Tag: Policies Foreign and Domestic

Idle Thought – last week in January, 2019

What if this past weekend were the beginning of the end for the orange haired baboon?  And, in the process, the GOP were so damaged that even a Pence presidency couldn’t do much harm, and we gained a president in 2020 who was smart, thoughtful, respected intelligence and loyalty to allies and was up for repairing the extraordinary damage, domestic and international?

Someone who might say something that would remind us of these lines –

“Let the word go forth from this time and place, to friend and foe alike, that the torch has been passed to a new generation of Americans, born in this century, tempered by war, disciplined by a hard and bitter peace, proud of our ancient heritage, and unwilling to witness or permit the slow undoing of those human rights to which this nation has always been committed, and to which we are committed today at home and around the world. Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty.”

Suppose we looked back on the past two years, or three, as having fought and emerged from a great conflict, knowing that the alternative was always looking us in the face, that if we had failed no one would never hear the American version –

… then the whole world, including the United States, including all that we have known and cared for, will sink into the abyss of a new dark age made more sinister, and perhaps more protracted, by the lights of perverted science.  Let us therefore brace ourselves to our duties, and so bear ourselves, that if the British Empire and its Commonwealth last for a thousand years, men will still say, “This was their finest hour.”

And in an inaugural speech in January, 2021, we might hear echoes of –

With malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in, to bind up the nation’s wounds, to care for him who shall have borne the battle and for his widow and his orphan, to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations.

Good luck to us with that.  How would that sit with all the tinpot dictators who have sprung up in the last five years, and their beleaguered people? And how would that sit with all those in Africa, and the –stans, and South America, who have looked hard and trembled at rapacious lending of China and the prospect of Chinese internet, Chinese censorship, Chinese media, Chinese rule of men, Chinese tribute, wishing for an alternative that left them some dignity?

Oh.  And Reagan on walls –

“Rather than talking about putting up a fence, why don’t we work out some recognition of our mutual problems, make it possible for them to come here legally with a work permit,” he said. “And then while they’re working and earning here, they pay taxes here. And when they want to go back they can go back.”

https://www.mercurynews.com/2018/12/21/analysis-heres-what-reagan-actually-said-about-border-security/

And –

“I’ve spoken of the shining city all my political life…in my mind it was a tall, proud city built on rocks stronger than oceans…with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That’s how I saw it, and see it still.”

https://www.azquotes.com/quote/547667

What’s New is Old Again

on tangibles and intangibles in the trade conflict

Fake LV bag


Source:  Wondermika
(note – access to Chinese Constitution at this site is now forbidden)

From Caixin –

China Starts New Crackdown on Intellectual Property Theft After Xi-Trump Talks

Thirty-eight state agencies have announced that they will soon begin a coordinated campaign against IPR infringement

From Bloomberg, via Slashdot –

China has announced an array of punishments that could restrict companies’ access to borrowing and state-funding support over intellectual-property theft. … Bloomberg reports: China set out a total of 38 different punishments to be applied to IP violations, starting this month. The document, dated Nov. 21, was released Tuesday by the National Development and Reform Commission and signed by various government bodies, including the central bank and supreme court…. violators would be banned from issuing bonds or other financing tools, and participating in government procurement… also restricted from accessing government financial support, foreign trade, registering companies, auctioning land or trading properties. In addition, violators will be recorded on a list, and financial institutions will refer to that when lending or granting access to foreign exchange. Names will be posted on a government website. “This is an unprecedented regulation on IP violation in terms of the scope of the ministries and severity of the punishment,” said Xu Xinming, a researcher at the Center for Intellectual Property Studies at China University of Political Science and Law.

Admirable.  Thirty-eight agencies, thirty-eight punishments, and a coordinated effort within hours of the Xi-Trump non-agreement (the crackdown actually publicized in China before the Xi-Trump meeting).  When announcements of this extent come so rapidly, one may be pretty sure that nothing of consequence will happen.   IP theft is the only real issue in the trade war.  All else – deception or fraud in business dealings or failure to abide by (American) labor or environmental standards, are par for the course in international trade.  Not that they should not be addressed, but there are other ways – better negotiation on the part of American businesses with Chinese, or efforts by international NGO and multiple foreign governments on labor and the environment.   Trade wars do nothing to address those issues.

