China lawyersNo idea why but we have lately been seeing an increase in clients interested in getting their products from China anonymously. These companies want to have their products made in China without anybody knowing who in China is making them, and sometimes that that they are being made in China at all. There are many reasons why companies seek an ultra-low profile when having their products made in China, including the following:

1. They do not want their buyers to know that the products they are buying are made in China. But what about place of origin requirements? What about them? If you are selling an item that says “hand burnished in the United States” most of your buyers will believe your product is made in the United States even if all you do to hand burnish them is to have some $8.90 an hour employee (perhaps even from China) spend five seconds running a clothe over your product before it goes on retailer shelfs. There are plenty of items that people buy all the time without realizing they come from another country. For example, about 90 percent of seafood sold in the United States is imported, yet in my experience pretty much nobody realizes it is even more than half. Whenever someone tells me that they refuse to eat anything made in China I tell them that if they eat garlic or anything with garlic, they do eat something from China. About 80 percent of garlic in the US comes from China and that number is almost certainly considerably higher when it comes to processed and frozen foods. The point is that many (most?) companies that are completely truthful about where their product would prefer their buyers not know their products come from China.

2. They do not want their competitors to know that their products are made in China and they especially do not want their competitors to know exactly where in China their products are made. This is incredibly common. If you are making better widgets than any of your competitors and selling them at a better price, you can bet your competitors want to know how you are pulling this off. And if you are accomplishing this by using a super high quality super efficient Chinese manufacturer, you can also be that your competitor(s) would seriously consider using your same Chinese manufacturer if they could find out who it actually is. I cannot tell you how many times one of our China lawyers has asked a client how it chose XYZ Chinese manufacturer and gotten the following sort of response: “Well, company X is the leader in our industry and so I tracked down who company X uses in China to make their widgets and I went to them to have them make our widgets too.”

3. They do not want their Chinese manufacturers to know where their products are made in China. I’m being somewhat facetious here, but not really. In fact, it is this reason that has been driving the increase in clients seeking China manufacturing anonymity. They want to have portions of their product(s) made by three to six different Chinese manufacturers, without any of the manufacturers knowing about the others and without any of the manufacturers knowing to what use its portion will be put.

But all of the above is easier said then done, and I would estimate that most SMEs do not achieve the secrecy they seek, either because they mess up somewhere along the way or because doing so is simply too expensive.

The below are the pressure points where we see companies frequently fall off the secrecy track:

  1. The initial email to a potential Chinese manufacturer. Yes, the initial email. If your name is Luis Twederluski (I made that name up so please don’t even bother to look it up) and you send out emails to ten companies in China from your LuisTwederluski333@gmail.com account, you have probably already revealed more than you wanted. From just your email address, there is a good chance someone can figure out your full name (this is oftentimes possible even if your email address is goshijustreallyloveparis@gmail.com). And then from your full name there is a good chance they can figure out your company name and from that what you are intending to have made in China.
  2. The parts in your product. Take the company that does not want anyone (especially its China constituent part suppliers) to know what it is making. This company has company A in Suzhou make part 1, Company B in Xi’an make part 2, Company C in Dongguan make part 3, and company D in Shenzhen make part 4, and then it calls it a day. Wrong. What if one of these companies somewhere stamp their name on the parts that are going into the product? What if even without any stamping of names their parts are identifiable by those in the industry? The more typical problem with having 3-6 companies operating completely independently of each other is cost. If you are a large company with personnel who can coordinate logistics, timing and interoperability of parts between your various suppliers, then you should be covered. But if you are a small company and you think you can coordinate all of this things will sitting home in Pittsburgh, well that just isn’t terribly likely. Most importantly, where are you going to put the 3-6 parts together into your product and then have it packaged? If you were thinking of doing these things in the United States for anything near to as low a price as you would pay in China, well that is not likely going to happen.
  3. Importing the product into the United States. It never ceases to amaze me how few people realize how easy it is to review import records on the web. Just by way of an example, Google search “Lululemon (which is NOT a client of our firm) import records” and the first item will take you to www.importgenius.com which for free shows you a “sample shipment record” showing Lululemon imported “hustle pants” from Mactan Apparel out of Taiwan, but the pants actually came from Cebu, Philippines. If I actually cared from where Lululemon gets its products, my next step would be to sign up and pay for Import Genius (there are other search services as well) and then start going through all of Lululemon’s import records. Your competitors might be doing that with your import records even as I write this. We have had client companies tell us of the amazing lengths they have gone through to keep their name off U.S. import records. A few years ago it was the rage to form a company in Hong Kong and have that HK company buy your products from the PRC manufacturer and then have the PRC manufacturer actually ship your products to your Hong Kong entity and then that way the US import records would not reveal the name of the PRC manufacturer because your own HK company would be the exporter. There was (and still is) usually a far easier way, especially if you are in a large industry. Let’s say your company is called World’s Best and Finest Toys and you sell toy dolls that you have made in China and you do not want your competitors (or anyone else for that matter) to know from which toy factories you are getting your dolls. You can set up an import management company and call it World’s Most Mediocre Hamburgers and Kielbasa’s and use that company to import your dolls. This is a cheap way to make it far harder (perhaps impossible) for anyone to know what you import.

