If you’ve been following us for the past two years, you have probably been an active participant or observer of the heated debate around what we call the “New Normal” of doing business in China. On Wednesday, February 5th, we invite our readers to join us for an in-person and in-depth discussion, “Trade Wars or Truce? Legalities of Doing Business with China in 2020” at World Trade Center Utah. China Law Blog authors Dan Harris and Jonathan Bench will examine legal changes and risks and forecast what to expect in the wake of the recent Phase One signing between the U.S. and China. Joined by Robert Lamb of Fabian VanCott, this is a limited opportunity to be proactive and strategic about your business future in China.

Tickets for this FREE event are now available. Lunch will be provided to all attendees.

Register HERE today!

Date: Wednesday, February 5th from 12:00 – 1:30 PM MST

Location: WTC Utah, 60 E. South Temple, Suite 300, Salt Lake City, UT 84111

International Manufacturing Lawyers

Chinese factories are hurting these days. Bad. Their sales are way down, especially to the United States. In China’s manufacturing exodus set to continue in 2020, the South China Morning Post made this starkly clear with statistics:

Tariffs saw China’s trade in goods surplus with the US fall by 7.9 per cent in November, according to data released by the US Census Bureau on Tuesday. This was amid a 20.84 per cent fall in Chinese exports to the US from a year earlier, including items like cellphones. US purchases of Chinese goods are now at their lowest point since March 2013.

Of equal importance is that China factory exports are expected to dip even more in 2020:

For every foreign company that left China in 2019, there were two to three more seriously contemplating doing so and we expect more companies to leave China in 2020 than in 2019.

Chinese factories are well aware of these numbers, and they are terrified by them. Chinese factories see American companies reducing their purchases to buy their products elsewhere. “Compared with June 2018, the month before the trade war began, US imports of goods from Vietnam have soared 51.6 per cent, Thailand 19.7 per cent, Malaysia 11.3 per cent, Indonesia 14.6 per cent, Taiwan 30 per cent and Mexico 12.7 per cent.” This massive downturn in American companies manufacturing in China has greatly impacted Chinese factories and greatly influenced how they see things.

Chinese factories believe their existing American clients will be leaving China in 2020, and they also believe their newest American clients are using them as “test kitchens” to develop products and then move production outside China once the product is developed and selling. Our China lawyers know this because Chinese factories have told us this and because we see what Chinese factories are doing.

What exactly are Chinese factories doing? They are getting aggressive with requirements to get started on manufacturing with them. They are getting less concerned with the quality of goods they make and sell. And they are stealing IP (especially trademarks) far sooner and far more often than even a year ago.

Let me explain….

Chinese factories that used to help American companies develop their products without any written guarantee regarding product purchases by the American company are seldom doing this any more. Chinese factories no longer believe it makes economic sense for them to spend time and money developing a product for an American company that may never produce that product in China or will produce it there for only a short time. What our China manufacturing lawyers are seeing now is Chinese companies helping American companies develop their products and then claiming the developed product belongs to the Chinese company, not to the American company. In other words, the American and the Chinese company work together on developing the product and then once the product is developed, the Chinese company refuses to make it for the American company, choosing instead to sell it under its own brand name. The best way to prevent this  is with a China Product Development Agreement.  See also China Product Development: Manufacturing Rights are Key.

Chinese factories have also become much sloppier in terms of product quality. Why should a Chinese factory bust its butt making high quality product for an American company that will likely move its manufacturing to Vietnam or Mexico or Thailand no matter how well it performs? The best way to prevent quality problems with your China factory is with a Manufacturing Agreement that is clear about quality requirements and clear about the damages the Chinese factory must pay if the contractual quality standards are not met.

Perhaps most chilling is how Chinese factories are stealing IP so often and so quickly. In the good old days, Chinese factories typically would wait until their relationship with their customer had declined before selling their customer’s products and registering their customer’s trademark in China as their own. Now, our China lawyers are constantly seeing Chinese factories going off and registering those trademarks literally days after they first learn of them. We are seeing American companies send an email to a Chinese company inquiring about the possibility of having that Chinese company make widgets for it and that Chinese company a day or two later filing to register the American company’s trademark in China. We are seeing Chinese companies sell foreign company products worldwide before they even sell one to their foreign company customer.

The media (and the Trump administration) love to deride China’s intellectual property protections, but what they invariably fail to mention is that in most instances involving trademarks, the fault lies with the foreign company, not with Chinese IP enforcement. Foreign companies too often think they can wait to see how their products do on the market before going all out on protecting them with trademark registrations, but that attitude is just too dangerous today. If you want to protect your trademarks on your brand names or logos you need to file to register them before you reveal them to anybody. And you especially must file to register them before you reveal them to anyone in China. Sending an email that can be traced to your brand name/logo is the equivalent of revealing your brand name/logo. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. To expect trademark protection in China, you must register your trademarks in China, and the prudent company does this before pretty much anything else.

The fact that you are manufacturing your product in China just for export does not in any way minimize the need for you to protect your trademark. Once someone registers “your” trademark in China, they have the power to stop your goods at the border and prevent them from leaving China. They can stop your goods from leaving because they own the trademark associated with those goods, not you. We are aware of companies having to pay hundreds of thousands of dollars to get their trademark “back” and to get their goods flowing out of China again.

In China Trademark Theft. It’s Baaaaaack in a Big Way I gave the following short history regarding trademark theft in China:

For years we probably averaged a call a week from someone who had lost their trademark to China, to someone who had gone ahead and filed it before the non-Chinese company did so. Then, starting maybe 5 or 6 years ago, the number of these calls declined. I have ascribed this decline to two things. First, American companies started getting wiser about the need to get their brands, their logos and their company names registered as trademarks in China, due in small part to this blog even. Second, and of equal importance, China instituted rules to try to stop Chinese manufacturers and trading companies from registering as trademarks the brand names and logos and company names of the foreign companies for whom they were manufacturing or sourcing products. To simplify a bit, your China agent could not hang on to a China trademark that you were using before you brought them on for your manufacturing or product sourcing. We went from one China trademark “theft” call a week to maybe one a month.

But starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a soul in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China, it will not go off and register it under its name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name? See Your China Factory as your Toughest Competitor.

If your brand name or your logo has been registered as someone else’s trademark in China, things are bad for you but not hopeless. Our China trademark lawyers typically go through the following analysis to determine whether and how they can help.

