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

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My 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.

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

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). 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 me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus 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.

Setting up a factory in China

There is an old saying about how lawyers do well when times are good and lawyers do well when times are bad. The only bad times for lawyers are when there is little to no change at all. In spite of the trade tensions, China’s declining economy, and just the overall uncertainty, our China lawyers have of late been getting a stream of requests from companies (mostly European for some unknown reason) looking to set up their own factories in China. These are mostly companies that supply parts to multinational manufacturers that make products in China. These manufacturers are pressuring their suppliers to set up factories in China, presumably out of tariff concerns.

The below email is an amalgamation of what we have been sending out in response. I post it on here because it nicely explains the basics of what it takes for a foreign company to set up a factory in China, which is not so much different from setting up a factory in Vietnam or Thailand or Cambodia or the Philipines or Mexico or wherever and we intend to write about the basics on setting up factories in these other countries as well. The below email is an amalgamation of internal emails from one of our international manufacturing lawyers to one of our Spain lawyers.

 

We can certainly help them [the client] with this project. The first thing we typically do is work with our clients to help them determine what it is exactly that they want to do. I say this because often this is not entirely clear. After we get clear on their objectives, we then work with them to  design a plan that is both consistent with Chinese law and on the ground realities and the client’s own objectives. I note that we have several good contacts in China who are expert in ___________[parts] who could help as the situation becomes clearer.

Generally, the __________ manufacturers want their parts subcontractors to operate out of a factory located in China. For that reason, the idea of using a non-China based factory as the parts supplier will not be accepted by the _______ manufacturers located in China. It is important to note that the parent manufacturing company often has ideas that are completely rejected by its China based subsidiary.

Setting up a factory in China is not an easy process. China now imposes a large number of anti-pollution, safety, local energy supply, and local transport issue regulations that must be complied with in setting up a new factory. These rules must be complied with even when the factory will be located in a well established industrial zone.

The below are what is normally required:

1. Find the best location. The search for a good location should be started as soon as possible. However, it is not possible to find a location until after the general plans for the factory have been completed. The local government/industrial zone operator will require a basic plan for the factory building and a basic business plan before they will consider the feasibility of factory operations in their district. I note that it would be unusual for this type of factory to be located in the _______ area.  Dongbei or Shandong are more likely locations. Most of the _________ factories are in  ______________. These districts are somewhat less concerned about the environmental and other feasibility issues.

2. Form a WFOE. Once the location has been determined, the foreign company will be required to form a Chinese legal entity, or WFOE. WFOE stands for Wholly Foreign Owned Entity and it is just a 100% foreign owned subsidiary. The application for a WFOE formation involves the following two separate sets of procedures.

a. Formal process for company formation. This is the standard Chinese company formation process. Though this process was recently streamlined, it is still highly bureaucratic and it still focuses on obtaining a large number of documents from the home country. The process is tedious and time consuming and it should therefore be started as soon as possible. Detailed rules depend entirely on what district in what city the company will be formed. But the basic rules are clear enough and we can start work immediately if the client is serious about forming an entity in China.

b. Approval process for operating the local factory. This involves a number of steps/issues including the following

i. Will the factory building be owned or rented. Both options are possible.

ii. Feasibility study performed by a local professional.

iii. Environmental impact statement drafted by a local professional.

iv. Other environmental and safety reports as required by the project.

Normally, a and b are done at the same time so that the company formation approval and the project approval are completed at the same time. The key issue is determining the factory location. Every jurisdiction in China has a different set of rule and so there is no way to know what will be the requirements in detail until after the factory location has been determined.

3. Note that the PRC just adopted a new Foreign Investment Law that will go into effect in 2020. This means the old rules will be discarded in favor of an entirely new system. This change may happen in the middle of this project, which could cause delay.

4. The process above normally takes from 6 to  18 months. The fees from our side depend entirely on how much of the process we handle. Some of our clients have us handle just the company formation and the other legal issues that stem from that (leases, employment contracts, vendor contracts, IP registrations). Many others have us handle things like the location analysis, the feasibility/EIS drafting, etc., in which case our fees are of course more.

5. IF it is possible for the supplier to use an outside of China parts factory, then the Chinese entity would be formed as a trading company. This makes for an easier formation process because the feasibility/EIS/safety analysis can be waived. However, as I noted above, the _______ manufacturers in China usually reject this alternative. Moreover, the local governments want jobs, so they can also be difficult to work with when a trading company is proposed. That said, the new Foreign Investment Law is supposed to make this type of trading company approach easier, but who knows whether this will really be the case. If the client is serious about this alternative, we should start researching it right away. In the simplest terms, there is no reason to do a lot of research if the _________ manufacturer will reject the idea.

It is also important to note that the procedures in China always take longer than any European company believes possible. In addition, there can be two additional sources of delay: a) EU companies often resist providing the intrusive company information required by the Chinese government and b) the advent of the new Foreign Investment Law and recent unclear changes in company formation procedure mean local governments are often reluctant to proceed, which itself leads to delays. I cannot tell you how many times I have found myself explaining new laws to local Chinese government officials and having to convince them that what our client is proposing to do is perfectly legal. That said, _______ parts is a favored industry in China and we should expect the districts in the traditional production areas will welcome this project. That is, the attitude will be more positive than our more recent projects which involved troublesome chemical and other polluting/unsafe projects.

