Recently I had the opportunity to talk with Luis Alemañy, a Puerto Rican entrepreneur whose company, SJT Manufacturing, provides a real-life example of the opportunities present in Puerto Rico for companies looking to bring parts of their supply chains closer to North and/or Latin America. SJT is a contract manufacturer of high-precision sheet metal parts, based in Bayamón (Puerto Rico’s second-largest city by population, which is located in the San Juan metro area). Some of the items SJT produces are computer and communication racks, electrical boxes, and medical and examination furniture. SJT’s clients include Google, HP, Tyco Worldwide, Johnson Controls, and Sanmina, as well as clients in the military and defense space.

I read about Luis and SJT in an intriguingly titled article in the local press, Mudan manufactura de Asia a la planta SJT Manufacturing en Bayamón (“Asian manufacturing moved to SJT Manufacturing plant in Bayamón”). There have recently been important initiatives to promote Puerto Rico as a replacement for some China manufacturing, especially in the pharma sector. For instance, the MMEDS Act, a bicameral initiative introduced in the House by Puerto Rico’s resident commissioner and in the Senate by Marco Rubio, would “rescue domestic medical manufacturing activity by providing incentives in economically distressed areas of the United States and its possessions.” In that context, it was exciting to read about companies making the switch from Asia to Puerto Rico, especially from outside pharma.

It’s not just tariff-plagued and cyber-insecure China that companies are fleeing for Puerto Rico. SJT has also snatched production from Malaysia, a country that is viewed as an alternative to China. This underscores a critical point: A move across the border from China to neighboring Southeast Asian countries like Malaysia or Vietnam might (or might not) provide a quick fix for the tariff problem, but may create new supply-chain anxieties. For a start, those countries could soon find themselves with a target on their backs for their own trade practices, such as currency manipulation, abetting illegal transshipment, and dumping.

Even if a country is a good trade actor, the realities of geography and borders mean that, during a time of crisis, its supply chains might become unreliable. This is exactly what has happened during the ongoing COVID-19 emergency. Within this scenario, the advantages of working with a manufacturer in the United States have become more apparent than ever.

When they work with producers such as SJT, companies that ship/sell their products to the United States do not have to worry about international travel restrictions and quarantines. For staff based in, say, Boston, travel to Puerto Rico is as straightforward as it is to Florida. In addition, Puerto Rico has largely remained open for business. Even though the island adopted stricter measures than most places in the United States, the controls had enough built-in flexibility to allow companies like SJT to keep on working. For instance, the company would issue letters explaining the essential nature of workers, in order to help them navigate police checks during lockdowns.

Beyond that, you will be dealing with English-speaking U.S. citizens culturally attuned to dealing with Americans. Many will have spent time living in the mainland United States, including studying at U.S. colleges. At the same time, Puerto Rico “has the lowest labor costs of any region under U.S. jurisdiction,” according to Invest Puerto Rico. This means companies can benefit from the U.S. labor force at a discount, which is appealing to American companies, of course, but also to companies from other countries, as evidenced by the fact SJT has been contacted by prospective clients in Spain and other European countries. These attractions will outlive COVID-19, and could also help Puerto Rico gain a long-term edge over Southeast Asia, not to mention China.

Puerto Rico has not been spared the negative impacts of the coronavirus pandemic, but if there’s a silver lining for the island, it’s the renewed attention being given to its manufacturing capabilities and other economic potential. COVID-19 has made it clear that securing supply chains is, literally, a matter of life and death. When it comes down to it, no manufacturing destination can offer the guarantees that one located on U.S. soil can deliver.

In the specific case of medical devices and medicines, Puerto Rico is an obvious choice: it is already the largest U.S. exporter of pharma and medicine products. SJT’s success, however, demonstrates that pharma is not Puerto Rico’s only game.

Listen above or stream on SpotifyApple Podcasts, Google Play or Stitcher!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are proud to announce our new podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

Every Thursday, we’ll take a bite-sized look at legal and economic developments in locales around the world as we try to decipher global trends in law and business with the help of our international guests. No topic is too big, too small, too simple, or too complicated. We plan to cover continents, countries, regimes, governance, finances, legal developments, and whatever is trending on Twitter. We want your suggestions on topics you want us to cover and the people you want to hear from.

In this second webcast, we discuss Puerto Rico with Dr. José Raúl Perales, Deputy Director of the Global Alliance for Trade Facilitation. We cover:

  • Puerto Rico’s political status as an unincorporated U.S. territory, and how that impacts the island’s international role.
  • Puerto Rico’s storied role as a manufacturing platform for U.S. companies, especially for the pharma sector.
  • How concerns over supply-chain security and overdependence on China may give Puerto Rico an opportunity to attract some manufacturing back.
  • Industry-specific opportunities in Puerto Rico, for example, business services such as phytosanitary certification for Latin American companies.
  • Possible obstacles Puerto Rico might face as it tries to become a manufacturing powerhouse once again, such as energy and transport concerns.
  • How Puerto Rico could form win-win partnerships with other U.S. jurisdiction, such as joint branding of “Made in the USA” products.
  • What we’re reading right now, with suggestions from José Raúl (Será larga la noche, by Santiago Gamboa, and The Triumph of Injustice, by Emmanuel Saez and Gabriel Zucman), Jonathan (The Accidental Superpower, by Peter Zeihan), and Fred (A Fair Country: Telling Truths About Canada, by John Ralston Saul).

