China employment lawyer

The below is a transcription of an interview of Grace Yang on Legal Talk Radio. Grace heads up our China employment law team and the interview deals with the coronavirus’s impact on China employers and employees.

But more than that, it movingly and powerfully deals with the big picture issues arising from the virus. I listened to this interview twice and was so touched by it that I posted on my law firm’s Slack message how proud it made me to have Grace as a lawyer in our firm. I know I am gushing here (which is not something I ordinarily do), but really love this interview and I cannot urge you strongly enough to LISTEN to it as listening will convey so much more than just reading the automated transcription below. There is just so much to be gained by listening to someone like Grace — who loves China and cares deeply about the people there — speaking from the heart about what is happening there.

So please, please, please go here and give it a listen.

 

Craig Williams (Host): 
Welcome to the lawyer to lawyer on the legal talk network. I’m Craig Williams.

It was first identified in early December, 2019, a novel strain of coronavirus now renamed by the world health organization as COVID-19 and it comes from Wuhan where it was first found and it’s attracted the attention of the world and as of February 10th, 2020, more than a thousand people have died. Tens of thousands of others have been infected, fears, continue to mount, disruptions to trade and travel are being felt around the world, and there’s a rising volume of misinformation about the outbreak.

Well today on Lawyer to Lawyer, we’re going to discuss this new coronavirus/COVID-19 outbreak. We’re going to take a look at the real picture of what’s happening, the overall impact on travel and business and China’s new rules for dealing with that virus. To help us explore this topic, we have attorney Grace Yang who works out of Harris Bricken’s, Seattle and Beijing offices. Grace is Harris Bricken’s lead attorney on China labor and employment law matters and she’s the author the book, The China Employment Law Guide. Her international background gives her a deep understanding of both American and Chinese cultures as well as their legal systems. She also writes for the China Law Blog, which can be at www.chinalawblog.com. Welcome to the show Grace.

Grace Yang (Guest): Thank you, Craig. Thank you for having me here.

Craig Williams: We’re very glad to have you. Can you give us a little bit of the background behind the COVID-19 outbreak — where it started, how it started? There has been a lot of misinformation about this virus and I’m hoping you can help clear some of that up for us.

Grace Yang :  The outbreak started from Wuhan at a seafood and meat market there that has since been closed down. This is where the first cases were discovered, and like you said, there has been a lot of misinformation and this is because the Chinese government’s initial reaction was to cover up the whole picture. And then the virus spread really fast and the Chinese government has since then been doing its best to try to control the situation and prevent the epidemic from getting even worse. But it’s been really tough.

Craig Williams: From seeing the construction of a hospital in 10 days, it seems China is throwing all its resources against this.

Grace Yang: Yes, it has. China is a complex country. It’s incredible that it can build a hospital in 10 days, but it’s also the control Beijing is trying to assert; it’s trying to basically control how the information flows and what people see and this is also incredible and I mean this not in a good way. I personally think it could put even more efforts into caring about its people rather than just focusing on enhancing its control.

Craig Williams: Well, there have also been some videos where we’ve seen some pretty rough handling of Chinese citizens where they’ve been forcibly taken from their homes and quarantined. There have been stories about caregivers being quarantined and then the person receiving the care died. That’s so different than what we would see. At least we would like to think we would see, between the cultures. Can you help us understand the difference in the cultures to explain that? It’s hard, I think, for Americans to understand the kind of forcible behavior we’re seeing on television.

Grace Yang: I think it has less to do with cultural differences and more to do with how the Chinese government is, in trying to control its people and control how how others view it. It is heartbreaking to see that Chinese people — ordinary people — are not being treated as, as people! So it’s shocking too. I’m from China originally, but when I hear stories like the one you were just saying , that pains me to. I can’t even imagine the pain . . . . and you know how scared and frustrated and angry the Chinese people have been. Especially those who a forced — especially where they have been hit the hardest within China.

Craig Williams: What kind of information are the people getting about this outbreak?

Grace Yang: There is a lack of accurate information. There is no free press. There’s no free flow of accurate information. They are getting the pictures that are  painted by Beijing, the central government there. And they know that because in today’s world it’s different than before. People now have access to the Internet, especially people with VPNs, they can sort of see what’s out there, what’s beyond the Great Wall. And that changes things.

Craig Williams: Is China losing its control because of its citizens’ access to the internet?

Grace Yang: Yes. And that is why they have been focusing their efforts and resources on strengthening their control. So the CCP is not going to back down just because people can see what is going on outside China.

Craig Williams: What’s the danger to the rest of the world given that there’s official misinformation coming from China? I mean, do we really know what’s happening in China or is it being kept from us?

Grace Yang: I think we sort of know what’s happening there. There’s a free press outside of China. I mean, granted it’s hard to get truthful and accurate information from China. But, there are  honest reporters that are writing stories about what’s going on in China and some of them are in China telling the rest of the world exactly what is going on and that is really helpful.

Craig Williams: There have been articles that say that certain bloggers have put out videos and then their family members say they went gone missing and they haven’t been heard from. Is that actually what’s going on? Is there an independent blogger putting out presumably accurate information —  is the Chinese government then seizing that journalist or citizen journalist and taking that information away from us?

Grace Yang: Yes. Unfortunately that has been the case. I mean, not just independent bloggers. I mean even lawyers who are fighting for human rights in China have gone missing or are being threatened and their family members are threatened. That’s been going on.

Craig Williams: You spend part of your time in Beijing. Is this a danger to you to even be on this planet?

Grace Yang: Mmm, I get concerned sometimes. Thankfully I’ve been spending the majority of my time in Seattle, but I’ve got extended family in China and I’m scared for them and my family tells me to be careful about what I say on a platform like this because you know, we get monitored for everything.

Craig Williams: Well, we certainly don’t want to put you in any danger or in any position where you’re saying something that’s inappropriate. So please, you know, take care and if I’m asking a question, feel free not to answer it if it would impact your safety. So give us a little bit of perspective on the labor market — your specialty — and how this Coronavirus, COVID-19, has been impacting businesses and the travel industry.

Grace Yang: It has had a huge impact on businesses, both on companies doing business in China and with China as well. The travel industry has also been hit very hard due to the restrictions on traveling to China and within China. And there are so many migrant workers working in China that are not getting to where they should be working now, assuming that it’s okay for them to go back to where they work — their locales in China.

Craig Williams: We’ve even heard of a situation where there’s a cruise ship that can’t find a place to dock because countries are concerned there is coronavirus on board and then there’s another cruise ship that’s been forcibly detained and quarantined in a port in Japan. This has impacted every aspect of the travel industry, hasn’t it?

Grace Yang: Yes. I can imagine what the people on the ships are going through and their family members. Yeah, it’s really rough.

Craig Williams: What advice would you give travelers to China or people that are supposed to travel — just to stay away for the time being?

Grace Yang: I would say yes. Many companies have adopted policies that do not necessarily ban travel to China, but really require that employees clear with the managers of the companies prior permission to travel to China to or that will limit the amount of travel unless it’s truly necessary. Um, do not go to China.

Craig Williams: What impact is it having on the products being made in China and the goods and materials that are shipped to and from China to make those products? Are those at a standstill as well?

Grace Yang: Eerything is delayed. If an order is placed even before the Chinese New Year, I don’t think the chances are good that the buyers, the foreign buyers will be getting them, even with the factories sort of starting to open after the government mandated time off period. I mean the workers, most of the workers are not at the factories. And so I’d say the factories are not fulfilling their orders and the buyers are not getting their products. Not anytime soon.