A word of warning is definitely in order though: some of these methods may not work or may even be legal for your particular industry or your particular country or may increase your taxes or just otherwise make your life miserable. In other words, don’t anyone write me an email months from now saying (and I do get these) I did what you told me to do in this [link] blog post and now I am wondering if….” The above are examples; I am not telling you to do anything at all. In fact, I am telling you that you will be making a huge mistake to do any of these things without first consulting with an international trade law attorney and with your tax professional.

The goal of this post is not to solve your product secrecy problems but rather just to get you thinking about the issues and not to blow your cover with your first email.

What do you do to maintain your product secrecy?

China manufacturing lawyers
China product manufacturing: the tensions are rising

We often write about the increasing sophistication of China contract manufacturing. Fifteen years ago, the typical US-China manufacturing agreement involved the sale of socks or rubber duckies. Today, the typical contract involves a complicated electronics device involving hardware and software and all sorts of intellectual property and much greater risk of defect and injury than a pair of socks.

With the increasing sophistication of China manufacturing and China manufacturing contracts has (not surprisingly) come increasing business and legal sophistication by Chinese manufacturing companies. Two to three years ago the overwhelming majority of manufacturing contracts my firm’s China manufacturing lawyers wrote were accepted either unchanged or with only minor changes by the Chinese side. Today, Chinese manufacturing companies better understand the legal impact of the contracts they sign and they are becoming increasingly reluctant to sign contracts that pin major potential liabilities on them.

Today’s post is about liability issues for defects, which issue our China manufacturing lawyers are dealing pretty much every day and which issue is truly on the front lines in terms of the contract “war” that has broken out between China manufacturers and their foreign company buyers. The below is an amalgamation of three recent emails we sent to companies looking to our China lawyers to reduce their product defect risks when buying from China.

 

I understand your concerns. Defect rates from China are too high.

For China, the issues surrounding product defects are usually the following

1. You need a Chinese language, Chinese law agreement you can enforce in China.

2. Contracts typically used in the West are usually too vague and flexible for China. For China, you need to be blunt and clear. Defect beyond some rate means a monetary penalty of some amount. If your contract is not clear on what constitutes a defect and the price your manufacturer must pay for the defects, it is not appropriate for China. Do you want just a repair/replace warranty, or do you want damages also to include the costs of dealing with the issue or do you want it to include all the above, plus claims from customers and consumers. If ALL the damage is included, the number can be big and if the Chinese side understands this (and they probably will), there is a good chance they will not agree to it, unless you have sufficient economic leverage over them such that they feel they have no choice. Even if they do agree to it, you need to be concerned about whether they have the money or the insurance to pay on any major problems.

3. One of the biggest issues for China is how to enforce your defect contract provisions. We typically propose something like the following:

Step One: Determine a sum certain amount owed based on a mechanical formula. Calculation is entirely in our client’s control with no good faith participation by the Chinese side.

Step Two: Report the amount owing to the Chinese supplier through a formal invoice. Do this on a regular basis, say every quarter.

Step Three: Collect the amount owing. The most common way to do this is to apply the amount owing as a credit against the invoice for the defective product, against current invoice amounts, and against future invoices.

Step Four: If step three does not cover the amount, send an invoice for the remaining amount. If the invoice is not paid, file suit in China. If the lawsuit is based on a sum certain amount even the threat of the lawsuit can have some benefit.