The point of my comments is to say that the planning process should begin as soon as possible. Delay is a mistake. We have done this in the past and we have successfully worked with a phased fee structure and this is a project where that type of structure is appropriate.

One of my best friends in ____________ is a __________ engineer. For the past 15+ years, his main work has been taking over the operations of __________ parts companies that set up in China to supply parts to ___________ and ___________. He has to take over these operations because the formation process was rushed and the entire project is a complete mess. It usually takes him two to three years to fix these things. It would be good for this client to avoid this result, since these messes have two bad results: a) they are very costly and b) they cause the major company buyer to develop a very bad impression of their parts supplier.

International patent IP lawyers

At least once a week one of our international manufacturing lawyers will get an email that starts with something like the following:

We just wrapped up the patent on our newest product and we are now ready to start shopping around for getting it manufactured overseas.  Is there anything else I need to protect that product from being copied?

Because what’s done is done, we virtually never tell the company that the huge sums it has already spent on its patent may have been completely wasted or at least could have been far better spent elsewhere, because what’s the point in trying to get someone to cry over spilled milk? But guess what? In most cases it probably was.

There is a massive and unfounded love for patents by American companies. I see this as an historical remnant from when the U.S. economy was far more domestic and far more focused on industrial as opposed to consumer goods. Those days are over and so people need to just stop it with their OTT patent love. Just to be perfectly clear, I am NOT saying patents never make sense, because they obviously do. What I am saying is that they are being bought and paid for far too often by companies on the international stage and these expenditures often actually weaken IP protection.

How can getting a patent weaken IP protection?

Let me explain…..

Patents are expensive. I know I keep saying that but that is because it is important to realize that. If you are a big company that can afford to spend for every single thing you need to protect your IP, you can stop reading now. This post is intended for the 99% of companies that need to make budget choices even on how they will protect their IP. Truth is there are countless things a company can do to protect its IP, including the following:

  1. Patents. In every country in which it might have its product manufactured or sold.
  2. Copyrights. In every country in which it might have its product manufactured or sold.
  3. Trademarks. In every country in which it might have its product manufactured or sold.
  4. NNN Agreements, with every person or company to which you might reveal confidential information.
  5. Mold and Tooling Ownership and usage agreements, with every company that will be making your product.
  6. Product Development Agreements, with every company with whom you work on developing or even refining your product.
  7. Manufacturing Agreements with those companies that will be manufacturing your product.
  8. Non Compete Agreements with your employees, your suppliers, your vendors, and others.
  9. Trade Secret Agreements with your employees, your suppliers, your vendors, and others.
  10. Constant Monitoring of the Internet and the physical world for counterfeit or infringing products. See Getting Counterfeits off Alibaba: Anger is NOT a Strategy.
  11. Take down letters and cease and desist letters to stop the selling of counterfeit or infringing products.
  12.  Raids against counterfeiters. We will be writing more about these in the next few weeks.
  13.  Litigation.
  14. Administrative actions.
  15. Police assistance.

I could go on and on. The whole point of the above is that there are countless possible weapons in an IP protection arsenal and the best ones for your business are the best ones for your business. See How NOT to Lose Your Shirt When Having Your Product Made Overseas, Part 3: What Makes Sense for you is What Makes Sense for YOU. What this really means is that the last thing you should do is focus on one thing (like a U.S. patent) and only after you get that go out seeking expert advice for what you need to protect your IP.

Why then with the multitude of choices am I being so tough on patents? Two reasons. One, they are really expensive to get. Figure around $15,000.  But hey, you are probably thinking that this might be worth it to get the gold standard in IP protection and you might be right in some cases. But here’s the other dirty little secret about patents: They usually cost a small fortune to enforce. There are truly few things more expensive than patent litigation. In 2017, the median overall cost for a patent infringement case with $1 million to $10 million at stake was $1.7 million, according to the American Intellectual Property Law Association’s “2017 Report of the Economic Survey.” People, that’s the median for what are relatively small patent litigation matters. When you spent $15,000 on your patent, did anyone tell you that enforcing it would likely easily cost you more than a million dollars? Would you have paid for that patent had you known that? Did anyone tell you that patent protection essentially ends at the Canadian and Mexican borders? Would you have spent $15,000 on your patent had you known this? Again, I am not saying patents do not have their time and their place but I am saying that people need to stop viewing them as IP panaceas.

But wait, you may be saying, I got this patent not to sue those who violate it but to be able to get any product that infringes on my patent removed from the online marketplace on which it is being sold. In China and Worldwide: Trademarks Good, Patents Bad we explained why the “lowly” and inexpensive trademark can be so much better than a patent, especially when it comes to online marketplaces:

Let me further explain, first with patents:

  1. Securing a patent (other than a design patent) typically costs three to four times what a trademark costs. This is true in China, the United States, Europe, Canada, Mexico, wherever.
  2. If you believe someone is violating your patent and you send them a cease and desist letter to get them to stop doing so, there is a pretty good chance they will claim there is no violation. And after you explain to them why there is a violation, there is still a pretty good chance they will  explain to you why you are wrong. If their orthopedic device is exactly like yours but for some relatively unimportant button somewhere, they will claim that relatively unimportant button is actually important and it means they are not violating your patent.
  3. If you go to the e-commerce sites on which they are selling the orthopedic device that almost certainly does violate your patent and you ask that e-commerce site to take down the infringing product, the odds are good that site will tell you that they are not patent lawyers and you will need a court order or a judgment for them to take it down. This is generally true of tall the leading e-commerce sites around the world.
  4. The above means that if you want to stop your competitor from selling what you see as the infringing orthopedic device you must sue and you likely will need to hire an expensive expert to prove the infringement. Few things in life cost more than patent litigation, and since my law firm does patent litigation, I know whereof I speak on this.

