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.

Doing Business in China lawyersWe recently wrote two posts (Doing Something China Doesn’t Like? Don’t Go There and How To Avoid Getting “Detained” in China and Why Your Odds are Worse than you Think). Whenever we blog about foreign companies getting into trouble in China, and especially when we write about foreign personnel being detained or held hostage in China, we receive angry emails from readers. These readers always insist that we are exaggerating the problem and that China is pretty much perfectly safe.

These angry readers have a point. They have a point because it is a really small percentage of foreign companies doing business in China that get in big trouble in China and that is because it is a very small percentage of foreign companies doing business in China that do anything that will get them in big trouble in China. The big question I always have though is what percentage of those doing those thing that will get them in big trouble in China end up getting into big trouble in China? That is the percentage I think is much higher than people realize. And I say that because it just seems that a large percentage of companies our law firm turns down as clients because of how they intend to operate in China are eventually forced to leave China.

But enough with the negative. This post is going to focus on the positive. A very experienced China businessperson, Ward Chartier, left the following comment on here the other day:

Based on what I’ve read since repatriating from China and what I observed in the seven years I worked there, many Western businesspeople regard doing business in China as a sort of Wild West, anything goes situation. This is exacerbated by Chinese nationals hired as consultants or general managers saying things like, “If you want to be successful, this is how we do things in this district. No, it doesn’t meet the requirements of the law, but this is how we get things done here.” “But what about auditors from Beijing?” the hapless Westerner asks. “The mountains are high, and the emperor is far away (old Chinese maxim).” the consultant replies.

The media doesn’t help by reporting on malfeasance in China, thus encouraging readers to think that money (bribes) and influence will pave the way towards success and riches doing business in China.

What worked for me was scrupulously following both the law and the local regulations, involving the local government bureaus in any legal and regulatory gray area decisions to gain their input before taking action, and treating Chinese employees absolutely correctly. Doing these things fully avoided very unhappy surprises from the government.

Thank you Ward for advertising exactly how my law firms’ China lawyers conduct their legal work in China and exactly how we advise our China clients to conduct their business in China. 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.

Oh, and just to follow up a bit on what Mr. Chartier says about advice from locals (or in this case ersatz locals) I strongly urge you to read one of my favorite blog posts of all time, Your Chinese-American VP Don’t Know Diddley ‘Bout China Law And I Have Friggin Had It.

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.

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.

One of the most common questions our China attorneys get asked, is “whether it is safe for me to go to China” or “whether it is safe for me to stay in China.” In light of the very recent and highly covered Crown Resorts detention, we have been getting these questions even more often of late. For more on the Crown Resorts situation, check out How To Avoid Getting “Detained” in China and Why Your Odds are Worse than you Think and Doing Something China Doesn’t Like? Don’t Go There, and for more on getting held hostage in China, check out China Hostage Situations With a New Twist).

As lawyers, we have to answer both questions pretty much the same way, which is that we have no way to quantify the exact risk of someone being detained by either the Chinese government or by some private Chinese party using (or not using) the Chinese government for the detention, but detentions happen a lot more often in China than widely realized and it would no doubt be safer to wait out your problems from the safety of your home country or from a country near to China but not China.

In the end, the risk assessment will usually be up to you.

China Lawyers for foreign companies doing business in ChinaIt is not uncommon for foreign companies doing business in China to brag about how they have not been forced to comply with a particular Chinese law. Much of the time when our China lawyers hear this sort of thing, our response is that there are many laws in China that are not vigorously enforced until they are. And oftentimes they get enforced at the worst possible moment, like when the foreign company seeks to engage in a new and different transaction or get money out of China, or pay taxes.

I was reminded of this the other day when a friend of mine wrote me the following email, regarding the same sort of thing happening regarding newly enacted requirements for factories in China to export their products:

Are you aware that China Customs has issued a new edict requiring all 加工贸易 companies to provide a renewed 商务証 and that in order to get this they (or some other agency) has specified that we must have current land title, workplace safety certificate, environmental certificate and fire safety certificate? If not, you will be hearing more soon. Most of the factories in China cannot come up with all of these because they are illegal. The s**t has really hit the fan here in ________ over this and the edict is said to apply to the whole of China. It was announced in the last week of August and came into force on 1 September and nobody can open a new customs book 手册 until they can come up with the documents.