You can see how the above can work well for what you are seeking to accomplish, but Chinese factories and Western buyers are in major battles now over defect issues. The Chinese manufacturers are concerned with agreeing to sell on a net 30 or net 60 or net 90 basis and then having the foreign side refuse to pay because of claimed defects. The Chinese is legitimately concerned with the foreign side using the defect issue to reduce payments actually owed. All of this is right now a hot topic within the Chinese export factory community so the odds are good that your China factories will be sensitive on these issues.

We should discuss the above and then formulate a strategy for dealing with your China manufacturers.

 

On Tuesday, April 18, China Law Blog’s Dan Harris will be speaking on China IP at the Global Sources Summit in Hong Kong. This summit is designed to teach entrepreneurs and small businesses how to create and build an Amazon FBA (Fulfillment by Amazon) business.

How to protect your China IP eventDan will speak on protecting your intellectual property from China, focusing on the following:

  • How to choose the right China manufacturer
  • How to identify the IP assets you need to protect
  • How to structure your China manufacturing deal
  • How to drafting your China manufacturing contracts to protect your IP
  • What you should know about trademarks, patents, copyrights, and licensing agreements
  • What to do when you’ve been copied

Forbes listed the Global Sources Summit in its top twelve conferences you should attend in China. You can register for the event here. Group discounts are available.

 

 

China employment lawyerHardly a day goes by without one of our China employment lawyers (usually me) getting a “quick” question from either or both an employee or an employer seeking a one-minute answer to what is usually at least a five hour question. For why pretty much every China employment law question is at least somewhat complicated, check out China Employment Law: Local and Not So Simple.

The following are probably the most common ones we get and I am putting them here along with our typical answers to get them more broadly seen than our individual email responses.

Example #1: I have worked at the same employer as in ______ (city/province) China for ______ years. I am considering leaving even though the school has offered me a new contract. Am I entitled to any end of service/redundancy pay? Does it matter how much notice I give?

Our Response: I am sorry but because we represent so many China employers we cannot help you at all without first running a conflict check to make sure we don’t represent your employer, But even if we do not, we cannot give you an answer unless and until we review all of the documents pertaining to your employment, particularly your employment contract and your employer rules and regulations (aka employee manual). Then we would need to check the local laws and regulations to see what they say and it may also make sense for us to check in with the local labor authorities as well.

 

Example #2: I’m looking for a lawyer. I hold a ______ (foreign) degree and have working in ______(city/province) China since ______. I have a valid working permit and a residence permit. I have been asking my employer to sign a contract but they kept refusing and now they no longer want my services. They say it is because my services are no longer needed but it is really because I caught them doing ________. Am I entitled to double wages for being employed without a written contract?

Our Response: I am sorry but because we represent so many China employers we cannot help you at all without first running a conflict check to make sure we don’t represent your employer, But even if we do not, we cannot give you an answer unless and until we review all of the documents (things like emails and your employer’s rules and regulations become very relevant here). Then we would need to check the local laws and regulations to see what they say and it may also make sense for us to check in with the local labor authorities as well.

 

Example #3: We just caught one of our employees taking kickbacks. I assume I can just fire him without any repercussions, right?

Our Response: Believe it or not, that would not be a good idea. See China Employee Terminations: Don’t Get Lazy to get some idea why this is the case. The last thing you want is to botch this such that this employee can sue you for back wages, plus penalties, plus — yes, I am not kidding — a return to his job at your company. For us to help you here we would first need to review all relevant employment documents (such as this person’s employment contract and your rules and regulations) and then review local laws and regulations and maybe even talk with the local labor authorities as well.

 

Example #4: How much time off do we need to give our employees for _______ holiday?

Our Response: Without our first looking at what your employment contracts and your employer rules and regulations and the local laws and regulations say, all I can say is that you do not want to get this wrong and you need to give at least whatever time off is required by China’s national laws.

 

Example #5: I just got fired from my job of ______ years and my employer never paid me any overtime. What should I do?

Our Response: I am sorry but because we represent so many China employers we cannot help you at all without first running a conflict check to make sure we don’t represent your employer, But even if we do not, we cannot give you an answer unless and until we review all of the documents (things like emails and your employer’s rules and regulations become very relevant here). Then we would need to check the local laws and regulations to see what they say and it may also make sense for us to check in with the local labor authorities as well. You also should consider whether you would be better off just moving on with your career instead of possibly getting bogged down in a dispute with your former employer. This is especially true if you are in an industry where word of employee contentiousness spreads quickly. I am not telling you what you should do here, but I am saying that these sorts of decisions can have lifetime significance and they should not be made quickly or out of anger and good counseling from a more objective third party is usually in order.

