China contract damages
  Joost Bakker

This must be China contract damages week. I say that because in cleaning up months of emails I came across three interesting emails on contract damages (similar to  liquidated damages under common law). Before I discuss those three emails, I will explain what contract damages are and why they are so important in just about all China contracts.

Contract damages refers to a contract provision setting out the damages for breach. The typical contract might have a provision saying if Party X breaches this contract, Party Y is entitled to $100,000 in contract damages. Some contracts we write will have more than one contract damages provision. For instance, we might write a distribution agreement that provides for $300,000 in contract damages for a distributor breaching the contract by stealing our client’s IP and another contract damages provision providing for 1% a month in contract damages for late payments.

Contract damages are an amazing and oftentimes essential element of a good China-specific contract.

In the standard commercial contracts, our China lawyers usually include a specific damage amount for certain (but not all) violations of the contract terms. We alway say that coming up with the right amount and the right combination of contract damages is an almost magical combination of experience and art, not a science. We vary the amount of contract damages each time, based on a combination of the amount at stake in the contract, the likely amount of damages if there is a breach, the location of the court in which disputes will be resolved, the moral culpability of the breach, the industry, the financial wherewithal of the Chinese party, the power/prestige of the Chinese company, and sometimes even the country in which our own client is based. The only constant is that we try to make the amount as high as we can, while at the same time erring on the side of keeping it low enough so that it will actually work to scare the Chinese company into not breaching the contract.

Our China lawyers need to ensure that the Chinese judge will not view this provision as a penalty, but rather an honest assessment of what real damages might result from the breach. Perhaps most importantly, this amount needs to be high enough to deter the Chinese counter-party from breaching the contract, yet also low enough so that it will actually sign the contract and so that a Chinese court will enforce it. Chinese courts will often simply invalidate or just ignore a contract damages provision if they deem it to be too high. Far too often foreign companies and their lawyers will put use such a high amount in their contract damages provision that the Chinese company will readily sign the contract, knowing it will never be enforced. They are trying to cover themselves for any potential lost profits they might lose from a breach, but in doing so they shoot themselves in the foot because no Chinese court will enforce it and knowing this, their Chinese company has no fear in breaching.

But done right, contract damages can be a near miraculous thing and our China attorneys love them for the simple reason that they work. Putting the right contract damages provision in your China contract does the following important things:

  1. Increases the likelihood your Chinese counter-party will not breach your contract.
  2. Increases the likelihood you will be able to avoid litigation if your Chinese counter-party breaches your contract.
  3. Increases the likelihood you will prevail quickly in litigation if you do end up needing to sue your Chinese counter-party.

Chinese contract law clearly provides for “contract damages” and Chinese judges tend to like them. Though contract damages are both permitted and encouraged, they cannot be used as a penalty and Chinese courts therefore usually will allow a defendant to argue that the contract damages are too high and the court should therefore ignore them and award a lower amount. The court is then free to accept this argument and award the lower amount.

Amazingly enough, the plaintiff also has the right to argue for an amount higher than the contract damage amount. That means that well-crafted contract damages can be used as a damages floor, but not a ceiling. Though this idea of allowing defendants to argue for less than the amount of contract damages set forth in a contract while also allowing a plaintiff to argue for more does obscure the concept of contract damage amounts, our China lawyers still nearly always include contract damages in the China contracts we draft. We do that for the following three reasons:

  1. We want a specific number for when we contact the breaching party to try to settle and having contract damages gives us a specific damage amount to discuss.
  2. We want a specific number for when we go to the court when suing for a breach of contract. This is particularly important for those situations where the amount of damages is not clear.
  3. Most importantly, we want a specific number to use for a prejudgement attachment of assets. One of the best ways to stop a Chinese company from infringing on your intellectual property rights (IPR) is with prejudgment attachment. But to to get that you need a reasonable standard for the amount of damage that will quickly set the amount to be attached. Contract damages provides that reasonable standard. Chinese companies know how easy it is to attach/seize their assets based on a contract damages provision and they fear this. This in turn makes them far less likely to breach a contract with a well-crafted contract damages provision.

Securing injunctive relief is difficult in China and  have an agreed contract damage amount in cases where the actual amount of damages is difficult/impossible to calculate. In these cases where there is no clear monetary damage (the classic common law injunctive relief situation), PRC courts generally have NOT allowed defendants to argue that no relief should be awarded when there is a contract damages provision.

Now about those three emails. The first was from one of our China manufacturing lawyers to a client regarding the amount of contract damages we had chosen to put into an NNN Agreement. I see this sort of email all the time and it was in response to a client complaining that the amount we had chosen as contract damages were too low:

I do not advise we increase the amount of contract damages we have written into your NNN Agreement. Note that this $350,000 per each event and note that it is intended to represent a fair estimate of your losses from each breaching event. When the amount of contract damages is too high, the Chinese side is unlikely to sign the agreement because it will think you are being unreasonable and or demonstrating your inexperience with how to conduct business in China. Equally importantly, a Chinese Court is unlikely to enforce a much higher amount because it will view it as not having a sufficient relation to the actual damages.
That said, there is nothing “magical” about the $350,000 we chose here for the contract damages amount. We came to this figure using various different factors we ordinarily use for calculating the best amount of contract damages for any specific contract. If you still believe our number is too low, let’s talk more about what your losses are likely to be and see whether we can come to a number we both like.
The second email also was from one of our China IP lawyers to a client involving an IP licensing agreement. In this matter, the Chinese side had stricken our contract damages provision entirely and our client was asking how to respond to that:
As for paragraph 8.2, the sentences they [the Chinese company on the other side of the deal] are seeking to remove are one of the core provisions of this licensing agreement because they provide for contract damages in a specific monetary amount for every act of breach. This sum certain amount (called contract damages) provides the Chinese court with the basis for a prejudgment seizure of the Chinese company’s assets (but it does not limit the court’s power to decide the amount of damages). In short, these sentences give your agreement real teeth and I would not accept the proposed change and would push back hard on this. The Chinese company knows this provision is powerful and will make its breaching your contract more risky to it and for that reason it does not like it. This is somewhat of a red flag regarding the Chinese company’s intentions and so we probably will want to draw a clear line on this issue.

The third email was from me to a company that wanted our China litigation/arbitration team to take its case and the contract damages part of this email went like this:

I also do not like the contract damages provision in your contract. It’s for $25 million dollars on a 2.5 million dollar deal and near as I can tell from what I have read and from what you told me when you spoke, your damages here are well under a 2 million dollars on a really good day and I do not see how anyone could ever have viewed them as being higher than this when the contract was signed. To be blunt with you, I do not even see how you get to $2 million dollars in damages under your analysis and under a U.S. damages analysis I have a hard time getting past $1 million in damages and I am skeptical a Chinese court would see even $750,000 in damages here. Your too-high contract damages provision is going to hobble us from the get-go. It is too high for us to use to try to freeze the Chinese company’s assets so we probably should just forget about that. Even worse, and based on what the Chinese company has told you and on how it is acting, it has zero fear of this happening and in fact, it plans to use this provision to paint you as the horrible exploitive Westerner (the potential client was from the Europe) trying to take advantage of a Chinese company. Not sure how far that will actually get this Chinese company, but it probably will to eat up more time.
So again, I really wish you had used a lawyer who knew what it was doing with Chinese contracts because if you had, you would be in a much better position right now and we might have been interested in taking on this case. But this, coupled with all the other flaws we see in your contract have convinced us that we are not the right law firm for this case. But just to be clear, I am NOT telling you that you have no case and I am NOT telling you not to pursue this case. What I am telling you is that we simply would not feel comfortable taking your money to handle this case nor are we interested in taking it on a contingency fee basis. I therefore urge you to find another attorney/law firm for this litigation and I truly wish both you and your company nothing but the best going forward. This Chinese company did not treat you fairly and I would hate to see it get away with that.
Bottom Line:  Contract damages can be a great thing in a China contract, but only if done right.

China tariffs

Some very important news today from the United States Trade Representative (USTR). Approximately 20 percent of the items set to be hit with a 10 percent tariff on September 1 had their tariff date pushed back to December 1, this morning, per the following announcement from the USTR:

USTR Announces Next Steps on Proposed 10 Percent Tariff on Imports from China

Washington, DC – The United States Trade Representative (USTR) today announced the next steps in the process of imposing an additional tariff of 10 percent on approximately $300 billion of Chinese imports.

On May 17, 2019, USTR published a list of products imported from China that would be potentially subject to an additional 10 percent tariff. This new tariff will go into effect on September 1 as announced by President Trump on August 1.

Certain products are being removed from the tariff list based on health, safety, national security and other factors and will not face additional tariffs of 10 percent.

Further, as part of USTR’s public comment and hearing process, it was determined that the tariff should be delayed to December 15 for certain articles. Products in this group include, for example, cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing.

USTR intends to conduct an exclusion process for products subject to the additional tariff.

The USTR will publish on its website today, and in the Federal Register as soon as possible, additional details and lists of the tariff lines affected by this announcement.

The USTR then almost immediately came out with two new tariff lists. One, called List 4A, is a 121 page lists of products that will be subject to a 10 percent tariff on September 1, as originally planned. The other, called List 4B, is a 21 page list of products that were to be subject to a 10 percent tariff on September 1 but will instead not be subject to that tariff until December 15.

Cellphones, laptop computers, video game consoles, certain toys, computer monitors and some shoes and clothing make up the bulk of the list of items on which tariffs have been delayed. This delay is believed to have been instituted to avoid higher prices on items often bought by back-to-school and holiday shoppers.

Doing business in Hong Kong

Not sure why nobody has just come out and said this yet, but Hong Kong as an international business and financial center is no more. I take no comfort in saying this because I have many friends in Hong Kong and I’ve always loved going there, but Hong Kong’s special position is over. Kaput. Fini. Terminado. 完. законченный. Done. Over. No more.

I challenge you to say “one country two systems” with a straight face.  

