China lawyers
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The trade and investment relationship between the U.S. and China is going through permanent change, with the current round of tariffs just the start. As the tariffs fail to bring a resolution, we should expect the United States to implement other restrictive measures, including, some combination of the following:

  • Prohibiting the selling or licensing of technology to China.
  • Prohibiting Chinese companies from purchasing all or part of U.S. technology companies;.
  • Prohibiting Chinese students from attending U.S. schools and universities
  • Prohibiting the hiring of Chinese nationals by U.S. business
  • Ending cooperative research programs with Chinese scholars and researchers.

This will be the “new normal” in China/U.S. business relations and U.S. companies that do business in or with China should start now to prepare for this new reality. Many companies are waiting to react because they believe this conflict is a temporary political problem and will soon blow over. This view is a mistake.

The tariff measures are the first step in a much more general conflict over the entire Chinese system. The U.S. objects to virtually every aspect of China’s economic/trade/investment system. Rather than take on the entire Chinese system as a first step, the current tariff dispute with China has been narrowly defined.

The USTR 301 Report bases the US tariffs on two concrete issues: China’s well-documented propensity to engage in forced technology transfer and IP theft. When confronted regarding these two issues, the Chinese government response has been to simply deny every claim. In its White Paper responding to the 301 Report, the Chinese government flatly denied every claim in the report. On forced technology transfer: it does not happen and U.S. companies that transfer their technology to China do so voluntarily based on their own business calculations. On IP theft: it does not happen and accusations of trade secret theft and cyber-hacking are simply lies.

China’s consistent and complete denial of every statement in the 301 Report has been maintained by every layer of the Chinese government. There has been no movement at all. For example, in the forced transfer area, the Chinese government has refused to even consider opening the network, e-commerce and cloud computing markets in China to foreign based businesses. In the IP theft area, the Chinese government has refused to cooperate in investigating and extraditing those sought under recent U.S. indictments in several high profile cases.

There is a reason for China’s hardline position. Its forced transfer and IP “assimilation” regimes are at the core of China’s economic system. The current leaders of China understand this and that is why they cannot even suggest a compromise on these critical issues.

With China standing resolute and with there being no hint or likelihood of this changing quick resolution of the US-China trade war will require the U.S. trade team to capitulate. U.S. businesses have waited twenty years to see real improvement in the Chinese system only to see things grow steadily worse. China has lost nearly all of its former supporters in the U.S. business community. Since China has lost its main body of support in the U.S., there is very little pressure on the U.S. trade team to back down. It is therefore unlikely it will.

The situation is critical and nearly all foreign companies that operate in China should be analyzing how they can best deal with the trade situation. These companies need to make concrete plans for dealing with the impact the US-China trade war is having and will have on their business operations. Many companies believe they must either abandon China or pretend nothing is happening and go on with business as usual. For nearly all companies neither of these approaches make sense.

Some companies will continue to work with China based the same way they have for the past decade. For these companies, their major adjustment should be that they quit dreaming anything will change. For other companies, developing supply relations outside of China will become critical. For some of these companies a move out of China will be required. Others will be best off splitting their production between China and other countries.

What is consistent for pretty much every company that operates in China is the need for it to evaluate its operations in China under the New Normal of increasingly restrictive trade and investment measures. In assisting our own clients with this sort of evaluation we’ve been targeting the following:

1. How will current and future tariffs impact the business. For some of our clients, the tariffs are largely irrelevant. For others, the impact is so severe that failing to move quickly could lead to their demise.

2. What can be done about the tariffs? Is an exclusion from the tariffs possible? Will the Chinese factory agree to a price adjustment? Should the supply chain be moved to another country? Should the company shift the sales of its products to countries (other than the U.S.) where tariffs are not being imposed?

3. If the supply chain needs to be moved to another country, a careful analysis is required. Will you need to build a factory in that other country or can you purchase your products from an existing supplier or contract manufacturer? Is the infrastructure and legal system in the target country adequate for your needs? How long will it take to move and what will be the cost? As high as the costs are going to get to manufacture in China, this analysis often reveals China is still many companies’ cheapest and best choice.

4. China currently requires many technology companies to license their technology into China. For example, such licensing is essentially required in the network, cloud, SaaS sector, e-commerce and fin-tech sectors. The Chinese government has made clear this policy will not change. Companies in these sectors that have held off on “going into” China in the hopes of a change in policy should now either accept the licensing requirement or just abandon China as a market.

5. Many U.S. companies engage in co-development of technology and products in China, working with many types of Chinese entities. Over the past 15 years, the Chinese court system has been largely receptive to protecting the contractual rights of foreign entities, provided that the contracts are properly drafted. See China Contracts: Make Them Enforceable Or Don’t Bother. Will Chinese courts continue to enforce these manufacturing contracts, especially on behalf of American companies? Or will U.S. companies need to look to different ways to protect their innovations that do not rely on the Chinese legal system? Fortunately, all signs still point to continued contract enforcement.