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz@harrisbricken.com. And please follow us on social media to stay informed on upcoming guests and topics:

We’ll see you next Thursday for another discussion on the global business environment in Uganda with our guest, John Brittell.

Mexico manufacturing lawyers

The party is over for an increasing number of U.S. companies who danced with China’s communist rulers. Their giddy, devil-may-care pursuit of the China Price has now devolved into the dystopia of “Uyghurs for sale”. See China’s Other Supply Chain Infection — Forced Labor. When someone finally listened to their complaints about IP theft, the strongest response came in the form of tariffs that have wreaked havoc on their supply chains. As these companies navigate the painful decoupling between the U.S. and China, having—hopefully—learned valuable lessons, they should pay attention to opportunities closer to home… and even at home.

In a blog post last month, I wondered out loud why U.S. imports from Mexico aren’t even higher than the $346 billion ringed up in 2018. Having spent the last few days in San Diego, I almost want to run that blog post again. As I write these lines, I’m at the city’s airport, from where a traveler stepping off a domestic flight can reach one of Mexico’s most important cities in just over a half hour. In fact, the San Diego Trolley goes right up to the border crossing at San Ysidro. Mexico is so close you can hear cars speeding along Federal Highway 1D while you hike in San Diego’s backcountry. Mexican radio stations share the airwaves with American ones, providing updates on border crossing times. Should travel deeper into Mexico be required, a bridge will take you from the U.S. side directly into the Tijuana airport terminal.

But Mexico is not the only destination that should be revisited. A recent New York Post editorial reminds us that the U.S. commonwealth of Puerto Rico “was for decades a central hub of U.S. drug manufacturing”, calling for a return to that role to counter America’s “serious over-reliance on China for pharmaceutical production”.

As a youngster in 1980s Puerto Rico, I kept hearing three numbers—9, 3 and 6—in news broadcasts, conversations between adults, and political debates. As I grew older, I came to understand that those three numbers provided the economic foundation of the island. Section 936 of the Internal Revenue Code provided tax incentives for U.S. manufacturers operating in Puerto Rico. These incentives were a continuation of efforts “to help Puerto Rico emerge from a colonial past, transforming its largely agrarian economy into a manufacturing powerhouse”.

The effort, known as Operation Bootstrap, began with a series of tax breaks designed to attract manufacturers who would provide steady factory jobs.

For a time the plan seemed to work, as standards of living in Puerto Rico rose. Between 1950 and 1980, per capita gross national product grew nearly tenfold in Puerto Rico, and disposable income and educational attainment rose sharply, according to the Center for a New Economy, a think tank based in San Juan, Puerto Rico.

One of those tax breaks, enacted in 1976, allowed U.S. manufacturing companies to avoid corporate income taxes on profits made in U.S. territories, including Puerto Rico. Manufacturers, led by the pharmaceutical industry, flocked to the island.

To the extent that the Puerto Rico of my childhood looked and felt like a reasonable facsimile of the United States mainland, it’s largely because of la nueve treinta y seis—and in particular, las farmaceúticas—the jobs it created and the money it pumped into the economy.

Section 936 did have its detractors. Some in the U.S. saw the tax breaks as a form of corporate welfare, while some Puerto Ricans viewed them as an obstacle to becoming a U.S. state. The pressure eventually led to a 10-year phaseout initiated by President Clinton. Since then, the island’s economy has taken a nosedive.

The demise of Section 936 has had another dismal consequence. Although pharma has maintained a presence in Puerto Rico, “about 90 percent of the active ingredients (manufactured “precursors”) used by U.S. drugmakers now come from China”. This situation presents a two-layered threat. First, it means U.S. domestic capacity might be insufficient to deal with public health crises such as the current COVID-19 pandemic. Second, it gives China a powerful lever with which to exert pressure over the United States.

The Post views the return of pharma to Puerto Rico as a “no-brainer”, in order to boost both domestic drug production and Puerto Rico’s economy. Though the newspaper is generally unsupportive of “targeted tax breaks”, in the case of pharma “there’s a clear need for a national-security exception”. As the ongoing pandemic is demonstrating, the same can be said about a wide range of goods (for example, masks). The time is right to incentivize renewed production of such critical products in Puerto Rico and elsewhere in the United States.