A Chinese program to address IP theft should encompass theft both in China and in the US.  The recent coordinated announcement has no value.  And there are multiple ways in which it has no value.

First, feigned compliance with rules from above is a standard operating procedure in Chinese governance, and has been for centuries.  A leader proposes, the officialdom disposes.  Officials responsible for implementation of any rules are responsible to their local Party leaders, not to Xi or to some sense of obligation to openness and fair dealing.

Second, provincial or local-level officials who do seek to vigorously comply with an actual rule put themselves at a disadvantage for promotion.  Increasing GDP is still a measure by which officials are rated for promotion, and hindering local business growth for the sake of discouraging IP theft from the foreign barbarians is hardly a good idea.  Businesses of any size, particularly the very large non-SOE businesses, are now required to have a CCP committee.  That Party leader will have a relatively high status within CCP.  No one can know the internal machinations of the discipline inspection bureau or the organization department, but it is by no means clear that a Party leader at a large business would cooperate with a national plan rather than a local colleague with local interests at heart. 

Third, remedies available within China are insufficient to address IP theft.  We should distinguish two broad kinds of theft – theft of tangible and intangible products or designs. 

On tangibles, the government has made efforts in the past few years to cut down on fakes sold on the street, on Alibaba, and in foreign countries.  There has been some success, but fakes are still easy to purchase everywhere in the world.  An equally damaging kind of tangible IP theft is the illegal production of goods beyond amounts contracted by the purchaser, which are then sold in China or elsewhere in the world, Africa or the –stans.  (Prices to the original western buyer can be held very low if additional copies can be sold elsewhere in the world for a lot more money. Contract to produce 100,000, make 200,000, sell the overage privately).  See from 2011 – China to crack down on fake iPhones and from 2015 – China to crack down on selling fake goods online   One should not doubt that we will see comparable articles in 2019 and beyond.  And theft need not be actually undertaken by a contracted supplier.  A cousin or closely related startup business would be sufficient. 

The thirty-eight agency announcement, signed by the central bank and the supreme court, is still not a credible promise of crackdown on theft.  In the absence of rule of law, with local courts controlled by CCP and subject to undue local business influence, local control will still dominate transactions.  In any case, there are penalties and there are remedies. The list of penalties in the article above sounds impressive – serious restrictions on obtaining loans or travel.  As always, the proof of this pudding will be in enforcement of agreed intentions.  I suggest that most penalties will continue to be confined to some payment of money for theft of sales, or return of molds.  Months or years later, while a case winds its way through the Chinese courts, some minor compensation for lost sales is small recompense.  Monetary remedies continue to be limited to some estimate of actual sales losses – no deterrent damage amount is assessed.  Theft by fake registration of copyright in China, or aggressive adverse copyright, will remain a problem.   Michael Jordan was able to win his  trademark dispute after a years-long battle over use of the Chinese characters for his name by an unrelated shoe manufacturer.  Jordan had the money and the time.

Steve Dickinson at China Law Blog, comments on the G-20 “agreement” –  As someone who has been involved with these sorts of China IP issues for decades, I view the odds at near zero that China will make significant and meaningful changes in their system on the issues that will be discussed.

With regard to intangibles, there is no advantage to China in restricting or punishing theft – military or scientific or commercial designs, or molecular design or software.  If Trump were to get China to agree to restrict or do away with “China 2025” – itself a ridiculous request – China could drop the marketing and continue with the practices.

Theft of intangibles is the key issue.  More than one Chinese researcher has been arrested in the US for theft of IP with intent to sell to a Chinese company.  See here, here, here.  Of local interest, one of those arrested was a student at IIT in Chicago.

