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.

China lawyersWith all the arrests of Canadians and Americans and English teachers (we are getting 1-2 emails from arrested English teachers every week), our China lawyers have been getting a slew of emails from clients and readers asking whether they should or should not go to China and what they should do to avoid arrest if they do go.

I personally am never quite sure how to answer clients who ask me this question. I cannot tell them “just go and don’t worry” because even though the odds of their having a problem are exceedingly low, the last thing I want to do is have someone get arrested and then blame me for not having “told them so.”  So what I usually say is that they need to balance their need to go to China against the risks. How though do you calculate the risks?

There is no one way to calculate the risk of getting arrested in China, but the following are what can change that calculus one way or the other.

  1. Going to China on a U.S. or a Canada passport increases your risk.
  2. If you have a China WFOE that has not paid all its taxes and or is otherwise not in full compliance with China’s laws or has announced that it will be closing down, your risks are higher.
  3.  If you should have a WFOE in China but you don’t have a WFOE in China See Doing Business in China Without a WFOE: Will the Defendant Please Rise.
  4. If you go to China on the wrong visa or you overstay your visa, your risks will increase. WARNING: The English teachers who write us are from all over the world but what they all have in common is that their employer did not properly hire them. Two years ago, we absolutely never heard of English teachers getting arrested for this, but nowadays we hear about this all the time, even though the bad actors are their Chinese employers. Fortunately, these teachers are being jailed for only a week or two and then they are allowed to leave.
  5. Do not do anything illegal while you are in China. Do not buy or consume illegal drugs, including cannabis. Do not get into a fight, even if provoked. If your taxi driver or your bartender or anyone else tries to rip you off, seriously consider just paying the overcharge and move on.

The risks are really low, but it does pay to be careful.

What else?

Perspectives on Chinese Business and LawJust finished reading (most of) the book, Perspectives on Chinese Business and Law and I very much liked it.

This book lists four professors as its writers: one from Poland, one from Belgium, and two from China. More specifically, its authors are Dr Łukasz Gołota, Assistant Professor at the Institute of International Relations, Warsaw University (where I was a guest professor earlier this month!), Dr Jiaxiang Hu, Professor of Law at Shanghai Jiao Tong University, Dr Kim Van Der Borght, Professor of International Economic Law & Diplomacy at the Vrije Universiteit in Brussels, and Saisai Wang, Lecturer of Law at the Law School of the Shandong University of Finance and Economics. It also includes a number of additional authors who wrote or co-wrote a chapter.

I start out mentioning the authors because in some respects this is an academic book, but I nonetheless found it extremely helpful on practical Chinese legal issues that impact foreign companies doing business in China. The book consists of the following twelve chapters:

  1. Evolution of the Chinese Economic Model and Its International Implications
  2. Domestic Political and Economic System of China
  3. EU-China Economic and Trade Relations
  4. The Idea of “Law” in China: An Overview
  5. An Introduction to the Civil Procedure System
  6. Foreign Related Commercial Arbitration in China
  7. Contract Law
  8. Chinese Company Law
  9. Chinese Foreign Direct Investment Law
  10. Establishment of Overseas Branches of Chinese Companies in the EU
  11. Regulation of Financial Services in China
  12. Chinese Intellectual Property Rights

All of the chapters are well written and useful, but I found chapters 5-9 and 11-12 particularly helpful for foreign companies looking to do business in China. In fact, a number of these chapters were the clearest English language writing I’ve seen on their topics. Its Amazon blurb quite accurately describes what you can expect:

Perspectives on Chinese Business and Law contributes to the debate and understanding on China by offering insights and perspectives from both Chinese and European scholars on themes related to business and economic affairs. The current foreign trade and business-related legal framework of China are expressed along with certain historical and political analysis on China’s development.  This book offers different perspectives on China’s business and law. It aims to offer an introduction into both theoretical and practical aspects of China’s law on foreign related business affairs. This comprises economic and political background information, including China’s economic evolution and China-EU trade relations, in addition to more detailed information on selected subject areas important to foreign related business affairs in China, namely: commercial arbitration law; contract law; company law; IPR protection; financial law; foreign direct investment law; and also the establishment of overseas branches of Chinese companies in the EU.

I highly recommend this book to lawyers who represent companies that do business in or with China, to academics seeking a better understanding of Chinese law, and to anyone else seeking a high level understanding of Chinese law.

