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

Under trade pressure from the United States and the EU, China has in the last year made all sorts of noises about opening up its economy to foreign investment. This has led many to believe that China will actually open up its economy and this in turn has caused many companies to write our China lawyers for legal assistance on this front. This also has caused many to write us to complain about our “ignoring” these “major changes” and to accuse us of “bias” or “never wanting to give China a break.” The usual question is something like, what is this opening up going to mean for foreign investment in China.

Our short answer is that we are skeptical that there will be much in the way of favorable change and we will believe it when we see it. Truth is that China is notorious for the legal equivalent of vaporware and these announcements could very well turn out to be exactly that. China could be floating these changes as trade negotiation carrots, to be pulled back depending on what happens on the trade front. Yes, some of this is has already become law and more of it is set to become law relatively soon. But again, we will believe it when we see it and not before. Trust us when we say that much law that is promised never actually becomes law (how many times has China pushed back its laws opening up its financial sector?) and much that does become official law is pretty much completely ignored — like SaaS and ICP licenses. See Selling SaaS in China: Resistance is Futile.

Heck, if we wrote just once a month about each Chinese legal rumor or even promise or statement, we probably would not have time to write about anything else. So until we see real change in China’s foreign investment laws and in the on the ground realities, we do not expect to have much to say.

What are you seeing out there?

 

 

China work cultureI was interviewed the other day by a reporter working on an article on why Chinese companies so often fail outside China. I think the thesis of the article will be cultural differences. After we spoke, this reporter sent me links to some of what he had read for background and particularly liked.
I read the links and enjoyed them as well. The below comes from Quora and is entitled What’s the difference between working in Japan vs. in China? 
I have edited it a bit (without changing any of its substance) to shorten it and to make for smother reading.

Being a Chinese who has working experience in both China and Japan, here are some of my personal observations. Please take this with a grain of salt (Warning: Generalization ahead!) :

Imagine employees A and B. Employee A is smart and “can-do” but pretty “lazy.”  He often rushes into the office at the last minute in the morning. He never does overtime, and he never needs to. He always finishes his tasks perfectly, long before they are even due, which is why you can often see him surfing the Internet or Skype chatting.

Employee B works very hard but he is not particularly skilled. B always arrives at the office at 8:30am and he usually leaves at 9:30pm and he sometimes works weekends. His work performance is just okay. Sometimes he will submit his reports late, but he always tries his best to meet all deadlines

What would their performance evaluations be like?

In a typical Japanese company, B would generally be considered a qualified employee and he would likely have an average or even above average career path and he would be respected by his coworkers. And A? He would not be liked very much. Some managers and coworkers would doubt his work ethic and his attitude and in many cases he would be isolated. He would not have a bright future.

Want the opposite scenario? Welcome to China!

There is a famous Chinese saying that describes the majority of Chinese companies’ culture: “It doesn’t matter if it’s a white cat or a black cat, a cat that can catch rats is a good cat!” It roughly means that “I don’t care how you do it or how much time you spend on it or how much effort you put into it, or even how you do it… as long as you give me a good RESULT, you are good!”

Some of my Japanese coworkers who work in a Chinese joint venture used to keep their Japanese style work habits. They would work long hours, draft super detailed reports full of numbers and report literally everything to the boss. Then their Chinese general manager would tell them:  “Stop bothering me with your useless papers and stop wasting my time on endless meetings. How you do things is your job to decide. Just show me you did it.”

One of my Chinese coworkers (an IT guy) who went for training at the Japan head office was reported for having “played with his cellphone during work time.” He couldn’t understand why that was wrong, especially because he had been doing a good job on the training project. The funny thing is that the Chinese HR manager who was supposed to give him a warning could not give a good explanation either. She said, “You can’t do that. You know, it’s Japan.”  

There are other differences too:

  • The HR system. Equalitarianism and seniority in Japan. Performance-only-matters company values in China. My coworkers often jokingly say “China is a capitalist country that calls itself socialist; Japan is a socialist country that calls itself capitalist.”
  • Data-and-detail-loving Japanese vs.  data-and-detail-hating Chinese. A typical Japanese style business report format is an A3 paper, full of numbers and charts and super small sized font. The Japanese boss will always find any typos or inconsistent borders and you should be ready to revise it at least three times. A typical Chinese style business report format is… well, in most cases (if it’s not an outward-facing presentation), there isn’t one because your Chinese boss has no interest in reading it anyway. Instead, you talk to your boss about your findings, maybe while smoking together and in 5 minutes — that’s it.
  • Risk-hating Japanese vs. risk-loving Chinese. My Japanese boss’s favorite question is “What do you think about the risks?” Too which my Chinese boss will usually respond: “Risks mean bad things have not yet happened, right? Let’s talk about them when they do.”
  • Silent Japanese vs. talkative Chinese. MyJapanese coworkers generally don’t speak much. When they need to do a presentation, they often will make a super detailed Power Point and read it word by word. Some Chinese leaders from the head office can give a 2 hour speech without any text at all. Amazingly, when you think seriously about the content, you will find… no real content there.

The list can go on and on. The differences always amaze me. I guess they explain why Japanese products are known for their quality and longevity and why Chinese enterprises develop so fast.

A reader left the following comment/joke:

International Manufacturing Lawyers

This is part one in a new series on the legal side of having your products manufactured ex-China.

Ten years ago, our international manufacturing lawyers would frequently need to spend 10-20 minutes with clients and potential clients, justifying the benefits of having NNN Agreements and Manufacturing Agreements with Chinese manufacturers.  And then another 10-20 minutes explaining why securing a China trademark (even when NOT selling at all to China) was absolutely critical. See also, The Three Keys to Protecting Your IP in China. We rarely have to explain these things about China any more.

