China Joint Venture LawyerThis is part 3 of our series on China Joint Ventures. We are writing this series now because our China lawyers are seeing a record number of potential joint ventures, due largely to China’s declining economy, the belief that truly foreign companies will not be well-treated in China, and a desire to try to “share the risk” of all this uncertainty. In part one of this series, China Joint Ventures: The Long Version, we talked about fake and exploitive joint ventures. In part 2, we assumed your Chinese counterpart is legitimate and wants to do a legitimate JV with your company and we discussed how to make sure you are truly on the same page with your China joint venture counterpart(s)  regarding what will go into the joint venture and how it will operate once formed.In this post, we discuss some of the things you need in your joint venture agreement if you are to reap benefits from your China joint venture.

Just as a quick aside: there is a 99.99% chance you will never see a dollar from your joint venture if you use your joint venture partner’s attorney or even any attorney chosen for you by your joint venture partner or you use no attorney at all. If you don’t realize this after reading the below, I don’t even know what more to say.

Many China joint ventures fail because the foreign partner made the fundamental mistake of believing its 51% (or more) ownership of the joint venture gave it effective control over the joint venture. Foreign investors too often assume Chinese joint venture companies are managed according to the common Western corporate model under which a board of directors has controlling power over the company. Since the board is elected by a majority vote of company owners, most foreign investors strive to obtain a 51% ownership interest in their China joint venture. As the majority owner, the foreign investor just assumes it has the right to elect the entire board, and thus effectively control the joint venture company.

After winning the struggle for percentage ownership the foreign investor will frequently give the Chinese side the authority to appoint the joint venture’s Representative Director and the company General Manager. But  this concession cedes effective power and effectively renders the foreign investor’s struggle for board control is rendered meaningless. The Chinese side will intentionally angle to ensure this outcome, usually by offering to concede majority ownership to the foreign investor in return for control over these two key management positions in the joint venture company. If you want to exercise effective control over a China joint venture, you must avoid this mistake. If you do not, you will not have control over the joint venture’s day-to-day management.

For you to maintain control over your Chinese joint venture you need the following:

  • The power to appoint and remove the JV’s Representative Director. The party that appoints the joint venture’s Representative Director will have significant control over operations. The usual practice of conceding the power to appoint a key officer or director to the Chinese side is a mistake if you want to maintain control over your China Joint Venture.
  • The power to appoint and remove the JV’s General Manager. The General Manager is an employee of the joint venture company and that person is employed entirely at the discretion of the JV’s Representative Director. The common practice of appointing the same person as both Representative Director and General Manager is usually a mistake.
  • Control over the company seal, or “chop.” The person who controls the registered joint venture company’s seal has the power to make binding contracts on behalf of the joint venture company and to deal with the company’s banks and other key service providers. For these reasons, the power over that seal should be carefully guarded. Ceding control over it as a matter of convenience is a mistake. There is a long, documented history of this seemingly minor consideration dooming China Joint Ventures.

The Chinese side to a joint venture will usually refuse to agree to these three measures by claiming it is more efficient to have the Chinese side control day-to-day management of the company. The Chinese side will also often claim they cannot bring their political connections, or their guanxi, into play unless their own people act as the joint venture’s Representative Director and General Manager. These claims usually are used to disguise the Chinese company’s efforts to gain operational control over the company and your relinquishing these three control mechanisms to your Chinese counterpart will likely be problematic for you.

Once these three control mechanisms are entirely under the control of your Chinese joint venture partner, you will likely quickly learn that you have relinquished all power to run the JV and bad things will likely result. What sorts of bad things? The most common is that you will never see any money from the joint venture. Ever. This occurs because with its control over your Joint Venture your Chinese counterpart can always make sure the joint venture never makes a profit, but his or her company always does.

How can this be achieved? We often see this done by using one of the following two tactics:

  1. Suppose your Chinese JV partner can make the JV hiring and firing decisions. Now suppose your JV should have 200 employees but your JV partner hires 350 employees, thereby wiping out any profit for the JV. Why though would your JV partner do this and how does your JV partner benefit from doing so? Many reasons. The extra 150 employees can be some combination of 1) relatives who do or do not kick back a good portion of their grossly inflated earnings to your JV partner, 2) strangers who do kick back a substantial portion of their grossly inflated earnings, and 3) friends and relatives of Chinese government officials who are hired to increase your Chinese JV counterpart’s standing and thereby benefit your JV counterpart and his own companies, 4) friends and relatives of whomever else your Chinese JV counterpart wishes to increase his or her or its standing.
  2. Your Chinese JV counterpart chooses to buy (possibly inferior) products and services at inflated prices from his or her own companies, including from the company that is your JV partner.

In our next post we will explain why the China joint venture lawyers at our firm both love and hate them and what you can do if you are stuck in a bad one.

China Joint Ventures

This is part 2 of our series on China Joint Ventures. We are writing this series now because our China lawyers are seeing a record number of potential joint ventures, due largely to China’s declining economy, the belief that truly foreign companies will not be well-treated in China, and a desire to try to “share the risk” of all this uncertainty. In part one of this series, China Joint Ventures: The Long Version, we talked about fake and exploitive joint ventures.

In this post, we are going to assume that your Chinese counterpart is legitimate and truly wants to do a legitimate JV with your company. But just because there is good potential for a profitable China Joint Venture and you are working with a putative China joint venture partner that is sincere and honest does not mean doing the joint venture will make sense. Before you do a joint venture with anyone you should make sure the two (or more) of you are truly on the same page regarding what will go into the joint venture and how it will operate once formed.

There is an old Chinese saying that applies to any sort of partnership without a meeting of the minds: “same bed, different dreams” (同床异梦). I applied this saying to China Joint Ventures (I was certainly not the first to do so) in a Wall Street Journal article I wrote back in 2007, titled, Joint Venture Jeopardy:

The much-publicized legal fight between French beverage maker Groupe Danone and its Chinese partner, Wahaha, calls to mind an ancient Chinese proverb often used to describe a bad marriage: “Same bed, different dreams.” Danone accuses Wahaha of breaking contracts and setting up competitor companies; Wahaha denies the allegations. The case is a highly visible test of China’s commitment to rule of law in matters involving foreign business. Whatever the outcome, China’s joint ventures increasingly look like unfruitful unions.

How can you avoid a bad joint venture marriage? By putting your dreams to the test before you wed.

China joint ventures are notorious for their high failure rate. Foreign companies too often rush into China joint ventures without ever discussing their respective dreams with their China joint venture partner. The sooner you seek to discern whether you and your potential China joint venture partner share the same dreams, the sooner you will know whether it makes sense for you to keep spending time and money trying to do the joint venture deal.

To help our clients determine whether they have found their dream JV partner, we have compiled a list of questions they should ask their potential Chinese joint venture partner to determine whether there is sufficient commonality to press forward with their joint venture deal.

  • What are you seeking to accomplish with our joint venture?
  • What will you do for and with our joint venture?
  • What will your company do to advance the business of our joint venture
  • What do you want our company to do to advance the business of our joint venture?
  • Who will make business decisions for our joint venture?
  • What mechanisms will we use for reaching JV decisions?
  • Who will control what of our JV?
  • Who will make what decisions for our JV?
  • What will you contribute to our joint venture, both now and in the future? Property? Technology? Intellectual property? Money? Know-how? Employees?
  • What do you expect us to contribute to our joint venture, both now and in the future? Property? Technology? Intellectual property? Money? Know-how? Employees?
  • If our joint venture loses money, who will be responsible for putting more money in?
  • How will we resolve our disputes? The common Chinese company response will be something like “we will work out any issues among ourselves and if that fails, we will have a special meeting to try to resolve everything. This answer is meaningless. You need an answer that explains exactly how day to day disputes will be resolved so your joint venture does not collapse
  • Can either of us use confidential JV information for our own business?
  • Can our own businesses compete with our JV?
  • Can our own businesses do business with the JV? What is that going to look like?
  • How and when will the joint venture end?
  • What if one of us wants to buy the other one out?
  • How do we end the JV?

If you get answers you like to the above, you keep moving forward. If you get too many answers you do not like to the above, you move on.

In our next post, we will talk about how to structure a China JV so you do not lose your shirt.

International lawyers

Got two emails this morning that were similar and yet could not have been more different.

