COVID-19 Webinar

China is just beginning to restart its economy after a two-month shutdown. U.S. companies that still remember that we are in the middle of a trade war with China read thinly veiled threats from Chinese officials regarding limiting pharmaceutical supplies and medicine inputs and wonder what is the best way to deal with their China-dependent supply chains.

Join Harris Bricken international attorney Jonathan Bench this Thursday, March 26th at 8:30am PST/11:30am EST as he discusses key factors to rebuilding your Asia supply chain in this FREE webinar. Together with Cameron Johnson, head of APAC Strategy for FAO Global, a Washington, D.C.-based global consulting company, they will address the following questions:

  • What is the best way forward for companies whose supply chain is primarily located in China?
  • What can companies expect that are looking for ways to diversify their supply chain into (or out of) Southeast Asia?
  • What is the right way to (re)engage with Chinese manufacturers?
  • What is the right way to leave your Chinese manufacturers and enter an alternative manufacturing market in Southeast Asia or elsewhere?
  • How important are intellectual property and contracts in these scenarios?
  • How are claims of force majeure affecting China and the global supply chain?
  • What will happen to the global supply chain throughout the rest of 2020 and beyond?

This webinar will cover the above and provide advice for businesses when building a global presence:

  • Logistical Factors
  • The Global Supply Chain
  • Dealing with Counterfeits
  • U.S. Federal Government Priorities
  • Practical Tips & Advice
  • Global Economic Outlook

We will also be taking questions live via the Zoom meeting chat interface during the webinar.

REGISTER HERE today!

If you have any questions about this webinar, please email brandon.hughes@faoglobal.com.

China Employment Law Webinar

Our law firm’s lead China employment lawyer, Grace Yang, will be leading a 90 minute webinar on what HR departments need to know about China employment law. China is getting a lot tougher on how foreign companies (especially American companies) in China treat their employees and staying in compliance has never been more important. See China’s New Company Tracking System: Comply, Comply, Comply. The onset of the COVID-19 coronavirus has only further complicated what foreign companies with employees in China must do to stay on the right side of the law.

More than a decade ago, we wrote on what was then China’s new employment law regulations: China’s Brand New Labor Law Regulations. It’s All Here. A client got angry with me for even writing about this because he was certain these new regulations would never be enforced and he thought our post would “scare” foreign companies into complying with the new laws and in doing so, further damage their ability to compete against their China company peers. Nobody still believes China does not enforce its employment laws against foreign companies.

In the early days of China’s employment laws, we divided the work among our team of China lawyers, with nobody a true China employment law specialist. But as China began stepping up its employment law enforcement and as so many of China’s employment rules became so localized, it became clear we would need a lawyer to focus on China employment law. Grace Yang is that lawyer for us. Grace has law degrees from leading law schools in China and the United States and she has written a well-received book on China employment law: The China Employment Law Guide: What You Need to Know to Protect Your Company. If you are doing HR in China and you want English language help, you really should buy the book! 

Our China employment law team mostly works on the following these days:

  1. Helping foreign companies in China avoid employment law problems. We do this mostly by performing employer audits and then remedying the mistakes we find. See China Employer Audits: The FAQs.
  2. Helping foreign companies with a specific and urgent employee problems. These problems range from fending off a lawsuit or a government regulator to figuring out what to do with employees that will be brought on via a merger deal or will be terminated due to an office or company shut-down. See China Employment Law Trends
  3. Helping expats negotiate enforceable contracts with their China employer. See China Expat Employment Contracts: The 101
  4. Coronavirus. Coronavirus. Coronavirus. The below are just some of the many articles Grace has written about how coronavirus has greatly impacted pretty much everything employment related in China these days and she will be addressing various coronavirus related employment issues tomorrow as well.

Now about this upcoming China employment law webinar. It’s called China Employment Law: What HR Needs to Know and it’s going to be on tomorrow (Tuesday),  March 24 at 1 p.m. Eastern Time and it will get you 1.5 general recertification credit hours toward PHR, SPHR, and GPHR recertification through the HR Certification Institute. It also will get you 1.5 PDCs for the SHRM-CP or SHRM-SCP.11

It will be geared towards “HR, in-house counsel, financial officers, and company presidents.” It is being put on by HR Webinar Company and they describe it as follows:

China’s employment laws are complicated and highly local. Foreign companies doing business in China face complex China labor and employment issues and questions every day – often without even realizing it. What works in the United States has very little in common with what works in China. Employment compliance has become one of the most important issues foreign companies face in China and it is the rare foreign company that gets it right. Employee disputes are becoming considerably more common and government enforcement is getting significantly more stringent. It virtually always costs less for your company to deal proactively with China employment law issues than to wait to address them only after they devolve into a dispute. It is therefore imperative that you understand the framework of China employment law and steps you can take to mitigate risk.

Please join Grace Yang as she helps you better understand the China employment law landscape. She will focus on helping you recognize key China employment issues and on giving you guidance on how to solve real-life China employment law issues and problems.

WHAT YOU’LL LEARN

This webinar will cover the following:

YOUR CONFERENCE LEADER

Your conference leader for “China Employment Law: What HR Needs to Know” is Grace Yang. Grace heads Harris Bricken’s China employment law practice and contributes a weekly column about China employment law issues for the multi-award winning China Law Blog. Grace received her B.A. degree in law from Peking University and her J.D. degree from the University of Washington School of Law. She represents both China employers and employees in their China employment law matters. Grace published a book entitled The China Employment Law Guide.

If you have China employees, you really do not want to miss this webinar!

Forming companies in China: Like a Maze
Forming companies in China: Like a Maze

As part of the supporting regulations relating to the Foreign Investment Law (FIL), China’s Ministry of Commerce (MOFCOM) and State Administration for Market Regulation (SAMR) issued the Measures for Foreign Investment Information Reporting (the “Reporting Measures”). Under the FIL and the Reporting Measures, all foreign investors or foreign invested enterprises (FIEs) must report to MOFCOM information related to any foreign investment via the Enterprise Registration System and the Enterprise Credit Information Publicity System.

According to the FIL, the Reporting Measures and the accompanying announcement and the Q&As published by MOFCOM and SAMR, the following activities must be reported:

  1. Foreign investors forming FIEs (Foreign Invested Enterprises) in China.
  2. Foreign investors forming representative offices in China that engage in production and business operations.
  3. Foreign investors acquiring stocks, shares, assets or other similar equity of a Chinese company.
  4. FIEs re-investing and forming subsidiaries in China.
  5. Foreign investors investing in new projects in China, individually or jointly with other investors (without forming a Chinese entity of acquiring another Chinese entity’s stock or ownership interests). As explained below, this is not likely to concern the average investor.