6. Will new rules (either from the U.S. or from China) make it difficult or impossible for U.S. companies to sell or license their technology to Chinese companies? For U.S. companies that want to bring in Chinese investment, what will be the impact of restrictions that are currently being proposed? For U.S. companies that rely on hiring large numbers of Chinese professionals, what will be the restrictions? For U.S. education and research institutions that want to work with Chinese researchers, will that be possible? What about Chinese scholars who have become naturalized citizens of other countries? Will they also be banned?

Every party from the U.S. that works with China in any way should be asking themselves at least some of the questions above. Foreign companies that sell their Made in China products to the United States should be doing the same. China will not be completely and permanently cut off from business relations with the United States, but the nature of the US-China relationship has changed and it is not going to return to the way it was for a long long time.

The US-China business relationship is fluid and its final configuration has not yet been settled. Nonetheless, businesses that wait for a final resolution will be left behind. Now is the time to evaluate and take action.

What is your company doing to get ready?

China cryptocurrency

The Shenzhen Court of International Arbitration (SCIA) of China recently published a case analysis (link in Chinese) on contract disputes between parties to a share transfer agreement involving cryptocurrencies.

In this case, an unnamed applicant engaged the respondent to manage and invest in a pool of cryptocurrencies (Bitcoin, Bitcoin Cash and Bitcoin Diamond) on behalf of the applicant. In another transaction where the respondent was purchasing company stock from a third party, the applicant agreed to pay part of the purchase price on behalf of the respondent, so long as the respondent returned the cryptocurrencies to the applicant. The terms of this deal were recorded in a written contract between the applicant, the respondent and the third-party seller of the company stock. The respondent failed to return the cryptocurrencies and the applicant and third-party seller demanded arbitration.

One of the key issues in this case was the validity of the company stock transfer agreement. Citing the Announcement on Preventing the Financing Risks of Initial Coin Offerings made by China’s central bank and several other government agencies in 2017 (often referred to as China’s “ICO Ban”), the respondent argued the company stock transfer agreement was invalid and unenforceable because exchanging and delivery of cryptocurrency is illegal.

The arbitral tribunal disagreed holding that though the ICO Ban prohibits using cryptocurrency as a financing tool and prohibits financial institutions and non-bank payment processors from providing services related to cryptocurrency financing, no Chinese law prohibits private parties possessing Bitcoin or even engaging in transactions involving Bitcoin. Since the respondent’s obligation under the company stock transfer agreement was simply to return the cryptocurrencies to the applicant, the ICO Ban does not apply. Because the agreement was properly executed and did not violate any statutes on the validity of a contract, the agreement is valid and enforceable.

The arbitration tribunal further explained that though cryptocurrency is not fiat money (inconvertible paper money made legal tender by a government decree) and should not be exchanged and treated as fiat, this does not prevent bitcoin from being protected as property that can be owned and controlled and that has economic value.

The SCIA is not first Chinese tribunal to rule that cryptocurrencies should be protected as property. Earlier this year, a Shanghai court reached the same conclusion regarding Ethereum. In the Shanghai case (link in Chinese), the defendant received Ethereum from the plaintiff by mistake and refused to return it. The Court held that Ethereum should be treated as property and the defendant’s keeping other people’s property constitutes unjust enrichment.

Although China’s General Provisions of Civil Law (民法总则) provide that “any laws on the protection of data or network virtual properties shall be followed,” there is so far no law in China that defines or sets forth the rules for protecting network virtual property. However, as long as cryptocurrency continues to exist, it will in China no doubt continue to be heavily regulated.

Bottom Line: China is generally very suspicious of cryptocurrency, largely because it can make for such an easy tax dodge. However, recent cases do show that cryptocurrencies are not completely illegal and the property rights inherent in them will, at least sometimes, be protected.

China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of the questions both our China lawyers and our international trade lawyers have constantly been getting of late — from clients, from readers, and from the media — is when will the US-China Trade War end.

Most of us respond by saying that it is too early even to foresee an end because the terms on which it is going to end are not the least bit clear.

What will the United States require for this trade war to end? Will it require simply that China buy more American goods? If that were all it wants it would have ended months ago. Does it want China to open its economy to foreign companies? Does it want China to stop with the IP theft? We believe it is the latter two and for that reason we do not see the trade war ending soon, if ever.

We say this because we do not see China making anything resembling major concessions on either of these two things and we say this in part because China refuses even to concede these are real issues. Two things from this week enforce our position on this.

  • A number of my firm’s China lawyers attended an event earlier this week to welcome the new China Consul-General from San Francisco. Former US Ambassador Gary Locke kicked it off with a five or so minute talk about how there are many issues between China and the United States but there is the possibility of resolving them and he went into how nobody in the room wanted anything but for relations between the United States and China to improve. The Chinese Consul-General followed this up with a 45 minute speech which he read straight from his notes on how pretty much nothing of which the U.S. was accusing China was actually happening. How can there be resolution of problems when there is not even agreement on whether the problems are real or not?
  • The PRC foreign ministry and government media (in Chinese) have lately been encouraging the Chinese people not to be angry with the American people using language like the following: “The Chinese people and the American people are friends. The American people do not think China is doing anything wrong. President Trump and his team are acting against the will of the American people and the basically friendly relations between the people’s of the two countries. China is confident the will of the people will be recognized and the people of the U.S. will force President Trump to back down.” Again, no admission of any wrongdoing but add to that the idea that it is merely President Trump pushing his own agenda and you get the strong sense that China’s plan is to try to wait out the trade war until the United States has a new President.

