China cybersecurity lawyers export control

In the face of the Wuhan coronavirus outbreak, Xi Jinping went into hiding. From January 28 to February 5, he made no public appearances. He briefly appeared on February 5 and promptly disappeared again. We would have expected that during his brief appearance Mr. Xi would make a stirring speech about leading China in a full scale effort to combat the coronavirus epidemic. To the surprise of many of us, Mr. Xi’s first public announcement did not provide details on the health and safety measures that will be implemented in China to contain the outbreak and provide medical assistance to the ill and dying. Rather, he discussed a completely different matter: legal controls intended to contain the social stability impacts of the outbreak. As reported by the South China Morning Post (SCMP):

“Xi also chaired a legal work conference on Wednesday, at which he said the nation’s legal system had a key role to play in helping to contain the virus. It was essential, he said, that laws covering the trade in wild animals and the management of public health incidents were strictly enforced.

“Currently we are at the critical moment of controlling the epidemic,” he said. “Offences jeopardizing disease control, including resistance to control measures, violence towards medical staff, counterfeiting medical materials and the spreading of rumours must be severely curtailed.” ”

President. Xi’s statement from this conference has been headline news all over China, as a headline article on the Xinhua website  and as the lead article on the Seeking Truth website devoted to communist theory and the thought of Xi Jinping.

This is what happened. On February 5, President Xi convened a meeting of the CCP Central Committee Working Group on Comprehensively Governing the Country in Accordance with Law. 中央全面依法治国委员会中央全面依法治国委员会 This is an ad hoc committee with no set meeting time or agenda. This means that Xi called this meeting as an extraordinary session. In attendance at the meeting were the core members of the Politburo: Li Keqiang, the head of the State Council and Li Zhanshu and Wang Huning, President Xi’s ideological supporters (the “think tank” 智囊). With this group of four in attendance, it is clear that the meeting represents the thinking of the core of the CCP leadership.

As a result of this meeting, Mr Xi issued the statement referred to by the SCMP. The (long) title of that Statement is “Provide an effective system of legal measures for epidemic prevention and control by comprehensively improving the ability to control, prevent and govern in accordance with law (全面提高依法防控依法治理能力 为疫情防控提供有力法治保障). The full text of the statement can be found (in Chinese) at the Xinhua and Seeking Truth links provided above.

As reported by Xinhua, the focus of the statement is the threat to use legal measures to control the response of the public, medical staff and local governments to laws and regulations coming from the central government intended to deal with the coronavirus epidemic. But what are those legal measures? The Statement provides that the Beijing Central government will do the following:

  1. Enact legislation for effective prevention and control of the epidemic.
  2. Improve the system of punishments.
  3. Strengthen public security measures.
  4. Establish an effective legal system for prevention and control of the epidemic.

Given the current situation in China, consider just how odd this list of measures is. The two key features are, one, a reference to legal work that will be done in the future, and, two, insistence on responses to the coronavirus situation that will come from the bureaucrats and the governing center.

But the persons suffering from the epidemic need help now, not at some vague time in the future. And the help they need is provision of medical facilities, personnel and supplies. The LAST thing they need is more laws issued from Beijing by bureaucrats with no front line contact with the situations on the ground. Stated simply, what the people need is funding and support for medical issues, not threats of legal action. But instead of convening a working group of doctors and scientists, this is what President Xi decided was most important.

Though this latest Statement is truly bizarre (and grossly unfeeling), it is actually quite consistent with the approach the Chinese government has taken towards this outbreak since its inception. Pretty much since Day One of the coronavirus outbreak, the Chinese government’s central focus has been on controlling information and exercising oppressive control over the public, the frontline medical personnel and the lawyers and journalists working to reveal the truth of the situation. This control at all costs approach continues. In his most recent response to the situation in Wuhan, President Xi did not send down a medical expert. Rather, he instead dispatched Chen Xixin, former Wuhan CCP chairman, who is usually described as President Xi’s “security protege” and whose sole job is to maintain social stability. See Xi Jinping security protégé to bolster China’s coronavirus task force.

This control over information will also lead to arrests of more truth-tellers like  Dr. Li Wenliang, most of whom will never become publicly known. The Chinese government has seen how Dr. Li’s heroism and subsequent arrest has already galvanized the Chinese public against the government and it will be more careful to suppress similar information going forward. Martyrs make for revolutions and, more than anything, the Chinese Communist Party will do whatever is necessary for it to remain in power.

For those of us focused on doing business in and with China, this Chinese government emphasis on control over cure will likely have two immediate impacts. First, access to accurate information about the coronavirus situation will become even more restricted. Second, local officials are now required to produce results and this means the pressure on local governments to provide falsely positive coronavirus data will increase.

The above means uncertainty of information in China will increase, distrust of the government will grow, and the general hysteria in the Chinese public will increase. These things will likely exacerbate the paralysis of transportation throughout China that we are already seeing. making the planned return to work scheduled for February 10 very uncertain. Prepare for a bumpy ride.

Tomorrow we will talk about why we are pessimistic about foreign companies getting their products manufactured in China and shipped for delivery.

Update: See He spoke out about the Wuhan virus. Now his family and friends fear he’s been silenced.

International Trade LawyersOn February 5, 2020, Wincom Inc. filed an antidumping (AD) and countervailing duty (CVD) petitions against U.S. imports of certain corrosion inhibitors from China.  Included in the proposed scope are inhibitors know as tolyltriazole (“TTA”) and benzotriazole (“BTA”) in all grades and forms, including liquid and solid forms. These corrosion inhibitors are used to protect elements and metal alloys, including copper, copper alloys, zinc, cobalt, silver, aluminum, and steel from corrosion.