 

Example #6:  XYZ Chinese company wants to hire me starting next month and they say that they cannot give me a written contract right away because of _________. Is it safe for me to go ahead and take the job.

Our Response: It is generally not a good idea to fly halfway around the world to work for a company that claims an inability to abide by the law.

 

Are you getting the pattern? Oftentimes when we respond with something like the above, we get one of the following two responses, grossly summarized, to which we respond generally as noted in italics below:

  1. Thanks. No problem. Good luck.
  2. How do I go about retaining you. Let me explain….

But maybe a third to half the time we get a response like the following:

All I really need is about three minutes of your time on this and I do not need a complete answer, just a quick answer off the top of your head based on the law. This ought to be easy for you because you already wrote about this here [cite] on your blog.

My standard response to this is usually something like this:

Though we are familiar with the laws and practices in China’s major expat cities from our having provided China employment law counsel for countless clients in those cities, because the laws are so localized (sometimes down to the district within the city) and can change quickly and sometimes without notice, we always need to conduct at least some quick research to confirm the current laws and practices.

Also, and just as is true of all sorts of laws and pretty much everywhere in the world, there tends to be general rules on an issue also a slew of exceptions and even exceptions to the exceptions. At this point, we simply do not have nearly enough facts about your particular situation to provide you with an answer to your question. Take for example, example #1 above. I do not know why this employee is leaving or has left. Is it because she was caught stealing? Is it because she is a teacher who hit her students? Is it because her employer is experiencing massive financial difficulties? Is it because she just wasn’t good at her job? Is it because she could not get her work visa extended? And take example #2 above. I do not know what documents the employee has actually signed. Did she sign an employment contract without realizing it? Was she offered an employment contract but refused to sign? Has she ever had an employment contract with this company? I do not know her position in the company. I do not know what led the employer to refuse to sign a written employment contract. Was their a proposed employment contract in writing? And, if so, what did it say? I do not know how the termination was handled. I could go on and on.

For those who persist in seeking a quick answer to a specific China employment law question here goes: it depends.

China import duties
When it comes to China trade, there’s a new sheriff in town

Less than a week before Chinese President Xi Jinping’s scheduled visit to the United States, President Trump on Friday, March 31, 2017, issued an Executive Order “Establishing Enhanced Collection and Enforcement of Antidumping and Countervailing Duties and Violations of Trade and Customs Laws.” This order is aimed at collecting unpaid antidumping and countervailing (“AD/CVD”) duties on U.S. imports of foreign goods, including (particularly?) goods coming into the United States from China. If you are importing products from China or thinking of doing so, this post is relevant for you because a significant percentage of existing U.S. antidumping orders cover goods from China and many of these are covered by countervailing duties as well.

Though U.S. importers are ultimately liable for the AD/CVD, many of these importers are non-residents without sufficient assets in the United States to pay AD/CVD when due. U.S. Customs and Border Protection imposes bond requirements for imports, but where goods are subject to AD/CVD, normal bond amounts securing payment are often substantially less than the AD/CVD ultimately owed. To address these nonpayment issues, the Executive Order requires the Secretary of Homeland Security, through Customs, to develop a plan within the next 90 days to require new and existing importers that pose a risk of revenue loss to the United States provide security through a bond or legal measures. This Executive Order requires Customs establish an importer risk assessment program to review the risk of revenue loss from unpaid AD/CVD and consider increasing bonding requirements.

This means many new importers of goods from China (and elsewhere) subject to AD/CVD and those with a history of late payments likely will see their customs bond amounts increase. This is costly to import businesses since the bond surety requires cash collateral. With the new directives in the Executive Order, now is a good time for companies to assess the merchandise they import and if any of that merchandise is subject to AD/CVD, to ensure it has procedures and controls in place to monitor AD/CVD declarations at entry.

In addition to enhanced customs bonding, the Executive Order also calls on the Secretary of Homeland Security to develop a plan within the next 90 days “for combatting violations of United States trade and customs laws for goods and for enabling interdiction and disposal, including through methods other than seizure, of inadmissible merchandise . . . .” The Executive Order also addresses intellectual property enforcement at the border.  by mandating that the government share with rights holders information about intellectual property rights infringement and abandoned merchandise.

