/CVD actions against Chinese solar cells and modules in 2011, China initiated its own AD/CVD actions against solar-grade polysilicon from the United States, EU and Korea. China’s AD/CVD action effectively closed off the largest export market for US polysilicon producers, and was a significant contributing factor to REC Silicon’s decision to shutter its polysilicon production operations in Washington and Montana. REC Silicon just this month blamed China trade actions for its less than stellar third quarter revenues.

In late September, 2016, China announced preliminary AD duties of 33.8% and CVD duties of up to 10.7% against imports against U.S. distillers’ dried grains (DDGS), an ethanol by-product used as animal feed. The U.S exported $1.6 billion of DDGS to China in 2015. China also apparently also has an AD/CVD action prepared against U.S. soybeans exports to China and is just waiting for the right time to initiate that action. The U.S. is the largest producer and exporter of soybeans and U.S. companies exported over $10 billion of soybeans to China in 2015. If the Trump Administration gets tough against China, US soybean producers likely will incur massive collateral damage in an escalating US-China trade war.

2. China Antitrust Enforcement. China may also respond against U.S. anti-China trade actions by stepping up its enforcement of its antitrust laws against U.S. companies. China implemented its anti-monopoly law only in 2008, but it has become increasingly active in reviewing mergers and investigating abuse of market dominance. In February 2015, Qualcomm paid a $975 million fine to settle Chinese antitrust allegations of having abused its market dominant position. This year, China’s antitrust authorities have targeted pharmaceuticals, medical devices, vehicle manufacturing, ocean shipping, and smart manufacturing as industries of particular concern. Because these industries are already prioritized for extra scrutiny, China could relatively easily ramp up its antitrust enforcement actions against U.S. companies in these industries to retaliate quickly against U.S. trade actions against China.

3. China Criminal Enforcement. China might also retaliate against U.S. companies by more strictly enforcing its criminal laws against U.S. company officials in China. Earlier this month, China detained more than a dozen employees of Crown Resorts, Ltd, an Australian gambling company, and it will be pursuing criminal charges against at least three of them. See Foreign Executives Arrested in China: Please Do NOT Look Away. No one knows where and when the next China anti-corruption effort will occur, but foreign companies doing business in China in important or politically sensitive industries need to be extra cautious.  Company officials need to know which way the wind is blowing in China, particularly when enflamed U.S. trade rhetoric may trigger a Chinese backlash. Our China lawyers are already hearing rumors that China is going to start criminally pursuing those who use independent contractors in China but have no company in China and pay no employer or income taxes in China. China might be planning this sort of action against smaller companies as a sort of warning shot against the United States. For more on what this situation looks like, check out China’s Tax Authorities Want You.

Though Trump has talked a lot about China, China itself has so far taken the high road, noting that U.S.-China trade relations are “too big to fail.” China appears to be waiting to see if Trump’s actions will in fact harm China. For example, the United States’ abandoning the Trans-Pacific Partnership (the TPP) has actually allowed China to step in and fill the TPP void by promoting its own Regional Comprehensive Economic Partnership trade agreement (RCEP).

If the United States starts engaging in trade tactics China considers excessive, it is naïve to think China will do nothing in return. China has a home market that is in many cases the biggest export market for US producers and China has many options under its own laws to directly or indirectly retaliate against U.S. interests. Anyone wishing to do business in China or with China should consider the risks of being targeted for retaliation in a spiraling US-China trade war and they should start preparing to try to minimize the fall-out from that.

China lawyers
Three myths of China technology transfers

Many technology transfer licenses in China fail. Though it may be true that not all Chinese companies plan from the very start to violate the terms of their licensing agreements, you must not ignore that many do. A fascinating thing though is that when Chinese companies plan to breach their licensing agreement with a foreign party, they almost always cannot help but reveal this from the outset.

A Chinese company that intends to violate a licensing agreement and run off with the foreign company’s IP will usually have a very clear plan. What the China lawyers in my office call the Standard Plan works as follows. First, the Chinese company will negotiate in a way that guarantees a weak license that cannot be enforced against them by the foreign party. The tricks used to do this are quite standardized. Second, the Chinese company will ensure that it does not make any (or else it makes very few) payments until after it has already received the technology. If the Chinese company makes any payment at all, it will make a minimal number of payments, usually late and in violation of the agreement and then once it has received enough of the technology it seeks, it will cease making any payments entirely.

