I was interviewed by a reporter yesterday who is doing a story on legal pitfalls for companies doing business in China.

I listed out some of the more common ones that American companies in China encounter, including the following:

At the conclusion of my litany, the reporter said something to the effect of “why does anyone do business in China at all?”  My response was because of the opportunities and then I told her of how I think that about 90 percent of my firm’s clients actually do quite well in China.  I then mentioned that I thought that virtually every AmCham survey reveals that American companies in China have higher profits there than in the United States.  I then talked about how everything is relative and that overall and as compared to most other emerging market countries, China is a relatively easy country in which to do business.
That was borne out for me today upon reading the World Economic Forum’s latest Global Competitiveness Index (2013-2014), which ranks China 29th out of 148, right behind Ireland and right ahead of Puerto Rico (since when did Puerto Rico become its own country?).  Not bad.
The report has this to say about China:
China leads the BRICS economies by a wide margin, well ahead of South Africa (53rd), Brazil (56th), India (60th), and Russia (64th).25 The Chinese institutional framework is improving slightly (47th), but weaknesses—including corruption (68th), security issues (75th), and low levels of accountability (82nd) and ethical standards (54th) among businesses—remain. In addition, problems endure in those areas that are becoming increasingly important for China as it becomes wealthier and can no longer rely on cheap labor: its financial market (54th) is undermined by the relative fragility of the banking sector; technological adoption by firms (86th) and by the population at large (79th) remains very low; and the efficiency of its goods market (61st) is seriously undermined by various barriers to entry and investment rules, which greatly limit competition.  On a more positive note, China’s macroeconomic situation remains favorable (10th). Inflation was back down to below 3 percent in 2012 (from 5.4 percent the previous year), the budget deficit is moderate, China’s public debt-to-GDP ratio at 22.9 percent is among the lowest in the world, and the gross savings rate represents a staggering 50 percent of GDP. However, this rate is probably too high in light of the need for China to rebalance its economy away from investment and toward more consumption. Although China receives good marks in health and basic education (40th), the assessment is more negative when it comes to higher education (70th) because of China’s low tertiary education enrollment, the average quality of teaching, and an apparent disconnect between educational content and business needs (54th). Finally, China’s innovation capacity has been improving recently, but much remains done for it to become an innovation powerhouse.
Seems about right to me.  What do you think?

As China steps up its enforcement of its customs laws, it is becoming increasingly important for foreign companies doing business in China to understand those laws and how they are enforced. This is the final part of a four part series of posts by Shawn Mahoney designed to help you avoid China customs problems.  Go here for Part I, China Importation 101, which dealt mostly with the core concepts related to importing product into China.  Go here for China Importation 101. Part II, which mostly discussed China’s Harmonized Tariff Schedule and the similarities between China customs laws and US and EU customs laws. And go here for China Importation 101, Part III, which mostly deals with how to deal with China’s General Administration of Customs (GACC).  This post examines the most effective ways to communicate and interact with AQSIQ (The General Administration of Quality Supervision, Inspection and Quarantine).  Here is part IV of Shawn’s series:

Though just about everyone is aware of China Customs (GACC), many foreign companies doing business in or with China know little or nothing about the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ). This lack of knowledge is dangerous, as AQSIQ has more power than GACC in many aspects of importation approval. In today’s post I will introduce AQSIQ as an institution, with some brief advice on how best to interact with them.

AQSIQ is most widely recognized for its oversight of food/beverage products and scrap materials, yet it controls, directly or indirectly, thousands of products including:

  • Chemicals
  • Cosmetics
  • Any item which requires a CCC Mark
  • Items that require compulsory inspection
  • Specialized machinery like Refrigerators

All told, AQSIQ has 19 internal departments and 15 separate “affiliates” and it manages the administration of the Certification and Accreditation Administration of China (CNCA) and the Standardization Administration of China (SAC). AQSIQ has 35 Entry-Exit Inspection and Quarantine Bureaus (usually known as CIQ’s), nearly 300 branches, more than 200 local offices, nearly 3500 laboratories and tens of thousands of employees in China to assist with its mandate. To quote AQSIQ’s own website:

AQSIQ participates in the planning and checking of national ports opening up to the outside world. According to the relevant law, AQSIQ formulates the List of Entry-exit Commodities subject to Inspection and Quarantine of Entry-exit Inspection and Quarantine Agencies. AQSIQ administers the inspection and quarantine clearance for the entry-exit goods related to environment, health, animal and plant health, and human safety, and for transportation means and personnel. At ports, an inspection and quarantine clearance management model is applied to entry-exit goods, that is, “Inspection application first, and customs declaration second”.

