China lawyers

China has laws. China enforces its laws. Like pretty much every country in the world, China enforces its laws unevenly. By unevenly, I mean that it is not uncommon for China to enact a law and then not enforce it for a few years and then all of a sudden start zealously enforce it. Conversely, China will sometimes zealously enforce some of its laws for a stretch, and then relax its enforcement. A great example of this was how incredibly tough law enforcement was in the run-up to the Beijing Olympics. It is also always the case that some regions of China will strongly enforce a particular law while other regions do not. Lastly, China enforces many of its laws depending on who is violating them.  For example, it has always been the case that China (like most countries in the world) tends to be tougher on foreign companies in enforcing its business related laws. Oh, and lately, China has tended tbe tougher on enforcing its laws as against companies and individuals from the United States and Canada and, starting a few weeks ago, as against companies and individuals from the United Kingdom as well.

None of the above should cme as a big surprise to anyone because so much of it holds true to at least some extent for nearly every country in the world.

Right now what you need to know is that China has never been tougher in enforcing its laws against foreign companies. It is at a ten out of ten on that right now. But with respect to the United States, Canada and the United Kingdom (and perhaps a few other countries as well, like South Korea, Taiwan and Norway), it has taken it up to eleven.

And yet, far too many are not taking this seriously enough.

Let’s talk for a minute about English teachers in China, and if you think that because you are not teaching English in China you can stop reading now, you are 111% WRONG. English teachers in China are THE canary in the coal mine in terms of China’s treatment of foreigners.

Less than a month ago, I wrote one of our more controversial blog posts, entitled, Do NOT Teach English in China and Why EVERYONE Should Read This. In it, I highlighted some of the problems English teachers were facing in China, including (but not limited to) the following:

  1. Teachers are being drug tested using their hair samples. Many are testing for cannabis and being jailed for 30 days or more and then being deported. This is happening to newly arrived teachers who insist they did not consume any cannabis since arriving in China. Listen up everybody, cannabis can show up in hair testings up to (and even sometimes beyond) 90 days after you have consumed it. So if you are going to be teaching in China and you do not want to spend time in jail and get deported, please, please, please go at least four months without consuming ANY cannabis before you go there and please, please, please do not consume any cannabis while there. None. Zero. Zilch. 没有. Aucun. Keiner.  PLEASE. Invariably, the schools use this as a reason not to pay the teacher whatever is owed.
  2. Teachers are being checked (or reported on) for having an improper visa for China. The teachers are then being tossed in jail and then deported or just deported straight away. Invariably, the schools use this as a reason not to pay the teacher whatever is owed. It appears to have become very common (as a cost cutting measure) for schools to have teachers come to China and start their teaching on tourist visas, all the while claiming this is perfectly legal — it isn’t. The teachers believe this until the day they are arrested. Near as I can tell, the schools rarely if ever get in any real trouble for this but the teachers sure do.

I eventually concluded that it is simply too risky to take an English teaching job in China and encouraged people to go elsewhere:

I have reached the conclusion that the best thing an English teacher can to do protect themselves from the sorts of things mentioned above is not to take a teaching job in China in the first place. Go elsewhere. And if you are teaching in China now, leave now or just resign yourself to your fate. I wish I could give better advice than this but I cannot. Sorry.

I then wrote about how what was true for English teachers in China was also true for all foreign employees in China and then I concluded that post by noting how important it is for every foreign person and company to comply with China’s laws:

Living and working and doing business in China is way more legally complicated than ten years ago and tolerance of foreigners in China (particularly for Americans) is way down. This means that the likelihood of you going astray of Chinese law is considerably higher as well. When you then add in that China’s ability and desire to catch foreign companies and foreigners operating illegally in China is higher now than it has ever been, you can see why it is so critical you make sure that both your company and you are operating in China within the law. If you are not already operating legally, you need to start doing so now and if you cannot, you probably should leave China or not go there at all.  This is the new normal for China. See Want to Keep Your Business in China? Do These Things NOW. 

If you are not able to know whether you are in compliance in China and thus protected, you (and your company) would be better off not being there at all, English teacher or otherwise.

I said that this English teacher post was controversial in large part because it engendered a ton of social media discussion, especially on Linkedin, on Facebook, and on Reddit (here and here, among other places).

And yet, at least three times in the last couple of weeks one of our China lawyers has received an email from a foreign company making clear that it would continue operating illegally in China either because “it has no choice” or because it has “nothing to lose.” In all of these instances, the companies were essentially correct in saying that they had no choice but to operate illegally in China because it simply is not possible for those foreign companies to operate legally in China because China essentially does not allow foreign companies to do so. These companies excused their illegality by pointing out that others operate similarly and nobody has gone to jail for doing so and these companies were right about this also.

And yet, I felt utterly compelled to warn them of their actions. And before anyone says that my compulsion arises from a desire to charge these companies money for legal services, please note that the opposite is in fact true. Our law firm does not make any money whatsoever from a company we tell we cannot help get into compliance. Anyway, the below is an amalgamation of the sort of emails I wrote:

As our firm’s chief worry-wart, I feel compelled to write.

I strongly disagree that you have nothing to lose here. I think the opposite is true.

You will be openly violating Chinese law to operate this way. China is in open conflict with the United States and your company will be violating the law in a sensitive area — the Internet — the PRC government has identified as a national security issue. Today’s New York Times discusses what is happening to Americans in China these days and the sort of mistreatment it discusses is far more prevalent than the media lets on. American businesspeople are either afraid to publicly discuss what is happening or they do not wish to do so, but we hear similar stories from American companies all the time. They usually act surprised and a little perturbed for getting into trouble for doing “the same thing we’ve always done.” When we say, “ yeah, but what you were doing is illegal” their response is often something like, “well they [the Chinese government] always did allow it and it’s not like we are the only ones doing this.”