Niether the FIL nor its supporting regulations explain what “investing in new projects” means, which makes it confusing as to how foreign investors can invest in projects in China without establishing a subsidiary. A possible explanation is that this refers to the activities set out in the Measures for the Administration of Registration of Enterprises from Foreign Countries (Regions) Engaging in Production and Business within China, which regulate the registration of business activities carried out in China by foreign investors without establishing an FIE or acquiring part of or entire ownership interest a separate Chinese entity.

These Measures were initially issued in 1992 and updated in 2016 and 2017. Only limited activities in highly regulated industries are listed in these Measures. For example, exploration and exploitation of onshore and offshore oil, establishing branches of foreign banks in China. In practice, investors in these industries would communicate directly with the regulatory authority for the particular industry (e.g. China’s Banking Regulatory Commission) instead of filing a regular company registration with the SAMR.

Foreign investors or FIEs may report relevant information through the following reports:

  1. The Initial Report upon forming an FIE or acquiring a non-FIE by foreign investors.
  2. Amendments to the Initial Report if if there are changes made to it.
  3. A Cancellation report upon dissolution of an FIE or upon conversion from an FIE to a non-FIE.
  4. Annual reports. FIEs must submit annual reports for the preceding year by the end of June each year.

Investors and FIEs can submit these reports via the Enterprise Registration System by SAMR, which will share the information with MOFCOM and other government agencies. FIEs formed after January 1, 2020 are no longer required to file with MOFCOM.

The information reporting system saves most FIEs a separate filing with MOFCOM. But such filing has become less significant in recent years, as it normally does not require substantive review by MOFCOM or its local branches.

On the other hand, other practical challenges still exist when forming entities in China. For example, foreign investors need to provide documents to prove their identity or company status, which must be authenticated by Chinese embassies or consulates in the country where the investor is located. Since late last year, my law firm’s China company formation team has been seeing an increase in the Chinese consulates rejecting authentications based on some “new” never published requirement. The challenge is not the lack of good written laws, but the increasing usage of unwritten rules that vary depending on time and place and that cannot be known until the government says they exist. Until China stops using random new rules to slow down the forming of foreign entities in China, its new law for establishing FIEs in China cannot be said to have made forming such companies in China any easier.

coronavirus insurance coverage covid-19

For the last three or so months, our China lawyers have been confronted with a host of legal issues related to the coronavirus. This should not be surprising because China was the seminal coronavirus epicenter. For the past two months or so, our Seattle lawyers have been working on a host of legal issues related to the coronavirus. This too should not be surprising because Seattle is the United States’ coronavirus epicenter. For the past month or so, all this has become true for our Spain lawyers as well, as Spain too became an epicenter and last week went into a full lockdown. Our California and Oregon lawyers have also in the past few months been hit with a slew of coronavirus related legal matters.

The coronavirus does not discriminate, though sadly, people do. See Do Not Blame Chinese People for the Coronavirus. No Exceptions. The coronavirus has and will continue to impacts all societies and economies and this has meant our law firm has been seeing and dealing with the same sort of legal issues in all the countries in which we work. This sameness of legal issues around the world has led us to create a cross-border legal team out of the United States, China and Spain to assist companies with their legal issues arising from or related to the coronavirus. This multi-disciplinary and multi-jurisdictional team is using the knowledge and experience our lawyers have gained in one jurisdiction to determine best practices in the other jurisdictions.

In this series of posts, we have been discussing the legal issues our lawyers in China, the United States, and Spain have been confronting, with the goal of making this blog a repository of information on coronavirus law and especially on how to handle legal matters that have arisen due to the coronavirus.

In Part 1, we focused on employment law issues because those were the first issues we saw and those are the issues that continue to arise most often. In Part 2, we looked at force majeure “in real life.” In Part 3, a couple of our international trade lawyers analyzed how coronavirus is impacting tariffs and duties in the short term and how it will likely impact tariffs and duties and global trade going forward. In this part 4, we’ve brought in one of our insurance coverage lawyers, John McDonald, to discuss the big insurance coverage issues our lawyers are seeing stemming from COVID-19.

 

Articles abound about the effects Coronavirus has had on everyday personal life.  Many individuals are self-quarantining or self-isolating, many (most?) workers are working remotely and many businesses have been forced to shut their doors to the public.  A collateral effect produced by these circumstances is how businesses—both large and small—will be affected by the virus, and whether those businesses may seek insurance coverage for their loss of time or their inability to access supplies during this unprecedented event.

This post explores how businesses may or may not have “business interruption” coverage for their loss of time, and how businesses with an international supply chain may or may not have “supply chain” coverage for their inability to either ship or receive goods and/or parts.  In short, there are various types of coverage available to these businesses, and the coverage available to them will in large part depend on the language in their business insurance policies.

 

Business Interruption Insurance

As a result of the virus, many businesses have been required to shut their doors to the public by local and state governments and there is no certainty as to when they will be able to re-open their doors.  Other businesses that have not been forced to shut down in the wake of the virus are nevertheless experiencing steep drop-offs in business as a result of many consumers self-quarantining or self-isolating.  These circumstances have led many to predict a recession in the near future and lately many are saying most countries are already in one.  If your business is one of the many that is experiencing a business slowdown due to the virus, you should check your business insurance policy (if you have one) to see if it has “business interruption” coverage for this event.

Like all other insurance, business insurance is governed largely by the language of any particular policy.  The “business interruption” coverage in some (and most) Commercial Property Insurance Policies requires actual physical damage to or loss of the covered property.  Businesses should check their business insurance policies to see if any suspension of their business requires “direct physical loss of or damage to property.”  If your policy includes such language, your insurer will likely claim that its commercial property insurance should have no coverage for any suspension of your business as a result of Coronavirus, because the virus has not caused any direct damage nor loss to your insured property.

Other business insurance policies, however, have special endorsements—for a higher premium—that cover business interruptions not caused by physical damage to or loss of commercial property.  These endorsements can extend coverage to anything from cancelled bookings and even specifically disease. Business insurance policies that have this sort of an endorsement allow policyholders to argue that their business interruptions caused by the Coronavirus should be covered under their policy.