Before President Trump unleashed an unprecedented wave of tariffs issued pursuant to obscure sections of the U.S. trade laws (Section 232 – national security – steel/ aluminum, Section 301 – China), the most commonly used trade remedy actions were the AD/CVD investigations.  Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

This latest filing reinforces what our international trade lawyers have been saying pretty much since the US-China trade war began: this trade war involves more than just tariffs. This means that even in the unlikely event all the tariffs are eliminated, large aspects of the trade way, including anti-dumping and technology and national security issues will remain.

This AD/CVD case looks like it involves a very small industry for a very discrete specialty product with just one U.S. producer, and probably very few U.S. importers fighting to sell to a small number of U.S. customers.  This product is a specialty chemical that is used to inhibit corrosion and rust for metals (copper, silver, zinc) used in water cooling towers, engine coolants, industrial water treatment, and for other metal working fluids, lubricant, cleaner applications.

This case has an interesting twist in that the Petitioner is also listed as a U.S. importer of the Chinese product against which AD/CVD duties are being sought.  It is unclear how much of the Chinese subject merchandise the Petitioner is importing and how big oa share of total Chinese imports Petitioner accounts for.  But this does raise questions as to what extent the Petitioner might actually be helped by its Chinese imports rather than being injured by other Chinese imports.

Scope

The petition identifies the scope of the merchandise to be covered by these AD/CVD investigations as:

The merchandise covered by this petition is tolyltriazole and benzotriazole. This includes tolyltriazole and benzotriazole of all grades and forms, including their sodium salt forms. Tolyltriazole is technically known as Tolyltriazole IUPAC 4,5 methyl benzotriazole. It can also be identified as 4, 5 methyl benzotriazole, tolutriazole, TTA, and TTZ.

Benzotriazole is technically known as IUPAC 1,2,3-Benzotriazole. It can also be identified as 1,2,3-Benzotriazole, 1,2- Aminozophenylene, lH-Benzotriazole, and BTA.

All forms of tolyltriazole and benzotriazole, including but not limited to flakes, granules, pellets, prills, needles, powder, or liquids, are included within the scope of these petitions.

The scope includes tolyltriazole/sodium tolyltriazole and benzotriazole/sodium benzotriazole that are combined or mixed with other products. For such combined products, only the tolyltriazole/sodium tolyltriazole and benzotriazole/sodium benzotriazole component is covered by the scope of these investigations. Tolyltriazole and sodium tolyltriazole that have been combined with other products is included within the scope, regardless of whether the combining occurs in third countries.

Tolyltriazole, sodium tolyltriazole, benzotriazole and sodium benzotriazole that is otherwise subject to these investigations is not excluded when commingled with tolyltriazole, sodium tolyltriazole, benzotriazole, or sodium benzotriazole from sources not subject to these investigations. Only the subject merchandise component of such commingled products is covered by the scope of these investigations.

Tolyltriazole has the Chemical Abstracts Service (“CAS”) registry number 299385-43-1. Tolyltriazole is classified under Harmonized Tariff Schedule of the United States (“HTSUS”) subheading 2933.99.82.20.

Sodium Tolyltriazole has the CAS registry number 64665-57-2 and is classified under HTSUS subheading 2933.99.82.90.

Benzotriazole has the CAS registry number #95-14-7 and is classified under HTSUS subheading 2933.99.82.10.

Sodium Benzotriazole has the CAS registry number 15217-42-2. Sodium Benzotriazole is classified under HTSUS subheading 2933.99.82.90.

Although the HTSUS subheadings and CAS registry numbers are provided for convenience and customs purposes, the written description of the scope of these investigations is dispositive.

 

Alleged AD/ CVD Margins.

Petitioner calculated estimated dumping margins ranging from 388.28% to 420.32% for China.

Petitioner alleged numerous government subsidy programs that benefitted the Chinese corrosion inhibitors industries, but did not allege a specific subsidy rates

Named Exporters/ Producers

Petitioner included a list of companies that it believes are producers and exporters of the subject merchandise.  See attached list here.

Named U.S. Importers

Petitioner included a list of companies that it believes are U.S. importers of the subject merchandise.  See attached list here

 

Estimated Schedule of Investigations.

February 5, 2020 – Petitions filed

February 25, 2020 – DOC initiates investigation

February 26, 2020 – ITC Staff Conference

March 21, 2020 – ITC preliminary determination

July 6, 2020 – DOC CVD preliminary determination (assuming extended deadline) (4/30/20 – unextended)

September 2, 2020 – DOC AD preliminary determination (assuming extended deadline) (7/14/20 – unextended)

January 15, 2021 – DOC final determination (extended and AD/CVD aligned)

March 1, 2021 – ITC final determination (extended)

March 8, 2021 – DOC AD/CVD orders issued (extended)

China employment lawyers

As workers in some locales in China head back to work after the end of extended time off period (some ended on February 3), one hashtag #eat in cafeteria, feels like exams# gained a lot of traction. It started with a picture showing workers were separate from each other while eating in company cafeterias. Though every company does it a little differently, the common theme is to allow only one person per table and two people must be at least two to three meters apart to avoid close contact. So basically like separate seating when taking exams. Many are reacting to this hashtag.

