China import duties
                          Kanye has it right

If you are importing product originally from China covered by or even maybe covered by an antidumping or countervailing duty order, you must be very careful, no matter the country from you are directly importing the product. Two recent U.S. Commerce Department decisions to expand antidumping (“AD”) and countervailing duty (“CVD”) orders on hardwood plywood to cover ready to assemble cabinets highlight this problem.

Earlier this month the U.S. Commerce Department issued a final scope ruling on Ready To Assemble (“RTA”) Cabinets in the Hardwood Plywood AD and CVD case, finding no exclusion for RTA cabinets. Commerce held that this exclusion from AD and CVD duties applies only to cabinets sold to an ultimate end user (the consumer) and not to RTA cabinets sold to contractors that then install them. With this ruling Commerce effectively expanded the AD and CVD orders to cover RTA cabinets sold to the construction industry, which many (most? importers previously believed were excluded by language in the AD and CVD orders.

The RTA kitchen cabinet exclusion does not expressly address the manner in which RTA kitchen cabinets must be packaged to be suitable for purchase nor does it expressly define the term “end-user.” Nevertheless, the exclusion’s requirements require RTA kitchen cabinets be “packaged for sale for ultimate purchase by an end-user” and be packaged with “instructions providing guidance on the assembly of a finished unit of cabinetry.”

This decision exposes US importers of RTA cabinets to millions of dollars in retroactive liability for AD and CVD duties. U.S. cabinet importers that stuck their head in the sand while this AD/CVD exclusion case was pending will likely soon be hit with an enormous bill from the US government.

Years ago, my firm’s international trade lawyers handled a review investigation involving high tech products from China covered by an AD and CVD Order for a Chinese exporter/producer company. Much to the Chinese company’s surprise, the Commerce Department had determined that this small Chinese company was a mandatory respondent and that meant it would need to respond to the entire Commerce questionnaire and be subject to verification.

The Chinese company explained that it had never exported these high tech products to the United States because but it admitted to having sold its products to a Canadian customer. It had no knowledge of what this Canadian customer did with its products and it did not know whether the Canadian company exported the products to the US from Canada.

Under United States AD and CVD law, sales made by a Chinese company and imported into the United states are generally considered to be U.S. sales by the Chinese company if the Chinese company knew when it made the sales that its products were destined for the U.S.  In other cases, Chinese companies have been found to be respondents in AD and CVD cases if their packaging revealed that their products were ultimately destined for the U.S.

The problem for the Canadian companies and the U.S. importers in these situations is that the Chinese company that has made these Canada sales of products that go to the United States will usually just give up and not participate in the AD and CVD review investigation.  But the US importer of the products from Canada (which often has some affiliation with the Canadian company) will find itself owing substantial AD and CVD duties to the US government. I can remember a Canadian company that had to shut down its entire U.S. operations because it had exported chemical products from Canada to the United States that were covered by U.S. AD and CVD orders.  All of a sudden, the U.S. subsidiary was hit with millions of dollars in retroactive liability because of an AD and CVD case.

US importers that import products from Canada or anywhere else in the world that are originally from China need to be careful right now because their products may be covered by United States AD and CVD orders. These companies could wake up one morning and find themselves liable for millions in dollars in retroactive AD and CVD duties. This is truly the sort of situation where an ounce of prevention is worth a pound of cure. Now is the time to review your supply chain for its China vulnerabilities, whether you import directly from China or not.

China employment law

Residents of Taiwan, Hong Kong and Macau no longer need a work permit to work in mainland China. The PRC Ministry of Human Resources and Social Security earlier this month issued this notice that will obviously make it easier for residents from these three regions to work in mainland China. This means Taiwan, Hong Kong and Macau citizens will — for employment purposes — be treated (almost) the same as mainland residents.