I have been in my current factory, which is in an industrial park and owned by the local government (镇), for _______ years and just discovered that although my land title is okay, they actually built ___% of the park over farmland. One consequence of this is that they have never been able to issue a proper fire safety certificate, which actually I never knew I needed because they do regular inspections and sign off on something or other. But the fire hydrants in the factory have never been connected and I never understood the reason until now. They were unwilling to explain the real reason and have just fudged all these years saying that it was going to happen soon. Now the chickens have come home to roost. One of the problems is that, as well as being illegal, the underground reticulation system that feeds into the factory fire fighting systems was substandard because the officials seem to have pocketed much of the budget that was set aside for it, probably in the form of kickbacks from the contractor. So all have dirt on their hands and want to keep this quiet. At this stage it seems they have come up with a fudge-around solution in cooperation with the next level up (区) and so I can probably get the docs I need. I hope so. Anyway typical s**t that we have to deal with here, although this one is a magnitude more serious because without the right to import we are out of business.

The problem in China is that you never know what it is that you do not know until it is too late. The say here that the “water is deep” and that is certainly the case when it comes to the doings of the local authorities.

One of the China stories I love telling is of an American company that retained my law firm many years ago to form a WFOE in a fairly remote part of China. This American company had a Chinese General Manager based in that remote city on whom it relied for pretty much everything. Early on in the WFOE formation process, it became clear that there was a lot of tension between how our China lawyers wanted to form the China WFOE (completely by the book) and how the Chinese General Manager wanted to form the China WFOE (really quickly and without dealing with most of the formalities). So at some point we put it to the American company: either give us full control over how this WFOE formation is going to be done or just fire us. Because having us involved and paying lawyer fees to do this “the Chinese way” (the General Manager’s term, not mine) makes no sense at all. The American company agreed with our assessment and told us that it had to go with its General Manager because without that person it would have no Chinese company. We parted on very amiable terms.

So amiable in fact, that about two years later the owner of the American company wrote me to say that though it had managed to get the WFOE formed really easily and really quickly, Beijing had come in and audited the local government and shut down a bunch of improperly formed WFOEs, including theirs.

Bottom Line: You can fool some of the people some of the time, but eventually, if you are not operating legally in China, there will come a time when you will pay the price for that. The Chinese government has stepped up its law and order efforts and that has meant that time is coming more often these days for foreign companies doing business in China.

China lawyersAccording to the media, Chinese authorities have detained a number of Australians from Crown Resorts for gambling-related offenses and have launched a criminal investigation into their actions. According to the Australian Financial Review, It appears that 18 Crown Resort staff have been detained, including three Australians, “as other foreign casino operators…scramble to safeguard their China-based staff.” The Crown staff were detained in a series of overnight raids “in an apparent crackdown on illegal marketing by offshore casinos.”

This news is relevant many companies doing business in or with China. I say this because our firm constantly hears from companies that have personnel in China that market some product or service (oftentimes an internet service) from China that is illegal in China. I repeat: many foreign companies have sales people and executives in China who market products or services in China that are illegal in China, with offshore and foreign casinos just one example.

To be clear, we have no knowledge regarding Crown Resort outside what we read in the mainstream media.

There are many things illegal in China (either completely or just for foreign companies) that are widely legal elsewhere, with the following just those that quickly pop into my head:

  • Gambling
  • Certain types of education services
  • Certain types of internet services
  • Certain types of communication services
  • Many publishing services

Many foreign companies get around China’s laws prohibiting their business by operating all or a large portion of their business outside China. But if you have people working for you (either as employees or otherwise) in China or if you are marketing to China, your people may be at risk for getting “detained” in China. I know I am being vague here, but for many reasons that is deliberate, so sorry.