And national security needs to be understood broadly. Take for example the issue of Central American migration—a very present concern for San Diegans and Tijuanans alike—which U.S. intelligence has consistently found to be a national security threat. The U.S. has to some extent helped create economic opportunities for Central American countries, most notably through the CAFTA-DR. According to the United States Trade Representative, as a unit, CAFTA-DR countries were the country’s 18th largest goods trading partner in 2018. Imports from the bloc totaled $25.5 billion, slightly more than from Australia.

Clearly, a significant production base already exists. Moreover, any improvement in economic conditions in these countries is in the best interest of the United States. Even leaving aside possible reductions in the number of immigrants (as happened in the case of Mexico as its economy improved), prosperous neighbors mean nearby markets for U.S. goods and services (in fact, the U.S. enjoys a trade surplus with the CAFTA-DR bloc), as well as stronger regional allies to combat threats such as drug trafficking, terrorism—and creeping influence by rival powers.

For decades, America’s China policy was characterized by engagement.

Burgeoning economic links gave both countries a stake in getting along. Despite China’s human rights abuses and other irritants, successive U.S. administrations sought to bring Beijing into international accords on trade, nuclear arms and other concerns, arguing that engagement would lead to economic and political reforms.

However, “the progress did not produce political liberalization or easing of strict economic controls”, leading to today’s more confrontational dynamics, in which geopolitical considerations are of renewed concern. In that environment, it makes sense for U.S. businesses to look to the south once again.

 

 

 

Trademarks for China, Taiwan, Hong Kong and Macau

Just got back from a family vacation in Puerto Rico. While there, I saw a rental car company called Target with the same logo as the Target stores so common on the U.S. mainland. Well of course that got me to thinking. Is this rental car company infringing on Target (the store’s) trade-name and trademark (the logo)?  Or is it the case that even though Puerto Rico is a U.S. territory, its trademark regime is separate from the United States?

My research quickly determined that Puerto Rico’s trademark regime is actually separate from that of the United States. In other words, if you want your name or mark trademarked in both the United States and Puerto Rico, you should register it in both places. Presumably, Target rental car beat Target stores to the name and logo in Puerto Rico and is now able to use both legally there.

Hong Kong and China are the same way. And Taiwan and Macau too. Our international IP lawyers constantly have to explain this to our clients, at least half of whom just assume that a trademark registration in the PRC operates as a trademark registration in Hong Kong and vice-versa. And who can blame them, since Hong Kong is one with the mainland, right? Same with Macau, right? Many have this same view regarding China and Taiwan as well. None of this is true.

If you want your brand or mark registered and thus protected in China, Hong Kong, Macau and Taiwan, you must register them in China, Hong Kong, Macau and Taiwan. If you thought you were protected in more than one of these places simply because you had registered in one, you better get moving and start registering in one, two, or three more.

What do you think?

A lot is happening these days in and with China and around the world. Obviously.

Earlier this year, much of our legal work centered around helping our clients deal with the US-China trade war. That truly feels like ages ago, as today, — working remotely — our international lawyers have been consumed with helping companies (and NGOs and even countries) figure out how best to source PPE and coronavirus testing products. In addition to this PPE sourcing, a huge part of our practice is now focused on helping companies deal with the myriad of legal issues that have arisen from the coronavirus. For more on this, please check out our coronavirus law page.

The coronavirus is making people sick and killing people. It also is disrupting company plans and actions. Our social media pages reflect all this, oftentimes with a much stronger and more controversial viewpoint than on here where we are at constant risk of the great firewall. On social media you will see a lot more controversy and a lot more individualism as between our various lawyer-writers. There we can let loose and fully express ourselves, and we do.

It is also on social media where we get the most heat. It is there that we are constantly accused of hating China AND being China apologists. Truth is that we both love and hate China — not so different how we feel about the rest of the world as well. We all have spent huge chunks of our lives in China and working to smooth relations between China and the rest of the world. It is from this where we have come to love China.

But we are above all else lawyers trained to analyze things objectively and to advocate for our clients. And we have also been trained to give our clients the truth as best we can and then work with them in using that truth to plan and enact their next moves. This requires we not be emotional or loyal to any one side of anything before we have completed our research. This requires we sometimes defend China and at other times we be harshly critical of it.

Things are tough with China right now as huge swaths of the world are either mad at China for having suppressed news about the coronavirus, rather than suppressing the virus itself. Way back in October, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we started emphatically telling people how China had become riskier and why they should be looking at other countries to make their products. This angered many. We had been beating that drum on social media before that and we have been beating it ever since. See e.g., our June, 2019 piece, Has Sourcing Product From China Become TOO Risky?

Without a doubt, the two biggest issues most companies that do business in or with China are facing these days is whether to stay or go and/or whether to continue having their products manufactured in China or diversify production elsewhere.

Increasing exclusions and harassment of foreigners is influencing these decisions and every day we get emails from foreigners who tell us they are leaving China for this reason. See “They see my blue eyes then jump back”– China sees a new wave of xenophobia. Many of our clients are “splitting the difference” by setting up and/or growing their businesses in China, but doing it more than ever with trusted locals instead of expats. China has literally banned the entrance of all foreigners so for the immediate future, foreign companies have no choice in this. In the last year the number of WFOE formations our lawyers have done is down at least 50%. But the number of deals where our client licenses its technology or brand name to China have more than doubled.