How will it be/look if someone from your company gets detained or if you get shut down and essentially banned from China?

Your company competes with [large Chinese company] in [Chinese city], a city completely controlled by [large Chinese company]. I can easily imagine [large Chinese company] inspecting your url, noting __________________, and then convincing the local authorities to crack down on you in a big way or in such a way to end you as a competitors and to scare away others. This is China….

I worry for you. A lot. Just my two cents.

The common response to the above is a non-committal thank you.

The arrests yesterday in Shanghai of twelve stock analysts from Taiwan have me even more worried. Global Times (an official CCP publication) wrote about these arrests in 12 stock analysts from Taiwan arrested in Shanghai. I learned about these arrests from one of my firm’s China lawyers, who who Slacked me this article with the following comment:

Note this article on Taiwan stock traders arrested in Shanghai for operating without a license. This is what we are seeing: the PRC government ignores the legality issue for years and then they are suddenly cracking down. Notice also that the crackdown is not a deportation. The crackdown is arrest and jail time. People need to stop assuming the China today is the China of a year ago because it isn’t. It is far riskier in every way and this idea that you can just violate Chinese laws because that was allowed in the past or would just be met with a slap on the wrist and/or deportation must be excised. China is getting serious and I just hope that more people start realizing this before it is too late for them.

It is hard to know exactly what these 12 analysts were doing, but based on what we have seen other companies do in this space and reading a bit between the lines of what the media is saying about it, it would appear that they were making stock recommendations live and via an app and doing so without a license. If this is correct, I can tell you that there are a ton of other foreigners in China right now at extreme risk of arrest. The good news is that China can go one of the following three ways in the next few months:

  1. It can wait a few months to let these arrests sink in, giving the others that are doing the same thing time to shut down and leave China. If I had to bet, this is what I suspect China will do. The fact that this got a big story in the Global Times makes me think this is what will happen.
  2. It can arrest more people for doing the same thing to speed up the cleansing of this problem. This is the second most likely option.
  3. It can do nothing further on this front. It may have had special reasons for singling out these 12. The big story in the Global Times makes me think this will not be the case.

In other words, it is not clear how China will proceed against other similarly situated foreigners in the next few months, but I can tell you that if I were a similarly situated foreigner I would likely already be on an airplane right now, relieved and en route back to my home country.

What exactly should you do to avoid becoming a Chinese shut-down, deportation, or arrest statistic? What exactly does all of this mean for your company if it is doing business in China? What can you do to reduce your risks?

If past performance is any indicator of future performance — and we really don’t have anything else to go on, so we have to assume it is, even though I just said above that this is certainly always going to be true,  you should do the following, and fast:

  1. Make sure your WFOE or your Joint Venture or your Representative Office actually exists and is still licensed to do the business it is doing in China. Make sure it is current on its capital obligations. See Doing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. Make sure your WFOE or your Joint Venture or your Representative Office is actually properly licensed to do business in every city in which it is doing business. It is shocking how often this is not the case.
  3. Make sure your company is doing everything correctly with its employees. Consider an employer audit and note that our China employment lawyers have never done an employer audit without finding multiple problems.
  4. Make sure your company is current with its taxes. If you think it may not be, it almost certainly is not.
  5. Review your lease agreement and the relevant zoning rules. Are you renting from a real landlord? Is it really legal for your business to do what it is doing where it is doing it?
  6. Have a trusted China contract lawyer review your contracts related to your China operations to make sure each and every one of them is legal.
  7. Conduct due diligence on your suppliers/manufacturers, distributors, retailers, and e-commerce platforms. Your risk is going to be influenced by the company you keep.
  8. China has many business crimes that are not crimes in the West. Know these.
  9. Make sure your IP has been properly registered and that your company is not violating a China company’s IP rights.
  10. If your WFOE or your Rep Office or your Joint Venture share is American or Canadian owned, consider forming a new company (“Newco”) in a country with good relations with China and selling the WFOE Joint Venture share or Rep Office package to that Newco.

I could go on and on. None of the above are new, but with what is going on in China today, their importance and their urgency has increased exponentially. Get fully legal. Now.

Please.

International IP lawyers and International manufacturing lawyers

With no sign of a peace breaking out any time soon on the U.S.-China trade front, an increasing number of businesses are turning their eyes toward alternative manufacturing destinations, such as Vietnam, Thailand and Mexico. Understandably, such relocations will present all sorts of new and  different headaches, but I suspect that before long many folks will look back at their China days (perhaps as they lounge at a beach in Ko Samet or Da Nang) and ask, “why didn’t we do this before?”

Business is business, and whether the beaches near Bangkok are better than those near Beijing (they are, of course) or the coffee in Saigon is better than that in Shenzhen (it undisputedly is) is ultimately of no consequence when thinking of the bottom line. The point, however, is that once companies get a handle on the challenges of relocation, many of them will see that the “new” kids on the block can actually be pretty good places to do business. They may have preferred to stay put in China and avoid the hassles of moving—but when all is said and done, they will see that, give or take, the Vietnams of this world are just as viable and in a whole host of ways perhaps even better, all things considered.

Unfortunately, one area where things are not likely to get better for foreign companies is intellectual property rights (IPR) protection. That may be hard to believe to those who have had their products blatantly counterfeited in China, but the fact is that IPR protection is in many respects even less robust in the lands across the Red River. According to the U.S. Chamber of Commerce’s IP Index 2018, China’s score on protecting IP is almost half that of the United States and Britain, but considerably higher than Vietnam, Thailand, and Indonesia, with Mexico and Malaysia essentially ranked the same as China). Myanmar is not ranked, but presumably its score would be rather low, given that it only passed its trademark law this year.

