How to form a China WFOE lawyersChoosing to enter the Chinese market via a WFOE is still very much a viable business decision for many companies.  See Why NOW Is a Good Time to Double Down on Doing Business in China. The purpose of this post is to provide guidance to facilitate a quick and effective China market entry.

I will primarily focus on those areas a company can control in the market entry process, recognizing there are also steps in the process that cannot easily be controlled and are to a greater or lesser extent at the mercy of the Chinese bureaucracy.

Many mistakenly act as if forming a WFOE and successfully acquiring a business license to operate in China are the major objective of the market entry process.  But, China market entry is really only a means to an end. Your objective in entering China should be to become operational as quickly and efficiently as possible and creating a WFOE and obtaining a business license are just parts of that process.  Toward that end I offer the following five suggestions for a faster and more successful market entry.

1. Have a strategic China long-term plan and detailed operating plan with realistic financial and staffing plans.

Doing business in China typically requires a greater commitment of upfront resources than almost any other market and that should not be underestimated.  Having a realistic grasp of your China WFOE’s business scope, financial and capital needs, and staffing requirements before you get started on your WFOE formation will save you a great deal of pain later on.  All of this presumes your company has done appropriate due diligence in understanding the China market opportunity and risk.

2. Have a China knowledgeable project manager with recent in-country experience to lead the process.

This person must be a credible individual with sufficient gravitas, influence, and access to senior company leadership and the board, if necessary. This can be an internal or external resource (I have operated in both capacities), but your market entry process needs to have effective project management to ensure all the balls in the air are being tracked and moving in the right direction at the right time. Just pulling in someone you know in China is not going to cut it.

3. Parallel process as much as possible.

Your company’s best outcome will to be operational as close to receiving your business license as possible. This means working on naming your Chinese WFOE (which is always harder than it sounds), working on securing trademark and other IP protections, leasing and building out an office, hiring staff and identifying a local payroll provider, engaging a local accounting firm, developing a banking relationship, all of which need must be completed for your WFOE to be fully operational.  Most of these activities (and more not listed) are best done concurrently during the licensing application process.  A few things need to be sequential, but the more you can parallel process, the more likely you will hit the ground running when your license is approved.

I have too often seen companies complete the minimum steps required to set up their WFOE and receive a business license, only to waste months of precious time and resources because they were not prepared to actually conduct business once their WFOE was formed.  A useful question to ask at the beginning of your China WFOE process is: “What do I need to have in place to be able to conduct business on day 1?”  That is your target at the end of the business license process.

4. Be prepared to make decisions quickly and delegate as much as is feasible to the project manager.

Your company will need to make many decisions during its China market entry process, any of which could derail or delay your desired timeline, often for extended periods. For example, I have seen companies agonize and debate over office location decisions for months on end while the clock on their WFOE formation continues to tick. Even something as simple as agreement on the Chinese company name can create unnecessary delays. An experienced project manager can help you understand what decisions need to be made and when they will need to be made. They can also help prepare your company in advance for these key decisions so they do not come to you as a surprise.

5. Have a trustworthy local Chinese representative/liaison to follow-up with local government officials on the business license application.

Having someone credible on the ground in the city in which you will be forming your WFOE is essential. This person is necessary to bird-dog your application process and maintain regular contact with local officials so as to keep your WFOE application on track and so as to give early warnings when something needs to be addressed. Many district governments have business development staff that can be helpful in running the WFOE formation gauntlet. An effective local liaison can help bring a problem to light that may have sat on a government official’s desk for months without the company knowing anything about it. If you do not have your own such person (and most companies do not), be sure your WFOE formation lawyers have access to such a person.

These above five suggestions are not meant to be exhaustive, by any means. But they together make for a good starting point to help you control the things you can control and accelerate the time it will take for your China WFOE to become fully operational.


The above is a guest post by Patrick O’Hara, an international business consultant with 25 years of high-level China business experience, with big public companies and private equity funded tech companies. I asked Patrick to write this post because our law firm’s China lawyers have worked with Patrick on many China matters and we view him him as one of the smartest and best prepared and easiest to work with clients ever. Our China WFOE lawyers worked with Patrick on setting up a WFOE in China and getting that WFOE operational and that WFOE set-up was easily one of the two or three smoothest, best run, and fastest WFOE formations we’ve ever done, and I attribute that largely to Patrick. He he had lined up and prepared the right people to help every single step of the way in forming the WFOE and getting it operational Our China WFOE lawyers are always asked: how long does it take to form a WFOE? Our answer invariably includes stating that the biggest factor in how long it takes to set-up a WFOE is you, the client, not us the WFOE lawyers, nor the Chinese government. A prepared client able to make quick decisions is key. I asked Patrick to write the above because I figured our readers could learn a lot from Patrick. I have. 


US China trade deal

US-China Trade Deal As we have noted in previous posts, the trade war with China goes far beyond the Section 301 tariff action. The New Normal between the United States and China includes a host of U.S. government actions directed at China’s high tech sector, with an export ban under the Department of Commerce Entity List system as one of the most powerful tools.

Huawei was the first target under the Entity List ban and the Department of Commerce just expanded its Entity List to include five Chinese entities that develop supercomputers and supercomputer technology. The reason given for these latest bans is that China uses supercomputers for military purposes which negatively impacts United States national security.

This new ban falls within the traditional use of the Entity List to deal with technology having military uses. Note however that pretty much every high tech product has potential military uses and that just about every high tech Chinese company has at least some relationship with China’s military. This means this type of ban can be used very expansively against China’s high tech, electronics, and telecommunications industrial complex. The implications of these latest bans therefore extend beyond this specific action.

This new Commerce Department ban list can be found here. The list really breaks down into two sets of companies: one owned by Sugon/Dawning (曙光) and the other the Wuxi Jiangnan Institute of Computing Technology and its aliases:

Sugon Group.

  • Chengdu Haiguang Integrated Circuit, including two aliases (Hygon and Chengdu Haiguang Jincheng Dianlu Sheji);
  • Chengdu Haiguang Microelectronics Technology, including two aliases (HMC and Chengdu Haiguang Wei Dianzi Jishu);
  • Higon (Hygon), including five aliases (Higon Information Technology, Haiguang Xinxi Jishu, Youxian Gongsi, THATIC, Tianjing Haiguang Advanced Technology Investment, and Tianjing Haiguang Xianjin Jishu Touzi Youxian Gongsi)
  • Sugon (Shuguang), including nine aliases (Dawning, Dawning Information Industry, Sugon Information Industry, Shuguang, Shuguang Information Industry, Zhongke Dawn, Zhongke Shuguang, Dawning Company, and Tianjin Shuguang Computer Industry);

Wuxi Jiangnan Institute of Computing Technology, including two aliases (Jiangnan Institute of Computing Technology and JICT).

Sugon is one of the major manufacturers of supercomputers for public use and its product offerings can be seen here. The companies in the Sugon group are majority owned by Sugon and are infected by that ownership. The ownership of Sugon itself is unclear, but it started as a state owned company and the assumption is that it is still controlled by the PRC government. The ban notice justifies including Sugon by stating that “Sugon has publicly acknowledged a variety of military end uses and end users of its high-performance computers.”

The justification for adding Wuxi Jiangnan Institute of Computing Technology is more direct. Wuxi Jiangnan is owned by the 56th Research Institute of the General Staff of China’s People’s Liberation Army and as stated in the ban notice, “Its mission is to support China’s military modernization.” This means applications in battlefield communications, satellites, cyber-hacking and cyber-warfare. It is not clear why the U.S. waited so long to add this company to the Entity List.

The impact of the Entity List classification is the same as for Huawei. U.S. companies are prohibited from selling hardware or software or services to the companies named on the list and the ban extends to non-U.S. companies that include these U.S. items in what they sell to the banned Chinese companies. So the impact goes beyond hardware and it extends beyond U.S. borders.

The PRC has been very proud of its  supercomputing advancements. Now we will see whether supercomputing can continue in China without access to U.S. inputs in hardware, software and services.

The timing of these latest bans is significant also in its impacts on the restart of trade negotiations between China and the United States, with Presidents Xi and Trump scheduled to meet next week at the G20 summit in Japan. The purpose of these discussions is supposed to be to attempt to restart negotiations for resolving the Section 301 tariff issue. In a recent post, Does China WANT a Second Decoupling? The Chinese Texts Say That it Does,

I wrote about how the official China press has been indicating China is anything but enthusiastic about reaching a resolution with the United States. Timing this supercomputer ban to be effective on June 24, just four days before the G20 meetings in Osaka, indicates the U.S. also is less than enthusiastic about reaching quick resolution with China. Optimists who see a quick resolution due to the personal “chemistry” between Xi and Trump may want to take these developments into account.

Many believe there will be resolution before the 2020 election so President Trump can go into that election claiming victory. But I tend to think the exact opposite may be true. If President Trump reaches a deal with China, it is virtually certain not to be nearly as good a deal as the United States has been seeking and it will open Trump up to criticism by the Democratic Party nominee that he was not “tough enough” with China. If Trump holds out against China, he does risk weakening the U.S. economy, but he also will be able to claim he needs to be re-elected to finish the fight against China.

Either way, since October of last year, we have been pushing our clients to reexamine their China operations and plans in light of US-China tensions and we fully intend to continue doing so. We remain of the view that a US-China trade deal will — at best — merely slow down the straight-line worsening of relations between these two countries and we believe China-Europe relations will trail what happens between the US and China.