Craig Williams: Thank you Grace. You have talked about some severe impacts with the people not working, the docks not being utilized, the products not getting shipped, materials not coming into the country, and it sounds like this is been going on for a period of time. What can we expect economically to be the effect of this as it has its ripple effect across the world?

Grace Yang:
Well, it has had a huge effect on economic activities, especially those really related to China, even in the smallest way. And The thing is, it’s not going to change anytime soon.

Craig Williams: How long can we expect this to last?

Grace Yang: We don’t know when this will end.

Craig Williams: We’ve heard estimates from president Trump that China thinks it may be finished as of April. Is that a realistic timeframe or can we expect this to last much longer than that?

Grace Yang: As much as I would like to say it will end in March or maybe April, we don’t know. No, we just don’t know.

Craig Williams: There have been some reports that the number of reported cases lessened yesterday in China by some 20%. Is that a valid assessment or do you think that we’re not really getting the true story from China in terms of the number of reported cases, or is this the type of thing that the World Health Organization and other governments just simply mandate the truth?

Grace Yang: I would not necessarily trust the information that comes from the Chinese government.

Craig Williams: How do we go about protecting ourselves from this? I mean I don’t want to be a fear-monger in the sense that we all understand what an outbreak and the possible effects of it. What should we really expect? What’s the current estimate about the effect of the virus itself on people? Are there, have there been estimates of the expected number of deaths and infections?

Grace Yang: Well, some, some measures such as having employees work from home and just trying to avoid human — any sort of close contact — as much as possible. That would help. I’m not aware of any estimates.

Craig Williams: Right. So it’s all up in the air at this point. Well, we have something to compare it to. We have the 2003 SARS where some 774 people died, but so far this looks like it’s going to be a little bit worse. Do you have an insight on that?

Grace Yang: It seems to me this is worse than the 2003 SARS outbreak. I mean like we talked about, there is just no end in sight.

Craig Williams: How long were businesses closed from the SARS outbreak?

Grace Yang: It was a long time ago, but I remember staying at home and doing nothing and not going to school for very long time back then.

Craig Williams: And that was because of the clampdown put in place in China by the government?

Grace Yang: Yes.

Craig Williams: How does this affect employees in China in terms of their pay? If they’re not working, are they getting paid?

Grace Yang: It depends on where the employees are and what the local employment laws say. Generally speaking, they should be paid at least as well, even with the business closure —  the employee should be provided with their standard wage rate in their employment contract. Iv’e heard stories and cases about employers not providing any pay to their employees and that is in most cases not legal.

Craig Williams: So for employees that are working at home, they can expect to be paid? Is that right?

Grace Yang:  Well, yes. The short answer is, is yes. If they are basically doing their normal work and the only difference is that they’re doing it at home then they should be provided with their mobile pay. The reason why I was a little hesitant was because for example, in Shanghai before the work resumption t his past Monday, February 10th, if the employee had worked back then they would get not just their normal pay but overtime pay.

Craig Williams: Right. That makes sense. What about for other countries that rely on goods being shipped from China? You know, obviously they’re are being delayed. What kind of remedies exist for that situation?

Grace Yang: I’m afraid the Chinese manufacturers have started arguing for force majeure, and the remedies available to the foreign buyers that rely on Chinese goods are kind of limited. They could try to negotiate with their suppliers to amend their agreements with the Chinese suppliers, and our international manufacturing lawyers have been doing some of this. They is so much uncertainty. The Chinese factories themselves don’t know when they will be up and running.

Craig Williams: So has China adopted new employment rules for dealing with this?

Grace Yang:  Since the outbreak China has been pretty much, coming out with new employment rules every day and many of the locales are rushing out new rules to deal with the epidemic as well. This has made things difficult on employers, given the local differences and how many rules that have come out. It’s hard to even give a summary. But the focus is on protecting employees and this is being done by putting the burden on the employers as mucha as possible to not put their employees’ health and lives in danger by having them resume work.

Craig Williams: In some situations it’s not even possible for some employees to work because there aren’t any supplies. What happens in those situations?

Grace Yang: Generally speaking, the employers are encouraged to negotiate with their employees —  to come to an understanding about possibly reducing work hours or to be put on standby for a period of time and to mandate salary payments to deal with this situation. But it’s difficult for everyone. I mean the employees don’t want to be punished for the outbreak and neither do the employers and the government position is that the parties should negotiate and come to a mutual understanding on these issues, to the extent possible

Craig Williams: Sounds to me like everybody suffers and what happens to the workers without any pay.

Grace Yang: If they’re laid off they may be able to collect unemployment, benefits and some locales have announced they will try to make this application process as easy as possible and the employee supposedly can do everything online without having to go actually go to the local labor Bureau to get this taken care of.

Craig Williams: Is this occurring throughout the entire country?

Grace Yang: It is occurring all over the country.

Craig Williams: How will the government be able to financially handle what it’s going to take to keep its workers with money to pay for food and shelter and basic necessities and yet continue to run? It seems like an impossible task.

Grace Yang: I guess we’ll see. My guess is that they will try to finance it and I’ve heard that the prices for goods have have now gone up significantly because of the outbreak, but the problem is that there is just not enough medical supplies, nor enough medical personnel and facilities.

Craig Williams: There is certainly a lot up in the air and a lot remains to be seen about what’s going to be happening,. We’ve just about reached the end of our program so I’d like to take the opportunity to invite you to share your final thoughts and your contact information for our listeners to reach out to you.

Grace Yang; Sure. If you are an employer in China, be super careful about any potentially adverse employer decision you might because everything is trickier in China right now because of the current situation. So think twice before you act. And if you have any questions, check out our blog, China Law Blog and you can also send me an email grace@harrisbricken.com.

Craig Williams: Great. Thank you very much. We’d to thank our guest attorney Grace Yang of Harris Bricken for joining us today.

 

 

Again, please, please, please go here and give it a listen.

 

international cannabis marijuana

In the past year or so, our international lawyers have seen a remarkable uptick in requests for advice and legal services related to the international cannabis/CBD trade. This business involves clients from all over the world seeking help on on import/export agreements, foreign direct investment, regulatory compliance, customs issues and everything in between. Things are evolving very fast in the cannabis/CBD industry and this is particularly true internationally.

This webinar will be hosted by Harris Bricken attorneys Adams Lee (Seattle), Griffen Thorne (Los Angeles), Nathalie Bougenies (Portland) and Vince Sliwoski (Portland) and it will cover the following:

  • The treatment of cannabis (both marijuana and hemp) under international law;
  • Import and export of medical marijuana, including customs issues;
  • Import and export of hemp and CBD products, including customs issues;
  • Considerations around foreign direct investment in U.S. cannabis businesses; and
  • Your questions.

Register here to join us on Wednesday, March 4 at 12pm PST.

If you cannot attend, feel free to register anyway and submit questions prior to the event. Adams, Griffen, Nathalie and Vince will do their best to field them, and we will post a recording of the webinar afterward.

We hope to see you on March 4! In the meantime, check out our extensive series of international cannabis blog posts, which can be found here.

In the meantime, another one of our international lawyers, Jonathan Bench, was recently interviewed by the Wall Street Journal on “China is Ready for CBD. But Regulators Might Not Be.” You can listen to that interview here and I urge you to do so. Jonathan has written frequently on cannabis and CBD in China and — coronavirus willing — he will be speaking on that issue in Hong Kong in April.

For more on China and the business side of hemp/CBD/cannabis, check out the following:

force majeure china factory

One only need read the news to understand how many Chinese factories have yet to resume operations and most that have resumed operations are not at full capacity. China factory production levels have “only reached about 30-50 per cent of capacity” and this means many foreign companies that have their products manufactured in China will not be getting the products they ordered. See The coronavirus means tense times for small business owners who import products from China.