But trademarks are much simpler and much cheaper:

  1. Securing a trademark typically costs 1/3 to 1/4 less to secure than a patent. This is true pretty much everywhere.
  2. If you believe someone is violating your trademark and you send them a cease and desist letter to get them to stop doing so, there is a decent chance they will stop, especially if they are not in the counterfeiting business. If I brand my orthopedic devices “The Harris Special Orthopedic Device” and secure trademarks for that name and someone else uses that very same name, they are going to have a tough time claiming they are not violating my trademarks — assuming I have the registered trademark in the relevant countries.
  3. If you go to the e-commerce sites and request that the product that is violating your trademark be taken down (and it is in fact violating your registered trademark), there is a very good chance it will be taken down. This is generally true of the leading e-commerce sites around the world. Take the “Harris Special Orthopedic Device” as the example. It does NOT take a lawyer to know that if I have the registered trademark in China and the United States for “Harris Special Orthopedic Device” (in the right class), anyone else selling “Harris Special Orthopedic Device” in China or the United States (that did not come from me) is violating my trademark. My law firm’s success rate in taking down offending trademarks is really really high.
  4. And should you choose to sue for a trademark violation, proving the trademark violation is oftentimes relatively easy.

Oh, and one more thing. To grossly generalize. patent protection in China courts tends not to be as strong as in either the United States or Europe. Whereas China trademark protection tends to be surprisingly strong.

Bottom Line: Do not on your own or with the help of the Internet decide what IP protection makes sense for your international business and then pay for something. Anything. Your better course of action is work with a qualified IP professional with international expertise to map out a protection plan that makes sense for you based on your needs and your short and long term budget.

international lawyersOur international lawyers draft more NNN Agreements than any other agreement. These agreements are used to protect your confidential information. They protect confidentiality and they protect against the company or person to whom you reveal the information from using that information to compete against you or go around you to your own customers or clients. The three Ns are for Non-Compete, Non-Circumvent, and Non-Disclosure. These contracts are commonly used before revealing anything important to anyone, such as your technology, designs, or customer lists, whether those qualify for trade secret protection or not.

Because our international attorneys so often draft NNN Agreements, we have a template email we send to our clients (modified each time to suit the particular situation) explaining the customized NNN Agreement we have just drafted for them and explaining what they should do with that agreement going forward. The below is such an email and I write about it because it not only explains in a real life way how NNN Agreements should be employed, it also explains what makes NNN Agreements different from a traditional NDA Agreement and why NNN Agreements are so important.

Attached please find an English/Chinese draft NNN Agreement for use with [XYZ company]. My comments follow:

  1. This is not a traditional US-style NDA agreement. A traditional NDA agreement relies on the concept of trade secrecy. Under this sort of an agreement only something that qualifies now and later as a trade secret is entitled to protection. As a practical matter, the information you will be disclosing will almost never meet the technical legal standard for trade secrecy. Therefore this NNN takes a different and more effective approach. We write this to prevent your counter-party from using the information you give them in competition with you.
  2. The agreement has no set term. In other words, [XYZ Company] can NEVER use your confidential information; it is a permanent obligation.
  3. The agreement holds the receiving party [XYZ Company] liable for any damages caused by a related party in violation of the agreement as if the act were committed by the receiving party.
  4. The agreement provides for contract damages in a specific monetary amount for every act of breach. This provision provides two primary benefits. First, it makes clear to [XYZ Company] that it will face real and quantifiable consequences each time it breaches the NNN agreement. Second, a specific monetary amount provides for a specific minimum level of damages which then provides a court with the basis for a pre-judgment seizure of assets. A credible threat of your seizing [XYZ Company] assets greatly increases the likelihood of [XYZ Company] abiding by your NNN agreement. Note that this amount needs to be a reasonable pre-estimate of your damages as a result of XYZ Company’s violation of the NNN. The amount we have set for contract damages in your contract is fairly standard for this sort of transaction in _________ [country].
  5. Note that this agreement gives you the right to enter into an NNN with a subcontractor. Note also though that regardless of whether you  enter into such a separate agreement, the receiving party will be liable for any damages caused by a subcontractor in violation of this agreement on the same basis as if the act were committed by the receiving party.
  6. I was able to confirm [XYZ Company’s] name and address information against the relevant government website. According to available government data, ________’s title at the company is manager and executive director and I have inserted this information into the agreement.
  7. If XYZ Company accepts the terms of the agreement, you should go first by signing and dating this agreement and then sending it to [XYZ Company]. You should wait until you get this agreement back, fully executed, before you disclose any confidential information. 