Bottom line: Right now there has been little to no (really just no) recognition by China that it has done anything to justify the trade war. Until China admits there are real issues we do not see China making real concessions and until China makes real concessions we do not think it even possible to guess as to when the trade war will end. We see President Trump’s “very good phone call” with President Xi as President Trump trying to influence the mid-term elections with “good news.” In the meantime, companies that export Made in China products to the United States are looking for alternatives, and fast. Would the Last Company Manufacturing in China Please Turn Off the Lights.

NOTE: Whenever we write anything that it is less than sunny about US-China relations we get a ton of backlash from people saying either that we have no clue or that we are out to sabotage this or that or that we are saying things just to generate more business. To which I merely note that our blog is called the China Law Blog and well over half of my law firm’s international legal business is China. We have every incentive to say only good things about doing business with China but we also have a greater incentive to do our very best to tell the truth as we see it and that is what we will continue to do.

What are you seeing out there?

China lawyer

Our China lawyers had a team meeting yesterday and as is so often the case at such meetings, much of the meeting involved our talking about what we have been seeing lately. We mostly focused on the following trends:

  1. Six months ago, we rarely worked with our firm’s international trade lawyers. Sure, we would occasionally call one of them in to help with a sticky customs issue or a client concerned about getting hit with antidumping or countervailing duties, but these days we find ourselves working with them constantly. Companies that are getting hit or will soon be hit with having to pay 25% tariffs are looking for help in figuring out how to have their Made in China products made elsewhere so that they can legally avoid having to pay the tariffs. See China Tariffs and What to do Now, Part 1 and China Tariffs and What to do Now, Part 2.
  2. Six months ago, about 90% of the international contracts we drafted involved China or the EU. That number is now nearing 60% as our existing and new clients are diversifying outside China.
  3. International litigation is on the rise. We are reading about this we are seeing it. This is happening because of the uncertainty and the disruptions stemming from the tariffs. With disruptions and uncertainty comes disputes.
  4. China is more open to foreign businesses than it has been in years. Forming a WFOE is a bit faster, cheaper and easier than it was just a few years ago, especially if your WFOE will be operating fully legally. Check out The NEW Steps for Forming a China WFOE.
  5. Chinese factories are copying and selling their foreign customers’ products faster than ever before. Almost every week we hear of a Chinese factory that sold its foreign customer’s product before or right after shipping out the foreign customer’s first order. The tariffs are causing Chinese factories to question the viability of a long-term relationship with their foreign buyers and they are simply calculating that they can make more by selling their customers’ products online themselves. In the past, our lawyers did not push back when start-up companies wanted to test their product in the marketplace before spending for a contract to protect against their Chinese manufacturer competing with them. Now though we make very clear that this a very bad idea because by the time market strength has been determined, there may no longer be a product to sell. See China Trademark Theft. It’s Baaaaaack in a Big Way, China and the First to Market Fallacy, and Protecting Your Product From China: The 101.
  6. Following the law makes sense if you are going to be doing business in China. The number of companies coming to us with big China legal problems has gone way down but the number of companies coming to us to proactively present big and small China legal problems has gone way up. This is a good thing because it means foreign companies have come to realize China has gotten both serious and effective at enforcing its laws as against foreigners. See Doing Business in China Without a WFOE: Will the Defendant Please Rise for a good example of where China has really cracked down against foreign companies and see China Employer Audits: The FAQs for a good example of the sort of thing foreign companies are doing in China to avoid future legal problems.

What are you seeing out there?

international lawyersThe 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.

On top of the client and potential client calls, we have also been getting a steady stream of reporters asking us for permission to talk to our clients leaving or looking to leave China. We tell them that for various reasons, none of our clients are likely to want 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.

With the extreme reluctance for anyone specific to say that they will be leaving China, whenever we write about companies leaving China (especially when we do so on our China Law Blog Facebook page) we get hit with invective against us claiming we are making this stuff up because we hate China. Well guess what everyone, there is now strong factual support for what we have been saying for the last few months. A huge chunk of American companies are looking to move their manufacturing from China.

Reuters reporter  Sue-Lin Wong did a story yesterday, entitled Many U.S. firms in China eyeing relocation as trade war bites, on how “more than 70 percent of U.S. firms operating in southern China are considering delaying further investment there and moving some or all of their manufacturing to other countries as the trade war bites into profits, a business survey showed on Monday.”

In this business survey of 219 companies by the American Chamber of Commerce in South China, “64 percent said they were considering relocating production lines to outside of China.” And just as our international lawyers are seeing and just as we have been reporting, “the trade war is shifting both supply chains and industrial clusters, mostly towards Southeast Asia” — in other words, Vietnam, Thailand, Malaysia, The Philippines, Cambodia, Indonesia and India. “U.S. companies reported facing increased competition from rivals in Vietnam, Germany and Japan, while Chinese companies said they were facing growing competition from Vietnam, India, the United States and South Korea.”