 

Supply Chain Insurance Issues

Businesses are also facing serious issues stemming from disruptions in their supply chains, both domestically and especially internationally as a result of the Coronavirus. These businesses should also look to the terms of their business insurance policies to determine whether “supply chain” coverage is available to cover the losses they are sustaining as a result of the pandemic.

Like most “business interruption” coverage, “supply chain” coverage often extends, in the first instance, to some physical damage to or loss of a business’s supply chain. Insurers will likely again argue that those policies should not apply to business interruptions as a result of a virus. Many sophisticated businesses these days, however, have obtained insurance coverage for disruptions in their supply chains that cover non-physical damages.

This coverage is often limited to a named supply or supplier in the business insurance policy, but it can be extended to a wide variety of covered “events.”  Those events can extend coverage to non-physical damage as a result of work stoppages, civil action, regulatory action, and even pandemics. Those businesses operating both domestically and abroad that rely on a supply chain and have business insurance coverage should examine their insurance program to determine whether they have coverage from their insurance carriers for supply chain disruptions as a result of the Coronavirus.

 

Whether or not a business affected by the Coronavirus may seek coverage under its current business insurance policies will depend on the specific language in those policies.  Creative policyholders should look to the terms of their coverage forms and any applicable endorsements to see if any provisions (such as those discussed above) can or should apply to these unprecedented times. What we are finding is that insurance companies are, for the most part, acting during the coronavirus just as they always acted before the coronavirus: they are mostly declining coverage and forcing their policyholders to hire a lawyer if they want to see dollar one.

In any event, those businesses currently affected by the Coronavirus who wish to insure against any other similar unfortunate future events should build the contingent coverage discussed above into their insurance programs.

We sent the below email to our firm clients and we figured it would be good to post it on here as well, to better spread the word. Bottom Line: We are up and running and we want to help.

 

On behalf of everyone at Harris Bricken, our hearts go out to all those impacted by COVID-19 around the world — not only those diagnosed with the virus, but also their friends and family and those whose work, education, and way of life have been affected. Our top priority, as always, is the health and well-being of our employees, clients and communities. With the above in mind, we write to update you regarding our operations and outlook for the days, weeks, and months ahead. We also want to communicate our plan to help you navigate this pandemic. Clients are the lifeblood of our firm, and we are tied together in good times and bad.

As a West Coast law firm with a large China practice, we have been monitoring the coronavirus outbreak since January. Since March 5, all attorneys and staff have been working from home to enable social distancing. Working remotely is not challenging or unique for our lawyers, in the sense that we regularly work from locations across the globe.

Whether in China, Spain, or the United States, our lawyers already have engaged with a myriad of legal and non-legal issues relating to the coronavirus, both for our clients and our own families. We have created a separate coronavirus section on our blogs (here and here) with our latest insight and commentary. Please let us know if you have suggestions for additional topics you would like us to cover.

In addition, to show solidarity with clients negatively impacted by the coronavirus, we will reduce our fees by 25% for any coronavirus related matter. Our goal is to mitigate your economic hardship, while ensuring you have access to a full range of legal services for getting through this critical period.

Though we are all experiencing great uncertainty, we are certain that by sticking together and supporting each other, we’ll all emerge from this stronger than before.

Most importantly, please do not hesitate to contact us, whether you need assistance with a legal matter or just to stay in touch.

Thank you for your loyalty. Stay safe.

Harris Bricken
firm@harrisbricken.com
206-224-5657

Coronavirus lawyers
@ Matt Kenyon

For the last three or so months, our China lawyers have been confronted with a host of legal issues related to the coronavirus. This should not be surprising because China was the seminal coronavirus epicenter. For the past two months or so, our Seattle lawyers have been working on a host of legal issues related to the coronavirus. This too should not be surprising because Seattle is the United States’ coronavirus epicenter. For the past month or so, all this has become true for our Spain lawyers as well, as Spain too became an epicenter and last week went into a full lockdown. Our California and Oregon lawyers have also in the past few months been hit with a slew of coronavirus related legal matters.

The coronavirus does not discriminate, though sadly, people do. See Do Not Blame Chinese People for the Coronavirus. No Exceptions. The coronavirus has and will continue to impacts all societies and economies and this has meant our law firm has been seeing and dealing with the same sort of legal issues in all the countries in which we work. This sameness of legal issues around the world has led us to create a cross-border legal team out of the United States, China and Spain to assist companies with their legal issues arising from or related to the coronavirus. This multi-disciplinary and multi-jurisdictional team is using the knowledge and experience our lawyers have gained in one jurisdiction to determine best practices in the other jurisdictions.

In this series of posts, we have been discussing the legal issues our lawyers in China, the United States, and Spain have been confronting, with the goal of making this blog a repository of information on coronavirus law and especially on how to handle legal matters that have arisen due to the coronavirus.

In Part 1, we focused on employment law issues because those were the first issues we saw and those are the issues that continue to arise most often. In Part 2, we looked at force majeure “in real life.”  In this part 3, we look at how the coronavirus is impacting tariffs and duties in the short term and how it will likely impact tariffs and duties and global trade going forward.

The coronavirus crisis has triggered increasingly loud calls in for lifting U.S. tariffs on steel and aluminum under Section 232 and on various other Chinese imports covered by Section 301. Many are worried the coronavirus is the proverbial straw that breaks many U.S. companies already struggling with the extra burden of the steel/aluminum and China tariffs. Lifting the tariffs on Chinese products in particular would give immediate relief to U.S. companies that have not been able to find alternative supply sources outside of China and are stuck with paying some, if not all, of the tariff bill on the Chinese products. See Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Prices.

Short of getting lifting the tariffs entirely, companies can petition the United States Trade Representative (USTR0 to lift specific tariffs via exclusion requests. So where are we with all these exclusion requests and what can your company still do to get your tariffs removed by using the tariff exclusion process?

USTR has announced four lists or tranches of tariffs on Chinese imports that were rolled out in intervals and went into effect starting in July 2018. Though the deadlines to submit exclusion requests for Section 301 tariffs for all lists of Chinese products have already passed, USTR is still reviewing many already-filed exclusion requests. So far, the Section 301 tariff exclusion request process has resulted in the USTR granting a good number of limited exclusions.

For the List 1 and 2 products (25% on $34 billion and $16 billion of goods), about 34% and 37% of the nearly 14,000 exclusion requests were granted and a handful of these requests still remain to be decided. Meanwhile, for List 3 (25% on $200 billion), the USTR has granted only around 1.3% of over 30,000 exclusion requests. Though the deadline for submitting these requests has also closed, as of about six months ago on September 30, 2019, nearly 60% of the List 3 exclusion requests are still pending review and we that percentage is probably not all that different today. The deadline for List 4A exclusion requests (7.5% on $120 billion) just closed on January 31, 2020. As noted below, USTR has already granted some exclusions from this list, but it seems the exclusion rate for List 4A product will be as low as for List 3.