When our China attorneys encounter a Chinese company clearly working on the Standard Plan, we warn our clients. However, it is also typical for our clients to nonetheless want to forge on ahead. The client will usually explain how their situation is unique and that means the Chinese could not possibly be planning to breach.

These explanations are often based on common misunderstandings about how China works, or on what so many call China Myths. Here are three of the many such myths I have heard from clients in just the past six months:

1. Myth One: The Chinese company will not breach our technology licensing agreement because it needs us. The usual argument is that the technology is complex and the application know-how is critical and the important/critical information will not be disclosed until the Chinese company has made its last payment. The problem with this argument is that even though it may be factually true that the Chinese company cannot successfully implement the technology without the final data and continuing support from the foreign licensor, what really matters is that the Chinese company believes otherwise.

Far too often the Chinese company is convinced that once it gets some relatively small percentage of the technology from the foreign licensor, it no longer needs the foreign licensor. First, Chinese companies commonly believe with respect to the technology itself that the whole package is not important; the only thing truly important is the magic formula. Based on this the Chinese company will seek to extract the magic formula as soon as possible in the transfer process and with as few payments as possible, and once it has done that, they see no reason to continue the relationship with their foreign licensor. The Chinese company believes (often with good reason) that once it knows some key portion of the technology it can just hire key engineers to assist them in the implementation phase for considerably less than it would cost them to continue making their licensing payments. And get this: many times the Chinese company will bring in your former employees and consultants and former employees and consultants from your competitors to do this work.

2. Myth Two: The Chinese company is acting this way because it is inexperienced or incompetent, not because it plans to breach. This myth is based on Western arrogance and it is the rare Chinese company that does not know how to exploit it. Our China legal team sees this myth in a number of settings, including the following:

  • The Chinese company submits its response to a carefully crafted technology licensing agreement 2-3 days before the deadline for executing it. The document comes back from the Chinese company with substantial revisions to the agreement terms, but with no redlining and no explanation.
  • Immediately after executing the technology transfer or the technology agreement, the Chinese side insists on assigning the agreement to a newly formed subsidiary that has no assets.
  • When the Chinese company’s payment is due, it reports that the bank has imposed restrictions that either make its payment impossible or that require substantially revising the agreement. And no surprise, the revisions the Chinese company contends must be done to free up payment are the exact revisions it sought but was denied during the technology license negotiations. The Chinese company will then press for the foreign company to continue transferring technical information while this payment issue gets resolved.

When we describe the above tactics as standard tools of the Standard Plan, used almost by rote by Chinese companies planning to breach their license agreement our clients will sometimes counter by arguing that these are not indicators of an intent to breach, but rather just mistakes that reveal the Chinese company’s lack of international experience and general incompetence.

This argument is based on a myth and it is seldom correct. First, Chinese companies are not incompetent. They know what they are doing just as much as Western companies and on international technology licensing agreements, probably better. If you can read Chinese, you can go to any bookstore in just about any Chinese airport and find books (yes plural) that explain exactly how to take advantage of Western companies on technology licensing deals. Second, Chinese companies are not inexperienced in the procedures that apply in international technology transfer agreements. Tech transfer has been a core of Chinese business since 1981. Chinese companies, together with their lawyers, bankers and government/private consultants know exactly how the system works. What is true is that Chinese companies know exactly what to do to get Western companies to let down their guard and give them what they want. In this way, Chinese companies that intend to breach are masters at fooling foreigners into thinking (wrongly) that they are inexperienced and incompetent. Our Chinese lawyer friends readily (and laughingly) admit all of this to us.

3. Myth Three: The Chinese company will not breach this technology transfer agreement because it takes a long view of business and it will not want to sour relations for the future. This myth is based on a general view that due to their long history, the Chinese take a long term view toward business relations. This is often explained by some vague reference to a Confucian ethic that still underlies Chinese culture, even in the PRC, a communist country.