Most of our law firm’s clients that have products made in China OR elsewhere with Chinese component parts are not at all confident of getting the products they ordered on time or even ever. They are telling us things like, “we have enough inventory to last two months but after that, it will be a disaster” or “time will tell as to when we get our products” or “we are taking a wait and see attitude.” One client told me “we will know that we will be getting our products when the products arrive at our door, not before.” But now is not the time to just sit back and wait for your products to arrive. If ever there is a time to be proactive regarding your factory production, now is that time.

If your Chinese factory is back online but at less than full capacity this likely will mean that some of your factory’s product buyers will get product while some will not. Your job right now  is to increase the odds that your company will be one of the companies that does get its product. If your factory is at 40 percent capacity, you need to do what you can to make sure your company is in the 40 percent (or so) that gets its product.

There are lots of things you can do to increase your odds, but usually the best thing is to offer to pay more. If you are paying 100 dollars per widget you might want to test whether paying 120 dollars will get you to the front of the line, because it very well might. Our manufacturing lawyers have engaged in this sort of negotiation many times pre-coronavirus when shipments were delayed for other reasons. Convincing your Chinese manufacturer that you will be with it for the long-haul is another way, but that will likely require you sign a long-term contract evidencing that.

If you are going to pay 20 percent more for your widgets you need to you want to be doubly sure you will actually get the widgets. A good China-centric manufacturing contract is of critical importance for this and that includes being sure that contract does not have a force majeure provision that will let your manufacturer off the hook for non-performance. See Do Not Let Force Majeure be a Major Force In Your China Contract and China Force Majeure Provisions are not Your Father’s Force Majeure Provision so BEWARE. See also, this recent Financial Times article, Chinese copper traders declare force majeure over coronaviruson Chinese companies invoking force majeure because of the coronavirus.

Even with a good contract, it will make sense for you to do what you can to determine your Chinese factory’s ability to actually produce and deliver your widgets. Pre-coronavirus, this would have meant sending someone to the factory to conduct due diligence, but that is obviously far more difficult now. About the best I can tell you on this score is that our China manufacturing lawyers and our China business specialists have been actively assisting our clients with this in various different ways. What we do is very much case dependent because what makes sense for a jewelry company that has its product made in Qingdao will usually be very different from what makes sense for a technology company that has its products made in Shenzhen.

What are you seeing out there?

coronavirus layoff rules

Since the coronavirus outbreak, many new employment rules have been released on both the national and local levels to cover new employment issues that have arisen due to the virus. With China’s economy significantly damaged and pressure coming from the central government to maintain stability, China employers are finding it difficult to strike a balance between employee protections and maintaining the profitability or even existence of their China businesses. Though different locales are handling their coronavirus related employment issues differently, none of them want to see employees getting laid off now.

In the United States, we are somewhat used to employee layoffs. The termination letter might say that the layoff has nothing to do with the employee’s performance, the employee will be provided with a small severance (maybe 2-8 weeks pay) and maybe some support for the laid off employee during the transition. This is a unilateral notice and it usually takes effect the same day it is provided to the employee. In other words, it does not matter what the employee says; the termination decision has been made.

In China layoffs are also a unilateral termination, but layoffs in China are very different from the U.S. For example, to initiate a mass layoff in China (defined as a reduction by twenty or more employees or by more than 10% of the workforce), the employer must meet a bunch of legal requirements (such as proving it has experienced significant difficulties in its business operation by showing its financial and tax statements etc.) and jump through a bunch of hoops (such as submitting its redundancy plan to the local labor authorities). And even if clears all these hoops, there are a still bunch of legal restrictions on things like who may be laid off and who may not—e.g., a pregnant employee. This means that in China merely sending a termination notice is far from sufficient for a mass layoff. Normally, China employers just need to file their proposed layoff plan with the labor authorities and does not need to seek the authorities’ approval on its plan. But with all that has been going on with the coronavirus in China, the employment bureau authorities in most Chinese cities are getting more proactive in reviewing and approving layoffs.

The difficulty in initiating layoffs in China at this time extends to smaller scale layoffs as well. Even with layoffs that are not large enough to constitute a mass layoff, employers cannot simply send a layoff letter to each terminated employee saying the employee is being permanently laid off, effective immediately. China employers cannot do this because a “layoff” is not grounds for an employee termination under Chinese employment laws. Instead, you as employer need to refer to a legal basis under China’s employment laws for a layoff termination. One of the commonly used grounds is that the law permits an employer to terminate an employee with either thirty days’ written notice or one additional month’s wage when the objective circumstances which formed the basis for the parties’ having executed the employment contract have significantly changed, causing the contract to be unable to be performed, and after negotiations, the parties are unable to reach agreement on amending the contract (provided the termination does not otherwise contradict the law).

So here comes the big question: can an employer say that the coronavirus outbreak and the subsequent government measures to deal with that outbreak constitute significant changes in the objective circumstances such that an employment contract can no longer be performed? The short answer is that this is simply not yet clear in most Chinese cities and at this point our China employment lawyers expect the following sort of reactions from the Chinese government to proposed and actual layoffs:

  1. The current operational problems facing employers in China due to the coronavirus is just temporary and therefore employee non-performance is also temporary.
  2. Employers have alternatives to laying off their employees in China. For example, they can pay the minimum wage to their employees who are not working.
  3. Employers should talk to the employees they wish to lay off about amending their contract and figuring out a way these employees can continue to perform under their contract.
  4. Stabilizing the workforce is China’s number one priority right now.
  5. The Chinese government has and will continue to help reduce employer burdens so there is no need to lay off workers now.

Also, don’t forget that the employer and the employee need to first attempt to amend the employment contract and only if they are unable to reach an agreement can the employer unilaterally terminate the contract on this basis. It is also important to mention that the employer bears the burden of proving it has complied with the law on any employee termination. Seeing as how terminating an employee based on the employment contract no longer being able to be performed was difficult before the coronavirus outbreak, our China employment attorneys have no doubt that it will be extremely difficult now.

Any type of unilateral termination will be viewed as problematic by China’s employment authorities at this time and, if at all possible, should be avoided.

Coronavirus Myths
Drawing by Bill Kerr.

I am writing this to update my recent post on the legal response to the Covid-19 virus epidemic in China, China’s Coronavirus Solution: More Government Control Trumps More Medicine.

In response to President Xi’s Statement on using law to combat the virus outbreak, the Beijing authorities have responded in a manner consistent with the theme of his Statement. The CCP are continuing to prioritize maintaining social stability by concealing the truth about what is actually happening on the ground than oRather over controlling the disease or providing comfort to the public. Concealing the truth will make it impossible for the Chinese government to contain the epidemic. This will be a tragedy for China, but it will (as it already has) also prove both an economic and health risk for the entire world.

In the previous post, we noted how the death of whistleblower Doctor Li Wenliang has become a focus for citizen anger at the Chinese government suppression of information about the disease. When Li and other doctors expressed their concerns about the disease, they were detained by the police and forced to retract their statements. Li’s death from the exact disease he sought to expose highlights the issue.

In response to the Li Wenliang situation, the PRC National Supervisory Commission issued a terse statement on its official website, noting that in accordance with authorization from the Beijing, it will dispatch an investigation team to Wuhan. The stated purpose of this investigation is to conduct a complete investigation of the Dr. Li Wenliang affair in response to the concerns expressed by the masses. (經中央批准,國家監察委員會決定派出調查組赴湖北省武漢市,就群眾反映的涉及李文亮醫生的有關問題作全面調查。) .