The first thing our China trademark lawyers usually do is try to figure out some basis for challenging the Chinese company’s trademark filing. Our favorite challenge is non-usage of the trademark for more than three years. This does not usually work if the trademark theft just happened. Our second favorite is when a former factory does the filing because there are laws against that. But to show that it is the former factory, we must show that the company that actually filed is the same company that you used for your production and that is seldom possible because the Chinese factories know about this rule and they usually have someone else file for the trademark so as to avoid it. Sometimes we can claim the filing was in bad faith, but winning on this is tougher than it sounds.

If none of the above are likely to work, the our China trademark lawyers typically next try to figure out a trademark workaround. Many years ago, we had a lawn equipment company that had a “trademark thief” secure a China trademark for the lawn equipment company’s brand name on 17 things related to lawn equipment. But the trademark “thief” failed to file a China trademark for small engines, like those you find on lawn equipment. So our workaround was to get our client the China trademark for small engines and then have it put its brand name in steel on the engine and then add a sticker or two to the lawnmowers once the lawnmowers hit the United States and Europe where our client sold its lawn equipment. This ended up increasing our client’s overall costs, but it was far better than it having to switch out its well-known brand name. [I changed the type of product to make it impossible to be able to identify the company for whom we did this intellectual property workaround.]

If none of the above look like they can succeed, we then try to buy the brand name or logo from the Chinese company that has it. We do these buys by lining up a Chinese person in China to handle these negotiations — not a lawyer and not anyone with any apparent connection to our law firm or our client. We do all this because Chinese companies ask for a lot more money from foreign companies. It sometimes even makes sense to form a Hong Kong company to do the trademark buy.
Sometimes our best advice for a company that has lost its brand name is to sue the attorney that filed for the wrong trademark or gave them bad advice on the need to file at all (both of these things are a lot more common than you might expect). Although this does not work if the company used an online filing company or a fake lawyer, both of which seem to have become more common in the  the last year or so. See Fake China Law Firms Are The Real Deal and Is This a Real China Lawyer?

Lastly, if you want to protect your IP that cannot be trademarked — things like your designs or your customers or really whatever — you should consider filing for a China design patent or a China copyright or, more likely, you should require those who are going to see your IP or trade secrets sign a China-specific NNN Agreement before you show them anything. See also NDAs Do NOT Work for China but NNN Agreements Do.

Protecting your IP from China is complicated but necessary. The key is act early and correctly because doing it late or doing it wrong is what destroys businesses. For a good summary of what to do to protect your IP from China, check out The Four Best Ways to Protect Your IP from China. And finally, please note that pretty much all of the above applies with equal force to the countries other than China to which so many are going and will be going for their manufacturing.

Prison labor in China

The issue of forced labor in China has been in the news recently. In part, this is due to the connection between this issue and the larger human rights crisis in Xinjiang. However, forced labor is hardly a problem confined to Xinjiang, as evinced by a recent scandal involving British supermarket chain Tesco shows. Last month, Tesco suspended production of Christmas cards in China after what appeared to be plea for help from a foreign prisoner at Shanghai’s Qingpu Prison was found written in one of the cards.

Predictably, the Chinese government and state media claimed this is all fake news. The Foreign Ministry’s spokesperson said, “After verifying with relevant departments, we know for sure that there is no forced labor of foreign prisoners in Qingpu Prison in Shanghai”. That could well be the case but notice how every other prison in China—not to mention Qingpu Prison’s local prisoners—are uncovered by that denial.

In any case, there is no need to split hairs: Forced labor is a reality in China. And if you source from China, you need to keep close tabs on your supply chain to avoid forced labor becoming a part of it. In addition to the ethical and reputational implications of using forced labor, it can also get you in trouble with the law.  In the United States, for instance, 19 U.S.C. § 1307 prohibits importing goods made using forced labor, defined as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily”. U.S. Customs and Border Protection (CBP) may issue withhold release order (WRO) against merchandise it suspects has been made using forced labor.

When it comes to forced labor in China, in order to protect your business, you should take a page from President Reagan, who popularized the Russian proverb “Trust, but verify”. However, you should “Not trust and verify”.

Seriously, you should not trust any claims made by your Chinese supplier regarding forced labor. A few years ago, I was contacted by a Chinese company that was—and still is—subject to a US Customs WRO. After some initial evasive answers, they fessed up to having used labor from a nearby prison in the past but claimed they no longer did. They were keen to undergo an audit that would help demonstrate to CBP that they no longer used forced labor.

It soon became clear, however, that the company did not want a real audit. They sought to place unreasonable time constraints on my team, rushing us into action. As I noted in a contemporary email:

We still don’t have a list from [X] of the facilities to be audited. That is critical, because only based on that can we issue a notification to ensure the audit team has all the necessary access rights, and that all the necessary preparations area made. No sense rushing things if the key preparatory work has not been done. I’ve seen this many times before in China… whether on purpose or an unintended result, a hectic situation is created, which then leads to a half-baked outcome.

As I reiterated my concerns, it became clear that the expectation was that the audit report’s conclusion would be a favorable one, regardless of what my team observed. As far as the company was concerned, all we needed to do was fly in the morning, have a cursory walk around the factory, possibly “interview” one or two cleared employees, and then go back to the airport for our flight back to Hong Kong. Easy as 123.

In the end I declined the work, but perhaps others would have played along. I’ve seen audit reports that say little more than that “we flew up there, we spoke to some of their staff, we walked around—and our report has plenty of caveats”. The point is that you should be wary of any certifications or audits, let alone the word of company staff.

Turning to the “verify” part, that means that you—or a third party you truly trust, who ideally has some skin in the game—carry out the due diligence. If a supplier says your products are being made at a given location, check it out. Make sure your agreements give you—or your authorized third party—the right to carry out such inspections. And remember, even if everything is hunky-dory at a given time, it doesn’t mean that it will remain above board. Suppliers are subject to all sorts of pressures and temptations.

A couple years ago, I was retained by a client (“Y Brands”) to audit a supplier the client suspected of making unauthorized, third shift products. As our client informed the supplier that we were headed to the factory to conduct a social compliance audit, my team and I trooped out to an unlovely city Yangtze River Delta in the dead of winter. Once in town, we proceeded to the address our client had on file for the supplier’s factory.

Our concerns began as soon as we left behind the city’s gritty industrial outskirts and found ourselves in a decidedly agricultural area. The alleged factory was a small building surrounded by croplands. Inside we found some products, but no production lines. Here is how the conversation with the person-in-charge went:

A: We are here on behalf of our mutual client, Y Brands. As per the terms of the agreement between your company and Y Brands, we are here to perform an audit. Y Brands has given advance notice to your corporate office.