Literally the day before President Trump’s tweet regarding his plan to institute a 25% tariff on another $250 billion of Chinese goods, we wrote a long piece, entitled The US-China Trade War: Winter is Coming, in which we wrote how no trade deal between the United States and China will change much between them and how the trade war will merely go forward on other fronts. We concluded that post (as we have so many other posts) by exhorting foreign companies to look closely at their own business relationships with China:

How though should your business respond to all this? To quote an old investment adage, “the trend is your friend,” and right now the trend is for the West and China to continue decoupling. This means the most important thing for your business is to be cognizant of this and to monitor it. We keep writing about this because we see it as likely to impact nearly all foreign companies that do business with China, even those from countries whose relations with China are much better than those between the United States and China. No matter in what country your company is based, if you do business with the United States — especially if you have your products made in China and then sell them to the United States — your business is at risk of becoming entangled by the decoupling.

If you want to see your company go into China or have its products made by China or increase its China presence, you should be prepared to explain to your company’s decision makers why you believe your business will not fall prey to US-China tensions. If you are having your products made in China, you almost certainly are already looking to reduce your China exposure, but in doing your cost benefit analysis for that, consider whether yours is the sort of business whose sales might increase merely by being able to tell its customers/consumers that your company does no business with China. And yes, this is going to sound self-serving (and it is, but it is also true), you need to more than ever make sure you are not doing anything that might make you an easy target of the Chinese government. In other words, make sure your company is in full compliance with China’s laws, particularly its tax, environmental, employment and bribery laws.

This advice stands.

International trade lawyers China tariffs

The U.S. Trade Representative (USTR) officially announced an exclusion request process for specific products on the $200 billion (List 3) of Chinese products. These are the products that recently had their tariff rate increased from 10% to 25% starting on May 10, 2019.  Any exclusion requests granted for the List 3 products will be effective from September 24, 2018, when the 10% tariffs were first applied.  Any granted exclusions will be valid for one year from the date the exclusion grant is published in the Federal Register.

The key dates for the List 3 product exclusion requests are as follows :

June 30, 2019, noon EDT – USTR will open a web portal for exclusion requests to be filed.  One new wrinkle – USTR is requiring parties to register through the portal before filing their exclusion request.

September 30, 2019 – Deadline to submit List 3 product exclusion requests.

In other words, you must file your exclusion request between June 30 and September 30, 2019. You must file your product exclusion request via the USTR’s web portal, which does not actually become operational until noon Eastern Time on June 30.

After a product exclusion request is posted on USTR’s web portal, interested parties will have fourteen (14) days to comment on that request, either by expressing their support for or their opposition to it.  Replies to responses must then be filed within seven (7) days of the posting of the response.

If your product exclusion is granted, it will be effective for one year from the date your exclusion is published in the Federal Register and it will be retroactive to September 24, 2018.

A List 3 product exclusion request will be similar to that used for the prior two lists of tariffed Chinese products (List 1 – $34 billion, List 2 – $16 billion), but it will require additional and more detailed information.

Exclusion requests are to cover only a single product, and must include the following information:

  • the 10 digit subheading of the HTSUS applicable to the particular product requested for exclusion.
  • the physical characteristics (e.g., dimensions, material composition, or other characteristics) of the product that distinguish it from other products within the covered 8-digit subheading.
    • USTR will not consider requests that identify the product with criteria that cannot be made available to the public.
  • The product function, application, and principal use.

Unlike prior exclusion requests, USTR will ask submitting parties to provide more detailed sales and financial information, including the following:

  • The company’s gross revenue for fiscal year 2018, first quarter 2018, and first quarter 2019.
  • The percentage of the company’s 2018 total US gross sales that were accounted for by the Chinese products.
  • The quantity and value of the company’s purchases for 2017, 2018 and first quarter 2019, not only for the Chinese imports, but also from domestic and third-country suppliers.
  • Whether the Chinese product is a final product or an input.  If an input, companies will need to report the percentage of the total cost of the finished product that is accounted for by the imported Chinese input.
  • Whether your company is a “small business,” as defined by the Small Business Administration.
  • Your relationship to the product. Whether you are an importer, U.S. producer, purchaser, industry association, or “other.”

Exclusion requests also should address the following factors:

  • Whether the particular product is available only from China.  In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
    • Requestors are asked to discuss any attempts to source the product from the United States or third countries.
  • Whether imposition of additional duties on the particular product would cause severe economic harm to the requester or to other U.S. interests.
  • Whether the particular product is strategically important or related to “Made in China 2025” or to other Chinese industrial programs.
  • Requesters may also provide any other information or data that they consider relevant to an evaluation of the request.

As you can tell from the above, this latest round of exclusion requests will require a lot more work and a lot more expertise and knowledge (especially regarding China) than the previous exclusion requests. Even with the easier previous exclusion requests, my firm’s international trade lawyers had to turn down a rash of companies seeking our assistance only days before the filing deadlines. Do NOT let that happen to you, especially this time around. Instead, line up your international trade lawyer now (it would be good if that lawyer can read Mandarin or if some other lawyer in that attorney’s firm can do so) to start gathering up key information and preparing your exclusion request now.

It is hard to predict what the chances of prevailing on a tariff exclusion will be (maybe 20-25% overall), but if you do prevail, your economic windfall can be huge, especially since it will mean your tariffs going back to September, 2018 will be retroactively rescinded. No matter what though, do not wait to submit your China tariff exclusion request.


international law

This is part 6 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.  World’s Top Bicycle Maker Says the Era of ‘Made in China’ Is Over. Bloomberg. Because that era is indeed over (or will be in a few years, depending on how you define it) and because the sooner everyone realizes this, the sooner everyone can move on to the next questions, which include, where will companies go to have their products made? What will this mean for China? What will this mean for the world?

2.  Is Catalonia the next American dream? Generalitat de Catalunya. Because it is amazing (even though our law firm has a thriving Barcelona office) how much American investment there is in Barcelona and how fast it is growing. 28% of all tech investment is coming from America. Because when we opened our first Spain office  back in 2016, people often asked, why Spain and not England or Germany? My response was because Spain is growing faster, is more central, way less expensive, and it will help our Latin American clients. We don’t even get the “why Spain” questions any more.

United States Languages other than Spanish3. Chinese Cash That Powered Silicon Valley Is Suddenly Toxic. Wall Street Journal.  “As U.S. startups reject their money, Chinese venture-capital firms in U.S. are dialing back investments.” Because there are a lot of reasons for this and because this holds true  for more than just tech: China is doing whatever it can to stop foreign currencies from leaving China, Western companies are wising up to China IP theft, Western governments are closely scrutinizing such deals, and teaming up with Chinese companies does not play well politically or in the market.

4.  Watch Bob Dylan perform ‘Hurricane’ live for the very first time, 1975. Far Out. Because this is one of the best protest songs by one of the best protest (or other) songwriters. Because my father was born and grew up in Patterson, NJ, where this took place.

5.  Inside China’s ‘thought transformation’ camps. BBC. Because this 12 minute video will let you watch and decide for yourself.

6.  This map shows the most commonly spoken language in every US state, excluding English and Spanish. Business Insider.  Because this map is interesting and important and — for me anyway — surprising. For example, I had no idea Vietnamese is the most common language spoken in Oregon (after English and Spanish), even though we have an office there and I go there all the time.

7.  What Do You Call Those Plastic Tubes of Colorful Ice? Food Network. Because, as George Orwell said, “if thought corrupts language, language can also corrupt thought.” Because the correct answer is Otter Pops and the best color is blue and it is important the world know this.

8.  Google tried to prove managers don’t matter. Instead, it discovered 10 traits of the very best ones. Inc. Magazine. Because management shapes your company and because Google is good with analytics.

9.  Genius hid a Morse code message in song lyrics to prove Google was copying them. Because Google is not infallible. Because when I was a young lawyer I helped defend Rand McNally in an antitrust case in which we damaged plaintiff’s credibility by showing it had copied a Rand McNally map. We did this by proving plaintiff had copied a subdivision from a Rand McNally map that did not actually exist, but had been put into the Rand McNally map  to catch copycats. These fake map portions were known as “traps” and, lucky for us, this IP theft was made more memorable for the jurors because Rand McNally had named the streets of the non-existent subdivision after the various members of the Von Trapp family.

10.  What Hong Kong Protests Mean For Business. Global Finance Magazine. Because not only are companies thinking twice about China, they are thinking twice about Hong Kong as well. Because our own Steve Dickinson has the money quote:

Steve Dickinson, an attorney with law firm Harris Bricken which specializes in corporate law in China, added that the protests, coupled with the growing integration of Hong Kong with the PRC, will likely push financial professional and multinational to other Asian hubs.

“Singapore will be the most likely beneficiary, but Bangkok, Taipei, Tokyo and Seoul will also benefit,” he tells Global Finance. “The PRC would like these folks to move to Shanghai. But recent actions on the part of the PRC government driving away expats of all types means that a move to Shanghai is not going to happen.”

11.  It’s a Winner-Take-All World, Whether You Like It or Not.Atlantic. Because I am still mulling over and discussing whether this is true or not, but either way, I know/feel this is an important issue and I would love your thoughts on it.

Your thoughts on any or all of the above?

Please don’t be shy!

Presidents Xi and Trump prepare for a meeting next week at the G20 event with the purported goal of restarting negotiations to resolve the Section 301 tariff dispute and other trade issues between the U.S. and China. Many analysts and business people from both countries are confident this meeting will lead to resolution. Unfortunately, this hopeful position ignores that there is a strong faction within China that does not want a resolution. This faction argues strongly for China de-coupling from the United States.