This has led to a slow-down in orders for manufacturers in China:

Customers are slowing down orders or not placing them at all, Harley Seyedin, president of AmCham South China, told Reuters.

“It could very well be that people are holding back on placing orders until times are more certain or it could very well be that they are shifting to other competitors who are willing to offer cheaper products, even sometimes at a loss, in order to get market share,” he said.

“One of the most difficult things about market share is once you lose it, it is very hard to get back.”

Companies in the wholesale and retail sectors have suffered the most from U.S. tariffs, while agriculture-related businesses have been most hit by Chinese measures, the survey found.

The survey was conducted between Sept. 21 and Oct. 10. I would bet the percentages would be even higher if the survey were conducted today and much higher still after January 1, when U.S. duties are set to rise sharply.

“Around 85 percent of U.S. companies said they have suffered from the combined tariffs, compared with around 70 percent of their Chinese counterparts. Companies from other countries also reported similar impacts as their American counterparts.” This too reinforces what our international trade lawyers have been seeing, which is that our European clients have been nearly equally impacted because so many of them sell their products into the United States.

The problems extend beyond just tariff costs as “nearly half the companies surveyed also said there had been an increase in non-tariff barriers, including increased bureaucratic oversight and slower customs clearance.”  It is not clear whether these customs problems are being felt in China or the United States or both, but from what we hear from our own clients, it’s both.

What are you seeing out there?

 

China e-commerce lawyer

 

In the midst of our international lawyers handling a massive influx of foreign companies that manufacture in China looking to get out of China (See How to Leave China and Survive), we are also handling a much smaller (but increasing) influx of companies looking to sell their products online to China. Somewhat paradoxically, we even have some clients simultaneously looking to move their manufacturing out of China while looking to move sales into China.

Many of these companies have attended seminars where someone has told them how easy it is to sell your products online to China. Many have attended Alibaba conferences where Alibaba puts 3-4 foreign companies on stage to have them explain how quickly and easily it was for them to make millions from selling their product on TMall or Taobao or wherever. These companies are almost certainly telling the truth and I know this because I have represented many American and European companies that make millions of dollars a month by selling their products into China. And it is in fact relatively easy to sell your product on one of the leading Chinese e-commerce platforms, particularly if you use one of the many companies that handles all of the logistics for you

The tough part though is actually making the sales and I have personally represented a number of American and European companies whose products barely sell or sell not at all to China. As lawyers, our best advice for determining whether your product will sell well into China and for making sure that it does is to get help from companies and people with actual track records in marketing and selling products to China.

Our job as lawyers when we represent foreign companies that want to sell their consumer products into China is relatively uncomplicated and usually consists of our doing the following:

1. Making sure the product is legal in China and can be legally sold to China by a foreign company without need for any special license or testing or certification. See this Forbes Magazine Article, Do This One Thing Before Doing Business in China.

2. Making sure the contract our client signs with the China e-commerce platform company actually works for and makes sense for our client.

3. Making sure our client’s intellectual property is protected such that a Chinese company cannot immediately start selling the exact same thing with the exact same brand name. In doing this, our China IP lawyers typically start out by explaining how our clients trademarks and patents in other countries will not protect them in China because China is a “first to file” country. By way of an example, this means that (with very few exceptions) whoever files for a particular trademark in a particular category gets it. So if your company’s name is Bill’s Clothing and you sell shirts and you have been doing so for the last five years and some other company (Chinese or foreign) registers the “Bill’s Clothing” trademark in China for shirts, that other company gets the trademark. If you allow some other company to register “your” trademark in China, that other company can stop you from selling your products in China using “your” trademark. This happens all the time and your starting to sell your products online in China is like a bell whistle for trademark trolls. If you want to protect your IP in Mainland China you must register the IP in Mainland China.

But before you just go off and registering a trademark in China you should think long and hard about what you should be registering.  Do you register your English-language name? The answer to this is nearly always yes. Do you create a Chinese name and register that as well? The answer to this is that you usually should. Should your Chinese name be a translation of your English name, a transliteration, or something unrelated? This really just depends, and if oftentimes figuring this out requires both a China trademark lawyer and a China marketer. In Hermès’ China Trademark Case. Do You Know What Trademarks You Really Need? I talked about how my firm’s clients often handle these trademark issues:

In situations where our clients are making product in China for export only and their product has the trademark on it only in English, securing just an English language trademark is usually enough. In situations where a company intends to manufacture its product in China and eventually sell in China, the company must weigh the costs and benefits of securing a Mandarin (or other language) trademark now, or just wait. In situations where the company knows it will be selling its product in China right away, it needs to analyze the options set forth above. In almost all instances where our client’s trademark has actual meaning, they have chosen to trademark both the English and the Mandarin of the word. Rarely do our clients seek a China trademark in a language other than either English or Mandarin. Only around 25% of the time do our clients seek to secure the trademark for a transliterated or phonetic version of their English language trademark. Most of the time, they choose to wait and see how their product does in China and then, if it proves successful, they usually come back and register more on it. Waiting also allows them to see exactly what the Chinese will call their product. The downside to waiting is that someone else may register the name in the meantime.