They both were in response to yesterday’s seemingly neutral blog post The 101 on Overseas Manufacturing Contracts (OEM, CM and ODM), in which we talked about what should go into your manufacturing agreements around the world, and did not mention China even once (other than in the form of one link to a previous post).

The first email I read was the following, from a self-described “China consultant who has been living in Shanghai for the last seven years” and “resents” how we are “lying about the situation on the ground in China because we are “hell-bent on bad-mouthing China at every opportunity.” This person said: “I see what you did with yesterdays’ blog post and I see what you have been doing for the last few months. You are trying to scrub China from your blog and I know why you are doing this and I resent it.” He went on to accuse us of bad-mouthing China to “build up” our business “in Vietnam and Thailand and everywhere but China.”

The second email was from a lawyer who “spent six years in Thailand and 11 years in Taiwan” and “very much appreciates” our writing about countries other than just China and suggests we change our blog’s name to “International Law Blog.” He especially wants us to write more about the EU and Spain because his “life-long dream is to live in Malaga.” I responded to him by saying that even though we write an incredibly widely read blog about China, we get 1-3 emails every month from someone writing to tell us for a job with us in Spain because it has been their dream to live and work there but I do not recall having ever gotten an email (at least not for many years) that contained “dream and China in the same sentence.”

Both of these emails by essentially challenging us on taking the right path going forward.

Okay….

We get it. Trust us, we get it. And hardly a day goes by without our China Law Blog team of international lawyers (note how I said international lawyers and not China lawyers) think about these sorts of things, email or no email.

These sorts of emails have become fairly typical since the start of the US trade war. Hardly a day goes by without our receiving an email from someone who is absolutely furious about our not speaking about China in consistently exalted terms or an email from someone pushing us to broaden the blog beyond “just China.”

This morning I went back and read our blog’s Mission Statement, written on our very first day in the China blogging biz, way back in January, 2006, and barely revised since then. It reads as follows, with the key sections highlighted (just now):

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.

In summation then, our job is to always strive to tell it like we see it and that will not change. Well before we started this blog, our law firm did a huge amount of legal work with Russia, particularly with the Russian Far East. We represented a huge percentage of American and European businesses involved with the Russian fishing, timber and mining industries. These businesses dealt constantly with Asia (first mostly Japan and Korea) and then China and to a lesser extent Vietnam and Thailand, and it was on these countries that our international lawyers focused.

Eventually Russia became incredibly inhospitable to foreign businesses and I can remember after going on national television after one particularly egregious and large-scale and very public Russian asset seizure and being asked whether this would lead foreign businesses to start avoiding Russia and Russian businesses. My answer was (as best as I recall and I recall it quite well) something like the following: “Of course it will. How can it not? Any foreign company looking to do any business involving Russia now must ask themselves whether they too will get their assets seized. There is no way this recent action will NOT caste a pall on doing business with Russia.”

Before I had even stepped into the door at my office, one of our lead Russia lawyers — a lawyer from Russia and licensed to practice law in both Russia and the United States — was waiting for me ready to pounce: She quite angrily said to me “How could you have said what you said about Russia. You just destroyed our Russian business. What were you thinking?” I responded with something like the following: “I told the truth. There was no way I was going to sit there and act like this [asset seizure] was nothing. Two reasons: One, I am not going to lie. And two, had I lied, everyone who knows anything about Russia would have known I was lying or just thought I am a complete idiot. And for you to blame me for foreign companies being afraid to do business in Russia is ridiculous. It is not some stupid lawyer in Seattle [me] saying they will be afraid of doing business in Russia that will make them afraid. They will be afraid because of what Russia has done. Our only hope to keep up our business is to tell people the truth because if people think we are lying to them they will flee us in droves.

Our Russian business went into a free-fall because business with Russia went into free-fall, but nearly all our clients who stayed in business stayed with us as they moved their business to the rest of the world, and we represent many of them around the world today, including in China.

So yeah, all of us are going through great changes with China today and those changes are making many tense and uncomfortable and I get that. But we have always tried to avoid being China bears or pandas and we will continue with that. It’s just a lot easier for us to do our best to call things as we see them and let the chips fall where they may.

We really don’t have any other choice.

Oh, and at least for the immediate future, we have no plans to change our blog’s name but we will continue to write about what we think our readers want and need to know.

But what do you think? Are we being too hard on China these days? Too soft? Just right? Please explain.

 

Mexico China business

In part one of this series, Mexico-China Economic Relations: New Administration, Same Old Shortcomings, I discussed how Mexico’s new federal administration does not seem to have a sophisticated strategy for dealing with China. In this post, I will discuss the implications of what appears to be the Federal Government’s China policy, based in large part on the actions it has recently undertaken regarding China.

On December 20, 2018, ProMexico’s Director-General issued a communiqué stating that Mexico’s Ministry of Economy had ordered it to close all of their offices abroad by terminating all office leases and informing local employees that their contracts would not be renewed and by repatriating all Mexican personnel, and all within 60 days. The closure order also included ProMexico’s offices within Mexico as well. My company received an email on December 31 from the head of the ProMexico offices in the State of Mexico (my home state) stating that it had “received indications for the ProMexico Office in the State Operations to cease operations as of December 31 [2018].”

The impact of ProMexico’s closure can hardly be understated. Under the past two federal administrations, ProMexico had set up 46 offices abroad (four in China) and had become a very visible and highly regarded face for Mexico trade and investment promotion. No frontline links between Mexican companies and international markets exist now (INADEM, the agency created to assist SMEs in Mexico will also likely disappear) and trade promotion tasks abroad are now being entrusted to Mexico’s embassies and Consulates, per a new yearly work plan that’s part of a collaboration agreement between the Ministries of Economy and Foreign Affairs, released on January 7th.

Under that agreement, specially-appointed Mexican Foreign Service members will be assigned economic promotion tasks in key diplomatic missions. Putting qualifications aside, one should at least wonder whether the Embassy and Consulate officials will have the necessary time and resources to fulfill their newly created trade and investment promotion duties when their primary functions have more to do with Public International Law than with IP, trade or business law, which is the sort of commercial assistance Mexico’s internationalizing companies need. Similarly, the representative offices abroad of Mexican Ministries like Economy and Agriculture were set up during the past administration to support the efforts of agencies like ProMexico across the globe and it is asking a lot of them to now start paying attention to Mexican companies abroad under the new scheme/

It gets better.

According to El Economista, the Mexican Federal government’s 2019 economic budget shows budget decreases for the Ministries of Foreign Affairs, Agriculture & Rural Development, Economy and Environment & Natural Resources (8.8%, 28.5%, 9.0% and 32.1% respectively). Even if, as the Undersecretary of Foreign Trade says, it only wants to boost Mexican exports to markets like China it is questionable whether these Ministries will enough resources to accomplish that. Just by way of one example: the decreased budget will almost certainly lead to a decrease in monetary support to Mexico’s farmers. Will this preclude increasing agricultural exports to China? Will it make sense to try to increase those exports at the possible expense of local demand. Is it wise for Mexico to seek to increase its incoming foreign investment from China just as China seems interested in stemming capital flight? Is it wise for Mexico to seek to increase its incoming foreign investment from China while contemporaneously laying off so many employees who had the ability to scrutinize the incoming Chinese investors?

The absence of an agency that promote Mexican company internationalization — that was another of ProMexico’s tasks —  will also have legal implications. Indeed, one of the major flaws of sub-internationalized companies is their inability (or unwillingness) to comply with foreign country laws. This was already a problem with ProMexico in place, but now with hardly anyone to help Mexico’s companies better understand what they need to do to comply with China’s laws their vulnerability has just increased. The fact that China has consistently gotten tougher on foreign businesses only makes things even riskier. Many in Mexico are saying that China’s recent ill-treatment of Canadian businesspeople is a sort of warning against the U.S. and it is not farfetched to believe China might start going after Mexico — the United State’s other USMCA partner — at some opportune time.

Mexico needs a proper infrastructure to be able to put in place a sound strategy for dealing with China and to have the leverage to compel China to comply with its treaty obligations. Unfortunately, the restructuring undertaken by Mexico’s new administration has left my country less equipped than ever to deal with a China that ever more openly exerts its power with less and less regard for the interests of other countries. Mexican companies are going to need to learn to rely far less on their own government to protect them against China or to compete in or with China. In my third and final post I will discuss how Mexican (and Latin American, for that matter) companies can do more and better business abroad without having to rely on a shrunken Mexican Government for assistance.