Please review and get back to me with any questions.

International Education Law

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

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

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

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

Recognizing that most of these teachers are not wealthy, our lawyers strive to do their best to give responses that contain actionable advice with the limited time and information we have. The below reflects how we typically handle the four most common categories of foreign teacher emails.

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

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

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

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

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

4. Starting a school issues. The typical email will come from someone who has been teaching English in China or in Vietnam or in Poland or wherever and they now want to know what it will take for them to start a school in one of these countries. The below interaction is an amalgamation and it is typical:

English Teacher: We would like to open a school for foreign students _________. There is a small but growing group of foreign parents in the city looking for foreign education options for their children.

We are unlikely to get the enrollment needed to have our own campus. Can we legally share school grounds with a local primary school (public/private) if our students do not follow the Chinese curriculum? If we can’t, then I guess we are out of luck.

My second question concerns whether your law firm could handle the process, assuming it is feasible and how much it would cost.

Our response: We have helped set up many foreign school companies in China but we’ve never dealt with your question on sharing space in [China fourth tier city]. My guess is that you can share facilities with the local school, but only if your school has its own separate address. I say this because most cities require you have your own address for any WFOE (the company we would need to set up to own and operate youor school), but things like this tend to be very local.

As for how much this will cost, I would estimate it will cost at least $30,000. This estimate would be for our China lawyers and China business specialists (all of whom have substantial experience in setting up foreign schools throughout China) to research and figure out what you can and cannot do, form the company, secure various governmental approvals, register your trade names and logos, help on the lease and other agreements with the entity that owns the existing facility, draft your employee contracts and your employer rules and regulations, and the various other legal matters that invariably arise when starting a school company in China, including all sorts of discussions with local government officials.

If – as it sounds – the ability to use the facility will make or break this deal, I would propose we start by figuring out whether that is or is not possible. We would do that by researching the applicable laws and then by confirming with the local authorities that our reading of the laws corresponds with theirs. If you can tell us more about the potential space we can get back to you with an estimate for our handling this discrete issue.

If you have any additional questions, please don’t hesitate.

Pretty much every time we then get something back from the teacher saying that the costs and/or the complications are more than they expected and they will need to re-think.

As much as I dislike being the one to hit them with reality, I take comfort from believing it is better they get the truth than to have them waste time and money on a project they are will not finish.

 

China foreign investment lawyers

MEH.

For weeks now, our China foreign investment lawyers have been getting a steady stream of emails regarding China’s now approved new law on foreign investments. Those emails can very roughly be divided into two camps:

  1. Those (mostly from our own clients) asking us what it will mean.
  2. Those (mostly from China Law Blog readers) using this law as proof that we either “exaggerate how unfair China treats foreign companies” or that we “have become way too cynical about China.”

This post strives to answer both email strains.

The new law sounds good but the devil will be in the details and like everything else related to China laws the details will be in its enforcement. But right off the bat, you can color me highly skeptical.

China has never treated foreign companies remotely the same way it treats domestic companies. China’s entire economic system is based on this and, if anything, things have mostly gotten worse for foreign companies in the last 5-10 years. Why should things all of a sudden change now? Because China is under tremendous pressure from both the United States and its own declining economy to stimulate foreign investment.

But China — like pretty much every country in the world — does not like being told what to do by a foreign power or even by a declining economy. This, coupled with China’s long history of failed promises to open up more to foreign businesses, makes me doubt it is really serious this time either. And reading between the lines of how this law got approved and even when it will actually become law make me doubt China’s enthusiasm even more.

In China approves new foreign investment law designed to level domestic playing field for overseas investors, The South China Morning Post highlights the following red flags:

  • “Beijing rushed the legislation through the country’s largely ceremonial legislature in an effort to fend off complaints from the United States and Europe about unfair trade practices. The new law was first introduced as a draft in 2015, but its progress picked up markedly from the middle of last year to address issues identified by Washington as part of the US-China trade war.”
  • “At the same time, the wording of the law, which will replace three foreign capital laws – the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises – passed between 1979 and 1990 in the early years of China’s process of reform and opening up, is quite general, leaving many details to be addressed in other regulations and implementation procedures.”

In other words, this is an effort China started in 2015, but now it all of a sudden (under the pressures mentioned) above, has decided to embrace. Enthusiasm matters because without enthusiasm there will be no enforcement. Heck, this law is not even set to go into force until 2020 and it needs all sorts of supporting rules and regulations in the meantime. Enthusiasm matters because without the enactment of the supporting rules and regulations there will be little to nothing to enforce.

The SCMP article ends with an amazing quote from “He Weifang, an outspoken law professor at Peking University” who questions whether China’s existing government structure will adequately enforce the new law:

“We need democratic supervision and justice to ensure enforcement if there are any regulations issued later. Enforcement really relies on structural changes and an independent judicial system. So, I cannot say that I will be more optimistic when more regulations come out,” he said.

“It would be even worse if we lack the implementation mechanism after we enact a law, because the outside world will not trust you no matter what law you enact in the future. We need checks and balances to ensure enforcement, otherwise, all well-intentioned enactment of laws will end in vain.”

He is, of course, 100% right.