On the manufacturing front, the big issue is diversification. China’s factories going dark during the peak of the coronavirus have convinced foreign companies that manufacture exclusively in China that they must diversify.

But the coronavirus will eventually dissipate and that will create new opportunities for companies looking to do business in China or grow their business in China. And on that, we remain optimistic. Once the world truly gets past the coronavirus — and that day will someday arrive, the CCP will very likely make efforts to tamp down on racism, just as it did so successfully earlier in this decade with respect to the Japanese, French, Norwegians, and South Koreans.

In an effort to remain visible to our many readers in China, we are careful about what we write here on the blog. There are words we avoid using and topics we avoid discussing on this blog because we want our reach to include China and if China does not like something, its government has this “magical” ability to make it go away. And there is a lot China does not like these days. Facebook and Linkedin and Twitter give us a much greater ability to speak freely. The below is a quick update and listing of what we are doing these days outside this blog.

Linkedin. We have a thriving China Law Blog Group on Linkedin that serves as spam-free forum for China information, networking, and discussion. This group is always growing and now totals nearly 13,000 members.

The members of our Linkedin group are fairly evenly split between those who live and work and do business in China and those who do business with China from the United States, Australia, Canada, Europe, Africa, the Middle East and other countries in Asia. Some are international lawyers and some are China lawyers, but most are businesspeople and some are academics (students or professors). We have senior level personnel (attorneys and executives) from large, medium, and small companies and tons of mid-level and junior personnel as well.

What truly separates us from most (all?) of the other Linkedin China groups is that we remove anything that smacks of spam or is not relevant for those doing business with or in China. Our hewing to such a tight line on what we permit means we do not get a large volume of postings, but this also means we do not waste people’s time on drivel or business pitches. If you want to learn more about doing business in China or with China, if you want to discuss China law or business, or if you want to network with others doing China law or business, I urge you to and join our China Law Blog Group on Linkedin. Please do join us there.

Individually, many of us post often on Linkedin about China matters and we are also always accessible there. You can find our China lawyers and China trade specialists on Linkedin as follows, some of whom post there more than others:

My personal Linkedin page has more than 10,000 followers and that has led me to post more often there on all things China. I welcome new followers and new connections, though I warn you that I tend to be slow in responding to connection requests. I promise not to overwhelm you with posts: I post roughly 3-5 times a week.

Facebook. Our China Law Blog Facebook page, is thriving as well with just under 25,000 followers (this is its number of “likes”). We use Facebook to post interesting, important and entertaining articles about China. Posts there get a lot of comments and discussion, often heated. We tend to be very open and opinionated and free-wheeling there. With so much going on with China and Hong Kong these days, our Facebook page has become a key source. I urge you to go there and “like” us so you can benefit from what we are doing there.

I am also now posting a fair amount on Twitter at @danharris. I left Twitter for many years but I am now happy to be back as I enjoy the sheer immediacy of it. I most definitely do not hold back there but I also post on non-China things from time to time. I also urge you to check out and follow Fred Rocafort from my firm as well, (@RocafortFred). Until recently, Fred was living in Hong Kong/the PRC and his tweets (oftentimes in both English and Spanish) do a great job of bridging the various gaps between HK, the PRC and the West. In addition to posting on China and Hong Kong, Fred also often posts about Latin America. Jonathan Bench (@jonathan_bench), who spent around five years living in China and now splits his time between Seattle and Salt Lake City, is also a frequent poster on Twitter about all things China and all things international business and I urge you to follow him too. We also have a China Law Blog feed, @chinalawblog and it would be great if you were to follow that too.

We also JUST YESTERDAY started a new Twitter account in Spanish (@HarrisBrickenES, a/k/a Harris Bricken en Español). That account will be mostly run by Fred Rocafort and Adrián Cisneros Aguilar and Arlo Kipfer.  Fred is based in the United States, Adrián is based in Mexico, and Arlo is based in Colombia and all three of them are fluent in Chinese, Spanish, and English and all three work with our clients moving production or investment from China to Latin America or to Spain, both for Chinese and for American/European/Asian companies.

Fred, along with Jonathan Bench also just wrapped up Episode 24 of their weekly Global Law and Business Podcast focused on doing business all around the world and the laws that impact that. They’ve already had guests from India, Mexico, Israel, Nigeria, China, Australia, Chile, Xinjiang, Hong Kong, Uruguay, Belgium, Malaysia, Brazil, and Puerto Rico discussing their homelands and worldwide experts discussing Cyberwarfare, Global HR, Cannabis in Asia, Infrastructure Finance, International School Law, Iran, Public-Private Partnerships, Artificial Intelligence, and East Africa. I urge you to check out some or all of these podcasts and be sure to stay tuned to future podcasts as well.