For more on business relations between Mexico and China, check out the following:

 

*  The above post is by Adrián Cisneros Aguilar. Adrian is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalization services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University. He also is our law firm’s go-to lawyer for anything Mexico.

 

En la primera entrega de este post, Mexico-China Economic Relations: New Administration, Same Old Shortcomings, hablé de cómo el nuevo Gobierno mexicano no parecía tener una estrategia muy acabada para tratar con China. En esta entrega, hablaré de las implicaciones de lo que parece ser la política del Gobierno federal hacia China, y que en gran parte retoman lo que ya se ha hecho en años recientes respecto a ese país.

El pasado 20 de diciembre, el Director General de ProMéxico emitió un comunicado, anunciando que había recibido la instrucción de la Secterataría de Economía para clausurar todas las oficinas de ProMéxico en el exterior, dando por terminados todos los contratos de arrendamiento de oficinas, informando a los empleados locales que sus contratos laborales no serían renovados y repatriando al personal mexicano, entre otros. Todo, dentro de un plazo de 60 días, a partir de la fecha del comunicado. Al final, la orden de clausura incluyó, también, a las oficinas de ProMéxico dentro de nuestro país. El 31 de diciembre, mi empresa estaba recibiendo un correo-e del encargado de la oficina de ProMéxico en el Estado de México (mi Estado natal), expresando que había “recibido la instrucción para que la Oficina de ProMéxico en el Estado de México [dejara] de operar a partir del 31 de diciembre del presente año.”

Apenas cabe exagerar el impacto de la desaparición de ProMéxico. En los dos sexenios anterior, ProMéxico abrió 46 oficinas en el exterior (cuatro de ellas en China) y se había convertido en una cara muy visible y tenida en muy alta consideración si se la promoción del comercio e inversión a/de México se trataba. Con esto, ya no existe enlace gubernamental directo entre el empresariado mexicano y los mercados internacionales (INADEM, el organismo del gobierno encargado de apoyar a los emprendedores, particularmente, las PyMEs, está también condenado a desaparecer). Así, las tareas de promoción del comercio y la inversión han recaído ahora en las Embajadas y Consulados de México en el exterior, de acuerdo con un nuevo plan de trabajo anual que forma parte de un Convenio de Colaboración celebrado por las Secretarías de Economía y Relaciones Exteriores el pasado 7 de enero de 2019.

De acuerdo con el Convenio mencionado, se asignará las tareas de promoción económica a miembros seleccionados del Servicio Exterior Mexicano sirviendo en misiones diplomáticas clave. Cualificaciones aparte, uno no puede evitar preguntarse si los diplomáticos de las Embajadas y Consulados mexicanos gozarán del tiempo y recursos necesarios para cumplir con sus nuevas tareas de promoción del comercio y la inversión, si consideramos que sus funciones primigenias tienen más que ver con Derecho Internacional Público que con Derecho Mercantil (Propiedad Intelectual, Societario, Comercio Exterior, etc.), que es el tipo de asistencia comercial que la empresas mexicanas que buscan internacionalizarse necesitan. Mismo criterio podríamos aplicar a las oficinas representativas que Secretarías de Estado como Economía y Agricultura y Desarrollo Rural abrieron en el extranjero durante la pasada Administración para apoyar la labor de organismos como ProMéxico y para las que sería, también, mucho pedir que empiecen a prestar atención a las necesidades de internacionalización de las empresas mexicanas en el exterior bajo el nuevo régimen.

Y se pone mejor.

De acuerdo con El Economista, el Paquete Económico 2019 muestra recortes al presupuesto de las Secretarías de Relaciones Exteriores, Agricultura y Desarrollo Rural, Economía y Del Medio Ambiente y Recursos Naturales del 8.8%, 28.5%, 9.0% y 32.1% respectivamente. Incluso si, como dijo en su momento la Subsecretaria de Comercio Exterior, el Gobierno sólo quiere aumentar las exportaciones mexicanas a mercados como el chino, es de cuestionarse si las Secretarías involucradas en ello tendrán recursos suficientes para lograrlo. Por poner sólo un ejemplo, la disminución del presupuesto llevará casi con certeza a una disminución de los apoyos que se les dan a los productores mexicanos. ¿Impedirá esto el aumento de exportaciones agroalimentarias a China? ¿Tiene sentido tratar de incrementar dichas exportaciones a costillas, quizá, de la producción destinada al mercado local? ¿Resulta sensato para el país tratar de incrementar los flujos de inversión extranjera directa (IED) china en un momento en que China parece más interesada en frenar la salida de capitales de su territorio? ¿Es buena idea tratar de incrementar dichos flujos de IED cuando, al mismo tiempo, hay despidos masivos de servidores públicos que pudieran estar calificados para someter a escrutinio a los inversionistas chinos que atiendan el llamado?

Por otra parte, la ausencia de un órgano gubernamental que promueva la internacionalización de las empresas mexicanas –ésa era otra de las tareas de ProMéxico- no estará exenta de implicaciones legales. En efecto, una de las mayores debilidades de una empresa sub-internacionalizada es su inhabilidad (o falta de disposición) para cumplir con la legislación en los mercados de destino. Esto ya era un problema cuando operaba ProMéxico, pero ahora, que virtualmente ya no habrá nadie en gobierno que ayude a comprender lo que se necesita hacer para cumplir con las leyes chinas, la vulnerabilidad de las empresas mexicanas se ha incrementado exponencialmente. El hecho de que China se ha ido volviendo más y más estricta en su aplicación de la ley a las empresas extranjeras sólo incrementa el riesgo. No son pocos en México los que, como un servidor, señalan que el reciente maltrato jurídico de empresarios canadienses es una suerte de advertencia dirigida a los EE.UU., y ya no resulta descabellado pensar que China arremeta, en un futuro oportuno, contra el otro socio de EE.UU. en el T-MEC: México.

México necesita contar con la infraestructura apropiada para implementar una estrategia sensata para tratar con China, así como para tener los medios para conminar a Cina a cumplir con sus obligaciones internacionales contenidas en los tratados que firma. Desafortunadamente, la restructura iniciada en este sexenio ha dejado a nuestro país menos equipado que nunca para hacer frente a una China que, cada vez más abiertamente, ejerce su poder con menos contemplación de los intereses de otros países. Así, las empresas mexicanas tendrán que aprender a depender mucho menos en su Gobierno para defenderlos de China o para competir en o con dicho país.  En mi tercer y último post hablaré acerca de cómo las empresas mexicanas (y Latinoamericanas, también) pueden hacer más y mejores negocios en el exterior sin necesidad de depender de la ayuda de un Gobierno mexicano encogido.

Para saber más acerca de la relación económica entre México y China, aquí los siguientes enlaces:

 

*  Este post fue escrito por Adrián Cisneros Aguilar. es el fundador y Director General de Chevaya (驰亚), una empresa de servicios de internacionalización para Asia-Pacífico. Adrián es Doctor en Derecho por la Universidad Jiao Tong de Shanghái y Maestro en Derecho Internacional y Chino por la Universidad de Wuhan. También es el abogado de cabecera de nuestro despacho, para todo lo referente a México.

 

 

China Mexico Trade

The China Daily recently interviewed Felipe Garcia, Commercial Counselor of the Mexican Embassy in Beijing regarding Mexico-China relations. The gist of the interview was that Mexico-China relations would improve under Mexico’s new federal administration because both countries want closer relations and because China knows just what is needed for such closer relations. In the China Daily’s view (and presumably that of the Chinese government as well), closer relations are a near-certainty because the first ambassador met by Mexico’s President López Obrador was from China and because China then reciprocated by inviting Mexico to the China International Import Expo (CIIE) to be held in November 2019.

The China Daily piece, titled With a New Leader, Mexico Eyes Stronger Ties with China is actually emblematic of how the Mexican government still does not understand how to generate more trade with China.