The National Supervisory Commission (CCDI) was formed in 2018 to take the lead on  President Xi’s anti-corruption drive. The Commission was formed to allow China’s national government to focus on the activities of local government due to suspicions local supervisory authorities were not acting aggressively enough in promoting President Xi’s agenda. The Commission has no role regarding the medical emergency. Its sole purpose is to project power from the Center (the CCP) down to the provincial and prefectural governments.

As we reported in our earlier post, the other major step from Beijing was to dispatch Mr. Chen Xin ( 陈一新) to serve on the central government virus control task force nominally headed by Madame Sun Chunlang 孙春兰, Vice-Premier of the State Council of the People’s Republic of China ( 中华人民共和国国务院副总理). Madame Sun is a member of the Party School faction and holds little power. Chen, on the other hand, is a protege of President Xi and it is widely believed he is in command of the working group. See Beijing pins hopes on ‘guy with the emperor’s sword’ to restore order in coronavirus-hit Hubei.

But who is Chen Yixin? He is the Secretary General 秘书长 of the Central Political and Legal Affairs Commission 中共中央政法委员会, the CCP’s top law enforcement organization. More specifically, he is tasked with leading the anti-corruption campaign on a national level. He came to China’s Legal Affairs Commission after having worked closely with Wang Huning on the Central Comprehensively Deepening Reforms Commission (中央全面深化改革委员会), where his mission was to increase the power of President Xi and the Beijing center against power in the provinces.

So the two responses we noted have the same goal. The anti-corruption authority in Beijing has been dispatched to Wuhan to contain the crisis. Some in China argue that “anti-corruption” is just a euphemism for dealing with the political enemies of President Xi. Thought there is no doubt some truth to that, that is not the real issue. The fundamental focus of the anti-corruption drive is to increase the authority of the Beijing center as against local sources of power, both within the CCP and the local governments. So the action from Beijing should be seen in that light.

The focus on power, suppression and control can be seen in what has actually happened in Wuhan after the arrival of the anti-corruption team. Consider first the issue of the response to the suppression, arrest and death of Li Wenliang. After the arrival of the CCDI and Mr. Chen, the clampdown on independent sources of information has greatly increased:

  • Citizen activist Fang Bin has been arrested and disappeared.  Note that for China, “disappeared” is a transitive verb, as in Fang Bin was disappeared.
  • Lawyer and citizen journalist Chen Qiushi has been arrested and disappeared. 
  • Censorship on all matters related to the Wuhan situation has been made absolute. See China’s online censors tighten grip after brief coronavirus respite. No information comes from Wuhan medical officials. All information is now coming from Beijing, where it is carefully controlled.
  • Chen Yixin has ordered the press issue only “happy” stories, leaving the truth unreported: The SCMP reported that, “Meeting officials on Saturday, Chen said they should make plans for “two battlefields, both online and offline, guide the consensus, strictly handle online rumours and promote touching stories taking place at the front line of preventing and combating disease”.
  • Beijing is seeking to pass off the injustice done to Dr. Li Wenliang on the local police. Even though the CCDI sent an investigation team to Wuhan, there has not been a sigle report of any person from the public security system being investigated. Members of the Wuhan health department have been removed but as was true before and during Dr. Li’s detention, Chinese government officials are instructed to detain those who speak publicly (or quasi-publicly) about the coronavirus in a way that runs at all counter to the government’s happy narrative. In other words, they are to treat people exactly the same way they treated Dr. Li.
  • This move to further suppress information has been echoed by the national government legal authorities on multiple occasions. In its recent notice on dealing with the virus outbreak, China’s Ministry of Justice emphasized that control of information, the Internet, journalism and media would be THE single primary focus. In response to the Xi Jingping Statement we reported on in our previous post, the justice officials in Beijing issued a ten point program on the legal response to the virus epidemic. It should come as no surprise to learn that its primary focus is on suppression and control: “Malicious fabrication of epidemic information, causing social panic, stirring up public sentiment, or disrupting social order, especially maliciously attacking the party and government, taking the opportunity to incite subversion of state power or overthrow of the socialist system, should be strictly punished in accordance with law.” See Chinese authorities say coronavirus control at heart of clampdown. The recent arrests of scores of Chinese citizens seeking to reveal the truth about the coronavirus situation are consistent with this program of suppression and control.

On the background of this program, the Politburo Central Committee convened a meeting on the issue on February 12. After the meeting, President Xi issued a formal statement, which can be found here, in Chinese.  This Statement makes two points: First, local officials and party members are ordered to resolve the health crisis as soon as possible. There is NO statement about how to do that or where the funding will come from to do that. Second, local officials and party members are ordered to get the economy moving so China can achieve President Xi’s goal of achieving a relatively prosperous society by year 2020. Again, the objective is stated clearly, with no details on how to achieve that objective or from where funding will come to achieve the goal.

This will produce two typical responses from local officials and party members. The first will be paralysis. In times of crisis, the Chinese bureaucracy tends not to take affirmative action; they instead usually freeze up and do nothing. They do this out of fear that any action they take will bring disaster later, as they saw happen in Wuhan. So they will do nothing. The second will be to falsely report success. Beijing demands success ,so that is what the local governments will report. The real situation will be hidden. As Mr. Chen requires, only “happy” stories of success will be released. No one will know what is really happening. This was the primary factor that lead to the Great Leap Famine. Less dramatically, this is what leads local government officials to constantly and consistently lie about their local economic numbers.

There is substantial risk that the same thing will happen with the Covid-19 epidemic.

EDITOR’S NOTE: Many of us are getting hate mail and intense criticism for our writings regarding what is really happening in China. Many of these seem to come from those who are incensed that we are providing more than just “happy” stories from and about China. Most of these accuse us of hating China and of writing what we do to somehow gain economic advantage. This is nonsense. We are writing the TRUTH about China as best we can not because we hate China, but because we care deeply about the Chinese people. Most of us have spent decades involved with China and we have friends and relatives in China and many have Chinese spouses. If you want to accuse us of these things, go ahead, but do not expect us to take these false accusations lying down. Our response has been and will be to note that those who say that about us seem more concerned about protecting China’s existing power structure than protecting the health and safety of the Chinese people.

China lawyers on social media To put it mildly, a lot is happening these days in and with China. What is true this morning about a region in China or a company in China or a factory in China, may no longer be true this afternoon. The coronavirus is making people sick and killing people. It also is disrupting company plans and actions. Our social media pages reflect all this, oftentimes with a much stronger and more controversial viewpoint then on here. It is there — free of the great firewall — that those of us who write on here can fully express ourselves, and we do.

It is also on social media where we get the most heat. It is there that we are constantly accused of hating China and being China apologists. Truth is that all of us for China Law Blog both love and hate China. We all have spent huge chunks of our lives in China and working to smooth relations between China and the rest of the world. It is from this where we have come to love China.

But we are above all else lawyers who have been trained to analyze things objectively and to advocate for our clients. All of us have been trained to give our clients the truth as best as we can and then work with them in using that truth to plan their next moves and help them enact. This requires we not be emotional or loyal to any one side of anything before we have completed our research. This requires we sometimes defend China and at other times be harshly critical of it.

Things are tough in China right now. The coronavirus is ripping through parts of the country and impacting everything and China has done a poor job in dealing with it. When the virus first struck in Wuhan, the Chinese government focused on suppressing news about it, rather than suppressing the virus itself. Even today, it is not telling the truth about the numbers. When we say this, some people get angry. When we talk about Xinjiang and Hong Kong, people get angry at us. Way back in October, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we started emphatically telling people that China had become far riskier and that they should be considering other countries to have their widgets made. Needless to say, this angered many as well. We had been beating that drum on social media before that and we have been beating it ever since. See e.g., our June, 2019 piece, Has Sourcing Product From China Become TOO Risky?