In the meantime, we look forward to continuing to discuss China and the world with you online!

Hong Kong Independence
Photographer: Anthony Kwan/Bloomberg via Getty Images

One of the Chinese Communist Party’s (CCP) most persistent bugbears are separatist threats—real or imagined—on the fringes of its empire. The most recent manifestation of this concern has been the CCP’s response to the ongoing unrest in Hong Kong. On May 20, 2020, the National People’s Congress adopted a decision regarding “national security” in Hong Kong (H/T to China Law Translate for the translation). According to the decision’s preamble, “illegal activities such as ‘Hong Kong independence,’ splitting the country, and violent terrorist activities have seriously endangered the sovereignty, unity, and territorial integrity of the country.” Such is the extent of the CCP’s agitation that it must combat independence even on the linguistic front, putting the characters in quotes to stress the unthinkable nature of the concept.

Elsewhere, the CCP has justified its reeducation camps in Xinjiang by “claiming they are for ‘education transformation’ and ‘vocational training’ in the fight against the ‘three evils’ of ‘separatism, terrorism and extremism.’” There are also “separatist elements” at work in Tibet. Even the CCP’s militaristic designs on Taiwan are framed in delusional “anti-secession” terms.

The existence of secessionist movements within China is not in question. Xinjiang and Tibet have had independence movements for a long time. And though Hong Kong independence was until recently a fringe idea, by December 2019 it was supported by 19% of Hongkongers—and it is reasonable to assume that support has only grown in the following months. Critics of CCP policies in places like Hong Kong point out that they should be free to have this stance. This would be consistent with international law. Article 1 of the International Covenant on Civil and Political Rights, of which China is a signatory, declares,

All peoples have the right of self-determination. By virtue of that right they freely determine their political status and freely pursue their economic, social and cultural development.

Defenders of the CCP often seek to deflect criticism over the repression of separatist views by drawing comparisons to the West’s own secessionist movements, denouncing what they perceive as some Western countries’ hypocrisy. “Do you think the United States would allow Hawaii and California to declare independence?”, they ask. (This particular comment was taken verbatim from Twitter). As the debate over Hong Kong becomes more contentious, more comments like this are popping up on social media, but this line of argument is not new.

There are two glaring problems with this particular tack. First, whatever practical obstacles may stand in the way of, say, Texas or California independence, Texans and Californians are free to express secessionist views. The president of the Texas Nationalist Movement can and does tell Atlantic that Texans “deserve their own land” without fear of persecution. Meanwhile, in neighboring Canada, the secessionist Bloc Québécois holds more than a third of Quebec’s seats in the House of Commons. In Spain, parties that support the independence of Catalonia and the Basque Country, such as Esquerra Republicana de Catalunya, are represented in the Spanish Parliament. The Scottish Nationalist Party not only holds 47 of Scotland’s 59 seats in the House of Commons, but also governs Scotland. Despite calling for Scottish independence, First Minister Nicola Sturgeon can sit down with the British prime minister without being told she will stink for 10,000 years.

Scotland also evinces the second big flaw with the secession whataboutism, which is that there are actual instances of Western countries telling one of their regions they are free to go. In 2014, Scotland held a referendum on independence, with the support of the British government. As then-Prime Minister David Cameron stated,

I always wanted to show respect to the people of Scotland. They voted for a party that wanted to have a referendum. I’ve made that referendum possible and made sure it’s decisive, it’s legal and it’s fair, and I think that’s right for the people of Scotland.

In 1995, Quebec also held a referendum on independence. Though the referendum was not the result of negotiations between Quebec and the federal government, the referendum was allowed to take place, and then-Prime Minister Jean Chrétien made the electoral case against independence. Questions remain about what would have happened had Quebec voted for independence. We know now that Chrétien “had a speech ready to be delivered in the event of a [pro-independence] vote, outlining that the referendum question had been too ambiguous to be binding, and that he would interpret the vote as indicating a dissatisfaction with the status quo, requiring negotiation but not separation.” However, Chrétien was concerned that Quebec’s pro-independence government would proceed with a secessionist plan, “seeking recognition from foreign governments and dismantling links with the federal government.”

At that point, Chrétien would not argue with mere words. He would need a game-changer. His plan was to move quickly, within a month or so, to ask Québecers another question in another referendum: Do you want Québec to separate from Canada? If those voting yes had a clear majority — not just 50 per cent plus one but some unspecified threshold — he planned to hold a national referendum on what position the federal government should take.

Chrétien was not prepared to see the country break up on a trick question and a narrow margin of support. But he was prepared to ask Québecers a direct question and live with the result.

Chrétien was prepared to question the legitimacy of the referendum and to subordinate Quebecers’ wishes to those of Canadians as a whole. However, he appears to have understood that a compelling demand for independence could not have gone unanswered.