But with so many of our clients moving their manufacturing out of China, we are again having to provide long explanations as to what companies must do to protect themselves in countries like Vietnam, Thailand, Mexico, the Philipines, Indonesia, India, Bangladesh, Pakistan, Taiwan, Poland, etc. Because the overall legal paradigm for manufacturing and for contracts and for IP tends to be generally the same from country to country, our manufacturing lawyers have been suffering from a bit of deja vu lately. I myself have no fewer than three times already this shortened week found myself explaining why it makes sense to have a good contract with manufacturers in Bangladesh, Vietnam and Thailand.

The bottom line is that no matter how bad the legal system in the country in which you are manufacturing, a good contract can both help you and even more importantly, protect you and your IP. Far too often Western companies believe the only reason for having a good contract is to be able to sue or to arbitrate to enforce it. There are though three main reasons to have a good contract with your manufacturer (no matter where it is) and enforceability is only one of those. Having a good contract makes sense for the following three reasons:

1. To achieve clarity. Having a well-written contract in a language your manufacturer truly understands will assure you that the company with which you are doing business truly understands what you want of it. Put simply, it will put the two of you on the same page.

For example, if you ask your Vietnamese supplier if it can get you your product in 30 days, it will answer with a “yes” pretty much every time. But if your Vietnamese supplier signs a Vietnamese language contract mandating that its failure to ship your product within 30 days will require it pay you 1% of the value of the order for each day late, you will know that it is truly serious about the 30-day shipment terms.

2. To prevent your manufacturer from breaching. The second reason for having a well-written contract with your manufacturer is to convince it that it will be better off complying with your contract than violating it. Having a well-written contract that is at least potentially enforceable means your manufacturer knows exactly what it must do to comply and knows that its failure to comply could subject it to a lawsuit or arbitration it will need to fund and very well might lose.

Let’s use the 30-day shipment time as the example again. If your manufacturer makes widgets for 15 foreign companies and five of those have very clear time deadlines with very clear contract damages provisions and it starts falling behind on production, to which companies will your manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line. You need to make sure your company is one of those five companies.

3. Enforceability. This is the third reason for having a good contract. The international manufacturing lawyers at my law firm have written hundreds of manufacturing contracts and we have never once been called on to litigate any of them, nor am I aware of any of them having been litigated. I attribute this to reasons #1 and #2 above, but I have to admit this also means I cannot stand up and scream that xyz country’s courts enforce well-written contracts. Even better though, I can stand up and scream that they certainly do seem to prevent problems. Even though I cannot speak regarding the enforceability of my firm’s contracts.

Future posts will focus on what sort of contracts you should have and what should go into those contracts and what other steps you should take to protect yourself.

China employment lawyers
Handle your China employee contracts with care

In Part 1 of this series, How to Avoid China Employment Law Problems, Part 1: An Employee Handbook That Works, we wrote how Chinese authorities are going hard after foreign employers (especially Americans) for violations of China’s employment laws. See also Want to Keep Your Business in China? Do These Things NOW. The Chinese government loves going after employment law violations because doing so 1) is popular with its citizens, 2) protects its employees, 3) generates hard currency for the government and 4) quietly and legally retaliates against American (and Western) companies in the trade wars.  Add in the fact that it is so easy to find violators (the government interviews employees who are happy to report their employers, or paid or pressured to do so). It’s the perfect storm and it’s a rare day when one of our China employment lawyers is not contacted by a foreign employer caught in this net. The key for foreign employers to avoid these expensive (and sometimes terminal) employer problems is compliance.

In Part 1, we discussed how critical it is for foreign employers in China to have relevant, timely and well-crafted China employer rules and regulations — often referred to as an employee handbook.

But just having a good employee handbook is merely step one; you need more. You also need a current and appropriate employment contract with each and every one of your employees. Like the employee handbook, your employment contract must actually work for you and not against you and it must comply with all of China’s current national and local employment laws.

Chinese law requires every full-time employee be hired pursuant to a written employment contract and have an up to date one during their tenure. It also makes sense for your part-time employees to have a written contract as well because their part-time employment contract proves they are a part-time employee. This contractual proof often becomes necessary because part-time employees love claiming they were really full-time employees all along and you owe them lots of money for having failed to provide them with the required benefits that come with full time employment.

When the China employment lawyers at my firm are tasked with writing an employment contract, the first thing we do is review the employer’s HR program and the employee’s situation to determine what terms and conditions can/should go in the employment contract and what can/should be left in the employee handbook. What will be the employment term? Will there be a probation period? What will be the employee’s working hours? How will overtime be paid? What sort of compensation package will the employee get? What are the conditions (if any) for the employee getting a bonus? How many vacation days will the employee have? Will the employee get any additional paid time off besides vacation days and national holidays? A good contract protects both the employer’s and the employee’s interests within the laws and realities of the parties’ locale. See China Employment Law: Local and Not So Simple. Most importantly, a good contract helps guide both the employer and the employee in making good decisions and by doing so, it reduces legal and government disputes.

A good employment contract coupled with a good employee handbook gives foreign employers greater freedom to act. China’s declining and changing economy has led to many foreign employers wanting to lay off or terminate employees and our employment law team has been getting a lot of matters lately where foreign employers want to terminate an employee for “not working out. This is difficult to accomplish under Chinese law and nearly every time the dividing line between those employers who can do this and those who can’t has been the employment contract and the employee handbook.

We have had times where after we looked at all the facts regarding the employer/employee situation and reviewed the employment contract and the employer rules and regulations and other documents pertinent to the employee’s employment, we confirmed the employee’s employment term was expiring soon and there were no laws requiring the employee be retained beyond the last date of the contract and the employer was not otherwise required to enter into an open-term contract upon the expiration of the contract. In other words, a clean non-renewal notice could relatively easily achieve the employer’s goal and it did. In these situations, all the employer had to do was pay the employee statutory severance for not renewing the contract — a small cost compared to keeping them for another term and possibly converting them to lifetime employees. The terminations went smoothly. We have also had times where we have had to tell the foreign company that terminating any employee was simply too risky.