A summary of the views of this faction was recently been published in Qiushi (Seeking Truth), under the title Several Issues That Need to Be Clarified Regarding the U.S. China Trade Deficit(中美经贸摩擦需要澄清的若干问题). You can find the Essay on the Qiushi website here. Qiushi is the Chinese Communist Party’s (CCP) official ideological mouthpiece. This journal is controlled by Wang Huning, widely considered to be Xi Jingping’s one man think tank. Not everyone in China agrees with Wang Huning and Qiushi. But the current view is that Qiushi provides the guiding core policies for President Xi as he works his through China’s current set of policy disputes with the United States and Europe. For this reason, one must consider the position taken in this essay.

The first thing to note about this essay is that it brings back the standard Maoist anti-U.S. rhetoric of the Cultural Revolution. This is the stuff I read when studying Chinese during that time. I thought we were done with that, but I was wrong. The essay describes the United States as a political and technological hegemonist, a trade bully, a user of strong arm techniques against weaker nations, a unilateralist, a practitioner of fundamentally unfair trade, and a hypocrite that follows a “kick out the ladder policy” designed to keep the developing world in a subordinate state.

In keeping with this basic rhetorical position, the essay asserts that the US-China trade dispute is 100% the fault of the United States, whose sole goal is to keep China down. China will therefore resist without faltering so as to defeat the U.S. Beyond this rhetoric, I note two additional key features of the essay.

First, as has been consistent with China’s position since 2018, the essay asserts that the entire dispute between China and the United States is a balance of trade issue. The essay correctly points out that free trade economists in the U.S. (Paul Samuelson, Paul Krugman) have long argued that it is virtually inevitable developed countries like the United States will have a manufactured goods trade imbalance with developing countries like China. Though this may be true, this issue is not relevant to the Section 301 dispute or to the related disputes related to the Huawei ban or the earlier ZTE ban.  See 2019 Special 310 Report and Update Concerning China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property and Innovation.

The essay does not address the core issues between the U.S. and China: IP theft conducted by Chinese companies and the Chinese government, China’s forced technology transfers, China’s closed cloud and network markets, China’s closed financial markets, China’s policy of exporting it overcapacity in steel and other metals and manufactured goods, China’s government subsidies to SOEs and to key industries that distort world prices, or Chinese company evasions of Iran, North Korea and other sanctions.

Stated simply, the Essay completely ignores the 301 Report issues that are at the heart of the tariff dispute. See The New Normal in US-China Relations and What to do About that. The Essay does not even bother to treat the 301 Report as lies. It could have analyzed the 301 report item by item and stated China’s position on each issue, but it did not. Instead, it follows a series of Chinese white papers that completely ignore the key issues.

China ignores the key claims in the 301 Report because those claims make China look bad and because they are all true. The EU, Germany and other market economy countries from around the world have all clearly stated they agree with the factual claims in the 301 Report. Many (most?) do not agree with the United State’s tariff approach, but they agree with the basic facts. Since the essay cannot refute the facts, it resorts to factual analyzing non-301 matters and to name calling.

Second, it is not wholly accurate for me to say the essay ignores IP completely. It does not ignore intellectual property; it denies the concept entirely. It essentially says there is nothing for China to say about IP theft since there is nothing to steal. The essay takes the position that intellectual property does not exist and that every person in every country should be free to make use of science and technology without regard to the person or company that developed the technology or made the discovery. Science and technology cannot be owned and countries that assert ownership of IP is fundamentally wrong. This is Maoist rhetoric from the 60s. Property is theft (Pierre-Joseph Proudhon). Moreover it is a form of theft designed to keep China and other developing countries down.

Lest you think I exaggerate, here is the lead sentence from Section 4 of the essay: “Science and technology are the crystallization of human civilization and is the common wealth of human society.” ( 科学技术是人类文明的结晶,是人类社会的共同财富.) “Common” is used here to mean something that cannot be owned or appropriated by any single country or individual. The essay then goes on to say that the U.S. government and its companies seek to illicitly appropriate property from human society. The United States is seeking to block the free flow of science and technology to China.

The essay points out that access to modern technology is essential for China’s economic development/ The U.S. exercises technological hegemonism by not allowing China free access to that technology. It then concludes by stating that “opposing technology hegemonism is our [China’s] mission and that is our right.” (反对科技霸权,这是我们的使命,也是我们的权利). This position justifies Chinese government IP theft, cyber-hacking and forced technology transfer and though these acts violate all international rules relating to intellectual property protection , they are okay. In fact, these acts are part of China’s glorious mission.

This is a long standing Maoist argument, usually made by outsiders, not CCP insiders. By allowing China into the WTO, WIPO and other international trade and IP organizations, these sorts of arguments by the Chinese government were supposed to stop. But here they are again in 2019, expressed by the CCP’s “flagship” policy organ. So the take away from this essay has to be that the Chinese government plans to continue maintaining its closed economy to protect China from unfair trade and it will continue stealing IP from other countries so as to combat technological hegemonism. China will do this because it is morally right and right for China and it will do this unless and until it is forced to do something different.

The rest of the essay focuses on the damage to the U.S. economy that comes from tariffs, trade barriers and isolationism. The essay assumes the United States is so dependent on “China priced” products that it will soon back down in its trade dispute with China. The strong opposition to the tariffs shown at the recent tariff hearings and recent complaints from Google about the Huawei ban are seen  by China as evidencing the weakness and decadence of the U.S. government and its citizens. If China simply holds the line, China will prevail. Not only is China in the right, but China is on the side of history.

Is this the message Xi Jinping will be taking to the G20 meeting? Many analysts think essays like this are just bluster written in Chinese for a Chinese audience. I am far less sure. It is important not to underestimate what the CCP is willing to do and how much pain it is willing to have the Chinese people endure. China has a history of decoupling from the rest of the world and it could do it again. It is a real threat that should not be discounted just because of the pain it will cause to China.

China’s first decoupling was from the Soviet Union. The Soviet Union was the CCP’s main supporter and largely responsible for creating the People’s Republic after 1949. But by 1966, the Soviet Union completely de-coupled from China, withdrawing its technology, advisors and financial support. This decoupling led to the Cultural Revolution and to decades of chaos in China, right up to the Deng reforms of 1992. President Xi is openly opposed to the Deng reforms and many of his closest advisors long for the ideological purity represented by the Cultural Revolution.

The complaints being made about the U.S. in this essay are the same complaints made about the Soviet Union before that decoupling. The result was that the Soviet Union could not take it any longer and it decoupled. The same thing could happen with the United States and China, and the impetus would come from within China. It is a mistake to assume President Xi is unwillingly to see China endure a second decoupling. More troubling perhaps is that there is little the United States can do to influence China’s decision to capitulate to U.S. demands or to decouple. Forcing China to do what the United States (and to a somewhat lesser extent, the EU) want is not a real option. If you disagree with the above, I urge you to read what is written in China in Chinese, not the pablum and propaganda China feeds to outsiders. And trust me when I say that Robert Lighthizer’s team has read this essay (and more).

International manufacturing lawyers

For many, the short answer is yes.  Let me explain….

First there are the tariffs, which come and go and come and go, but are always a risk for any company that buys product from China for sale in the United States. They are a risk because the $10 widget you buy from China today may cost you $12.50 if you end up having to pay a 25% tariff on it in the end. Yes, there are all sorts of things that can be done (and my firm’s international trade lawyers seem to be spending half their waking hours doing these things for our clients), but in the end your product prices from China will almost invariably go up. Will the Trump-Xi meeting in Japan at the end of this month solve this problem? Highly unlikely.

Then there are the duties, which for many of our clients are (and should be) the scariest thing of all. These are typically anti-dumping (AD) and countervailing duties imposed on Chinese products by the United States and the European Union. Far too few companies are familiar with these duties until they get hit with a massive bill for them. The United States International Trade Commission describes these duties as follows:

Under the Tariff Act of 1930, U.S. industries may petition the government for relief from imports that are sold in the United States at less than fair value (“dumped”) or which benefit from subsidies provided through foreign government programs. Under the law, the U.S. Department of Commerce determines whether the dumping or subsidizing exists and, if so, the margin of dumping or amount of the subsidy; the USITC determines whether there is material injury or threat of material injury to the domestic industry by reason of the dumped or subsidized imports. For industries not yet established, the USITC may also be asked to determine whether the establishment of an industry is being materially retarded by reason of the dumped or subsidized imports.

Antidumping and countervailing duty investigations are conducted under title VII of the law. The USITC conducts the injury investigations in preliminary and final phases.

Preliminary Phase Antidumping Investigations (Imports Sold at Less Than Fair Value) and Preliminary Phase Countervailing Duty Investigations (Subsidized Imports)

When: After the simultaneous filing of a petition with the USITC and the U.S. Department of Commerce, the USITC conducts a preliminary phase injury investigation.

Duration: The preliminary phase of the investigation usually must be completed within 45 days of the receipt of the petition. If Commerce has extended its deadline for initiating the investigation, the USITC must make its preliminary injury determination within 25 days after Commerce informs the USITC of the initiation of the investigation.

Finding: The USITC determines, on the basis of the best information available to it at the time of the determination, (1) whether there is a “reasonable indication” that an industry is materially injured or is threatened with material injury, or (2) whether the establishment of an industry is materially retarded, by reason of imports under investigation by the Department of Commerce that are allegedly sold at less than fair value in the United States or subsidized.