Turning to the United States, the Civil War, arguably the most important event in the country’s history, was in essence a war over the secession of the Southern states (with the secession attempts motivated, of course, by a desire to maintain slavery). In fact, the war is sometimes called the War of Secession, particularly in other countries. It must be pointed out, of course, that the world is a very different place now than it was in 1861, and the Civil War offers little practical guidance on how the U.S. federal government would deal with a similar challenge today—especially if the fundamental issue of slavery was not at the heart of a secession drive.

Perhaps a more useful example of contemporary U.S. approaches is that of Puerto Rico, a U.S. territory that has held multiple votes on its political status, the most recent in 2017. In all of these, independence was among the voters’ options. Moreover, when he visited Puerto Rico in 2011, President Obama proclaimed, “when the people of Puerto Rico make a clear decision, my administration will stand by you.” In fact, the Obama administration wanted Puerto Rico to hold a referendum “on whether the territory should be independent or part of the U.S.” In addition, the Puerto Rican Independence Party is represented in the island’s legislature, and fields candidates to represent Puerto Rico in Congress.

A legitimate objection to this example is that Puerto Rico is not an integral part of the United States, as are the 50 states and the District of Columbia. A line of U.S. Supreme Court decisions known as the Insular Cases have long established that Puerto Rico is not a part of the United States for all purposes. For instance, in Downes v. Bidwell (1901), the Court held that Puerto Rico is “a territory appurtenant and belonging to the United States, but not a part of the United States within the revenue clauses of the Constitution.” In Balzac v. Porto Rico (1922), it was held that Sixth Amendment protections regarding jury trials did not extend to Puerto Rico.

The Insular Cases can be understood as a recognition that Puerto Rico was different than the 50 states, at least in some ways—a reality that continues to this day. Due to its special status, the federal government’s views regarding Puerto Rican independence should be viewed with particularity. The question remains though: what would happen if a state of the Union, like Texas or California, held a referendum on independence?

The U.S. Constitution does not establish a process for secession but it does not explicitly prohibit it either. We must therefore look to the Supreme Court for guidance. In Texas v. White, an 1868 case that dealt with fallout from the Civil War, the Supreme Court held that Texas’ “ordinance of secession, adopted by the convention and ratified by a majority of the citizens of Texas, and all the acts of her legislature intended to give effect to that ordinance, were absolutely null.”

They were utterly without operation in law. The obligations of the State, as a member of the Union, and of every citizen of the State, as a citizen of the United States, remained perfect and unimpaired. It certainly follows that the State did not cease to be a State, nor her citizens to be citizens of the Union.

Nine years later, in Williams v. Bruffy, considering the validity of legislation enacted by the Confederacy, the Court held:

The United States, during the whole contest, never for one moment renounced their claim to supreme jurisdiction over the whole country and to the allegiance of every citizen of the republic. They never acknowledged in any form or through any of their departments the lawfulness of the rebellious organization or the validity of any of its acts except so far as such acknowledgment may have arisen from conceding to its armed forces in the conduct of the war the standing and rights of those engaged in lawful warfare. They never recognized its asserted power of rightful legislation.

These decisions clearly establish the Supreme Court’s view that the unilateral secession of the Southern states was unconstitutional. However, the White court did not categorically reject the possibility of lawful secession. Considering the indissoluble links between Texas and the rest of the states, it held that “there was no place for reconsideration, or revocation, except through revolution, or through consent of the States.” The Court could have closed the door on secession altogether, but instead it chose to explicitly distinguish a negotiated departure from the unilateral, violent actions of the Confederate states. This is a remarkable concession, just three years after the end of the Civil War.

Whatever the intricacies related to U.S. jurisprudence on secession, what is clear is that the CCP’s approaches are unsupported by practices in the U.S. and Western countries that have dealt with the same issues or by international law. Even when the emotions of the Civil War were still raw, the U.S. Supreme Court recognized that, through negotiation, a state could leave the Union. The CCP, on the other hand, does not even recognize the right of individuals in its territories to express support for their independence. It does not even allow the word “independence” to be used in the context of Hong Kong without quotation marks.

Furthermore, the CCP and its apologists should not limit their analysis to the United States (and even then, to speculation about what would happen if a state wanted to secede in the present). If Scotland, which has been a part of the United Kingdom since 1707, can hold a referendum on independence with the support of the British government, why can’t Tibet—an independent nation until 1959—do likewise? Since China supports Palestinian independence why does it clamp down on East Turkestan independence? Why can’t supporters of Hong Kong independence hold seats in the Hong Kong’s Legislative Council, as Quebec, Catalan, Basque, Welsh, and Scottish secessionists do in their respective national parliaments?

To answer these questions, look not to the CCP’s views on China’s territorial integrity, but rather to its complete disregard for the will of its citizens. After all, China’s citizens cannot vote for their leaders so why should we expect they would be allowed to vote for anything else?