  1. The Chinese Ambassador inviting Mexico to the CIIE says nothing regarding relations between China and Mexico’s new federal administration both because Mexico had been invited to this event long before it had even become clear that López Obrador would be Mexico’s new President — it had been promoted among Mexican business circles for almost a year before this so-called invitation.
  2. The invitation is not that big a deal anyway. Many countries get invited to the CIEE (which is an annual event) and it is not clear Mexico has sufficient resources to promote its goods, services, tourism and investment opportunities at the CIEE. Mexico attended last year’s CIEE not so much because it was invited to do so, but because Mexico’s previous administration had a strong policy of promoting economic diversification abroad and it devoted substantial resources to do so. It is not at all clear President López Obrador shares this same economic view or the same willingness to devote resources to expanding Mexico’s global trade.
  3. The trade numbers given by Mr. Garcia in his interview hide the true shape of Sino-Mexican economic relations (something quite convenient after fiascos in recent years, such as the Mexico City-Queretaro high speed railway fiasco or the Dragon Mart fiasco. The China Daily interview mentions that “[e]ven before the expo there had been good news in the air. Bilateral trade had climbed 11 percent to nearly $48 billion in 2017, and Mexico’s avocado exports to China in the first half of this year, a whooping 9,368 tonnes, had already overshot 2017’s total.” These numbers conveniently ignore that China exported more to Mexico than the previous year and that China’s trade deficit with China is approximately that Mexico exported less than USD$7 billion to China in 2017, while importing more than $74 billion from China in that same year for a whopping $68 billion yearly trade deficit.
  4. The China Daily also uses a “before we had nothing” argument to highlight whatever little has been achieved in terms of Chinese investment into Mexico. The article notes that in 2017, “China’s JAC Motors, a state-owned automobile manufacturer, teamed up with Mexico’s Giant Motors to invest $200 million in an SUV auto plant in the central state of Hidalgo. And after China and Mexico decided to set up a joint investment fund of $2.4 billion, one of the fund’s first deals in 2016 was to invest $140 million in Citla Energy, a new Mexican oil company. According to a widely-cited Atlantic Council report last year, from 2014 to 2016 Mexico saw more than 40 deals valued at over $4 billion from China, a significant jump since no previous year had seen more than five.” But if you put these numbers in perspective, $4 billion is nothing compared to the value of projects currently underway between China and Chile, a Latin American country with a much more developed relationship with China. For instance, China has already invested US $3 billion in Chile according to the World Economic Forum and, as of last November, Investchile was working on “74 Chinese companies and 18 specific projects worth over US$1,800 million in areas such as energy, mining and infrastructure.” Though Chile’s economy is much smaller than Mexico’s it (along with Brazil) are China’s biggest trading partners in Latin America and Chile, at least in part because Chile has a wealth of qualified people that Chile have furthered Chile’s trade relations with China. Chile has even expressed its intention of joining the Belt and Road Initiative (BRI).
  5. Mr. Garcia nicely mouths the same old discourse to “win China over,” by highlighting Mexican exports of agroindustrial products that if not exported to China would almost certainly be exported to various other countries and “Mexico’s strategic location, bordering the US and a beachhead into Latin America [that] could help China’s global reach.” Or as the China Daily puts it: Mr. Garcia that “stressed the importance of bilateral trade…before ticking off in quick succession some of Mexico’s proud exports, like avocados and tequila.”

The China Daily interview irritated me for other reasons, too. Cabinet members in Mexico seem also persist with an outdated and ineffectual view on how to “approach” China. On December 20, during her first press conference as Economy Minister, Graciela Márquez Colín, issued assurances that the new Mexican government would work to make China a “very important market for this country,” as though that same plan had not been official Mexican foreign policy during past administrations. She also stated the obvious, saying that Mexico must look for a way to insert itself into the Asian region, which is a growth locomotive for the coming years,” and that “although [evolution of Sino-Mexican] cultural and educational relations had begun since the 70s, that of trade had been slower.” But the punchline came when she pointed out that Sino-Mexican trade exchanges would teach Mexicans “how to understand this potential market” and given that “there are Mexican entrepreneurs in China…there was a “great opportunity to understand China’s technological and innovation advancements.” Sadly, I view her talking about opportunities to understand China as only confirming how little has been learned about dealing with China from either past administrations or from those Mexicans who actually have been dealing with China for the last two decades.

Mexico’s Undersecretary for Foreign Trade, Luz María de la Mora, stated (as we have heard so many times before) that “Mexico was seeking with China an agenda that responds to the interests of both countries” and that this agenda should be strengthened for Mexico’s export offerings, adding that we are “also very interested in attracting quality Chinese foreign direct investment (FDI) that allowed fostering an initiative of innovative industries development [using] top-notch technology” and pointing out that the CIIE was “a very interesting fair . . . where Mexico . . . could present its products to that Asian country which displays export opportunities.”

Mexico must start thinking of Chinese FDI as more central to our economy, and not just as one of many possible ways to boost Mexican exports. Even if the new administration is putting closer economic relations with China high in its priority list, its ignorance and lack of plans regarding how to accomplish that have so far been its defining traits.

There have been many changes already under Mexico’s new federal administration, including one that will significantly impact Mexico’s economic relations with China and the rest of the world: This is the plan to shut down ProMexico a Federal Government agency tasked with promoting international trade with Mexico and foreign direct investment into Mexico. In my next post, I will discuss the legal and business implications of ProMexico’s closure and various other budget reductions of key Mexican ministries, all with a focus on China.

For more on business relations between Mexico and China, check out the following:

 

*  The above post is by Adrián Cisneros Aguilar. Adrian is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalization services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University. He also is our law firm’s go-to lawyer for anything Mexico.

 

 

El periódico “China Daily” entrevistó recientemente a Felipe García, Consejero Comercial de la Embajada de México en China, acerca de la relación bilateral con ese país. La tónica de la entrevista fue que dicha relación mejoraría en el nuevo sexenio porque ambos países desean estrechar lazos y porque China sabe exactamente lo que se necesita para que ello ocurra. En la perspectiva del “China Daily” (que, presumiblemente, es la misma del Gobierno chino), relaciones más esteechas son casi una certeza, tanto porque el primer embajador conque se reunió el entonces Presidente electo Andrés Manuel López Obrador (AMLO) fue el Embajador chino,  como porque China luego agradecería el gesto invitando a México a la Exposición Internacional de Importaciones de China (CIIE, por sus siglas en inglés), a tener lugar en noviembre de 2018.

El artículo del “China Daily”, intitulado With a New Leader, Mexico Eyes Stronger Ties with China [Con un Nuevo Mandatario, México Contempla Lazos Más Fuertes con China] resulta paradigmático en cuanto a cómo el Gobierno mexicano no acaba de entender cómo generar mayor comercio con China:

  1. El que el Embajador de China haya invitado a México a la CIIE nada dice acerca de la relación entre ese país y el nuevo Gobierno encabezado por AMLO. México había sido invitado a la Expo desde mucho antes de que fuera evidente que AMLO sería el nuevo Presidente: el evento llevaba casi un año promocionándose en los círculos empresariales mexicanos cuando la susodicha invitación tuvo lugar.
  2. La invitación no es la gran cosa, en todo caso. Muchos países fueron y son invitados a la CIIE, que está pensada como un evento anual y para el cual, por cierto, no está claro que México cuente con recursos suficientes para promocionar sus bienes, servicios, turismo y oportunidades de inversión. El país asistió a la Expo del año pasado no tanto porque haya recibido una invitación, sino porque la diversificación económica era una política medular del gobierno anterior, que llevo al mismo a destinar recursos considerables para su promoción. No está nada claro que AMLO comparta esta visión económica o tenga la misma disposición a destinar recursos para expandir el comercio global de México.
  3. Las cifras proporcionadas por el Consejero García en su entrevista maquillan el verdadero estado de la relación económica bilateral (algo que resulta muy conveniente, tras fiascos como el Tren Bala CDMX-Querétaro y el Dragon Mart Cancún). El “China Daily” menciona que “incluso antes de la Expo ya había buenas noticias por ahí. El comercio bilateral había crecido 11% a casi $48 billones (sic) en 2017, mientras que las exportaciones de aguacate mexicano a China en la primera mitad [de 2018], la escandalosa cantidad de 9,368 toneladas, ya había excedido el total exportado el año anterior.” Estas cifras convenientemente ignoran que China exportó más a México que el año anterior, con lo que tenemos que México había exportado menos de $7mmdd a China a 2017, mientras que se ha alcanzado un déficit comercial acumulado de $69,363 mdd a octubre de 2018, los números más recientes publicados por la Secretaría de Economía al momento de escribir estas líneas.
  4. El “China Daily” utiliza también un argumento de “antes no teníamos nada” para resaltar la poca inversión extranjera directa (IED) china que se haya logrado atraer a México. El artículo hace notar que, en 2017, “la empresa china JAC Motors, una paraestatal fabricante de automóviles, se asoció con Giant Motors de México, a fin de invertir $200 mdd en una planta de manufactura de SUVs en el Estado de Hidalgo. Y luego de que China y México decidieran crear un fondo conjunto por $2,400 mdd, una de las primeras transacciones para las que dicho fondo se había utilizado en 2016 había sido la inversión de $140mdd en Citla Energy, una nueva empresa petrolera mexicana. Según un informe del Atlantic Council de 2017, ampliamente citado, de 2014 a 2016 México vio más de 40 acuerdos valuados en más de $ 4 mil mdd de China, un salto significativo ya que ningún año anterior había visto más de cinco.” Ahora bien, si ponemos estas cifras en perspectiva, $4 mil mdd no son nada, especialmente si los contrastamos con, por ejemplo, le valor de los proyectos de inversión china actualmente en preparación en Chile, un país latinoamericano con una relación bilateral mucho más desarrollada que la de México. Para muestra, China ya ha invertido $3 mil mdd en China, de acuerdo con el Foro Económico Mundial y, en noviembre pasado, Investchile anunciaba que se encontraba trabajando “con 74 empresas chinas, y con proyectos específicos por más de US$1.800 millones, en rubros como energía, minería, infraestructura y otros.” Si bien la economía chilena es mucho más pequeña que la mexicana, Chile, junto con Brasil, son los principales socios comerciales de China en América Latina, lo cual se ha logrado en parte gracias a que Chile tiene una veta de personal calificado que ha fomentado las relaciones comerciales con el país asiático. Chile incluso ha expresado formalmente su intención de unirse a la Iniciativa de la Franja y la Ruta (BRI, por sus siglas en inglés).
  5. El Consejero García recita muy bien el Viejo discurso para “ganarse a China”, basado en resaltar las exportaciones de productos agroindustriales mexicanos que, si no se exportasen a China serían casi con certeza enviados a muchos otros países, así como “la ubicación estratégica de México, colindante con los EE.UU. y una puerta de entrada hacia América Latina que podría servir para apuntalar el alcance global de China.” O, como lo vio el “China Daily”, un discurso que “enfatizó la importancia del comercio bilateral…antes de palomear, en rápida sucesión, algunas de las orgullosas exportaciones mexicanas, como los aguacates y el tequila.”

La entrevista del “China Daily” también me molestó por otras razones. Los miembros del nuevo Gabinete mexicano parecen persistir en exhibir una visión desactualizada y poco efectiva acerca de cómo “acercarse” a China. El 20 de diciembre pasado, durante su primera conferencia de prensa como Secretaria de Economía, Graciela Márquez Colín, aseguró que el nuevo Gobierno mexicano trabajaría para que China se convirtiera en un mercado “muy importante” para el país, como si ese plan no hubiera sido parte de la política exterior mexicana en sexenios pasados. También hizo hincapié en lo obvio, manifestando que “México debe buscar la manera de insertarse a la región asiática, que “es una locomotora de crecimiento para los próximos años” y que “sí bien términos de intercambio cultural y educativo, inició desde los años 70’s, [la evolución de la relación bilateral] en materia comercial, ha sido más lenta.” Pero el colmo vino cuando la Secretaria señaló que “”este intercambio comercial nos tiene que dar lecciones a nosotros – a los mexicanos- para saber cómo entender este mercado potencial”, como es China” y que, dado que en la actualidad existen empresarios mexicanos en China, existía “”una gran oportunidad” para entender el avance en materia tecnológica y de innovación en China.” Lamentablemente, no puedo evitar ver su discurso acerca de oportunidades para entender a China como una mera confirmación de lo poco que se ha aprendido, ya sea de Gobiernos pasados o de empresarios que efectivamente han estado haciendo en China los últimos 20 años, acerca de cómo tratar con dicho país.

Por su parte, la Subsecretaria de Comercio Exterior, Luz María de la Mora, declaró (como tantas otras veces hemos escuchado en el pasado) que México buscaba con el país asiático una agenda “que responda a los intereses de ambos” y que dicha agenda debía reforzarse para “la oferta exportadora”, para luego agregar, “también”, que “a nosotros nos interesa mucho atraer inversión extranjera [IED] china, inversión de calidad que permite impulsar la iniciativa de un desarrollo de industrias innovadora con tecnología de punta”, señalando que la CIIE “”fue una feria muy interesante”…[donde] México…[pudo] presentar sus productos a ese país asiático donde existen posibilidades de exportar.”

A ver, México debe comenzar a pensar en la IED china como un factor más central de su economía, y no sólo como una de las muchas maneras de impulsar las exportaciones mexicanas. Incluso si en el nuevo sexenio se está dando enorme prioridad a entablar una relación económica más estrecha con China, la ignorancia y falta de estrategia acerca de cómo lograrlo son también los rasgos característicos del Gobierno hasta ahora.

Muchos cambios han tenido ya lugar dentro de la flamante Administración Pública Federal, incluido uno que impactará considerablemente las relaciones económica de México con China y el resto del mundo: el plan de desaparecer ProMéxico, el órgano especializado en la promoción del comercio y la inversión de y hacia el país. En mi próximo post, hablaré de las implicaciones políticas y de negocio de la clausura de ProMéxico, así como de aquéllas derivadas de la reducción al presupuesto de varias Secretarías clave, todo con un enfoque dirigido a China.

Para saber más acerca de la relación económica entre México y China, aquí los siguientes enlaces:

 

*  Este post fue escrito por Adrián Cisneros Aguilar. es el fundador y Director General de Chevaya (驰亚), una empresa de servicios de internacionalización para Asia-Pacífico. Adrián es Doctor en Derecho por la Universidad Jiao Tong de Shanghái y Maestro en Derecho Internacional y Chino por la Universidad de Wuhan. También es el abogado de cabecera de nuestro despacho, para todo lo referente a México.

 

international trade lawyersDespite the federal government shutdown, there have been a couple of recent developments regarding the Section 301 tariffs imposed by the Office of the U.S. Trade Representative (“USTR”) on a broad range of products imported from China.

First, on December 28, 2018, USTR published its determination for the first batch of exclusion requests granted for the 25% tariffs imposed on $34 billion worth of Chinese imports (List 1). USTR granted exclusions for 984 separate requests. Based on the USTR’s index of product exclusion requests, USTR also rejected around 1,000 exclusion requests. Thus far, USTR has made decisions on only about 20% of the 10,000 exclusion requests for the first tranche of China products, with the remaining exclusion requests still being considered.

Importers will be eligible to apply for refunds of the 25% tariffs paid on the List 1 products entered after their July 6, 2018 effective date. The product exclusions will remain in effect for one year, expiring on December 28, 2019.

USTR indicated that the product exclusions will be applied on a product basis, meaning all imports of the product will be excluded regardless of whether the importer filed an exclusion request. This is different from the steel/aluminum tariff exclusion request process which limited the exclusions only to the specific products identified by the specific requesting party.

Second, on January 11, 2019, USTR replied to eleven Democratic senators who had asked why an exclusion process had not yet been established for the $200 billion of Chinese products (List 3) subject to a 10 percent tariff similar to the exclusion request process already in place for the prior list of Chinese products (List 1 – $34 billion; List 2 – $16 billion). USTR stated that an exclusion process for the List 3 products would not be established unless negotiations fail to resolve the US-China trade dispute by President Trump’s March 1, 2019 deadline. If no US-China resolution is achieved,  tariffs on List 3 will increase from 10 to 25 percent on March 2, 2019.

These developments show that although some progress is being made on the Section 301 tariff exclusion requests, that process is going to be slow.  USTR has barely made a dent in the thousands of exclusion requests for the first two lists of Chinese products and it has deferred starting the exclusion request process for the much bigger $200 billion list of products. U.S. importers in the meantime will be required to continue paying the 10 or 25 percent tariffs while waiting for USTR to slog through the outstanding exclusion requests or for the U.S. and China to find a way to end the trade dispute. The companies for which my firm’s international trade lawyers filed exclusion requests are incredibly frustrated at not yet hearing back.