If the USITC determination is affirmative, Commerce continues its investigation. If the USITC determination is negative, the investigation is terminated. However, if the USITC, in making a preliminary or final determination, finds that imports from a country are negligible, then the investigation regarding those imports must be terminated. Imports from a country under investigation are deemed negligible if they amount to less than 3 percent of the volume of all such merchandise imported into the United States in the most recent 12-month period preceding the filing of the petition for which data are available.

There are exceptions to this rule. One exception is that when imports from more than one country are subject to investigation as a result of petitions filed on the same day, imports from one or more of those countries under investigation will not be deemed negligible if the sum of imports from countries subject to investigation whose imports are less than 3 percent on an individual basis collectively amounts to more than 7 percent of the volume of all such merchandise imported into the United States. Further, if there is a potential that imports will imminently exceed the 3 percent or 7 percent thresholds, such imports will not be deemed negligible for purposes of the USITC’s threat determination. There are also other exceptions to the negligibility rule.

Final Phase Antidumping Investigations (Imports Sold at Less Than Fair Value) and Final Phase Countervailing Duty Investigations (Subsidized Imports)

When: After a preliminary affirmative determination by the Secretary of Commerce (or after a final affirmative determination if the preliminary determination was negative) that imported products are being, or are likely to be, sold at less than fair value or are subsidized, the USITC conducts the final phase of the injury investigation.

Duration: The USITC final phase injury investigation usually must be completed within 120 days after an affirmative preliminary determination by the Secretary of Commerce or within 45 days after an affirmative final determination by the Secretary of Commerce, whichever is later. However, in cases in which the Commerce preliminary determination is negative but the Commerce final determination is affirmative, then the USITC final injury determination must be made within 75 days.

Finding: The USITC determines (1) whether an industry in the United States is materially injured or threatened with material injury, or (2) whether the establishment of an industry in the United States is materially retarded, by reason of imports that the Department of Commerce has determined to be sold in the United States at less than fair value or subsidized.

If the USITC determination is affirmative, the Secretary of Commerce issues an antidumping order (in a dumping investigation) or a countervailing duty order (in a subsidy investigation), which is enforced by the U.S. Customs Service. If the USITC determination is negative, no antidumping duty or countervailing duty orders will be issued. If the USITC makes a finding of negligibility, the investigation regarding those imports will be terminated.

USITC determinations may be appealed to the U.S. Court of International Trade in New York City, or, in cases involving Canada and/or Mexico, to a binational panel under the auspices of the North American Free Trade Agreement. (For further information on antidumping investigations, see section 731 et seq. of the Tariff Act of 1930, 19 U.S.C. 1673 et seq. For further information on countervailing duty investigations, see section 701 et seq. of the Tariff Act of 1930, 19 U.S.C. 1671 et seq.)

Section 753, Tariff Act of 1930

In the case of a countervailing duty order with respect to which an affirmative determination of material injury by the Commission was not required at the time the order was issued, interested parties may request that the Commission initiate an investigation to determine whether an industry in the United States is likely to be materially injured by reason of imports of the subject merchandise if the order is revoked. Such requests must be filed with the Commission within six months of the date on which the country from which the subject merchandise originates becomes a signatory to the Agreement on Subsidies and Countervailing Measures. (For further information, see section 753, Tariff Act of 1930, 19 U.S.C. 1675b.)

The following five things make up most of what you need to know about these duties:

1. These duties mostly apply to products that have been subsidized by a foreign country. China clearly subsidizes some of its products and it arguably subsidizes all of them. China is the highest risk country, by far and its list of products subject to duties is roughly five times more than any other country.

2. These duties can be massive and they typically range from 50% on up to 200%+.

3. These duties can be imposed retroactively. In other words, you may be hit with a 200% duty on those widgets you bought from China last year. Not kidding.

4. Having your China products go to some other country before you bring them into the United States or the EU will not change a thing, other than to perhaps put you at risk for illegal transhipment fines and criminal penalties. See US-China Tariff Updates: What You Can (and Should NOT) do NOW. The US and the EU are aggressively seeking out companies that claim their products from China to be from somewhere other than China. The South China Morning Post did a story on this just today.

In Importing From China (Directly OR Indirectly) has Big RETROACTIVE Risks, one of our trade lawyers (who was at the time working on a massive case involving illegal transshipment that eventually led to a $60 million+ settlement), back in September, 2018, warned about the duty risks on China products:

If you are importing product originally from China covered by or even maybe covered by an antidumping or countervailing duty order, you must be very careful, no matter the country from you are directly importing the product. Two recent U.S. Commerce Department decisions to expand antidumping (“AD”) and countervailing duty (“CVD”) orders on hardwood plywood to cover ready to assemble cabinets highlight this problem.

Earlier this month the U.S. Commerce Department issued a final scope ruling on Ready To Assemble (“RTA”) Cabinets in the Hardwood Plywood AD and CVD case, finding no exclusion for RTA cabinets. Commerce held that this exclusion from AD and CVD duties applies only to cabinets sold to an ultimate end user (the consumer) and not to RTA cabinets sold to contractors that then install them. With this ruling Commerce effectively expanded the AD and CVD orders to cover RTA cabinets sold to the construction industry, which many (most? importers previously believed were excluded by language in the AD and CVD orders.

The RTA kitchen cabinet exclusion does not expressly address the manner in which RTA kitchen cabinets must be packaged to be suitable for purchase nor does it expressly define the term “end-user.” Nevertheless, the exclusion’s requirements require RTA kitchen cabinets be “packaged for sale for ultimate purchase by an end-user” and be packaged with “instructions providing guidance on the assembly of a finished unit of cabinetry.”

This decision exposes US importers of RTA cabinets to millions of dollars in retroactive liability for AD and CVD duties. U.S. cabinet importers that stuck their head in the sand while this AD/CVD exclusion case was pending will likely soon be hit with an enormous bill from the US government.

Years ago, my firm’s international trade lawyers handled a review investigation involving high tech products from China covered by an AD and CVD Order for a Chinese exporter/producer company. Much to the Chinese company’s surprise, the Commerce Department had determined that this small Chinese company was a mandatory respondent and that meant it would need to respond to the entire Commerce questionnaire and be subject to verification.

The Chinese company explained that it had never exported these high tech products to the United States, but it admitted to having sold its products to a Canadian customer. It had no knowledge of what this Canadian customer did with its products and it did not know whether the Canadian company exported the products to the US from Canada.

Under United States AD and CVD law, sales made by a Chinese company and imported into the United states are generally considered to be U.S. sales by the Chinese company if the Chinese company knew when it made the sales that its products were destined for the U.S.  In other cases, Chinese companies have been found to be respondents in AD and CVD cases if their packaging revealed that their products were ultimately destined for the U.S.

The problem for the Canadian companies and the U.S. importers in these situations is that the Chinese company that made the Canada sales of products that eventually go to the United States will usually not participate in the AD and CVD review investigation.  But the US importer of the products from Canada will find itself owing substantial AD and CVD duties to the US government. I can remember a company that had to shut down its entire U.S. operations because it had exported chemical products from Canada to the United States that were covered by U.S. AD and CVD orders.  All of a sudden, the U.S. subsidiary was hit with millions of dollars in retroactive liability because of an AD and CVD case.

US importers that import products from Canada or anywhere else in the world that are originally from China need to be careful right now because their products may be covered by United States AD and CVD orders. These companies could wake up one morning and find themselves liable for millions in dollars in retroactive AD and CVD duties. This is truly the sort of situation where an ounce of prevention is worth a pound of cure. Now is the time to review your supply chain for its China vulnerabilities, whether you import directly from China or not.

Since this post the number of new anti-dumping and countervailing duty cases against Chinese products has exploded, to the point that one of our international trade lawyers (who profits from just about every such case filed), had this to say about them in Yet Another International Trade (AD/CVD) Petition Against China: This Time it’s Metal File Cabinets:

The last few months have seen an onslaught of trade actions brought by U.S. companies against incoming products of all kinds from China. With all the trade issues involving China and bipartisan anti-China sentiment prevalent in the United States, now is a great time to bring such actions. The international trade lawyers at my firm almost exclusively defend against antidumping and countervailing duty claims instead of bringing them. So I say this not to encourage more such actions, but as a simple statement of fact. If you are importing products from China, now is the time to know the trade risks of your imports.

Again, the international trade lawyers at my firm make our money by representing the Chinese manufacturers and their US importers so the more petitions brought against incoming Chinese products the more money we make. The more petitions, the more our law firm financially benefits and the more I personally financially benefit.

And yet, from an economic and policy standpoint even I am starting to get concerned by all these cases. I say this because of the massive onslaught of AD/CVD cases being brought against China and how aggressively (on multiple levels) the United States Commerce Department has been on these cases. To the point where I am finding myself wondering how important a trade deal with China will be if the United States giveth on the one hand and then taketh via these AD/CVD cases on the other hand. And is it right for the United States government to almost “on the sly” be pushing American (and foreign companies as well) away from China, without making this policy clearer?

Based on all that I hear from my own firm’s China lawyers and international manufacturing lawyers, many American and European companies are decreasing or eliminating their business with China. See China-US Decoupling Continues and Will Continue, but Must be Done Right and China Manufacturing: Is the Bloom now Off That Rose? and The China-US Trade War and the Winner is….MEXICO. It appears US foreign policy is to drive business from China to countries like Mexico, the Ukraine, VietnamThailand, the Philippines, and Indonesia, among others. Should not our government just come out and say this? What this means big picture is that slowly but surely the price of products from China in the United States is rising and will continue to rise. So as one of our China lawyers so often tells our clients: “you need to act accordingly.”