P: Uh, okay. What kind of audit?

A: A social compliance audit. Looking at workplace safety and things like that.

P: Ah, I see. Please go ahead. Let me know if you have any questions.

A: Well, to be honest, this doesn’t look like a factory. I only see a few products here and there, and none of them belong to our client. Where is the production line?

P: Oh, we only handle quality control here. The products are made elsewhere.

A: And where would that be?

P: A prison in L City [few hundred miles away].

A: A prison?

P: Yeah, it’s a lot cheaper than a normal factory. Here, these are some invoices we have received from the prison.

Pretty soon, the hapless man realized that, as Depeche Mode warned, the policy of truth is not always the best. Not only was the issue of overproduction still unresolved, but now we had stumbled upon a larger problem for our client. Instinctively, he backtracked:

P: Actually… Y Brands’ products are not made at the prison. Other clients’, yes, but not Y Brands’.

A: And where do you make Y Brands’ products?

P: Uhm, at a regular factory…

A: Located where?

P: L City.

Later that day, I typed up an email to my client that basically said: “I have bad news and bad news. Your products are likely being made in a prison—which by the way is the perfect place to crank out unauthorized goods since, well, you will never know and, even if you did, there’s zero risk of a law enforcement raid.”

Our client demanded that a visit to the “factory” in L City be organized right way, but the supplier refused, without providing an acceptable reason. This was the final straw for Y Brands, who already suspected the supplier of undercutting them by selling directly to retailers, and the relationship was soon terminated.

Forced labor is terrible, and you don’t want to have any part in that nasty business. But in an opaque place like China, it’s not simply a matter of good intentions. You must be proactive and thorough in your due diligence. Better for you to uncover the truth than some kid in London reading a prisoner’s scrawled plea for help.

Best China Blog

Way back in February, 2006, when China Law Blog was all of one month old, the Wall Street Journal wrote about and linked to one of our blog posts. Our readership shot up from around 50 to 5,000 and we thought that was just about the coolest thing ever. It meant we had made it. We were so thrilled we wrote a blog post to celebrate, entitled, The Wall Street Journal — They Like Us. They Really Like Us:

In the “we are not above shameless self-promotion category,” we cannot resist pointing out that the Wall Street Journal cited us today on our recent story on the Chinese company that sued a U.S. company for patent infringement. To make sure everyone gets the good parts, I am quoting liberally from the article, “Chinese Company Sues U.S. Firm For Patent Infringement:

From the turnabout-is-fair-play-department: a Chinese company has sued a U.S. company in the United States for patent infringement. China-based Netac Technology Co., a flash memory-chip manufacturer, filed a lawsuit against New Jersey-based PNY Technologies in U.S. District Court in Texas on Feb. 10.

On the China Law BlogSeattle lawyer Dan Harris sees the lawsuit “as further evidence of increasing maturation of Chinese companies regarding the importance of both innovation and intellectual property protection.”

Thank you Wall Street Journal.

Six years later, we yet again felt compelled to devote a post to our being called out. In that post, They Like China Law Blog. They Really Like Us, we again waxed poetic about being appreciated:

Back when China Law Blog was a young pup, the Wall Street Journal Blog referenced one of our posts and we went all Sally Fields about that. We ran a post, entitled, The Wall Street Journal — They Like Us. They Really Like Us, the sole purpose of which (near as I can tell nearly six years later) was to let everyone know that the Wall Street Journal had noticed us. We are, of course, far too cool/wise/jaded/experienced/old to act that way now.

Or so I thought until I read a post on theContractsGuy Blog, entitled, The Reading List: China Law Blog.

The author of that post, St. Louis business lawyer, Brian Rogers, so totally understands this blog that his post felt like confirmation of what we are seeking to achieve here. In addition to that (or better yet, because of that), Rogers’ post does a phenomenal job listing out what are probably our best (or at least most practical/helpful) posts for 2011.

I am not going to list all the posts Rogers lists because i want to make sure you read his entire post, but I am going to state how delighted I was to learn that his favorite post “by far” was China Manufacturing Agreements. Watching The Sausage Get Made, which he describes as follows:

The post consists simply of a pair of sanitized client emails. One explains the typical contents of a Chinese  manufacturing agreement, along with a discussion of important issues to consider. The other email accompanied the initial draft of a manufacturing contract. They’re pieces of commercial transaction art, clearly explaining the significant issues the client should consider and providing salient commercial and legal advice.

I too loved that post because it consisted pretty much entirely of emails co-blogger Steve Dickinson had sent to a client and all I had to do was remove any client identifiers and then post it. In other words, the post was the essence of what we as China lawyers do pretty much every day. Then to have a fellow lawyer appreciate that is — to me — one of the highest compliments we could ever get.

Whenever someone thanks me for highlighting on our blog something they have written elsewhere, I demur by saying that I should be thanking them instead. I say this because we mention and link to other writings not as a favor to their authors, but because we think the writings are interesting and worth reading and we want to bring them to the attention of our readers. So for this reason, I am not going to thank theContractsGuy for highlighting our blog on his blog.

Instead I am going to thank him for making my day. Thank you, thank you, thank you.

Seeing as how we seem to do this every six or so years, I am again going to go all Sally Fields and talk about how honored and pleased and thrilled we are to have been called out as a LexBlog Excellence Award Winner.

Lexblog is the hosting site/mentor/blog designer of just about every law blog that matters. Pretty much every AmLaw 200 law firm with a blog has their blog on LexBlog, and with good reason.

The LexBlog Excellence Awards is something LexBlog did for the first time in 2019. It is a competition for the best blog post in various categories. Unlike so many blog awards, this one is not a popularity contest. It is a true competition, judged by six impressive and disinterested legal experts.

Of all the legal blog posts in the world and of all the blog posts on this blog, the China Law Blog post LexBlog called out for recognition is my favorite post: The US-China Cold War Starts Now: What You Must do to Prepare. This post was chosen Best News or Trend Analysis, 1st runner-up.

This post took what was at the time a very controversial stand. It said that no matter what deals might be reached between China and the United States, relations between the West and China will never return to what they were and we should expect US-China relations to worsen over the next many years. When this post came out in May 2019, most still believed the U.S.-China trade war was the only big issue between the United States and China and most also believed that  issue would quickly be resolved and things would get back to normal. Not us, and we got a ton of heat for this.