Without a doubt, the two biggest issues most companies that do business in or with China are facing these days are (1) where to have products made and what to do to prepare for the end of the coronavirus. The Coronavirus Is Wreaking Havoc on Supply Chains and companies that once depended fully on China are realizing they must diversify. Really diversify. But the coronavirus will eventually dissipate and that will create new opportunities for companies looking to do business in China or grow their business in China. And on that, we are really positive and optimistic.

We see China coming back better than before for foreign businesses. The Chinese government has been more encouraging of foreign businesses in the last few months than in a long time and we see that continuing. Some are saying the coronavirus will isolate China but we see it having the opposite effect. We see it leading to China opening up more to the world and becoming more flexible regarding foreign businesses operating on its soil. We constantly talk about these sorts of things on social media and we will be writing about them on here as well over the next few weeks. Despite all of China’s problems right now, we remain bullish on China overall.

In an effort to remain visible to our many readers in China, we are careful about what we write here on the blog. There are words we avoid using and topics we avoid discussing on here because we want our reach to include China and if China does not like something, its government has this “magical” ability to make it go away. And there is a lot China does not like these days.

Facebook and Linkedin and Twitter give us a a much greater ability to speak freely and because we have greatly ramped up what we do on social media.

Linkedin. We have a thriving China Law Blog Group on Linkedin that we maintain as a spam-free forum for China information, networking, and discussion. This group is always growing and now totals nearly 12,500 members. I urge you to join it.

We have had some great discussions there, as evidenced both by their numbers (some have gotten more than 100 comments) and by their substance. Our discussions range from people asking and trying to answer questions like, “why is it so difficult to do business in China” or ”what do I need to do to get my Chinese counter-party not to breach my contract” to the ethereal, like “when will we know China is taking innovation seriously?” Mostly though the focus is — not surprisingly — on doing business with China or in China.

The members of our Linkedin group are fairly evenly split between those who live and work and do business in China and those who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and other countries in Asia. Some of our members are international lawyers and some are China lawyers, but most are businesspeople and some are academics (students or professors). We have senior level personnel (attorneys and executives) from large, medium, and small companies and tons of mid-level and junior personnel as well. This diversity enlightens the discussions, though, honestly, I sometimes wish the discussions were more rigorous than they are, but I attribute the lack of discussion rigor more to the location (a group on Linkedin) than to anything else.

What truly separates us from most (all?) of the other Linkedin China groups is that we remove anything that smacks of spam or is not relevant for those doing business with or in China. We have become so proficient at shutting down spam that hardly anyone even tries to sneak spam past us anymore. Our hewing to such a tight line on what we permit means we do not get a large volume of postings, but this also means we do not waste people’s time. If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to and join our China Law Blog Group on Linkedin. The more people in our group, the better the discussions. So please do join us there.

Individually, many of us post often on there about China matters and we are also all always accessible there. You can find our China lawyers and China trade specialists on Linkedin as follows, some of whom post there more than others:

My personal Linkedin page has just a shade under 10,000 followers and that has led me to post more often there on all things China. I welcome new followers and new connections, though I warn you that I tend to be slow in responding to connection requests. I promise not to overwhelm you with posts: I post roughly 3-5 times a week.

Facebook. Our China Law Blog Facebook page, is thriving as well and heading towards 25,000 followers (this is its number of “likes”). We use Facebook to post interesting, important and entertaining articles about China. Posts there get a lot of comments and discussion, often heated. We tend to be very open and opinionated and free-wheeling there. With so much going on with China and Hong Kong these days, our Facebook page has become a key source. I urge you to go there and “like” us so you can benefit from what we are doing there. Plus, I really want us to get to 25,000 likes!

I am also now posting a lot on Twitter at @danharris. I left Twitter for many years but I am now happy to be back as I enjoy the sheer immediacy of it. I most definitely do not hold back there but I also post on non-China things from time to time.I welcome more followers there as well.  I also urge you to check out and follow Fred Rocafort from my firm on Twitter as well, (@RocafortFred). Until recently, Fred was living in Hong Kong/the PRC and his tweets (oftentimes in both English and Spanish) do a great job of bridging the various gaps between HK, the PRC and the West. Jonathan Bench (@jonathan_bench), who spent around five years living in China and now splits his time between Seattle and Salt Lake City, is also a frequent poster on Twitter about all things China and I urge you to follow him as well. We also have a China Law Blog feed, @chinalawblog and it would be great if you were to follow that too.

Many of us are also on WeChat and I will be doing a separate post on that once I gather up the requisite information on who among us is active on that social media platform as well.

We look forward to discussing China with you online!

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I have been a huge fan of Jim Boyce since 2007. Jim has lived in Beijing at least since then and while there he has frequented pretty much every bar and restaurant worth frequenting and he has probably written at least something about pretty much each of them. Jim is the brains behind BeijingBoyce an amazing and long-standing website on Beijing’s bar, nightlife and food scene, World Baiju Day,, a website on Baijiu and Grape Wall of China, the best and most influential website on China’s wine industry. If you are interested in any of these topics, these sites are a must read. Even if you are not interested in any of these topics, they are still worth reading because of the insight they provide into China.

I also follow Jim on Facebook, both because we are friends and for his great insights on China, mostly Beijing. His Facebook page has been a great source of information on what is going on in Beijing during the coronavirus and his most recent post on this is so good that I feel compelled to post it below, word for word. It is on what is going on with Beijing’s bars and restaurants and I have zero doubt that it is accurate and zero doubt that it is important and when i say important, I mean really important and important way beyond the Beijing bar and restaurant scene. It is important because it describes an important snippet of life under the coronavirus and it also describes an economy on the brink of disaster. No, I take that back. It describes an economy that is barely functioning.

Many of the big investment houses are saying things like how China’s economy could suffer as much as a one percent decline in GDP growth in 2020. In other words, it’s GDP growth might decline from around 6 percent to 5 percent. Whenever I read that sort of prediction (which is often), I figuratively throw up my hands and mumble either, “they are just guessing,” “liars,” “bullshit”, or “they have no clue.” From all that I am hearing from those I know who are in China and the steady stream of emails I get from people I do not know in China, there is hardly any economy to speak of in China right now. We are not talking about “maybe” a one percent decline in GDP growth. No. We are talking about what I have to believe is more like a 20 to 30 percent decline. We are talking about an economy that is not really functioning.

Why then are the investment houses getting this so wrong? I’ll tell you why. Because it is in their own self interest to do so. China will recover from this horrible virus and when it does, most of its industries will come roaring back. The American company that has not ordered ten million dollars worth of widgets this month will do so when the virus ends — if it has not moved its manufacturing elsewhere in the meantime. See Manufacturing in China Got You Down? Make a Run for the Border. The Spanish company that chose not to set up in Shanghai last month because of the virus will set up in Shanghai a few months after the virus has ceased to spread. See Opportunities for Spain After the Coronavirus Situation Ends. These investment companies know this and they want to be in the Chinese government’s good graces when it happens. They want to be able to say to the Chinese government and to Chinese companies, “look here, we had your back  (by essentially lying for you) during the difficult times, so now let’s do business together.”

Because my law firm’s clients, past, present and future, overwhelmingly come from the United States, Canada, Australia, and Europe, it is much easier for us to just tell it like it is. Because we are an international law firm (and not just a China law firm), we make money from our clients going into China AND from our client’s leaving China and going into Thailand or Spain (where we have offices) or Mexico (where we will soon have an office) or Poland or Colombia or Vietnam or wherever. We are country neutral.