Lastly, the Executive Order instructs the Attorney General develop recommended prosecution plans and allocate resources to Federal prosecutors for prosecution of trade law violations. Though AD/CVD and intellectual property have been priority trade issues for many years and the federal government has been free to pursue criminal actions, most enforcement has been via civil penalties and/or product seizures. The call for a criminal prosecution plan and increased prosecution resources to pursue such a plan no doubt will lead to an increased focus on criminal penalty actions for customs and trade violations. To put it bluntly, many trade violations that formerly led to penalties and fines could mean jail time under our new administration. Immediately after the issuance of this Executive Order, Customs announced that it is ready to follow through on the Trump directives. See CBP To Implement Executive Order.

Bottom Line. If you are importing product from China (or any other country), now is the time to double check what you are doing with your trade and customs programs and to make darn sure that you are not bringing in product that will cost you a lot of money or maybe even jail time. There is a new sheriff in town and he does not like imports.

International lawyersLong ago, I once said on here that if we get at least three emails on a particular topic, we will write about it. I long ago received three emails on the Wall Street Journal article Did Xie Zhikun’s Nearly $1 Billion Go Missing? A Private-Equity Mystery but I am just now getting around to writing about it.  To grossly oversimplify this terrific article, Xie Zhikun claims to have invested $1 billion into a U.S. based private equity company via a “share entrustment agreement” that specifies that he is the actual owner in a third Cayman Island Company. The Wall Street Journal says these sort of “agreements are commonly used by wealthy people who want to put money into shell companies without being identified in corporate records.” To grossly oversimplify the private equity company’s response: Xie Zhikun who?

And to grossly oversimplify the three emails I received regarding this article: WTF?

Let me just say that what is described in the article is shockingly common and my firm’s international lawyers often see the same sort of thing, including the following:

  • A Russian company contacted my firm’s litigation team to pursue an $3 million dollar lawsuit against an American company that had failed to pay for a Russian airplane it had purchased. But when our lawyers saw the paperwork, it all reflected a $350,000 purchase price. When we asked the Russian company why they had told us the purchase was for $3 million when the paperwork said $350,000, they immediately told us that the paperwork had been drawn up that way to save them taxes in Russia. We declined the case.
  • Our law firm once defended a case on behalf of a large shipping company involving an alleged $2 million or so in damaged cargo. But because the cargo manifest put the value of the cargo at something like $500,000 (presumably to avoid having to pay more for customs and or for insurance), settlement was based on the $500,000 figure, not the $2 million the cargo was allegedly (and realistically) worth.
  • A Chinese company (let’s call it Chinese Company A) contacted us because it had never received the shares it had been promised for investing $8 million into an American company. Our review of the documents did say a Chinese company was entitled to shares in the American company, but it was a completely different Chinese company from Chinese Company A. Let’s call this second company, Chinese Company B. Our China lawyers asked Chinese Company A whether Chinese Company B had received the ownership in the American company promised to Chinese Company B and who exactly is Chinese Company B. Chinese Company A said it did not know whether or not Chinese Company B had received those shares and that was because Chinese Company A and Chinese Company B “no longer had a good relationship.” We declined the case, without even bothering to ask why Chinese Company A had invested $8 million into an American company in return for that American company giving stock to another Chinese Company.
  • A Chinese company many years ago did what used to commonly be referred to as a “round-tripper.” Round-trippers were when a Chinese company would have someone in the United States form a US company and then that US company would go to China (hence the name round-tripper) as a foreign company able to take advantage of all the tax and other benefits China used to provide to foreign companies. Anyway, this Chinese company contacted one of our China lawyers based in China because it had become massive and it was looking at going public. Only one problem: it was 100% owned by a United States Limited Liability Company that had not paid any U.S. taxes for more than a decade. And here’s the real kicker: the U.S. LLC was 100% owned by the cousin of the founder in China and the founder had no clue where the cousin was in the United States, nor how to find him.

What’s the common thread in all of the above? They all involve a transaction that ran into problems because at least one key set of documents did not clearly reflect the deal, either because they were wrong on the amount of money involved or they were wrong on the parties involved. Many of these deals also involved Chinese (or Russian) companies that refused either to retain lawyers to represent them on the deal or retained legal counsel  inexperienced with foreign deals. At least this was the case on all of the matters on which my firm’s international lawyers were approached to handle.

Now here’s the funniest thing about all of this (to the extent there is anything at all funny about all of this): when I discussed this WSJ article with one of the China attorneys in my firm, we spent all of maybe 15 seconds on it and our conversation was basically to note that “we’ve obviously been doing this China law thing too long because nothing in that article surprised me in the slightest.”