What constitutes a good China employment contract? A good China employment contract must be written from the perspective of Chinese laws and from the laws of the locale in which your employees are based. In other words, you should not use an employment contract for a China-based employee that is nothing more than a Chinese translation of your U.S. (or any other non-PRC jurisdiction) employment agreement. You also should not use the same contracts for Shanghai that you use for Shenzhen.

Consider this: An employer and a Chinese employee sign an employment contract which provides that the employee can be terminated without cause so long as the employer pays a certain amount of severance. The employer employs the employee for a few years and when things are good, both sides are good. Then the employer decides to lay off the employee and verbally informs the employee of its unilateral decision and its intent to pay the severance specified in the contract. The employee says, “I do not agree to the termination.” The employer refers to the provision noted above. The employee says, “yeah but that provision is illegal, so it is not enforceable against me.” The employer assumes the parties can contract around termination, but many China employment laws simply cannot be contracted away.

Agreements like this can and often do cause big trouble for foreign employers, especially when they make an improper termination decision. Most of the time when our China employment attorneys are called in to help in this sort of situation, the employers do not even realize the extent of their problems because they think that by following their own employment contract they have done everything right. All this stems from the employer’s having failed to use a proper employment contract in the first place.

Last but not certainly not least, an employment contract, regardless of how well-written it is, must be current. If it is not current it could subject the employer (not the employee) to all sorts of risks and problems. I will talk about more about this in the later part(s) of the series. For now, just remember that you should not have an employee on your payroll without a current written contract. If you have an employee or employees whose contract is about to expire, you should take the time to at least consider and answer this question: should you renew the employee’s contract for another term?

Bottom Line: Avoiding China employment law problems requires you have a current China-centric and localized employment contract with all your China employees.

China cyber lawyers

Those who have been paying attention know that the recent U.S. bans on Chinese technology companies (by adding them to the U.S. Export Administration’s Entity List) are not new but are a continuation of ongoing concerns with Chinese government deficiencies. This is the same Chinese government that requires Chinese organizations “support, cooperate with and collaborate in national intelligence work,” accelerating China’s great technological leap forward by appropriating trade secrets and technology from other companies and governments. The U.S. government and U.S. companies are rightly concerned and have been for decades. Several Chinese companies (generally in the aerospace industry) and Russian companies (the nuclear industry) have been on the Entity List since its inception in 1997, back when many of us were using Netscape Navigator on our 28.8Kbps or 33.6Kbps modems and could only access broadband internet (and our favorite search engine Lycos) at our local universities. 1997 was four years before China’s accession to the WTO.

Stealing secrets was much harder two decades ago. Fast forward to 2008 when experts expressed concern that China’s cyber intrusions were becoming “more frequent, more targeted, and more sophisticated.” Today, with broadband internet, telecommunications companies like Huawei have the potential to embed software and hardware laced with malware at virtually every internet node and in virtually every IOT device. The U.S. does not want to cripple Chinese technology advancements “just because” the U.S. is an economic bully, though that is the Chinese government’s internal refrain. The USTR’s Section 301 complaint focuses on China’s unfair trade practices and overt actions that lay the groundwork for Chinese companies to acquire, force the transfer of, or steal trade secrets, including IP, customers’ personal data, and valuable technological data. As we discussed in a previous blog post about China’s own cybersecurity law, China recognizes the value of its data, requiring all CII (Critical Information Infrastructure) Operators to keep within mainland China all personal information and important data collected and generated within mainland China. They are not allowed to transmit such data overseas without first passing a security review.

U.S. companies affected by cybercrime, of which China has been identified by security experts as “the world’s most active and persistent perpetrators of economic espionage,” do not have many avenues to cope with these advanced persistent threats. Depending on the information accessed and stolen as a result of the systems breach, companies will generally be concerned with: (1) damage control (assuaging their valuable customer base either that nothing sensitive was compromised or that “it will never happen again”), (2) how to prevent getting hacked again (enhancing their network and security defenses), and (3) how to mitigate the company’s damages in the marketplace from stolen trade secrets being used by their rising Chinese competitors (preserving company value moving forward, which is extremely important to stockholders). Chinese hackers seek high value technological information, which means that whatever information is of value to the U.S. company will be valuable to a similar Chinese company in the same industry.

The U.S. is not idly standing by but recently targeted five Chinese supercomputer companies by adding them to the Entity List, which companies joined the ranks of four other Chinese supercomputer companies included in 2015. The U.S. government is also increasing its offensive cyber warfare on Iran, China, and others, and the Chinese hackers, at least, are fighting back, and they are persistent. What recourse do U.S. companies have in the face of so much relentless aggression, which is sometimes a daily occurrence? They can report the intrusion and theft to U.S. state and federal law enforcement agencies, who may not have the time, resources, or inclination to pursue the hack (only 165 cases of computer fraud were pursued by the DOJ in 2017 and only 160 in 2018). Or maybe they can receive a battlefield commission and join the ranks of the deputized in the global cyber conflict.

Recently U.S. Representative Graves of Georgia proposed H.R. 3270, the Active Cyber Defense Certainty Act, aimed at providing a defense to prosecution for fraud and related activities that are engaged in for defensive measures against unauthorized intrusions into company information networks. In brief, the bill would protect defensive hackers from prosecution in the U.S. if they follow certain guidelines. First, they must report the crime to law enforcement, specifically the FBI National Cyber Investigative Joint Task Force, and receive the green light to move forward with defensive measures (either obtaining prospective approval or approval to deploy defensive measures after being hacked). The FBI may provide additional guidance on improving those defensive measures. Second, they should improve their system’s defensive measures, including receiving enhanced training, utilizing strong passwords, and routinely updating and patching computer systems. Third, defenders are admonished to not violate the laws of any other nation where the attacker’s computer may reside. This severely limits what a defender can do, but the operative word in the proposed legislation is “defense,” not “offense.” Fourth, cyber defense techniques should only be employed by qualified defenders with a high degree of confidence in attribution, and extreme caution should be taken to not impact intermediate computers (that are the foundation of all sophisticated cyber attacks), escalate the cyber activity, or cause collateral damage (e.g. physical injury, financial loss, or threaten public health or safety, including affecting U.S. government computers). Attributional technology is permitted to help identify the attacker, but measures that allow the defender to hack back in an offensive manner to cripple the attacker’s entire system are not authorized (but the defender can disrupt continued offensive hacking that affects their own systems).