Our China lawyers are constantly being asked to provide legal risk assessments to companies that may be skirting the edge in China (yes I know I am again being vague here). One of their most common questions is “should I go to China.” Our most common answer — by far — is no, because we simply cannot quantify the risks of their getting detained, nor really can anyone. As attorneys, we are going to be extremely cautious because the last thing we want is for us to give carte blanche to someone going to China and then having that person detained.

We tend to be a bit more positive about our clients going to Hong Kong, but even for going there we are not willing to unequivocally say yes. The below is a brief excerpt from one of many memoranda we have written on the issue of going to Hong Kong in the above (vague again, I know) sort of situation:

This memorandum addresses the risks of _Mr. __________’s going to Hong Kong. Our conclusion is that we see __________’s going to Hong Kong as a low risk endeavor.

If _________ were to travel to China, there is a risk his presence would be reported to the police. If this happens, an arrest could occur. Though it is not possible to quantify this risk, the risk is not low. There is always a very slight chance of spillover risk from the PRC to Hong Kong. However it is important to note that to date, the Hong Kong authorities have not cooperated in China’s _______ crackdown and we have not seen anything to indicate that they will. Though we are not prepared to say that Mr. ________’s going to Hong Kong is wholly without risk, we do not believe the Hong Kong authorities are following the situation with _______ in the PRC and we do not believe that they would do anything to _______ in Hong Kong even if they were to become aware of _________’s situation in the PRC. We also do not believe the PRC would seek Hong Kong’s help against someone from a company like _______. So again, we do not see much risk in Mr. _________’s going to Hong Kong at this time.

We often are asked to give similar legal risk assessments for clients involved in legal disputes with Chinese companies and our advice in those situations is usually (but definitely not always) short and simple: it would be better if you can delay going to China until you have resolved your dispute.

The thing that gets to me about all of this though is how so many companies either have no clue about their risks or willfully choose to ignore them. One of our China lawyers loves to tell of how he met an expat bragging in a bar about his China business and when our lawyer told him that what he was doing was flat out illegal, the response was that the Chinese government didn’t care and actually wanted this sort of business in China, the written laws be damned. And everyone else at that table joined in on this sentiment. Just a few years later this person was arrested and convicted and served not insubstantial time in a Chinese prison.

The area where we see this most often and the area where there is far too little concern is taxes. China is cracking down hard on foreign companies that make money from China (especially those foreign companies that have “independent contractors in China) and do not pay their taxes in China. If you want to operate this way, at least recognize your risks and act accordingly. See China’s Tax Authorities are After You, an article I wrote for Forbes Magazine on how China is stepping up its tax collection efforts, especially as against foreign companies with China-based “employees” but no China company. Most foreign companies though are either blissfully unaware of those risks or downplay them.

If you or your company are doing anything remotely marginal in China, step back a minute (really for at least a few hours) and ask yourself whether what you are doing or about to do is really worth it. I know this sounds simple, almost trite, but far too often hard-charging businesspeople fail to ask this question.

I love telling a story about a long-time client and friend. This person’s business empire stretches across at least four continents and his net worth has to be well north of twenty million dollars. Many years ago he mentioned that he would be going to Iraq the next week to finalize the negotiations on some big construction deal. When he told me this, I immediately told him of how I had met a businessperson who went to Iraq and never came back. I basically asked my friend why with the entire world available to him (and with three kids) he was even considering going to Iraq. He poo-pooed my concerns but then called me back the next day to say that he had given my advice more thought and he had cancelled his plans.

I am not telling you to be afraid of the world, nor am I telling you not to take risks. I am just saying that before you jump, familiarize yourself with where you will be landing.

For more on what can happen to you in China legal difficulties there, check out the following:

Bottom Line: Pause and think before you act and pause and think before you go.

What are your thoughts?

China employment lawWhen the employment relationship ends between a China employer and employee, there are always a few things the China employer should do. One of the most important things you as an employer must do is provide your soon to be ex-employee with a Proof of Termination of Employment Relationship document, transferring the employee’s files and social insurance, and completing any relevant other procedures required under the law. Failing to provide such a document gives your ex-employee a near-perfect basis for suing you.