I feel compelled to conclude this post with a few words of wisdom, so here goes:

  1. What you put on paper will last a lot longer and be a lot more powerful than any side oral agreement you might have. Therefore think long and hard before you sign anything on paper that even resembles a contract.
  2. Whatever explanation the other side gives for needing the documents to reflect one thing even though the deal is supposedly based on another thing will almost certainly not matter or will be denied when the proverbial ______ hits the fan.
  3. No smart businessperson does international deals without first retaining a good lawyer.

The above prove the points.

Your thoughts?

China US tradeChina’s President Xi Jinping is scheduled to meet with President Trump later this week at Mar-a-Lago and trade issues are expected to be at the top of their agenda. President Trump has already warned on Twitter that this meeting “with China will be a very difficult one in that we can no longer have massive trade deficits … and job losses.”

President Trump’s tweet shows how he views China primarily through a US-China trade imbalance lens, linked to American job losses. Trump’s trade worldview ignores the surpluses in trade in services and T-bills the US has with China. He also disregards jobs created by U.S. manufacturers that use inputs imported imported from China to produce higher value added products in the United States. See China. Friend Or Foe? Opportunity Or Challenge? Or, Why Can’t We All Just Get Along? President Trump also refuses to acknowledge (or recognize?) that the United States has lost more jobs to automation than to trade with China. Focusing too much on US-China bilateral trade deficits is an incomplete and misguided way of looking at a far more complex US-China trade relationship.

President Trump also seems to believe China will be willing to renegotiate terms with the US because it is so dependent on the US market. Though China does see the US as a very good and very important market for its goods, it is also true that China exports to all corners of the world and its home market consumer demand is also rapidly growing. China will not agree to massive trade concessions out of a desperate need for access to the US market.

President Xi also likely will be able to use this meeting to score points for his constituents back home. He will almost certainly demand that the U.S. treat China as a market economy, as promised fifteen years ago in the US-China WTO Accession agreement, even though he knows there is no way the U.S. will grant China market economy status under President Trump’s watch. China thus far has not overreacted to any of Trump’s blustery threats and has instead patiently waited to see what specific trade actions Trump orders. Until President Trump orders 45% tariffs on all Chinese imports or labels China a currency manipulator, President Xi will almost certainly continue taking what the international community will view as the high road and just keep firing off missives about how no one wins in a trade war. If though President Trump takes strong concrete actions against China at this week’s meeting, you can be certain China will quickly retaliate by taking its own trade action.

President Xi likely sees this meeting as an opportunity to elevate China’s standing as a more reasonable global market player than the United States and if President Trump continues to antagonize its global trading partners, China becomes a more attractive alternative trading partner. Loans from the China Development Bank and Export-Import Bank of China already have become the a very important source of foreign financing throughout Asia, Latin America and Africa. If Trump wants the U.S. to scale back from participating on the global stage, China is more than willing to step up and try to fill the void.

There will be plenty of posturing and both sides will get the sound bites they want to satisfy their core constituents at home, but it’s not clear what, if any, specific tangible takeaways either side will get from this meeting. Time will no doubt tell and we will be reporting back.

China employment lawyer
Have you checked your China employment contract? You should.

In October 2016, China initiated a pilot program for foreigner work permits in a few cities (including Beijing and Shanghai) and provinces that integrates foreigner entry employment licenses and foreign expert employment licenses into one “foreigner employment permit.” This pilot program is intended to streamline current application and administration procedures and processes and to attract more high-level foreign talent to China. As of March 28, 2017, the pilot cities/provinces have processed 20,188 applications, and issued 4,375 foreigner work license notices (外国人工作许可通知) and 9,638 foreigner work permits (外国人工作许可证) and 21,866 employers have registered their accounts with the relevant authorities.

The program will go national on April 1, 2017. Tomorrow.

Under the new regime, the current foreign expert work license and foreigner employment license will be integrated into one document called the foreigner work license notice. The employer and foreign applicant will be able to complete and submit the license form electronically. The original “alien employment permit” and “foreign expert certificate” will be integrated into one permit called the foreigner work permit. Every foreigner will have one permit number per foreigner work permit, which will be used by the same individual for life.

A nationwide administration service system for foreigners coming to China will be established. The application materials required for submission will be considerably fewer than previously, reducing by about half the documentation needed to submit.

