China US cold warThe air is getting hotter
There’s a rumbling in the skies
I’ve been wading through the high muddy water
With the heat rising in my eyes

Everyday your memory grows dimmer
It doesn’t haunt me like it did before
I’ve been walking through the middle of nowhere
Trying to get to Heaven before they close the door

When I was in Missouri
They would not let me be
I had to leave there in a hurry
I only saw what they let me see

You broke a heart that loved you
Now you can seal up the book and not write anymore
I’ve been walking that lonesome valley
Trying to get to Heaven before they close the door.

When you think that you’ve lost everything you find out you can always lose a little more.

The above is from Nobel Prize Winner Bob Dylan’s song, Trying to Get to Heaven, and I apologize for quoting so much from it, but it is just so spot-on regarding the US-China cold war.

In early October, in one of our Quick Question Friday posts, we wrote about how all companies that sell Made in China products to the United States need to recognize there will be no quick end to the US-China trade dispute and to start preparing accordingly. This post led to more than the usual volume of hate mail, most of this coming from second-tier “China consultants” who prefer to blame this blog for putting their China gravy train at risk, rather than the downslide in China-US relations doing that.The below is the key portion from that Quick Question post:

My favorite emails though are the ones that essentially ask how far we see this movement out of China going and how we see the US-China trade war ending.

My answers to both of these questions have so far remained pretty much the same and they are as follows:

I see a lot of foreign companies leaving China now and I see that exodus as continuing. It would hardly be an exaggeration to say that on at least one level, nearly all of our clients would — at least in theory — like to cease having their products made in China. Part of this is due to the hassles and the hard times they have gone through in China and part of this is due to the grass always being greener on the other side. But to a large extent, these (hurt) feelings are mostly irrelevant. What’s relevant is whether these companies can do their manufacturing in a country other than China and whether their company would be better off doing so. I think that in large part the answer to the second question will more often be yes than no but the answer to the first and more important part will more often be no than yes. Put simply, most of the companies currently having their products made in China have no choice. No country right now comes close to matching China for its combination of manufacturing sophistication and low cost and until this changes, the overwhelming bulk of companies having their products made in China will continue to do so.

I do not see an end to the US-China trade war and that is why I call it the new normal. I think that the US will not back down unless and until China truly opens up its economy and I do not see that happening. Instead I see the tariffs sticking and maybe even increasing. President Trump has said that trade wars are easy to win and it would seem he truly believes this. He believes he can only win this trade war with China because China will either back down or Western (especially US companies) will move their manufacturing out of China due to its increased costs. But see How to Lower your Product Costs, Part 1: This is China, for how China is lowering costs and for how you as a product buyer can take advantage of this. JP Morgan today forecasts that tariffs on all US-China trade and I see essentially the pretty much the same thing. See JPMorgan is now forecasting tariffs on all trade between China and the US — and it could cause havoc for Chinese stocks.

If you are going to up and leave China for another country, you will need the very same protections in whatever country you go as you need for China, but specifically tailored for whichever country to which you are going. This may include the following:

  1. An NNN Agreements before you reveal your product specifications or design or customers or any other trade secret.
  2. A Mold/Tooling Ownership Agreement if you will be bringing your molds or tooling from China to the new country or if you will be paying (either directly or indirectly) for new molds or tooling in the new country.
  3. Product Development Agreements if you will be working with your new manufacturer to modify an existing product or create a new one.
  4. Manufacturing Agreements with whomever new who will be making your product. Go hereherehere, and here for what that entails
  5. You will need to register your trademark to protect your brand name and your company name and your logo in whatever new country you will be going. This will likely be the most important thing you do.
  6. design patent or a utility patent
  7. copyright. Usually not needed, but when it is needed, it’s very important.
According to this Report, China has made clear — both in public statements and in government-to-government communications –-that it will not change its policies in response to the initial Section 301 action. Indeed, China has largely denied there are any problems with its policies involving technology transfer and intellectual property. The report goes on to note how China’s State Council issued a 71-page “White Paper” in September 2018 that dismissed the Section 301 investigation’s findings and denounced U.S. actions as “trade bullyism” and how China has attempted to harm the U.S. economy by increasing duties on U.S. exports to China.

In other words, “deny deny deny.”

According to the USTR, these actions reveal that the initial tariffs are “no longer appropriate to obtain the elimination of China’s unfair trade acts, policies, and practices. In addition, the burden or restriction on United States commerce of these acts, policies, and practices continues to increase, including following the one-year investigation period. Accordingly, under direction of the President, USTR imposed additional tariffs on approximately $200 billion of imports from China on September 24, 2018.”

I see this “no longer appropriate” phrase as meaning that the U.S views it must do more than just impose tariffs on Chinese goods entering the United States. Like it or not, we see the United States engaging in some or all of the following against China:

  1. Increasingly block Chinese investment into the United States.
  2. Seek to have China removed from the WTO.
  3. Seek to block high end technology from going to China. See the just released proposed Federal rules for accomplishing this.
  4. Seek to isolate China as much as possible. We see a situation where the Untied States will be presenting the world with a “you are either with us or against us” situation similar to the US-Russia cold war.

In light of the above, we think it wishful thinking to believe the upcoming G20 meeting between President Xi and President Trump will do anything to ease US-China tensions and if we had to predict, we see that meeting only exacerbating the situation, much as the recent APEC meeting did. There can be no resolution on matters that are 100% denied by one side.

We take no pleasure from the above as China has been a massive part of our law firm’s Asia legal practice over the last two decades — we started this China Law Blog in 2006! But at the same time, as international lawyers we too need to remain nimble and we now focus as much on the rest of Asia and on Europe as on China. What are you doing to prepare for the above? See Would the Last Company Manufacturing in China Please Turn Off the Lights. Where will you be going? Thailand? Vietnam? The Philipines?