What does this document do? It evidences the termination of your employment relationship. Why do you have to provide this document? Because your employee probably needs it to prove his or her employability. On the flip side, you should require all your new employees provide you with such a document before you hire them. China employees also need this document to claim unemployment benefits and if your delay in getting them this document causes them delay in collecting their unemployment benefits, you are legally responsible for those damages.

Regardless of why the employment relationship has ended, you must perform your legal obligations by providing your former employee with a proof of termination document. It is not relevant that the termination was amicable. Under China’s Labor Contract Law, failing to provide this document subjects the employer to both administrative corrective orders and to having to pay the ex-employee any damages suffered because of your failure to follow the law. If you don’t want an employee suing you for his or her inability to get a new job, you should provide this document to all of your leaving employees as soon as you possibly can.

This document typically must specify the term of the employment contract, the date when the employment contract was terminated or ended, the position the employee held, and the number of years of service the employee put in for the employer. It is important to be careful not to go much beyond this because the more you put in, the more likely what you wrote could “backfire” on you. By way of just one example: your ex-employee who is leaving voluntarily asks you to do them a “favor,” by stating in that document that you unilaterally terminated the employment contract, with the excuse being that they do not want to look like a job-hopper. You go along with this and then he or she flips around and sues you for unlawful termination.

Because a well-crafted Proof of Termination of Employment Document is and should be brief, it will not include enough to protect you as the employer. It does not address why the employee left employment. It does not address any statutory severance the employer may owe. Finally, it does not address any future claim the employee might bring, which claims are being brought more and more often, particularly as against foreign employers. See China Employment Arbitration: Good Luck With That Battle.

A proof of termination document is primarily done for the benefit of the ex-employee and the next employer, not for the employer. For this reason, it usually makes sense for you as the employer to get your departing employees to sign a settlement/severance agreement. Though this agreement can also serve as proof of termination of employment relationship, it goes beyond that. It should ensure that you will not get sued by your ex-employee one week, one month or one year down the road. Such an agreement should make explicitly clear that the employee is releasing the employer and any of its affiliates from any future claims that could be brought by the employee. This agreement should be in Chinese (the official language) as well as in English (for your reference). You should not submit this agreement to China’s labor authorities, and, in fact, we usually recommend that it contain hard-hitting confidentiality provisions. You must follow all your internal procedures in having this severance document executed by both parties and it should also comply with and work under China’s employment and contract laws. I will write more about this in future posts.

Bottom Line: When your China employee walks out your door for the last time — no matter what the circumstances, you as the employer need to do a whole host of things to make sure that you do not see that same employee walking through a court door a few months later.

How to negotiate with Chinese companiesIn this series of posts I am 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 have called the “courtship” phase. The second post considered what Pye has to say about the Chinese tendency to prefer agreements on generalities. In this third post I examine what he has to say about specific Chinese negotiating tactics.

According to Pye, Chinese negotiators tend to use the following tactics:

Open with flattery — In response to flattering remarks the foreigner feels compelled to give an enthusiastic affirmation. The foreigner is then called on to give an emphatic denial of a feigned, self-deprecating remark. This puts the foreigner on the back foot from the outset.

Operate on two levels — There is the manifest level of bargaining about the concrete and there is also the latent level at which attempts are made to strike emotional bargains based on dependency. Chinese negotiators seek relations in which the foreigner will feel solicitous toward China, thus implicitly becoming a protector and more a superior than an equal.

Focus on mutual interests — Westerners like to think of themselves as conciliators. The Chinese tend to reject the principle of compromise and prefer instead to stress mutual interests. When mutual interests have been established it is easier to ask the foreign party to bear a heavier burden without protest.

Use meetings as seminars — Negotiations are seen partly as information-gathering operations. Foreign competitors are played off against against one another to extract maximum technical intelligence from presentations. Negotiating sessions are used frequently for training purposes. The foreigner is encouraged to perform so as to impress the passive Chinese host. The obliging guest entertains in repayment for hospitality and brings “gifts of knowledge”. Put simply, Chinese companies often claim to want to do a deal with you when all they really want is to get access to your technology or know-how. I cannot stress enough how often our China lawyers see this sort of situation.