Foreigners will be divided into three categories: A for high level talent, B for professional personnel, and C for foreigners who are nontechnical or service workers hired on a temporary/seasonal basis. Various criteria will be rated and used to generate a score for each foreign applicant, such as salary, educational background, Chinese language fluency, experience, and length of service. The goal is to encourage A level foreigners to come to and work in China, exert control over B level foreigners and restrict/limit the C levels.

A “green channel” will be available to A high level foreign talent. These high level foreigners will no longer need to submit hard copies of the documents required to apply for a foreigner work permit notice or for a visa application before entering into China. A self-certification system will be used for work experience, diplomas, and proof of no criminal record. The review and approval period for work permit application, extension and cancellation will go down from 10 business days to 5 business days and the longest permissible period for the work permit will be extended to 5 years.

China continues easing burdens and reducing hurdles to make its workforces more global and China employers are showing much greater willingness to spend real money to attract high-level foreign talent. Years ago it was a rare month in which a foreign executive would retain one of our China employment lawyers to review their contracts with their new China employers. These days, it is a rare week where we do not have at least a couple of such contracts under review. But what has not changed a bit is that pretty much every such contract we have reviewed has greatly favored the Chinese employer at the expense of the foreign executive) and many (most?) contain well-known China-specific loopholes that work against the foreign executive or fail to provide the employee with what he or she had been promised. Sad to say, but with the onslaught of high level foreign employee hirings has come an onslaught of high level foreign employees who have gone to China believing they would get one package and then finding out months later that they got a far lesser one.

Have you checked your China employee contract? I mean really checked it? You should.

China lawyers
Trading Babe Ruth was a big mistake. So what?
Donald Trump is that fantasy sports team owner who vetoed every trade involving Team China or Team Mexico (except his own, of course).  But now he’s become the league commissioner and he’s promised to fix or renegotiate all of those “bad” trade deals. Yikes.

Donald Trump and Peter Navarro, head of the newly formed White House National Trade Council, are always bitterly complaining about the huge trade deficit the United States has with China and other “bad” countries. But trade deficits should not be equated with unfair trade or with the alleged utter destruction of American manufacturing. This is like complaining that a baseball trade was so bad it caused the team not to win the World Series for, say, 86 years. Or, complaining that your team is suffering from a seven-to-one player trade deficit even though your team gave up seven players who were either nobodies, soon to be has beens, or never will bes, and your team gained a perennial All-Star or future Hall-of Famer in return.

The U.S. trade deficit with China does not mean the United States is losing to unfair trade. Trade of goods is just one part of what drives our economy. Though the United States may run a deficit in the trade of goods (both overall and with China), we run a surplus in the trade of services.  Also, China and Japan each own more than $1 trillion in U.S. Treasury bills, bonds, and other securities. Moreover, foreign companies are “insourcing” and purchasing U.S. assets, such as buying U.S. companies or investing in building new factories, shopping malls, hotels, etc. Harping on the United States’ trade deficit while completely ignoring other economic factors in which the United States has a surplus is an incomplete and misguided way to evaluate how the U.S. economy is performing. Full disclosure: my firm and especially our international trade and our China lawyers have a lot of skin in this game as we generate millions of dollars a year in services directly related to US-China trade.

Looking at trade balances between countries as if they were a zero-sum game to be “won” or “lost” does not make sense because countries don’t actually engage in trade with each other on a national level. Only companies and individuals in each country trade with one another. A trade (for fantasy league baseball players or for real life goods) happens only if both sides believe they are exchanging comparable value with each other. China exports boatloads of goods to the United States because U.S. companies and individuals see those imports as the best value for their specific needs. A good chunk of the imports contributing to the U.S. trade deficit are used to manufacture higher value-added products in the United States. The U.S. imports crude oil for U.S. refineries to produce gasoline and other higher-value petroleum products. Boeing airplanes include all sorts of parts imported from around the world. If Party A and Party B each a consensus that a trade is mutually acceptable, and there is no sign of fraud or collusion, why should the President/League Commissioner intervene and try to fix those so-called “terrible” trade deals?

Even those trades perceived to have been lopsided or unfair does not mean that the losing team on the deal needs rescuing or that the deal should be voided or undone. Teams make stupid deals all the time.