Now if you are saying, sure, China’s economy is hurting right now, but pretty much everyone agrees it will come roaring back when the coronavirus threat settles down and that will be within weeks, I have to wonder where you are getting your information. Sure, President Trump is saying that the coronavirus will “miraculously” go away by April due to the heat, but, like so much of what he says, he had little to no factual basis for saying this. Sadly, there is a chance that it will just keep going. See Can Coronavirus Be Crushed By Warmer Weather? So it may end in March or April or May or June or July, or it may not. Obviously the coronavirus’s economic impact will depend on when it is defeated or at least greatly reduced and we simply do not know when that will be. As of right now, is spread is only accelerating. See Coronavirus Cases Seemed to be Leveling Off. Not Anymore. The huge pile of unknowns about the Novel (it is called that for a reason) coronavirus means any economic prediction for China is just guessing.

Back to Jim Boyce and his latest Facebook post. Here it is (below), word for word. Note also that the picture above comes from Jim’s Facebook page as well. Does this sound like an economy whose GDP might decline just a little? Draw your own conclusions.

 

Beijing’s restaurants and bars are being hit really hard by the coronavirus crisis. Many are closed. Others remain open, often with reduced hours and menus. They all face evolving rules as the situation mutates.

I’ve talked to many food & beverage trade people these last few weeks and done a lot of reading, and I’d like to post some stuff I’ve heard and info I’ve gathered. I don’t claim to be an expert on any of this, I’m just sharing things I’ve learned.

  • Beijing Evening News reported last week that only 13% of the city’s 87,000 food venues were open during the epidemic. Global Times pegged the catering sector loss at USD72 billion nationally as 93% of restaurants shut over the Chinese New Year holiday break.
  • I write a lot about wine in China and many sales are linked to entertaining. Losses are big: one top distributor said sales will fall 80% this month and 50%+ next month. Trade fairs, tastings, classes et al are postponed. Good luck finding many Chinese wine tourists in Napa or at Australian wineries, where they are usually major forces.
  • The Beijing authorities recently banned group dining, such as company and birthday parties. Even small gatherings are frowned upon. Events like quiz nights and open mic nights have been canceled at the bars I frequent.
  • Based on talking to a dozen-plus owners / managers, and F&B WeChat groups, the current rule seems to be groups of no more than three people, placed at least one meter apart, and taking up less than half of the venue’s capacity.
  • Owners told me they must now record the temperature and name / phone number of customers. Restaurants risk fines for staff not wearing masks, not following disinfection rules, etc. Some have closed rather than to deal with these issues or the pressure of authorities.
  • Some venues are also closed as staff have not returned from holidays and are stuck in distant cities. Some have started or boosted delivery services to get revenue flowing. Rent is a big factor and some have received relief from landlords while others still hope.
  • Here are direct quotes that typify what I’m hearing from Beijing restaurant and bar people.
  • Bar: We want to protect our staff. We haven’t closed for one day during the past ten years, so this was a really hard decision.
  • Bar: It will impact us and many other bars & restaurants. It will take a long time to recover. I think in general people will be afraid to go out.
  • Restaurant: It’s not looking good. My staff can’t even return to Beijing as some of their villages are locked down. And when they return, they are required to do a two-week self-quarantine.
  • Wine: The year is gone. Big losses. Some people will be out of business for sure.
  • Restaurant: The impact has been severe. Revenue has dropped 95%.
  • Wine: For sure, the first quarter is done, and things can only come back gradually. The ones who still have cash flow [and can hold out] will win in the end.
  • Bar: I feel very sad but what can we do? We can only try out best. I hope everyone will be be okay.”
  • Restaurant: “Our workers cannot come back. They are all blocked because of coronavirus.”
  • Bar: “Even [bar name] is closed today. I don’t think they’ve ever closed before.”
  • Tough times. I really do hope all of my friends in the food and beverage scene can keep jia you-ing until this crisis is over. Got a favorite restaurant or bar or a wine company? Give them some business today. Order a meal for delivery or grab a drink or stock up on some bottles.

UPDATE: Got a Qingdao update saying that hardly anybody is going out and at all there because they “don’t want to encounter another human being.” This is in a city without a single case of Covid-19 infection.

UPDATE: This CNBC article says that China’s textile factories are operating at less than 10 percent capacity right now.

UPDATE: Got this report this morning (2-15-2020) from Dongguan. It’s even worse than you and your friend think it is. I’ve lived here since 2009 and I’m currently in DongGuan, population 9 million. It’s a ghost town. Every restaurant, grocery store, shop, and small business is closed. Every shopping mall is closed, and there’s one on every corner. Here’s what the article is missing: what happens when all those retail businesses can’t pay their rent? And what happens when the tens of millions of people who work in them can’t pay their mortgage? And the four other houses they bought for investment purposes (because they are going to get rich) can’t find renters, and they can’t pay those mortgages either. And, all the big office bldgs built on spec, certain that businesses will move in on Day 1?  Real estate is the Achilles heel here.

UPDATE: Jim “Beijing” Boyce has updated his facebook post by adding considerably to it and it can now be found on his Beijing Boyce blog here. I urge everyone to read it.

I also note that I have been getting a ton of heat on social media for this post, mostly from Chinese saying that I have no right to write about their country and that I should instead be writing about my own country and saying I hate China. I mention this because I find this hugely ironic because the bulk of this post comes from someone who is staying on in China through the coronavirus and is so loyal that he urges people to order from their favorite restaurants so as to keep them afloat. Enough with the anger, people, we are all in this together against the virus. Don’t get mad at those who are just reporting on (or even analyzing) what is happening.

UPDATE: Got the below from a foreigner (not from the United States) in Zhongshan, “a small county of 3 million, up the Pearl River halfway between Guangzhou and Hong Kong.”

In a 45 minute walking radius, which includes the Central Business District, virtually nothing is open. All banks are closed. All retail stores are closed. All coffee shops are closed. The only places open are convenience stores, drug stores, some bakeries, a produce market, and supermarkets. Some small restaurants are open, but only for take out business which is very little. The shopping malls are dead. Nothing is open at the malls except for the supermarket.

All the parks are closed, so you can’t even go out and sit on a park bench.

You are required to wear a mask if you leave your home. I live in a gated community, which uses a check box card system for anyone leaving the community. Those who are working have a card that allows them to leave once a day. For all others, each household has a card that allows one person in the household to leave every second day to buy necessities.

Everyone’s temperature is checked both when they leave the community and when they return. It is also checked at the produce market and at the supermarket. My temperature is checked between 2 and 5 times a day.

The worst is the palpable fear. Friends wear masks while visiting. There is no contact on greeting, such as a handshakes. Aside from close family, people are uncomfortable being less than 1 meter from anyone.

The fear is so deep that I don’t think there will be a snapback. It will take a long time before people will feel comfortable gathering in groups. All the reunion dinners, company gatherings, and family gatherings will take a while before they return to normal. Until they come back to normal, I don’t see the Chinese economy coming back to normal.

 

FARA Registration Lawyers

We Americans do not like foreign governments meddling in our domestic affairs, but our laws permit some activities if they are disclosed. This is the third of three posts (first post here and second post here) regarding non-governmental (not to be confused with “NGO”) economic and political agents who operate and exert influence on U.S. soil on behalf of foreign governments and quasi-governmental groups. Often lawyers, lobbyists, and consultants are the types of individuals involved with representing the interests of foreign clients, but those categories are not exclusive. These entities and individuals are considered “foreign agents” under the U.S. Foreign Agents Registration Act (“FARA”), and as foreign agents, they are required to register and update their registrations regarding each foreign client.