A few quick highlights:

  1. Residents from these three regions can use their Taiwan/Hong Kong/Macau residence cards and mainland travel permits to seek or take up employment in the PRC. The following will now be deemed to constitute proof of employment in the PRC: a business license, an employment contract, a wage payment voucher and/or a social insurance payment record.
  2. Residents from Taiwan/Hong Kong/Macau can now register for and receive unemployment benefits in mainland China.
  3. Improvements will be made to public employment services, such as policy advising, information on job opportunities, and business incubation in an effort to help Taiwan/Hong Kong/Macau residents who wish to work in mainland China better navigate China’s employment system and gain access to more job-related services.
  4. Local governments are expected to offer more support to local employers and to Taiwan/Hong Kong/Macau residents and to protect the employment rights and interest of these residents so as to create a suitable environment for such residents working in China.
  5. Effective July 28, 2018, residents from these regions no longer need a work permit to work in mainland China. Starting August 23, 2018, applications for such a work permit will not be accepted and if an employer has submitted an application but no permit has yet issued, the relevant authorities will inform the employer that it need no longer pursue its application.
  6. Up until December 31, 2018, still valid work permits still within the validity period can still be used as evidence of employment.

One thing that has not and will not change is that regardless of where you are from, if you are looking to work in China, you should have your employment contracts thoroughly reviewed before you signing them.

China IP theftIn a very short and very helpful video — The big secret in Chinese/Western negotiations? — China negotiation expert Andrew Hupert explains two things of which you should be aware when negotiating with Chinese companies.

The first is to realize that most Chinese companies are not so much looking to do a long-term deal with you, but rather, to secure your IP. In our “free look scheme” series we wrote about how Chinese companies will feign interest in doing a deal with you when what they really want is your IP for as little cost as possible. Essentially, China free look schemes are methods employed by Chinese companies to get a “free look” at your intellectual property and trade secrets. In part 1 of this series, we looked at how Chinese companies use their purported interest in investing in a foreign company to convince the foreign company to give the Chinese company access to the foreign company’s IP. In part 2, we explained how Chinese companies use Memoranda of Understanding (MOUs) to get free looks at foreign technology. In part 3, we explained how Chinese companies use Joint Ventures (real, fake and non-existent) to get at foreign technology without paying for it. In part 4, we noted how there are plenty of legitimate Chinese companies seeking legitimate deals with foreign companies and then explained how to determine whether the Chinese company with which you are dealing is serious about doing a real deal or is just trying to get a free look at your IP. And in part 5, we addressed how best to deal with the risk of a China company free look scheme.

This is sort of part 6 and it deals with how to negotiate away from a free look scheme.

Hubert starts by noting how once you have been “partners” with a Chinese company for more than six months your China partner probably thinks it can earn more without you. Hupert goes on to say that Chinese learning curves are much steeper than western learning curves and because of this, Chinese companies are usually not terribly afraid of you leaving them and going it alone. Once they see your IP, they are over-confident about their ability to make use of it. I completely agree with Hupert and would only add that Western companies tend to be over-confident about the ability of their Chinese counterparts to take what little IP the Western company gives and run away with it and start competing.

Hupert then discusses how your Chinese partner likely believes that without its help, you will not be able to function in China and once it sees your technology it typically believes it is “competing on a more or less even playing field with you as far as the product is concerned.” I love how Hupert says that if (as is so often the case) it seems that your Chinese counter-party is spending most of its time trying to uncover your intellectual property and asking questions about your business processes, it’s because they are. Again, I completely agree. I can remember many times where one of our clients did not believe its Chinese counter-party was seeking to take its IP and was eventually proven wrong, but I cannot remember a single time where a client believed its Chinese counter-party was seeking to take its IP and that was not the case.

Per Hupert, the second thing of which you should be aware is that to protect your interests, you want your Chinese counter-party to work with you all the while believing you will provide new technology and even more valuable ideas to it in the future. But at the same time, you also want your Chinese counter-party to fear that you may team up with a different Chinese partner. “This hope-fear dynamic is your best best for building a good, healthy relationship in China.” Again, I completely agree and in fact, I add the following PowerPoint slide to nearly all of the talks I give on China:

How to Structure Your China Deal

I put this PowerPoint slide in nearly all of my China talks because — like Hupert — I see this as the key to negotiating deals with Chinese companies that work.

For more on negotiating with Chinese companies check out the following:

Or go all out and spend $4.99 for the Kindle version of Hupert’s book on negotiating with Chinese companies, 10 Common China Negotiating Mistakes: A Survival Guide for Front Line Negotiators and Team Leaders.