Blur the lines of authority — You can’t tell who reports to whom or where the apparent leader fits in the hierarchy of the Chinese company. Negotiating teams tend to be large but the lines of authority are diffuse and vague. Chinese negotiators are often unsure of their mandates and of the probable decisions of their superiors. They therefore tend to give inaccurate signals about the state of negotiations. Foreigners persist in trying to find a particular person who has command authority at each level. In China it cannot be assumed that power is tied to responsibility. Proof of a person’s importance often lies precisely in their being shielded from accountability.

Never say “no” — Chinese negotiators will frequently seem to be agreeing when they say something is “possible” but often this is an ambiguous way of saying “no”. They will often respond with silence to a proposal and then at a much later date suddenly return with interest.

Never telegraph their next move — Chinese negotiators don’t telegraph their next moves through displays of emotion. The level of friendliness or impersonality remains the same whether negotiations are heading for success or failure. This brings surprises. Warm and progressively friendly meetings can lead to disappointing outcomes. Chinese negotiators are quite prepared to end meetings or negotiations on a negative note. As negotiators often have little authority they often find it prudent to maintain a negative attitude. At the same time, apparently disinterested negotiators can suddenly announce that a positive agreement is possible.

Exploit Chinese members of the foreign team — Ethnic Chinese associated with the foreign team will be sought out in the belief that they are naturally sympathetic to China. Our China attorneys have also seen many instances where an Ethnic Chinese person on the foreign side is accused of disloyalty for not siding with the Chinese side in the negotiations — always in Chinese, of course.

Use “shaming” — Chinese negotiators may be quick to point out “mistakes” in an effort to put the foreign party on the defensive. There is a deep belief that people will be shattered by the shame of their faults so there is a tendency to make an issue over trivial slip-ups and misstatements.

Make big asks — Chinese negotiators often have no hesitation in presenting what they must understand are unacceptable demands. These demands are often accompanied by a hint that they will be withdrawn in return for only modest or symbolic concessions. Extreme language is often used to obtain symbolic victories.

Stall — Chinese negotiators are masters of creative use of fatigue. They have, according to Pye, great staying power and almost no capacity for boredom. These traits keep foreigners’ hopes alive. This approach may also reflect lack of experience, bureaucratic problems or a subordinate’s fear of criticism from above. Conversely, when agreement reached it is often the Chinese who become impatient for deliveries by the foreigners. For more on this tactic, see Doing Business In China Requires Patience. Don’t Just Be Leaving On That China Jet Plane.

As I have said before, Pye never moralizes or suggests there is anything wrong with the Chinese approach. He merely points out how different it is from the typical Western approach, leaving readers to conclude that foreigners ignore or disregard Chinese negotiating tactics at their own peril. This is certainly consistent with our view that one should not rush to blame the Chinese when things go wrong.

In my final post in this series I will outline Pye’s tips for foreigners when negotiating with Chinese companies.


Softwood lumber disputeI recently spoke on the U.S. Canada softwood lumber dispute at an American Chamber of Commerce in Canada event. I was subbing for my colleague Bill Perry who could not make it because he was in China. My talk focused on the history of the dispute, its key issues, and most importantly, what will likely happen if new AD/CVD petitions are filed and investigations initiated. This post builds off my presentation and it focuses on how China will affect the next round of the US-Canada Lumber wars, expected to start this week.

For the past ten years, the United States and Canada have abided by a 2006 agreement that regulated Canadian lumber imports into the United States with a system of export fees and quotas triggered by specified average US market price points. That 2006 Softwood Lumber Agreement is set to expire this week and with that expiration, a coalition of U.S. lumber producers is expected to immediately file a fifth round of antidumping (AD) and countervailing duty (CVD) petitions seeking US government investigations to determine whether Canadian lumber is unfairly dumped or subsidized and is injuring the U.S. domestic lumber industry.