This is kind of a long way of saying that China is truly different from any other jurisdictions in terms of its different systems, cultures and expectations. It means even for multinationals that want to take one universal approach in all jurisdictions they operate, when managing China employment affairs and pretty much everything else, you need to keep in mind the practices and realities in your specific locales in China. We have been keeping getting tons of questions from employers and employees regarding what their rights, obligations and options are during the coronavirus epidemic. Given there is so much uncertainty right now and we cannot predict when the current state will end, our advice is to watch for the developments and stay in compliance to the best you can. For example, Beijing is sort of business as usual in that employees are now back to work, though many are working remotely as the government has encouraged them to do so at least before February 10. But what happens after February 9? Will the government continue to encourage employers to have employees work at home to avoid crowd gathering? This is likely but we just don’t know now. The mandatory rest period is still in place in Shanghai through February 9 and what happens after that? We don’t know.

Just a few days ago after the PRC State Council extend the Chinese New Year through February 2, some city officials in Nantong city were inspecting a textile mill and they saw three workers working there. This was a flat-out violation of the Jiangsu provincial government mandated extended holiday and so they reported this to the local police. It turned out the workers were asked by their employer to complete unfinished orders placed before the Chinese New Year. And the person-in-charge of the mill was arrested and then sentenced to be detained for 5 days for failing to comply with the government order. So be careful. If you are in a city where the employers are required to close their businesses now, comply.

You as China employer need to do your best to be legally compliant. Make sure you have someone on the ground who is keeping up with the local requirements, as well as the measures favorable to employers that are coming out to address employer concerns and ease employer burdens such as extensions of deadlines for social premium payments, delayed raises on social insurance bases and government-provided subsidies for maintaining workforce stable. Because the new rules are being rushed out, the level of details is not great and therefore it is advisable to seek clarifications from the local authorities (to the extent possible). However, the authorities did not just invent new rules out of the blue, instead, they relied on existing rules so it is important to check the rules and practices that were effective prior to the outbreak as well (to the extent they exist) to better navigate the issues at hand. Also, the intent and spirit of the laws should not be forgotten, and that is employee protectionism—which has been in force in China for a long time.

Now, more than ever, is not the time to apply an approach or take an action which may be considered okay in your home country but not proper for your specific locale in China. For example, we are still getting questions about how the employer can do about laying off employees now and our answer is a consistent no, at least right now, don’t do it. The bottom line is as China employer you need to do right by your business and your employees all under the confines of Chinese law.

 

 

China Espana

According to a survey conducted by Grant Thornton (thanks to our friends at the Madrid Chamber of Commerce for sharing), Spanish exporters are upbeat about prospects for 2020. Forty-one percent of Spanish companies are expecting to increase their exports during the year, a greater degree of optimism than in the European Union as a whole (35%).

In light of this, it is worth asking, will we see an increase in Spanish exports to the United States?

According to the International Trade Administration, in the first 11 months of 2019, Spanish imports to the U.S. went down 3.8% year-on-year. This contrasts with increases in France, Belgium and the Netherlands of 11.4%, 15.1% and 24.4% respectively.

It seems clear that Spain has not benefited from the U.S.-China trade war, which is not surprising. An advanced economy like Spain’s is not exactly an alternative to “just right” China, with its relatively lower costs. In turn, countries that more directly compete with China, such as Mexico, India, Thailand, Malaysia and Vietnam have all seen their imports to the U.S. grow. The tariffs imposed by the U.S. on agricultural goods from Europe, which hit important Spanish products, have not helped matters.

Nonetheless, China’s ongoing coronavirus crisis could give rise to new opportunities for Spanish industry. Of course, this crisis is above all a humanitarian one, and our thoughts are first and foremost with the victims in Wuhan and elsewhere. Yet, it is important to pay attention to the broader impact of this outbreak. Simply stated, China is closed for business. The Lunar New Year holiday has been extended in all important economic centers, prolonging the usual shutdown of the manufacturing sector. If the crisis is not brought under control soon, the authorities will have no choice but to continue the closures. As our managing partner Dan Harris warned recently in his post, What’s Going to Happen With My China-Dependent Supply Chain, “How long will this last? Nobody knows.”

This presents serious problems for companies reliant on Chinese suppliers. Even if they manage to get hold of their suppliers, the latter will not be able to offer even a ballpark estimate of when they will be able to ship product (and if they do, they are lying), let alone take new orders. And never mind those yearly trips to visit factories and/or check out the latest at the Canton Fair (which, by the way, may be cancelled).

The scourge of coronavirus follows the beating that Chinese factories have taken as a result of the Section 301 tariffs imposed by the United States. Even before that, China was losing ground to its competitors in Southeast Asia and elsewhere, which generally offer lower costs, as well as other advantages. As a result, many Chinese manufacturers were already “walking dead”. The coronavirus stoppage will finish off many of them.

As a result, many companies will need to find alternative sources outside China for their inputs. Vietnam and its neighbors will offer alternatives in some instances, but not in all. Even if there makers of the product in question, their production capacity may be insufficient, especially in the face of a massive, sudden shift away from China.

And let’s not forget that, in a worst-case scenario, Vietnam and its neighbors may themselves face a coronavirus pandemic.

As the Spanish proverb goes,  a río revuelto, ganancia de pescadores. Fishing in troubled waters, we’d say in English. Spanish companies should not let this opportunity pass.

 

 

China Espana

De acuerdo a un estudio de la firma Grant Thornton (del cual nos informamos gracias a nuestros amigos de la Cámara de Madrid), los exportadores españoles afrontan con optimismo el año en curso. El 41% de las empresas españolas espera aumentar sus exportaciones durante 2020, una cifra superior a la de la Unión Europea (UE) en general (35%).

Ante este panorama, ¿veremos un incremento en las exportaciones españolas a los Estados Unidos?