This winning post was one of the longest posts I’ve written and that is because it in part an amalgamation of previous posts and because I had been working on it in my head for months. I very much wanted to explain our position, no matter how many words that might take. Though written in May, this post remains so current that it reads as though I wrote it this morning. I consider this post the most important post I’ve ever written and so I implore you to please, please, please go read it. Please also feel free to comment, whether you agree or disagree, even vehemently.

This post started by reciting how for so long our blog was in the minority for deeming the U.S.-China conflict to be the new normal and calling for companies that manufacture in China to move their manufacturing outside China, if possible. Just about daily we would get emails from “China experts” whose livelihoods fully depended on China accusing us of making things out to be worse than they were so as to push foreign companies out of China and thereby line our own pockets. Do not ask me how a law firm so well known for its China practice would financially benefit from companies moving out of China, because I have no answer for that one. Let’s just say these emails and articles were infused with anger, not logic. At least one email accused me of working for the CIA and — even worse for a lifelong Democrat — many called me a “Trump-lover.”

This cold war post was meant to let everyone know that we would not shut up, that we would continue to call things as we saw them  and let the chips fall where they may, whether it hurt our China business or theirs. The post led with the following:

Since the very beginning of U.S.-China trade negotiations we have been unequivocally negative on the likelihood of a deal, and we have taken huge amounts of heat for that, via hate e-mail, online, and even from our own clients, some of whom have accused us of being too cynical or too negative about China. Our response to all of this has been consistent. We just kept saying that NOW was (and it still is!) the time for foreign companies (especially those that sell their products to the United States) to work hard on reducing their China footprint.

We first publicly sounded this warning call back in October 2018, in China, the United States and the New Normal, though we had been warning our own clients about this for months. This “New Normal” post was an attempt to get in the face of those who had been sending our lawyers hate mail because we had in a September 2018 post predicted manufacturing orders from China were declining and would continue to decline:

I got a badly written and vituperative email yesterday in response to my post, On the Impact of China Tariffs: Is This a Dead Cat Bounce? In my post, I predicted a large decline in manufacturing orders from China, starting in the next few months. The email accused me of “hating China” and wanting “to impede its peaceful” rise and of being “jealous of its progress.” All this because we have been writing of late how so many of our law firm’s own clients and so many others are leaving China, or looking to leave China. We have been getting quite a lot of these sorts of emails lately.

In April of this year, the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, saying the following:

“There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.”

The hate mail has pretty much ceased and last week we got a batch of emails asking us to blog about the recently signed Phase One trade deal between China and the United States. We have held off on analyzing that deal because the mainstream media has mostly gotten it right. It is a near meaningless pause in the trade war between China and the United States, but the issues between China and the U.S. go well beyond trade. The Phase One trade deal will increase the short term money flow between the U.S. and China, but it will not solve the key long term issues between the United States and China OR between China and the EU. Hardly anybody expects this micro-deal will lead China to trade fairly. Virtually nobody expects this deal will reduce the threat of China IP theft or cause China to treat foreign companies remotely equal to Chinese domestic companies. It also will not reduce China’s brutality in Xinjiang or in Hong Kong. Heck, it probably won’t even lead China to buy anything close to what the agreement requires it buy. Most importantly, it will not make relations between the U.S. and China and between the EU and China better and those relations will if anything, only get worse. There, I said it.

So thank you LexBlog, and thank you judges. Your recognition of us and of our writings and of this one blog post mean the world to us. We appreciate being appreciated. We truly do.

China Employment Lawyers

Employers should be very careful using WeChat to manage their employment affairs.

Consider this hypothetical. Employer amends its Rules and Regulations to require its employees forward or repurpose all Employer WeChat articles as the employee’s own “moments” on the employee’s personal WeChat account. The new Rules and Regulations also discipline employees who fail to meet the required minimum amount of  WeChat “forwards.” Employee several times fails to abide by this new rule and Employer terminates her for breaching Employer’s Rules and Regulations. Employee brings a labor arbitration claim for wrongful termination. Will Employee prevail?

The short answer is most likely yes, and in a labor arbitration case with facts similar to those above, the arbitrator sided with the employee.

Here are a few things to consider.

First, requiring an employee to conduct company business on the employee’s personal WeChat account is a non-starter. The company and its employees’ personal affairs should be kept separate. It is important to step back and think from a company culture perspective: do you really want to convey to your employees that you do not respect their privacy or their personal lives?

Second, WeChat and overtime exposure tend to go “hand-in-hand.” Assigning work to an employee via WeChat outside of normal working hours can subject the employer to overtime liabilities (even doing so within normal working hours can be tricky). Even if you are merely “assigning” work and not asking the employee to get on it right away, given the app’s real-time nature, the employee may feel compelled to do the work right after receiving the message anyway. Far too often, the employer initiates an audio/video chat on WeChat just to ask a quick work-related question and the employee feels he/she has to take it. Unless you make clear to your employees (in writing) that they are not expected to read or check or reply to work-related WeChat messages outside normal working hours, you are setting yourself up for overtime claims down the road. As most people spend even less time thinking things through with WeChat messages than with email, you really should think twice before contacting one of your employees on WeChat. If your assignment is not worth your company paying for employee overtime, you should wait until the next business day to send your request. Again, think from your’s company culture/image perspective. Most employers want their employees to have a work-life balance, and “bugging” them over WeChat after work defeats that and is not exactly the sort of company culture for which most companies want to be known.

Note that generally speaking you need to obtain the employee’s consent before requiring them to extend working hours. This applies to asking an employee to work overtime via WeChat as well.

Also, to revise the employee’s work duties, the best (safest) way to do this is to have the employee sign an amendment to the employment contract. Unilaterally amending the employer’s rules and regulations may be deemed by the Chinese authorities as an attempt to get around amending the employment contract. Though employer rules and regulations generally apply to all employees, this does not mean an employer can simply amend this document as it wishes when it wants to impose a new duty on all employees. Amending each employee’s contract may be required under certain circumstances, and if that is the case, merely amending the employer’s rules and regulations (even though the employer complies with the applicable law regarding such amendment) is not going to work.

Our China employment lawyers once had a case where the employer attempted to replace an employee-wide program with a less favorable program simply by publishing a new set of employer’s rules and regulations minus the employee-wide program. Even though the company gave the employees a chance to ask questions after they published the new employee rules, it had already angered every employee, and many key employees threatened to leave if the company did not revert to the old employee program.  The company had to spend a lot of time and money on attorney’s fees to “calm down” the employees, and it ended up having to re-negotiate with each employee and amend each employee’s contract anyway.