Many of the issues in this fifth round of the US-Canada Lumber trade war likely will be the same or very similar to issues raised in the previous four rounds. US lumber producers will likely allege that Canadian lumber producers benefit from a wide array of government grants, loan guarantees, tax preference schemes and other subsidies provided by the Canadian federal and provincial governments. The US lumber producers will contend that these subsidies give Canadian lumber an unfair competitive edge.

The primary issue remains whether Canadian lumber is unfairly subsidized by the Canadian system of “stumpage rates,” which is the price paid for the right to harvest lumber from provincial land. Since most Canadian forests are on “crown” land controlled by the Canadian provinces, Canadian stumpage rates are primarily set by each province. Since most US lumber is harvested from privately owned land, US stumpage rates are primarily market determined through competitive auctions. US lumbers producers are unhappy with the benefits Canadian lumber producers allegedly receive from the provincial stumpage system.

This next round of lumber dispute will likely be more than just a simple replay of previous lumber investigations since there have been a significant developments since the last round was settled in 2006. Two China-related developments in particular could have significant impact.

First, China has been the most targeted country for US CVD investigations; the US Department of Commerce (“DOC”) has conducted about forty CVD investigations against China since 2008. In many of these CVD cases against China, the DOC calculated very high subsidy margins, often based on aggressive interpretations of CVD laws and regulations. The CVD investigation practices developed by the DOC in these Chinese cases will likely be applied in the next Canadian lumber CVD investigation. The DOC will no doubt conduct its CVD investigation against Canadian lumber mindful of how it might affect on-going and future Chinese CVD cases. Unlike past Canadian lumber CVD determinations where CVD margins never exceeded 20%, the DOC could very well calculate a much higher than expected CVD rate in Lumber V.

The other significant post-2006 China-related change is the growth Canadian lumber exports to China. In 2006, 82% of Canadian softwood lumber exports went to the United States. By 2011, the United States received only 53% of Canadian softwood lumber exports. China in particular became a significant market for Canadian lumber, much of which was from British Columbia.

In addition to developing alternative export markets (like China), a number of Canadian lumber producers have developed alternative production options by acquiring US lumber mills. As of 2015, major Canadian lumber producers (such as West Fraser, Canfor, and Interfor) now own more sawmills in the United States than in Canada, and they are now also among the top ten largest U.S. lumber producers.

Canadian lumber producers that now have the option to ship their lumber within the US from their US sawmills and to export their Canadian lumber to China are going to be well-positioned to withstand settlement terms demanded of them by the US lumber industry. At a minimum, the new cadre of Canadian lumber producers with China and/or internal US options will almost certainly make it harder for Canadian lumber producers to unify around a common negotiating position against their US counterparts.

China’s influence on even Canada-US timber relations will no doubt be felt.




China trademark registrationClients often ask us whether they need to register their company name as a trademark in China. As I am the product of an American law school, it’s hard to resist the gravitational pull of responding with “it depends,” but in this instance I have little difficulty. English-language company names have virtually no protection in China. If you don’t want someone else to use your company name in China, you should register it as a trademark.

It’s true that in order to form a business entity in China (e.g., a joint venture, WFOE, or representative office), you must select both a Chinese name and an English name for the entity. But only the Chinese name has any legal relevance. That name needs to be approved by the State Administration of Industry and Commerce (SAIC) and cannot conflict with preexisting company names. The English name, on the other hand, is just a trade name that appears on your company chop. It does not need to be approved, and you can change it at will. It has the same amount of protection of any trade name used without registration: virtually none.

Even your Chinese-language name won’t have any protection as a trademark. Although company formations and trademark registrations are both under the umbrella of the State Administration of Industry and Commerce (SAIC), the departments do not have any meaningful cooperation. A third party could register your entity’s Chinese name as a trademark, and you could register a third party’s trademark as your company name. But because a company’s legal name in China often has little in common with the company’s trade name, most people only care about the latter.