One possible reason for the astoundingly sharp drop-off in exclusion rates is that List 1 and 2 mainly covered intermediate inputs (e.g., chemicals, engine and machinery parts) used by U.S. companies to manufacture other goods here in the United States, whereas List 3 and 4A covered far more consumer goods that were just imported and resold to U.S. distributors, retailers, and consumers. USTR was perhaps more sympathetic to exclusion requests from U.S. manufacturers who explained how their ability to produce goods in the United States would be compromised if the tariffs cut off their access to Chinese-origin inputs. In contrast, USTR seems to view consumer goods as something that could or should be fairly readily available from U.S. or third-country (non-China) sources, and thus far less willing to grant exclusions for List 3 and 4A products. List 4A products is getting few exclusions because the tariff rate on these has already been reduced from 15% to 7.5% by the Phase One Trade deal, so USTR likely considers these products as already having received a break and thus not in need off additional exclusions.

Another frustration with the Section 301 exclusion request process is the utter lack of transparency on how USTR decides whether to grant or deny an exclusion request. Describing the process as “opaque”, NBC News offered some examples of USTR’s decisions that are baffling observers.

For example, one company’s request for an exemption on metal dog crates was granted — but an almost identical product was denied … A single-speed bike received a tariff waiver, while a multi-speed bike by another company was denied.

Similarly, USTR granted a company’s exclusion request for curved-blade kayak paddles, but rejected exclusion requests from the same company for spoon-blade kayak paddles or stand-up paddles.

USTR’s exclusion letters — both rejections and grants — merely announce their thumbs-up or -down conclusion without providing any explanation or analysis of the facts presented. Despite many exclusion requests providing detailed explanations with supporting documentation why their products were not available from the U.S., or any third-country sources, USTR summarily concluded that the products were available but provided no factual basis for their decision.  Similarly, many company’s heartfelt pleas for relief from the economic burden of the tariffs were met with cold responses from USTR concluding that the tariffs would not cause severe economic harm to the company or to any other U.S. interest.

Because USTR’s exclusion decision making process is so opaque and appears to be made in a black box, many speculate that political influence is more important than any factual basis.  The timing of President Trump’s tweets regarding Apple, and the exclusion requests submitted and granted for Apple products, can hardly be considered a coincidence.

Trump even suggested last month that any waiver Apple has received should compel the company to offer further assistance to federal investigators seeking ‘back-door’ access to iPhones used by criminals. ‘I’ve given them waivers, because it’s a great company,’ Trump told CNBC in an interview at the World Economic Forum in Davos, Switzerland. ‘Apple has to help us.’

At the same time, however, the fact that Apple still has numerous exclusion requests still pending for products such as AirPod headphones and HomePod smart speakers suggests that even Apple’s significant political pressure has only achieved limited success through this exclusion request process.

Perhaps the only good thing about this incredibly flawed Section 301 exclusion request process is that the exclusions granted are not limited to only the company that requested them. Any other company with a product that fits the description listed in USTR’s exclusion notice may be eligible for refunds of the Section 301 tariffs even if they did not submit an exclusion request, or even if their own exclusion request was denied. USTR specifically states that the exclusions granted apply to the products listed and are not tied to any specific company or any specific product description from the underlying exclusion request. Some companies may prefer to have the exclusions apply only to them and would rather not have others free-ride off their work to prepare and submit the exclusion request. But given the randomness of USTR’s decision-making process and the limited exclusions being granted, it seems that sharing the benefits of the tiny handful of exclusions being granted is the right thing to do. So, even if USTR has already rejected your specific exclusion request, you should still closely monitor USTR’s exclusion notices because you could still benefit from USTR granting another company’s exclusion request if that product is similar enough to yours.

As we noted in a prior post, Get Your China Tariff Refund Now,

Products that were granted exclusions are now eligible for a refund of the tariffs paid as far back as the initial implementation of the tariffs. In other words, you could be owed a lot of money, but to get it, you need to properly ask for it.

USTR continues to issue a steady trickle of exclusions granted for the Section 301 China products. The latest round of exclusions was granted on March 10 and March 16 for products on List 3 and List 4A. Many of these recently excluded products include a variety of medical products imported from China, including face masks, hand sanitizing wipes and examination gloves. It appears that USTR has expedited the review and granting of these exclusion requests in just over a month after they were submitted because they could directly and immediately help first responders fight the spreading coronavirus outbreak. In this respect the coronavirus is leading to the USTR becoming more liberal in granting exclusion requests.

Though the need to grant exclusions for medical and health safety products is particularly urgent, the need to grant exclusions for other products needed by American companies to stay economically viable should also be considered just as urgent. Arguably, the Section 301 tariffs created enough pressure to get China to agree to the Phase One deal that theoretically will cause China to change its wicked IP ways. But now that the tariffs have helped move China, the U.S. should reconsider the harmful effects the tariffs likely will have on a currently reeling U.S. economy and whether they are still necessary. Because of the extenuating circumstances caused by the coronavirus crisis, USTR also has an opportunity to reconsider reversing any of its prior decisions to reject exclusion requests. Given how quickly the coronavirus is causing the shut down of economic activity in the United States, USTR should act quickly and decisively to not just suspend, but to refund tariffs on some or all Chinese goods to give more U.S. companies a fighting chance to survive. And if it would make the USTR feel any better, China’s economy did horribly in January and February and with the coronavirus crushing demand worldwide, there is no recovery in sight.

All this means that the coronavirus is more likely to lead to a short-term reduction in tariffs in both the United States and worldwide. Long term, however, the coronavirus is likely to have the opposite impact.

A Foreign Affairs article, Will the Coronavirus End Globalization as We Know It? discusses what the coronavirus has taught the world about globalized supply chains, and as most of you would probably guess, those lessons have not been pretty:

The lesson is that globalization is fragile, despite or even because of its benefits. For decades, individual firms’ relentless efforts to eliminate redundancy generated unprecedented wealth. But these efforts also reduced the amount of unused resources—what economists refer to as “slack”—in the global economy as a whole. In normal times, firms often see slack as a measure of idle, or even squandered, productive capacity. But too little slack makes the broader system brittle in times of crisis, eliminating critical fail-safes.