According to the Law of the People’s Republic of China on Import and Export Commodity Inspection and its implementation regulations, AQSIQ carries out inspection and supervision on import and export commodity and its packaging and transportation means. AQSIQ conducts legal inspection, supervision and administration over commodities included in the List of Entry-exit Commodities subject to the Inspection and Quarantine of Entry-exit Inspection and Quarantine Administrations, and conducts sampling test over the non-listed commodities.

As evident from its own description, AQSIQ is responsible for inspecting and supervising the import and export of ANY product specifically listed under its authority and for sample testing non-listed commodities. I am always saying “Inspection application first and customs declaration second” to clearly signify how AQSIQ has greater relevant authority than GACC for all products in which it has been given statutory oversight. Yet virtually every month a company already exporting products to China will contact me with no knowledge about AQSIQ and no idea why AQSIQ has authority over their products.

Much like GACC, AQSIQ has become a much more efficiently run and managed institution over the last decade, especially in the last five years. However, it has not developed a professional relationship infrastructure like the Customs MCME system. This only heightens the importance of discovering in advance if AQSIQ has oversight over your product(s) exported to China. If it does have that authority, it is vital to learn as much as possible about the specific law and regulations pertaining to your product before you begin exporting it to China. Once you have acquired this knowledge, it is important to reach out and create a relationship with AQSIQ in the Chinese ports and cities in which your products will be imported and used. Depending on the circumstances, your WOFE office or your customer would work on creating this relationship.

Although there is no MCME system in place for directly working with AQSIQ, several laws have recently been enacted requiring registration by all exporters and importers in certain product categories, with the most notable being all food and beverage imports starting in 2012. This required registration allows foreign companies a foot in the door to create a working relationship with AQSIQ.

I will leave you with an example of the value in knowing the regulatory details regarding your product and in having a relationship with the appropriate branch of AQSIQ. A few years ago, I was working with dozens of customers in a specific part of the food industry. One customer in particular had an ongoing problem exporting one of its more valuable food products to China. Over the course of five years, AQSIQ had rejected every sample and order shipped by our client. Even though both the importer and exporters tests showed they were in compliance, AQSIQ continually claimed the product was outside the allowed limits for nitrate and nitrite.

We offered to assist our client in finding a workable solution to this ongoing problem. We quickly identified the AQSIQ standard allowing only three testing methods for nitrates and nitrites, two of which were never used in the US. Our next step was to approach a customer outside of the largest ports with a good working relationship with their local CIQ. Via this relationship, we approached the local CIQ and after several days we were able to agree among the three parties to:

  • Use the exact same testing method (the one we use in the US),
  • Use the same quantities of solution
  • Use the same fluid to create the solution
  • Share all test results

In the end, all tests came back nearly identical and all showed that the product was well within China’s standards for both nitrate and nitrite levels. Because of this, our customer was able to ship its product to China on a consistent basis for the first time in six years. This result would not have been achievable without the intercession of someone with an ongoing relationship with AQSIQ and a thorough understanding of the rules and regulations pertaining to that specific product.

China is evolving and certain things that were “no big deal” five years ago are a big deal now. Dealing with China customs law is a prime example of that.

My law firm does not generally handle routine customs matters, believing that they are better left to non-lawyers who specialize in that; it just usually does not make economic sense to pay lawyers rates to have someone figure out custom codes and tariffs.  This is true for China as elsewhere around the world.  However, we gladly represent foreign companies that are being asked to explain something to China customs at risk of a major fine or going to jail.  In fact, we pretty much think any company that fails to use an attorney for that ought to have their collective heads examined.  Until a few years ago, we averaged maybe one or two such matters a year, but in the last couple years, our average is closer to one a month and we attribute that change solely to stepped up enforcement by China customs.