These Chamber of Commerce rankings necessarily reflect mostly in-country written legal protections. They do not much account for the likelihood of your own manufacturer or your own employees or anyone else stealing your IP, nor do they reflect whether the theft of your IP will include your product showing up on Alibaba or on some other international online marketplace for sale around the world. On these things, China is still (and will likely be for a long time) in the undocumented/unofficial first position. These rankings also do not reflect how the likelihood of your IP being protected in China depends on whether your product is central to China’s security or technological future. Nonetheless, the other countries to which so many foreign companies are increasingly moving their manufacturing are not IP paradises by any means.

As when in China, in the face of a reduced ability to rely on the legal system for protection, savvy businesses need to do all they can to protect themselves—and protection starts at home. Through preventive efforts at their manufacturing facilities, businesses can go a long way towards minimizing IP and related risks. What sort of prevention are we talking about? Obviously, you want to guard against unauthorized (i.e., third shift) production by your suppliers. You will also want to prevent sensitive prototypes from being photographed or extracted, as well as digital files with design specs from being leaked. You will also want to exercise strict controls over any materials that could help criminals improve the quality of their counterfeits, such as genuine accessories.

Clear, comprehensive guidelines are a cornerstone of product security in China and everywhere else. If you have experienced professionals on your payroll, they can draft those guidelines, but you should not wing it. Copying and pasting something you find online may not account for country- or factory-specific conditions. For instance, in some locations, legal protections or labor agreements may prevent workers from being directly recorded by CCTV. If that’s the case, you will need to find a workaround (and they exist) to monitor staff at key locations.

Having established guidelines, the next step is to ensure staff actually comply with them. Though some factories do a pretty job monitoring themselves, most don’t. This is why you need specialized compliance audits, by professionals who understand the underlying risks.

Beware of lazy auditors who will sit for a couple of hours in the air-conditioned conference room, sipping coffee while they tick off checklist items based on self-serving answers from staff. Proper auditing requires getting your hands dirty—literally. Rummaging through trash is an essential part of any product-security audit. Trust me, it’s no fun to look around a garbage dump in the middle of a tropical summer, but the finds can be worthwhile. I once audited a factory in Cambodia that was contractually barred from working for my client’s competitors. As we walked around, we saw nothing fishy in the main office, production floor or warehouses. But a casual peek inside a wastebasket in a side office revealed trashed work orders . . .  from a competitor.

Just as is true with China, (see China Trademark Theft. It’s Baaaaaack in a Big Way) you also need to register your IP with the relevant authorities. And oftentimes most importantly, your contractual framework with your supplier must include product-security considerations, such as your right to audit facilities and provide remedies for IP-related breaches. You almost certainly will also need country-specific NNN Agreements and Manufacturing Contracts for each new country in which you are having your products made. See China NNN ≠ Foreign NDA and Overseas Manufacturing Contracts (OEM, CM and ODM). You may also need a Product Development Agreement, a Product Ownership Agreement, and a contract protecting your molds and tooling. With all the tariffs and duties coming (and even occasionally going), it also makes sense to have your manufacturing contract delineate who will ultimately be responsible for paying what.

Bottom Line: Moving your manufacturing from China does not change the need to protect your product and your IP with appropriate auditing, proper trademark, patent, and copyright registrations, and country-specific manufacturing contracts. This is all good for our international manufacturing lawyers and international IP lawyers, but not so good for companies that fail to understand this.

China data privacy lawyers

Most established European and American companies that do business in or with China have already done a good deal to comply with the EU’s General Data Protection Regulation (“GDPR”), and maybe even the California Consumer Privacy Act (“CCPA”). They have likely drafted new privacy policies, re-designed  their websites, and adopted more internal controls to be better about data processing.

If they are going to China, a lot of that’s going to need to change.

One of the common trends for new privacy laws across the globe is the concept that the person who collects or controls a person’s data generally must have a legal, justifiable reason to do so. Each governmental entity that’s adopted a privacy regime has modified what those grounds are, and in many cases if data is collected or used for a reason that’s not on the list, it’s not lawful.

Countries with more robust privacy laws (like those within the EU) are moving more and more towards consent-based processing, meaning businesses must actually inform users why they are processing user data and get their consent. These countries usually do not require consent for all processing. There are usually enumerated exceptions to consent or just other grounds for processing listed. When it comes to GDPR, two of the important non-consent grounds for processing are: (1) the processing is necessary to perform a contract between the parties, and (2) the processing is in the legitimate interest of the controller of the data (usually the company) and it does not violate the fundamental rights of the subject.

The contract performance ground gives the business that controls the user data flexibility over how it uses customer data when it enters into a contract with a party. Companies may not always know how exactly they will use data to carry out their obligations to a customer and explaining everything they intend to do to a customer may be overly complicated.

The legitimate interest ground is more of a catch-all provision that also allows businesses to process data absent express consent. Notably, it will require a careful balancing of the controller’s interests against the subject’s rights, but in many cases it will still allow for processing of the data even without the subject’s consent.

Of all the many obligations GDPR imposes on businesses these exceptions to consent at least give EU companies some breathing room. China is  a completely different story.

China’s Personal Information Security Specification is China’s national standard on the collection and processing of personal information. An English language version of the May 2018 version of the Specification can be found here. Recently, China proposed changes to its May 2018 Specification.

The May 2018 Specification makes clear that consent is the preferred basis for data collection. There are some exceptions to consent enumerated in section 5.4, including for performance of a contract, but excluding legitimate interests. However, in the proposed changes, contract performance is removed. In other words, two of the most significant grounds for processing under GDPR (other than consent) are not allowed in China.

I cannot stress enough the significance of these differences from GDPR. If your business is doing anything in China that involves collecting data, you will soon need to comply not only with the GDPR rules (which will be very strictly enforced against foreign—especially U.S.—companies), but you also must completely revamp your US or EU-centric privacy policies and (probably) websites to explicitly get consent. This will be a lot of work.