Addressing the cynicism question, all I can do is quote what an audience member once said at a China event I attended: “For those of us who have been dealing with China for more than a decade and have therefore been involuntarily trained to ignore the smoke and just wait for the fire, can you please just tell me what you have seen that has actually changed with ….” This proposed law is smoke that may or may not ever become fire and even if it does become fire, it may be nothing more than a match that soon blows out.

Is this new law an effort to improve the chances of a China trade deal? How strong will this law be if there is no trade deal? How strong will it be if there is a trade deal?

At this point, the best strategy is probably just to wait and see.

China tax lawyersThe tax man cometh and taketh away. ALWAYS.

There has been a lot of press lately of how China is reducing business taxes to stimulate its declining economy. This is all well and good but when it comes to taxes — especially China taxes — there ain’t no such thing as a free lunch.

Yes, China is reducing various VAT rates and mandatory employer pension contributions but it also is moving ever apace in tightening up its tax enforcement capabilities and these enforcement changes will and already has impacted foreign businesses more than the tax reductions. As our regular readers know, we have for at least a decade written about how China has consistently and inexorably tightened its laws and tightened its law enforcement, especially as against foreign companies. See e.g., Doing Business in China Without a WFOE: Will the Defendant Please Rise.

Official Chinese publications on its tax decreases talk of how tax collections will actually rise, due in part to changes in law to force individuals and businesses onto China’s tax “grid” and due to stepped up tax enforcement. For an example of legal changes that will bring “hidden” businesses to light, check out China’s Daigou Shopping Model: This is the End, My Friend…. The Bank of China recently issued a notice requiring China’s banks to report all transactions exceeding certain amounts with the plan for some of the accounts involved in those transactions to be turned over to the tax authorities for further investigation. Foreign companies, I’m talking to you. China has also enacted various laws to name and shame and penalize individuals connected with businesses that fail to fully comply with China’s increasingly stringent tax laws.

Foreign businesses operating in China can and must protect themselves by doing the following (somewhat obvious) things:

  1. Determine whether they are or are not doing business in China. If you have anyone on the ground in China on behalf of your company the odds are good that you are doing business there and you owe all sorts of taxes for that. See againDoing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. Hire a good accounting firm and a good bookkeeper to make sure you are doing everything right on your China taxes.
  3. Don’t listen to anyone but your own accountants and bookkeepers and lawyers about what you should be doing regarding your China taxes.
  4. Just because you know of others who are not paying certain taxes does not in any way justify your not paying those taxes.
  5. Be wary of anyone — either inside or outside your company — who in any way minimizes the need to pay China taxes.

At the end of 2018, in How’s Your China WFOE? Please Check, we wrote of how “at the end of every year, our law firm always gets a slew of emails and phone calls from foreigners in big trouble in China.” The post then talked of how “in past years the trouble has mostly involved unpaid taxes, usually with the following sort of scenario:

Foreigner (disproportionately Northern European) calls to say that they are in their home country for the holidays and they have learned that the “tax man” has come by and is extremely unhappy about the company not having reported all of its China earnings. The person wants to know whether it is safe for him (it has 100% of the time been a male) to return to China. Three more minutes of talking reveals that this company has not even come close to paying its China taxes and the person on the other end of the line “justifies” this by saying his Chinese accountant told him that “nobody pays these taxes.” I very dispassionately tell this person that I don’t know what percentage of foreign companies pay their China taxes, but that the China attorneys at my firm advice all our clients to pay all their taxes and that is in large part because China LOVES going after foreign companies that don’t pay all their taxes AND has gotten really good at catching those that don’t. I then tell him that he absolutely should not go back to China unless and until his company has cleared up all back taxes, with interest and with penalties. I got only one such phone call (so far) this year.

Though we are not even three months into 2019, it feels like we have gotten more tax trouble calls this year than all of 2018 combined. These are calls involving employer taxes, company and personal income taxes, and custom duties (especially). And in nearly every instance the problem has stemmed from a foreign company (so far just North American and European companies) not paying taxes based on some misguided belief that no taxes were owed. Do not choose your accountant based on an “ability” to save you money. Choose an accountant who provides you with the real life advice you need.

Tomorrow I am going to write about flat out bad China WFOE formation companies and how those same companies show up again when it comes to providing flat out bad China tax and accounting advice and how those two things are so intimately tied together.

In the meantime, be careful out there.

China bribery. Don't. Just Don't.

I’ve become obsessed with the college cheating scandal that has so far implicated Hollywood celebrities, a high-end lawyer from a Wall Street Law Firm, a “slew of CEOs,”  among others.

I am sorely tempted to use this scandal as a teaching moment on how we Americans need to look more deeply at the rising inequality and unfairness in our country, instead of falling back on comfortable tropes like how we are the land of opportunity. But I recognize this is probably not the place for that.

So I will instead use it as a teaching moment on why bribery is dangerous and even pointless.

Back in 2017, we did a post, China Bribery. Not Smart and Not Necessary. In that post I started out talking about how it is wrong to contend that contracts are not needed in China because of court corruption. I then talked of how most Americans don’t understand how court corruption usually works in breach of contract cases, using a Russian litigation matter my firm had handled as an example. The point of that post and this one was that paying bribes is never wise:

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of our firm’s China lawyers would ever make that claim.