Lack of fail-safe manufacturing alternatives can cause supply chains to break down, as they have in some medical and health-related sectors as a result of the new coronavirus. Producers of vital medical supplies have been overwhelmed by a surge in global demand, pitting countries against one another in a competition for resources. The outcome has been a shift in power dynamics among major world economies, with those that are well prepared to combat the new virus either hoarding resources for themselves or assisting those that are not—and expanding their influence on the global stage as a result.

Products like surgical masks and medicines glaringly highlight the price the United States and Europe are paying for having offloaded so much of their manufacturing to China. Both the United States and Europe are low on surgical masks and certain medicines and China is exploiting these shortages to reward those countries that do its bidding and to punish those that don’t:

These beggar-thy-neighbor dynamics threaten to escalate as the [COVID-19] crisis deepens, choking off global supply chains for urgent medical supplies. The problem is dire for the United States, which has been late to adopt a coherent response to the pandemic and is short on many of the supplies it will need. The United States has a national stockpile of masks, but it hasn’t been replenished since 2009 and contains only a fraction of the number that could be required.

*      *      *      *

[These shortages give] China an enormous short-term opportunity to influence the behavior of other states. Despite early mistakes that likely cost the lives of thousands of people, Beijing has learned how to fight the new virus, and it has stockpiles of equipment. These are valuable assets—and Beijing has deployed them with skill.

In early March, Italy called on other EU countries to provide emergency medical equipment as critical shortages forced its doctors to make heartbreaking decisions about which patients to try to save and which to let die. None of them responded. But China did, offering to sell ventilators, masks, protective suits, and swabs. As the China experts Rush arrangements and Julian Administration have argued, Beijing seeks to portray itself as the leader of the global fight against the new coronavirus in order to promote goodwill and expand its influence.

The United States has already responded to these medical and geopolitical threats by moving to enact legislation that will encourage the United States to re-start its manufacturing of medical products. Pharma Will be Leaving China to Come Home to the United States. And once the coronavirus starts to dissipate, we anticipate the Trump Administration — and likely the next administration as well (whoever that may be) — will take bold steps to reduce U.S. dependence on China, while concurrently striking trade deals with the UK and the EU that include mandatory product sharing arrangements in times of crisis. In other words, we anticipate a resumption more and larger tariffs and duties against Chinese products in the years to come, and not just from the United States.
Foreign Affairs nicely sums up how the coronavirus trade shocks will shape the future of global trade:

As policymakers around the world struggle to deal with the new coronavirus and its aftermath, they will have to confront the fact that the global economy doesn’t work as they thought it did. Globalization calls for an ever-increasing specialization of labor across countries, a model that creates extraordinary efficiencies but also extraordinary vulnerabilities. Shocks such as the COVID-19 pandemic reveal these vulnerabilities. Single-source providers, or regions of the world that specialize in one particular product, can create unexpected fragility in moments of crisis, causing supply chains to break down. In the coming months, many more of these vulnerabilities will be exposed.

*      *      *      *

Unsurprisingly, President Donald Trump’s trade adviser, Peter Navarro, has used this and other shortages to threaten allies and to justify a further withdrawal from global trade, arguing that the United States needs to “bring home its manufacturing capabilities and supply chains for essential medicines.”

The coronavirus shock has rattled and changed the thinking of manufacturing companies as well. Many are calling the coronavirus “the last straw” for their doing business with China and they are scrambling to get out as soon as they can. See China’s ravaged manufacturing heartlands force international firms to speed up exit strategies. US and EU manufacturers have gone from paying lip service to diversifying their supply chain to focusing on doing so. Since the inception of the coronavirus, one of our firm’s international manufacturing lawyers often says there are now four types of companies manufacturing in China: 1) Those that desperately want to get out and are making concrete plans to do so: 2) Those that desperately want to get out and say they will start making concrete plans to do so once the coronavirus impacts have declined enough so that they have the opportunity to do so; 3) Those that desperately want to get out but realize doing so in the next couple of years is simply not possible; and 4) The smattering of companies (mostly big multinationals) that want to keep just enough of their manufacturing in China to look good to Chinese citizens that buy their products.

The coronavirus has already greatly impacted global trade and we expect that will continue for years if not decades.

Force Majeure lawyers
Force Majeure: The Band

For the last three or so months, our China lawyers have been confronted with a host of legal issues related to the coronavirus. This should not be surprising because China was the seminal coronavirus epicenter. For the past two months or so, our Seattle lawyers have been working on a host of legal issues related to the coronavirus. This too should not be surprising because Seattle is the United States’ coronavirus epicenter. For the past month or so, all this has become true for our Spain lawyers as well, as Spain too became an epicenter and last week went into a full lockdown. Our California and Oregon lawyers have also in the past few months been hit with a slew of coronavirus related legal matters.

The coronavirus does not discriminate, though sadly, people do. See Do Not Blame Chinese People for the Coronavirus. No Exceptions. The coronavirus has and will continue to impacts all societies and economies and this has meant our law firm has been seeing and dealing with the same sort of legal issues in all the countries in which we work. This sameness of legal issues around the world has led us to create a cross-border legal team out of the United States, China and Spain to assist companies with their legal issues arising from or related to the coronavirus. This multi-disciplinary and multi-jurisdictional team is using the knowledge and experience our lawyers have gained in one jurisdiction to determine best practices in the other jurisdictions.

In this series of posts, we have been discussing the legal issues our lawyers in China, the United States, and Spain have been confronting, with the goal of making this blog a repository of information on coronavirus law and especially on how to handle legal matters that have arisen due to the coronavirus.

In Part 1, we focused on employment law issues because those were the first issues we saw and those are the issues that continue to arise most often due to the coronavirus. In this Part 2, we look at the second most common issue we have been seeing arise from the coronavirus: force majeure. In fact, our deep experience with this issue has already led our lawyers to be interviewed and quoted on force majeure in this Economist article, this Financial Times article, and this Corporate Counsel article and in Spanish in this EuropaPress article and in this Cinco Días article.

The force majeure issues we have been handling and seeing in the last few weeks in the United States and in Spain have to a large extent tracked those we started getting months ago involving China. Below we discuss a complicated and yet common supply chain force majeure issue that involves both China and the United States so as to highlight the importance in all force majeure cases of trying to resolve them before they become a long and expensive loser take all lawsuit.