U.S. or E.U. companies doing business in China will not be able to rely on having entered into contracts with Chinese citizens to process their data. they will now need to painstakingly explain all of the ways in which they will use the data and get consent for using it, unless one of the other few very narrow exceptions applies. If you want to change in how you processes data after collecting it and getting consent, most of the time that will be just too bad—unless there’s another exception. You will need to go back and get fresh consent. In other words, and as so many of our clients keep wanting us to confirm, what you have done to comply with GDPR and US/California data privacy laws does not really help you much if at all for China. You will need to undertake wholly separate and different compliance work for China.

Needless to say, our clients are not happy about this and many rightly point out the increased trouble, costs and time this is going to take. A few of them not so subtly mention how ridiculous all of this is and how “this seems to benefit nobody but the China data privacy lawyers.” Our response to that is to agree and then to note how China has always gone its separate way on pretty much everything Internet because its goals surrounding the Internet do not in any way line up with those of the West. One of our China data privacy lawyers often says that when thinking about EU/GDPR data privacy goals, think privacy and when thinking about U.S. data privacy laws, think profits with privacy. When thinking about China data privacy laws, think about the Chinese governments goal of protecting its Internet from foreign companies and about not giving private companies too much information about China’s inner workings.

And lest you may be thinking that none of this applies to you because you do not have a company in China or in Europe, you would likely be wrong. Both China’s data privacy laws and the GDPR have a global reach. Companies with absolutely zero footprint in either the EU or in China can be subject to compliance with their vast and complex data privacy laws. Even companies with only U.S. presences who only sell goods in the U.S. can be subject to the GDPR and the same goes for China.

If anything is clear, it is that China’s new data privacy laws are going to be a headache for foreign companies and complying with them will be difficult even for companies that have been ahead of the GDPR and/or CCPA curve.

Sorry.

international law

This is part 9 of our series on eight+ things to read about China and a lot more. We constantly get emails from readers asking what to read on China and all sorts of things related and even barely related to China and this series is intended to constantly and consistently answer these questions.

As we said in our initial post on this, our plan is to list out eight (or so) articles we benefitted from reading and think you our readers would also benefit from reading, along with a very brief explanation as to why the particular article was included. More specifically:

The articles will likely include many on China and on Asia and a few on international trade, international politics, Spain and Latin America, economics and really just anything else we believe might benefit our readers or even that we just want people to read. We do not plan to choose articles that push our or any other political agenda or any other agenda for that matter, but having said that, we are not objective and our views may creep through. Our goal though is to focus on articles that are important or helpful or — most importantly — that make you think. Our posting of an article will NOT mean we agree with all of it or even any of it. Most of the articles will be from the week preceding the post but we will also sometimes throw in older articles (classics if you will) as well.

Please do not hesitate to comment at the end of this or any other post. We cannot tell you how much we appreciate your comments, good, bad and indifferent.

Here we go, in absolutely no particular order.

  1. The Chinese Influence Effort Hiding in Plain Sight. Atlantic. Because I consider this THE single most important article I’ve read in months. Because “Beijing uses student and professional associations to try to influence not just Chinese citizens abroad, but outsiders, too.”
  2. To thrive in a “wicked” world, you need range. Quartz. This article is about David Epstein’s new book, Range: Why Generalists Triumph in a Specialized World.  Because “having a capacity for abstraction and the ability to transfer concepts is the key to success in our “wicked” world. While it’s true that some chess grandmasters and world-class athletes start early and drill hard, this repetition is only effective in golf or games with strict rules and easily quantifiable results, Epstein says. Those are “kind” worlds with limited possibilities. In life, however, and especially in postmodern life, where rote tasks are increasingly automated and pretty much any fact can be discovered with a web search, the rules aren’t straightforward. What it takes to be great is intellectual flexibility.” Because I completely buy this. Do you?
  3. Real Hedge-Fund Managers Have Some Thoughts on What Epstein Was Actually Doing. New York Magazine. This article talks with a number of hedge fund managers who make a compelling case that accused pedophile Jeffrey Epstein has been running a large scale blackmail operation, not a hedge fund. What I found so interesting about this is how we lawyers usually agree (and are angered by) the incredibly small number of fellow lawyers believed to be cheating their clients.
  4. Elementary Education Has Gone Terribly Wrong. Atlantic. This article posits that U.S. elementary schools are focusing too much on teaching children reading comprehension and not enough on imbuing them with knowledge and this particularly works to the detriment of poor kids: “Children from better-educated families—which also tend to have higher incomes—arrive at school with more knowledge and vocabulary. In the early grades . . . children from less educated families may not know basic words like behind; I watched one first grader struggle with a simple math problem because he didn’t know the meaning of before. As the years go by, children of educated parents continue to acquire more knowledge and vocabulary outside school, making it easier for them to gain even more knowledge—because, like Velcro, knowledge sticks best to other, related knowledge. Meanwhile, their less fortunate peers fall further and further behind, especially if their schools aren’t providing them with knowledge. This snowballing has been dubbed “the Matthew effect,” after the passage in the Gospel according to Matthew about the rich getting richer and the poor getting poorer. Every year the Matthew effect is allowed to continue, it becomes harder to reverse. So the earlier we start building children’s knowledge, the better our chances of narrowing the gap. True?
  5. China’s trade war manufacturing exodus could be hastened by EU-Vietnam trade deal, analysts say. South China Morning Post. Because our international manufacturing lawyers are seeing almost the same percentage of our European clients moving or looking to move their manufacturing from China as our U.S. clients. The U.S. is still the world’s largest consumer market and if you are a European or Canadian or Australian or Latin American company that sells a good percentage of your products to the United States, China is not a good place to be these days. This article posits that this new EU-Vietnam trade deal could cause “a flood of European companies [to] seek low-cost manufacturing in Vietnam, at China’s expense
  6. Jeremy Hunt refuses to rule out sanctions against China. The Guardian. The UK’s foreign secretary says the “UK will always put its principles first, as Hong Kong row escalates.” The United Kingdom is obviously none to happy with China these days either.
  7. Manufacturing in China: Control your Molds. China Law Blog. Because when companies move their manufacturing from one factory to another, they usually want to bring over their molds and their tooling from the old factory to the new factory. Because getting your Chinese factory to freely relinquish molds usually a good contract and many of the companies coming to my law firm for help in moving out of China do not have that and this is causing them problems. Part 2 of this series on controlling your molds is here and Part 3 is here. There have been times where we have counseled our clients to hold off on changing factories until they get a contract that will enable them to leave with their molds.
  8. Are tariffs against China bringing factories and jobs back to the U.S.? USA Today. Because one of our clients is mentioned in this article. Because it highlights how so many American companies have moved or are looking to move their manufacturing out of China. Because it says that some companies have actually moved their manufacturing back to the United States. Not a lot but more than I think many realize. Because it says that SE Asia and Mexico are the most common countries to which manufacturing is moving and because I believe the United States directly benefits from a rising Mexico economy. See The China-US Trade War and the Winner is….MEXICO.
  9. Foreign Student Gets Physical with a Traffic Officer, and Then… Guide in China. Because ignorance of the law is not an excuse anywhere in the world, including China. Because if you are called out for a legal violation, fighting the police officer who does so is never going to be your wisest move.
  10. Walmart’s Supplier Says Chinese Factories in ‘Desperate’ State. Bloomberg. Because this supplier is Li & Fung, who is the “world’s largest supplier of consumer goods” and probably knows more about China factories than any other company in the world. Because Li & Fung says “China’s factories are getting ‘urgent and desperate’ as worried U.S. retailers accelerate a move out of the country amid heightened trade tensions. Because doing business with “urgent and desperate” companies is very risky and because I plan to write a blog post this upcoming week on why this is so and on what our China lawyers are seeing that can be attributed to Chinese factory desperation.