Defenders will still be able to seek civil remedies (compensatory damages and injunctive relief) if they resort to these defensive measures. Active cyber defense measures will not need to be conducted solely through in-house cybersecurity expertise but rather can be undertaken “at the direction of” an authorized defender. This means that the ranks of cybersecurity firms may swell in the future with would-be defensive hackers and that the rest of us may want to invest in the stock of trusted and credible U.S. cybersecurity firms. These threats from China, North Korea, Iran, Russia, and elsewhere will continue to increase, not decrease.

There is, perhaps, one shade of a silver lining. China has been stealing commercial secrets for decades to the detriment of U.S. businesses. But for all of its efforts, China has yet to develop much in the robust domestic industries on the backs of these stolen technologies. That is because having the plans in hand is not the same as having the deep expertise that created the plan (see China’s Copycat Airforce). When will China have the capability (and willpower) to fully replicate what the U.S. has in R&D strength?

In the meantime, it is still crucial to evaluate and enhance your network security and train (and retrain) anyone with access to your network.

REUTERS/Jonathan Ernst

The G20 meeting is over, leaving much to digest and decisions to be made. In this post we will report on what happened and what we believe will happen going forward. Most importantly, we will suggest what international businesses should be doing in response to all this.

 

What Happened at the Trump-Xi meeting at G20?

The below image from Bloomberg, U.S.-China Trade Truce: A Side-by-Side Comparison of Statements, nicely sums things up.

.relates to U.S.-China Trade Truce: A Side-by-Side Comparison of Statements

Let’s unpack this a bit, statement by statement.

1. No new tariffs. For now. This means exactly what it says, and quite a bit more. This means that so long as things are moving forward between the United States and China and so long as President Trump doesn’t do something imperiously, there likely will not be new tariffs imposed on Chinese goods coming into the United States for a while. Or, if past history is any predictor of future performance (and we all know that it is), this merely means there will be no new tariffs until there are. Let us not forget that when President Trump met with President Xi in Argentina, President Trump made this same statement and yet he imposed new tariffs by tweet a few months later.

Reality.  The 25% tariffs that were on tap to start very soon almost certainly will not start very soon, but if there is no trade deal between the United States and China relatively soon (whatever that means), there will almost certainly be new tariffs down the road. This is but a temporary truce.China is insisting on a “balanced” trade deal and because of China’s long history of IP and market opening transgressions the United States has made clear there will be no such deal. See China wants a “balanced” trade deal at summit, but the US isn’t interested. The U.S. and China were not able to reach a deal in the last year and unless the intellectual property and market opening issues disappear or get resolved, the odds of a trade deal are slim.

In A China-America trade truce could enshrine a global economic shift, the New York Times had this to say:

The United States would keep in place broad tariffs on Chinese goods for months or perhaps years to come. Global companies would almost certainly respond by continuing to shift at least the final stages of their supply chains out of China.” As long as the threat is out there, there are risks in depending on these long supply chains,” said Jacques deLisle, director of the Center for the Study of Contemporary China at the University of Pennsylvania. “Businesses don’t like uncertainty, and this prolongs the uncertainty.”

Action Plan. If you are making products in China for sale to the United States or sourcing products from China for sale to the United States, this should not give you any comfort at all and you should either continue looking for alternative countries or — if feasible — start looking for alternative countries. China is high risk right now and it will likely be high risk for at least the next decade, trade deal or no trade deal. We still have the 25% tariffs on $250 billion in Chinese goods and the threat of more tariffs at any time. See Has Sourcing Product From China Become TOO Risky? See also The US-China Cold War Starts Now: What You Must do to Prepare. Tariffs or no tariffs, you should expect a massive increase in duties (up to and maybe even beyond 200%) to be imposed (sometimes retroactively!) on Chinese products. See Importing From China (Directly OR Indirectly) has Big RETROACTIVE Risks.

2.  Agreed to restart talks where they left off. Or not. It is not clear whether there was agreement on this or not, but it hardly matters where talks begin. What matters is whether they continue and end in a resolution or not.

Reality. There will be a deal or there will be no deal. That is what matters.

Action Plan. See above.

3. Negotiations must be equal, reflect mutual respect and address respective concerns. I don’t mean to trivialize this, but a statement like this is really just for internal consumption in China.

Reality. There will be a deal or there will be no deal. That is what matters.

Action Plan. See above.

4. Trump threatens future tariffs if no deal is made. This is key.

Reality. How long will Trump wait for a deal before he imposes new tariffs? I predict 10% tariffs within 3-5 months and another 15% on top of that within 1-2 months of that. It is not clear to me what impact the 2020 elections will have on this.

Action Plan. See above.

5. Trump says China will buy a “tremendous” amount of food and agriculture products. U.S. will give China a list of things to buy. Okay.

Reality. China will probably make a few big soybean and other food purchases from the United States to a lot of fanfare, but future orders will likely depend on trade war progress. What about China’s tariffs on U.S. food and agricultural products? No indication those will be removed.

Action Plan. Try to sell what you can.

 

What about Huawei?  President Trump also vaguely mentioned that he would now “as a favor” allow Huawei to make purchases from the United States so long as those purchases do not impact national security. It is not at all clear what this means and because of that it is not at all clear what impact this might have on the trade war, if any. If Huawei is in fact a national security threat, it strikes me as weird for anything to really change here, especially since the U.S. government has been warning other countries about the Huawei threat. If the United States does flip on this issue in exchange for a few Chinese orders of U.S. soybeans, U.S. credibility around the world likely will take another massive hit. In addition to this and per the New York Times: “leaders from both major American parties have indicated that the United States could continue to take a tough line on China no matter who is in the White House. The attitudes toward Huawei, in particular, show an appetite on both sides of the aisle for taking a tough line.”