 

In the face of the COVID-19 pandemic, the breakdown in the global supply chain has become even more severe. At one point, the issue was confined to imports from factories in China. Now the issue has become global. As a global issue, the impact is felt by all players in the global system: factories that make things, importers that import those things, and retailers that sell those things.

Many of our clients are American (both North, Central and South), European, and Australian companies that stand in the middle of this now broken global supply chain. Our clients import products made in China and in other countries, like Vietnam, Thailand, Turkey, Malaysia and Mexico. Our clients then sell their products to wholesale and retail customers in their own countries, and often times globally as well. As the supply chain breaks, the importer is in a difficult position.

Consider the difficulty and take China as an example. The U.S. importer has a contract with a Chinese factory. But the importer also has a contract with a U.S. customer. At the start of the COVID-19 pandemic, the concern of the importer was direct. The importer is required to sell to the U.S. customer on a confirmed contract: either a long term purchase agreement or one or more confirmed purchase orders. But due to China’s long COVID-19 lockdown, this U.S. importer’s Chinese factory cannot produce any product. So the importer is unable to meet its contractual obligation to its U.S. customer and is therefore in default.

The legal issue is then whether the U.S. importer can escape liability for its default by claiming its failure to supply is a force majeure event. Under force majeure principles, the importer is not liable if its inability to perform is due to an event that a) is not within its control and b) was not foreseeable. In China, it is generally understood that COVID-19 in China qualifies as a force majeure event.

But under U.S. law, the situation is not that simple. Unlike China and most civil law countries, the U.S. does not have a general law of force majeure. In China, the contract law has a built in provision concerning impossibility of performance. But in the U.S., the issue is normally addressed largely by analyzing of what the applicable contract provides on the force majeure issue. In the case of the U.S. importer, this then results in an impossibly complex situation. A court would be required to examine: a) the facts of the outbreak in China and its impact on the Chinese factory, b) the contractual relationship between the Chinese factory and the importer and c) the contract between the U.S. importer and the customer.

The situation in the U.S. has become even more complex. In the standard analysis, the customer wants the product. The importer cannot provide the product and the customer makes a claim for breach. But in the current situation, the opposite may be true. The importer has made heroic efforts to obtain the product by having made additional payments to its Chinese factory to jump ahead of the Chinese factory’s other buyers. Or maybe the importer spent large sums of money to move its production out of China so as to be certain to get its U.S. customer the product. But now that the importer has jumped through one or more expensive hoops to get the product to the United States, its customer no longer wants the product because coronavirus lockdowns in the United States has eliminated demand. Say you are providing a product for sale in a smart phone accessories retail chain. But that chain has shut down. Or you are providing items used in the restaurant, bar or hotel industry. But that industry is shut down. Being shut down, they have no need for your product. Even worse, they do not know when they will be back up and running.

This situation can then lead to a cascade of defaults where force majeure principles could plausibly be used as a defense in four settings: a) importer against foreign factory default, b) foreign factory against importer default, c) U.S. customer against importer default, d) importer against customer default. In this cascade of defaults, lawsuits and defenses, the importer is stuck in the middle.

So what is to be done? In our experience once the lawsuits begin, the importer in the middle suffers the most. For this reason, the strategy for the importer should be to take action NOW, with the goal of preventing the cascade of defaults from starting and of preparing a legal defense that will mitigate legal liability if the prevention work does not fully succeed.

The first step is for the importer to review all its agreements. This should include its contracts, purchase orders, sales plans and estimates. The first thing to consider is whether the contract specifically deals with force majeure and, if so, how. Some contracts do not deal with the issue at all. For contracts in most civil law countries like China (and most other countries in the world), impossibility of performance usually addresses the issue. In the U.S., there are a full range of possibilities. Some contracts will have pages dealing with specific rules on dealing with force majeure. Some will have a single “bolerplate” paragraph. Some distribution arrangements are done on a handshake and say nothing. Other sales arrangements are based on a bare purchase order that may or may not be formally accepted.

The purpose of this first step is to determine whether there are any required procedures in place that must be followed. For example, in many cases, if force majeure will be used as a defense, the party invoking force majeure must provide immediate notice and a mitigation plan must be adopted. If these rules apply, they must be followed or any later force majeure defense very well might be deemed ineffective. For the importer, this analysis is complex. The importer may have numerous foreign factories and numerous customers. The importer must determine where it stands with all the players and then must assess its liability with respect to each.

The second step is to develop a plan NOW to communicate with all the players. Based on our experience in these situations, once the cascade of defaults and lawsuits starts, it is too late for the importer to save the situation. The importer must get ahead of the situation and fight against the tendency of all parties to “freeze up” and stop communicating, in the belief that if we don’t discuss it nobody will notice it. This is a natural response; the parties hope the situation will just go away. But this approach almost invariably fails. The approach with by far the best chance of working is for the importer to take action.

The basic action plan should usually be as follows:

  • Assess the situation. Will the factory provide product? Don’t rely on a vague statement from the factory that it will do so because that is just not good enough in this sort of situation. Insist on a specific delivery date and seek to avoid having to make any payments until the delivery is made. If the factory will not provide a hard delivery date, assume no delivery will be made. Do the same assessment with your customers. Do they still want the product? Will there be a delay? If there will be a delay, how long? What about payments, now or in the future?
  • Make a plan that involves communicating with all parties. In a global pandemic situation like that of COVID-19, the analysis will almost certainly reveal problems. Take immediate action to communicate with the parties involved to work out a plan to deal with these problems. If the factory will delay delivery of the product the importer cannot deliver that product to its customer and it should contact that customer immediately to develop a plan to deal with the situation. If the customer does not want to take delivery, it should work with both the customer and the factory to develop an alternative plan.

In the planning phase, some players will be cooperative and some will not. One of the goals of the planning phase is to find this out. For the cooperative player, work constructively to develop a plan. For the resistant players, work to develop a legal plan that protects your interests and those of the other parties that will be impacted. In either case, it is critical that you document your plan and then closely monitor all relevant events and revise your plan as conditions change.

The ultimate key when you are involved in any force majeure situation, be it one involving a global supply chain or your restaurant lease in Seattle, Washington or Madrid, Spain, is not to become a passive victim of the COVID-19 pandemic. Get out in front of the issue. Face the reality of the situation, assess your contractual and factual situation and make a plan that can solve or alleviate the problems and then implement that plan.

COVID-19 and China business complexities have been filling our minds and our inboxes with difficult questions for months. On Thursday, March 19th at 7:30 a.m. Pacific Time, we will be answering many of those questions at this free webinar put on by the World Trade Center Utah.