For the last few months I have been relentlessly asking everyone I know in Hong Kong or who used to be in Hong Kong or who at one time contemplated setting up a business in Hong Kong how what has been happening in Hong Kong has and will or would impact their doing business in Hong Kong. Based on those responses and on my own experience with how international companies operate, I foresee the following:

  1. Companies that were deciding between Hong Kong or Singapore for their Asian headquarters will choose somewhere other than Hong Kong.
  2. Growing companies with offices in Hong Kong and with offices somewhere else in Asia will increase their hiring outside Hong Kong and decrease or eliminate their hiring in Hong Kong.
  3. Companies with offices in Hong Kong and with offices somewhere else in Asia will be move personnel from their Hong Kong office to their other offices.
  4. Fewer contracts will be drafted with Hong Kong as the venue for arbitration.
  5. Companies will move their Hong Kong bank accounts elsewhere. It is no coincidence HSBC stock hit its 52 week low today.
  6. Travelers will choose somewhere other than Hong Kong as their Asia stopover. It is no coincidence Cathay Pacific stock hit its 52 week low today.
  7. Many Hong Kongers will eventually go elsewhere.

I am not saying any of the above will be noticeable tomorrow or even a month from now, but I am saying that all of the above have already begun and all of the above will accelerate once China’s army goes in at full force, which is pretty much inevitable. Within two years Hong Kong will be a very different place than it is today and within five years it will hardly be recognizable for those of us who have been there within the last five years.

Since the inception of the US-China trade war, this blog has been relentlessly downbeat about the US-China trade war and its impacts. Way back in October 2018, we called the US-China trade war the “New Normal” and in Would the Last Company Manufacturing in China Please Turn Off the Lights, we forecast an inevitable sharp decline in China manufacturing. On May 8, 2019, in The US-China Cold War Starts Now: What You Must do to Prepare, we warned of a “straight line decline in US-China relations” and we laid out what businesses should do in response to that. Long before that, my law firm brought on three additional sourcing experts experienced with product sourcing from Southeast Asia and with other countries outside China.

Our gloomy predictions have angered many, and I get it. What we are saying is not pleasant, especially for those with companies or livelihoods that depend on free trade with China or on Hong Kong remaining as Asia’s leading business hub. But please understand that we are only calling things as we see them, not as we want them to be.

As for Hong Kong, we are now suggesting our clients (and you) (1) consider places like Singapore and Bangkok as your Hong Kong replacement, (2) implement plans for evacuating your Hong Kong personnel, (3) cease using Hong Kong arbitration clauses (except with Hong Kong companies), and (4) avoid going there unless truly necessary. If corporate responsibility or data protection are at the core of your business your Hong Kong decisions are more pressing.

What are you doing about Hong Kong?

 

China risks

I recently participated in a publicly broadcast round table discussion on the US-China trade war. This discussion was organized in response to President Trump’s recent announcement that the U.S. will on September 1 be imposing 10% tariffs on a new list of Chinese products. Many analysts were surprised by this move. They treated the announcement as a wild card. The US stock market responded in the same way with a major decline.

The organizers of the discussion asked me for my list of PRC/U.S. trade war wild cards. Below is my list, at least for today. Note however that when a deck holds a wild card, the impact of the wild card is something that can be predicted. The wild card changes the rules, but the players all know the wild card will eventually be coming and they can make their plans and their strategies based on this. This is key: understanding the risks and then taking action to minimize the potential of devastating impact that can result from those risks becoming a reality. In this way, a careful consideration of the wild cards is essential for planning by companies currently working with the PRC. You cannot eliminate the risk, but you can reduce their impact.

The below are the China wild cards I see now:

1. The Dow and other U.S. stock markets continue to respond negatively to the various reports of increased tariffs and other U.S. – China trade issues. If the markets suffer a serious decline in the next several months, it will be hard for the Trump administration to continue to take a hard line on China trade. The same issue applies for the economic damage that has been inflicted on the U.S. farm sector. This sector is a major supporter of President Trump. Negative impact on the farm states could also soften the U.S. position against China.

2. The situation in Hong Kong has continued for over two months, with no resolution in sight. The PRC government has already blamed the U.S. and Taiwan for the unrest and it has warned the HK protestors against starting a color revolution (the CCP’s biggest fear). The PRC has massed 12,000 riot police on the border and the PLA is on alert. If the PRC takes military action in HK, the impact on trade will be immediate and severe. Sanctions against China will likely come from the U.S., Japan, Australia, and Europe, disrupting trade for many years.

3. The South China Sea and the Taiwan straight are getting “hot.”  Armed vessels and warplanes from a number of countries are moving in this region in direct defiance of PRC claims that such movement is prohibited. In this chaotic situation, armed conflict could easily break out by mistake due to the actions of “hot headed” local military officers. Keep in mind the Gulf of Tonkin incident and the Corfu Channel Case. One led to a hot war and one led to a cold war. Either could happen here.

4. China has started importing oil from Iran in direct defiance of U.S. sanctions. Violation of Iran sanctions is the reason for the U.S. banning sales to Huawei and detaining Meng Wanzhou in Canada. The U.S. might impose sanctions on the companies importing Iranian oil. More significantly, the U.S. might impose sanctions on the China banks financing these oil trades. Some in the U.S. have even proposed a “nuclear” option where the entities and banks involved would be cut out of the CHIPS and SWIFT systems.

5. The FBI says it is currently investigating more than 1000 IP/trade secrecy thefts involving China. Reports are that most of these cases also allege Chinese government participation. If formal proceedings are commenced, normal trade in many sectors will be disrupted and cooperative R&D with Chinese companies, research centers and universities will be curtailed or even eliminated. Finally, U.S. hiring of PRC nationals in the tech sector will be impacted or even eliminated.