 

CFIUS China FDI
FDI from China has slowed to a crawl

Any securities lawyer worth their salt knows that a “covered security” means more applicable laws, more regulations, more oversight, more time consumed in the transaction, and more expense. Enter CFIUS, the U.S. Treasury Department’s Committee on Foreign Investment in the United States and its oversight of certain transactions involving foreign investment in the U.S. that may impact national security (called “covered transactions”). If you have been paying attention, you know CFIUS has been in the news for some high profile actions regarding China Mobile’s FCC license application, PatientsLikeMe, a healthcare startup, Grindr, the LGBTQ dating app, and HealthTell. We previously wrote about CFIUS in New CFIUS Rules Shut Down Chinese Investment in U.S. Technology, U.S. Legislation Against Huawei/ZTE That Will Rock the World, and New Restrictions on High Tech Technology Transfers to China. CFIUS has been operating since 1988, though it was recently rejuvenated and its oversight expanded with passage and implementation of FIRRMA, The Foreign Investment Risk Review Modernization Act, which was signed into law on August 13, 2018. Now CFIUS has jurisdiction over all FDI deals, not just those resulting in a foreign entity owning a controlling interest in a U.S. business. China has analogous laws restricting investments in certain industries, though it is loosening some of those restrictions, but in practice every piece of data generated in China has potential national security (or national sovereignty) implications.

CFIUS in its more robust oversight role has been targeting Chinese-related investment in the U.S., though not exclusively. Deals with Canadian, English, and other countries have also received scrutiny from CFIUS in recent years. But FDI from China dropped precipitously in 2018 from prior years. As we said in a previous post:

Chinese companies did not lose interest in the United States. What happened is that the U.S. government’s security review system has made Chinese investment in any form of technology company virtually impossible. New legislation and regulations adopted in 2018 will make those investment barriers formal and permanent. These restrictions will survive any trade “deal” made on the current Section 301 tariff dispute with China. The investment restrictions have become part of the “new normal” in US-China economic relations.

What are some key takeaways from this new normal for U.S. companies seeking investors from abroad?

  • Technology deals will continue to get reviewed. Technology is a massive part of most deals that will be attractive to foreign investors, whether it be biotech (pharmaceuticals, medical devices), computing (computers, electronics, semiconductors), aerospace, energy, data processing, software, or R&D. Data is the new universal currency, particularly data about customers or users, and that data can be exploited in many ways, including those areas impacting national security.
  • Small startups will not be exempt. A large percentage of startups involve technology in some way, with at least 47% of startups in the past decade considered “technology-based.” Technology is the way to scale a business, and that is what founders and investors want the company to do. If a business is not scalable, investors will take their money elsewhere. Even startups that do not consider themselves technology-heavy may be included in the larger technology group, especially if their business can be tied to national security in any way.
  • Any investment size and type may be scrutinized. Regardless of debt, equity, or derivative investments, and especially if the investment is coupled with some management rights or may lead to assimilation of technology by the foreign investors, CFIUS may take action.
  • No deal is safe and no statute of limitations applies outside the safe harbor provided by the review process. If CFIUS determines that a deal will impact national security, it can block the deal, require significant modifications, undo the deal after it has closed, require certain owners to divest their ownership interests, or require the sale of the entire business or all of its assets after the closing.
  • CFIUS’ jurisdiction extends to deals involving foreign investors, not just Chinese investors. This means that (1) Chinese investors looking for a backdoor entry into U.S. tech companies will be scrutinized and (2) deals will not be safe just because they do not involve Chinese investors. Companies looking for FDI dollars must conduct due diligence of potential investors to determine whether a prospective investor is on any of the U.S. government’s persona non grata lists.
  • There is available capital outside of China. Even if the U.S. proceeds with slapping tariffs or other restrictions against other allied countries, investors from those countries will not be subject to the same capital controls or the same national security concerns as investments from China. The U.S. State Department reports a massive backlog of EB-5 visa applications for foreign entrepreneurs (with an estimated 2-4 years to process the application). Why? Because along with the freedoms U.S. citizens enjoy, the U.S remains the preeminent market for stable investments, including U.S. capital and real estate markets. India and Vietnam top the EB-5 application list after China.