What does the United States-China future hold? As our regular readers know, we are unrelentingly negative regarding the future for the US-China relationship. It is not at all clear either China or the United States care about their relationship for reasons beyond short term economic stability and large factions in both countries would prefer an immediate decoupling. See Trump’s Offer Of U.S. Tech Lifeline For Huawei Prompts Fierce Political Backlash and Does China WANT a Second Decoupling? The Chinese Texts Say That it Does.

 

What should you do? If you are already in China or selling to China, you almost certainly should not leave. See Why NOW Is a Good Time to Double Down on Doing Business in China. You should though make double-sure that you and your company are in full compliance with Chinese law, especially as related to taxes and employment and visas. See Want to Keep Your Business in China? Do These Things NOW. See also, Foreign Companies in China: What We are Seeing and Hearing NOW and Foreign Companies in China: What We are Seeing and Hearing NOW, Part 2. 

If you are having your products made in China and sold to the United States or sourced in China and sold to the United States, you really do need to be considering other options, a safety valve, for diversification, or as a replacement. See US-China Tariff Updates: What You Can (and Should NOT) do NOW

Most importantly, keep your eyes and your eyes wide open.

international law

This is part 7 of our 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. Can the US-China crisis be stabilized? Brookings Institute. Because this is a very thoughtful analysis of what the United States and China can and should do to reduce tensions between them.
  2. China bans all meat from Canada alleging forged customs certificates. CNN. Because this (along with China ceasing to buy canola oil from Canada) show the lengths to which China will go to punish smaller countries that engage in actions of which China does not approve — in this case arresting Huawei’s Meng Wanzhou).
  3. HSBC’s Jasmine22 startup relaunched as Serai. Global Trade Review. Because this HSBC-backed startup claims it will revolutionize global trade for SMEs and because I have a very sophisticated client who vehemently agrees with this, but most others have either never heard of it or are highly dubious. What do you know and think about Serai?
  4. Industry leaders are ‘freaking out’ about tariffs and clamoring for warehouses in this loophole-friendly Mexican border town. Business Insider. Because many companies are taking advantage of the “First Sale Rule” to legally avoid tariffs and because so few companies are aware of this “rule” and because so many companies think they are abiding by this rule but are not and will likely be facing massive fines down the road for that.
  5. Istanbul Mayor Poses Existential Threat to Erdogan. Spiegel. Because Turkey is a critical country on the world stage and because The new mayor’s [Ekram Imamogluvictory heralds the arrival of a great democratic hope for Turkey — and perhaps even the beginning of the end of the Erdogan era and because I went to high school at Robert Koleji in Istanbul and so I care deeply about the country and would like nothing more for it to be rid of Erdogan.
  6. Chinese cinema eclipses US box office as Hollywood films suffer during trade war. The Telegraph. Because this is a big deal. And yet, as our own China entertainment lawyer, Mathew Alderson, pointed out in a speech he gave in San Francisco yesterday, the box office number ignores how Hollywood movies make way more money from both streaming and ancillary products than do Chinese movies.
  7. Confession: I Hate Beach Vacations. TRVL Channel. Because the beaches in Cancun and the beaches in Phu Quoc both consist of sand and water and is it really worth traveling a long distance to spend a week at a beach anywhere in the world. I know it’s just me, but if I am going to visit another country as a tourist I want to see its cities and its people and partake in its restaurants and its museums and its landmarks. Who’s with me and this writer on this one?
  8. Cell phone photos and a rideshare helped lead to man’s arrest in the killing of Mackenzie Lueck. CNN. Because though I realize this is a total cliche, there is a yin and a yang to the invasiveness of technology, and I cannot help but think about that when I read an article like this. But for technology, it’s very unlikely the accused in this case would have been found and arrested so quickly, maybe not ever.
  9. Mom’s viral post reminds us that social media isn’t real: “Mamas, don’t compare yourself.”  USA Today. Speaking of the yin and yang of technology….
  10. “Dire” Law Enforcement Crisis in Rural Alaska Prompts Emergency Declaration, New Federal Funding. Pro Publica. Because this is an excellent and in-depth and fascinating article by Pro Publica, which is known for such things. Because it highlights how parts of rural America are falling behind and really hurting. Because rural crisis is not just confined to the United States. See e.g. ‘Empty Spain’: country grapples with towns fading from the map and Japan’s disappearing village a sign of things to come for rural Japan.

Your thoughts?

 

G20 Meeting

As the G20 meeting approaches, many of our clients have asked us how the US-China trade war has impacted China’s economy. President Xi’s top think tank advisors at Qinghua University are telling him that China’s GDP will hit 6.3% this year (within the government target), the impact of the tariffs/trade war is minimal and can be contained, and U.S. demand for an agreement that complies with law and is enforceable violates Chinese sovereignty and must be resisted. Chinese analysts believe this is the message President Xi will be taking to the G20 summit with President Trump.

This analysis of China’s GDP is supported by the International Monetary Fund, which in recent reports, reduced its 2019 estimate of PRC GDP down from 6.3% to 6.2%, a minimal reduction. So if impact on China’s GDP is the measure, the trade war’s impact on the Chinese economy has been minimal.

So China is off the hook, right? No, it is not this easy. This focus on GDP is a fundamental mistake because Chinese GDP numbers (like most economic data from the Chinese government) is fake. The PRC GDP number is a manufactured number calculated in a way to allow the PRC government to always hit its artificial target. This has been explained in detail by Professor Michael Pettis in What is GDP in China?

The Chinese economy is not growing at 6.5 percent. It is probably growing by less than half of that. Not everyone agrees that the rate is that low, of course, but there is nonetheless a running debate about what is really happening in the Chinese economy and whether or not the country’s reported GDP growth is accurate.