If you haven’t formed a business entity in China, then you have no presence other than the names you use on your products or services. For some companies, like Coca-Cola and McDonald’s, the company name is the brand, and they very much want to protect that name. For other companies, like National Amusements (the parent company of Viacom and CBS) and Yum! Brands (the parent company of KFC, Taco Bell, and Pizza Hut), the company name is not the brand, and they are perhaps not as concerned about protecting it. You’ll have to make that call for yourself.

China has a well-publicized exception that affords protection to “well-known” trademarks even if they’re not registered in China. But as we have written numerous times, this exception is almost never available: unless your company is named Coca-Cola or Nike, you are not well-known. Companies often push back against this and argue that they are well-known in their country among people who know their industry, and that makes their company name well-known. But this is not the standard. For a mark to be considered well-known in China, the mark must be generally known throughout China. Take a big American toy company like Hasbro or Mattel. Most Americans have heard of those companies, even if they don’t follow the toy and game business. But if we stopped 100 people walking down the street in Nanjing, how many do you think would be able to correctly identify either company?

The only protection for your English-language company name in China comes from registering it as a trademark with the Chinese Trademark Office. Relying on any other method is just magical thinking.

China employment lawsThe PRC Ministry of Human Resources and Social Security recently released a set of rules regarding providing public notice of China employer labor violations (《重大劳动保障违法行为社会公布办法》). The goal of these new rules is obvious: it is intended to deter employers from violating China’s labor and employment laws and regulations. These rules are set to take effect on January 1, 2017 and will apply to all China employers, domestic and foreign. The following rulings/decisions on employer violations of China’s labor laws may become public:

  • Failing to pay “substantial” employee remuneration
  • Failing to pay an employee’s social insurance and the circumstances are “serious”
  • Violating the laws on working time or rest or vacation and the circumstances are “serious”
  • Violating the special rules on protecting female workers and underage workers and the circumstances are “serious”
  • Violating the child labor laws
  • Causing significantly bad social consequences due to violations of labor laws
  • Other serious illegal conduct

Neither “substantial” or “serious” are anywhere defined.

When publishing these labor law decisions, the following information will be released to the public (with exceptions for national security, trade secrets or individual privacy):

  • The employer’s full name, integrated social credit code/registration number, and address
  • The name of the legal representative or the person-in-charge
  • The main facts of the violation
  • The decision made by the authorities

The above information will be published on the labor authorities’ portal as well as in major newspapers, magazines and TV and other media each quarter at the city/county level and twice a year at the provincial and national level. This information will go into the employer’s credit file on integrity and legal compliance and may be shared with other governmental departments. The employer can file a petition with the relevant labor authorities if it does not agree with what has been published and the authorities will render a decision within 15 working days and notify the employer. If the published information has been modified or withdrawn according to law, the relevant authorities will modify the published content within 10 working days.

The rules are not very detailed, which comes as no surprise. China’s local human resources and social security bureaus will be responsible for implementing these rules and they presumably will have considerable discretion in how they do so. Note though that they don’t get to “cherry pick” what to publish: if a violation meets the applicable standard, it will be published.

Beginning January 1, 2017, if a China employer commits a serious violation of Chinese labor and employment laws, it may be made public by the labor authorities. Make sure you are in compliance and you stay in compliance. And if you do not know whether you are in compliance, figure it out. NOW.

To say we are concerned for our clients for whom we do not conduct regular employer/employee audits is an understatement. It is getting progressively more difficult for foreign companies doing business in China to compete with domestic companies on hiring Chinese workers and a foreign company that gets public excoriated for employer misconduct will no doubt find it even more difficult and expensive to find good workers. We see far too many foreign companies doing business in China with little to no clue about its employment laws. Some still believe China today is the same as China a decade ago, where unhappy employees could be “bought off” with a month or two of wages because they knew they could (and they did) easily move on to another job.

Those days are over and we fear foreign employers will be disproportionately singled out for public approbation.

As we have been pointing out pretty much since we started this blog, going after foreign companies in China is simply good politics. It always has been and it always will be. Read Machiavelli.  Read Sun Tzu.  Read Animal Farm.  Read 1984. Just look at what pretty much every country in the world does.