6. Huawei is still on the Entity List and sales of technology of all kinds is still banned. The tentative commitment to ease the sanctions President Trump made at the G20 meeting has not resulted in any change. In fact, U.S. actions against PRC companies in the tech sector have expanded with the recent announcement that the U.S. government cannot make purchases from five PRC companies, including Huawei, ZTE and Hikvision. It is not unlikely that this purchase ban will extend beyond government contracts to a more general ban on all U.S. purchases from Huawei and other PRC tech companies. There has also been talk of late of the United States banning China tech companies that facilitate surveillance of Chinese citizens.

The six above are the most critical wild cards, but there are plenty more, including the following:

7. The Taiwan election is in full gear. At one point, some politicians in Taiwan were pro-PRC, seeking to expand and improve relations with the Mainland. But with the recent events in Hong Kong, the ban on travel from the PRC to Taiwan and the open military threats against Taiwan, no Taiwan politician who wants a future can take any form of pro-PRC position. This all could lead to escalating conflicts in the Taiwan Strait. The continued support of Taiwan by the U.S. will strain relations with the PRC on the military level.

8. The U.S. Congress continues to propose anti-PRC legislation. In the past, such legislation has been symbolic and has not been adopted. If the Trump administration shows weakening in its trade war position, some or all of this legislation may be adopted. This would then take the anti-PRC policy out of the hands of the president, leaving no room for negotiation.

9. The SEC seems intent to cut PRC companies out of the U.S. securities markets. If the SEC will not take action, Congress has threatened to step in. PRC companies see the writing on the wall and most are shifting their big IPO plans to the Hong Kong markets. This trend then further decouples the PRC from the U.S. with impacts both on the U.S. and the PRC. See China and the U.S. Stock Market: Nowhere to Go.

10. There may be a tipping point at which consumers in the United States and the EU and elsewhere become so bothered by the way China treats its Uyghur and Tibetan populations (see this and this) or with how it is acting against Hong Kong or Taiwan or with its efforts to exert control outside China. These sorts of things are leaking out more of late as the bloom is off the rose and we are hearing more and more from our own clients (American and otherwise) saying that they are having employees refuse to go to China or consumers complaining about their goods being made in China. Take a company like Patagonia which has a stellar reputation for caring about the environment and people and even goes so far as to call itself The Activist Company; how much longer can it maintain its moral high ground while still having some of its products made in China?

11. The U.S. has identified the PRC as a currency manipulator for the first time since 1994. The PRC has responded by continuing to weaken the RMB. If this trend continues, the U.S. could respond by raising tariffs rates even higher than the current 25% rate. The back and forth on this currency issue would then further disrupt purchase of PRC manufactured product.

12. Countervailing duty and anti-dumping cases against PRC industry sectors continue to increase. Higher and higher duties against Chinese industry are being ordered. These actions are independent of the administration. Continued action in this area threatens major sectors of trade with the PRC. No change in administration will have any impact. See Yet Another International Trade (AD/CVD) Petition Against China: This Time it’s Metal File Cabinets.

13. To avoid the impact of tariffs, many companies are leaving China. But it is not unlikely that the U.S. government will expand the current tariffs to other countries, particularly countries in S.E. Asia that are seeing the first wave of moves. Moreover, as more product is made outside of the PRC, it is likely that countervailing duty/antidumping actions will be expanded to cover those other countries as well. This may mean there will be limited options to avoid U.S. tariffs and other duties.

14. There are a host of internal factors in the PRC that could have a major impact. Factors I look at are: a) the inability of the PRC leadership to take any stand other than defiance, leading to no chance of any resolution of issues by diplomacy and mutual agreement, b) African swine fever cuts Chinese pork supply in half, c) African army worm substantially reduces Chinese grain crop, d) consumer price inflation coupled with factory price deflation.

As you can see from the above, my view is that the larger geo-political issues and U.S./Chinese domestic political issues are the real wild cards for doing business in or with China over the next decade. It is these issues that will determine the ultimate course of the Section 301 case tariff based trade war. Focusing on the narrow and technical 301 case issues threatens to blind businesses and analysts to where are the real risks.

As we have been saying on China Law Blog for going on a year now, welcome to the New Normal. But take heart. As Baron Rothschild said, “the time to buy is when there’s blood in the streets.”

Importing from China

Companies importing goods into the United States can find themselves having to respond to a U.S. Customs and Border Protection (“CBP”), Request for Information (CBP Form 28) or what may be worse, a CBP Notice of Action (CBP Form 29). CBP Form 28 – Request for Information is a tool routinely used by CBP to verify if the goods are properly classified, valued or otherwise meet U.S. import requirements. CBP Form 29 – Notice of Action can be used to inform an importer of a proposed action, including assessment of additional duties on the goods, or to notify the importer of an action already been taken by CBP. Both communications may be considered red flags for CBP to investigate prior transactions of an importer to initiate a penalty investigation.

Though you as an importer may have an easy response to a CBP inquiry or a valid basis as to why CBP’s proposed action should not be taken, your response often will require you provide information from your overseas product supplier. In these situations, it can be critical for your supplier to work with you to ensure you have all necessary information for the goods you imported. It is also critical that your communications with CBP not provide the agency with information it can use against you. Pulling together a sufficient response for CBP within a short time frame is no small task, but you can almost always ease that task and improve your odds by anticipating and preparing for your customs problems within the framework of import procedures and controls.