PPE Exports

On April 3, 2020, President Trump signed a memorandum invoking the Defense Production Act to direct relevant federal government agencies to “allocate to domestic use” the following personal protective equipment (PPE):

  • N-95 respirators
  • Other filtering facepiece respirators (e.g., those designated as N99, N100, R95, R99, R100, or P95, P99, P100)
  • Elastomeric, air-purifying respirators and appropriate particulate filters/cartridges
  • PPE surgical masks
  • PPE gloves or surgical gloves

In response to the presidential memorandum, the Federal Emergency Management Administration (FEMA) issued a temporary final rule (TFR) prohibiting exports from the United States without FEMA’s express approval. The TFR provides that U.S. Customs and Border Protection (CBP) will detain shipments of listed products temporarily, to give FEMA time to determine if the products should be returned for domestic use, subjected to a rated order, or permitted to be exported in full or in part.

When making its determination, FEMA can consult other agencies and consider factors such as the impact on foreign supply chains, as well as humanitarian and diplomatic considerations.

The TFR also excludes shipments by U.S. manufacturers with continuous export agreements with customers in other countries since at least January 1, 2020, so long as at least 80 percent of the manufacturer’s domestic production of covered materials, on a per item basis, was distributed in the United States in the preceding 12 months.

There is also a catchall provision, which allows additional exemptions at FEMA’s discretion. Pursuant to that catchall provision, on April 21, 2020, FEMA announced additional exemptions:

  • Shipments to U.S. territories, such as Puerto Rico (where I am from!)
  • Exports by nonprofits and NGOs
  • Intracompany transfers by U.S. companies
  • Exports of materials to be included in medical and diagnostic testing kits destined for U.S. sale and delivery
  • Exports of sealed, sterile medical and diagnostic testing kits where only a portion of the kit is made up of listed products that cannot be easily removed without damaging the kit
  • Shipments by foreign diplomatic missions
  • Shipments to U.S. military facilities and diplomatic posts
  • In-transit merchandise
  • Exports for which the final destination is Canada and Mexico
  • Shipments made by the federal government

In the case of some of these exemptions, exporters must provide a letter of attestation to CBP.

We expect PPE export rules to remain in a state of constant flux, just as is true in China, as we recently pointed out in Will Your PPE Pass China Customs? As change happens, we will continue to keep you informed.

Finally, the allocation process should be distinguished from seizures of PPE destined for domestic use, of which there are numerous reports, and which are bound to raise serious legal issues in the months to come.

Listen above or stream on SpotifyApple Podcasts, Google Play or Stitcher!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are proud to announce our new podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

Every Thursday, we’ll take a bite-sized look at legal and economic developments in locales around the world as we try to decipher global trends in law and business with the help of our international guests. No topic is too big, too small, too simple, or too complicated. We plan to cover continents, countries, regimes, governance, finances, legal developments, and whatever is trending on Twitter. We want your suggestions on topics  you want us to cover and the people you want to hear from.

In this first webcast, we discuss Brazil with Rodrigo Guedes Nunes, international business attorney and Vice President at Kaivo Biotech. We cover:

  • How Brazil is dealing with the COVID-19 crisis and the expected short- and long-term economic effects (teaser: Brazilian businesses are just starting to take it seriously);
  • What Brazilians think about their largest trading partner, China, and their second-largest trading partner, the U.S. (teaser: China is an important trading partner, but Brazilians generally have more affinity for the U.S. than China);
  • Why the next several months will provide a unique and unprecedented opportunity for M&A activity for U.S. companies that want to invest in Brazil (teaser: many Brazilian companies with good products and customer bases will need outside capital and partners to survive post-COVID-19);
  • How Brazilian legislation provides opportunities for foreign investment and how to deal with bureaucracy (teaser: good rule of law, but you need good local advisers to facilitate your plans);
  • What is Brazil’s current business environment (teaser: Brazil is open for business and is very pro-Western ideals and developing relationships); and
  • What we’re reading right now, with suggestions from Rodrigo (The Splendid and the Vile: A Saga of Churchill, Family, and Defiance During the Blitz by Erik Larson), Fred (The Blue Nile by Alan Moorehead), and Jonathan (Confessions of an Economic Hit Man by John Perkins).

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz@harrisbricken.com. And please follow us on social media to stay informed on upcoming guests and topics:

We’ll see you next Thursday for another discussion on the global business environment in Puerto Rico with our guest, Jose Raul Perales.

China pharma returning to the United States

Earlier this week, in Moving Your Manufacturing From China: Look South (Again) to Mexico and Puerto Rico, I highlighted a recent New York Post editorial that decried America’s “serious over-reliance on China for pharmaceutical production”, and called for Puerto Rico to once again become a “central hub of U.S. drug manufacturing”.

Then on the same day CNBC reported the introduction of a bipartisan Senate bill “that would funnel $100 million to develop U.S. manufacturing of drugs”. The bill’s sponsors—Sens. Marsha Blackburn (R-TN) and Bob Menendez (D-NJ)—are “concerned about possible drug shortages amid the coronavirus outbreak”. According to CNBC:

About 72% of manufacturers of pharmaceutical ingredients supplying the U.S. are overseas, including 13% in China, according to FDA testimony last year. That could make U.S drug companies vulnerable to shortages if COVID-19 forces factories to shutter and shipments to the United States to stall, experts have warned.