Companies that are looking to sell their products into China should take a long term approach to their China trademark filings. Sure you are only making shirts now, but what about your plans to eventually expand to pants and jackets and shoes. Should you register your trademark in the trademark classes/categories that encompass all of these ? Do you care if someone makes socks with your name on it? These are just some of the trademark type issues you should consider before you sign your contract with Alibaba to sell your consumer products to China.

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China lawyer Vietnam
We miss the good old days

A China lawyer friend of mine and one of our most loyal readers, pretty much since day one, (January 4, 2006, but who’s counting) emailed me the other day reminiscing about the good old days of China blogging. In his email he linked back to our first post, INTRODUCTION TO OUR BLOG, in which we introduced ourselves to the world with the following (stay with me here because this post does indeed have a point).

Why are we doing this?

What exactly will we be doing?

There are more than 4 million blogs. Many of these are about China, including some very good ones. Some of our favorites include Talk Talk China and Simon World for general China information, The China Stock Blog for Chinese stock market information, China Tech Stories for information regarding China’s technology sector, and Journey Around China for travel information.  [3-6-2012 Update: None of these blogs still exist so we removed the links]

There is even a superb Chinese law blog, The Chinese Law Prof Blog, but it has a distinctly academic bent and we will not.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you about what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy. We want to start a conversation with, for and about the person who wants to know “what is what” in China and the practical aspects of starting and growing a business in or involved with China.

We are not writing for those who want to know more about Section (A)viii of a particular piece of Chinese legislation or the history of that act or the policy reasons behind it. Our site is not focused on the legal scholar or the China lawyer.

We want to initiate a discussion regarding the changing laws in China. We will constantly be challenging the various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it.

We will provide information to those who conduct business with or in China as to how they can use the law as both a shield and as a sword. We will give you our insights to achieve practical solutions, while doing our best to entertain.

We know lawyers are not popular, and though we are ourselves really quite likable, we recognize the need to avoid those things that incite lawyer hatred. In other words, we will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.

We want this blog to be a place for conversation and even controversy. We expect many of you will disagree with us much of the time and we do not care. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong — in fact, we want you to tell us when and how we are wrong. If you want “lawyer language” or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.

Though our focus will be on the interaction of law and business in China, we most certainly will be personalizing this page with our own experiences. We will tell you more than just that the law is this and this is what needs to be done to comply. We will discuss how the laws as written may say one thing, but our experience dictates something else. We will tell you when you need to do more than just follow the law to succeed and we will set out exactly what that something else is. We will estimate the chances for success if one does one thing as opposed to another. You will hear what we have done to succeed for ourselves and for our clients in China and you will hear about where we failed. We will regale you with stories about the Chinese lawyers with whom we work, the foreign and Chinese businesspeople with whom we deal, and even the places we go. There will be times where our lawyer ethical rules will make us unable to name names, but we will always work to tell the full story.

In addition to our discussions regarding what we are seeing on the ground in China, we will post articles and postings from elsewhere, to which we will, when appropriate, add our own comments. We will also post events, like seminars, conferences and trade shows, that we believe will advance our readers’ grasp of China law and business.

It has become a blog cliché to implore readers for their input, but it is so important we must join the crowd on this. We do not purport to know everything about Chinese law. That is impossible.  China is anything but monolithic and the differences in the legal situations between the various regions are no less pronounced than the cultural differences.

The strengths of our China attorneys who will be writing for this blog are in forming companies in China (WFOEs and Joint Ventures and Representative Offices, mostly), in drafting international contracts with Chinese companies (in English and in Chinese), in intellectual property protection, in technology licensing agreements, in media and entertainment, and in litigation. We welcome your comments, suggestions, and ideas on any area of law relating to doing business in China.

In plain language, we ask that you write us early and often. We will review your comments before we post them, but that does NOT mean you should not criticize us or disagree with us. Our review will be to filter out “comment spam” and comments that are without substance and/or are personally abusive. We want to encourage a high level of discussion but we will not ban or delete your comments just because you come after us — at least not the first few times.

So why are we doing this? The short answer to this initial question is that we are doing this to — in our own small way — advance the dialogue regarding Chinese law and business.

And now for the point.

We were so excited back then. So optimistic. Speaking just for myself now, I can say that I saw the opportunities for China business as nearly unlimited. By this point my law firm was already representing many companies outside the United States (I was already contemplating where we would eventually set up our Europe office — even back then Spain was my first choice) and I believed (correctly as it turned out) that our global reach would expand as China’s expanded.

And comment you did. We would sometimes get literally hundreds of comments on one post and there were so many great discussions within them. Blogging has changed since then and though there has yet to be a year when our readership has not grown, few of you are seeing this on our own blog page and commenting on here (and for every other blog) has plummeted.

Far worse though is that the way so many view China has plummeted as well.