It is a common misconception among importing companies that they do not have to be exact on their commercial invoice or other import documentation. But to properly import goods for entry in the United States, a complete product description, accurate country of origin, and correct value in accordance with CBP rules are all key pieces of information that must be accurately provided. These requirements fall under the importer’s legal responsibility to exercise “reasonable care.” If you as an importer fail to attend to these basic legal requirements, you will be greatly increasing (1) your risk of delays in the release of your goods, (2) further scrutiny by CBP through an audit, and (3) penalties.

The import compliance burden shifted to U.S. importers in 1994, when Congress passed the Customs Modernization Act or “Mod Act” as a part of the same legislation package as the North American Free Trade Agreement (“NAFTA”). It is under the Mod Act that CBP expects importers to exercise “reasonable care” when addressing the following, per CBP’s Reasonable Care Checklist:

  • Customs documentation for entry;
  • Complete merchandise description for tariff classification and proper duty rates;
  • Valuation of merchandise consistent with specific CBP valuation rules;
  • Country of origin verification, marking, labeling; and
  • Free trade agreements

Despite its name, CBP’s Reasonable Care Checklist is not a formulaic standard, but rather a list of questions to prompt U.S. importers to create their own internal framework or methodology to meet United States import compliance standards. CBP allows U.S. importers flexibility in how to manage their reasonable care responsibilities based on the importer’s own transactions.

If you import products from overseas, your first step in managing your reasonable care responsibilities so as to minimize your importing compliance risks is to start with the basics and become familiar with CBP’s Reasonable Care Checklist. Answering the questions posed by CBP will help you formulate your necessary internal import procedures and controls.

international law

This is the thirteenth episode in our ongoing Saturday series on eight+ things to read about China and a lot more. We constantly get emails from readers asking what to read on China and all sorts of things related and even barely related to China and this series is intended to constantly and consistently answer these questions.

As we said in our initial post on this, our plan is to list out eight (or so) articles we benefitted from reading and think you our readers would also benefit from reading, along with a very brief explanation as to why the particular article was included. More specifically:

The articles will likely include many on China and on Asia and a few on international trade, international politics, Spain and Latin America, economics and really just anything else we believe might benefit our readers or even that we just want people to read. We do not plan to choose articles that push our or any other political agenda or any other agenda for that matter, but having said that, we are not objective and our views may creep through. Our goal though is to focus on articles that are important or helpful or — most importantly — that make you think. Our posting of an article will NOT mean we agree with all of it or even any of it. Most of the articles will be from the week preceding the post but we will also sometimes throw in older articles (classics if you will) as well.

Please do not hesitate to comment at the end of this or any other post. We cannot tell you how much we appreciate your comments, good, bad and indifferent.

Here we go, in absolutely no particular order.

1.  The big reason China won’t let the yuan go into free fall against the dollar has to do with Japan and Europe. MarketWatch. Because there is this big unfounded fear of the RMB plunging but this article is correct in that China is not going to let the Yuan fall too far and one of the reasons is because of Europe and Japan. But this also highlights why economists and investment advisors have gotten the trade war wrong since its inception by consistently saying it would end soon. They got it wrong because they don’t know China and the main reason China is not going to let its Yuan fall too far is because if it did China’s wealthy would be heading for the exits with their money and themselves. Because I am hearing that if China goes “too far” with its devaluation, the US will just keep increasing tariff percentages to match it. See US will take strong action against China if it devalues yuan to “neutralize tariffs.” Because Sinocism puts it best:The impact of the recent RMB depreciation may be significant psychologically but fairly minimal financially, and Beijing knows that it can not let the RMB drop much more without triggering increasing stress over external debt repayment and raising pressure even more for capital outflows.

2. How Chinese students overseas became a subject of scorn. South China Morning Post. I had to reduce the actual title (something to do with fire+walls). Because it is sad how China wants to control its people and the world outside China and sadder still how that is impacting Chinese students and their relations with their fellow students. This is a true MUST read. See also China bans Cathay Pacific staff involved in HK protests.

3. Here’s a better reason to unsubscribe from the New York Times. New Republic. Because newspapers are dying and the thesis of this article is that the New York Times is written to make money from its wealthy readers and in the process it is harming all other (local) newspapers. I have to not so reluctantly admit both to loving the New York Times and viewing my local newspaper (the Seattle Times) as worthy of no more than 5 minutes or less of reading a day on an iPhone, if at all.

4. What Ails the Right Isn’t (Just) Racism. Because this article says that racism is most often found in those who do not like difference or change and I think there truth to that. Based on this, we need leaders who emphasize our similarities, not our differences. The analysis is a lot more complicated than explained here, but this article is important.

5.  American With No Medical Training Ran Center For Malnourished Ugandan Kids. 105 Died. Because I cannot tell you how many times I have had an American or a European or Australian doctor, dentist or architect seek my law firm’s help in setting up a business in China and get irritated when one of our China lawyers asks them if they are licensed to practice medicine or dentistry or architecture in China. They usually huffily respond with something like, “is that really necessary?” To which we all love responding by saying, “yes, do you think doctors or dentists or architects can practice in the United States or the EU or Australia with just their Chinese license?” Come on people, get real, all countries have their own laws.