This bill “is at least the third legislative proposal addressing the issue”. The other two measures are also bipartisan in nature, suggesting broad support for incentivizing, and in some cases forcing, a return of pharma to the United States.

U.S. legislators are not just concerned about pharma offshoring generally, but about China specifically. Introducing the Pharmaceutical Independent Long-Term Readiness Reform Act, Rep. Vicky Hartzler (D-MO) bluntly stated:

China having control over the production of our military’s medicine poses a grave national security threat. Not only does it open the possibility of them deliberately manipulating our servicemember’s medical regimens to cause physical harm, but the Chinese government’s lack of proper oversight and regulatory standards on prescription drugs is also deeply alarming to me. We need to ensure that our military’s medicine is American-made.

The bill’s cosponsor, Rep. John Garamendi (R-CA), piled on.

Right now, China has the ability to attack the United States without firing a single shot by poisoning our servicemembers’ medicines or cutting off their supply. The Chinese government is the principal developer of generic prescriptions, which account for approximately 90 percent of pharmaceuticals. China’s chokehold on the global pharmaceutical market leaves our servicemembers and our nation vulnerable to attack. We need to reinvigorate the United States industrial base to produce generic medicines and antibiotics domestically.

I know from conversations with Puerto Rican business leaders that they are gearing up to take advantage of the opportunities. But whether a considerable part of any repatriated pharma production ends up in Puerto Rico specifically is beside the point. In fact, Sen. Menendez is hoping that with its “leadership in the life sciences industry and institutes of learning”, his home state of New Jersey “can lead the way and make a difference”.

What matters is that there will be enormous pressure for U.S. pharma to come back home, powered by national security concerns. And as we discussed in our post earlier this week on forced labor in China, pharma is likely just be the beginning.

China LawyersOur China lawyers are often asked to explain the relationship between Hong Kong and China.

When I would get asked this, I would usually start by telling American clients to think of Hong Kong’s relationship to China as being similar to New York’s relationship to China. For our European clients I would use London or Madrid or Frankfurt or some other European city as the example and for our Australian clients I would use Sydney. I would then say that for businesses, Hong Kong is essentially a foreign country when it comes to China.

I then might explain how a Hong Kong trademark is not a PRC trademark and if you think that having a Hong Kong trademark will protect you in the PRC, you are wrong. See China Legal. Not Hong Kong Legal. Not Taiwan Legal. Not Macau Legal and China And Hong Kong Trademarks. Think Puerto Rico. And then I would usually launch into how having a Hong Kong company does NOT permit you to do business in China and that it is dangerous to think otherwise.

If relevant to the discussion (and oftentimes it is) I would talk about how China has become incredibly adept at hunting down foreign companies doing business in China without a required Chinese entity and that it shows no more mercy to a Hong Kong guilty of this than to a New York or London or Sydney company that does this. I repeat: Having a Hong Kong company will no more help you get legal in China than setting up a new company in New York. When it comes to business law, you need to think of Hong Kong as a completely different country than the PRC. For more on the China-Hong Kong distinction when it comes to corporate entities, check out How to Form a China WFOE: What’s Hong Kong Got to Do with It?

One last area where we often have to deal with the differences between Hong Kong and China is with manufacturing contracts such as NNN Agreements and Product Development Agreements. Many Chinese manufacturing companies want their agreements with their foreign customers to be with the manufacturer’s Hong Kong entity, not with its China entity. This creates all sorts of complicated ownership and liability and jurisdictional and venue issues that must be resolved correctly to prevent a legally nonsensical or invalid agreement or equally bad, an agreement that makes perfect legal sense, but provides no protections to the foreign buyer. Again the key issue here is that Hong Kong and the PRC are legally separate when it comes to commercial transactions.

But I was asked this question today by someone and it made me realize that my answer started changing earlier this year. Now my response is a question along the lines of why do you want to know. I ask this because if you or your company have ever had a legal problem in China or if you or your company owes any money in China or if you or your company have been outspoken about how China oppresses anybody (especially on the Internet), you absolutely should think long and hard about whether it is safe for you to go to Hong Kong, because it may not be. See The Case of Hong Kong’s Missing Booksellers.

Will going to Hong Kong be as risky as going to the PRC? Absolutely not. But is it riskier than going to Singapore or to London? Absolutely yes. My advice is that if you or your company have any of the China “issues” I mention above, you should include Hong Kong in your risk assessments.

This is another reason to think long and hard about accepting Hong Kong as your venue for international arbitrations. Will you be able to go there in two to three years should you have a dispute? The odds are overwhelming that the answer to that will be yes, but again, why take even this small chance?

What are you seeing out there? Are you re-assessing your Hong Kong risks?