This is just a cultural stereotype not based on recent Chinese history. I am not going to discuss Chinese culture or Chinese history in this post, but I am going to tell you what I have seen over the decades in which I have been providing legal representation on Chinese transactions (coupled with what the other China lawyers have seen in their practices as well) and that is that Chinese companies — if anything — tend to take the long view far less often than the Western companies (mostly North American, Latin American, European, and Australian)  I represent. In fact, many of the Chinese business people I know and with whom I speak (in Chinese) are very skeptical about the future and tend to evince a “get it while I can” attitude about business, particularly when dealing with foreign companies, who tend to come and go and have little power or even relevance. Benefit now is real, calculation for the future is for suckers. See Is There A Chinese Mindset, And So What If There Is?

These are three commonly held myths by foreign companies that do technology transfer deals with Chinese companies. They are not true; they do not reflect reality. If you are negotiating with a Chinese company based on any of these myths, you will likely fail. Don’t do it.

Importing cannabis products from ChinaLate last month, U.S. Customs and Border Protection initiated an action before the U.S. Court of International Trade (“CIT”) to recover civil penalties and unpaid taxes amounting to almost half a million dollars from two companies that imported cigarette rolling papers, mini hookahs, smoking pipes, and pipe screens from China. U.S. Customs alleged that Green Planet, Inc. and Token Group LLC, both located at the same address in Riverside, California, had imported various smoking products from China without including the correct amount of duties owed on the import entry declarations filed with Customs.

According to U.S. Customs, between June 2010 and February 2013, Green Planet made four entries (with an entered value of $407,308.71) and Token Group made five entries (with an entered value of $1,412,456.73) of imported products from China, but failed to pay Customs over $200,000 in applicable duties that should have been declared at the time of entry. U.S. Customs alleged that Green Planet and Token Group filed import entry declarations that contained material false statements and/or omissions and their failure to exercise reasonable care in submitting information to Customs constituted negligence in violation of 19 U.S.C §1592(a).

After the entries had been made, Green Planet and Token Group or their surety companies paid Customs almost all of the outstanding duties that should have been paid. Though Green Planet and Token Group together now owed less than $30,000 in outstanding duties, Customs still decided to seek penalties of $432,975.86 against them for their having negligently filed material false statements on their Customs entry declarations. For negligent filing of entry declarations, Customs is entitled to collect civil penalties equal to twice the lawful duty amount that should have been collected at the time of entry.

It is not clear why Green Planet and Token Group did not pay the duties owed on their imported Chinese rolling papers and smoking products. Perhaps they sought to cheat Customs and purposefully tried to avoid paying lawful duties. Or perhaps they had a legitimate basis to claim the products should have been declared under a duty free tariff heading. Numerous cannabis and smoking related products have ambiguous or uncertain classification, particularly as new products are developing. Regardless of their intent, Green Planet’s and Token Group’s failure to properly file true and accurate Customs entry declarations was deemed to be negligence warranting the initiation of a Customs penalty action.

This case demonstrates how U.S. Customs will pursue penalty actions regardless of how small the amount of duties owed. I mention this because we often hear otherwise from our customs clients, many of whom wrongly believe that there is some minimum safe haven out there. There is no minimum amount Customs considers necessary to pursue a penalty action against importers and because the penalty is double the amount that should have been collected at the time of entry, underreporting can be very very costly. If you are an importer and make any material false statement or omission on your entry declaration, you are at risk of a substantial Customs penalty action.

If you catch your mistake on your customs entry declaration before Customs initiates a penalty action, you can make a prior disclosure to Customs of your error. This will help mitigate potential penalty actions, and could limit your exposure just to the amount of outstanding duties owed.

Importers need to take care to ensure their import declarations are filed accurately. Although customs brokers file Customs entry documents on behalf of importers, they are only agents of the importers and it is you as the importer who bear ultimate responsibility for any Customs entry declaration. In fast developing industries (like cannabis), importers need to be especially mindful of the customs reporting challenges to make sure their imported products are correctly declared to Customs so as to avoid penalties.

Bottom Line: Get your customs declarations right the first time.

Negotiating with Chinese companiesIn this series of posts I have been looking at themes explored by Lucian Pye in his work Chinese Commercial Negotiating Style. Pye concludes that the way most Sino-Foreign negotiations are conducted helps the Chinese side apply its preferred strategies and tactics. My first post looked at how Chinese companies tend to control the preliminaries during what I call the “courtship” phase. The second post considered what Pye says about the Chinese tendency to prefer agreements on generalities. In my third post I examined Pye on  specific Chinese negotiating tactics. In this final post I summarize Pye’s tips for negotiating with Chinese companies.