 

China WFOE formation lawyersNot sure why (China government arrest quotas?), but at the end of every year, my law firm always gets a slew of emails and phone calls from foreigners in big trouble in China. In past years the trouble has mostly involved unpaid taxes, usually with the following sort of scenario:

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

No, this seems to be the year of the busted (pun intended) China WFOE, as we have received one email on this, one Facebook communication (on our China Law Blog Facebook Page), and one phone call. Vaguely summarized, these are two people who were . arrested and put in jail for about ten days and then released and told not to leave their city and one person who was visited by the police and told not to leave his city. All are being “questioned” about doing business in China without a WFOE. Doing Business in China Without a WFOE: Will the Defendant Please Rise. Hard to tell exactly what is going on with any of the three. One vehemently claimed he had paid someone to form a WFOE for him and that person had said he had in fact formed the WFOE, and yet the police said he had no WFOE. So it appears he was scammed. The other weakly claimed he “thought” he had formed a WFOE but my sense is that he never did and now the chickens were coming home to roost for him.

The third one was the most interesting, because he insisted that he had formed a WFOE with a “legitimate” entity formation company but it appeared that company had formed the WFOE as a consulting WFOE and this company (with 18 employees) clearly should not have been a consulting WFOE. I do not know if the entity formation company duped this person by forming the company as a consulting WFOE (this is not uncommon because these are typically the easiest and fastest WFOE to form), knowing it did not really qualify under that scope, or if the foreign company had started out as consulting WFOE and then morphed into something else and then failed to alert the Chinese government, as required. This was the person who was never imprisoned. See Forming a China WFOE: Scope is Key.

All three of these broken/non-existent WFOEs were in second tier (at best) Chinese cities and in all three cases I recommended that the person in extremis secure a really good and local criminal lawyer.

Bottom Line: Check your WFOE. Now. And if you are going to form a WFOE, make sure you do it right. Please. Oh, and one more important thing: many times foreign companies would be better off not forming a WFOE at all and not having any of their own people on the ground in China at all. For more on this, check out Forming a China WFOE: Needed or Not.

China internet litigationFollowing on the heels of China’s first Internet court in Hangzhou, two other Internet courts have recently been established respectively in Beijing and Guangzhou. In the meantime, China’s Supreme People’s Court published the Provisions on Several Issues Concerning the Trial of Cases by the Internet Courts, 最高人民法院关于互联网法院审理案件若干问题的规定 (link in Chinese) (“Provisions”), clarifying the types of cases within the jurisdiction of these courts and regulating certain procedural issues relevant to Internet courts.

According to the Provisions, the Internet courts are designated to handle disputes involving the online sale of goods and services, lending, copyright and neighboring rights ownership and infringement, domains, infringement on personal rights or property rights via the Internet, product liability claims, and Internet public interest litigation brought by prosecutors.

Currently, all three internet courts are trial courts within the jurisdiction of their own cities. Most appeals will be heard by the intermediate courts in their respective jurisdictions. However, online copyright-ownership and infringement disputes and domain-name disputes tried by Guangzhou and Beijing Internet courts will be appealed to the Intellectual Property Courts in their respective cities.

As a general rule, the entire litigation process in the Internet courts will be conducted online, including the service of legal documents, the presentation of evidence, and the actual trial itself. Notably, in these Provisions, the Supreme People’s Court confirms that the Internet courts may consider electronic evidence provided by the parties that can be authenticated by electronic signatures, time stamps, hash value verification, blockchain and other tamper-proof verification methods. In fact, before these Provisions were announced, the Internet Court in Hangzhou for the first time in China admitted evidence that was authenticated by blockchain technology in an online copyright infringement case (link in Chinese, not official source). In this case, the plaintiff sued the defendant for copyright infringement because the defendant published the Hangzhou company’s copyrighted material without a proper license to do so. The plaintiff captured defendant’s webpages, their source code and call logs, and uploaded the data to a blockchain platform. The Court held that the data confirmed each other and accurately reflected their source, generation and path of delivery, and were therefore reliable and could be admitted as evidence.

As far as I know, China is leading the world in internet litigation, which in some respects should be no surprise as so much in China is done online and its regular courts so much favor documentary evidence over live testimony. The fact that China has expanded its Internet courts from one city to three (and Beijing is not exactly an unimportant city) means it views its initial foray into internet dispute resolution as having been a success. It will be interesting to see how fast these internet courts spread within China and to the rest of the world.