I then wrote about how after a talk I gave in Cleveland that touched on bribery and corruption I discussed China bribery with “an audience member, Kimberly Kirkendall, who had commented to the audience that in her experience many of the times where she was aware of someone having paid a bribe in China they had done so essentially because they wanted to, not because it was necessary they do so.” I mentioned to Ms. Kirkendall “how some companies seem almost to delight in paying bribes but that our China lawyers — believe it or not — had never once been asked to pay a single bribe in China, even though we are constantly dealing with the Chinese government to register trademarks and copyrights and WFOEs and Joint Ventures. Kimberly commented on how foreigners sometimes brag about paying bribes and how troubled she was by that. I then mentioned how stupid and risky it is to pay bribes in China.”

In that post I quoted extensively from something Ms. Kirkendall had written on bribery that I very much liked:

In China 30 years ago it was very common to incentivize someone to do their job by giving them a gift. Why? The China of the late 1980’s and into the 90’s was a communist economy that relied on 95% government controlled business. And in that communist economy there was very little difference between the salary for the GM of a factory and the guy who mopped the floor. So how were they compensated for their relative value to the organization? The GM could “gift” some of the company’s products to someone else, who often then re-gifted that to someone they wanted to influence and so on and so forth. By gifting them, the GM was able to get a slightly larger apartment, or their child in a better school, or some other economic benefit. People recognized their relative power in the economy by giving and/or accepting gifts. Sometimes cash, but frankly there wasn’t a lot of cash to go around. Much of this was actually bartering, trading your goods/access/influence for someone else’s.

In the booming late 1990’s and into the early 2000’s, as people were allowed to own a business in China, things changed a bit. How do you move a government owned or controlled economy to a privately held one? Where do individuals get the money to buy apartments or companies if they weren’t making much cash beforehand? In this period of transition there were many instances of people using their power and influence for economic gain. From how these government companies were taken private (and ownership and shares divided up) to how people came up with the money to buy apartments or build new ones. In this environment people in high positions saw the money being made and they wanted their share – and now there was the cash to pay them.

Towards the late 2000’s and into today, we are looking at a China where many people (but not all) are in a position to make money in direct ways. Through entrepreneurship, increased education and wages, investment, taking risks on new ventures, or changing jobs to accelerate their careers. Much of the population are no longer stuck in a powerless place where bribes are their only way to obtain value from their position of authority. Certainly it still exists, and there are still people who feel that they can’t get ahead so they exact a little extra money on the side.

When I hear that a US company has used bribes I start wondering about the reason for the bribe. Was it a payment to someone to do his or her job or a payment for them not to do their job? In almost every instance these days, it seems it is the foreigner who initiates the bribe. The below examples of matters on which I personally worked highlight the important difference between these two reasons.

Example: A U.S. company was importing components from China, using both its own team in China to find suppliers and control the orders and a trading company. The US management came to our China team for help in figuring out why some in their company were claiming that they needed to use a trading company for some of their China business, even though the trading companies were increasing costs by taking their own payments from the transactions. They wanted to know why they were paying a trading company to buy and export goods when they could do all of that themselves. It turned out that a group within the company wanted to utilize lower HTS custom codes for export to save money and Chinese Customs didn’t agree with that custom code classification. The US company was using the trading company to pay China customs a bribe so they could export their products under the “wrong” code and save money. In other words, there was no need to pay bribes, just a desire.

Example: A company was setting up a factory in China and the local government was concerned about air emissions from its manufacturing process. In the U.S. the company had shown that emissions were well within range of EPA guidelines. The local Chinese agency was not convinced and asked for more tests and documentation. The company was left with options – see if there was an “economic incentive” that would encourage the regulatory official to approve the paperwork, or spend a few months and thousands of dollars doing the research to prove their manufacturing met the guidelines. They chose the “economic incentive” route. Again though, an example of a company choosing to pay a bribe out of a desire to get a government official not to do his or her job, not a bribe necessary to get that official to actually do his or her job.

The point I am trying to make here is that the excuse foreigners make about having no choice but to pay a bribe rarely if ever holds true. The foreign companies I hear about paying bribes had plenty of choice; they simply chose wrong. They were not responding to a request for money but offering money as an incentive for a Chinese worker to deviate from his or her professional responsibility.

I agree.

I cannot resist shamelessly plugging my alma mater, Grinnell College, from where my wife also graduated and from where my youngest daughter will in two months be graduating. I am plugging Grinnell College because it is one of a small number of U.S. colleges and universities that truly has a “need blind” admissions policy and will meet the financial needs of all its American students. Wikipedia defines need-blind admissions as a “policy in which the admitting institution does not consider an applicant’s financial situation when deciding admission. Generally, an increase in students admitted under a need-blind policy and needing financial aid requires the institution to back the policy with an ample endowment or source of funding.” In other words, schools that are not pay to play.

If you are not only troubled by parents paying bribes to get their kids into a school, but also troubled by the daughters and sons of the wealthy being more likely to get admitted or being able to fund their education, you should consider one of the following schools that are both need-blind and meet the full demonstrated financial needs of their students (per Wikipedia):

Your thoughts?