To put it bluntly, it is open season right now on duty cases against Chinese products and so if having to pay a massive duty on your products scares you, you should really be looking elsewhere, starting right now. And what is true for the United States is pretty much true for the EU as well.

In Apple, Black & Decker and Steve Madden among US companies moving production out of China. Here’s the full list, Fox Business lists out some of the growing list of well-known US companies that have moved their production from China or are planning to do so:

GoPro. The action camera company is moving the bulk of its production out of China to Mexico by mid-2019. It will still continue to manufacture its local products in the country. “Today’s geopolitical business environment requires agility,” GoPro CFO Brian McGee said in December. “We’re proactively addressing tariff concerns.”

Hasbro. The toymaker is shifting most of its production from China to Mexico, Vietnam and India due to Trump’s tariffs.

Steve Madden. The footwear and handbag maker, which ships the bulk of its goods from China, is shifting production to Cambodia. Executives at the Pawtucket, Rhode Island-based company previously said prices during the upcoming holiday shopping season would be higher as a result of the increased duties. “We’d love to make shoes in the United States,” CEO Ed Rosenfeld told NPR. But “it’s very hard to envision a scenario where we’d make the types of products that we make, at the prices that we make them, in the United States.”

Stanley Black & Decker The firm is shifting production of its hallmark Craftsman brand to the U.S., where it is opening a new facility in Fort Worth, Texas. The company plans to hire 500 people for the $90 million plant, but will employ robots and other advanced technology to keep production costs in line with those in China.

Brooks Running The athletic footwear maker owned by Warren Buffett’s Berkshire Hathaway is moving production from China to Vietnam, largely due to the new tariffs. “We’ve had to make a long-term decision on this picture. It’s disruptive, but the reality. So we’ll be predominantly in Vietnam by the end of the year.” CEO Jim Weber told Reuters.

Whirlpool Corp. The company is moving the manufacturing of some of its KitchenAid appliances to the U.S. from China.

Intel Corp. CEO Bob Swan in June told Bloomberg the company is reviewing its supply chain and whether production can be shifted out of China.

Our international manufacturing lawyers are seeing the following:

  1. Our biggest clients are mostly staying in China for the short term, but slowly moving production elsewhere and working on plans to move all or nearly all production out of China in the next few years, either by sourcing from factories outside China or by building their own production facilities outside China. These are the companies that have had been manufacturing in China for a long time, either with their own facilities or with good-sized Chinese companies. These companies are mostly looking at Vietnam, Thailand, Malaysia and Mexico.
  2. Our mid-sized clients are really all over the map, depending largely on their own individual situations. Some are already completely out of China, some simply cannot leave for a long time, if ever, and some are slowly shifting their production to other countries. Those companies that have others make their products for them have been much quicker to leave. Those with their own production facilities are for the most part reluctant to pay to build out new factories outside China until their future becomes even clearer.
  3. Our smaller clients are also all over the map, depending largely on their products. These are companies that do not have their own production factilities and they tend to be very risk averse. We are helping many of them find alternative supply sources in Vietnam, Thailand, Malysia and, to a lesser extent, Mexico and the Philippines. Finding alternative sources for many of these companies has been relatively easy and in most cases their new suppliers are charging less (oftentimes by considerable amounts) than what they were paying in China and that is not even counting their no longer needing to pay tariffs. But for certain products, China is pretty much it. Other clients sell such high quality, high margin items, that it just does not make sense for them even to bother trying to find a new supplier. One client has a medical item made in China for twenty cents, which it then sells in the United States for eight dollars. It sees no reason to spend time and effort trying to find and onboard a new supplier so as to save a nickel.

What will you do? Will the tariffs impact your business? What about the duties?

6-21-2019 Update. Just in case all of the above is not enough to give pause to your China product sourcing, there is now talk of the United States imposing sanctions for China’s internment camps. Not at all clear these sanctions will directly impact US-China trade or product sourcing, but they are yet another indication that US-China relations will continue to detiorate and we fully expect EU-China relations to trail. In other words, the risks just keep rising and they will continue to do so. And if you believe that China’s decoupling is being driven solely by the United States, you must read today’s post, Does China WANT a Second Decoupling? The Chinese Texts Say That it Does. 

Just learned that the US has blocked commercial dealings with five Chinese supercomputer firms, including one US-China joint venture. This is a really big deal. See The U.S. blacklists five Chinese supercomputer firms, including AMD joint venture THATIC.

Teaching English in China

If you are thinking about taking a job teaching English in China, my strong advice to you is DON’T DO IT. Just don’t. Look for such a job in Vietnam or Thailand or Japan or Spain or the Czech Republic or really just about anywhere else in the world. I say this because teaching English in China has become that corrupt, that horrible, that exploitive, and that risky.

Let me explain….

Our international lawyers have always gotten a steady stream of emails from English teachers in foreign countries who are in trouble or not getting paid. Though these matters are invariably too small for us (or just not the sort of work we handle), we do want to help to the extent we can. That “help” usually consists of an email providing “fly-by” legal or career help or even emotional support. We view helping these teachers as a bit of a public service.

In International Education: The Emails We Get, we explained how our international lawyers have inadvertently found themselves on the front lines with this, even though we have never made a single cent from representing an English teacher anywhere in the world.

A couple years ago we wrote a four part series on establishing an international school in China. In part 1, Establishing International Schools in China: The Basics, we discussed the complications foreign parties typically see when trying to start a school in China. In part 2, Establishing International Schools in China: A Deeper Dive, we focused on what it takes to start a School for the Children of Foreign Workers. In part 3, Establishing International Schools in China: A Deeper Dive (Continued), we discussed Sino-Foreign Cooperative Schools and Chinese Private Schools. In this, my last post in this series, I look at future trends for international schools in China. In Part 4, Establishing International Schools in China – Future Trends, we wrote about some of the distinctive issues foreign schools face in China. We also sometimes write about the legal issues stemming from teaching overseas. See e.g., Teaching English In China: Be Careful.

Many of our lawyers and staff attended international schools or are sons or daughters of teachers or professors. I spent my junior year of high school at Robert College in Istanbul, a year studying Spanish at LAE Madrid, and 8 months studying French at the Institut de Touraine. All three are amazing schools and these were some of the best years of my life. My father taught English Literature at a liberal arts college for 36 years. Our law firm has a long history of representing universities and international schools on their international legal work, ranging from helping them set up in foreign countries to licensing technology they’ve developed to foreign companies.

Our writings and our legal work and our various international school connections mean we get 10-20 emails every month from people teaching around the world, roughly be divided into the following four categories:

  1. Visa issues.
  2. Employment contract issues.
  3. Medical and landlord issues.
  4. Starting a school issues.

We went on to talk about how our international lawyers try to do their best to give responses that contain actionable advice, based on the limited time and information we have and the below reflects how we typically handle the four most common categories of foreign teacher emails.

1. Visa Issues. We almost always have to punt on visa issues because our immigration law expertise is mostly limited to business immigration to the United States, with a smattering of additional knowledge gleaned from the transactional work we do in Asia and in Europe. Since none of us have deep immigration law knowledge relevant for foreign teachers our response is usually to urge them to seek out a local immigration lawyer for assistance. I know from my own experience in other countries that there is a veritable ton of bad and outdated immigration law information on the internet and an hour or two with a lawyer who actually knows this area of law can be invaluable. This is pretty much true of all aspects of international law. See China Law Online: It’s All Wrong.

2. Employment contract issues . The typical email we get will say something like “I am a teacher in China and I have been fired for taking a day off because my sister came to visit. Can my school do this?” Our response to this sort of email will usually be something like the following — changed quite a bit for brevity and for emphasis:

I have no idea whether your school can or cannot and for us to know we would first need to make sure we do not represent the school at which you worked (because if we did, we could not represent you) and then we would need to read your contract and then compare that as against the local laws and the province’s laws and China’s laws and then maybe speak with the local employment authorities as well. If it does turn out that the school illegally terminated you we would then need to figure out exactly what we can do about that. Likely that would be registering a complaint with the appropriate Chinese governmental body and using that to try to pressure your employer to take you back, which is very unlikely to happen. When you are not taken back we would then need to look into suing the school. If we did sue the school and you won, we might get an order saying the school needs to take you back and we might get some really small amount in damages. Then again we might also lose. Your school may or may not abide by the order.

The problem with the above is that at some point your China visa may be revoked and you will need to leave China. And win or lose, you challenging this school may lead to you never getting a job in China again and going through the above will be time consuming and expensive.

3. Medical and landlord issues. These emails often come down to money. “The hospital wants $400” or my “landlord wants to raise rent by $100 a month.” As a father, my responses to these are usually nine parts paternalistic, one part legal.

4. Starting a school issues. The typical email will come from someone who has been teaching English in China or in Vietnam or in Poland or wherever and they now want to know what it will take “to open a school for foreign students in X city in Y country.” We then explain the basics of what setting up a school will require and the estimated costs.

Since relations between China and the West (especially the English speaking West) started going into straight line decline about a year ago, the number of these emails have increased exponentially and the problems have shifted. The problems we are seeing these days generally fit into the following three categories:

1. English teacher in jail for a fight or for drug possession. Our advice is to have someone close to them reach out to their country’s embassy and work with the embassy in securing a good local criminal lawyer. We urge them to act quickly and, if at all possible, secure financial support from their parents. We urge them not to publicize their case unless and until their retained lawyer suggests that be done, which is rare.