6. Donald Trump’s ‘real threat’ of Vietnam tariffs sends ripples of anxiety through Southeast Asian nation. Because President Trump does not like Communist countries and because so much of the manufacturing that is leaving China is going to Vietnam and because there a lot of illegal transshipping of Chinese goods through Vietnam. See How To Get Rich From Your Competitor’s Illegal Transshipping: Moiety and the False Claims Act.  Because our international manufacturing lawyers and international manufacturing advisors are currently favoring Thailand and Malaysia and the Phillipines and Mexico and Poland and Central America, when possible, for manufacturing outside China. As much as we have always liked Vietnam, we see it as too full and too risky for most companies right now. See Doing Business Outside China: It’s Thailand’s Time, The China-US Trade War and the Winner is….MEXICO, Nike Likes Manufacturing Outside China and You Should Too, How to Stop Manufacturing in China: Try Harder, Moving Your Manufacturing Out of China: The Initial Decisions.

7. Street photography reveals China in the 1980s. BBC. Because these are some super-cool pics.

8. Checking a bag vs. carrying on is the great debate of airline travel. Washington Post. Because we really ought to be able to all just get along.

9. Globalisation as we know it will not survive Trump. And that’s a good thing. The Guardian.  Because it’s almost certainly right about globalization not surviving Trump, but will that be a good thing?

10. Tariff Fears Caused a U.S. Import Surge. Now Warehouses Are Full. Bloomberg. Because this portends a big reduction in future China product orders. See On the Impact of China Tariffs: Is This a Dead Cat Bounce? where we talked about this way back in September.

11. Big Bang theory wrong? Star older than Universe discovered – threat of “scientific crisis.” Express. Because this is pretty seminal.

12. Washington woman who posed with octopus on face hospitalized. New York Post. Because if a star makes us question the Big Bang theory this person should make us question evolution.

international manufacturing lawyers

Your thoughts?

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

Not surprisingly, the most common questions we are getting these days relate to the tariffs being put on products made in China and imported into the United States. The questions and our typical answers are usually some variant of the following:

1. How much will my tariffs be? Tell us about your products and we will tell you what the tariffs will be.

2. How long will my tariffs last Nobody knows, but we believe these tariffs will be in place a long, long, time. See When Will the US-China Trade War End? It’s the New Normal.

3. Is there anything I can do to get my products excluded from these tariffs? Yes, so long as the deadline for your particular products has not already passed. Our international trade lawyers handle these. See How to Succeed with your China Tariff Exclusion Request (or not).

4. If I cannot get my products excluded from these tariffs, what should I do? You should consider moving your production outside China, to a country without tariffs. See Moving Your Manufacturing Out of China: The Initial Decisions. You should try to negotiate lower prices from your existing Chinese manufacturers. Just yesterday, Bloomberg News wrote China Factory Prices Drop as Consumer Gains Hand. In Who Pays the Tariffs on China Imports? What YOU Can do NOW to Reduce Your China Prices we explain why your China factory’s costs have declined and in How to Lower your Product Costs we explain how you can negotiate lower prices from your China suppliers.

Any more questions?

What are you seeing out there?

 

China BriefingI have been a fan of Foreign Policy Magazine (now usually called just Foreign Policy or FP) since I was a kid — not kidding. I can remember always going to Michigan News in Kalamazoo, Michigan (that store has been there since 1947!) to spend my hard-earned newspaper delivery money on the latest issue of the Sporting News and Foreign Policy Magazine, and whatever else sports-related that looked interesting.

FP pieces are nearly always well-written and thoughtful and not pretentious.

Wikipedia describes the founding of FP as follows:

Foreign Policy was founded in the late 1970s by Samuel P. Huntington, professor of Harvard University, and his friend, Warren Demian Manshel, to give a voice to alternative views about American foreign policy at the time of the Vietnam WarHuntington hoped it would be “serious but not scholarly, lively but not glib”.

FP describes its readers as “well-informed, intelligent individuals with a wide range of interests. They are not necessarily specialists in international affairs (though many are).” I describe it as a consistently great read on what is going on in the world, and all without much political slanting.

I mention FP today because it just “introduced” a China newsletter it will be calling China Brief. FP’s introduction describes its newsletter thusly:

Welcome to the first edition of Foreign Policy’s China Brief, where every week we’ll bring you news and analysis from the most populous country in the world: the one with the angriest crowds, the hottest tech, and the smelliest dofu. I’m James Palmer, a senior editor at FP previously based in Beijing for 15 years. Every week, I’ll break down the news and explain it here.

Palmer is one of the most highly regarded and widely respected writers on China and so I urge everyone with an interest in China to bookmark this page and check it weekly. I sure will.

 

 

Nike has always been in the forefront of international manufacturing. So much so that I can remember a time (before China became THE factory to the world) when many companies would base their decision on where to do their manufacturing on where Nike did its manufacturing. Nike started its international manufacturing (pretty much from day one) in Japan, but by the 1980s, it had moved almost all of its manufacturing to South Korea and Taiwan. Nike opened its first factory in Mainland China in 1981.