Bottom line: Despite all its brilliant features (mobile payment etc.), WeChat is not a good employer or labor management tool in China.

China Lawyer

With Phase One of the US-China Trade deal requiring China to purchase large quantities of goods and services from the United States, it makes sense to write how to ensure payment when selling to China.

When our China lawyers represent a client that will be providing products or services to a company in China, we usually start by asking about payment terms. If the Chinese company will be paying our client the full amount upfront, the contract provisions do not need to be too specific. But full upfront payment is rare.

In the typical provision of services scenario, the Chinese company pays the foreign company a small amount upfront (usually 20-25%), another portion (maybe another 25%) after the foreign company has met some vaguely defined milestone, and then paying the remaining 50% or so after the project is “completed.”

This sort of payment structure puts a large amount of risk on our foreign company client because it must perform first and then collect. The vagueness of the various milestones (including what constitutes “completed”) only increases the risk to the foreign company. Many times, the Chinese company will make so many changes to the deliverables or to the schedule that the foreign company ends up losing money even if it eventually gets paid in full.

Because of the above, our China lawyers typically advise our clients to consider the following three things when it comes to payment terms with China companies:

1. Make the payment terms as simple and clear as possible. This actually benefits both parties. The terms should be written so it is crystal clear when a payment is due, whether it is because the calendar shows a given date or because a project phase has been completed or a prototype has been delivered. Clarity is one of the key reasons why it almost always makes sense to have your contract in Chinese. See Good Contracts are Key, Corruption be Damned.

2. Require a large upfront payment and make clear in your contract that you will not begin work until you receive this initial upfront payment. Having a large upfront payment works both to prove good faith by the Chinese side and to prove that it is able to make large payments outside of China. China’s currency, the renminbi, is still a nonconvertible currency, and a Chinese entity that wants to send more than $50,000 in hard currency overseas must first secure approval from the transmitting Chinese bank. This generally requires it have an executed contract (in Chinese) for goods or services that are acceptable for foreign entities to provide and that the foreign company has submitted a formal invoice in a form acceptable to the bank. This is all because the bank in turn usually needs to get approval from government authorities. For the specifics on what is required to get paid by a China company. See How to Get Paid by Chinese Companies for your Services: It’s as Easy as 1, 2, 3.  For reasons usually peculiar to the Chinese company with which you are doing business, this approval never comes. It is better that you learn early on whether the Chinese company with which you are doing business will be able to pay you.

3. Consider adding 10% as a final almost bonus payment due after delivery. A nontrivial number of Chinese entities insist on receiving delivery in full before making the final payment and then (because they already have what they need) never make that final payment. If you do get this final payment, consider it a bonus for the extra work Chinese companies are famous for seeking to extract from their vendors. And if you never get this “bonus” you can at least take comfort from having received a sufficient payment in any event.

Duties on products from China

On January 15, 2020, the Coalition of American Vertical Engine Producers (Petitioner), consisting of Kohler Co. and Briggs & Stratton Corp., filed antidumping (AD) and countervailing duty (CVD) petitions against Vertical Shaft Engines between 225 – 999 cc from China.  These engines are typically used for riding lawn mowers and other non-hand held outdoor power equipment.

This filing against Chinese vertical engine producers is yet another in a long line of anti-dumping/countervailing duty cases brought to increase the duties on Chinese products entering the United States. With growing anti-China sentiment in the United States, now is a great time to bring such actions and if you import products into the U.S. from China, you need to assess and know the trade risks of your imports. See Has Sourcing Product From China Become TOO Risky? 

President Trump and his administration are seeking to get companies to move manufacturing from China to the United States or at least to countries more friendly to the United States. For information on moving your manufacturing from China, see How NOT to Lose Your Shirt When Having Your Product Made Overseas.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

This petition noted that these engines were subject to the Section 301 25% tariff applied on Chinese imports, but that USTR granted exclusions to certain types of engines covered by this investigation, which caused a surge of Chinese imports since August 2019. Many of the U.S. importers of these engines are U.S. lawn mower producers (e.g., Honda, Husqvarna, MTD, Toro).

Scope

The petition identifies the scope of the merchandise to be covered by this AD/CVD investigation as “spark-ignited, non-road, vertical shaft engines, whether finished or unfinished, whether assembled or unassembled, designed primarily for use in riding lawn mowers and zero-turn radius lawn mowers. Engines meeting this physical description may also be designed for use in other non-hand-held outdoor power equipment. The subject engines are spark ignition, single or multiple cylinder, air cooled, internal combustion engines with vertical power take off shafts with a minimum displacement of 225 cubic centimeters (“cc”) and a maximum displacement of 999cc. Typically, engines with displacements of this size generate gross power of between 6.7 kilowatts (“kw”) to 42 kw.”

See the proposed scope definition for a complete description of the physical characteristics of the covered merchandise, and the HTS numbers that may be used to import the subject merchandise.

Alleged AD/ CVD Margins on Vertical Engines from China.

Petitioner calculated estimated dumping margins ranging between 320.41% and 633.64% for China.

Although Petitioner alleged numerous government subsidy programs that benefitted the Chinese wood moulding and millwork products industries, Petitioner did not allege a specific subsidy rates.

Named Chinese Exporters/ Producers

Petitioner included a list of companies it believes are producers and exporters of the subject merchandise.  See the attached list here.

Named U.S. Importers of Vertical Engines from China

Petitioner included a list of companies it believes are U.S. importers of vertical engines from China.  See that attached list here.

Estimated Schedule of Investigations.

January 15, 2020 – Petitions filed

February 4, 2020 – DOC initiates investigation

February 5, 2020 – ITC Staff Conference

March 2, 2020 – ITC preliminary determination

June 13, 2020 – DOC CVD preliminary determination (assuming extended deadline) (4/9/20 – unextended)

August 12, 2020 – DOC AD preliminary determination (assuming extended deadline) (6/23/20 – unextended)

December 25, 2020 – DOC final determination (extended and AD/CVD aligned)

February 8, 2021 – ITC final determination (extended)

February 15, 2021 – DOC AD/CVD orders issued (extended)

 

illegal transshipping

A few days ago, in China Manufacturing: “Elvis Has Left the Building”, we mentioned a South China Morning Post article suggesting the manufacturing exodus from China will not abate, regardless of any patches trade negotiators manage to place on the overall, strained U.S.-China relationship. That article included some sobering stats on the giant sucking sound we have heard coming from China the last couple years:

Compared with June 2018, the month before the trade war began, US imports of goods from Vietnam have soared 51.6 per cent, Thailand 19.7 per cent, Malaysia 11.3 per cent, Indonesia 14.6 per cent, Taiwan 30 per cent and Mexico 12.7 per cent, according to South China Morning Post calculations based on US Census Bureau data for November.