If Presidents Trump and Xi reach some agreement by March 1, 2019 the tariffs will likely be immediately lifted, but if they do not reach such an agreement by March 2, the U.S. will then increase tariffs on the $200 billion of List 3 Chinese products from 10 percent to 25 percent and very likely impose 25 percent tariffs on all remaining Chinese imports (about another $260 billion).

More to come. A lot more.

Spain lawyersTwo of my firm’s Spain lawyers are in town this week and they yesterday explained to us the advantages for foreign countries to form Spain entities before going into Latin America and the Caribbean. They explained how Spain has long-standing, well-tested agreements with 19 such countries that not only provide favorable treatment, but require these 19 countries to in all respects treat Spanish companies exactly as they treat domestic companies. This privileged position for Spanish companies has led companies from all around the world to set up a Spain business entity for going into the Caribbean and Latin America.

At the start of the e-commerce boom, our international lawyers did a steady business with mostly European companies that wanted us to set up United States companies for them so that they would appear more trustworthy to American consumers shopping online. Over the years we have also formed U.S. companies for many service companies (especially in the global construction industry) that want to bid on big projects as an American company rather than as a company in a country whose construction prowess is not viewed as highly,

And then there was the period in which we formed countless companies for Chinese businesses that wanted to return to China as a U.S. company so as to be able to secure various tax and other benefits China was giving to foreign companies to spur foreign direct investment. See China’s New Foreign Investment Law — Less Than Meets the Eye. My personal favorite is forming United States companies for foreign companies in countries where domestic businesses are far more likely to get shaken down by government agencies and/or local gangs than foreign companies.

What’s all this got to do with China though?

Let me explain….

If you have not been living under a rock for the last year you know that relations between China and the United States/most EU nations/Australia/Japan/South Korea/Vietnam (just to name a few) have not exactly been great of late. But the frostiness of those relationships is nothing as compared to the tension between China and Canada. Earlier this week, China imposed the death penalty on a Canadian convicted of drug smuggling, after previously having sentenced this person to 15 years and yesterday, China threatened reprisals if Canada bans Huawei from its 5G networks. If you are a Canadian company and you need to realize that “business as usual” in China or even with China is no more.

So let’s just say you are a Canadian company looking to form a WFOE in China today. Do you go into China as a Canadian company or do you at . least consider forming a new company in some other country first and then using that third country company to go into China? Six months ago, our China WFOE lawyers would not even have pondered this question but now we do. This is not a simple question because forming a new company in a third country has all sorts of costs and because China requires you reveal ownership of your WFOE forming entity, forming a new third country company must be done in such a way so as to comply with China’s WFOE laws while at the same time not revealing the downstream Canadian ownership. How to Form a China WFOE: Revealing Investor Ownership is NOT Optional.

What if you are a Canadian company that has for the last five years successfully sold your factory equipment into China? Should you form a new sales entity in a third country so as to increase the likelihood of being able to maintain sales? No way to answer that in a blog post, but certainly this should be considered. If you have a Canadian and a Costa Rican passport, which one do you use on your next trip to China? This one is easy: welcome to China señor.

Welcome to the frenemy era. Welcome to the New Normal.

 

 

US-China Trade War

In an earlier set of posts, I discussed U.S. laws and regulations to a) restrict technology transfers from US companies to Chinese companies (see New Restrictions on High Tech Technology Transfers to China and b) to prevent Chinese companies from investing in U.S. technology companies. See New CFIUS Rules Shut Down Chinese Investment in U.S. Technology. In those posts, I noted that the new rules are not intended to limit the right of U.S. companies to sell technology based products to Chinese companies.

Yesterday, however, the U.S. Congress proposed extending the prohibition to include sales of technology products to Chinese companies. See U.S. lawmakers introduce bipartisan bills targeting China’s Huawei and ZTE. The initial targets are Huawei and ZTE. The new legislation has been introduced by a bipartisan group from both the Senate and the House: Senator Tom Cotton (R-Arkansas), Senator Chris Van Hollen (D-Maryland) and Representatives Mike Gallagher (R-Wisconsin), Ruben Gallego (D-Arizona). The bill is titled the Telecommunications Denial Order Enforcement Act and its purpose is to direct President Trump to impose denial orders banning the export of U.S. parts and components to Chinese telecommunications companies in violation of U.S. export control or sanctions laws.” In other words no sales to Huawei or to ZTE.

Senator Cotton focused on Huawei:”Huawei is effectively an intelligence-gathering arm of the Chinese Communist Party whose founder and CEO was an engineer for the People’s Liberation Army. It’s imperative we take decisive action to protect U.S. interests and enforce our laws. If Chinese telecom companies like Huawei violate our sanctions or export control laws, they should receive nothing less than the death penalty-which this denial order would provide.”

Senator Van Hollen expanded to include ZTE: “Huawei and ZTE are two sides of the same coin. Both companies have repeatedly violated U.S. laws, represent a significant risk to American national security interests, and need to be held accountable. Moving forward, we must combat China’s theft of advanced U.S. technology and their brazen violation of U.S. law.”

If enacted, this prohibition on sale of parts and components will deal a crippling blow to both Huawei and ZTE. We have already seen how ZTE was severely impacted by an earlier ban on such sales and of how Congress was so critical of President Trump’s decision to back down on those restrictions. This bill will force the President’s hand and will include Huawei in the ban that threatened to shut down ZTE.

The U.S. has already convinced most of its allies to exclude Huawei from participating in providing equipment for the mobile 5G programs being introduced around the world. Australia, New Zealand, Japan, and England and France have already agreed and Poland and The Czech Republic seem to be on board for the ban as well. Germany was the lone significant hold out. But recent events concerning Huawei getting caught spying in Europe and being accused of stealing trade secrets in the U.S. seem to have turned the tide in Germany and Germany is now ready to join the ban on Huawei 5G. See Germany considers barring Huawei from 5G networks. I’ve been reading much of what the German press has to say about a German ban against Huawei and I predict it will happen, not because of US pressure, but because of the view there that Germany would be better protected by not having Huawei involved with its 5G network.

The potential impact of a US ban on the sale of telecom parts and components to Huawei and ZTE cannot be underestimated. Both these companies are entirely dependent on U.S. made components, primarily in the form of sophisticated microprocessors. This dependence goes far beyond the companies themselves. The Chinese high speed rail networks, air traffic control networks and telecommunication networks all rely on these U.S. made components. A ban on sales to Chinese companies would have a significant impact in China that goes far beyond the impact on the overseas business of Huawei and ZTE. This threat is far more significant than the current tariff dispute. It is also significant that the proposed bill is bipartisan.  These measures are not coming from the Trump administration and they are seeking to force the President to take measures far more severe than the President is currently seeking in the trade war tariff dispute.

What is really going on here? The various anti-PRC measures have focused on Huawei and ZTE as security threats. But the real issue runs much deeper. China is currently embarked on building a Digital Silk Road with the goal of creating an Internet/network/telecoms/GPS system entirely separate from the system currently built and operated by the U.S. and its allies. The Digital Silk Road is designed not to be interoperable with the U.S. led system. It is intended to be entirely walled off and separate.

Huawei and ZTE are the Chinese companies being called on to build the telecom equipment, cables and related infrastructure backbone for China’s Digital Silk Road. I see these recent actions as the U.S. acting to ensure that if the Digital Silk Road is built, it will be built without the assistance of the U.S. and its allies. This means the U.S. and its allies will not purchase Huawei products and technology and there will be no sales to Huawei of U.S. (later European and Japanese) semiconductors and other telecom related technical parts and components. If this plan succeeds, the Digital Silk Road will never be built. This critical issue is at the center of the trade war and it will not be addressed with tariffs. It will be addressed with the sort legislation and boycotts discussed above.

If you are planning to sell semiconductors and other high technology products to China, your plans are at great risk right now. Even if this bill is not signed into law, the direction of U.S. policy is clear.

Welcome to the new normal.

 

China CFIUSMergermarket, a leading U.S. mergers data reporter just published its global M&A report for 2018, revealing that investments from China in U.S. businesses fell by 95% as compared to 2016. A summary of the data in the Report shows the following:

1. Worldwide M&A activity was strong in 2018. “The transactions that did make it to the signing table reached USD 3.5tn worth of activity, ranking 2018 as the third-largest year on record by value. Average deal size saw its second-highest total value on record with USD 384.8m, just below the USD 400.3m peak reached in 2015.