Según los datos de la Administración de Comercio Internacional estadounidense, en los primeros 11 meses de 2019 las importaciones de productos españoles disminuyeron un 3,8% respecto al mismo período en 2018. Francia en cambio vio un aumento de 11,4%, Bélgica de 15,1% y Holanda de 24,4%.

A todas luces, España no ha salido beneficiada de la guerra comercial entre EE UU y China. Esto no sorprende. Una economía avanzada como la española no es precisamente el reemplazo idóneo de China, con sus relativos bajos costes. Por eso, en cambio, vemos cifras favorables para México, India, Tailandia y Malasia, por no hablar de Vietnam (cuyas importaciones en EE UU se han disparado aproximadamente un 25%). Estos países son competidores mucho más directos de China. Por supuesto, algo también han tenido que ver los aranceles impuestos en octubre de 2019 sobre los productos agrícolas de la UE, entre los que destacan importantes rubros españoles, como los productos porcinos.

No obstante, la presente crisis de salud pública que vive China a causa del coronavirus pudiera presentar nuevas oportunidades para la industria española. Por supuesto, esta crisis es ante todo una tragedia humanitaria, pero no por ello hay que ignorar sus otras dimensiones, incluyendo la comercial. Poniéndolo en términos coloquiales, China está cerrada. El tradicional feriado del Año Nuevo Lunar ya ha sido extendido en muchas localidades, agravando el típico paro de estas fechas. Si la crisis no se controla pronto, no quedará otro remedio que continuar prolongando el cierre.  Como advirtió hace poco nuestro socio gerente, Dan Harris, nadie sabe a ciencia cierta (o incluso, incierta) cuánto tiempo tomará el retorno a la normalidad.

Esto presenta graves problemas para las empresas que dependen de suplidores chinos. Aun si logran establecer contacto con su suplidor, este no podrá ofrecer tan siquiera un estimado general de cuándo podrá embarcar sus productos (y si lo hace, miente), mucho menos aceptar nuevas órdenes. Y ni hablar de los viajecitos anuales a visitar fábricas y/o pasar por la Feria de Cantón (la cual, por cierto, podría ser cancelada).

El batacazo del coronavirus se suma a la golpiza que se han llevado las fábricas chinas como resultado de los extensos aranceles impuestos por EE UU bajo la Sección 301 de su Ley de Comercio (Trade Act). Incluso antes de esta presión arancelaria, China iba perdiendo terreno ante sus competidores del Sudeste Asiático y otros, los cuales ofrecen costes reducidos en comparación a China, así como otras ventajas. Como resultado, muchas fábricas chinas ya estaban en posiciones delicadas. El coronavirus será su sentencia de muerte.

En vista de todo esto, muchas empresas tendrán que encontrar fuentes alternas para sus insumos. Y por supuesto estas fuentes no podrán ser otras fábricas chinas. Vietnam y sus vecinos ofrecerán alternativas en algunos casos, pero no en todos. Incluso si existen en estos países potenciales suplidores, su capacidad de producción podría ser insuficiente. Y por supuesto, no olvidemos que el coronavirus no respeta fronteras, por lo cual vecinos de China como Vietnam pudieran verse sumidos en la crisis también.

Como decimos en nuestro idioma, a río revuelto, ganancia de pescadores. Si bien la situación en China es una tragedia desde el punto de vista humanitario, representa también una enorme oportunidad para las manufactureras de otros países. Las empresas españolas no deben dejar pasar esta oportunidad.

Moving your manufacturing Out Of China

This is the first in what will be an ongoing series of posts we will be writing on how to move your manufacturing from China.

The South China Morning Post did a story yesterday whose title says it all: Coronavirus could be ‘death blow’ for many of China’s small manufacturers if not under control by April. The article itself consisted mostly of interviews with Chinese factory owners who talked about how bad things are for factories in China right now and how if things do not improve by, variously, the end of February, March or April, we should expect massive numbers of them to go under.

Judging by what our international manufacturing lawyers are hearing from our own clients, these predictions are likely spot on. We have clients that have already moved their manufacturing from China and we have clients that are in the process of moving their manufacturing from China and we have clients that are looking to move their manufacturing from China. And we even have some clients with no interest (at least pre-coronavirus) interest in moving their manufacturing from China. This series is intended for those companies looking to move their manufacturing from China, probably the largest and most sensitive of the categories.

About once a week now we are getting emails or phone calls from foreign companies that moved their manufacturing from China and have just learned that their former manufacturer in China is selling their products directly to the foreign companies’ own customers or to the world or have just realized that this is what their former manufacturer will soon be doing. These companies want to know what we can do to help them and FAST.

There is only so much we lawyers can do for a company in the situation above, but there is a heckuva lot more we can do for companies that come to us BEFORE they say goodbye to their Chinese manufacturer and we will in the next week or so be discussing those things. For now, just realize that you need to plan well in advance for terminating your China supplier. And by plan in advance, I mean you need to secure your molds and all of the product for which you have already paid before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere. And you need to protect your intellectual property and your people and your customers and even your ability to return to China for manufacturing someday. We will explain all this in detail in our coming posts.

International manufacturing lawyers

When I was 16, I lived for a year in Istanbul, Turkey, and it was then and there that I decided I wanted to become an international lawyer (if I was not going to make it as a professional basketball player). This was back in the days when you were considered international if you had driven to Windsor, Canada ( I grew up in Michigan).

I am now an international lawyer and I LOVE it. I love that it is part of my job to know the world. The entire world. Its politics. Its economics. Its cultures. What is more interesting than that? I also love getting questions from clients and giving them answers. And if I don’t know the answers right away (which is typical, actually), I love having an awesome legal team that knows a ton and what they don’t know, they almost always know how to find out. I especially love giving clients actionable information. I hate not having answers.