China manufacturing lawyers

Like most lawyers, I am hyper logical. That’s our training and that is who we are. We like order and we like clear explanations for when there is disorder. Clear enough so that we know how to prevent future disorder.

China is not terribly orderly, but well over 95% of the time, the problems foreign companies face in and with China are neither new nor unpreventable. Put another way, when I look at what has gone wrong for foreign companies in China I can usually find a number of things the foreign company  should have done differently to have prevented the problem or to have ameliorated it or at least to have positioned itself to have had real recourse once it occurred. Note that positioning yourself to have “real recourse” is often the single best way to prevent a problem in the first place. See e.g., You Need an Enforceable China Contract No Matter How Much You are Feeling the Love and You Need an Enforceable China Contract No Matter How Much You are Feeling the Love, Part 2. Or on the flip side, check out A Lifetime Sentence for Operating in China Without a Lawyer, Well Sorta, where we discuss the case of someone who is not allowed to leave China and highlight all the things this person did wrong to cause his present situation.

So when someone calls one of my firm’s China lawyers with a China problem for which they are entirely blameless my world gets rocked, at least just a bit. I mean, if that were to happen all the time, there would be no need for people to pay for lawyers, right? The one area where our China attorneys most often see this is when a foreign company has had a great relationship with its China factory for ten or twenty years and then all of a sudden the factory just disappears. What was the foreign company supposed to do? Fly out and visit its factory every two weeks to make sure everything was still okay? Get real.

So I was delighted the when a fellow lawyer sent me the link to a blog post titled, 10 Red Flags Your China Supplier is Going Bankrupt, as this post succinctly lays out the following warning signs for spotting a China manufacturer in trouble:

  1. Excess capacity.
  2. Poor lead times.
  3. Layoffs before the Chinese New Year.
  4. Workers aren’t being paid.
  5. Turnover has been rising for weeks.
  6. New payment terms.
  7. Quality is slipping.
  8. Phone calls and emails go unanswered
  9. Factory abruptly changes location.
  10. High customer complaints.

All of these make sense but I particularly like the following for the following reasons:

##3, 4 and 5. Layoffs, turnover and workers not being paid. If the people with whom you regularly work at your China supplier are disappearing or you hear of workers complaining, ghosting very well is about to happen. Our China manufacturing lawyers have seen this before.

#6. New payment terms. Almost always a sign of a factory in rapid decline or a bank switch scam. Either way, beware.

Any additions to the above?

Thailand manufacturing lawyers Vietnam

Way back in October, 2018, we wrote a post, Would the Last Company Manufacturing in China Please Turn Off the Lights, with the following as its lead paragraph:

The title is an exaggeration, of course. But with my law firm’s international lawyers fielding a steady stream of client requests for help with leaving China for Vietnam, Thailand, Malaysia, Cambodia, India, The Philippines, Indonesia, India and Turkey (mostly), it does sometimes feel as though within three years nobody will be making widgets in China anymore.

It then noted how the international manufacturing lawyers at my law firm have been getting a steady stream of reporters asking us to connect them with our clients that are leaving or looking to leave China. We tell them that for various reasons, none of our clients will be willing to discuss their leaving China and then they usually tell us that they “understand.” See How To Terminate Your China Supplier: Very Carefully and How to Leave China AND Survive.

It then notes how when we write about China economic problems we get hit with invective claiming we are making this stuff up either because we hate China or because we are trying to generate business for ourselves. But guess what people

Also in October, 2018, in response to questions our international lawyers were getting I wrote the following:

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.

Further proof of this trend comes from China’s most recent export numbers, which — as this blog has predicted would be the case — continue to rapidly decline. See China’s exports fall more than 20% in February (CNBC) and China February exports tumble the most in three years, spur fears of ‘trade recession. 

I see three big things keeping somewhat of a lid on a manufacturing exodus from China. One, capacity. Countries like Thailand and Vietnam are literally getting overrun by American and European companies seeking to move their manufacturing there and it has gotten to the point where if you do not use a sourcing agent with really good factory contacts in these countries you will likely find it difficult to impossible to find a factory willing to take on your product manufacturing. Two, capability. Countries like Thailand and Vietnam have for years been great at manufacturing certain things and not others. They are both rapidly improving in their capabilities, but they are not at China levels, at least not yet. Three, knowledge and soft infrastructure. Many foreign companies already know China and know how to get a widget made there. Far fewer know Thailand or Vietnam or Indonesia, etc. And even if you don’t know China, it can be amazingly easy to navigate on your own and there are countless people out there who are super knowledgeable (and many who most emphatically are not) to help you. See China Manufacturing: To Sourcing Agent or not to Sourcing Agent, That is the Question. Our clients were having so many problems finding good people to help them with Vietnam and Thailand that we brought in house our two most trusted Thailand and Vietnam people.

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, it’s very important.

And for a good overall read on what your company should be doing NOW in light of China’s plunging economy, check out China’s Economic Slowdown and YOUR Business: The Times they are a Changin’ — which we wrote back in September when many (most?) were denying there was any slowdown at all.

What are you seeing out there?