The reason for the widespread skepticism is the disconnect between the official data and perceptions on the ground. According to the National Bureau of Statistics, China’s economic growth in every quarter last year exceeded 6.5 percent. While that is much lower than the heady growth rates China has experienced for most of the past forty years, it is still, by most measures, a very brisk rate of growth.

And yet, when you speak to Chinese businesses, economists, or analysts, it is hard to find any economic sector enjoying decent growth. Almost everyone is complaining bitterly about terribly difficult conditions, rising bankruptcies, a collapsing stock market, and dashed expectations. In my eighteen years in China, I have never seen this level of financial worry and unhappiness.

Professor Pettis’ skepticism regarding China GDP growth is borne out by the most recent Purchasing Manager Index numbers for China. Virtually every PMI number from every agency and for every manufacturing sector shows that China’s manufacturing sector is either at steady state or is in a decline. China’s June factory PMI seen in contraction as demand falters.

China’s manufacturing sector has been directly impacted by the trade war. If we ignore the rest of the Chinese economy and focus solely on its manufacturing sector, we can see there is no growth now and there is no growth anticipated for the rest of 2019.

So what is really going on with China’s economy? To understand we have to dig down and look at the impacts of the trade war on the ground. We can do this by looking at three areas of major impact.

First, with respect to the manufacturing sector, China is still an export led economy with two sectors for export: low end and high end. The low end is labor intensive/low technology/low margin products like textiles, shoes, and furniture. In a policy mistake, the PRC at least a decade ago decided it would get rid of this sector on its developed coast. The plan was to drive this sector to the interior or eliminate it entirely as China moved up the product manufacturing value chain. This is the core concept driving the Made in China 2025 program.

The move to push its low end manufacturing to the interior failed; though disfavored, this sector survives in coastal China because Chinese private manufacturers have been able to maintain the “China price.” But U.S. tariffs eliminate the China price for most products. So exports from this sector from China are now finally being shut down and orders are disappearing. My law firm is spending huge amounts of time these days helping foreign companies in this sector move their production out of China, mostly to Thailand, the Phillipines, Malaysia, Indonesia, Vietnam, Turkey, India, and Mexico.

The list of foreign owned manufacturers that are leaving China is a long one. Korean companies are following Samsung out of China. See South Korean companies shift production out of China.Taiwan companies are moving back to Taiwan or are moving to lower end countries in S.E. Asia such as Indonesia and Myanmar. See 30 Taiwanese companies return home to invest total of more than NT$120 billion and a further 50 companies consider following suit and Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan. Japanese companies are either going bankrupt due to the pressure or setting up shop in S.E. Asia. See Why 110 Japanese firms went bankrupt in China last year and Japanese and other Asian firms shifting production from China as U.S. tariffs take toll.

Forty percent of U.S. companies surveyed by the American Chamber of Commerce in China are making plans to move to some other location beyond China. American Companies Plan to Leave China, How Will the Trade War Impact Your Business? This is a shockingly high number that requires some analysis. This 40 percent number comes from AmCham members. AmCham members are generally wealthier companies already in China and committed to China and with enough money and commitment to join AmCham. If 40 percent of AmCham members are planning to leave China, one can only imagine what the numbers are for those companies not in China that have their products contract manufactured there. Even Chinese companies are moving their low end manufacturing to Vietnam, Cambodia and Myanmar. See Chinese Exporters Shift Production to Low-Cost Nations to Dodge Trade War.

This is an irreversible trend; once companies move, they will not return. This means even if the tariff dispute is resolved today, the damage to China’s low end manufacturing sector has already been done and cannot be reversed. In the short term, the major impact of all this is and will be felt in China’s  employment sector. China’s low end manufacturing sector still employs a major portion of China’s migrant labor force. This sector employs migrant laborers without the skills or the hukou status that would allow them to move into the high end sector.

Reports from China indicate unemployment in this sector is rapidly rising and the central government is concerned about what to do with the swelling number unemployed migrant workers. Li Keqiang’s group at the State Council has urged local governments to find a way to keep these workers in place. A massive return to the countryside during the rest of 2019 is to be avoided. However, the Wang Huning faction has taken the opposite position and is urging these workers to return home and rebuild the countryside. So, though official Chinese employment statistics do not indicate any issues on unemployment, the mere fact this debate is occurring at the top levels in China shows unemployment is a very real issue and will likely to become more severe as the year progresses.

My law firm’s China employment lawyers are hearing from clients that local employment bureaus are subtly pressuring them not to lay off any employees and getting all sorts of pressures regarding their compliance with China’s employment laws. Our lead China employment lawyer, Grace Yang, mentioned this just yesterday in the first part of her new series on How to Avoid China Employment Law Problems, necessitated by rising employment law pressures.

From what we can see, China’s high tech sector has been less impacted by the tariffs because margins in this sector are high enough to so far blunt the tariff’s direct impacts. Having said that, many high tech/electronics manufacturers are also developing plans to diversify away from manufacturing in China and I expect that diversification will be felt within the next couple years. In fact, the Chinese electronics manufacturers that are being impacted by tariffs are not really high-tech. They are mostly makers of computer/smart phone peripherals or are simple assemblers in a way that does not significantly differentiate them from the low tech sector.

For the truly high-tech manufacturers in China it is not the imposition of tariffs that will have the most significant impact. As noted above, the plan of the Chinese government is to move out of the low end and into high tech manufacturing. This move is being led by companies such as Huawei, ZTE, HikVision, Sugon (Dawning) and other companies working in fields like artificial intelligence and automated vehicles. The Chinese government sees this sector as the future of Chinese manufacturing and the way to save the export led economy and China’s status as the “factory of the world”.