Which gets me to the question of the week and my answer: What is going to happen to my supply chain? I don’t know and there is probably no way to know right now. I hate having to give an answer like this.

Renaud Anjoran heads up a quality control and sourcing company out of Shenzhen. I’ve known and worked with and greatly respected Renaud for a decade and I have probably cited on this blog citied more often to Renaud’s blog posts more than to anyone else’s; 68 times by my calculations (69 after this one). I cite to Renaud because he knows whereof he speaks regarding China manufacturing and because he writes about it often and because he tells the truth.

Renaud’s blog post today is entitled China Epidemic: Real Effects on Logistics and Manufacturing, and it answers as best as possible, the manufacturing and logistics and supply chain questions our international manufacturing lawyers have been getting.

Renaud starts his post by briefly laying out the current situation. The virus is “spreading like wildfire,” governments are resorting to extreme measures, and “nobody believes Beijing’s official numbers.” I used to multiply those numbers by five but I now believe multiplying them by ten is not only quicker, but more accurate.

Below is Renaud’s take on the manufacturing/logistics/supply chain situation, with my comments in italics.

Will China’s factory workers return to work? When? Some will return, some won’t. Many Chinese factories are “walking dead.” Even before the coronavirus, many Chinese factories were on the verge of closure due to the economy, the tariffs and the duties. The coronavirus will be their last straw.

“The vast majority of factories are closed, and the holiday is getting extended. Certain employees (salespeople, HR staff, R&D engineers…) are starting to work, mostly from home.”

I 100 percent agree with the above. We have clients that have tried communicating with their China factories and gotten no response. The most common response is “we don’t know yet.” 

What is the worst that can happen in the next two months?  Many migrant workers will not want to return to their jobs for risk of getting the virus. Many will refuse to work cheek by jowl with their co-workers for fear of getting the virus. Many will simply be prohibited or unable to return. Renaud presents the following as possibly contributing to a worse case scenario, all of which seem quite plausible to me:

  • Some cities (or districts) that traditionally host a lot of migrant workers (e.g. Dongguan, Ningbo, Xiamen) may get frightened and decide to go into lockdown
  • Many people from Hubei who tried to get into Hong Kong (for better health care) have been stopped at the border, have stayed in Shenzhen, and this may trigger Shenzhen’s infection cases to skyrocket to the point where people are ordered to stay home
  • Stories about people getting infected at their workplace may multiply
  • Some entire factories may not re-open at all because their entire management and a good part of their operators are still blocked in Hubei province (and that’s true of many factories!)
  • The lower manufacturing output at the component level impacts many assembly & export suppliers, and many batches of finished goods can’t get made at all

How long will this last? Nobody knows.

What about the impact on logistics? How will products get to their buyers? Air carriers are suspending their flights. Some countries are blocking or delaying incoming carriers. Borders are closing. Certain types of products may be banned to prevent the spread of the coronavirus. Some countries might ban all products from China. I concur with Renaud on all these things and I raise him one. President Trump has always wanted to force a US-China decoupling. In August, 2019, in Repeat After Me: There Will be No US-China Trade Deal, we stated: All this leads us to believe that the U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China, as well. I can absolutely see President Trump using the coronavirus as a cover for shutting down or at least drastically reducing imports from China. 

Is China a low risk country? I give you Renaud’s answer:

This epidemic is causing a lot of purchasing managers to reconsider their risk analyses. China has generally been considered a stable, low-risk area. This is changing!

I remember a few years ago, after the disasters (building collapses, deadly fires in factories, rampant subcontracting) and the “Arab revolutions”, many apparel buyers were pulling production out of Bangladesh, which seemed very risky.

These days, some Western consumers are shocked by the way some minorities in Xinjiang and Tibet are treated, and now they might be worried about their health, too. “Made in Vietnam”, “Made in Portugal”, and “Made in Mexico” are starting to look much better than “Made in China”, don’t they?

Since October, 2018 we have been clear on how decoupling between the West and China is inevitable. See the below:

  • On October, 6, 2018, In China, the United States and the New Normal we called the US-China trade war as the “New Normal” and we predicted a “diminished future for foreign companies” manufacturing in China. We also said that “since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war.”
  • On October 30, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we recommended companies move their manufacturing out of China (if reasonably possible) and we have relentlessly done so ever since.
  • On January 30, 2019, in The Huawei Indictments are the New Normal, we wrote how what was happening between the US and Canada and Huawei would negatively impact the West’s relations with China even further.
  • On April 21, 2019, the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, on how “There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’ and on how the tariffs, the arrests, the threats, and the heightened risk have impacted companies and that reality will not go away.”
  • On May 1, 2019, in Yet Another International Trade (AD/CVD) Petition Against China, we wrote of how the United States was upping duties (retroactively and sometimes by more than 200%) against Chinese products as a way of conducting its anti-China foreign policy on the sly.
  • On May 4, 2019 — the day before President Trump’s by now infamous tariff tweet — in The US-China Trade War: Winter is Coming we wrote how neither the United States nor China wanted relations to improve and we should therefore expect relations between those two countries to worsen. We said “the United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade” and shutting out China will become a regular thing in all new U.S. trade agreements.
  • On May 8, 2019, in The US-China Cold War Starts Now: What You Must do to Prepare,  we proclaimed the start of the US-China cold war.
  • On June 20, 2019, in Has Sourcing Product From China Become TOO Risky? we laid out the many growing and unpredictable risks inherent in having products made in China and we posited that China was becoming too risky for many who make their products there.
  • On June 21, 2019, in Does China WANT a Second Decoupling? The Chinese Texts Say That it Does we wrote of how China wants to decouple from the West. We used Chinese government writings (in Chinese) to reach this conclusion.
  • On August 12, 2019 in The Top 14 China Wild Cards/Future Risks, we set ou the 14 biggest risks for Western companies doing business with China and promised to monitor the extent of those risks (and new ones) going forward.
  • On August 24, 2019 in Repeat After Me: There Will be No US-China Trade Deal we wrote how President Trump had intentionally “made it all but impossible for China to make a trade deal with the United States” and of how he U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China as well. And then we said that this means you “must stop believing there will be a solution to the trade war that will allow you to go back to doing business with China the way you used to do business with China. You need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are way more likely to get worse than they are to get better.”
  • On September 4, 2019  in China’s New Company Tracking System: Comply, Comply, Comply we wrote how China’s new company tracking system would be used to bring foreign companies doing business in China to heel and/or to push them out of China.
  • On October 9, 2019, in Can Your Business Afford/Stomach the China Risks? We looked again at the 14 key risks involved in doing business with China and concluded that “the risk of doing business with China has gone up substantially in just the last two months — heck, it’s gone up substantially in just the last two days. Many are no longer asking whether China is too risky; they’ve already decided that it is.”
  • On October 17, 2019, in China Detains 2 Americans Amid Growing Scrutiny of Foreigners, the New York Times wrote the following: “China has become a risky place,” Dan Harris, a lawyer at Harris Bricken . . . . says. “If you are going to do business there you had better know what the laws are and you had better follow them, because China is not going to let anyone slide, especially not an American or a Canadian. Little things that were virtually ignored for years are leading to foreigners going to jail.” I would now put Swedes in the higher risk category. See today’s SCMP article, on China’s threats against Sweden.
  • On October 20, 2019, in How to Avoid China Prisons: Know YOUR China Risks, we wrote how “every foreigner and foreign company is at risk in China; it’s just a question of how much” and then we laid out how to reduce your risks.

So yes, for many (most?) companies, sourcing products from China has become too risky. As for the risks doing business in or with China, I will write about that later this week. 

Will there be “a massive switch of production away from China in the short term?” Renaud emphatically says in the short term, definitely not, but in the long term, probably yes. As Renaud puts it: “I haven’t read any announcement in the press about this. No big brand wants to be seen as dropping China with it is in a deep crisis (or “shooting on an ambulance”), especially if that brand sells to Chinese consumers. Yet, make no mistake, decisions are going to be made.” I completely agree. Few companies will be able to make short term changes. Just not possible. But few companies are not going to be looking at alternatives. I probably had three to four times as many Mexico discussions last week as in any week previously. 

If you are looking to move your production from China, be careful and read the following:

UPDATE: China has ordered all film and TV production to cease indefinitely. If the coronavirus has gotten so bad in China as to end film production throughout the country, I fear it has gotten so bad as to end factory production throughout the country as well.

What to do about the China coronavirus

For the last week or so, our China lawyers have been inundated by requests from employers in China for help in dealing with the many employment law issues that virus has created. Just yesterday, our lead China employment lawyer, Grace Yang, wrote about that in Coronavirus and What China Employers Should be Doing (and Not Doing) Now.Our China lawyers have also been getting a ton of requests from employees in China seeking help as well. These are coming via email, linkedin and Facebook and well over half involve employees put on unpaid leave due to the coronavirus. The below email is an amalgamation of some I received today and it is pretty typical:

Hi. I’m a foreign English teacher in _________ province. The government order for my province is that all non essential businesses must stay closed until February 9 and my school is closed until February 15 at least, but they are talking about making us teach online. My annual leave was scheduled for January 31 to February 3. I know they can’t legally make me use the three days from 31-February 2, but what about the last day? Can they make me use my annual leave to cover this?A lawyer also told me the wage payment cycle law might also not apply until the END of the current cycle, which for us would be January 31 (plus the extended CNY holiday). In this case, would they have to pay us full salary for the extra mandated closed days (Feb 3-9)? He also said that they might have to pay us for a full wage payment cycle (so for us until the end of February) before being able to pay minimum wage. Can you please set us straight on this?

I have friends at another school who have not been paid for weeks and now their school has also stopped paying their apartment rent as well. We all know this isn’t legal, but can they get away with this? What should we do? Thanks.

My response to these requests is usually somewhat like the below:

You should probably leave China. Now.

You are in a country overcome by a deadly virus and news reports here in the United States make clear that it isn’t coping well with that. The official numbers of those with the coronavirus are not even close to the real numbers. China’s medical facilities are stretched thin and there is a shortage of masks and gloves and various other things needed to fight the virus. You are a foreigner in China with a job that does not pay particularly well. To put it bluntly, this means you are a low  priority for medical care and for being flown out back to your home country. If I were you I would prioritize my health and wellbeing over a day or two of vacation, or, a few hundred dollars in the case of the other teachers for whom you write.

As for your particular situation, it’s complicated and for our China employment lawyers to be able to give you sound advice we would need to review your employment contract and your employer’s rules and regulations and then research the local and provincial laws and also all relevant coronavirus employment updates. We might want to speak with the local employment law authorities as well. Our doing these things would not be cheap and all it would do is tell you what your legal rights are. This would allow you to tell your school what your legal rights are, but not much else. The problem is that your  telling your school your legal rights is far more likely to get you fired and then deported than it is to get you vacation time or money. You need to think about what you will do if you are fired and how that might impact you getting your next job?