Please join Harris Bricken as we partner with World Trade Center Utah for a webinar on how COVID-19 affects business with China and Taiwan.

Harris Bricken attorneys Jonathan Bench, Mathew Alderson and Fred Rocafort will be discussing an array of relevant issues for business owners, including the changes in:

  • China’s media and entertainment industry
  • Import and export activities
  • Cross-border M&A deals
  • Chinese e-commerce platforms
  • China’s labor and employment
  • Taiwan as an alternate launching ground to China after Taiwan’s recent presidential election.

As the rest of the world is just starting to grapple with COVID-19, China continues it slow recovery and is eager to return to business as usual. Will that be possible? What will the new normal for China look like?

For attorneys, this is a great opportunity to earn some CLE credit.

Register here today!

We are interested in your questions. Please send them to hlowry@wtcutah.com. Whether you can attend or not, we will be sure to point you to the recording on the blog. In the meantime, you can keep pace with us by checking out our extensive blog posts here.

coronavirus legal issues lawyers
(KPRC/Johns Hopkins Center for Systems Science and Engineering)

For the last three or so months, our China lawyers have been confronted with a host of legal issues related to the coronavirus. This should not be surprising because China was the seminal coronavirus epicenter. For the past two months or so, our Seattle lawyers have been working on a host of legal issues related to the coronavirus. This too should not be surprising because Seattle is the United States’ coronavirus epicenter. For the past month or so, all this has become true for our Spain lawyers as well, as Spain too became an epicenter and last week went into a full lockdown. Our California and Oregon lawyers have also in the past few months been hit with a slew of coronavirus related legal matters.

The coronavirus does not discriminate, though sadly, people do. See Do Not Blame Chinese People for the Coronavirus. No Exceptions. The coronavirus has and will continue to impacts all societies and economies and this has meant our law firm has been seeing and dealing with the same sort of legal issues in all the countries in which we work. This sameness of legal issues around the world has led us to create a cross-border legal team out of the United States, China and Spain to assist companies with their legal issues arising from or related to the coronavirus. This multi-disciplinary and multi-jurisdictional team is using the knowledge and experience our lawyers have gained in one jurisdiction to determine best practices in the other jurisdictions.

In this series of posts, we will be discussing the legal issues our lawyers in China, the United States, and Spain have been confronting, with the goal of making this blog a repository of information on coronavirus law and especially on how to handle legal matters that have arisen due to the coronavirus.

In this part 1, we will focus on employment law issues because those were the first issues we saw and those are the issues that continue to arise with the most frequency. In subsequent posts, we will look at the following legal issues, with a focus on what our lawyers are seeing and the the impact the coronavirus is having:

  • Contract law issues, especially those involving force majeure. See this Economist article, this Financial Times article, and this Corporate Counsel article in which our lawyers were interviewed in English regarding force majeure and this EuropaPress article and this Cinco Días article, where we discuss force majeure in Spanish.
  • Trade and customs law issues.
  • Insurance coverage issues, including business interuption insurance issues.
  • Real estate issues, including leases and construction contracts.
  • Intellectual property issues, including trademarks, copyrights, patents, trade secrets, and non-competes.
  • Dispute resolution issues, including litigation, arbitration, and mediation.
  • Data protection and data privacy issues.
  • Fraud issues, as those are very much on the increase.

EMPLOYMENT LAW ISSUES

Our employment lawyers have been working nearly non-stop on employment matters arising from the coronavirus and its concomitant economic downturn. The below are the sorts of issues we have been getting and/or anticipate getting, in China, the United States and in Spain.

Terminations.

In all places, clients want to know whether they can lay off one or many of their employees. Our analysis is usually the same no mater the jurisdiction but our conclusions are very much dependent on the state or the country. In all places, we review the employment contract (if any), the employer manual (if any), and the national and local laws, along with any new laws enacted to deal especially with the coronavirus. In the United States (with the exception of California), employee terminations tend to be somewhat less risky than employee terminations in China and in Spain.

Work hours and wages.

In all places, clients also want to know whether they can reduce the work hours or the wages for some or all of their employees in an effort to better reflect the business realities they are confronting. As is true for employee terminations, the answers to time and wage reduction questions usually requires our lawyers review the employment contract, the employer manual,  and the national and local laws, along with any new laws enacted to deal specifically with the coronavirus.

Workplace safety.

In all places, clients have many questions regarding workplace safety. As you would expect, our answers for China and the United States and Spain vary tremendously but for many of the below, many of the answers within China and the United States and Spain also vary tremendously based on the state/province and even the particular city. The below are the sort of questions we have been getting and that we anticipate getting relating to workplace safety.

  • What should we be doing as an employer to reduce the spread of COVID-19 ?  What are we required to do as an employer to reduce the spread of COVID-19?
  • Can we make our employees wear face masks? Can we make our employees not wear face masks?
  • What should I do about an employee who appears sick but keeps coming to work?
  • Can we take our employees’ temperature? Can we take the temperature of employees who appear sick? Can we take the temperature of an employee whose significant other works in a retirement home or a hospital, just because of this?
  • What should I do with an employee who had COVID-19 but has recovered? What do we do with an employee who has tested positive for COVID-19 yet shows no symptoms? What should we do with an employee who has tested positive for COVID-19 and who we have sent home? What should we do if one of our employees is suspected of having COVID-19 but has not yet been tested?
  • What should we do if we believe one of our employees has COVID-19 in terms of alerting our customers? Are we required to inform any government agencies that one of our employees has COVID-19?

What, if anything, should we require of our employees in dealing with our customers that we know have COVID-19? What if anything can or should we do with an employee who refuses to meet with customers for fear of getting infected?