CFIUS has and will continue to cause FDI from China to drop, but it is unlikely to completely shut off the flow. CFIUS’ review process is not the only factor in the marked drop, but it is a major factor. If you are a U.S. technology company seeking FDI, you need to court non-Chinese investors. Where should you look? Our international lawyers regularly work with companies seeking investment dollars from Asia, Europe, Latin America, and Africa. Or stay close to home if you are more risk-averse. Even though the baby boomers are well into retirement and the generation X’ers are nearing retirement (and getting less adventurous and free with their capital), there are domestic investors who continue to look for good companies and projects in which to invest. They speak your language and understand the dynamics and economics of your home markets and this familiarity can eliminate many potential friction points in the investment negotiations.

Investment in U.S. companies is always changing and CFIUS is just one element of that.

What are you seeing out there?

 

China tariff exclusion list

The United States Trade Representative (USTR) has announced additional trade exclusions. These are the products specifically excluded from the 25% tariff on the List 1 ($34 billion) of Chinese products imported into the United States. In other words, these are the products that will not be subject to the tariff.

Per the USTR “the exclusions are reflected in 110 specially prepared product descriptions, which cover 362 separate exclusion requests.” The exclusions cover any product that meets the description in the Annex listing the exclusions, “regardless of whether the importer filed an exclusion request. Further, the scope of each exclusion is governed by the scope of the product descriptions in the Annex to this notice, and not by the product descriptions set out in any particular request for exclusion.”  These exclusions will apply as of the July 6, 2018 effective date of the $34 billion tariff action, and extend until July 9, 2020. These exclusions mostly consist of various industrial equipment.

To see whether or your product is or is not on this list, go here to the Notice of Product Exclusions: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.

The opportunity to submit product exclusion requests for the List 3 ($200 billion) Chinese products began on June 30 and continues through September 30, 2019.  See our prior post on the information needed for the latest product exclusion requests.

China joint venture lawyersHuge swaths of China’s manufacturing sector are being thrown for a loop. Large numbers of foreign buyers of Chinese manufactured product have ceased or reduced their manufacturing in China and even larger numbers are looking to do so. Chinese manufacturers are rightly concerned and our manufacturing lawyers are seeing the results of that like never before. See e.g. Moving Your Manufacturing Out of China: The Initial Decisions. For instance, we are getting massive numbers of emails regarding bad quality product and far too often there is little we as lawyers can do to help because the foreign buyer does not have a China-centric manufacturing contract with its China supplier.

We are also getting at least triple the number of foreign companies looking to do joint venture deals with their Chinese manufacturer.  The high level thinking on these joint ventures usually goes as follows:

  1. China product risks and costs are rising due to tariffs and duties and working with the factory will mean both sides share in these increased risks and costs.  See Has Sourcing Product From China Become TOO Risky?
  2. The way for both the foreign buyer and its Chinese manufacturer to reduce risks and to increase sales and profits is to have the Chinese manufacturer sell the foreign buyer’s products in China.

The above makes sense, but there are usually better and safer ways than a joint venture for achieving these things.

As we so often write, joint ventures tend to favor the Chinese JV partner and they rarely make sense for the foreign company. See China Joint Ventures, Part 4, in which we explain why our China joint venture lawyers both love them and hate them. In addition to the various problems inherent in any China joint venture, joint ventures with your Chinese supplier have their own special issues/problems.

Chinese factories usually know very little about how to market products (even their own) domestically and when they are your factory and your joint venture partner, it can be very difficult for you to monitor the joint venture’s sales and profits. This article I wrote for the Wall Street Journal describes many of these problems. It usually does noot make sense for a foreign company to become a co-owner with its Chinese factory of a Chinese entity before it knows how good that factory will be at selling the foreign company’s product in China. The better way to handle these relationships is usually with a China-centric distribution agreement that sets forth sales goals and allows you to walk away if your Chinese factory does not hit those goals. It usually makes sense to have a trademark licensing agreement with your distributor as well.

SE Asia manufacturing advisor consultant

The uncertainty surrounding products manufactured in China is causing many foreign companies (especially those that sell their products to the United States) to ask us what they can do to mitigate their risks and where else they could look for getting their products made.  See Has Sourcing from China Become too Risky? 

Decisions about leaving China are not without risks, but there is a path forward.  In my role as Harris Bricken’s Senior International Manufacturing Advisor, I usually start by reminding people that it (leaving China) is already happening.  You won’t be the first. Companies are already leaving, including Chinese companies looking for other places to make their stuff. See US-China trade war manufacturing exodus creating boom times for Chinese logistics companies. Needless to say, other countries are vigorously competing for this business. Your path forward may not be a superhighway, but there are fairly well- paved roads to get there.

Our firm has lately been focused on the ASEAN region as a China alternative, specifically Thailand, Malaysia, Indonesia, Vietnam, and The Philippines.   We look to ASEAN for several reasons, including (1) Many of our clients are already familiar with this region, (2) Its proximity to China and China’s existing supplier base, (3) Its competitive manufacturing costs, (4) Its large and diverse manufacturing capacity and (5) Government support of manufacturing exporting. It also does not hurt that ASEAN consists of approximately 650 million people/consumers.

ASEAN has a free trade agreement with China. This means a company can find a new manufacturing source in an ASEAN country and still usually obtain needed materials and components from China tariff free and at similar costs. This makes it so you can start to leave China without completely leaving China. But as our international trade lawyers are always saying, you do have to be careful to make sure that you are not taking so much of your Made in China products to ASEAN that US customs will still view your product as having been made in China. See US-China Tariff Updates: What You Can (and Should NOT) do NOW. The last thing you want is to have to pay duties and fines and perhaps even go to jail for illegal transshipment. See Beware the False Claims Act When Importing Products .