And if you choose to sue your school for violating your legal rights will mean you will have to pay a lawyer and pay a filing fee and then wait many months for any sort of judgment — this assumes the Chinese courts where you will be functioning again soon. And even if you do get a monetary judgment against your school, this is not the same thing as getting paid on that judgment. So again, I urge you to think about your overall wellbeing and your overall future and I again posit that leaving China is likely going to be the best thing you can do for yourself. Leaving now will allow you to look for work elsewhere and I have to believe potential employers will understand why you left. In my experience, it is nearly always better to leave a country experiencing big trouble and decide from the safety of afar when and if it makes sense for you to return than it is to stay in the hope things will get better.

Many airlines last week announced they would be ending flights to and from China within weeks and today many of those same airlines announced that their final flights will be even sooner. There is no clear end in sight to coronavirus’s spread in China. With every passing day it will become more difficult for foreigners to leave China. For this reason and for the reasons set forth above, I now believe it makes sense for most foreigners to leave China now, if possible.

What are your thoughts? What are you seeing out there?

UPDATES: I got a long and interesting email from a friend in response to this post. This friend has lived in China for more than a decade but he left there about a week ago. His email thanked me for this post and then he went on to say how he believes that many involved with China are unwilling to admit the realities of what is going on over there out of loyalty to China or just wanting to be tough.  He said he left China because he began to worry about his own safety and his leaving should not be viewed as anything more than that. And yet he believes many are staying in China to send a message that they like China and want to stand by China and he thinks “this is silly” and these people will — “I fear” soon see the error of their ways.

I also have been told by multiple people that this post should have included Hong Kong because of the nurses’ strike there and because Hong Kong is taking its coronavirus orders straight from the CCP.  Yes, probably true.

I also am hearing that this post should have mentioned the recent study positing that there have been more than 75,000 coronavirus cases in Wuhan alone.  I just assumed nobody really believed China’s numbers and so I did not think citations would be necessary.

IF YOU WANT TO PARTICIPATE IN A LIVELY DISCUSSION ON THE ABOVE (OR JUST OBSERVE ONE), I URGE YOU TO GO HERE ON LINKEDIN.

 

 

China Employment Coronavirus To Do List

Last week I wrote about new employment rules for dealing with the coronavirus. In my first article, I wrote about the new rules issued by Beijing employment authorities and then the next day, I wrote about the new rules issued by China employment authorities. The Beijing rules apply to Beijing and the China rules apply nationwide. Since those two articles, a whole host of other locales in China have issued their own rules for how employers must deal with their employees during this time. Literally every day, our China employment lawyers are seeing and having to deal with Chinese employment authorities releasing notices and rules to provide requirements and guidance on pressing employment-related issues.

These new rules are throwing wrenches into all sorts of previously planned employment moves.

On January 26, the PRC State Council issued a notice to, among other things, extend the Chinese New Year through February 2. Right after that, a few cities and provinces extended this period even longer: for example, on January 27, the Shanghai government announced that employers cannot resume work earlier than 24:00 on February 9. Guangdong Province has this same timing requirement. The Suzhou government said the earliest work resumption date is 24:00 on February 8.  Those employers that provide necessity public services are excluded from the delayed work resumption dates though. Even something apparently as simple as opening dates has raised a whole host of employment law questions. Can employers require their employees to work from home during this time? If yes, are employers liable for overtime? Can employers ask their employee to go on paid or unpaid vacation during this time? Can they require this?

Following these many new notices came many different unofficial interpretations (mostly by legal practitioners on the Internet), leading to what can best be described as full scale confusion. Then, on January 28, Shanghai labor authorities issued “official interpretations” regarding the meaning of the extended period (from February 3 to February 9). These rules essentially state that these days need to be treated as “regular rest days” (normally Saturdays and Sundays) in that if the employee does work (and the employee should work from home), the employer needs to track such time carefully and count it as overtime incurred during regular rest day, and arrange comp time in lieu of overtime pay for any time worked and if comp time cannot be arranged, it needs to pay them overtime at a 200% rate. The Shanghai authorities’ clarifications were timely and helpful but still some questions stand such as whether there is any difference between the holiday period extended by the State Council (i.e., from January 31 to February 2) and the extended period required by those locales (e.g., from February 3 to February 9 in Shanghai) and if yes, what are the differences?

Our general advice is that employers should provide their employees their normal pay during China’s extended holiday/time off period, at least until further government notice. We are also advising China employers not to ask their employees to use their accrued vacation time or take unpaid leave. Think about it this way. Most Chinese employees do not have many vacation days banked and if you require that they take them all at once and now, they could have no vacation time left for the rest of the year. Some places (e.g., Guangdong) require employers obtain employee consent to take vacation days if the employee is unable to return to work due to the outbreak. In any event, employers during this troubled time need to think twice before making any potentially adverse employer decisions.

Our China employment attorneys have been answering questions from both current and potential clients pretty much non-stop these days regarding what they can and should do. We have been able to provide relatively quick answers to some of the new, coronavirus related employment questions we have been getting. For example, if a proposal is flat out illegal, our response is a simple “don’t do it”. But the majority of the questions require we gather up all the facts, review the relevant employment contracts and the employer’s rules and regulations, research the relevant laws and talk with the relevant government authorities. Needless to say, this slows down answers considerably.