Way back when we wrote the above introduction we not only believed the opportunities for China business were unlimited, I (naively as it turned out) believed the opportunities for China and for China-US and China-Western friendship would grow along a steep and nearly straight line. Sad to say I was wrong on this and that has been borne out by the typical conversations I have with clients and potential clients these days, which so often go along one of the following three lines:

1. You want to have your product manufactured in China? Why? Will you be sending them to the United States? If so, have you considered the cost of the tariffs as they exist right now and as they will likely exist in 1-6 months (we see 25% tariffs coming nearly across the board). We can help you figure out where to have your products manufactured and for your sort of product it makes sense to weigh the costs and the benefits of having them made in Vietnam, Malaysia, Thailand, Indonesia, India, or Pakistan or maybe even Eastern Europe. Last month — for the first time ever — we did as many deals and drafted as many contracts with Asian countries outside China as we did for China. And literally not a day goes by without at least one of our international lawyers or (even more likely) one of our international trade lawyers getting a call from an existing client seeking our help in leaving China. See the following for more on these things:

2. You want to go into China? Are you sure? You want to do a China Joint Venture? Are you sure? These are usually very difficult and expensive and you should at least consider other options, such as licensing your technology and/or your brand name to China or using a distributer or a reseller there. See China Licensing Agreements – Look Before You Leap and China Distribution Contracts: The Questions We Ask.

3. Speaking of licensing technology, are you aware that the US government (and some other governments as well) have become extremely wary of Chinese investment and is cracking down on it and has instituted new requirements for it and will be instituting more soon? See this article on that. It will make sense for us to figure out which of these apply to what you are doing before we move forward with much else.

The champagne days regarding China are over and proof of that is whenever we say something that even hints at this either on this blog or on our China Law Blog Facebook Page, we get all sorts of desperate hate mail or hate comments. The expectations we (and so many others) had for China are not going to happen for a long time if ever and we have adjusted accordingly. And contrary to those who have written to chastise us for our glee over this, this does not make us happy at all. In fact we and I find all of this quite sad. Yet this is the New Normal and we are not going to act otherwise to make anyone — especially not our harshest critics — feel better.

Oh, and one more thing. Because we are not stupid, we fully recognize that much of the above has not been a one-way street. In other words, many of the changes discussed above were influenced by other countries, particularly the United States. But, our purview is to help our clients navigate China and to navigate its substitutes, not to opine on the United States or its politics or on international politics in general.

What are you seeing out there?

China IP lawyer

Time for another entry in what has become a running series of posts about wine in China. Thus far, the series includes:

  1. China, Wine and Tariffs
  2. China Trademarks: Wine Labels in China
  3. China Trademarks – The (Mis)Classification of Wine

I’ve written previously about the rampant counterfeiting of foreign wine in China, especially with well-known brands like Château Lafite, Château Latour, and Screaming Eagle. Because counterfeiting only comes to light when it is discovered by authorities (or brand owners), the data is sketchy on the actual amount of counterfeit wine on the market – it’s either anecdotal or extrapolated, which leads to widely divergent conclusions. Maureen Downey, often cited as the leading expert on wine fraud, said back in 2014 that the majority of counterfeits were limited to a few vintages of a few labels, and that the top 16 counterfeit wines were all European. Meanwhile, another wine fraud investigator stated last year that 20% of all wine in the world is counterfeit, which would mean approximately 6 billion bottles of counterfeit wine are sold each year – a lot more than a few vintages of a few labels.

For many wineries, the design of the label — that is, in addition to the name of the winery – is also an indication of the source of goods. A bottle of Château Lafite doesn’t just bear the name “Lafite”; it also has a picture of the château. The obvious way to protect the wine label from infringement is via a trademark registration for the label design (or at least the graphic elements common to each label). But almost every wine label would also be considered a creative work in fixed form, and therefore eligible for copyright protection.

As we wrote in China Copyright Law: We Need to Talk:

Copyright is an essential part of any substantive IP protection plan in China, but many companies fail to take an extremely important step: registering their copyrights in China. One of the most common misconceptions our China IP lawyers hear is that copyright registration in China is optional, because you do not have to file anything to have a valid copyright in China.

The moral of that post is just as true for wineries as for any other company – the best way to enforce your copyright in China is to register it. Counterfeiters are creative in their own way, and I’ve seen some fakes that combine one winery’s label design with a new (often fake) winery name. A trademark registration for your label may be sufficient to stop such a fake, but why not give yourself more ammunition?

As with any business decision, wineries should conduct a cost-benefit analysis before registering a copyright in China. If you are a small winery and/or don’t sell wine in China and never expect to, I wouldn’t bother registering any IP in China, let alone a copyright. But if you’re big enough to export wine to China, you’re big enough to protect your IP. And that means trademarks for your name and your label, and also a copyright for the label.

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

Guess what people. Our post about foreign companies leaving China have nothing to do with our feelings regarding China and everything to do with what we are hearing and seeing. Our statements of fact about companies leaving China are not being made out of animus to China, but out of a desire to tell the truth and help foreign companies figure out what to do about China going forward. Life would be far easier and economically lucrative for us if foreign companies were not running for an exit from China. But from what we see, they are.