When we work with companies looking to move their manufacturing from China, it is always important for us to first determine why the company wants to leave China and what they are trying to accomplish by doing so. What is important to them? Increasing costs and tariffs may be driving companies out of China, but other factors should be considered before deciding whether to leave and where to leave to. Every country does different things well.  Every company looking to leave China should decide what is most important for them, their products, markets, IP protection, supply chains, and future direction of their business. A large part of our job then becomes lining up that company with a country and a manufacturer that most closely satisfies that company’s short and long term goals.

Finding a new supplier or location to operate a factory is a significant business decision and it should be treated as such.  Some of our clients are interested in finding new suppliers and some want to start up entire new factories themselves. We need to clearly distinguish between the two. In sourcing, for example, the range of what can and will be done is huge, from a simple purchase of a fungible commodity product all the way to purchasing high tech electronics where the factory is expected to provide substantial engineering input. Some of our clients are highly focused on costs, while others are highly focused on quality. Figuring all this out for each client is usually complicated and time consuming and the resulting project is quite different depending on the client’s goals and the result of the analysis.

We have had clients that make xyz widgets for which Thailand was perfect. We have had other clients that make the same product (but essentially for an entirely different market) for whom Mexico was perfect. In choosing a county and a specific supplier, there is rarely a one size fits all answer. And yes, quite often we end up determining the best solution for our client is to stay in China.

Some of our clients believed that finding and choosing and working with manufactures in S.E. Asia is similar to doing these things in China a Likely, it will not. To give just one small example, shipping from Vietnam is much more difficult than shipping from China. Shipping rates may also be significantly higher. After all factors are considered, the move can be properly evaluated but ignoring some of these key factors can result in the wrong business decisions being made. China is head and shoulders above pretty much any other country in the world in terms of both soft and hard infrastructure. Doing business in China is a piece of cake as compared to S.E. Asia. Trust us on this.

Tariffs or no tariffs, costs are rising in China and it is becoming a more difficult place to do business, especially for American companies, and most indications are that it will only get worse. The last year or so has been brutal for firms whose bottom lines hinge on continuous, reliable, uninterrupted trade. That’s as much from uncertainty—the chance of even more trade barriers—as from the actual duties imposed.

In the end, the decision to move your manufacturing is — of course — up to those who run your company. My job as international manufacturing consultant is to help companies plan for contingencies, understand their options, and wisely manage and respond to their risks. We are telling our clients this sort of planning should start today.

 

China Law Blog Social MediaWhen we first started writing this blog in 2006, we were able to be a lot more free-wheeling than today because the odds of the Chinese government blocking us were much lower back then.  We want this blog to be visible in China and so we write our posts to not get too close to various lines. We don’t like this, but we don’t write the rules.

Facebook and Linkedin and Twitter give us a lot more “space” and so we have ramped up what we do on social media. We have a thriving China Law Blog Group on Linkedin is a spam-free forum for China information, networking, and discussion. This group is always growing and now totals more than 12,000 members and our goal is to double in size within a year.

We have had some great discussions there, as evidenced both by their numbers (some have gotten more than 100 comments) and 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?”

The members of our Linkedin group are nicely 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 more than 90 percent are not. We have senior level personnel (attorneys and executives) from large and small companies and a whole host of junior personnel as well. We have professors and we have students. These mixes elevate, enliven, and enlighten the discussions.

What truly separates us from most (all?) of the other Linkedin China groups is that we remove as quickly as possible anything and everything that smacks of spam or is simply not relevant for those who do business with or in China. We have become so proficient at shutting down spam that rarely does anyone even try to sneak spam past us anymore. Our hewing to such a tight line means postings we do not get a large volume of postings but this also means this group will not waste your 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 check out and join our China Law Blog Group on Linkedin. The more people in our group, the better the discussions.

My personal Linkedin page has nearly 9,500 followers and that has led me to post more often there on China. I welcome new followers, especially as I plan to start posting more often there.

Our China Law Blog Facebook page, is thriving as well and heading towards 24,000 followers (this is its number of “likes”). We use Facebook to post interesting and important articles and entertaining articles about China. Posts there get a lot of comments and discussion, often heated. We can be a lot more free-wheeling there than anywhere else and we take full advantage of that. With so much going on with China 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.

See ya’ll there.

international law

This is part 8 of our series on eight+ things to read about China and a lot more. We constantly get emails from readers asking what to read on China and all sorts of things related and even barely related to China and this series is intended to constantly and consistently answer these questions.

As we said in our initial post on this, our plan is to list out eight (or so) articles we benefitted from reading and think you our readers would also benefit from reading, along with a very brief explanation as to why the particular article was included. More specifically:

The articles will likely include many on China and on Asia and a few on international trade, international politics, Spain and Latin America, economics and really just anything else we believe might benefit our readers or even that we just want people to read. We do not plan to choose articles that push our or any other political agenda or any other agenda for that matter, but having said that, we are not objective and our views may creep through. Our goal though is to focus on articles that are important or helpful or — most importantly — that make you think. Our posting of an article will NOT mean we agree with all of it or even any of it. Most of the articles will be from the week preceding the post but we will also sometimes throw in older articles (classics if you will) as well.

Please do not hesitate to comment at the end of this or any other post. We cannot tell you how much we appreciate your comments, good, bad and indifferent.

Here we go, in absolutely no particular order.