So if you are a foreign company doing business in China that involves importing products into China (or exporting, but less so), it behooves you now more than ever to get things right.  You can make sure to get things right regarding China customs and avoid having to pay for a lawyer or you can get into trouble with China and have to deal with the attendant risks that go along with that and pay a lawyer to try to fix your problem.  I know some lawyers don’t like my analogy here, but it really is no different from changing the oil in your car’s engine.  You can do that regularly at a relatively low cost or you can fix the engine every few years when it blows.

This is part one of a four part series of posts on import trade compliance in China that is designed to help you figure out how to avoid the huge cost of having to fix your China “engine.”  I asked my friend Shawn Mahoney to write this series of posts because Shawn (a non-lawyer) just flat out knows China trade compliance because he has been living and breathing it for nearly a decade.  Here’s part I of Shawn’s series:

 

There are thousands of stories, many of which we’ve read here at China Law Blog, of companies attempting to sell into China before understanding the legal and regulatory environment for their product. Importing into China is one of these often-overlooked areas, specifically, the rules and regulations as they apply to individual products. In my experience, the importation process creates more issues and lost revenue over time than any other day-to-day activity involved with selling into China.

From the inception of your idea to enter the China market, to the daily grind of fulfillment and sales, there are three keys to getting your goods into the commerce of the PRC.

First, understand the importation process and how it should be performed for your specific product before you ship anything (even samples). DUE DILIGENCE.

Second, if you are importing your own products into China, your relationship with China’s importation regulatory institutions is vital to your success. If you are not the importer of record for your product, see point one.

Third, always make sure your paperwork is correct before you ship, especially with samples and new products. This includes keeping up to date with new laws, regulations and enforcement rules for your industry.

The rest of this post will focus on the core concepts vital to understanding the Chinese importation regime. The next post will concentrate on understanding the ins and outs of the actual importation process, with the final two posts looking at the why and how of creating strong relationships with The General Administration of Customs (GACC) and The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ).

When first selling your products to China there are a few core concepts, that if understood, will make speed bumps out of potential mountains.

1)    All products brought into China require an import license. The importer of record is not necessarily your customer, but the entity that has the import license (like a trading company).

2)    Many products require additional paperwork or special licenses to be imported.

3)    There is an actual list of products that require compulsory inspection (Import and Export Commodity Compulsory Inspection Catalogue).

4)    You cannot abdicate your responsibility to understand import regulations to the importer of record. Even if you have no operations in China and sell Inco Terms this side of the Water (or even CFR/CIF China port), your company is still liable and can be punished if your products are imported illegally or incorrectly.

5)    The law in China is always written to allow extensive leeway for Ministries and departments to enact their own regulations and enforcement mechanisms.

6)    There is an assumption behind all enforcement that you must prove your stated content or claims. For example, you cannot simply send an MSDS sheet with no testing to verify your claim of content.

7)    GACC and AQSIQ are the front lines of enforcement, many other agencies, departments and Ministries allow these two entities considerable freedom in how they enforce specific regulations at the border.

Got a call the other day from an American company wanting to sell its food products into China. And fast.

The problem this company is facing is that one cannot “just” sell food into China immediately. To sell food legally into China, Foreign companies must first pass certification before China’s General Administration of Quality Supervision, Inspection and Quarantine, better known as AQSIQ (中华人民共和国国家质量监督检验检疫总局).  The food company told me that its research had revealed that it typically takes around a year to secure this certification, but that someone in China was promising they could do it in “around six to eight weeks.”

The food company was calling me (based on a referral) to hire us to secure their certification in “six to eight weeks.”  My response was essentially as follows:

If your research is telling you that it typically takes a year, there is absolutely no way we can do it in eight weeks.  Maybe we can do it in ten months, but that would only be if absolutely everything goes our way.  In fact, we do not even do this sort of work because there are plenty of really good companies that do nothing but assist foreign companies in securing AQSIQ certification and you should contact some of those. You do not need a lawyer for that; you just need someone experienced and honest.