We are telling the truth about companies (not just American companies) looking to leave China because part of what we do is help companies legally fulfill their goals and their plans. My firm’s international lawyers help companies negotiate their exits from China and we help companies figure out where to go instead of or in addition to China. We also help companies looking to set up in other countries, do deals involving other countries, protect their IP in other countries, and draft necessary contracts in other countries. In the last few months our international lawyers have been being kept nearly as busy with countries like Vietnam, Cambodia, Indonesia, Thailand, Malaysia, Turkey, India and Pakistan as with China.

The above is but an introduction to what we see as China’s diminished future for foreign companies. Since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war. At first, we saw the US tariffs as an effort by the United States to get China to “open up” and “act right” on things like the internet and IP. But because we did not see China changing on these things, we did not see the trade war ending.

Vice-President Pence’s speech on China earlier this week has only reinforced for me that the trade war between China and the US will not be ending any time soon, if ever. The New York Times has called that speech the Portent of a New Cold War between the United States and China and China’s own Global Times wrote an article entitled, Pence speech shows Washington’s tougher policy on China. Don’t blame us. We are just the messengers. Things are getting very tough between China and the United States right now and the trade war is just a symptom of that, not the disease.

The United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade. The new free trade agreement between the United States and Canada is further proof of this as it essentially blocks Canada and Mexico from engaging in free trade with China. See What Trump’s new trade pact signals about China. Word is that shutting out China is going to become a regular thing in all new U.S. trade agreements. See US Commerce’s Ross eyes anti-China ‘poison pill’ for new trade deals. Will the EU and Japan and Latin America play ball on this? I predict that most if not all of them will.

So yes, the above is why we will continue to write about what North American and Latin American and European and Australian businesses should be doing to deal with the new normal regarding China. We are writing these things because we value our credibility and because we presume our readers value our no-holds barred advice — threatening emails or not.

For more on the new normal, check out the following:

And just in case you still believe we are saying the above for political not business reasons, here is your palliative: a great book that asserts the United States is blaming China for the US’s own ills: Blaming China It Might Feel Good but it Won’t Fix America’s Economy, by Ben Shobert, a good friend of mine. Ben — what are you seeing out there in terms of companies looking to leave and/or leaving China? 

What are you-all seeing out there?

So far nobody has written to factually dispute that many (most?) foreign companies are looking to leave and/or are leaving China, but we certainly would welcome such information if you have it! 

UPDATE: An international lawyer friend just sent me a link to this blog post by Renaud Anjoran over at the Quality Inspection Blog. Renaud heads up a top-flight quality inspection/product sourcing company out of Shenzhen, China, but his post was written from Vietnam and is entitled Transferring Production from China to Vietnam to Avoid Tariffs. Renaud’s post is essentially a how to on moving production from China to Vietnam. Does anyone believe Renaud went to Vietnam and wrote this post for reasons other than because his clients too are looking to reduce their dependence on China?

 

China lawyers VAT rebateWith the onslaught of tariffs, many companies that import products into the United States are facing price increases. Our China lawyers are getting an earful about this from some of our clients, especially those that sell large chunks of their products to big retailers like Walmart and Target. On the other hand, our clients with super strong brand names and eye popping margins have for the most part not even mentioned the tariffs and their increased costs to us.

And yet, no matter who your downstream customers may be or what your margins are, now may be the best time ever to get your China contract manufacturing costs reduced, and our China attorneys are working with many of our clients to do exactly that. For many of them, we are working to help them diversify their manufacturing to countries outside China — so far this has mostly been to other Asian countries, such as Vietnam, Cambodia, the Philippines, Malaysia, Pakistan, India and Thailand, but also to Mexico and Eastern Europe and even to Canada and the United States — more so after the announcement of the “new NAFTA” agreement, a/k/a the USMC. Part 2 of this series will address the pros and cons of moving manufacturing out of China, to include a quick country-by-country analysis.

This post is going to focus on the steps you should consider taking now to reduce your China manufacturing costs.

In early February of this year, 1 dollar was worth 6.28 Yuan whereas that same dollar is worth 6.87 Yuan today, a nearly 10 percent increase. What this means in real life is that if you were paying your Chinese manufacturer $5 per widget in February and you are paying your Chinese manufacturer the same $5 per widget today, your Chinese manufacturer is making nearly 10 percent more today than it was yesterday, ignoring inflation, etc. What about you ask your Chinese manufacturer to at least share some of that 10 percent difference with you. I can tell you that virtually all of our clients that have made this request have gotten at least half of this savings back for themselves and many have pushed for and received all or nearly all of it. And for good measure, they are writing into their contracts that they get any future currency “savings” as well.

Our European clients are not “eligible” for quite the same savings, but seeing as how it was 7.41 Yuan to the Euro in mid-June and it is 7.88 Yuan to the Euro today (an approximate 6.5% increase) they too are “entitled” to not insubstantial price reductions as well.

But wait, there’s more.

Many Chinese factories (largely depending on the industry) will very soon be seeing fewer buyers and smaller purchases. How do I know this? I don’t know this for a fact, but I am virtually certain this will be the case. Last week, in On the Impact of China Tariffs: Is This a Dead Cat Bounce? I wrote about how business at my law firm is booming right now because so many companies are looking to move as quickly as they possibly can to get product made and out of China before tariffs further escalate and/or in time for the upcoming holiday season:

So for now at least our China practice and our international trade law practice are both booming and this state of affairs holds true for every China lawyer, every manufacturing lawyer and every international trade lawyer with whom I have spoken in the last three months. An old adage about lawyers is that we do well when times are good and when times are bad, just not when things are staying the same. That has been the case so far.