China lawyers for contracts
I am writing this on a plane back from Poland, where I spent a few days as a guest professor, lecturing at the University of Warsaw (and loving every minute of it).

My first day consisted of me speaking for 1.5 hours on How to Protect Your IP from China. I have given this talk many times mostly because it is my favorite, by far. I like it not just because protecting your IP from China is so critical, but because in discussing how to do this I get to weave in a ton of great stories on what it’s like to do business in China.

For my second day I was initially tasked with talking about China contracts for foreigners for 1.5 hours and how China’s law/business differs from the West for another 1.5 hours. I initially thought the first speech would be too boring and I was initially scared to death of the second one. How can I come up with 1.5 hours on the how China differs speech, without just feeding the audience a boring list of things. I should note that having to come up with a new speech ranks in terms of pain points with having to confess that the Seattle Seahawks just are not that good this year.

In preparing for my speeches, I decided to start with how China differs and to my surprise, once I got started I could not stop, to the point that I requested of my handlers that I just talk about contract law within this one, soon to be 3 hour speech and that is what I did. Turns out I could speak for three days on just this one topic and I now just need to come up with an hour long version and add it to my repertoire.

I started my speech (don’t worry, I am not going to discuss all 87 PowerPoint Slides and this post will get to its point very soon and yes there is one) with the following slide:

My following nine slides were various warnings about China, the second of which was the following:

China distribution contracts

I then used this slide (and countless other slides) as a jumping off point to explain and give examples how Chinese companies so often view their business relationships with their Western counter-party differently than the Western company. I also talked a lot about how Western companies need to be very careful not to assume their expectations of that relationship line up with the expectation of their China partner. I used the following two slides (which are a direct quote from my friend and China negotiation expert, Andrew Hupert:

China distribution agreement

 

China distributor contract

I assume you are by now wondering when I am going to link all of the above to China distribution relationships, or at least you should be since the title of this post is “Selling to China: Is your distributor your friend? Well here goes.

It is because on my flight back from Poland I read a really good Forbes Magazine article by Frank Lavin, CEO of Export Now, a US-based company that helps “brands succeed in China’s digital space. The article is titled Selling To China: Is Your Distributor Your Friend? and it deals with the “disconnect” between Western companies and their Chinese distribution partner. That article spurred this post. Lavin starts the article with the following example of that disconnect:

A global sports equipment company recently became frustrated by its sales in China. The company was experiencing strong growth from the tennis rackets it manufactures, but its badminton sales were a disappointment. Why the contrasting fortunes? Because the brand’s Chinese distribution partner was refusing to stock the company’s badminton equipment.

“Don’t blame me,” protested the distributor. “Badminton isn’t popular in China.” The distributor thought that if he stocked the inventory, it wouldn’t sell to the pro shops across the country.

This is not how the relationships between manufacturers and distributors are supposed to work. In the traditional model, the distributor takes on the responsibility of marketing the products and growing the business. It’s the distributor who establishes partnerships with wholesalers and retailers, keeping them supplied with the latest lines, stocking their inventory, and in return can receive a margin upwards of 50%.

Lavin then notes how in the West the distributor’s relationship with the brand owner is more “win-win,” with both companies working together to build the brand. This though is not usually the case in China because Chinese companies tend to focus more on short term profits:

In China, however, these conditions rarely apply. The brand is often new to the market, doesn’t command high revenue (yet), and the distributor might be handling anywhere between 40 and 200 different brands. Why should they care about yours, particularly if other brands are growing faster?

You might find yourself in a frustrating chicken-and-egg relationship. The distributor does not want to promote your product if it is not a winner, but the only way to make it a winner is to broaden its distribution.

My absolute favorite PowerPoint slide is the following one and I put it in nearly all of the speeches I give and it was in both of my Warsaw speeches:

 

This slide sums up how Chinese companies typically view their deals and their contracts and how it is the job of the Western company and its China lawyers to structure the deals and draft the contracts to deal with this.

For distribution contracts, this means being clear about what your distributor is required to do and the penalties if it doesn’t. In particular, it means being able to sell through additional channels if your Chinese distributor is not zealously enough working for you. Or as Lavin puts it from the business perspective:

Is your distributor your friend? Sure. Sort of. But the best approach in China might be to cultivate the distributor relationship for your high-volume items, and rely on e-commerce for the the full product slate, new product launches and customer engagement activities. Distributors are more likely to support you when they see that you have an e-commerce strategy. The best way of cultivating a friendship with that distributor is cultivating a friendship with e-commerce as well.