Fourth, what punishment compensates for theft of intangibles?  Will Chinese scientists or company owners agree to return the designs or software?  That will work.  Siemens and ThyssenKrupp never even bothered to sue for theft of high speed train designs.  See Der Spiegel from 2006.

Non-tangible theft can be kept secret for a time, and in any case, a lawsuit will need to wind its way through Chinese courts, where western concepts of discovery and evidence are … well, foreign.  And lawsuits don’t work if politics intervenes, on either side.  Trump’s hard crackdown on ZTE for violation of Iran sanctions was substantially softened with a phone call from Mr. Xi.

None of this addresses other “Its China” problems, such as unequal enforcement of regulations or complete disinterest in pursuing a request from foreign business for licenses (See China Law Blog on driving out Mister Softee).  Other tactics include local favoritism in selecting contractors or refusing to pay for services rendered.   Several years ago, I tried rather hard to line up an American architect to work on urban planning projects for which the contract in China was already in hand.  I could generate no interest.  American architects had learned the lesson of supplying work and then going unpaid.

Posted in Legal News, cited at China Law Blog –

If, like us, you’ve been following the China Law Blog for many years, you can’t have missed the numerous warnings it gives about the futility of obtaining judgments against Chinese companies in foreign courts since Chinese courts will not enforce them unless they were granted by a court in one of the limited number of countries with which China has a bilateral enforcement treaty. Furthermore, even where a treaty does exist, as is the case with Hong Kong, it can be extremely difficult if not outright impossible to get a foreign judgment enforced in China.

This is from 2015, and Xi is proposing changes in the law.   But changes in law say nothing about changes in interpretation of the laws in court or later enforcement.  It is still, “good luck with that.”   You should take it as dispositive that Mr. Xi has said nothing about changing the way courts are operated or controlled.  And our own dear leader never asked. 

What Chinese are talking about (1) – Shaolin Temple raises the red flag

I hope this will become an occasional post, based on what I hear on the ground. 

Shaolin Monks, originators of Kung Fu, Kneel to Chinese Government 
Shaolin Buddhist monks, the world famous monks of astounding feats of athletic skill, concentration, and mind over body, originators of the martial art of kung fu, have indicated their subservience to the Chinese government in a ceremony held at their home temple in Dengfeng County in Henan Province.  This is a first in 1500 years, that the monks would indicate political subservience.

All photos: http://english.sina.com/china/s/2018-08-28/detail-ihifuvpi1509972.shtml

August 28, 2018 – Beijing: Shaolin Temple raises the red flag  by Kirsty Needham  (China correspondent for the Sydney Morning Herald)

Shaolin Temple, the birthplace of kung fu and famous home of the fighting monks, has raised the Chinese national flag for the first time in its 1500-year history.

A flag raising ceremony on Monday was attended by officials from the United Front Work Department, which oversees religious groups in China because of the Communist Party’s fear they may be a threat to its rule ….

The national flag would bring socialist core values into religious venues and “enhance national awareness” the temple said.    Shaolin temple raises the red flag

This is a surprising development for Chinese, who generally see Buddhism, and the Shaolin monks in particular, as sacrosanct.   Even in an era of crackdown on religion, on Tibetan Buddhism, this was unexpected, both for the brazenness of the demand from the United Front bureau and the willingness of the monks to acquiesce. 

From a South China Morning Post piece –

Red flag for Buddhists? Shaolin Temple ‘takes the lead’ in Chinese patriotism push

…  While the move was applauded by some, critics said it risked tainting religion with politics.

“As a Buddhist, this makes me feel uncomfortable,” one Weibo user wrote. “Before, I thought of religious faith as pure, but now it confuses me … With patriotism interfering with spiritual life, there is no space at all for individual thought. Is this what a harmonious society looks like?”

Another wrote: “The Buddha and Marx have shaken hands … Buddhism is meant to cultivate the mind, body and spirit – what has it got to do with politics? Haven’t the monks in the monastery renounced worldly living? I feel uncomfortable and just think that raising the national flag at the temple is simply not appropriate.”   SCMP – Red flag for Shaolin monksMonks and United Front officials watch the ceremony

The pressure on the Shaolin monks is likely related to two developments – first, the Shaolin monks have had their share of scandal, as they have become a global revenue generator from shows and demonstrations. The government will always take a strong interest in a historical cultural phenomenon that generates millions of dollars each year.  For more see Rise and fall of CEO monk.