In a prior post, I predicted that FARA would soon bite those working on behalf of China:

You may also be wondering why those working on behalf of China as foreign agents have not been involved in FARA prosecutions at this point, while there have been plenty of criminal economic espionage cases brought against those stealing trade secrets for China (see here) by the DOJ. Based on the current state of affairs, you can believe that foreign agents operating on behalf of China will be in the crosshairs next.

FARA was recently in the news again: 35 US Lawmakers Seek DOJ Probe of Chinese State-Run Paper China Daily (and here) for its involvement in disseminating CCP propaganda under the brand China Watch, with articles being published in The Wall Street Journal, The New York Times, and the Washington Post, among others.

Here is a brief overview of the various FARA registration documents (found here at), all of which are filed electronically here.

Registration Statement. This is the primary registration form that must be filed by each foreign agent. The form centers on the registrant (the foreign agent) and not the foreign principals the foreign agent represents, though the foreign agent is responsible to report information on its foreign principal clients. The information required is not overwhelming, but this form and the following forms have some nuance to them, and you need to know exactly what actions you will be taking on behalf of your foreign principals so that you can describe them accurately and consistently across all of the forms.

Exhibit A. This contains information on the foreign principal you represent. If you represent multiple foreign principals, you must file one Exhibit A for each of them.

Exhibit B. You will attach your written engagement letter with the foreign principal to this form, and if you do not have a written engagement letter, you will need to describe the arrangement. You also need to describe your activities on behalf of the foreign principal, which includes determining whether your activities constitute “political activities,” meaning any activity that you believe will or is intended to influence any U.S. “agency or official” or “any section of the public within the United States.” If you are only helping the foreign principal engage with non-U.S. political actors, then you may not be engaging in political activities. You still need to register if you are acting as public relations counsel or political consultant to the foreign principal, both of which are broad categories.

Exhibit C. No printed form is provided, but you are required to provide a copy of your charter documents and bylaws. To a corporate lawyer like me, the request of “bylaws” seems unnecessarily narrow and should include shareholder agreements and operating agreements to provide a full view into how decisions are made within your company and who are the key players. But for now you only need to provide articles and bylaws if you are a corporation and only the certificate or articles of formation if you are an LLC (and nothing if you are a partnership that has not filed a certificate or articles of formation).

Amendment to Registration Statement. If the attorney general’s office requires you to make changes after submitting the Registration Statement, you will use this form. You are also responsible to use this form to update any information that becomes inaccurate after you file the Registration Statement, including minutiae like the list of employees, contractors, etc. working on each project and whether your activities on behalf of the foreign principal differ from those initially reported on the Registration Statement.

Short Form Registration Statement. This will be filled out and signed by every individual and entity that is a partner, director, or officer in your business, along with each employee, agent, consultant, or subcontractor involved in the work on behalf of the foreign principal.

Supplemental Statement. This is a detailed form like the initial Registration Statement, and you must file this every six months for the duration of your registration under FARA. It is used to report any changes to the Registration Statement. You are also required to file this statement within 30 days after your representation of the foreign principal has been terminated, including to indicate that you are no longer required to register under FARA.

FARA registration is required for representation of any foreign principal, not just those representing the Chinese government or quasi-governmental groups, but because China is in the crosshairs you need to ensure you are fully compliant with this registration process and the ongoing reporting requirements.

Image result for mexico border trucksI’m currently in Houston to attend a customs conference, where I expect there will be lots of talk about China, coronavirus, and the related disruptions to trade. Yet Mexico has also been on my mind. That is due to some extent to being in what, until not that long ago, was Mexican soil, but the main reason is that the coronavirus crisis is pushing to the fore questions that I (and many others) have pondered for a long time: Why aren’t U.S. companies manufacturing and buying more in Mexico?

To be sure, U.S.-Mexico trade is huge and our manufacturing lawyers drafted more Mexico manufacturing contracts in the last year than in the previous two years combined. According to the United States Trade Representative:

U.S. goods imports from Mexico totaled $346.1 billion in 2018, up 10.6% ($33.3 billion) from 2017, and up 60.3% from 2008. U.S. imports from Mexico are up 767% from 1993 (pre-NAFTA). U.S. imports from Mexico account for 13.6% of overall U.S. imports in 2018.

However, after more than 15 years of helping U.S. companies with their China-related headaches, I’m surprised these figures aren’t even higher. Consider some of the country’s advantages, as discussed in 2013—before coronavirus, before the trade war—in the context of a company’s decision to shift manufacturing from China to Mexico:

About two years ago, Melissa Palmer, CEO of a company called Hoopnotica, made a shocking discovery. Chinese factories were producing knockoffs of her company’s $50 travel Hula-Hoops and selling them on Alibaba and other international wholesale websites on the cheap. Palmer, a partner in the $1.5 million Venice, California-based company, sent cease-and-desist letters to the sites, with little success. “It’s infuriating,” she says.

When Palmer was unable to find a U.S. factory to produce the hoops, a business associate recommended a facility in Mexicali, a Mexican border town just a three-hour drive from Venice. “I made the mistake of not going to China to take action faster,” Palmer says. “Now I can zip down to the factory in a day.”

Hoopnotica is one of the growing number of U.S. businesses bringing manufacturing back to the U.S. or “near-sourcing” it to Mexico. The country has been losing manufacturing to China for years. But things are changing now that the value of the Chinese yuan is rising, the cost of overseas shipping has surged, and increased competition among Chinese factories has resulted in labor shortages and longer lead times.

Thanks to the North American Free Trade Agreement, goods imported from Mexico can enter duty free. Mexico also has a strong reputation for protecting intellectual property, a valuable advantage over China.

The RMB exchange rate fluctuates, as do shipping costs (though in any case it’s cheaper to import from nearby Mexico), but to the 2013 prognosis you should add “U.S. tariffs… rising labor costs, stiffening environmental rules, and the heavy, often capricious hand of the Chinese state”.

Historically, some foreign companies have favored China (and other Asian destinations) over Mexico due to Mexico’s higher wages, stronger labor law enforcement, and security concerns. Mexico’s new president isn’t helping matters either. As Bloomberg puts it, “Its once-business-friendly environment is looking much less so”.

Concerns over security no doubt persist, particularly in areas along the northern border, which have the greatest geographical advantages when it comes to U.S. trade. That said, the security situation is far from uniform. For example, a June 2019 survey by the National Institute of Statistics and Geography found that 83% of Acapulco residents considered their city unsafe, compared to 48.9% in Tampico, 43.1% in Puerto Vallarta and 30.2% in Mérida. In any case, security risks can be managed, as the many foreign companies operating in Mexico demonstrate. Moreover, China poses its own risks for foreign businesspersons.

As for labor costs, things have changed considerably since 2013, when “Mexico’s wages [were] 40 percent higher than China’s, at about $3.50 an hour”. According to the International Labour Organization (yes, British spelling), in 2018, the average monthly earning of Mexican employees was $338.42 at today’s exchange rate. Meanwhile, by 2016 (the most recent year for which ILO statistics are available), the equivalent figure in China was $808.33.

Mexico is far from being a world leader when it comes to labor protections, but these are more robust than in China, which reduces the potential for legal and reputational problems. In Forced Labor in China: Don’t Trust AND Do Verify, we recently wrote about withhold release orders (WRO) issued by U.S. Customs and Border Protection in cases of suspected forced labor. At present there are only two WRO outstanding against Mexico, both against the same producer—and dating back to the fifties! By contrast, there are two dozen WRO in place against Chinese manufacturers.