2. Chinese investment in the U.S. virtually collapsed: “Chinese buys of US firms fell 94.6% to USD 3bn from a record USD 55.3bn in 2016.”

3. In response to being cut out of the United States, Chinese companies turned to Europe as a source of acquisition targets. “China’s bids in Europe increased 81.7% to USD 60.4bn from USD 33.2bn last year.”

Chinese companies did not lose interest in the United States. What happened is that the U.S. government’s security review system has made Chinese investment in any form of technology company virtually impossible. New legislation and regulations adopted in 2018 will make those investment barriers formal and permanent. These restrictions will survive any trade “deal” made on the current Section 301 tariff dispute with China. The investment restrictions have become part of the “new normal” in US-China economic relations.

How will this work? Foreign investment in the U.S. has long been controlled by the Committee on Foreign Investment in the United States (CFIUS) review process. This review procedure is managed by the Bureau of Industry and Security (BIS) of the Department of Commerce. In August of 2018, CFIUS’s jurisdiction was substantially expanded by the adoption of the Foreign Investment Risk Review Modernization Act (FIRRMA).

The new law expands CFIUS’s  authority to review non-controlling investments by foreign companies (China) in U.S. companies that deal in critical and emerging technologies. As I previously reported in New Restrictions on High Tech Technology Transfers to China, BIS has begun rule-making to determine what specific technology will go on that list. The comment period for the rule making was extended to January 10, 2019 and as of right now, there are no reports on what exactly will go on the list.

BIS has though provided a listing of the general categories of technologies that will go on the list. I can simplify your review of this list (set forth below) by noting that it includes ANY form of technology in which a Chinese company would be interested.

1. Biotechnology, such as: (i) Nanobiology; (ii) Synthetic biology; (iii) Genomic and genetic engineering; or (iv) Neurotech

2. Artificial intelligence (AI) and machine learning technology, such as: (i) Neural networks and deep learning (e.g., brain modelling, time series prediction, classification); (ii) Evolution and genetic computation (e.g., genetic algorithms, genetic programming); (iii) Reinforcement learning; (iv)

3. Computer vision (e.g., object recognition, image understanding); (v) Expert systems (e.g., decision support systems, teaching systems); (vi) Speech and audio processing (e.g., speech recognition and production); (vii) Natural language processing (e.g., machine translation); (viii) Planning (e.g., scheduling, game playing); (ix) Audio and video manipulation technologies (e.g., voice cloning, deepfakes); (x) AI cloud technologies; or (xi) AI chipsets

4. Position, Navigation, and Timing (PNT) technology

5. Microprocessor technology, such as: (i) Systems-on-Chip (SoC); or (ii) Stacked Memory on Chip

6. Advanced computing technology, such as Memory-centric logic
Data analytics technology, such as: (i) Visualization; (ii) Automated analysis algorithms; or (iii) Context-aware computing

7. Quantum information and sensing technology, such as: (i) Quantum computing; (ii) Quantum encryption; or (iii) Quantum sensing

8. Logistics technology, such as: (i) Mobile electric power; (ii) Modeling and simulation; (iii) Total asset visibility; or (iv) Distribution-based Logistics Systems (DBLS)

9. Additive manufacturing (e.g., 3D printing)

10. Robotics, such as: (i) Micro-drone and micro-robotic systems; (ii) Swarming technology; (iii) Self-assembling robots; (iv) Molecular robotics; (v) Robot compliers; or (vi) Smart Dust

11. Brain-computer interfaces, such as: (i) Neural-controlled interfaces; (ii) Mind-machine interfaces; (iii) Direct neural interfaces; or (iv) Brain-machine interfaces

12. Hypersonics, such as: (i) Flight control algorithms; (ii) Propulsion technologies; (iii) Thermal protection systems; or (iv) Specialized materials (for structures, sensors, etc.)

13. Advanced materials, such as: (i) Adaptive camouflage; (ii) Functional textiles (e.g., advanced fiber and fabric technology); or (iii) Biomaterials

14. Advanced surveillance technologies, such as Faceprint and voiceprint technologies.

BIS reports that it is considering expanding this list to cover a separate category of “critical infrastructure.” Though no proposed rule on this category has been issued, it is assumed this will include telecommunications, power generation (nuclear power), utilities and transport (high speed rail).

As you can see from the above, the list includes virtually everything a Chinese company would want in the technology sector. Chinese companies are still free to purchase U.S. real estate as long as the building is not located next to the Trump Tower in Manhattan and so long as they can get the money out of China to do so. See Getting Money out of China to Buy a House: Not Your Issue. Chinese companies are also presumably free to purchase nail salons, massage parlors, movie studios, restaurants, retail stores, and hotels. But anything in the technology sector will be hands off. Note that it is not even required that CFIUS ultimately reject the transaction. The public notice required by the new rules and the extended period for review is enough to kill most business deals. This seems to be one of the motivations for the new regulations: kill the deal before CFIUS is required to make a politically motivated decision.

Chinese companies saw the writing on the wall and abandoned investment in the U.S. in 2018. With the new CIFIUS rules on investing in emerging technology, this situation will become permanent. For that reason, U.S. technology start ups looking for investments from China should for the most part plan to look elsewhere.

As discussed above, Chinese companies are now looking to Europe as a replacement for the U.S. market in tech company investments. In my next post (after I meet with a contingent of our Spain lawyers who will be in town) I will discuss the restrictions on investment from China coming on line in Europe.

China criminal law

Yesterday we wrote on how our China attorneys were hearing (mostly by email) of increasing arrests of foreigners in China and of how clients and readers were writing asking if they should go to China or not. Yesterday’s post, Five Things to do to Avoid Getting Arrested in China, was an effort to address those issues. At the end of that post, we pointedly solicited reader help on what more people can do to avoid arrest in China. We have received a number of emails from people, most of which said little more than “just don’t go.”

But we also received a very thoughtful comment here, expertly detailing the risks of working in China without dotting all of the i’s and crossing all of the t’s.

As someone who has lived and worked in China for a number of years, I do not think that being American or Canadian escalates the situation. We have seen recently a number of South Africans and people of other nationalities get caught too.

It is important to remind people that they are subject to Chinese law while in China and that the authorities can impose consequences including that of having issues for one to leave the country if the consequences are not served. The officer usually has control as to the consequences given. The embassy or consulate can just make sure that you have not been harmed physically but do not have any other power to remove you from the situation.

While the working illegally issue commonly happens to teachers, it is not limited to them, but also people in other professions. This comes in the form that you mentioned regarding not holding a work permit and residence permit, but also in the form of working for a company that is not the one tied with such documents (such as an agent puts you under their books).

I would add the caution regarding contracts that mention that the individual can come on any visa and that it can be converted to be allowed to work because that is a huge red flag. These days most non-“Z visa”s cannot be converted within China to a work permit and residence permit type of visa, the only one that allows working legally.

In addition, the job title is important as it regards to teachers. Many people have started English language companies which is basically a consulting or a culture company and will hire a teacher in another position because of not being able to legally employ them as a teacher and if the company is inspected, then this can create an issue for them.

There is also some basic information I would recommend that people keep in mind, besides those that you mentioned –

(a) Binding language is Chinese. English is a convenience.
(b) Only their employer can assist with cancellation of work permit receipt and release documents for the employee to move on to another job in the future. Leaving the country and starting again isn’t necessarily an option anymore because often times these release documents are still required.
(c) Implementation of many laws differs down to the city and/or district level.
(d) In your text when you say “the wrong visa” this is supposed to mean a visa that is different from the purpose of your visit

If one has set up a company and has a company to company agreement with another firm and they are the subject of providing the service to the client, I would say that this is usually a suitable method of working with multiple companies, BUT if there are special provisions for the industry then it is VERY risky (e.g. teaching related). It’s important to note here that freelancing is not allowed in China.