Every team hopes to avoid making bad trades, just as reducing the U.S. trade deficit is not wholly a bad idea. But reducing trade deficits by itself will not restore America’s manufacturing jobs any more than avoiding bad trade deals by itself will get teams a championship ring. The effects of a huge trade deficit or a bad trade deal, either in the market place or on the playing field, tend to work themselves out over time because there are so many other factors that go into the country’s economic performance or team’s performance. A good President/League Commissioner would know better than to try to fix every “bad” trade deal or trade deficit he doesn’t like.

Editor’s Note:  If you talk with people who regularly do business with China, especially people with companies that do business in China, they will mostly tell you that what they/we need is not so much higher duties on imports, but more pressure exerted on China to level the playing field for foreign companies doing business in China.

China counterfeit lawyersThe New York Times had a fascinating piece recently on the problems small business are having with knockoffs on Chinese e-commerce sites run by Alibaba. The story presented three case studies of companies making custom products: Vintage Industrial, a 25-person furniture maker based in Phoenix, All Earz Jewelry, a 1-person online jewelry shop based in Atlanta, and Reignland Concept, a 2-person online clothing store based in Los Angeles.

These companies all discovered multiple Alibaba listings for products that had been reverse engineered based on photographs on the companies’ own websites. Finding the counterfeit listings was the easy part, not least because the infringing listings use photos from the companies’ own websites. Removing those listings, and keeping new ones from cropping back up, has proven to be difficult and time-consuming, so much so that the small business owners are at their wits’ end.

I don’t blame them. Alibaba has a platform where IP owners can request removal of infringing listings, but it’s far from user-friendly. Our firm has never failed to remove an infringing listing, but we’ve been doing it for years and we have a team of Chinese-speaking lawyers and paralegals who understand China’s laws on intellectual property.

The best strategy, of course, would be to design a product that cannot be reverse engineered from a photo. But only a few products can be designed and marketed this way. For everyone else, protecting against infringement starts with registering your IP in China, and in particular any relevant trademarks, design patents, and copyrights. Without China registered IP, asking Alibaba to take down infringing listings will usually be an exercise in frustration.

Trademarks are the easiest to understand and the most important, because as we’ve discussed ad nauseam, China is a first to file country and once your brand gains notice in China, if you haven’t already filed for it someone else will. None of the products in the Times article were even remotely famous, which just goes to show how low the bar is in terms of gaining notice in China. A brand does not need to be famous to be profitable. And here’s the thing: a canny Alibaba seller will not only use the name of the brand but also register it himself, and thereby prevent not only the “true” brand owner but also other infringers from using that brand in China.

Are you listening, startups? I ask this because it is the smaller companies that so often have the problems described in the New York Times article, not because they are small, but because they did not do the registrations necessary to help prevent such problems or to be in a position to solve them if and when they occur. Our China IP team does a lot of work for big companies as well but much of that work is like shooting fish in a barrel. We send Alibaba the proof of our client having registered its trademark or its copyright in China and the offending product comes down.

Design patents protect product designs or aesthetic appearance. In the Times article, both the furniture and jewelry could maybe be protected by a design patent. But a design patent has an absolute novelty requirement: if a product isn’t new, it isn’t eligible for patent protection. And patent protection is country-by-country, so even if the products were protected by patents in the U.S. they wouldn’t be protected in China unless the owner had also filed in China. For companies that can easily tweak their product, this problem can be easily sidestepped; make a new version and it’s eligible for a design patent.

Copyrights protect original creative works in a fixed medium. In the Times piece, the furniture and jewelry could probably also be protected by copyright. China recognizes the validity of copyrights from any WTO signatory country, but if you are serious about taking down infringing listings on Alibaba, you’ll want to register your copyright in China. It just makes the process more smoothly and it increases your chances in making the process go at all.

Unfortunately for Reignland Concept, clothing designs can be difficult to protect under IP laws. Sometimes a clothing pattern can be protected by a copyright and/or trademark (e.g., the Burberry plaid) but that is more the exception than the rule. So although Reignland Concept may legitimately feel that its clothing is being knocked off by an Alibaba, that may just be the way fashion works.

However, Reignland could almost certainly use the protection of copyright infringement in one way: when the infringing listings use the exact photographs from Reignland’s website. The clothing may not be protected by copyright, but the photographs of the clothing are. This takedown approach works when Alibaba sellers are too lazy to take their own photographs, which is shockingly often.

Small business owners should take the Times article as a shot across the bow: no one is too small to need a China IP strategy.