international litigation lawyers

The Wall Street Journal ran a front page article last week on how American companies are working to reduce their exposure to China. The article is titled, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, and it reinforces what we have been saying here for months about how American and European companies are viewing the Trump tariffs and other government restrictions on China trade as a wake-up call and they are acting accordingly. It states exactly what our international lawyers have been saying for months and it reinforces that with concrete and specific examples. We keep writing about how so many of our clients have moved out of China, are seeking to move out of China, or simply very much want to move out of China. But due to the attorney-client privilege, we are not allowed to name names, but the Wall Street Journal can and it does.

The article starts out by talking about how no matter what sort of new trade deal the United States reaches with China and no matter what sorts of promises China makes about acting right in the future, the past is past and business with China will never be the same again.

[R]attled businesses on both sides of the Pacific are skittish about rushing back in to revive the once-booming investment activity between the two countries.

“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.

It then notes that the “US-China trade dispute isn’t the only factor driving a decline in investment flows between China and the U.S., which plunged to just over $19 billion last year, from a 2016 peak of $60 billion.” China has clamped down on capital outflows and “the U.S. Committee on Foreign Investment has moved to block or unwind Chinese investment in companies that could give it a strategic advantage, including social-media companies” and there is no reason to believe any trade agreement will change either of these things.

The article gives the following examples of foreign companies permanently reducing their China footprint:

  • “The camera maker GoPro has decided to move its camera production for the U.S. market from China to Guadalajara, Mexico. The company was contemplating such a move anyway, but the tariffs served as the ‘catalyst to improve supply-chain efficiency.'”
  • Bicycle maker Kent International Inc., based in New Jersey, “said it was investing in Cambodian factories to avoid the Chinese tariffs.”
  • Synplus Inc., a supplier of leather, fur and suede that sources its materials from China has “switched from western China pig leather to Pakistani lamb leather. Companies are ‘forced to create a new manufacturing channel’ and ‘if it’s successful, they won’t choose to come back,’ ” said Ms. Cynthia Gardenhire, the company’s Vice President.  Synplus has also begun considering investing in a Vietnamese supply chain to remain competitive and avoid future tariffs.

It also gives the following examples of Chinese companies pivoting away from investing in the United States:

The article then concludes by quoting the president of the American Apparel and Footwear Association, Rick Helfenbein, who “says that when apparel companies talk to analysts and investors, they are grilled on their exposure to Chinese uncertainties [and]…. “the wrong answer is ‘90% of everything I do is China,’ and a good answer is, ‘We’re working hard to reduce our exposure to China.’”

If you too are working hard to reduce your exposure to China, kudos to you BUT be careful because hell hath no fury like a Chinese company scorned and our China lawyers have of late been hearing frequently from foreign companies that did not realize that saying goodbye to China can have major ramifications. In this post, we will talk about the risks of terminating your China supplier and how to reduce those risks. In a subsequent post we will talk about how to shut down your China WFOE, Rep Office or Joint Venture or China factory.

It is common for Chinese manufacturers to retaliate against foreign product buyers that cease buying product from them or greatly reduce their purchasing. For this reason, you should line up your new suppliers and have them ready to go before they even hint that they might cease production with their existing China suppliers. Many Chinese manufacturers are suffering right now and they generally do not take kindly to foreign companies further imperiling their economic survival. This means you need to be careful in how you decouple from your China supplier. We give this advice because over the years our China lawyers have repeatedly seen the following:
  • The foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling that you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds In China and Want Your China-Based Molds? You’re Probably Too Late For That.
  • The foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. The foreign company then learns that someone in China has registered the foreign company’s brand names and logos as trademarks in China. The foreign company is convinced its China manufacturer is the one that did these registrations, but it has no solid evidence to prove this. The foreign company is now facing not being able to have its product — at least with its own brand name — manufactured in China. The way to prevent this is to fortify your trademark registrations in China and elsewhere around the world before you even hint to your China manufacturer that you will be switching suppliers.
  • The foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. A few weeks later, the foreign company has its products seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered its brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge (or just registered the design patent). China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. For how to prevent this from happening to you, check out the following:
  • The foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. China manufacturer then says that it will not be shipping any more product because the foreign company is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports the foreign company to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which can have the effect of convincing other Chinese manufacturers not to sell to the foreign company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out Be Sure Regarding China’s Sinosure. In the last few months our international litigators have been seeing a ton of cases where Chinese manufacturers have been claiming to be owed large sums of money when in reality nothing whatsoever is owed. This has been happening so frequently this seems to be the new “best” strategy for desperate Chinese manufacturers.

Bottom Line: Plan ahead for pulling your production from your Chinese manufacturer and do it right.

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.