3. Visa issues.  We usually suggest the teacher work with their school to try to solve these problems (if they trust/like their school) and/or get a good local immigration lawyer/visa specialist to assist. Occasionally we suggest the teacher leave the country.

4. Non-payment or underpayment. These usually involve the school perpetually underpaying, the school being late with payment, the school not paying promised bonuses, not paying for extra hours, not paying the final month’s paycheck under the contract or not reimbursing or paying for the flight home (as per the contract). Our advice is usually to let it go because finding and hiring and paying for a lawyer will likely be difficult and the teacher (just as with the work related problems mentioned above) may well be better off long-term by not making waves.

Pretty routine stuff right? Yes and no and it is the “no” part that is causing me to write this post. The no part is that in the last three months these issues have gone into warp speed. Speaking just for myself, the number of these emails has gone from one or two a month to four to five a day. I have seen at least a ten-fold increase in prison, visa and payment problems for teachers from China (and nowhere else in the world). It has gotten relentless to the point of being depressing. If the emails we are relentlessly receiving are any indication (and they have to be), the following is happening in China in what feels like every minute:

  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.
  3. Teachers are not getting paid. Just this morning I got an email from one teacher who say that she and another 75+ teachers in her city (from various different schools) have not gotten paid for months. And another email mentioning nine teachers in another city who also have not been paid.  Add to this the pretty much daily emails I get from teachers who do not get their last paycheck or the airfare reimbursements or the bonuses they were promised and it has become clear that it is open season right now against foreign teachers in China. The schools clearly believe they can blow off paying their teachers with impunity because they are right. When teachers ask me what they should do about getting paid my response is usually to say that they can retain and pay a local Chinese attorney to try to get paid, but the odds of a foreign teacher prevailing on such a claim are not good and pushing at all hard to get paid can have all sorts of negative ramifications. Schools will pull teacher’s work visas or refuse to assist in moving it to a new employer. They may also seek to have you deported so they can be sure to avoid having to pay wages owed and it is not uncommon for schools to make up claims about their teachers and to threaten to “make sure they will never work in China again.” You therefore need to think long and hard about getting bogged down in these sorts of disputes and even how they might harm your long term career prospects.

From beginning to end, the game is rigged against English teachers in China. The China employment relationship is complicated and if done wrong, employees can and do end up in jail. The only relevant portion of a China employment contract is the Chinese portion and so teachers who do not speak Chinese have no clue what their employment contracts say and no clue even whether the English language portion of that contract accurately translates the Chinese portion — I can tell you right now that the odds are about 100 to 1 that it does not. And even if you are able to read the Chinese portion, unless you have a comprehensive knowledge of China’s employment laws in the specific locale in which you are working. Our China employment lawyers consistently represent high-level China employees in their employment contract negotiations but English teachers simply cannot afford such assistance. This makes them incredibly vulnerable from day one and their employers know this and they don’t hesitate to take advantage of it.

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.

So how is the above relevant for non-teachers. I’ll tell you. The truth is that many Chinese companies prefer to hire foreigners illegally to legally because doing so can save them a ton of money and is usually pretty low risk — at least for them. So what I describe above regarding teachers is not as uncommon as you would think in other industries. The Global Times article, The detention of two Irish women who were working side jobs at an unlicensed school in Beijing shines a spotlight on the illegal English education market in China is about  two teachers from Ireland who were detained in prison for more than a week for working illegally in China. Both these teachers had visas that allowed them to work full-time in China, but only with their one employer who secured these visas for them. These two teachers had taken lucrative part-time teaching jobs on the side and it was those jobs that got them arrested.

The Global Times article says the big takeaway from what happened to these two teachers is that “employers have no qualms about hiring foreigners illegally” and “when the illegality is discovered, it is the foreign worker who gets the blame.” It then discusses the following “experiment”:

The article talks about someone who “ran an experiment” by applying for every English language teaching job listed in Beijing Magazine and clearly stating he could not qualify for a work visa. Only one out of the twenty potential employers declined his application! In other words, 19 out of 20 were happy to have this foreigner work for them illegally. The article notes that under  China’s immigration law, foreigners who work illegally in China can be fined 5,000 to 20,000 yuan and detained for between 5-15 days and then deported. “A lot of the burden and blame falls” on the employee who works illegally in China and therefore, as the US Embassy website makes clear, “it is up to each individual to evaluate potential employers before signing a contract.”

And the getting fooled by the English portion of the employment contract happens in all industries too. We discussed this in Dual Language China Contracts: Don’t Get Fooled!

Can’t believe this is still happening, but it does, and in numbers that would likely surprise many people. The “this” to which I am referring is foreign companies signing dual language contracts without knowing exactly what the Chinese language portion of their contract says. This is really risky dangerous and below I explain why.

Many dual language Chinese-English contracts are silent on which language controls. For some unknown reason, foreign companies far too often just assume that the English language portion controls or they just assume that it does not matter because the meaning of both the English and the Chinese portions is exactly the same. Wrong, wrong, wrong.

What language controls when you have a dual-language contract?  If both languages say the same one language controls, that one language will control. If both the English language and the Chinese language portions say the Chinese language portion controls, the Chinese language portion will control. Similarly, if both the Chinese language and the English language portions say the English language portion controls, the English language portion will control. These are the easy and safe examples.

It is everything else that so often cause problems for American and European and Australian companies in  trouble.

If both your English language and your Chinese language portions are silent as to which portion controls, the Chinese language portion will control in Chinese courts and in China arbitrations. In real life this means that if the English language portion of your joint venture contract says that you get 10 percent of the joint venture’s revenue  but the Chinese portion says you get 10 percent of the profits (which will of course be way less than revenues) you will have no legal basis for claiming anything more than 10 percent of the profits. Not surprisingly it is joint venture contracts and licensing agreements where our China lawyers most often see this sort of meaningful dichotomy between the English and the Chinese portions of the contract.

Of the hundreds of dual language contracts proposed by Chinese companies and reviewed by one of my firm’s China attorneys, we’ve never seen a single one where the Chinese portion was less favorable to the Chinese company than the English portion. But we’ve seen plenty where the Chinese portion is better or much better for the Chinese company than the English portion. Chinese companies love using a contract with an English portion that is more favorable to the foreign company than the Chinese portion and then relying on the English speaking company to assume that the English language portion will control.

But what if the English language portion explicitly states that it will control? This works right? Not necessarily. If the Chinese language portion also explicitly states that it will control, the Chinese language portion will control under Chinese law. If the Chinese language portion is silent or says that the English language portion controls, the English language portion will control.

As we noted in China Contracts: Make Them Enforceable Or Don’t Bother, it usually makes sense to draft contracts with Chinese companies in Chinese with an English language translation. But this also requires that if that contract is going to be enforced in China (as should usually be the case), you absolutely positively need to be certain that you know exactly what the Chinese language portion of that contract actually says. No matter what the English language portion of your contract says, it behooves you to know exactly what the Chinese language portion says as well.

In other words, if you are not truly able to read and understand Chinese, you probably do not know what your contact says. And if it is an employment contract that you do not fully understand, you could be putting yourself at serious risk.

I do not believe all schools in China cheat or mistreat their teachers, or even that a majority do. But I am convinced that so many schools do and so few English teachers who choose to go to China have the resources or the ability to figure out which is which or to be able to navigate the visa and contract minefields, that the odds of their having problems are just too high to warrant the trip. Conversely I do not believe that all the schools in Vietnam or Thailand or the Czech Republic or Japan or Spain are guaranteed not to engage in similar behavior, but I do believe that the odds of a problem in those countries are a whole lot less than in China and that the environment for you outside of school will likely be better as well.

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.

6-21-2019 Update. I ran this post on Linkedin here and that has engendered much interesting discussion. A number of people have noted that government schools in China are a considerably safer bet and I note that I do not recall ever receiving any emails regarding problems with Chinese government school positions. So if you truly are dead set on teaching English in China, you should consider a government job over a private sector one.

Interrnational Lawyers

Way back in 2007, we did a post on attorney ethics in China, entitled, China Lawyer Ethics — Perils And Pitfalls For Foreign Companies. In that post, we discussed a blog post entitled, Time to Raise The Professional Ethics Bar for Lawyers in China?  In that post, American lawyer Brad Luo  noted that China’s ethical rules for lawyers have a “bright line” rule forbidding them from representing both sides in the same conflict, but they go little beyond that. Brad wrote how he was troubled by how China does not require lawyer loyalty to former clients and how this means lawyers can turn on their own clients without offending their duty of confidentiality to either of them.

In  a subsequent post, Time to Raise The Professional Ethics Bar for Lawyers in China? (II), Brad rightfully describes “confidentiality” as “the bedrock of an open and trusting relationship between a lawyers and clients” and notes that American lawyers must keep client confidences “strictly confidential and secret.” Chinese lawyers, on the other hand, are prohibited from divulging only “’national secrets, clients’ trade secrets, and privacy of parties’ learned by the lawyer during representation.” “Personal privacy is not defined and Brad sees it as being fairly limited and he concludes that the “duty of confidentiality as stated in [China’s] Current Lawyer’s Law and Ethics does not provide sufficient protection to clients.

Brad concludes this post by saying “if I were a client, I’d hesitate talking about certain things, not even with my Chinese lawyer.” Brad is dead on with this advice and foreign companies using Chinese lawyers must be cognizant of this and this is something our China lawyers constantly have to explain to our somewhat disbelieving American clients. The following are some concrete examples where companies have paid a stiff price by not accounting for how lawyer-client issues differ across borders.