Unfortunately for China, these high tech sectors are currently dependent on U.S. technology. So though this sector can survive increased tariffs, it cannot survive being cut off from U.S. technology and the U.S. is using access to technology as a major tool in the trade war. Huawei has been put on the BIS entity list, cutting it off from U.S. technology. See The Huawei Sales Ban: Brrrrr. The entity list was recently expanded to include China’s major supercomputer companies. See U.S. Bans Chinese Supercomputer Companies with Presidents Xi and Trump Set to Talk Trade Next Week. It is probable the United States will soon expand its ban list to include China surveillance/facial recognition companies and drone manufacturers. The trend and the rumors are for this technology sales ban to extend to China’s entire high tech sector, impacting virtually every emerging technology described in the Made in China 2025 program. See The Top Ten Issues for China’s Economy.

Not only will technology sales to China be cut off, but Chinese company access will be further impacted. Chinese companies will be prohibited from investing or buying U.S. critical technologies. The U.S is also moving to ban purchases by any U.S. person of any high tech equipment from China. These things do not involve tariffs; they  involve absolute bans. Joint research between Chinese researchers and U.S. academic institutions is being restricted. Hiring of Chinese engineers and programmers in the high tech sector is also being restricted. There may eventually be a complete ban on such employment.

These moves will cut China’s high tech sector off from U.S. based technology and research. Since the Chinese high tech sector remains largely dependent on U.S. technology, the impact of this will be significant. For example, Chinese working in the semiconductor sector have stated that their development will reach a dead end without access to critical U.S. technology. The impact of this has not and even will will not be terribly apparent in China’s GDP or PMI numbers because sector that is right now so undeveloped and not generating much if anything for China’s economy. It is part of the China plan for the future of its manufacturing sector. If this trend continues, it is a future that will never be realized.

Development of China’s export manufacturing system has since 2001 relied largely on foreign direct investment and associated technology transfer. China’s export manufacturing sector was created by foreign investment, both in terms of investment dollars and in terms of the resulting transfers of technology. Chinese export manufacturers were taught by their foreign customers to make their export products. They did not learn how to do this on their own. The importance of capital from the U.S. has been underestimated. Consider one example. China’s e-commerce/Internet sector is dominated by AliBaba, Baidu, JD.com and Tencent. These are not Chinese companies; these are VIEs that raised their capital outside China, primarily in the United States public markets. Without U.S. capital they would not exist. The same applies in more general terms for China’s entire export sector.

But as a result of the trade war, United States foreign direct investment (FDI) into China has collapsed and FDI from Japan, Korea, and Taiwan has significantly declined. Since China’s low end manufacturing sector is already built out and in decline, this FDI collapse will not impact that sector much if at all. But China is relying on FDI to finance the build out of the critical industries in its high tech sector. China’s plan has been to use foreign capital and foreign technology to build out its new high tech sector in the same way it used foreign capital and foreign technology to build out its low value sector. This means the decline in foreign investment will have its primary impact on China’s plan to become a high tech superpower. This impact will therefore be felt in terms of the impact on China’s future, rather than on the current level of economic activity in China. It is therefore not an impact that can be accurately measured by looking at China’s current economic activity. As an additional blow, legislation currently being considered in the U.S. will bar all Chinese companies from access to the U.S. public stock markets. China and the U.S. Stock Market: Nowhere to go.

All of the above shows that even if China’s GDP numbers were real and meaningful (and they are neither), the impact of the trade war on China  has been and will be significant in ways that cannot be directly measured by a number such as GDP. These impacts include the following:

  • Social unrest due to unemployment from the collapse of the low value export market.
  • Job loss for low skill migrant workers due to export manufacturing leaving China for other countries rather than moving to the Chinese interior.
  • China’s high tech sector has been cut off from U.S. technology, crushing the Made n China 2025 plan.
  • Chinese companies have been cut off from U.S and other foreign investment, striking a major blow to China’s ability to convert from low end to high end manufacturing.
  • The United States is and will continue to relentlessly impose duties (these are different from tariffs) on incoming Chinese products. See Yet Another International Trade (AD/CVD) Petition Against China.

The trade war involves far more than tariffs. See The US-China Cold War Starts Now: What You Must do to Prepare. The impact of the US-China decoupling runs much deeper and is far more significant. This is why we continue to stress that what you are seeing with China above is the New Normal. As long as the New Normal continues, which it is virtually certain to do, a partial resolution of the tariff dispute at the G20 meeting (or even a fuller subsequent resolution) will not change the larger trend. China and the United States are decoupling and international businesses are starting to realize this and acting accordingly. See China-US Decoupling Continues and Will Continue, but Must be Done Right.

What are you seeing out there?

ChinaEmployee HandbookWith China’s economy in decline and with so many foreign companies in China laying off employees, it should come as no surprise that the Chinese government is cracking down harder than ever before on foreigner employers that do not comply with China’s employment laws and the number of employee lawsuits is correspondingly on the rise. We previously discussed this need for strict compliance in Want to Keep Your Business in China? Do These Things NOW:

If past performance is any indicator of future performance — and I firmly believe it is — we know well what foreign companies must do to avoid China problems going forward and we set out those things below. Before anyone panic (too much), let me just say that for the past decade or so, China has consistently gotten tougher on foreign businesses in China that are not operating legally there and though this announcement is a really big deal, it is more a change in scope than it is in kind.

In fact, two days ago, in How to React to a China Economy in Decline: The China Lawyer Edition, I listed out 8 things our international lawyers were seeing that were telling us that China’s economy is in decline. Item number one was the following:

The number of foreign companies getting into legal trouble in China. Whenever China’s economy slows, its government starts looking for foreign companies out of compliance with Chinese laws. It does this both to show its citizens that it is working on their behalf and to raise money by collecting on unpaid taxes, with interest and oftentimes steep penalties. In particular we are seeing yet another increase in China going after foreign companies doing business in China without a WFOE. See Doing Business in China Without a WFOE: Will the Defendant Please Rise and China’s Tax Authorities Want You.