And going after foreigners virtually always picks up during economic slowdowns, for generally political reasons. Just look at the U.S. election.

Many years ago, in a Wall Street Journal entitled, “China’s Slowdown and You,” Dan Harris, one of the China lawyers at my firm, asserted, among other things, the following on doing business in China during a slowdown:

  • The Chinese government “is much more concerned with social harmony than with economic numbers” and that is why it is continuing to encourage wage growth even though higher wages make China’s factories less competitive.
  • China’s prioritization of its citizens’ contentment means China is going to get tougher on foreigners, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny.
  • The key to weathering China’s slowdown will be for foreign companies to go back to basics: think afresh about what your company contributes to China’s economy and how that is likely to shape policy makers’ opinions; focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level.

Way back in 2006, in a post entitled, URGENT ALERT: Register Your Company In China NOW, we issued our first “urgent alert,” noting a crackdown on unregistered companies doing business in China and stressing how foreign companies are never going to be treated like domestic companies:

Long ago, when I was a young lawyer, I wrote an article entitled, “Four Essential Principles of Emerging Market Success,” positing that a failure to abide by the law in the country in which you do business is the surest way to lose your business without any basis for complaint:

In many emerging market countries, local businesses take advantage of corruption to avoid complying with laws. This may work for the locals, but it won’t work for you. The easiest way for a local rival to drive you out is for you to do something illegal. Neither you nor your government will have good grounds to complain if your rival gets your business closed down due to your illegal activity. It might even be your own partner who reports you so he can assume full ownership and control of your business.

The strength of my views on this has only increased as my firm has been contacted far too many times by companies driven out of countries for having engaged in illegal conduct no different from thousands of other foreign companies in the same country.  These companies assume they have legal redress, but in reality they almost never do. So long as the law of the country in which the company was operating allows for closures and/or penalties (and in every such situation my firm has encountered, it has), the company is essentially out of luck.

There was a time where most foreign business was illegal in China, particularly as a Wholly Foreign Owned Enterprise (WFOE).  Those days are pretty much over now and the Chinese government knows it.  If you came into China as a representative office (rep office) back when that was the only way, and your “registered office” is engaged in business activities that are improper for such an office, the time is now to get that right also.

If your local people in China are telling you this is not how Chinese business is conducted, you need to remind them you are not Chinese and the government will treat you differently.  Also remember that your employee’s knowledge that you operating illegally in China gives them tremendous leverage.

Then in 2007, we wrote of this same disparate treatment issue back in the context of China’s environmental laws, in a post entitled, “China Warns Foreign Companies On Pollution“:

China has always and will always (at least for the foreseeable future) enforce its laws more strictly against foreign companies than against domestic companies. I am constantly writing about this not to complain about it, but simply to point out the reality. Just because your Chinese domestic competitors are getting away with something does not in any way mean you will be allowed to do so.

Beijing is also now at the stage where it is pretty much neutral about all but the largest foreign companies remaining in China. I am not saying it is neutral about foreign direct investment (FDI) in general, but I am saying that it really could not care less about whether your individual business stays in China or goes. And if your business is a polluter, it actually would probably rather see you leave.

Lastly, going after foreign companies is politically popular.

We ended that post with the following:

Bottom Line: Obey the law, particularly the environmental laws. It is good business.

Certainly the same is now true with respect to China’s employment laws.

Similarly, in China Fines Unilever For Mentioning Price Increase. What That Means For YOU, we noted how foreign companies doing business in China cannot expect to be treated like Chinese domestic companies:

As long time readers of this blog know, one of our consistent themes has always been that foreign companies in China should not expect to be treated the same as Chinese domestic companies, no matter what the laws may say. The reality (not just in China) is that it is usually good politics to go after foreign companies and it is usually bad politics to go after domestic companies. The reality also is that when a large number of citizens have a particular problem, it is very good politics for the government to show that it is trying to solve it.

Don’t end up on social media for violating Chinese labor laws: the costs will be high. For more on how to handle the employer-employee relationship in China, check out the following:

Just get it right!