 

 

China tourism law

Kimberly Kirkendall,  a CPA with a ton of China experience and the CFO of Cleveland’s China Chamber of Commerce — and just an overall China powerhouse  —  posted the following on Linkedin the other day:

I’m in Sanya – often called China’s Hawaii. Talking about the island’s development (they’re aiming for both resort and tech) got me thinking about competition in the region. Hainan is a major destination for Chinese – for holidays, for retirees and companies for retreats. But they don’t have the volume of foreign travelers you see in Thailand or Vietnam. Why? The answer foreigners give is “its still China” – what’s that mean? Thailand, to western ears their language is soft. The resort areas cater more to foreigners than Thai’s, and the culture seems gentle, more calm body language. It feels like a relaxing holiday. The visa requirements are simpler. But Vietnam doesn’t have those same “attractions” – visas are difficult, it’s a “hustle” culture like China, and the language sounds similar to western ears. But the resorts are mostly foreign owned with foreign visitors. So….is it fundamentally because foreign travelers want to feel at home, not too far out of their normal? The Chinese wealthy population has made Hainan its destination, does that keeps foreigners away? Mexico is similar, the biggest resort destinations are ones w/ mostly foreign (Cancun) more than local (Puerta Vallarta) guests. Me? I prefer local, PV is my destination. What do you think?

As soon as I saw it I knew I would need to post on it, so here goes.

I love visiting Vietnam with my family. It’s one of my favorite countries in the world. I love the “hustle” of Ho Chi Minh and the history of Hanoi and the beauty of Halong Bay and the food and the people and its beaches and….. Hoi An is one of my favorite places in the world and if I were capable of living in a place with less than 2 million people and less than 30 good sushi restaurants, Hoi An would probably be first on my list. I also love visiting Thailand with my family.  I love the hustle of Bangkok and the beauty of Chaing Mai and Chaing Rai and the food and the people. And my family and I obviously love Mexico because we go there all the time. To Mexico City, to Guanajuato, to San Miguel de Allende, to Merida, to Puerta Vallerta and to Cancun (where a very good friend of mine lives) and I can hardly wait to go to Oaxaca next month for ten days to eat and enjoy the amazing food and art. But China, sorry but no. My wife and youngest daughter once joined me there for a couple of weeks and they both enjoyed Beijing (the Forbidden City is amazing, of course) and Shanghai (who doesn’t love the Bund?) and Qingdao and Dalian, but nobody has mentioned going back.

My eldest daughter and her boyfriend (now husband) did a six month Asia trip after they graduated college. Two words about my daughter: Project Manager. That is her job and that is her. She is the world’s best planner, the world’s best researcher and the world’s most organized person. If you want to know what sheets to buy for your bed you should ask her because she will have thoroughly researched it. If you want to know where to scuba dive in Asia, ask her because she will have thoroughly researched it and done it. When her and her friends go anywhere, she plans the trip and assigns the tasks. Her six month trip included Vietnam, Taiwan, Indonesia, Malaysia, Singapore, Thailand (where I and my wife and my youngest daughter met up with them), Myanmar, and Japan. No China, even though she has never been there. I’ve never asked her why. I just assume her extensive research convinced her that all these other countries would be a better use of her limited time and money.

Why is China not a popular tourism destination for Westerners? The following 14 reasons immediately spring to mind:

  1. It’s really crowded.
  2. People push. I mean really push.
  3. People yell. I estimate I’ve seen more yelling matches in China than the rest of the world put together.
  4. People try to cheat you. Often.
  5. People don’t talk to you just to talk to you; they talk to you mostly just to “hustle” you.
  6. You will not be made to feel welcome, not even by hotel and restaurant staff.  See A Post In Which I Bitch (Yet Again) About China Hotels.
  7. It’s polluted. Like really polluted. Like incredibly polluted in some places.
  8. It has major food safety issues.
  9. Bathrooms. Need I say more?
  10. You need a visa before you go.
  11. So much of China’s physical history has been destroyed and what is left is often neither well presented for Westerners nor easily accessed.
  12. China is a difficult place for foreigners who do not speak Mandarin and who do not like group tours.
  13. China executes foreigners for drug offenses.
  14. Slow and blocked internet.

My law firm has offices in Barcelona, Spain (and we just opened an office in Madrid as well) and Beijing. Pretty much every week someone will longingly engage me in a conversation about Spain, wanting to tell me about their trip to Barcelona or to Seville or to Madrid or to San Sebastian or to Mallorca or to Valencia (where one of our lawyers will be going for his vacation next week). I don’t recall a single time anyone has done the same about China. Most of our lawyers have visited our Barcelona office, including those whose work has little to nothing to do with Spain. None of our lawyers outside our China law team have ever talked of going to Beijing.

Those of us who constantly go to China for business know both how to minimize and deal with the problems listed above, but can you not understand why most people prefer not to have to deal with these sorts of things on their two weeks off from work? Kimberly, would you really tell someone who has never been to China to go there? Do you dispute any of the above? And if even only 5-6 of the above are true — and with all the incredible places to go in the world — does it really make sense for people to spend their limited tourism time and money on China?

Is the tourism trouble/reward ratio far better than I’ve painted it above? Is China merely undiscovered and ready to go viral as a tourist destination once people realize how wonderful it really is? Or do you agree with the picture I’ve painted?

Let ‘er rip people.