For more on China distribution relationships and contracts check out the following:

China employment lawyers

It is not news that Chinese labor authorities have been cracking down on employers that fail to make social insurance payments for their employees. What is news is that Chinese labor authorities are taking that enforcement to the next level. Last week, 28 government departments (including the National Development and Reform Commission, the People’s Bank of China, the Ministry of Human Resources and Social Security, and the State Administration of Taxation) jointly executed a Memorandum of Understanding on Joint Punishment against Serious Dishonest Enterprises and Related Personnel in the Social Insurance Sector (the “MOU”) that defines “serious dishonest employer behavior” to include the following:

(1) Failing to participate in social insurance in accordance with the law and refusing to rectify the situation;

(2) Failing to truthfully declare the social insurance contribution base and refusing to rectify the situation;

(3) Failing to pay social insurance premiums;

(4) Concealing, transferring, misappropriating or embezzling social insurance premiums, funds or engaging in illegal investment operations;

(5) Participating in fraud by, among other things, falsifying certification materials or social insurance fund expenses or social insurance benefits;

(6) Illegally obtaining, selling or disguising trading of social insurance personal rights and interests data;

(7) Refusing to assist the social insurance administrative department in its efforts to investigate accidents and problems; refusing to assist the taxation department in its efforts to supervise or inspect social insurance, and failing to provide relevant information related to social insurance; or

(9) Otherwise violating applicable laws and regulations.

Numbers 1, 2 and 3 above — that is, not paying or under-paying employee social insurance — are the violations our China employment lawyers most often see among foreign employers in China, and even before the MOU, we often saw foreign employers get in trouble for such violations.

The Ministry of Human Resources and Social Security, the State Administration of Taxation and the Medical Security Bureau will pass on information regarding employers that violate the social insurance laws to other Chinese government departments via the national credit information sharing platform and publish that information on Credit China, China’s National Enterprise Credit Information Publicity System, and on the official websites of these government agencies. In other words, the dishonest parties will be publicly named and shamed.

Employers/relevant personnel determined by Chinese government authorities to be dishonest may face a number of adverse consequences imposed by different government departments –not just limited to social insurance. Punishment might include restrictions on participating in government procurement as a supplier, financial subsidies and social security funds support, government assistance on streamlining the handling of social insurance, and participating in social insurance cooperation projects. The list of potential punishments also includes enhanced scrutiny or regulations. For example, when a dishonest enterprise applies for customs-related business, its import/export activities will be more strictly supervised and regulated, such as more stringent customs inspection, supervision and audit. The relevant authorities will also consider the “dishonest behavior” of the employer, its legal representative, actual controlling person, directors, supervisors, officers, and senior management in determining whether to grant preferential policy support. Punishment also may include prohibitions on purchasing airplane tickets and withdrawals of previous honors (e.g., taking back a previously-awarded model of high morality honor).

In October of this year, China’s Ministry of Human Resources and Social Security released a set of draft Interim Measures for the Management of a Blacklist for Serious Dishonesty in the Social Insurance Sector for public comments. This blacklist would be publicized on local and national credit information platforms and be made available to all government authorities. The MOU mirrors the spirit of these draft Measures. As always, the localities are expected to come up with their own detailed implementation rules.

Life in China for foreign employers has never been easy, but don’t make it harder by getting your company and its personnel on the “blacklist.” Can you confidently state that your company is in full compliance with its social insurance obligations? If not, you need to take action now to make sure it is.

 

 

 

 

China NNN Agreements

When our China lawyers are tasked with drafting a China NNN Agreement, they start by sending the client a tailored questionnaire. Then once they have the answers they draft the NNN Agreement in English (for the client) and in Chinese (the official version). Most of the time, our clients at that point take the NNN Agreement we have given them and send it on to their Chinese counter-party where from there the negotiating begins, or not.

But every once in a while our clients ask us all sorts of questions about why we drafted the NNN Agreement as we did. Because China NNN Agreements are so different from Western-style NDA Agreements, they are rightly puzzled by what we have done. See Why Your NDA is WORSE Than Nothing for China. Usually, we get these questions from in-house counsel for companies based in the United States, Great Britain, Canada, Israel or Australia (all common law countries). This is because China-centric contracts just don’t line up with standard common law contracts and common law lawyers sometimes have a tough time getting their head around this. For common law countries, think 20 page contracts filled with all sorts of boilerplate. For civil law countries like China (and Thailand and Vietnam, think 8 page contracts with virtually no boilerplate.