Back in the mid-1990s, Jardine Fleming Securities (now part of JP Morgan Chase) came up with the Swoosh Index, which was its theory that once Nike selects a country for its newest factory site, economic growth, rising stock markets, and other foreign companies follow. A Business Week article, entitled, “The Swoosh Index for Emerging Markets” explained it:

Nike first started using Japanese plants in 1964. When labor costs there climbed in the mid-1970s, it gave South Korea and Taiwan a run. In the 1990s, production jumped to Indonesia and China, which now account for two-thirds of Nike output. Nike pulled back from Thailand recently ahead of a collapse in stock and property prices. Next up: Vietnam. While production there is now only 2% of Nike output, that’s expected to double within a year.

When choosing factory sites, Nike looks for cheap labor. However, it also picks countries with stable–usually authoritarian–leadership, decent infrastructure, a pro-business government, and a liberal trade regime.

When it decides to leave, that doesn’t signal the end of prosperity. It often means that countries are ready to move on to high-end manufacturing. And democracy.

Many companies watch Nike and then follow Nike into whichever country Nike locates. I bring all this up because hardly a day goes by without my discussing with someone “where to manufacture” something. It feels like the old days when manufacturing in China was not a given and companies needed to make international manufacturing decisions without Nike-sized budgets. With China no longer the automatic choice for manufacturing, things have gotten more complicated and more interesting. I like it. It feels like a return to the past, back to when I would call myself an international lawyer, not a China lawyer.

Yesterday, I met with a couple people who operate a high-tech product inspection and sourcing company and we — as so often happens these days — quickly found ourselves talking about what we are saying by way of companies moving their manufacturing out of China. I talked about a company that was looking at Poland for manufacturing its baby strollers. They mentioned having looked into Poland for making shoes. I then talked about having worked with company that had its shoes made in Portugal and then eventually had some of its shoes made at a Portuguese-owned factory in Angola. We talked about being surprised at how many companies still make clothes and shoes in China that probably should have moved that manufacturing out years ago. We discussed how Vietnam is bursting at the seam these days. I should have quoted Yogi Berra (but I didn’t) on how Vietnam has become so crowded for manufacturing that nobody goes there anymore. They talked about how India is a great place for jewelry. I talked about how we had clients that loved Pakistan for making baseball hats.

We then talked about how China made manufacturing easy for SMEs (small and medium-sized enterprises) and no country even comes close to China on that count. We agreed that China had great “soft infrastructure” for manufacturing and every other country was pretty terrible at this and how this was a major factor in how slowly companies are moving their manufacturing out of China. I gave example after example of companies that had come to one of the international manufacturing lawyers at my firm for legal help with their China manufacturing only to end up manufacturing in another country at lower cost and no tariffs. These country changes happened at our urgings and these discussions nearly always go like this:

Lawyer: Why China for X product? Did you consider Thailand (or whatever other country seems to make better sense)?

Client: I actually wanted to have my X product made in Thailand but I could never figure out how to accomplish that.

Lawyer: We have people who can help you with that.

We then talked about the pros and cons of manufacturing in various countries and the countries we like for manufacturing and the “sleeper countries” — those countries we believe more companies should be considering for their manufacturing. I threw out Spain, Portugal, Poland, Thailand, the Philippines, Mexico, and Guatemala.

But what about Nike? What countries does Nike like? The answer to this question is easy because Nike has a website that tells us exactly where it manufactures its products. Nike has its products made in 41 countries, using 525 factories and a little over one million workers:

  1. Argentina — 13 factories (6 apparel,  3 equipment, 4 footwear)
  2. Bangladesh — 1 factory (apparel)
  3. Bosnia — 1 factory (footwear)
  4. Brazil — 24 factories (9 apparel, 15 footwear)
  5. Bulgaria — 1 factory (equipment)
  6. Cambodia — 10 factories (apparel)
  7. Canada — 3 factories (apparel)
  8. China — 109 factories (46 apparel, 33 equipment, 30 footwear)
  9. Croatia — 1 factory (equipment)
  10. Ecuador — 1 factory (apparel)
  11. Egypt — 5 factories (apparel)
  12. El Salvador — 3 factories (apparel)
  13. Georgia — 2 factories (apparel)
  14. Germany — 1 factory (apparel)
  15. Greece — 1 factory (apparel)
  16. Guatemala —  4 factories (apparel)
  17. Honduras — 5 factories (apparel)
  18. India — 8 factories (2 apparel, 1 equipment, 5 footwear)
  19. Indonesia 38 factories (15 apparel, 5 equipment, 18 footwear)
  20. Israel — 1 factory (equipment)
  21. Italy — 18 factories (10 apparel, 2 equipment, 5 footwear)
  22. Japan — 12 factories (3 apparel, 8 equipment, 1 footwear)
  23. Jordan — 3 factories (apparel)
  24. Malaysia — 7 factories (apparel)
  25. Mexico — 16 factories (14 apparel, 2 footwear)
  26. Moldova — 4 factories (apparel)
  27. Netherlands — 2 factories (apparel)
  28. Nicaragua — 2 factories (apparel)
  29. Pakistan — 6 factories (4 apparel, 2 equipment)
  30. Poland — 1 factory (apparel)
  31. Romania —  1 factory (apparel)
  32. South Africa — 1 factory (apparel)
  33. South Korea — 8 factories (1 equipment, 7 footwear)
  34. Spain — 2 factories (apparel)
  35. Sri Lanka — 17 factories (15 apparel, 1 equipment, 1 footwear)
  36. Taiwan — 13 factories (5 apparel, 5 equipment, 3 footwear)
  37. Thailand — 29 factories (24 apparel, 5 equipment)
  38. Turkey — 4 factories (3 apparel, 1 equipment)
  39. United Kingdom — 1 factory (apparel)
  40. United States — 42 factories (37 apparel, 5 equipment)
  41. Vietnam — 105 factories (68 apparel, 11 equipment, 26 footwear and 463,531 workers)