Second, forcing the monks to raise the flag is a sign to all other religions in China, particularly Catholicism, that there is no greater force than CCP in the universe.  This has greater significance in light of the concurrent deal between the Vatican and the government to permit government involvement in selection of bishops in China.  This is anathema to many Chinese Catholics, in China and outside, but the Shaolin flag-raising emphasizes that CCP will brook no competitors for power.   (For more on the new era of crackdown on Christianity, see for example this South China Morning Post piece –   Christianity crackdown  (note – this link is now blocked or deleted) )

There is another aspect to the Shaolin development.  The Shaolin Buddhist monks do not owe allegiance to the Dalai Lama, but in the current environment in China, religious activities must be dealt with directly and forcefully.  The Dalai Lama does not cooperate, so pressure must be brought where it can.

There is ongoing fear in CCP that the current Dalai Lama, the spiritual head of Tibetan Buddhism, will not name an heir, a new Dalai Lama, making Beijing scramble to figure out who will be a leader they can control.  This is the nature of the deal made recently between the Vatican and the Chinese government – the Vatican will choose to approve bishops preselected by CCP.  Beijing has in fact demanded that the current Dalai Lama, in exile, name a successor, otherwise, CCP will do so for Buddhists.  Even CCP is reluctant to take this move – atheistic CCP appointing a new head of Tibetan Buddhism.  From a 2004 Time Magazine interview with the current Dalai Lama –

The institution of the Dalai Lama, and whether it should continue or not, is up to the Tibetan people. If they feel it is not relevant, then it will cease and there will be no 15th Dalai Lama. But if I die today I think they will want another Dalai Lama. The purpose of reincarnation is to fulfill the previous [incarnation’s] life task. My life is outside Tibet, therefore my reincarnation will logically be found outside. But then, the next question: Will the Chinese accept this or not? China will not accept. The Chinese government most probably will appoint another Dalai Lama, like it did with the Panchen Lama. Then there will be two Dalai Lamas: one, the Dalai Lama of the Tibetan heart, and one that is officially appointed.

Alex Perry. “A Conversation with the Dalai Lama”. Time. October 18, 2004.

To further confound CCP, the Dalai Lama issued a statement in 2011 –

Bear in mind that, apart from the reincarnation recognized through such legitimate methods, no recognition or acceptance should be given to a candidate chosen for political ends by anyone, including those in the People’s Republic of China.  Retirement and Reincarnation Message

Checkmate, in advance.

 Short video about the flag raising ceremony –

 We have no king but Caesar?

The required Shaolin flag raising is, among other symbolic representations, a response to a Dalai Lama checkmate.  Hell hath no fury like a CCP scorned.

No Way Out from the Middle Kingdom

You remember the movie, with Kevin Kostner as the exemplary US Navy officer-special assistant to the Secretary of Defense (Gene Hackman).  The plot twists around search for a purported Russian spy in the US, codenamed Yuri, who has been able to infiltrate the Navy at the highest levels.  Following several plot twists, Kostner is ultimately left with no way out – he cannot be seen in public, as he will be implicated in a murder; and he does not want to return to his homeland, which he has not seen for at least twenty years.  He has no safe place to go, and no way out of his predicament.

No doubt some American businesses are in a similar predicament now, with regard to their manufacturing or distribution or licensing deals in China.  Conditions have been getting more difficult for foreign businesses, particularly American businesses, for years before the tirades coming from the current occupant of the White House.  Seagate closed its factory in Suzhou in 2017. Panasonic ceased all manufacturing in China in 2015.  And Home Depot, L’Oreal, Revlon, and Best Buy.  Microsoft moved its two China plants to Vietnam in 2015. 