Some of our readers have suggested that illegal transshipment of Chinese goods through these countries may account for a significant part of their export gains. (NB, when transshipment is legal, the goods are classified by U.S. Customs and Border Protection (CBP) based on the country of origin). If true, this would suggest the trend we are observing is a superficial one, which could be easily reversed. It would also suggest that many exporters who are “relocating” are in fact only placing a fig leaf over their China production, hopeful that it will soon be —China— business as usual and/or unable to find an alternative to “just right” China.

Our firm has no doubt that illegal transshipment is a reality. In fact, in “Illegal Transshipping/False Country of Origin — Help Us Help You Get Rich”, we recently highlighted our international trade law team’s success in helping the U.S. government recover $62.5 million from a company called Univar, for seeking to avoid a 329% antidumping duty by sending Chinese goods through Taiwan.

Meanwhile, the imposition of Section 301 tariffs by the Trump Administration has dramatically increased the number of Chinese products subject to U.S. tariffs. As a Pittsburgh Post-Gazette article on Christmas lights (those made in China now subject to 25% tariffs) explains, “Chinese suppliers are finding ways to ditch the ‘Made in China’ label to evade penalties, using neighboring countries like Vietnam to transport goods across borders, relabel them and ship them to the U.S.”.

However, as both our experience with Univar and the Post-Gazette article make clear, the illegal transshipment of goods is an exceedingly risky endeavor. The penalties are high, as we pointed out in “China Tariffs and What to do Now, Part 1”:

Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 U.S.C. § 1592 and to criminal prosecution under 18 U.S.C. § 542 (import by using false statement) and 18 U.S.C. § 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.

Meanwhile, the risks of detection are considerable. The folks at CBP are obviously aware of the games people play, and have “become expert at discovering such evasions”. They inspect shipments from Vietnam and the like conscious of the fact that right now there are many Chinese exporters and U.S. importers trying to pull the wool over their eyes. It’s not as simple as simply stitching on a “Made in Vietnam” label; certainly not if CBP decides to probe.

It is important to keep in mind that CBP increasingly has eyes on what happens overseas. In 2018, CBP “conducted more than 10 foreign onsite verifications in Thailand, Malaysia, and Cambodia… crucial to gather evidence for transshipment evasion”. Again, that was 2018. Earlier this year, the WSJ reported that “U.S. officials are stepping up enforcement against companies re-exporting Chinese goods via the Chinese-owned Sihanoukville Special Economic Zone in Cambodia, accusing unidentified firms of transshipment”. CBP also has quite a bit of information about factories that participate in the C-TPAT program, which could potentially be used to corroborate country of origin claims.

Authorities in exporting countries are also on the lookout, as the Post-Gazette article on Christmas lights illustrates:

For Au Anh Tuan, head of customs control and supervision in the General Department of Vietnam Customs, curbing the flow of illegal goods is a struggle. Through October, officials had uncovered about 14 significant cases of exports with fake labels this year.

‘We’ve been working with the ministry of planning and investment in scanning thoroughly FDI from China and Hong Kong,’ he said in a November interview in Hanoi. Chinese foreign direct investment into Vietnam grew by triple digits in 2019, data through November show.

Mr. Tuan said they’ve been looking at the investment value — and especially the scale of factories and technology use — to determine whether investors aim to ‘just set up a place to assemble all the parts they brought from China.’

They also check whether the planned products are subject to U.S. tariffs, a clue that investors may be trying to evade the penalties.

As the manufacturing sector in places like Vietnam continues to grow, expect enforcement to be stepped up. According to the WSJ, Vietnam is “vulnerable to losing some of its newfound business if the country is perceived as a transshipment center” (not to mention vulnerable to tariffs being imposed against it). As put by the Vietnamese Ministry of Industry and Trade, “Such fraudulent labeling not only directly affects products and consumers, but also significantly reduces the reputation and competitiveness of goods manufactured in Vietnam”. It’s one thing for Chinese producers to stiff the United States, and a very different one for them to stiff homegrown companies vying for market share. Word on the street is that the CBP intends to drastically step up its investigations and enforcement against illegal transshipping immediately following the signing of the US-China “phase one” trade deal.

And this provides a nice segue to the final point, which is that, in addition to U.S. and foreign customs, affected companies themselves are also on the lookout for those breaking the rules. As we have pointed out:

One of the biggest hammers against transshipping is the False Claims Act (“FCA”).  The FCA (31 U.S.C. § 3729) allows people or companies to file what are called “qui tam” lawsuits against individuals or companies that directly or indirectly defraud the Federal government seeking triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.

And we know this because we have represented such spurned competitors in the past—and represent them right now. Heck, if you know of any illegal transshipping going on out there, let us know so we can all profit together from that!

To sum up, without doubt the illegal transshipment of Chinese goods is a reality. At the same time, transshipment is far from being a simple trick that magically makes tariffs disappear. It’s not as easy to conceal as some would think, and the risks associated with getting caught are grave. Prison grave. Massive fines grave (see the $62.5 million Univar paid, as discussed above). With all this in mind, serious importers are wisely choosing to steer clear of such practices.

What are you seeing out there?

 

 

 

 

Foreign Agent Rules (FARA) Spain

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

Registration under FARA is not limited to U.S. individuals and entities. Non-U.S. individuals and entities operating in the U.S. as foreign agents also need to register, regardless of whether the foreign government being represented is a friend, frenemy, or enemy. Here are some key legal terms and questions with which to become familiar to assess whether you or your company must register under FARA:

Are you working on behalf of a “foreign principal”?

This broad term generally refers to a government of a foreign country or a foreign political party, but it also includes any faction or body of insurgents within a country exercising governmental authority, whether or not that group is recognized by the United States as a legitimate government over legitimately-controlled territory. A foreign principal also includes a partnership, association, organization, or other combination of persons having its principal place of business in a foreign country. Nation-states, government entities, government officials, political parties, ousted dictators in exile, guerilla groups, and for-profit and nonprofit entities owned by any of the foregoing all fit into the definition of a foreign principal.