The below are the sort of questions we typically get regarding our China NNN Agreements, along with our typical answers.

  1. Can we make this NNN agreement mutual? We do not recommend making this NNN agreement mutual. If your China counter-party wants to protect its confidential information or its IP, it should propose its own agreement and we will then review and advise if we think it’s okay for you to sign. More important is that we wrote your NNN Agreement to protect your interests and so many of its provisions will make little or no legal sense if invoked by the Chinese side. In our experience, mutual agreements essentially render the NNN unenforceable and this is not what we want. If you are doing cooperation and joint product development agreements, then you need a separate product development agreement that deals with all of the issues. A simple NNN Agreement is not appropriate for this type of complex commercial arrangement.
  2. Why does this NNN Agreement not contain a defined “purpose”? Would adding a defined purpose add or take anything away from the agreement? Anything you disclose to the Chinese side is covered under your NNN agreement and therefore a defined purpose is not necessary. The more specific we get regarding the purpose of the NNN, the more likely the agreement will be construed narrowly against you. For that reason, you do not want to put ANY information in the NNN Agreement itself that would suggest what is being covered.
  3. Why are you calling for disputes to be resolved in a Chinese court and not via arbitration, perhaps even in Hong Kong or Singapore? This NNN Agreement will be enforced in China. In China, arbitration is effective in situations limited to matters concerning money damages. In cases involving intellectual property and other intangible assets the Chinese court system is a more effective forum. We write our China NNN Agreements include many provisions that make the overall agreement provide maximum effectiveness within the Chinese court system. These provisions would be negated by applying it to a Chinese arbitration setting.
  4. Why does this NNN Agreement not contain any provisions making clear that we are not entering into a partnership or a Joint Venture with the Chinese side or any provisions making clear that this is the entire written agreement between the parties? This agreement does not create a partnership or a joint venture between you and the Chinese side and it is not necessary to state this in the NNN. It is a general principle of Chinese law that matters not specifically raised by the terms of the applicable document are not deemed to be inserted into the contract and inserting these common law boilerplate sort of provisions is disfavored in China, “Entire agreement” provisions are a common law concept that is both unnecessary and disfavored under Chinese law. Along that line, we do not base our China NNN Agreements on the concept of secrecy. Our NNN Agreements are instead based on contract principles which allow coverage for even “secrets” that have been revealed and thus are no longer technically secrets — unlike in the West. Though this agreement provides that prior disclosed confidential information is covered, the best way to protect yourself if you have already disclosed confidential information  is to identify in writing what prior information is confidential so that is also included in this agreement.
  5. Why is there no provision regarding how to give notice? Because it is not necessary to include a clause on notices for an NNN Agreement as these are meant to be used mostly just during the initial stages of discussions/negotiations. If you need to provide a notice to the Chinese side, we usually try to serve them at all addresses we can find, including its registered address which is already included in the NNN.

And there you have it.

China Sexual Harassment MeToo
By Prentsa Aldundia

On September 5, 2018, the PRC National People’s Congress issued a new draft of Several Sections of the PRC Civil Code (the “Draft”) for public comments until early November. The Draft would provide heightened protection against sexual harassment on a national level and would also impose more obligations on China employers. Below are a few highlights of the proposed law.

First, and perhaps most importantly, Article 790 defines sexual harassment as unwelcome behavior against another person by sexual language or actions or by sexual advances against a subordinate. Though a few China locales formally define sexual harassment in their local regulations — for example, Jiangsu Province’s provincial regulations on the protection of women’s rights define sexual harassment as harassment against women in any form of sexual content or sex-related language, words, images, sounds, and body movements — China does not have any national law defining sexual harassment. That means these PRC Civil Code revisions would constitute China’s first national definition for sexual harassment.

The wording of this sexual harassment definition would greatly increase protection against sexual harassment. Before the Draft, the national laws that cover sexual harassment limit protection to only female employees. For example, the Law on the Protection of Women’s Rights and Interests prohibits sexual harassment against women and it further says female sexual harassment victims may file a complaint with their employer and/or with the authorities. The Special Rules on the Labor Protection of Female Employees require employers prevent and stop sexual harassment against female employees in the workplace. The local rules also protect only female employees against sexual harassment. The Draft would extend sexual harassment protection to include male employees for the first time.