To summarize this comment from a China lawyer’s perspective: your China employment relationship is very complicated and done wrong you can end up in jail. The only relevant portion of your employment contract is the Chinese portion and if you do not speak Chinese you have no clue what it says and, most importantly, you have no clue whether the English language portion accurately translates the Chinese portion (I can tell you right now that the odds are about 100 to 1 that it doesn’t). And even if you are able to read the Chinese portion, unless you have a comprehensive knowledge of China’s employment laws and the employment and employment related laws that relate specifically to your potential new employer and to the specific locale in which you are working, you really do not know what you are doing and you should seek out qualified assistance in the form of a China employment lawyer fluent in both Chinese and in whatever language in which you are comfortable communicating.

I will now respond below to specific portions of this comment, all of which I have italicized.

“As someone who has lived and worked in China for a number of years, I do not think that being American or Canadian escalates the situation. We have seen recently a number of South Africans and people of other nationalities get caught too.” I 100% agree that the risks apply to foreigners of all nationalities in China. I only highlighted Canadians and Americans because of the recent spat of people from these countries being arrested for what many view as retaliation for the US-China Trade War and for the Huawei arrests. If your country is in China’s disfavor, you are at increased risk.

“It is important to remind people that they are subject to Chinese law while in China and that the authorities can impose consequences including that of having issues for one to leave the country if the consequences are not served. It is very important to remind people that they are subject to Chinese law while in China and I would also mention that Chinese criminal law is very different from US or EU or Canada or Australia criminal law. Last month I guest lectured for two days (and had a blast) at Warsaw University Law School. My second day lecture (4.0 hours!) was on Chinese laws that differ Western laws and how those differences impact foreign companies doing business in China. One of the things I briefly discussed was how China criminalizes certain things that are not crimes in the West. The following slides provide three examples of this.

 

If you are going to be living and working and doing business in China, you must know the laws and you must not violate the laws. I would also add that it can be relatively easy to face criminal charges as an individual for the wrongdoing of your company. We most often see foreign businesses get into criminal trouble in China is for violating China’s customs laws (See China’s Detention Of Foreigner For Alleged Customs Violation Should Be A Strong Warning), doing business in China without a legal entity (See Doing Business in China Without a WFOE: Will the Defendant Please Rise). For foreign individuals, it is undoubtedly for not having a proper employment visa.

“While the working illegally issue commonly happens to teachers, it is not limited to them, but also people in other professions. This comes in the form that you mentioned regarding not holding a work permit and residence permit, but also in the form of working for a company that is not the one tied with such documents (such as an agent puts you under their books).” I 100% agree. The only reason I highlighted foreign English language teachers is because they are so susceptible to being duped into working illegally in China, either because they do not even realize they are doing so or because they buy into the idea that they are somehow safe because “everyone else is doing it.”

“I would add the caution regarding contracts that mention that the individual can come on any visa and that it can be converted to be allowed to work because that is a huge red flag. These days most non-Z visas cannot be converted within China to a work permit and residence permit type of visa, the only one that allows working legally.” Very true. Our China employment lawyers constantly receive emails from foreigners planning to go to China to work and then, if it works out, their employer will help them get a Z visa. Our advice is that you should generally not go to China as an employee unless and until you are certain that you will be working there legally from day one. Many Chinese companies LOVE bringing on illegal employees because this gives them tremendous power over these employees. I explained how this can play out in Trust Your China Employer. Just Kidding:

Our China employment lawyers often get requests from individuals looking for help negotiating an employment contract with a Chinese domestic company. The first thing we like to do in this sort of situation is to make sure hiring our client by the Chinese company can and will be done legally. But when we suggest the necessity of our making sure of this, the response is often that we have nothing to worry about because the Chinese company would not be doing this illegally.

WRONG.

Truth is many Chinese companies prefer to hire foreigners illegally to legally because doing so can save them a ton of money and is usually pretty low risk — at least for them.

I thought of this when I read a very thoughtful and well-written article today, entitled, The detention of two Irish women who were working side jobs at an unlicensed school in Beijing shines a spotlight on the illegal English education market in China. The article (as you probably have guessed from its very long and descriptive title, is about two teachers from Ireland who were detained in prison for more than a week for working illegally in China. Both these teachers had visas that allowed them to work full-time in China, but only with their one employer who secured these visas for them. These two teachers had taken lucrative part-time teaching jobs on the side and it was those jobs that got them arrested.

The big takeaway for anyone looking to take a job in China though should be the sections entitled, “Illegal employers have no qualms about hiring foreigners illegally” and “when the illegality is discovered, it is the foreign worker who gets the blame.”

The article talks about someone who “ran an experiment” by applying for every English language teaching job listed in Beijinger Magazine and clearly stating he could not qualify for a work visa. Only one out of the twenty potential employers declined his application! In other words, 19 out of 20 were happy to have this foreigner work for them illegally. The article notes that under  China’s immigration law, foreigners who work illegally in China can be fined 5,000 to 20,000 yuan and detained for between 5-15 days and then deported. “A lot of the burden and blame falls” on the employee who works illegally in China and therefore, as the US Embassy website makes clear, “it is up to each individual to evaluate potential employers before signing a contract.”

Binding language is Chinese. English is a convenience. Correct. The binding/official language of a dual language contract will almost always be the Chinese portion, no matter what the English language portion of your contract might say. We discussed this in Dual Language China Contracts: Don’t Get Fooled!

Can’t believe this is still happening, but it does, and in numbers that would likely surprise many people. The “this” to which I am referring is foreign companies signing dual language contracts without knowing exactly what the Chinese language portion of their contract says. This is really risky dangerous and below I explain why.

Many dual language Chinese-English contracts are silent on which language controls. For some unknown reason, foreign companies far too often just assume that the English language portion controls or they just assume that it does not matter because the meaning of both the English and the Chinese portions is exactly the same. Wrong, wrong, wrong.

What language controls when you have a dual-language contract?  If both languages say the same one language controls, that one language will control. If both the English language and the Chinese language portions say the Chinese language portion controls, the Chinese language portion will control. Similarly, if both the Chinese language and the English language portions say the English language portion controls, the English language portion will control. These are the easy and safe examples.

It is everything else that so often cause problems for American and European and Australian companies in  trouble.

If both your English language and your Chinese language portions are silent as to which portion controls, the Chinese language portion will control in Chinese courts and in China arbitrations. In real life this means that if the English language portion of your joint venture contract says that you get 10 percent of the joint venture’s revenue  but the Chinese portion says you get 10 percent of the profits (which will of course be way less than revenues) you will have no legal basis for claiming anything more than 10 percent of the profits. Not surprisingly it is joint venture contracts and licensing agreements where our China lawyers most often see this sort of meaningful dichotomy between the English and the Chinese portions of the contract.

Of the hundreds of dual language contracts proposed by Chinese companies and reviewed by one of my firm’s China attorneys, we’ve never seen a single one where the Chinese portion was less favorable to the Chinese company than the English portion. But we’ve seen plenty where the Chinese portion is better or much better for the Chinese company than the English portion. Chinese companies love using a contract with an English portion that is more favorable to the foreign company than the Chinese portion and then relying on the English speaking company to assume that the English language portion will control.

But what if the English language portion explicitly states that it will control? This works right? Not necessarily. If the Chinese language portion also explicitly states that it will control, the Chinese language portion will control under Chinese law. If the Chinese language portion is silent or says that the English language portion controls, the English language portion will control.

As we noted in China Contracts: Make Them Enforceable Or Don’t Bother, it usually makes sense to draft contracts with Chinese companies in Chinese with an English language translation. But this also requires that if that contract is going to be enforced in China (as should usually be the case), you absolutely positively need to be certain that you know exactly what the Chinese language portion of that contract actually says. No matter what the English language portion of your contract says, it behooves you to know exactly what the Chinese language portion says as well.

In other words, if you are not truly able to read and understand Chinese, you probably do not know what your contact says. And if it is an employment contract that you do not fully understand, you could be putting yourself at serious risk.

“Implementation of many laws differs down to the city and/or district level.” Again, correct. And this is particularly true of China’s employment laws. See China Employment Law: Local and Not So Simple.

Bottom Line: Living and working and doing business in China is way more legally complicated than ten years ago. This means that the likelihood of you going astray of Chinese law is considerably higher as well. When you then add in that China’s ability and desire to catch foreign companies and foreigners operating illegally in China is higher now than it has ever been, you can see why it is so critical that you make sure that both your company and you are operating in China within the law. If you are not already operating legally, you need to start doing so now and if you cannot, you probably should leave China or not go there at all.

What are you seeing out there?