We can though give some general advice for dealing with employment issues right now. China employers facing these new rules and challenges should try their best to stay current on the new rules and laws and comply with them. Above all else this means being aware that your company might be required to comply with new national laws, new provincial laws, and new local laws. See China Employment Law: Local and Not So Simple. These new laws and requirements intended to deal with the coronavirus have been rushed out and most are unclear and lacking in detail. In response to this, our general advice is to err on the side of your employees, both in terms of their safety and their finances.

Think long and hard before you terminate an employee, regardless of whether you will be paying severance. The Chinese authorities have emphasized that they do not want to see workforce reductions or layoffs happening right now. In addition to staying compliant from a legal standpoint, remember that at the end of the day your employees are human beings who want to stay safe and healthy and do not want to be punished for the virus outbreak. Be humane when you make employment decisions during this time. Doing so will pay off not just with fewer lawsuits and governmental problems, but with increased loyalty and respect from your employees.

We will continue to monitor and follow up with updates.

Many months ago, an American company emailed me in a panic after reading a Linkedin post “your law firm” wrote on the need to register your brand name as a trademark in China as soon as possible.  This company and I corresponded back and forth about why securing trademarks in China  is so important and then we got them a China trademark. All good.

Yesterday, while cleaning out my e-mailbox, I saw the original email from the company and I noticed for the first time that it was not any of my law firm’s lawyers who wrote the post that had spurred the email from this company. The post to which the company linked was written by David Bennett, “IP Australia’s first Intellectual Property Counsellor to China, based at the Australian Embassy in Beijing,” not by anyone in my law firm and it is titled, I’m being sued for infringing my own trade mark?

I immediately loved the title because I have talked with countless companies who believe they have trademark rights in a country when they don’t. These companies just assume that because they are using a brand name in their home country, nobody else anywhere in the world can use that brand name and, of course, nobody else in the world can sue them for using their own brand name. WRONG.

So I read the article and I how it clearly relayed the need for “companies to register their trademarks in China as early as possible.” Bennett based this lesson on the  sad tale of an Australian wine company that failed to register its brand name as a trademark in China:

I always urge companies to register their trade marks in China as early as possible. An urgent enquiry I received this week from an Australian wine company serves as a cautionary tale of what can go wrong if you don’t.

The Australian wine company has been selling wine in China through local distributors for several years without incident. This week, they found that a Guangzhou-based company has registered their trade mark in China, and is suing two of their Chinese distributors for trade mark infringement. The distributors have been ordered to appear in local court this week.

As if this wasn’t bad enough, the squatter has also recorded the trade mark with Chinese customs, which could allow them to seize shipments of the Australian company’s wine entering Chinese ports.

Why is the Guangzhou company doing this? Most likely to build leverage to sell the trade mark back to the Australian company for a huge sum, or to use the trade mark on their own counterfeit or copycat wine products.

Sadly, my law firm’s international trademark lawyers constantly hear stories like the above one. Most of these sad stories of trademarks lost involve China, but many do not. Most involve American and Australian and Canadian companies but some do not. I explain below why companies from these countries tend to be most at risk for trademark loss.

Bennett then notes how China trademark problems like that suffered by the Australian wine company are “much harder to fix than . . . to prevent.” I would add that even when this sort of China trademark problem can be fixed, doing so will cost much more than it would have cost to prevent. Bennett then reveals what to do to avoid this sort of China trademark problem: “[I]f you’re contemplating doing business in China, register your trade mark in China as early as you can – well before you enter the market. China has a first to file trade marks system, which means the first person to file for a trade mark gets it.”

Repeat after me: “The first person to file for a trademark gets it.” This means that if someone files for “your” China trademark before you do, that person or company that filed first gets it. Why would this be the case? Because it isn’t your trademark in China until you have filed for and been granted it. And this is because China is a “first to file” country.

Australia and the United States and Canada are “first to use” countries, and that is why companies from these three countries are so often the ones that mess up on China trademark filings. In first to use countries, the first to use a trademark gets it. That means that if your United States widget company has been using the name “Bill’s Best Widgets” for 72 years to sell its widgets throughout the United States, it has trademark rights in the Bill’s Best Widgets name even if it has never filed for that trademark. These trademark rights mean anyone else that uses the Bill’s Best Widgets name on its widgets would be committing trademark infringement. But in China, this would not be the case, because in China (as is true in all first to file countries), pretty much all that matters is who has the filed trademark. This is why U.S. and Canadian and Australian companies tend to sleep on their trademark rights in China. The United Kingdom is a first to use jurisdiction as well, but by being in the EU (which is first to file), its companies are generally more savvy about what must be done to protect trademarks in first to use jurisdictions like China.

Bennett concludes his article by stating that “[o]perating in China without a registered Chinese trade mark is risky, but operating when someone else has registered your trade mark is just dangerous.” He’s right. Of course.

Way back in 2007, in China Trademarks — Do You Feel Lucky? Do You? we explained all this:

Our advice to all our clients is to register their trademarks in China before they go there.

China is a first to register country, which means that whoever registers the trademark first gets it.

Yes, there is an exception for famous trademarks, but unless you are Coca-Cola, it is lunacy to bank on a Chinese court holding your trademark is famous when just going ahead and registering it costs so little. Most firms charge less than $5,000 for this. So even if the Chinese Court rules your trademark is famous, you will probably have spent at least $100,000 in making your case. The economics just are not there.

Even if you are just manufacturing a product in China (and not selling it in China), you must protect it with a China trademark. If you don’t, someone else will register your product’s brand name and then use that trademark to block your product from leaving China. For more on why this has become so popular of late in China, see China Trademark Theft. It’s Baaaaaack in a Big Way.

Bottom Line: Don’t rely on a lucky feeling. Rely on registering your trademarks in China instead.