Then there is the new president, Andrés Manuel López Obrador (AMLO). Under his leadership, “the government is slashing investment in the kinds of infrastructure manufacturers need (and that China has been so exceptional in providing)”. AMLO’s labor reform and minimum wage hike may also give foreign investors pause. But as the Miami Herald notes, though AMLO may prove ineffectual in addressing Mexico’s most pressing challenges, he will not “destroy the prowess of Mexico’s private sector”.

Could you say the same of Xi Jinping?

It’s interesting to consider why NAFTA’s potential has not been more fully realized and why the China siren song proved so difficult to resist for so many U.S. companies. But we’re in a different world now. As it becomes tougher for foreign (and especially U.S.) companies to do business in China, as dreams of tapping into the billion-customer market become nightmares, and as the country reels from the economic devastation brought on by coronavirus, the appeal of free-trade partner Mexico is bound to increase. is it time you make a run for the border?

China Manufacturing Lawyers Coronavirus

Yet again yesterday, the number of coronavirus cases and deaths reached a record number. In other words, the virus continues to spread ever faster and until it begins to slow down there is literally no end in sight. And yet, yesterday was also the day some Chinese factories were to open again for business.

In light of these two things, our China manufacturing lawyers are getting bombarded with the following questions regarding the interaction between the coronavirus and Chinese factory production, each of which we seek to answer below:

  1. My factory said it would open on February 10 but now they are saying that it will more likely be February 17. Can we rely on that? Unfortunately, no. We are hearing rumors that factories will not open in some cities until March. It seems China is picking dates based more on propping up its stock market than on when it believes it will be safe for people to return to work. Also, in many cities, factories cannot reopen unless and until they are given a specific okay to do so by the local government. You have probably read how at least one of Foxconn’s plants has not yet been authorized to reopen. If Foxconn is having trouble getting this approval, just imagine how difficult it will be for your factory. I hate to say this, but your factory will be open when it opens, but see question #2 for what that might mean.
  2. My factory insists it will be open on February 17, but when I ask them whether this means they will be back to their normal production schedule, they say they hope so but they do not know. Why are they saying this?  They are saying this because a huge portion of China’s factory workers are migrant workers and until your factory actually opens back up for production, it has no idea how many of their workers will show up. The media is saying that only around 10% of Foxconn employees have returned to its reopened factories (see here) and if with all its money and power that is all Foxconn can get, just imagine for a minute what sorts of worker numbers you can expect to see at your factory. It is not easy to travel within China right now and even if it were easy, what percent of factory workers will want to risk their health (their lives?) to travel to a low paying job where they live in dorm-like rooms with 4-25 other people and work in factories with thousands of other people? If you were that worker would you choose these risks over staying relatively safe in your hometown? Your factory is undoubtedly aware of these issues and that is why it is unwilling to commit to anything.
  3. But if my China factory’s workers come back does that mean all will be good? Absolutely not. Virtually all factories in China depend on more than just their own workers to function smoothly. They also depend on other company’s workers. We have a client whose factory in Dongguan depends heavily on a very expensive, very complicated piece of equipment made by a company in Wuhan. That piece of equipment often goes down and when it does no product can be made until someone from the equipment manufacturing company comes out and fixes it. This client is worried that the equipment manufacturing company’s repair people will not be able to go back to Dongguan and production (if it ever starts up) will quickly cease when this piece of equipment goes down. We have another client whose products demand a grinder made of a special material and the Chinese company that makes that grinder is saying it will not be open again until March 1 “at the earliest” and our client’s factory in China does not have enough of these grinders to last until then. We have another client whose product has 44 component parts, made by 30+ factories, most in China. If its main China factory opens and operates, what are the odds the 30+ Chinese factories that make the product components will open and operate as well? Not very high.
  4. But if my factory opens and most of my factory’s workers make it to work, and the Chinese factories that make my product’s component parts open as well, and most of those factories’ workers make it in to work as well and there are no issues with the equipment, I’m golden right? Not necessarily. There is also the issue of getting foreign component parts into China and to your factory and that will be difficult, maybe impossible. You’ve been reading the news so you know that most airlines have stopped flying to China. Well, many shipping lines have stopped going there as well. And why would you think that China’s ports and interior transportation system is operating at 100% anyway? We are hearing that even with the greatly decreased incoming traffic, China’s ports are falling behind due to lack of manpower and so they will probably be delayed. But even if your parts get into a port and are unloaded there, they will still need to be loaded onto a truck and/or a train and/or an airplane and taken to your factory, and with so few people back to work and so much of China’s transportation network just not operating, that will probably severely delay things as well.
  5. Well, at least I can count on my products from Vietnam getting to me on time, right. I’m glad I listened to you urging us to diversify? I wish that were true but nearly half of the component parts to your products made in Vietnam come from China. That means all of what I list out above will apply to those products  as well — or at least to all of the Chinese-made components of those products. But on top of that, there is the likelihood that the Chinese component parts will never make it to Vietnam because Vietnam — like so many other countries in Asia and around the world — is doing just about whatever it can to try to block off anything from China so as to try to block off the coronavirus.
  6. But if I get jump over all of the hurdles above, at least you have to admit then that all will be good for me, right? Not exactly. Even if you and your factory jump over all of the above hurdles for your product, there is a good chance your chance your China factory will be in horrible economic straits due to first from the US-China trade war and then from being closed for the last few weeks while stil having to pay its workers. Economically weakened Chinese factories are dangerous. I know this from every past economic downturn and you need to know this as well and act accordingly. Even before the coronavirus our firm had been seeing a massive uptick in China factory problems largely resulting from the pessimism rampant in China’s manufacturing sector caused by so many foreign companies moving their manufacturing out of China  or looking to do so. Even before the coronavirus hit, we were seeing countless Chinese factories acting in ways that indicated they no longer viewed their foreign buyers as long term customers. Practically every week for the last year one of our China lawyers has gotten an email or a phone call from someone who bought product from China and received nothing in return or nothing even approaching what they actually ordered. This sending of “junk” instead of real product has spread to just about every industry in China and ordering your products from allegedly reputable online sites provides little to no protection.
  7. So what then should I do now to increase the odds that my payments for product from my Chinese factory will go to a company that actually plans to make and deliver my products and has the capability to actually do so? On behalf of our clients, our people in China regularly visit factories, conduct inspections, and maintain relationships with the most important people of all — Chinese factory managers. This is more than just basic due diligence. It’s about satisfying the important cultural expectation that foreigners befriend their factory manager. Few foreigners get this right. When we send one of our Chinese-speaking consultants into the field, the Chinese factory managers are virtually always happy to see them and with all that has gone on lately that will be truer than ever. Their visits are prestigious events during which the manager is shown “face” and given an opportunity to show hospitality. It’s a big deal when a Chinese-speaking foreigner bothers to come to one of the small towns where a factory is usually located. When handled correctly, these visits motivate Chinese factory managers to prioritize their new friend’s supply chain and send the “junk” elsewhere. This strategy works well in normal times — it saves our clients time and money. But as Chinese factories slowly re-open and need to allocate limited resources among a bunch of outstanding orders and demanding, worried customers, just by showing up, this can show that you care and are not frightened to work in and with China. This kind of support is not easily forgotten by factory managers on the front line and their payback is a greatly increasing your chance of timely getting the product you ordered and paid for. At worst, these visits can reveal that you need to find another manufacturer and fast. And if even this is impossible, you can always video in.

What are you seeing out there?

UPDATE: We are hearing of tensions in China between local governments that do not want factories to open for fear of spreading the virus and the CCP that is choosing to priotize profits by ordering these local governments to stand down. Not clear who will prevail.

2-14-2020 UPDATE:  This CNBC article says China’s textile factories are operating at less than 10 percent capacity right now.