Take general principles seriously. According to Pye, the Chinese usually prefer to begin with agreement about general principles before moving to concrete items, while foreigners like to begin with specifics and avoid generalities. Agreement on generalities allows the Chinese to make headway by drawing subsequent negotiations back to the “spirit” of the agreement. If you follow the Chinese route it is imperative you decide ahead of time the precise general principles you are prepared to accept.

Avoid the indebtedness trap. Chinese negotiators often seek to put foreigners in a position where they will feel obligated or indebted. Pye says that foreign negotiators need to be aware of the obligations they may be accruing. They should be skeptical in the face of the “effusion of personal friendship” often used to elicit an acknowledgement of the indebtedness. See How NOT To Choose Your China Business Partner. And Why I Take Cabs.

Prevent exaggerated expectations. Exuberant Western sales techniques are often read to mean the foreigner is prepared to do more than they intend. Once the Chinese assume a relationship has been established they will genuinely count on generosity and flexibility from their partners. If the Chinese decline an offer of generosity in one instance, they may consider themselves entitled to ask for the same kind of generosity in future. Chinese “face-saving” can involve turning down initial offers but there is no loss of face in asking for help later.

Handle the shaming. When disappointed, Pye says, Chinese negotiators tend not to search for appropriate counter moves but attempt to shame the foreign party with moralistic appeals and denunciation. They believe that if the other party can be shamed into doing the “right” thing they will be grateful and not resentful. You can often satisfy the shaming tactic with symbolic responses.

Master the record. A Chinese negotiator will normally be completely knowledgeable about the deal history and will test the other side’s memory to advantage. What was previously discussed or settled may be contradicted in an attempt to take advantage of new negotiators or changed circumstances. There is a belief that foreigners are careless and deserve to be penalized if they make mistakes. Pye’s tip is that you keep an exact record of your negotiation history.

Control the damage. It will inevitably be necessary, at times, to adopt positions the Chinese may find offensive or that may violate their beliefs about how people with mutual interests should behave. Pye’s tip is to concentrate on limiting the damage and not engage in mutual recriminations, which will only convince the Chinese side that the foreign side is insecure. According to Pye, the Chinese have a strong need to publicize what they perceive as mistreatment. Avoid an aggressive defense at all cost. Better to pass something off as an unavoidable misunderstanding about which the Chinese side has the right to be upset.

Pye’s report was commissioned by the US Air Force in the early 1980s. As I said at the start of this series, though some of his political and economic observations are somewhat dated, I was nonetheless struck by his report’s enduring relevance and I now recommend it to anyone interested in doing business with China.

Registering your copyrights in ChinaChina copyright takedowns is an essential part of any IP protection plan. But when you’re trying to enforce your rights, how do you prove what you have registered? A copyright registration certificate merely identifies a creative work by its name and the type of work.

If you have registered a work that is typically identified by name (e.g., a movie, a song, or a book), a copyright registration certificate may be sufficient for a takedown request on e-commerce sites. But if you’ve registered something that is less identifiable by name (e.g., a doll, a graphic design, or a work of art), a certificate alone probably won’t be enough.

Anti-infringement teams are not going to conduct independent research on your products or Google your company. All they care about are government-issued documents showing IP ownership. Consider how straightforward the infringement analysis is when based on a trademark certificate: (1) does the allegedly infringing item bear the mark listed on the certificate, and (2) is the item similar to the goods listed on the certificate? You need to make it that easy when you’re requesting action based on a copyright infringement.

Happily, there is a solution.

What some e-commerce sites request – and what China Customs requires – is an “authenticated search result” for each copyright at issue. This search result, duly stamped by the Copyright Protection Center of China (CPCC), includes both the copyright registration certificate and images of the creative work. You can’t request it until your copyright has been registered, but for certain works — especially works that are easily identified upon visual inspection but not by name — it’s essential.

China AttorneysBecause of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Our China attorneys are often asked by our clients whether they need a Chinese name for China. Our answer to that question is an emphatic yes if the company plans to conduct business in China within the next few years. In Don’t Be Like Mike: Register Trademarks In CHINESE, our lead China IP lawyer, Mathew Dresden, explained why:

Protect your Chinese brand, even if you don’t even have one yet. Because the minute your English-language brand gets attention in China, it will be given a Chinese name by the local media and consumers. Without exception. And the minute that happens, someone will register the Chinese name as a trademark, and you’ll have lost all control of your brand in China.