The Draft also makes clear employers will need to take reasonable (whatever that means) measures to prevent sexual harassment in their workplaces, create procedures for employees to file sexual harassment complaints, and create an internal company system for handling sexual harassment complaints. Though the Draft is not yet very detailed about any of this, it would still be a substantial improvement over the current law which says little more than that employers must seek to prevent and stop sexual harassment against female employees in the work place. This Draft is a clear signal that China is getting tougher on enforcement against employers that fail to fulfill their obligations under the sexual harassment protection law.

With its increased protections against sexual harassment, the Draft should serve as a clarion call to China employers to increase the protections they provide against sexual harassment in their workplaces. In other words, employer risks for not having proper sexual harassment policies/rules/measures in place to deal with sexual harassment are quickly increasing. Though the Draft has not yet been finalized, now would be a good time to audit your employment situation to make sure you have an enforceable and practical set of company rules and policies on anti-sexual harassment that complies with both China’s national and local laws (as noted above, your locale may already have more developed and detailed regulations than the national requirements and you must follow them).

#MeToo has gone international and any employer that ignores this is asking for trouble.

international trade lawyers

Give it a few months and the Trump tariffs are likely only going to get worse. I say this not just because I am convinced they will eventually increase and spread to nearly everything coming from China, but because I am convinced far too few SMEs understand them sufficiently.

I say this based on a multitude of conversations the international lawyers have had with American and European companies about the tariffs and about how to avoid the tariffs. When it comes to the tariffs it is surprising how many companies that ship their products to the United States do not know whether the tariffs impact their products and have no idea that more tariffs could be coming early next year. We are hearing from companies that are looking to start having their XYZ widgets made in China and when we ask them whether they have looked to any countries other than China for this brand new manufacturing, they ask us “why?” And when we tell them that many of our clients are already having their XYZ widgets made in such and such a country (usually Vietnam, Thailand or the Philipines) to avoid the China tariffs, they are completely surprised. In other words, despite the tariffs on goods from China it had not occurred to them to have their products made anywhere other than China. This is particularly true of European countries, who in general seem only very vaguely to be aware of the tariffs at all.

This is part 3 of our series on what to do about the trade tariffs President Trump has been imposing on goods from China. Go here for Part 1 of this series and here for Part 2.

This U.S. Government website sets out U.S. import duties and it would behoove you to understand all parts of it that are relevant to your actual or planned US imports and to understand also how your actual or planned US imports are likely to be impacted come early next year. What will happen to your sales if your products are subject to a 25% tariff and your competitors’ products are not? And all of this is way more complicated than just knowing whether your products will be hit by or escape the China duties; this also requires you know whether your products will come in duty free from Thailand or be subject to a 7% duty (or whatever) from Vietnam. I mention this because generally (though certainly not always) duties from Thailand and the Philipines are lower than duties from Vietnam, so even in choosing which non-China country you are going to use for your manufacturing, you need to know your way around the duty charts.

To further complicate things, we are hearing from and about far too many companies who believe they can avoid the China tariffs by having their products essentially made in China and then shipped to some third country to have it “finished” and then shipped from that third country to the United States. This may be as likely to land you in jail as it is to avoid the China tariffs. I wrote extensively on this in China Tariffs and What to do Now, Part 1:

But before I discuss what companies do about their tariff problems, it is far more important I start out discussing what they should NOT do. They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.

And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.

Chinese companies and the U.S. importers of their products often believe they can get around United States tariffs  by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, Thailand, Bangladesh, India, [or some other country] before sending them on to the United States. Their plan is to relabel the products with a new country of origin and then export the products to the US free of China , without US Customs and Border Protection (“CBP”) ever being the wiser.

So wrong.

US Customs has become expert at discovering such evasions and the penalties when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 USC 1592 and to criminal prosecution under 18 USC 542 (import by using false statement) and 18 USC 545 (smuggling). Lying about a product’s country of origin can subject you to 20 years in Federal prison.