What can be learned from all of this Nike info? That depends. Nike actually lists out the specific companies it uses in each country and there can be little doubt that Nike has thoroughly vetted each of these companies and their facilities. Do these companies engage in contract manufacturing for companies other than Nike? I would think most do. So this listing ought to be very helpful for anyone in the apparel, sports equipment or footwear industries.  Does that mean you should have your t-shirts made in Germany? I highly doubt that. It’s possible Nike has very limited amounts of specialized apparel made in Germany for Germany because doing so is cheaper or easier or better than importing Bayern Munich apparel from Vietnam.

What about this list surprises you? I’m surprised to see an expensive country like Germany on here and not the Philippines.

But what if you make toaster ovens? What can you learn from above? You can learn that there are plenty of countries other than China that manufacture quality items at a price that makes sense for a highly sophisticated international company like Nike and that alone ought to open your eyes to the manufacturing world outside China.

But, what is good for Nike may not be good for you and, quite frankly, there are countries listed above that I would immediately write off as too dangerous, too corrupt, too risky, too lawless, or just too difficult for the average company.

Where are you looking for your manufacturing these days? What countries do you see as manufacturing sleepers and why?

US-China trade war tariffs

A lot has gone on with China this last week.

1. On August 1, 2019, President Trump announced that the United States will on September 1 impose a 10 percent tariff on essentially all Chinese goods not previously subject to tariffs. This latest round of tariffs is being referred to as “List 4” tariffs and it will hit about $300 billion worth of imports from China. If that new tariff goes ahead, it will mean that nearly all products (save for those all imports of Chinese goods will soon be subject to tariffs.

2. Yesterday, China’s central bank allowed the Yuan to weaken to more than 7 RMB per dollar. CNBC nicely describes the significance of this:

The Chinese authorities have not let the currency weaken past the 7 yuan-per-dollar threshold since the global financial crisis. In fact, they have in previous years — such as in 2016 — burned a substantial portion of their foreign reserves to defend the currency from breaching that mark.

It’s for that reason that currency experts have long viewed that mark as a psychological important level. Breaching 7 yuan per dollar is a crucial development partly because investors don’t know how much more weakness the PBOC [People’s Bank of China] is willing to tolerate, so they could sell their investments in China to curb losses — and thereby trigger significant capital outflows from the country.

3. The Chinese government also yesterday instructed Chinese state-owned companies to stop buying U.S. agricultural products. This will likely mean non state-owned Chinese companies will greatly reduce their buying of ag products from the United States as well.

4. The United States Treasury then labeled China a “currency manipulator.” The last time Treasury designated any country as a currency manipulator was in the early 1990s, when China was named. Labelling China as a currency manipulator means the U.S. will likely lead to the United States requesting the International Monetary Fund (IMF) take steps to curb any unfair competitive advantages created by China’s currency manipulation.

What will the results be from all of the above and what should your company do about it?

This post will address the anticipated results.A subsequent post will lay out what you should do about it.

I predict the following over the next few months:

1. The 10% List 4 tariffs will go into effect on September 1.

2. There is about a 50-50 chance most (if not all) tariffs against China will rise from 10% to 25% within the next couple of months.

3. China will stop buying U.S. agricultural products directly from the United States, but I expect it will continue to receive large quantities of US ag products via third countries. China is very concerned about food inflation and though it will do what it can to stop buying US ag products, I do not see those purchases truly ending. If China switches from buying X ag product from the United States and starts buying X ag product from Brazil, we should expect Y country that was buying X ag product from Brazil to start buying more X ag product from the United States.

4. The RMB will slowly weaken, but I doubt it will go as high as 7.5 RMB per dollar within the next six months. I do not see this weakening of the RMB as a big deal for the United States beyond reduce the price of products purchased from China. See Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Prices.

5.  I do not see the IMF penalizing China for currency manipulation and if it does, I do not see those penalties moving the needle on anything.

6. China will retaliate against the United States in any way it can while remaining careful not to damage its own economy too much by doing so. China will reduce its purchases of goods from the United States. China will favor domestic companies (and perhaps companies from other countries as well) over U.S. companies. China will step up enforcement of its laws as against foreign — especially U.S. — companies. See How to Do Business in China Without Going to Prison and The Five Keys to China Company Compliance. Though this new wave of tightening enforcement will be tougher than any that has proceeded it, smart, well-run U.S. companies will survive it.

7.  Companies (U.S. and otherwise) that manufacture their products in China for export to the United States will continue to move their manufacturing out of China, if they can.  See How to Move Your Manufacturing from China AND Protect Your IP.

8. Most economists will continue to insist that the trade war will end soon because it is bad for the economies of China and the United States and the rest of the world. Those whose livelihoods depend entirely on China will make the same prediction. My law firm’s international lawyers will continue to insist there is no resolution in sight. See When Will the US-China Trade War End? It’s the New Normal. ‘

What do you see happening?