Are you engaging in “political activities” or will you act as “public relations counsel” or a “political consultant”?

Political activities means any activity the U.S. Department of Justice (DOJ) believes will influence or is intended to influence any U.S. agency or official or any section of the public within the United States. Public relations counsel refers to consulting with the foreign principal on how to sway public relations. Political consultants generally provide guidance on how to navigate interactions with state or federal legislative or executive branch members. The key of this analysis point is whether you are trying to sway U.S. government officials or U.S. voters. If you are only helping your client to engage with non-U.S. political actors and voters, then you may not be engaging in political activities or acting as public relations counsel or a political consultant for FARA registration purposes.

Who or what needs to register under FARA?

The business entity engaged on behalf of the foreign principal needs to register a primary registration statement, and each individual involved in performing political activities or acting as public relations counsel or a political consultant on behalf of the foreign principal needs to register under the primary registration statement on a short form registration statement. This includes employees and contractors of the FARA registrant entity. If the work on behalf of the foreign principal is being performed solely by an individual as an agent, representative, employee, servant, or in any other capacity at the request or under the direction of a foreign principal, then that individual needs to register a primary registration. Keep in mind that FARA registration only applies to actors engaging in the United States in conducting political activities or acting as public relations counsel or a political consultant.

The various relevant registration documents can be found here, all of which are filed electronically here and become public records (including your engagement letter and your fees actually received). In the third post we will walk through these forms in detail.

What are the penalties for non-compliance with FARA registration?

Penalties for non-compliance with FARA registration can be significant, especially if those activities involve hot-button topics and unpopular U.S. adversaries. The punishments and settlements made public by the DOJ range from probation, to months or years of prison time, to disgorgement of fees received from the foreign principal, with the worst punishments being assessed against individuals and businesses that made false statements in the registration process or to investigators trying to ascertain whether FARA violations occurred.

Whether you are working on behalf of official or quasi-official clients from China, Russia, Iran, India, Spain, or somewhere else, you need to assess whether your activities necessitate registration under FARA. Registration applies to those representing friends and foes, but foes particularly draw popular ire and DOJ scrutiny.

In Part 3 of this series, we will look at the specific FARA registration forms and discuss how to remain in compliance with the ongoing registration requirements.

Chinese contract lawyers

The United States and China are scheduled to have a grand signing ceremony on January 15 for the “Phase One” deal that is supposed to solve the U.S.-China trade war.  Though more than 200 guests have been invited to attend the ceremony, no one knows exactly what they will be signing because the text of the “Phase One” deal has not yet been released. Fox Business news reported that a U.S. trade source said the Phase One deal text will be posted on the website of the U.S. Trade Representative the “moment” the agreement is signed on Wednesday.

Treasury Secretary Steve Mnuchin has dismissed “rumors” that China’s commitments in the deal had been changed in translation. Of course, since no one has seen either the English or Chinese versions of any drafts of the deal, it is impossible to do a side-by-side comparison to see if the English and Chinese versions are consistent or what, if any, changes were made from prior drafts, also undisclosed. There is though a very significant possibility the Chinese version will not be entirely consistent with the U.S. English version and the Chinese will think they have agreed to something different from what President Trump and his team believe they have agreed to.

The Trump Administration’s cavalier attitude that the Chinese translation of what is reported to be an 86-page English version of the deal is just a minor technical matter is a bit shocking. In general, if treaties and other international agreements are authenticated in two or more languages, the text is equally authoritative in each language, unless specifically provided that one language will prevail over the other. It seems likely that the Chinese side will insist that the Chinese language version be considered equally authoritative as the English version.

We consistently advise our clients on the critical importance of having a reliable Chinese translation of any contract or agreement.  This is because my law firm constantly gets approached by American and European companies that wrongly believe they had a “deal” with a Chinese company and that we, the lawyers, were there “merely to document the deal.” However, once we lawyers get a hold of the “deal” document we discover at least one of the following problems:

  • There is no way the Chinese company would agree to one or more of the provisions and either it did not (and the foreign company is mistaken) or it did, but it does not understand to what it has agreed.
  • There are one or more things about the deal that are bad for both sides and both sides would benefit by changing those.
  • There are one or more things that are illegal, completely unworkable or nonsensical in one or both countries.

Getting consistency between the Chinese and English versions of any agreement is a big deal. We have seen our share of translation disasters over the years. We have seen contract terms with “must” translated into Chinese as “may.”  We have seen English language contracts referring to “A,” while the Chinese language versions of those same contracts referred to “not A.” The Chinese language contract then noted the Chinese language version would control in any dispute. So even though the U.S. company believed it had signed a contract saying “A,” it had actually signed a binding contract saying “not A.” See China Agreements. Why Ours Are In Chinese. Flat Out.

Many dual language Chinese-English contracts are silent on which language controls, and far too often foreign companies 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.

If both languages in a dual language contract say the same one language controls, that one language will control. So 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. No problems there.

It is everything else that so often causes problems for American and European and Australian companies.

You see, if both your English language and your Chinese language portions are silent as to which language 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 20 percent of the joint venture’s revenue  but the Chinese portion says you get 20 percent of the profits (which will of course be way less than revenues) you will have no legal basis for claiming anything more than 20 percent of the profits. Our China lawyers see this sort of intentional discrepancy all the time.

Of the hundreds of dual language contracts proposed by Chinese companies and reviewed by our 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 language portion is better or much better for the Chinese company than the English portion. Chinese companies love using contracts with an English portion more favorable to the foreign company than the Chinese portion and then relying on the English speaking company to assume 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 the contract is going to be enforced in China (as should usually be the case), you must 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. This necessarily requires that you be 100% certain that whomever is dong the translations is truly on your side.

International trade agreements are highly complex agreements, and hopefully the United States is not going to make the mistake of underestimating the importance of knowing exactly what it is the Chinese language version of the agreement says. Now let me tell you about another very common trick Chinese companies employ with their contracts. This one is called the deadline trap and we described this in China Contracts: The Deadline Trap:

The standard program Chinese companies use for manipulating a deadline usually works in three stages, as follows:

Stage One: The first draft of the contract is always submitted by the foreign party. The Chinese company never provides the first draft because that would require they “tip their hand.” The foreign party works overtime on a tight timeline and provides its draft thirty days before the deadline. This is done under the assumption that thirty days is sufficient to work out all the deal issues and arrive at a final draft agreement on the deadline date.