Immigration and Customs Enforcement (“ICE”) has conducted criminal investigations against a number of products, including honey, saccharin, citric acid, lined paper products, pasta, polyethylene bags, shrimp, catfish, crayfish, garlic, steel, magnesium, pencils, wooden bedroom furniture, wire clothing hangers, ball bearings and nails. Many of these investigations have led to criminal convictions and large fines and penalties. U.S. importers have also been prosecuted and sentenced to prison for bringing in Chinese products, such as honey, garlic, wooden bedroom furniture and wire clothing hangers, by means of false Country of Origin statements so as to evade US AD and CVD orders. My law firm’s international trade lawyers are always pointing out that whenever the US increases tariffs on a product, it knows there is an increased likelihood of illegal transshipping of that product and it prepares accordingly. There is zero doubt the U.S. government is preparing to catch those who transship China products to avoid the new China tariffs. There is also zero doubt that both the U.S. government (and even the U.S. populace as a whole) are going to be tougher than usual on anyone who engages in transshipping

United States CBP, ICE and the Justice Department can be very tough investigators and prosecutors.

One of the biggest hammers against transshipping is the False Claims Act (“FCA”).  The FCA ( 31 U.S.C. § 3729) allows people or companies to file what are called “qui tam” lawsuits against individuals or companies that directly or indirectly defraud the Federal government seeking triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company may file a qui tam lawsuit. And they do.

Qui tam actions are brought to attack competitors and to get 15 to 30 percent of the triple damages the U.S. Government can recover from the lawsuit. Your competitors and your importers and your own employees (and even employees of the Chinese company that has assured you that your transshipping is perfectly legal) are the most likely to initiate a qui tam lawsuit against you, but sometimes it is just someone who learned of what you are doing. Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits and look how much they are paying for qui tam keywords.

Qui tam lawsuits are filed confidentially and are not served on the defendants, but on the US Government. The US Government then determines whether to intervene and pursue the action or settle with the defendant(s). If the U.S. Government intervenes, it takes on primary responsibility for the case. If the U.S. Government decides not to intervene, the initial claimant may dismiss the lawsuit or pursue the lawsuit on its own.

What is your duty as the US buyer/importer to make sure the products you are importing are truly from the country listed on the import documents?

The examples below are illustrative.

  • A US importer is told by its Chinese producer/exporter whose products will be covered by the China tariffs not to worry about the tariffs because the Chinese company will ship the product through Taiwan and list them as Taiwan products. The importer should decline this offer because if it imports this product knowing it is from China and not Taiwan, it will be criminally liable under U.S. customs law and subject to potentially massive damages under the U.S. False Claims Act. 
  • A US importer suspects its Vietnamese “producer” is not actually making anything, but rather simply transshipping product that comes from the Chinese company that owns it. The company visits the Vietnam facility and it does not appear anything is actually being produced there. The US importer raises this concern with the Chinese company which tells the US company that it can avoid any problems by being listed as the consignee of the products and not the importer of record since it is the importer who is at risk. This too is simply wrong information.

Transshipment is a crime and Chinese companies and their US importers can have very different interests when it comes to importing product into the United States. The Chinese company wants to ship product to the US above all else and the US importer should above all else want to avoid Customs trouble and avoid liability and stay out of jail. The Trump Administration has made known its desire to vigorously hunt down and prosecute transshipment claims.

If you are doing business with a person or company using transshipments to minimize US customs duties, you could be in very big trouble and you should contact a lawyer immediately. If you are aware of such transshipments by a company with which you are not doing business, you should consider contacting a lawyer to determine whether you might profit from your information.

Here’s the thing though. There is often a lot you can do to legally change the country of origin of your products, but the key here is legally. The other key here is that the rules for figuring out the appropriate country of origin are incredibly complicated and best left to an experienced and qualified international trade lawyer, especially in light of all that is going on between China and the United States these days.

If you are going to take your made in China product and have it made partially in some third country and then have that product qualify as having been made in that third country and not China, that product will need to be “substantially transformed” in that third country. One of my law firm’s international trade lawyers describes the substantial transformation requirement as follows:

Substantial transformation dictates that a product consisting of components/materials from more than one country is a product of the country where the components/materials become a new and different article of commerce with a name, character, and use distinct from that of the components/materials from which it was transformed. The CBP makes its substantial transformation decisions on a case-by-case basis, though U.S. importers may seek advance rulings on origin covering specific products for import.

The rules for what constitutes substantial transformation are anything but clear-cut and the country of origin for your products should be determined on a case-by-case basis by a qualified international trade lawyer.