We also are seeing the issues set forth below, mostly involving questions centered around “What does the law require we do about X? or “What should we do about X”:

    • Working Remotely

      • Remote work policies
      • Remote employee productivity
      • Remote employee morale
      • Employee live meetings
      • Employees who insist on working from home out of fear of getting infected
      • Treatment of a 22 year old employee in great health versus a 64 year old employee with a long history of heart and lung problems
      • Requiring remote employees to work from their home only
      • Prohibiting remote employees from traveling
    • Record Keeping

      • What new records necessary
    • Employee Travel

      • What constitues employee travel
      • What to do for an employee stuck somewhere on vaction or business
      • Prohibiting employee from leaving town on vacation
      • What to do with an employee who just returned from a high risk area
      • What to do with an employee who refuses to travel for fear of getting infected
      • What to do with employees in overseas office
      • What to do with employees overseas on a short term basis
      • What to do with employees under quarantine locally or overseas
      • What to do with an employee who violates a quarantine
      • COVID-19 impact on foreign employees versus local employees
      • COVID-19 impact on employee immigration status or ability to remain in country
    • Liability 

      • Liability for employee getting the coronavirus at work
      • Liability for an employee getting covonavirus at work who could have worked from home but employer did not allow that versus an employee who could not reasonably have worked from home
      • Liability for an employees getting the coronavirus at work and then infecting his or her significant other who dies from it
    • Employee Benefits

      • Timing on changing health insurance plan
      • New health insurance requirements
      • New sick leave requirements
      • New laws that impact employee benefits

For most of the above, our advice varies depending on the situation and/or goals of the employer and its employee(s) and on the employer and employee’s country and location within the country. But our methodology and analysis are usually the same. What must the employer or employee do pursuant to the relevant contracts and the applicable laws? Or, what should the employer or employee do?

What are you seeing out there?

Moving your manufacturing Out Of China

Five years ago, for every 100 companies our China lawyers helped set up contract manufacturing in China, we helped maybe one end its contract manufacturing in China. Two years ago, that ratio was maybe 100 going to China and five leaving. Today, for every company our law firm helps set up manufacturing in China we help around the same number leave or at least try to leave. And because far fewer companies realize the need for legal counsel when ceasing to manufacture in China (as opposed to starting to manufacture in China), I have concluded that far more companies are ceasing to manufacture in China than are starting to manufacture in China.

This post addresses how best to extricate from your Chinese factory.

My law firm’s advice every single time to our clients who are laying off workers in China or closing a facility in China or allegedly owing money in China is to stay outside China  for any all negotiations. The same holds true for ceasing to manufacture in China. The below is our advice if you are in a dispute with a Chinese company or if you might owe money to a Chinese company. One only needs to be a regular reader of our blog to know that we took this position long ago and have never waffled:

  • The best thing to do is not go to China at all.
  • If you must go to China, think about using a bodyguard or two or three and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
  • Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

In a similar vein, we have also written extensively on the importance of preparing well in advance for terminating your China supplier. And by plan in advance, we mean make sure that you have secured your molds and all paid-for product before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere. It typically makes sense to have a new supplier lined up or at least in mind for when you make your exit. Last week, I worked on manufacturing exit plans for two companies, and both have a six month time frame, which is about average as they usually range from three to nine months.

For obvious reasons, few companies that have major problems trying to leave their China supplier speak about it to the press, but many years ago, in Jilted Chinese supplier tells would-be U.S. reshorer -“Not so fast,” an American toy company did, largely because it brought a lawsuit in the United States against its Chinese supplier. The article describes the lawsuit as based largely on allegations that the Chinese supplier ceased providing the American company credit and delayed deliveries, all in an attempt to make it impossible for the American company to start making its toys in the United States.

Though I have no idea whether the allegations in this lawsuit are true, I do know it is common for Chinese manufacturers to seek retaliation against their American product buyers that cease buying product from them. For this reason, we instruct our clients to line up new suppliers and have them ready to go before they even hint that they might cease production with their existing China suppliers. We give this advice because over the years our China lawyers have repeatedly seen the following:
  • Foreign company tells its China manufacturer it will no longer use its China manufacturer for its production. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds In China and Want Your China-Based Molds? You’re Probably Too Late For That.
  • U.S. company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. The China manufacturer then registers the U.S. company’s brand names and logos as trademarks in China and a key element of its product as utility patents in China and in the United States and then starts selling the U.S. company’s products around the world, using the U.S. company’s brand names. The U.S. company sues the Chinese company for patent infringement in China and for infringement of its U.S. trademarks in Seattle. The Chinese company then sues the U.S. company twice in Texas for patent infringement. The three U.S. cases are eventually consolidated (by agreement) in San Francisco and the U.S. company loses its patent challenge in China. I mention all this to tell you the high costs companies often have to pay for leaving their manufacturer without advance planning.
  • Foreign  company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. A few weeks later, foreign company has its products seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the foreign company’s brand names as trademarks in China long ago and is just now using that trademark to seize its product as revenge (or just registered the design patent). China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove it is your Shenzhen’s cousin in Xi’an that did the trademark registration, this sort of thing goes on unchecked. For how to prevent this from happening to you, check out the following:
  • Foreign company tells its China manufacturer that it will no longer use it for its production. China manufacturer then says that it will not be shipping any more product because the foreign manufacturer is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports the foreign manufacturer to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which convinces all of the foreign company’s other Chinese manufacturers not to sell anything to the foreign company without 100% payment upfront. We see this particular scenario all the time and for more on how these Sinosure cases go down, check out China’s Sinosure: It’s Back and It Wants Your First Born. Sinosure is relentless and I’ve seen it drive good companies into bankruptcy.
  • US company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. China manufacturer then either threatens to or actually does hold people from the US company hostage for alleged debt. For more on the problems that can arise from allegations of not having paid a debt to a Chinese company, check out China Hostage Situation. Now IS A Good Time To Pay Your Debts and How Not To Get Kidnapped In China, Part 3. Resolve Your Debt Problems Before You Go.

You should always plan ahead for pulling your production from your Chinese manufacturer. This planning ahead usually involves the following:

1. Not telling your Chinese manufacturer you are even contemplating leaving it until you are completely prepared to leave.

2. Making sure you have good contracts with your Chinese manufacturer before you leave it. If you don’t have good contracts with your manufacturer now, get them. These contracts will make it much tougher for your manufacturer to sabotage you when you leave.

3. Make sure your IP protections are in order before you leave your Chinese manufacturer.

4. Make sure your alternative supplier(s) are truly lined up and ready to go before you leave. We have had clients who left their Chinese manufacturer for a new manufacturer in another country and then had to wait 6 months to get good product from their new manufacturer. I realize there is cost savings by not duplicating production, but there are also big risks.

5. Figure out exactly what your total costs will be before moving your manufacturing to a new manufacturer in a new country. We have had companies come to our law firm after their move seeking help with re-negotiating their arrangements with their new manufacturer because they didn’t realize that the shipping costs would be higher or that their widgets would be a subject to a tariff or that they were expected to pay xyz tax or whatever. Just realize that these sorts of “extra” costs can vary tremendously country by country, as can the expectation as to who is responsible for paying them.

What are you seeing out there?