Many years ago, a couple of our international lawyers were meeting with in-house legal counsel for a very large Korean company, or chaebol. We were  there representing the chaebol on a matter, but the in-house counsel wanted to use our meeting as an opportunity to “pick our brains” about another fairly small, but somewhat complicated, multi-party case on which he was working. The other case involved an alleged breach of contract and a number of American high tech companies. The case was pending in a Korean court and settlement talks had just begun. The in-house lawyer spent maybe ten minutes explaining the facts of the case and the various players to us and once we had reached a point where we felt we understood its overall outline, the in-house lawyer handed us a two page letter to review.

The letter was written by an American attorney, on behalf of his American client, to the Korean lawyer representing the American company in Korea. The letter talked about how the American company wanted to settle the case for a million dollars, but it would be willing to take $600,000. The letter then instructed the Korean attorney to start settlement negotiations at $1.4 million.

Seeing as how my client had a copy of this letter, I initially assumed the American company whose settlement strategy was revealed in the letter was on the same side in the Korean case as our Korean client, and we read the letter accordingly. We then read the letter again and then we read it a third time. We were really confused and we confessed as much to the Korean in-house lawyer. We told him we had thought the American company whose settlement strategies were being discussed was the American company suing the chaebol, but we obviously must have misunderstood the facts. The Korean in-house lawyer (who had an American legal degree) smiled and then explained.

The American company in the letter was on the opposite side of the chaebol in the case and the letter setting forth the innermost workings of the American company’s settlement strategy directly involved the American company’s efforts to settle with the chaebol. Our Korean client had been given this letter by the American company’s Korean attorney because this Korean lawyer had attended the same Korean law school as the in-house lawyer and had started law school a year or two later, making the in-house Korean lawyer his “big brother.” The opposing Korean lawyer would golf once or twice a year with the in-house Korean lawyer and had been trying to secure legal work from this chaebol for some time.

We have since then learned of multiple instances where Western companies (it is always Western companies and Northern European and Australian companies seem particularly susceptible to this) have overpaid or been cheated from having their own lawyers reveal confidences to the other side. We have seen/heard of this happening in all sorts of deals, but most commonly in joint venture deals and in large procurement deals. In the end, this form of cheating is essentially the same as your standard run of the mill kickback deal, but involving your own lawyer.

The attorney-client privilege is a long-established principle in the United States (and generally in all of the Western world as well), recognized under English common law since at least 1576 (Berd v. Lovelace). The privilege fundamentally informs American company expectations of the legal profession, to a degree that creates dangerous assumptions when dealing with lawyers in jurisdictions outside the common-law tradition, where the privilege might not be as extensive—or may not exist at all.

By way of example, under Washington State law, “An attorney or counselor shall not, without the consent of his or her client, be examined as to any communication made by the client to him or her…” (RCW 5.60.060(2)(a)), while the bar rules hold that “A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent…” (RPC 1.6). According to the U.S. Supreme Court’s decision in Hunt v. Blackburn (1888), the privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure”

The Supreme Court’s reasoning seems compelling, but clearly its views are not universal. In China, for example, lawyers have a general duty of confidentiality (Art. 83, Law on Lawyers), but there is nothing to stop them from bearing witness against their clients in civil cases. And though Chinese criminal defense attorneys can choose to maintain confidentiality (Art. 46, Crim. P. Law) regarding their cases, the same discretion does not legally extend to other lawyers. Under this legal framework, an attorney defending someone accused of tax evasion could choose not to testify against their client, but the defendant’s tax attorneys would not be similarly protected.

In addition to these legal considerations, there are also practical ones. American lawyers are rightfully terrified of disciplinary action. Bar associations take complaints seriously and, for the majority of lawyers, disbarment would be a critical blow, both financially and reputationally. This is not to say that lawyers in China are not subject to disciplinary oversight from the government and bar authorities: they are. However, a study of disciplinary cases in Zhejiang found that only 11 out of 122 cases reviewed involved “some aspect of client protection”. Political concerns and the protection of law firms’ interests were usually the driving force.

It is hard to see how the average Chinese lawyer would be fearful of the consequences of revealing confidential information, especially if the affected client is a foreigner, even more so these days if it is an American company This means you are in a vulnerable situation if your Chinese lawyer stands to benefit by revealing information you provide. Perhaps your lawyer has another client who would just love to take a look at that new patent application of yours. Perhaps your law firm stands to benefit by tipping off your competitor before it files your trademark application. Or maybe it will be as simple as revealing that you told them that you would have paid $10 per widget, not just the $8 written in your contract. Worse yet, what if your lawyer is in hot water with governmental authorities and reporting the missteps of a foreign company will help them curry favor? Trust us when we say that all of these nightmare scenarios are real life possibilities.

Mindful of all this, savvy clients often take their China work to lawyers bound by the strict confidentiality rules of foreign countries. Of course, on occasion some information may need to be revealed to Chinese co-counsel, but it will be done in a careful, need-to-know basis. And of course there will also be times where using a Chinese lawyer is imperative.

Even in countries that do recognize some form of privilege, issues can still arise. For instance, in-house counsel cannot invoke attorney-client privilege in some jurisdictions. This is the case in France and Italy, where in-house lawyers are not considered members of the bar and are therefore not subject to rules of professional responsibility. Your CEO client needs to understand that conversations with the avocat d’entreprise at the company’s French subsidiary are not protected in the same way as chats with the general counsel back home. Sometimes, outside counsel will be brought in to participate in meetings to make the discussions confidential.

Needless to say, you do not want to find out that your communication is not privileged after you have disclosed confidential information. The best course of action will usually be to talk to your international lawyers in the United States and design appropriate strategies before engaging with lawyers abroad. These lawyer trust issues have been out there for a long time, but with the increasing tensions between China and the United States, they are and will continue coming to the fore and this has spurred us to write about this again.

Be careful out there. Like really careful. ​








China entertainment lawyer

Our lead China entertainment attorney, Mathew Alderson (who Variety Magazine named as one of the 50 most influential entertainment lawyers) will be speaking on a panel at the Westin St. Francis, San Francisco, on June 28. The panel is entitled “The Impact of Regulatory Changes on China’s Entertainment Sector: Trends and Challenges.” Mathew’s panel will be part of the 2019 Summit on Commercial Dispute Resolution in China, presented by The Beijing Arbitration Commission in association with JAMS.

The panel will focus on how recent regulatory changes in China are affecting Hollywood and the media and entertainment sectors in China. The event will be moderated by JAMS mediator and arbitrator, Jeffrey G.Benz. The other panelists will be Allbright Beijing’s James Tian and JAMS mediator and arbitrator Barbara Reeves.

China’s media and entertainment industry is, in many ways, on the front lines of the recent US-China trade war and it has already been greatly impacted by it. In Chinese cinema eclipses US box office as Hollywood films suffer during trade war, the Telegraph newspaper nicely sums up much of what is happening to Hollywood entertainment in China these days:

China is targeting Hollywood in a new escalation of its trade war with the United States, refusing to show Western films in cinemas and on television, and sacking American actors.

The move is intended to damage an iconic US industry as tensions between the world’s two largest economies remain high.

It also comes as China is set to overtake the US as the country with the biggest box office takings in the world next year.

Foreign movies and entertainment are getting hit by a double whammy as China seeks both to retaliate against U.S. tariffs and crack down on foreign influences. And as is true of so much of what China does with foreign companies, this crackdown against foreign entertainment is being done “unofficially””

It’s Hollywood, it’s a strong industry for America and it’s symbolic” Dan Harris an international lawyer advising clients doing business in China, told The Telegraph. “With the film industry there are levers China can pull and push as much as they want. That’s what we’re hearing they’re now doing. It’s a matter of degree, but it’s being ramped up and and it will continue to escalate. All of a sudden you realise there are no Western movies.”

There has been no official directive from the Chinese government but industry figures indicate not-so-subtle pressure has been brought to bear and a “de facto” policy is in place.

*    *    *    *

The Los Angeles-based Independent Film and Television Alliance, which represents independent film companies in the US, said the developments were an “extreme setback.” One industry insider said: “We just don’t know if it’s going to be possible to get release dates for American movies.”

A clear signal of China’s intent to target US-produced entertainment came two weeks ago when Tencent, the Chinese internet giant, cancelled streaming of the final episode of Game of Thrones. The series is highly popular in China. Over the Sea I Come to You, a Chinese TV series filmed  in the US with American actors, was also cancelled.

One, who asked not to be named, told Variety: “Essentially overnight many Americans have been left with no on-screen prospects. Some were fired, some had auditions cancelled, and essentially all our phones have stopped ringing.”

If you are interested in the issues confronting Hollywood in China you should go. The conference runs from 9 a.m. until 6 p.m., with the post-event reception scheduled to last until 7:30 p.m. Go to this link to register. Mathew’s session starts at 2:15.

We hope to see you there.

international lawyers

The U.S. and China engaged in a process of economic restructuring. See The US-China Trade War: Winter is Coming (published one day before President Trump tweeted out the newest tariffs) The US-China Cold War Starts Now: What You Must do to Prepare (published three days after the tweeted tariffs). The Section 301 tariff dispute is only one aspect of a much larger process  we have been calling the New Normal. See China, the United States and the New Normal (from October 6, 2018) The New Normal has already and will continue too impact many areas of U.S./China financial cooperation. One important area it will greatly impact is the access of Chinese companies to U.S stock markets.