Xi Jinping has worked hard to promote the home advantage for Chinese companies – in 2015, Starbucks was accused by the government and the Chinese media of gouging Chinese customers  Starbucks China Pricing  Similar charges were leveled against Apple  China’s anti-Apple campaign   and Yum Brands and Hewlett- Packard.  In all cases, Chinese responded to the government with a large raspberry. For Starbucks and Apple, they cited the safety of the coffee and the attractiveness of the iPhone.

Those were minor skirmishes that any big company must get used to.  Now companies of all sizes find themselves in the middle of a war, a trade war, conducted with spite and malice on both sides, and no clear end game.  Tariffs are a tool, but the Chinese government has many other tools that can be more effective against any one company.

The tools are essentially enforcement of existing laws in a biased manner, enforcement of regulations made up on the spot, threats, and support for local businesses acting in an entirely extra-legal manner.

Differential enforcement of law and application of “special” law is a well-known tactic in the US, for persecution of blacks and other minorities.  But in the US, there can be appeal to other avenues within the society – media, lawsuits, popular support, social media, engaging with legislators or regulators. These avenues are obviously restricted or non-existent for most American businesses in China – Starbucks and Apple being two that can generate widespread popular support.

But most American businesses in China are small to medium sized and without local guanxi.  Those businesses trying to get factories, molds, money, and personnel out of China may be subject to a whole other level of persecution.  By the way, I focus on manufacturing industries because foreign service businesses – retail, banking, finance, health care, education, real estate, insurance, media and entertainment – are highly restricted or forbidden in China.  To date, foreign service businesses are not much of a factor in trade.  Yes, Walmart and many chain retailers in shopping malls; but these are big companies with sufficient legal and financial wherewithal to withstand some ups and downs in the market, and American IP, personnel, and equipment are not at stake.

Dan Harris, at Harris/Bricken law firm, writes China Law Blog, by far the most useful general law blog about doing business in China.  Over the years, he and co-authors have explained difficulties of doing business in China, with examples and clearly written language that provides both useful information and blatant warnings about the dark side of doing business there.

Now, Harris has reposted some of his most dire warnings, based on what he is hearing from businesses in 2018 in China and seeking to get out –

How to Leave China AND Survive  September 23, 2018

The money paragraphs from this article –

Way back in 2013, in The Single Best Way To Avoid Being Taken Hostage In China, we wrote of how Chinese companies and individuals often take hostages in an effort to collect on alleged debts or to protest employee layoffs or the closing of a China facility:

As the article states, “it is not rare in China for managers to be held by workers demanding back pay or other benefits, often from their Chinese owners, though occasionally also involving foreign bosses.”

My law firm’s advice every single time to our clients who are laying off workers in China or closing a facility in China or allegedly owing money in China is to stay outside China for all negotiations.  One only needs to be a regular reader of our blog to know that we took this position long ago and have never waffled:

  • If you are in a debt dispute with a Chinese company, the best thing to do is not go to China at all.
  • If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.
  • Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

By this point many of you are probably wondering why I am writing about debt when the issue is leaving China. My answer is very simple: once the news goes out that you will be leaving China, alleged creditors will come out of the woodwork. The tax authorities will come up with taxes that you owe. Your landlord will explain why you owe it way more than you thought you did. Your suppliers will send you bills for items they never actually gave you. Your employees will demand all sorts of severance. I am not saying these sorts of things always happen, but I am saying that they often do and you need to be prepared for it.

No way out is not too strong an image.   Whatever the merits of the current US complaints about Chinese business practices – and there are plenty of valid complaints, including IP theft, preferential treatment for local companies, and subsidies for exporters – China-US IP battle – the US companies love the profits earned in China, and so are between a rock and a hard place.  For some companies, mostly the consumer facing companies like Starbucks or KFC, there is growing competition, but a measure of public support.  CCP members drink coffee and eat KFC ice cream, too.  B to B companies are out of sight, out of mind, a perfect mental location for the excesses of law or regulation that are simply another way to cheat or extort from the foreigners.