As far as the company that is claiming to be able to get your AQSIQ approval in six to eight weeks, RUN away.  And fast. That company is doing one of two things and neither will be good for you or your company.  It is either paying bribes or it is going to fail.

If it is paying bribes, you are paying bribes because it is your agent and let me tell you, if the Feds sue you for an FCPA violation, I’m not going to want to be the lawyer to stand in front of the jury and explain how you had no clue that the extra fees you were paying this company was going to be used illegally to speed up a foreign registration.

Let’s just say this company succeeds and you jump to the front of the line and get your AQSIQ certification.  Do you want to always be at risk of having Beijing pull your AQSIQ certification when it finds out what happened?  I don’t know what the chances of that are, but I know they are considerably higher than zero.

If that Chinese company is not paying bribes, my worry is that it will simply pocket your funds and disappear.  Trust me when I tell you I have heard many stories about this sort of thing and companies that offer to pass on bribes are prime candidates for stealing.  Or, at best, it will succeed in about a year and just have all sorts of excuses as to why it took so long.

Retain a good company and do it right. Trying to cut corners just isn’t worth it. This holds true for doing business in China in all areas, not just AQSIQ.

The American company thanked me and vehemently agreed.

The Wall Street Journal recently did an article entitled, “Beijing Scolds U.S. On Quality Control Items From GE, Deere Are on List of Imports China Deems Shoddy” on how China is trying to draw equivalencies between safety problems of Chinese products and China’s rejections of U.S. products. Really?

The article is based on an interview with “Li Changjiang — China’s most senior quality control official and head of the government’s 30,000-person inspection service, the General Administration for Quality, Supervision, Inspection and Quarantine. (AQSIQ)” Li presented a list of “defects and dangers” found in products shipped by U.S. companies. Close inspection of the list shows not much is there.

For example, Mr. Li cited shipments Hummer models H2 and H3, manufactured by General Motors and imported into China by unknown third-party suppliers. Mr. Li says these vehicles did not meet Chinese safety requirements due to the shape of their front headlights. “These Hummers were not manufactured according to Chinese standards, so there are serious hidden dangers to use these automobiles on Chinese roads,” according to a written statement provided by Mr. Li’s agency. Does anyone even for a moment believe these Hummers are less safe than these Chinese cars?

And if these cars fail to meet China’s automobile regulations, should not responsibility for that lie with the non-GM company that imports them? General Motors justifiably defends itself as follows:

“Any vehicle imported by General Motors into China or any other country would meet the certification and licensing requirements,” Mr. Laird says. “We certainly don’t support third parties importing the vehicles because the sorts of issues the government is raising can and do occur.”

Another example given by Mr. Li is also instructive. Chinese quality-control inspectors discovered a broken crankshaft on a cotton-picking machine made by Deere and Aqsiq blamed it on a design defect. Deere then replaced the parts on all 100 of the cotton-picking machines it sent to China. Deere’s position:

Ken Golden, a spokesman for Deere, of Moline, Illinois, said the company recognized a “quality issue” in a particular engine model that had been used in the 100 cotton pickers delivered to China. The problem had the potential to affect the engine crankshaft, although Deere was told that only one machine had actually failed, he said. The company replaced the part on all the machines “even though the probability of engine failure was low,” Mr. Golden said. “This was not a safety issue,” he said, “and at no time could the defect have endangered the users of the equipment.”

So what we have here is Mr. Li comparing small product problems in U.S. goods that do not appear to impact human health or safety with the spate of “active adulteration that has marked some of the Chinese export cases, in which factory owners have substituted chemicals in components of drugs and pet food to save money.” We also have real American companies stepping in and explaining what occurred and seeking to make things right, as opposed to the many instances of Chinese companies all but disappearing after problems arose.

I am not for a moment putting all Chinese manufacturers/producers in the same heap as those who have been in the news of late for product problems, but I think it is a big mistake on the part of Mr. Li to essentially minimize what those companies did. I have frequently argued China’s product safety problems need to be solved by both Chinese manufacturers and American importers, having a government essentially minimizing the problem can only put a damper on positive change. In addition to that, some of the Chinese adulteration rose to the level of criminality and government is required for that.

Mr. Li, you are not giving me a good feeling about Chinese products.