The foreign party hears nothing, not even an acknowledgment of receipt. This causes concern and after three or four days the foreign party asks the Chinese side about receipt and comments. The Chinese side responds that it did a quick review and everything looks okay. The foreign party is relieved and begins preparing to implement the project on the terms stated in the draft contract.

Stage Two: Seven or so days before the deadline, the Chinese side finally sends its comments on the draft agreement. At this stage, the Chinese side proposes two or three changes. However, these changes are designed to make the contract completely unenforceable against the Chinese side. Here are my three current favorites:

1.  The key to the contract is that the obligations provided in the contract are absolutely binding on the Chinese party for a period of three to five years. The Chinese side makes no revision to the 35-page contract. Instead, they insert a single article that provides that the Chinese side can terminate the contract at will on 30-days notice.

When challenged, the Chinese side claims mutual termination is common in international contracts.

2.  The Chinese side adds what it calls a force majeure provision. The standard force majeure provision provides that neither side can be compelled to perform in situations where performance is impossible due to matters outside the control of that party: war, strike, typhoon, or earthquake. The key to a standard force majeure provision is that neither party is required to perform. If the force majeure condition continues, the affected party is required to return the matter to the pre-contract status quo.

The Chinese provision is always written in a way that stands the standard force majeure provision upside down. In the Chinese version, the Chinese side is concerned only with the actions of the Chinese government. The Chinese force majeure provision will provide that if the Chinese government or its agents (foreign exchange bank) makes performance by the Chinese side impossible, the Chinese side is not obligated to perform. But the foreign party is still obligated to perform and the Chinese side is not obligated to return the matter to its pre-contract status quo.

When challenged, the Chinese side replies: force majeure provisions are standard in international contracts.

3.  In the critical provisions of the contract, in every place where it says “the Chinese party shall be obligated to do” the contract is revised to say “shall not be obligated to.” This is usually done where the revisions are not redlined or otherwise identified in a cover memorandum. The added word is only located after careful review of the contact. The longer and more detailed the contract, the more difficult it is to find this kind of revision.

When challenged, the Chinese side replies: we only inserted one word. What is your problem with that?

When the foreign side objects, the Chinese side will complain that the foreign side is being unreasonable. If well advised the foreign side will hold the line and refuse to agree to revisions like these that will essentially render the contract meaningless. The Chinese side then agrees to back down and the foreign side then feels relieved, assuming the agreement as drafted will be executed on or before the deadline. The unsuspecting foreign party does not realize that the opposite will almost certainly happen, leading to stage three.

Stage Three: Two to four days before the deadline, the Chinese side returns the contract with extensive revisions throughout the entire document, usually with no redline of the revisions. Some Chinese parties will redline some but fail to redline others. No explanation is ever given for the large number of revisions. No explanation is ever given for why these revisions were provided so close before the deadline when it is clear the Chinese side was aware of the issues weeks earlier when the draft was first provided to it.

Most foreign parties at this stage fall directly into the trap laid by the Chinese side since day one. The foreign party works desperately to revise the document in the face of the by now ridiculously short deadline. In this setting, the Chinese side is hoping two things will happen. First, the foreign side will make concessions just to get the document signed. Second, the foreign side will make drafting mistakes due to the short timeline and the need to work in two or more languages. The Chinese side will then ruthlessly take advantage of those mistakes at a later date.

It is always a mistake to fall into the deadline trap. The better response is to realize from the start that the deadline is not relevant to the Chinese side. The Chinese side is merely using the deadline as a tool to gain an advantage over you. The first step when faced with this trap is to refuse to make the revisions and execute the agreement under this time pressure. Instead, tell the Chinese side that since they are the ones who responded late, you view their response as a contract rejection and for this reason, the deal is off.

Then simply walk away. Do not propose a new deadline. If you propose a new deadline, the Chinese side will go through exactly the same steps (as above) in almost exactly the same way. The only useful course of action is to tell the Chinese side that if it is still interested in doing the deal it should come back with a reasonable set of proposals, and if we are still interested, we will take a look. But, since the deadline has passed, we may never come back to you. It is your risk.

In that situation, some Chinese parties will simply capitulate and come back with a reasonable set of proposals quite soon, often within one week. However, the most common response is that the Chinese side will continue to act in a manner designed to force the foreign party into making an unreasonable concession or a mistake. The only way to prevent that is to treat the deadline as a hard date and to walk away when the Chinese side is unreasonable.

It is impossible to predict what the Chinese side will do when you walk away. The Chinese side is not using this three-stage technique because it is inexperienced. The opposite is true. These entities are very experienced and they have learned that the deadline manipulation technique works very well. The only appropriate response from the foreign side is to call the bluff by walking away. But like a poker game with a stranger, you never know what will happen when you call the bluff. The response from the Chinese side is entirely unpredictable.

Be prepared.

It is worth noting that the Chinese are being incredibly quiet about the terms of the “phase one” deal. The Chinese have said little to nothing about what they are buying, how much they are buying, whether they are buying or promising to buy, etc. Indeed, the Chinese specifically noted to reporters that it had not released any details of the “phase one” deal because the U.S. side had switched positions repeatedly on numerous issues.

China is no doubt playing the long game. Who knows what a “phase two” deal will look like, when we don’t even know what is in the “phase one” deal we are signing? One month between the announcement and the signing of the deal seems like a very tight window to take care of all the millions of little but necessary details that go into an agreement. It would not be surprising if the Chinese side is planning to take advantage of President Trump’s absolute commitment to have a grand deal signing  ceremony on January 15 (tomorrow!) to sneak in some last-minute tweaks in the Chinese language version of the deal that may or may not be 100% consistent with the English language version, just as we’ve seen so many times in our own, much smaller and less globally important deals.

I guess we’ll just have to wait and see the agreement when it actually gets released after it is signed and too late to change anything. Hopefully, there won’t be too many provisions that wind up with inconsistent translations with significant impact, and hopefully any inconsistencies can be cleaned up in later negotiations. But hoping that a “phase two” deal will take care of any inconsistencies or gaps in the “phase one” deal is like hoping to build a house on a foundation of shifting sand. Rather than resolve the U.S.-China trade wars, this “phase one” deal likely will have some snap back provisions that, together with some inconsistent Chinese language translations, will result in a resumption of U.S.-China trade disputes in some form or another in the not too distant future.