  1. China says there will be no trade deal unless existing tariffs are stripped. CNBC. Because way back in early October, 2018, we proclaimed US-China tensions wer the New Normal and suggested everyone should get used to that and act accordingly. Because on May 4, 2019 (literally the day before President Trump’s new tariff tweet that rocked the world), in The US-China Trade War: Winter is Coming we said there would be no trade deal and even if there were such a deal, it would not matter much because US-China trade tensions would continue with things like bans and duties. Because on May 8, we posted The US-China Cold War Starts Now: What You Must do to Prepare, listing out what companies should be doing in light of what we described as a “straight-line” decline in US-China relations. Our writings on US-China relations have been unabashedly negative, not because we have any desire (or ability) to stir up tensions in US-China relations, but because we feel an obligation to tell it like it is to our readers and our clients, while all the while our international manufacturing lawyers have been continuously working to help companies reduce or eliminate their China footprint by going into less risky countries like Thailand, Taiwan, Vietnam, the Philippines, Malysia, Indonesia, Turkey, etc. Now back to the CNBC article listed above. China has made clear pretty much since day one of the trade war that it will not do a deal unless all tariffs are first removed and the United States has insisted that is a non-starter. Because one side will need to give on their demands on this and we do not see either side doing so. It has now been exactly a year since the U.S. first imposed tariffs on goods from China and there remain two camps regarding the likelihood of a deal. Because there are the Wall Street banks and analysts (who badly want a deal), who keep insisting a deal is imminent because it makes “compelling economic sense” for there to be a deal. Mostly on the other side, are the political scientists and the China experts who believe that neither side has the political will or the political capital or even enough desire or concern for their own citizens to make a deal. Because after one year with no deal, it is amazing how little the views of the economics side have shifted. Because we think the right answer lies in the fact that so many companies whose actions have real life consequences are moving out of China or trying to move out of China. Because there probably will eventually be a US-China deal but by the time it happens it will hardly matter because “the US-China ship will have already sailed.” See also today’s SCMP article, US-China trade war: ignore the hype, Trump and Xi are no closer to a deal, even if they are ‘friends.’  What do you predict?
  2. “Our revolution won”: Sudan’s opposition lauds deal with military. Al Jazeera. We keep writing about the Sudan because what is happening there is important and is pretty much being ignored by US media and because what is happening there deserves coverage and because what is happening there could be a precursor to what happens elsewhere.
  3. Mercer 2019 Cost of Living Rankings. Mercer. Because we love statistics and because so many of our readers are expats and because Barcelona shows up as a less expensive city than Madrid, which is something I have always claimed but on which I could never get anyone to concede — especially our lawyers in Barcelona.  See also, HSBC’s recent expat survey here.
  4. China’s trade war manufacturing exodus could be hastened by EU-Vietnam trade deal, analysts say. SCMP. Because many seem to believe/want to believe that only the United States has issues with China’s closed markets/unfair trade policies, but that is simply not the case. Around 30% of our clients are not US companies and they (especially the Canadians and the Europeans and especially those who ship Chinese products to the United States) are also looking to leave China. Because this article shows the EU is very cognizant of not becoming too dependent on China and this free trade deal it made with Vietnam is huge and is going to lead even more European companies to leave China for Vietnam. Here’s the thing about Vietnam right now though: it is getting pretty busy and so finding good suppliers and getting products made there and shipped from there just keeps getting tougher. Also, many are worried that the U.S. will slap tariffs on Vietnam because of suspicions that it is engaging in massive amounts of illegal transhipping. See U.S. Slaps Import Duties of More Than 400% on Vietnam Steel and US-China Tariff Updates: What You Can (and Should NOT) do NOW. 
  5. Professor faces 219-year prison sentence for sending missile chip tech to China. Verge. Because academia should be international and non-discriminatory and because few want to see the U.S. revert to McCarthyism or WWII type concentration camps or similar. And yet, there are indisputably spies amongst us.  Because this is such an important issue that SupChina has begun tracking it in The U.S. Sinophobia Tracker: How America Is Becoming Unfriendly To Chinese Students, Scientists, And Scholars, which itself is well worth bookmarking. For the flip side, read Chinese Universities Ordered to Spy on Staff, Students in Ideological Crackdown.
  6. Sun, Sand, and the $1.5 Trillion Dark Offshore Economy. Because there will always be tension between countries that want massive privacy to encourage foreign companies to use their country for their offshore companies on the one hand and countries that want transparency for tax and national security reasons on the other hand. Our observation as international lawyers is that too often companies believe offshore companies are more valuable than they really are and too often they are encouraged in this belief by service providers who want to make a buck by setting up these offshore companies and then continue making a buck by servicing them indefinitely. We had a company come to us with about 50 offshore entities for which it was spending about $250,000 a year (not to mention employee time) and our international lawyers restructured them down to four entities in a few weeks, for which this company is eternally grateful.
  7. From seed to Series A: Scaling a startup in Latin America today. Because so many countries in Latin America are doing well economically and yet it is still not on the radar of enough American or European companies. Because about ten years ago I asked a very large Central American retailer of a particular product what its costs savings were in China and they told me China cost more than having their products made in Central America and so I then asked whether it was a quality issue and they said that the quality was better in Central America also. They then explained that Central American consumers assumed products from China were cheaper and of better quality and so this company felt it had no choice but to use China for manufacturing. I do not know if this is still true, but I do know that foreign companies — especially US and Canadian companies need to start more seriously looking at Latin America and many are.
  8. A math equation that predicts the end of humanity. Vox. Because humanity has only 760 years left!?
  9. First photos of British tourists who ‘plunged to death taking selfie’ in Spain. The Mirror. Because with so many people dying while taking selfies, we may actually have less than 760 years left.
  10. Huawei staff CVs reveal alleged links to Chinese intelligence agencies. The Telegraph. Because Huawei keeps claiming it is independent of the Chinese government but pretty much all the direct and circumstantial evidence and common sense says this is not true. Why would a company this big not be publicly traded if it were not controlled by the Chinese government/military?