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How do you control a name that you don’t come up with yourself? In China, it’s not even a rhetorical question: you can’t, unless you’re also the first to file a trademark application. And so someone else registered the Chinese version of Michael Jordan’s name as their company name and a trademark, and Jordan has been playing catch-up ever since. And losing.

This is also exactly what happened to Pfizer, which released the drug Viagra in America before they had chosen a Chinese name for it, only to find that a Chinese name had been selected for it, popularized, and registered by a third party. Pfizer’s subsequent attempt to re-brand Viagra from the name it was already called in China (伟哥, or “Weige”) to its preferred choice (万艾可, or “Wan’aike”) was doomed from the start, as evidenced by a series of expensive court cases that Pfizer kept losing.

And – stop me if you’ve heard this before – the same thing happened (and keeps happening) with French winemaking giant Castel Frères, which saw someone else register the popularized Chinese version of its name (卡斯特, or “Kasite”) and has been losing court battles ever since in an attempt to regain “its” trademark. And again with Australian winemaker Penfolds and the Chinese version of its name (奔福, or “Benfu”).

It is not enough to register your English-language brand. If you are going to be selling your product or your service in China, you also need to select a Chinese name and register that name as a trademark in China.

Oftentimes when we tell our clients of the need for them to choose and register the trademark for a Chinese name, they ask us if we can help them come up with that name, seeing as how so many of our attorneys are fully fluent in Mandarin. Our answer to that is no, simply because we are lawyers not branding consultants. We have the language capability to make a Chinese brand name does not insult anyone, but we no expertise in coming up with a strong and marketable name. For a brand that “pops” you need a branding expert.

I was reminded of that this week when I read on Labbrand’s website how Labbrand came up with a name for a new Nestle ice cream product. Labbrand is an international branding consultancy that does a substantial amount of branding work for foreign companies that are doing business in China. Labbrand explains its branding work for Nestle as follows:

Labbrand, a leading China-originated global brand consultancy, worked closely with Nestlé to create the Chinese brand name 呈真 [chéng zhēn] for its new ice cream product. 呈 [chéng] means “deliver” or “present”, while 真[zhēn] is used to emphasize the “realness” of something. Together, the name 呈真 [chéng zhēn] can be translated as “deliver the true essence”, and effectively conveys the brand truth: real source and real taste made with real love. It also has an identical pronunciation to 成真 [chéng zhēn], reminding consumers of the beautiful feeling of one’s dreams coming true.

“We aim to help the client connect with the Chinese consumers with an appealing name in this dynamic ice cream market. In my view, nothing embodies the feeling of ‘reality’ better than the moment when you experience a dream come true. 呈真 [chéng zhēn] will deliver the most authentic taste to you and help you experience the wonderful feeling it brings.” states Senior Naming Consultant, Melissa Zhang.

Nothing against lawyers, but I don’t know any who could have done this, in any language.

Risks for foreign companies doing business in ChinaMy post yesterday, How to Do Business in China AND Sleep at Night, highlighted a very thoughtful comment from an experienced China businessperson. That businessperson emphasized how his China business philosophy is to figure out the laws that apply to foreign companies doing business in China and comply with them.

As China lawyers, my firm wholeheartedly agrees with that sort of philosophy. We have to. We are hired to help our clients discern China’s laws and how to comply with them. If a company is comfortable with violating Chinese law, they don’t have a lot of need for a China attorney. Yesterday’s post concluded with my saying the following:

Yes, scrupulously following the law in China can at times be difficult and expensive, but it is the ONLY way to achieve long term success there. It also is the only way — at least for most people — to sleep soundly at night.

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Bottom Line: If you want to succeed in China and avoid legal problems, work with the right people and do things the right way. It is that simple. The foreign company doing business in China that operates this way will virtually never get into trouble in China.

A reader who clearly did not like this blog post left the following comment:

It bothers me that you’re a victim of confirmation bias and don’t seem to realize it. You ONLY hear when people have problems. And, let’s face it, there is a tone of “you deserve all the grief you get, you morons!” running through the posts. It’s like this blog is a form of therapy to allow one man to vent his anger at being forced to be highly paid to deal with problems.