It is estimated that more than 200 Chinese companies have listed in various ways on U.S. stock exchanges with an estimated total market value exceeding 1.8 trillion U.S. dollars. Even at the height of the trade war, NASDAQ continues to announce that Chinese companies will do IPOs on the NASDAQ exchange. These IPOs are economically important to  NASDAQ and NASDAQ officials have stated that they welcome the new listings and are hoping for more in the future. See Nasdaq executive dismisses ‘discredited’ Steve Bannon’s call to bar Chinese companies from US capital markets.

But there is a fundamental problem with Chinese listings. The central core of the U.S. stock markets is that publicly listed companies are subject to financial oversight. First, they are audited by accredited U.S. auditing firms. Second, these audits are further monitored by the Public Company Oversight Board (PCOB). These regulations are applied with rigor against U.S. and European companies that list in the U.S., but Chinese companies are entirely exempted from such oversight.

This exemption from oversight is a product of Chinese government regulation. The Chinese government takes the position that allowing a foreign agency like the U.S. Securities and Exchange Commission (SEC) or the PBOC to audit Chinese companies on Chinese soil is an offense against Chinese government sovereignty. The initial response to this position was for the SEC/PBOC to say: fine, then just send the audit reports to us in the U.S. and we will audit over here. The Chinese then shut that option down by taking the position that the audit reports of Chinese companies constitute a Chinese government state secret. As a state secret, the audit reports cannot be allowed to leave China. According to a joint statement by the SEC and PCAOB from December 2018:

The business books and records related to transactions and events occurring within China are required by Chinese law to be kept and maintained there. China also restricts the auditor’s documentation of work performed in the country from being transferred out of China. . . . China’s state security laws are invoked at times to limit U.S. regulators’ ability to oversee the financial reporting of U.S.-listed, China-based companies. In particular, Chinese laws governing the protection of state secrets and national security have been invoked to limit foreign access to China-based business books and records and audit work papers.

Stated more directly, unlike companies from the U.S. and Europe and everywhere else in the world, Chinese companies that list on the U.S. stock exchanges are exempt from meaningful financial oversight. This is a longstanding scandal that is finally coming to a head. On June 5, U.S. Senators Marco Rubio (R-FL), Bob Menendez (D-NJ), Tom Cotton (R-AR) and Kirsten Gillibrand (D-NY) introduced the Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act. U.S. Representatives Mike Conaway (R-TX), Tim Ryan (D-OH), and Mike Gallagher (R-WI) introduced companion legislation in the House. See Disclose or leave: US bill vows to delist even biggest Chinese players As explained by Senator Rubio, this Act is intended to achieve the following three goals:

  1. Force the PRC government to allow full access for audit of Chinese companies listed on U.S. exchanges.
  2. Where such access is denied, compel those companies to delist. Under the current plan, the companies will be given three years to delist. The current view is that these companies will move to the Hong Kong exchange.
  3. For the future, Chinese companies that fail to comply with the audit requirement will not be permitted to list.

The likelihood that the Chinese government will comply with this demand is at most two percent. This then means that if this legislation is passed (which is looking likely), all Chinese companies currently listed on the U.S. markets will be delisted and no future listings from Chinese companies will be permitted on the U.S. markets.

The operators of NASDQ have openly expressed opposition to this legislation. In a NASDAQ report, the author stated: “But torching shares valued at around $1.8 trillion is a harsh price to pay for transparency.” See China audit crackdown is a Wall Street nightmare. This is the same argument the SEC has been using for years to justify its refusal to take action on this issue. The argument is essentially that the damage has been done and now requiring the delisting of these unregulated Chinese companies would cause more harm than good. This was always a weak argument. However, the ultimate failure of the argument is that Chinese companies continue to list. They continue to be unregulated. So the damage increases as the SEC looks the other way. For a short history of Chinese company stock fraud on US stock exchanges, check out The Dirty $50 Billion Scam Wall Street Is Getting Away With.

The argument of the SEC and NASDAQ is nonsense. “Transparency” is at the core of the U.S. public market system. Torching shares at ANY valuation is a required price to pay to maintain transparency. It makes no business sense to allow the PRC government to harm the integrity of the U.S. public markets merely to allow the listing of shaky IPOs. Members of Congress see this and so they are taking direct action to remove authority from an unresponsive SEC.

It is not clear whether this legislation will be adopted. Wall Street opposes it and you  do not need me to tell you that Wall Street is very powerful. Moreover, the SEC has allowed this scandal to continue for decades and unwinding it now will be a Wall Street nightmare, as commentators have quite accurately pointed out. Moreover, the net effect will be to push this business to Hong Kong, to the ultimate detriment of the U.S. markets. So the stakes are high and the arguments will be intense.

Readers should note that the argument of Wall Street and the SEC has been: the damage has been done and we just have to live with it. This is similar to the response of many U.S. retailers on the tariff issue. A large group of retailers just sent the Trump administration a letter requesting it back off on tariffs against China, using a similar argument: the damage has already been done. The China price is already built into the structure of American business and it is too damaging to fix the situation now. So the U.S. should just back off and go back to the Old Normal. See Over 600 U.S. companies urge Trump to resolve trade dispute with China: letter.

Though this argument at first sounds ridiculous, it is in fact a very powerful, made even more powerful by its being made by some exceedingly powerful constituencies. The U.S. has allowed the situation with China to progress to this point at least since the Clinton administration. The current U.S. economy has been built on a foundation provided by China as manufacturer for the world, creator of the China price, and investor in U.S. stock markets.

Is the U.S. now willing to endure the pain of dealing with the issues? Will the United States  continue to allow unregulated Chinese companies to list on the U.S. public markets? Will it continue to chase the China price by allowing China to export its government created surpluses into the U.S.? The answers to these questions are not clear. But at least the issues are clear.

Right now, the prevailing view is that no matter who wins the U.S. presidency in 2020 that person will be at least as “anti-China” as Trump. Way back in August, only 38 percent of Americans saw China favorably and I presume that number has dropped considerably since then. Even if the next President is pro-China, she or he will likely be too late to change much.

Chinese investment in the U.S. is down “by nearly 90 per cent since its peak in 2016, including a sharp drop in 2018 and early 2019.” All sorts of companies have moved their manufacturing from China or are scrambling to do so. See Google is moving US-bound Nest production out of China (“Google’s production shift is part of an increasing trend. GoPro is moving its US-bound production to Mexico. Yesterday, Foxconn said it was prepared to move the production of US-bound iPhones outside of China before new tariffs as high as 25 percent kick in at the end of the month.”). The international lawyers at my firm are all working overtime helping our clients move from China to countries like Thailand, Vietnam, Malaysia, Taiwan, Mexico, etc.

No matter what happens with the tariffs, we are going to keep seeing large numbers of anti-dumping and countervailing duty cases being brought against goods coming into China and the duties that stem from those cases are going to lead to an effective ban on huge numbers of products from China. Or as one of my firm’s international trade lawyers puts it:

Truth is that with all the trade issues involving China and bipartisan anti-China sentiment prevalent in the United States, now is a great time to bring such actions. The international trade lawyers at my firm mostly defend against antidumping and countervailing duty claims instead of bringing them — we represent mostly the overseas producers and exporters and the US-based importers — so I say all this not to encourage more such actions, but as a simple statement of fact. If you are importing products from China, you need to assess and know the trade risks of your imports and to think about alternative sourcing.

Based what I keep hearing from my own firm’s China lawyers and international manufacturing lawyers, many American and European companies are seeking to diversify their product manufacturing away from China. See China-US Decoupling Continues and Will Continue, but Must be Done Right and China Manufacturing: Is the Bloom now Off That Rose? and The China-US Trade War and the Winner is….MEXICO. It appears US foreign policy is to drive business from China to countries like Mexico (note how quickly President Trump’s mini-tariff war with Mexico was resolved), the Ukraine, Vietnam, Thailand, the Philippines, and Indonesia, among others. What this means big picture is that the price of products coming from China to the United States will continue rising and, as one of our China lawyers so often tells our clients: “you need to act accordingly.”

Earlier this week, Bloomberg Businessweek did a big story on how the FBI and the National Institute of Health (NIH) are investigating and  “purging Chinese cancer researchers from top institutions.

With so much US-China decoupling already having happened and so much more already in place to happen — pretty much no matter what — I have to wonder how many legitimate Chinese companies are still looking to list in the United States in any event. Even if this ban on Chinese stocks is not passed, will the Chinese government allow its companies to list in the United States? Who does not believe the Chinese government is not already pressuring Chinese companies already on American exchanges to leave them? See China opens Nasdaq-style board to lure tech firms back home. I realize there are a large number of Chinese companies set to IPO in the United States in the next year, but with China’s new board taking only “profitable companies,” and the incredibly poor performance history of so many Chinese companies that have done U.S. IPOs, I cannot help but wonder whether even a majority of these planned IPOs will happen even if the ban does not go through. In other words, is the economic damage NASDAQ and the SEC are touting even close to reality?

In It’s time to end the ‘China hustle’ on U.S. stock exchanges, Paul Gillis, one of the leading experts on Chinese public company accounting practices calls for the United States to crack down on Chinese companies listing on US stock exchanges:

“We’re bending our laws again for the Chinese for the sake of making money,” said Paul Gillis, professor at Peking University’s Guanghua School of Management. “Ordinary Americans are not aware they have a rising exposure to firms that are not adhering to U.S. laws.”

What are your thoughts?