Correspondingly it has become more important than ever for foreign employers to make sure they are complying with all of China’s national and local employment laws See China Employment Law: Local and Not So Simple. This post is part One in what will be a new series of roughly weekly posts laying out what foreign employers need to do to avoid the proverbial Chinese government knock on the door/employee lawsuit for failing to comply with Chinese employment law.

I start this series by discussing what you as a China employer should be doing with your Employer Rules and Regulations (commonly referred to as an Employee Handbook). I start this series with Employee Handbooks because these are such important documents under Chinese law and because their neglect so often causes major foreign employer problems.

Since China ramped up its employment compliance enforcement of foreign employers our China employment lawyers have been hit with just a ton of complex employment law matters for foreign companies fighting off China employment problems. Two “common themes” jump out at us from these projects as the most-frequently-needed services by China employers these days: employee terminations (especially of high-paid employees) and Employer Rules and Regulations/Employee Handbooks. The first should be obvious and not terribly surprising given what has been going on in China the last six or so months. The second is because many employers have now realized that to better manage their China workforce (or what is left of it), they need a clear and relevant and appropriate Employee Handbook that actually works for them and not against them, both for their existing employees and for their employee terminations. They need an Employee Handbook that lays the groundwork for how to make their employment decisions and that makes those decisions work under China’s employment laws.

For your Employee Handbook to satisfy these criteria, it must comply with today’s laws (not last year’s or a prior year’s laws) and it must comply with the laws of the locale in which your employees are based. In other words, using an Employee Handbook written for Shanghai four years ago when you now have employees in both Shanghai and Shenzhen is a recipe for disaster. Using an Employee Handbook for Shenzhen that is nothing more than a Chinese translation of your U.S. (or any other non-PRC jurisdiction) employee manual is another disaster waiting to happen. Oh, and one more disaster we keep seeing: Employee Handbooks created from a Chinese-language template that is not customized for the city or the industry or the employer and then is badly translated into English so nobody making the decisions really even knows what it says.

When our China employment law team is tasked with writing an Employee Handbook, the first thing we do is review our client’s existing employee rules/policies (if any) so as to better understand the client’s HR program and to better be able to consider and account for our client’s HR goals. Drafting any Employee Handbook involves our balancing our client’s HR goals with the realities and the laws and other requirements of the client’s particular industry and locale. That is the proactive side of our Employee Handbook work.

The reactive side of our Employee Handbook work comes in when we are retained by a foreign employer in China with an employee dispute or a merger or a terminations or a mass layoff or a government compliance problem. It is from those instances where we have learned how so many foreign employers in China have Employee Handbooks that are either useless or affirmatively harmful for them.

We have handled countless China employment law matters where a bad Employee Handbook has cost the foreign companies months of hassle and tens of thousands of dollars — sometimes considerably more than that. On the flip side, we have handled countless employment law matters where a well-crafted and enforceable Employee Handbook has meant that all we employment lawyers needed to do was to confirm and slightly guide an employer’s previously made decision based on an applicable provision(s) in their Employee Handbook. By way of an example, we have handled situations where employers have wanted to terminate an employee for “not being a team player.” This is not a terminable offense under Chinese law, per se. But after we had gathered up all the facts regarding the employer/employee situation and reviewed the Employee Handbook, we found several instances of employee misconduct which would permit a unilateral termination without severance. Because it was obvious the employees had breached enforceable provisions of the Employee Handbook, their terminations went off without a hitch.

No Employee Handbook can cover everything, but it should be written to cover enough bases and to include enough appropriate and enforceable catchall language to allow you the flexibility to act on most employee problems. A good Employee Handbook also sends a strong signal to your employees that you understand and respect how China’s employment laws work and this alone goes a long way towards preventing employee and government problems in the first place.

Avoiding China employment law problems requires you have a relevant and timely and well-crafted China employee handbook. This should be your Step 1.

A new client the other day asked me what it should be doing to protect its IP in China and I asked whether they wanted the ten minute version or the ten day version. Fortunately for the both of us (and not surprisingly), they chose the ten minute version and the below is basically that.

Five Keys to Protecting Your IP in China

I regularly speak on how to protect IP in China and the above is nearly always my first PowerPoint slide and the below is my standard accompanying explanation.

The first key is having a good partner. Having a good partner matters because a good, financially healthy Chinese company is less likely to steal your IP because it has something to lose, both with you and generally. China’s economy is in a substantial downturn, due in large part to the US tariffs and to US and EU duties on Chinese products. See Has Sourcing Product From China Become TOO Risky? This means more than even the usual number of . Chinese companies are not good partners and so finding a good Chinese partner just got tougher.  See e.g. China Trademark Theft. It’s Baaaaaack in a Big Way.

The second key is having a good contract with anyone in China to whom you will be revealing your IP.  The right contract or contracts will depend on your specific situation. The most common contract for IP protection is an NNN Agreement (this is a more thorough, more complicated and, most importantly, more China-centric version of an NDA). But this might also include a trade secret agreement, a non-compete agreement, a confidentiality agreement, a non-use agreement, a licensing agreement, or many other sorts of contracts tailored for your specific situation.  For making sure whatever contract you use to protect your IP actually works for China, check out The Five Keys to A China Contract That Works.

The third key is good registrations. This might include any combination of trademarks, copyrights and patents. It also usually makes sense for you to register your IP with China Customs and with the Customs Office in the country to which your products will be shipped.

And then just constantly monitor and protect both online and offline. See Getting Counterfeits off Alibaba.

UPDATE: Not more than ten minutes after this post went up, one of our international manufacturing advisors called to say that I should have tailored the above advice for those doing business not just with China, but with Thailand, Malaysia, Vietnam, the Philippines, and Taiwan (the countries where most of our manufacturing clients are going) as well.

Good point, so here goes. The above advice applies with equal force to Thailand, Malaysia, Vietnam, The Philipines, and Taiwan. Heck, it applies with pretty much equal force to India, Mexico, and the Ukraine as well, and to pretty much every other country in the world too.