This attitude is sorely lacking in real-world, shoe leather experience. What do you do when you call the labor bureau about your question, and they just shrug and tell you “chabuduo”? What do you do when the tax bureau can’t even get you the right forms to file in a timely manner? Or when there’s one strict, expensive standard for foreign companies and another totally lax standard for local companies? One that will drive you out of business if you actually follow it? Or, or, or, a thousand times or. “Go bankrupt” isn’t an option so let’s just eliminate that one already, shall we?

As mentioned in yesterday’s post, just about whenever we talk about foreign companies getting into any sort of trouble in China, we get emails from readers who accuse us of exaggerating. This comment hints at that by accusing us of unrealized confirmation bias. We do not dispute that as attorneys we get contacted a lot after companies have already had a China problem, but by the same token, most businesspeople do not reveal these sorts of problems openly, so there is a confirmation bias going the other way as well. But be that as it may, all we do here is report on what we see and we see a whole lot of foreign companies get into big trouble in China for not following the law. Does anyone really believe this is not the case?

I really don’t know how to respond to the accusation that I believe people “deserve all the grief” they get because they are “morons.” you morons, other than to say that I do not feel that way at all. I also am not the least bit angry at “being forced to be highly paid to deal with problems.” I love my job and I actually find it more interesting to help extricate companies from problems than helping them prevent them. Anyone who accuses me otherwise on this doesn’t know me.

But enough about me; let’s examine the substantive portion of this comment.

The reader asks “what do you do when you call the labor bureau about your question, and they just shrug and tell you “chabuduo”? First off, we don’t just go to the labor bureau with a question. We go to them with a question and with our own analysis of how we see the answer, based on our extensive legal research. When you go to a Chinese governmental body like this, it is the rare time where they give you no answer at all. And in those rare instances, we analyze the situation and give our client our best recommendation, based on a totality of the circumstances.

The reader also asks what do you do “when there’s one strict, expensive standard for foreign companies and another totally lax standard for local companies?” We have written about this situation many times on here and the answer is that you follow the law. Pretty much every country (and even state and city) favors its locals. If you are a foreigner, that is just a cost of doing business, not an excuse for violating the law unless you are willing to pay the penalties for doing so. We have never said that businesspeople in China have no choice about abiding by the law there. Of course they do. But our job as lawyers is to be clear about what the law is and what the risks are for not following it. If someone wants to take those risks, it is entirely up to them, but they should not shoot the messenger for calling out the risks.

And here’s the thing. The commenter is right that there are plenty of times where a foreign company simply cannot operate profitably in China and abide by its laws. See e.g., Buying A Chinese Company? Why China Deals DON’T Get Done. In those sitautions, we examine the alternatives, which often include things like licensing or distribution or other sorts of contracts/agreements that allow the foreign company to take its product or service or name into China without having to go into China at all. In a recent post, entitled, Uber Couldn’t Make it Alone in China, Why Do You Think You Can? we explicitly discuss how foreign companies are often at a disadvantage in China and we lay out concrete alternatives:

Chinese companies will almost always (though not always) be able to maintain lower cost operations in China than a Western company and so Western companies without other advantages generally don’t succeed in China. For some of the reasons why this is so, check out Buying A Chinese Company? Why China Deals DON’T Get Done. I guess all I am saying is that companies — especially SMEs — should not be so quick to demand “full control” over what they do in China (via a WFOE or a Joint Venture), and should think longer and harder about how they can stick their toes into China via licensing deals and distributorships. See Negotiating with Chinese Companies: Distribution Agreements with no Joint Venture Required.

Our China lawyers get calls all the time from America, Australian, and European companies seeking our help in getting them out of China by extricating them from their joint venture or by helping them close down their WFOE. But I truly cannot remember an instance where we have been called to help a company get out of a well crafted China licensing agreement or China distributor relationship. Of course, the lack of these calls may be due in equal parts to the fact that getting out of a contract — especially one at the end of its duration — is usually a piece of cake, but still.

So yes, we fully realize that operating a foreign company in China is usually very difficult. Our solution to that, however, is not to advocate that people just ignore the laws and risk massive penalties and even jail, but that they figure out how to profit from China in other — fully legal — ways.