Not surprisingly, it is not just international lawyers at full capacity these days, American and European companies that do business with Asia (mostly) are seeing many choke points as well. We are hearing the following from our clients and our readers:

  • We are hearing that the Chinese government has increased the VAT rebate for exports from 13% to 16% to encourage more exports.
  • The RMB has depreciated and that means Chinese goods are cheaper than they were, further encouraging exports.
  • “Everything along the supply chain is at or near full capacity right now. We are hearing that both China and US West Coast ports are really busy and ships are full and shipping costs are rising.
  • The time for getting products from Asia through U.S. customs and getting products from the United States through China customs has greatly increased. This is due in part to the increase in shipment volumes, but also because customs officials in both countries are “going through everything with a fine-tooth comb” that comes from the other country. No surprise, right?
  • An old China hand friend of mine put it this way: “Prices are rising at every point. Tariffs, freight forwarding, shipping and trucking are all going nuts. It is one big clusterf–k.” He went on to say that he expects things to get considerably worse over the next few weeks because of the new and widespread tariffs and because of the upcoming Christmas/Holiday Season. “Everyone is and will be racing to get their products to port to avoid the possibility of more and increased tariffs in January; everything is going to go into hyperdrive like nobody has ever seen before.”
  • Our international litigation lawyers are already seeing an increase in disputes related to late delivery and shipping disputes.

I concluded that post with the following call for responses:

So for now, things are booming but for how long will this last? Will there be a crash in February or when or not at all?

What are you seeing out there?

And boy did I get it. I must have gotten nearly a dozen emails (roughly divided between people I knew and people I didn’t know) and pretty much all of them were at least somewhat angry and pretty much all of them talked of plans to move manufacturing out of China either as quickly as they could or at least within the next few years. I fully recognize that these emails are not anything close to being a scientific study and what highlights that is that not a one of them came from industries where I do not expect there to be much if any movement out of China in the next two years if ever — industries like electronics, biomedical devices, and pharmaceuticals to name just a few. But even if these emails were confined to only ten percent of industries, there is very likely going to be that move. My favorite email — both for what it said and because of who sent it (a 20 year China veteran and logistics guru who I know very very well) had this to say (modified slightly):

Companies are starting to move out of China already. A good friend of mine has a small business designing and selling high-end _______ in the US. He has been manufacturing them in Vietnam. He stopped making them in China a few years ago because labor costs had risen so much but they remain pretty low in Vietnam. He told me he was shocked recently when his Vietnamese vendor had to lengthen delivery schedules (for the first time) from four months to six months because it was swamped with orders that used to be filled in China before Trump’s trade war. Just one example of what you and I know is going to be an onslaught.

If you are a Chinese company that just lost a chunk of your business to Vietnam or to wherever, you are going to be more willing to reduce your prices than before these business losses started happening.

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The Chinese government recently increased its subsidy of various exports via an increase in its VAT rebate. Go here for a good (but somewhat outdated) explanation on China VAT and China VAT export rebates. Very generally, China charges a 16% value added tax (VAT) on product sales but most product sales for export get a partial or full rebate of the VAT paid. A few weeks ago, China’s finance ministry announced that effective Sept. 15, “tax rebate rates for light-emitting diodes (LEDs), lithium batteries, multi-component semiconductors, machinery products, books and newspapers will be increased to 16 percent.” Reuters, and pretty much nobody else, carried this story in an article entitled, China to increase export tax rebates on 397 products:

The ministry, in a statement on its website, did not say what the current rebate levels are on those products. China assesses a 16 percent value-added tax on some exports, so a rebate of 16 percent will mean exporters get back the full amount paid.

“This is in effect to negate the impact from U.S. tariffs,” said Mei Xinyu, a researcher at a think tank affiliated with the Commerce Ministry.

For some other products, the rebate will be increased but not to 16 percent. According to the statement, China will increase rebates for stainless steel products to 9 percent and steel pipes to 13 percent. It was not clear immediately what the level of current rebates are.

Rates for chemicals also being increased, the statement said.

Exports are one of China’s key growth drivers, and any loss of momentum for them will pile more pressure on its already cooling economy.

China’s export growth has exceeded analysts’ expectations for the past five months, with some analysts believing Chinese exporters are rushing out shipments to beat fresh U.S. tariffs.

Last week, China’s state council said that it decided to increase the rate of export tax rebates for some products to support the economy.

Go here for the finance ministry’s announcement/list. This is in Chinese but if you go to the bottom of the page and click the part that says “xlsx” you will be able to download an excel spreadsheet that lists all of the items for which the rebate has been increased. If one of your products you have manufactured in China is on this list, you should figure out the rebate increase your manufacturer will be getting and you should consider asking it to “share” that rebate with you.

What all have you been doing of late to get your China manufacturing prices down?