Try this post – China Factory Scams: Their Time is Ripe   By Steve Dickinson on September 9, 2018

Think about it this way – is there another major American trading partner where one need fear being kidnapped over a real or imagined payment dispute?  Is there another American major trading partner for which the best trade advisories scream, danger, danger, danger?

In the movie No Way Out, we don’t know what happens to Kevin Kostner.  But his Russian contact is right – “Let him go. He will be back.  Where else can he go?”  In the tariff war, we can’t tell right now what will happen.  The US has a theoretical advantage in buying more than it is selling to China, and China will soon run out of US imports to tariff; but Mr. Xi doesn’t have to stand for reelection, and Chinese, even modern Chinese, are accustomed to conceding to power.  Neither Mr. Xi nor the orange haired baboon can concede without losing substantial face.  The uncertainty on all sides is palpable, and uncertainty in operations is deadly scary for manufacturing businesses.  (Ask any business in England right now).   The American Chamber of Commerce in China (AmCham China) says that almost half of 430 member companies surveyed expect a strong negative impact from the tariff war AmCham – more pain ahead. (note – this link is now blocked or deleted) Even though American businesses are developing strategies to move operations to Vietnam, Indonesia, Philippines, or Malaysia, it will be difficult to reproduce the infrastructure and organizational experience of having spent years in China. But at some point, companies will have to abandon the lure of profits when the cost and uncertainty become too great.  China is trying to soft-pedal its formal response to the orange-haired baboon, but the indirect penalties may soon become intolerable.

High tech industries in the US face a related set of problems.  In addition to traditional IP theft, Chinese companies are now innovative enough on their own to challenge world competitors, and the China market for high tech – business and consumer – is the biggest in the world.  Large government subsidies and huge attractive packages for individual scientists who relocate to China are the norm.  Chinese students educated in STEM fields in the US are now likely to return to China where opportunities are greater.  Money alone does not drive innovation, but it is certainly a catalyst.  Now American companies are feeling pressure to partner with Chinese companies on research, even as the threat of IP theft continues (even if less now than before) and loss of researcher talent continues.  How to respond in this new environment, particularly one in which malice aforethought is salient?  An MIT Sloan School of Management report from June of this year describes the conundrum – Changing Face of Innovation in China (limited access with sign-in).  The Sloan recommendations for foreign companies in China may be all that can be done   – hire more Chinese locally, learn to file patents faster in China, and “Engage in cutting-edge innovation in China when returns exceed global risks.”  I’m not sure what this means, but the Sloan report described it this way –

This requires both an aggressive global innovation strategy (for example, doubling down on promising R&D projects outside China and speeding up R&D outside China) and a complementary business strategy (for example, strategically patenting, engaging in more mergers and acquisitions in China and abroad, seeking greater support from home governments, and possibly shifting away from product lines increasingly dominated by Chinese companies).

Ok.

Obviously, tariffs and different locations within China affect industries differently.  For me, I expect those indirect costs – the unfair application of regulations and paperwork and extra-legal harassment as tools of trade war – to push a sizable chunk of American manufacturing out of China.  Not major companies, but many smaller companies, looking at the short and medium term, will need to negotiate a way out.  In the latest AmCham survey, 25% of American respondents said they had moved or are planning to move capacity out of China – and this survey was conducted a year ago.  At that time, businesses cited labor costs, IP theft, and a “more challenging regulatory environment” as the reasons for relocation. Forty-five per cent reported flat or declining revenue in China, and only 64% reporting a profit, the lowest percentage in five years.  Now comes the trade war.  AmCham – businesses leaving China (note – this link is now blocked or deleted) Larger companies may choose to reinvest elsewhere, but they too will have to bear the brunt of both sides – tariffs on imports to the US and tariffs on imports and punishment from China.   The greater the role that public stockholders play in company valuation, the more difficult it will be for American companies to find a way out.  Potential loss of profits and the sunk costs of capacity will be hard for stockholders to bear.   But no way out can only be a short term solution.  For some firms, as for Kostner in the movie, returning home – or at least, leaving China – may be the only way out.