Got an email from an American client this morning asking me whether I was aware of how American companies that do “significant” business with China cannot receive Paycheck Protection Program (PPP2) loans. I replied that I was not, because my focus is not on domestic U.S. law or business.
But then I started thinking more about it and realized that if I — a news junkie was not aware of it — it must be because it is getting almost no media play. And if it is getting almost no media play (which I confirmed) it is because U.S. government efforts to encourage decoupling from China is no longer a big deal.
How did we get here, and how is it that times have changed so much? And as someone would get angry (sometimes even threatening) emails and calls from people angry at us for proclaiming nothing but bad times ahead between the United States and China, I am surprised at how nonchalantly most are now taking the path to US-China decoupling.
A bit of history is in order here.
1. US-China Relations 2018-2020
Since October, 2018 we have been clear on how decoupling between the West and China is inevitable. I set out the below timeline not so much to show that we have been right all along, but to emphasize how you should expect this to almost inexorably continue and how you and your business need to act accordingly.
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 alsoo 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 out 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 13, 2019, in Hong Kong for International Business: Stick a Fork in It, we proclaimed the end of Hong Kong as an independent entity and as a center for international business.
— 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 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 Sliwoski . . . . 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.
— On December 10, 2019, in China and the West Are Decoupling: Please Act Accordingly, we made clear that even if there is a Phase One Trade Deal with China [there was] “it will be so limited as to be meaningless for most companies and nothing but a short-term pause in the decoupling. Look at all that has happened between the United States (and the West) and China over China’s treatment of Hong Kong and the Uighurs and tell me that the US and China are millimeters away from patching things up. Look at what is going on between Australia and China and between the EU and China and between Sweden and China and tell me that relations between the West and China will get better. Look at how “Beijing orders state offices to replace foreign PCs and software” and tell me who you think will stop the straight line detoriation in relations between the West and China. Decoupling is happening and will continue happening and you and your business need to act accordingly.”
Pretty much all of the above posts drew substantial heat and angry retorts, especially the Hong Kong one, where we were called everything from morons to liars.
During this entire period I have (on this blog and on Facebook and on Linkedin and on Twitter) been vociferously touting the benefits of manufacturing and doing business with countries other than China, and providing examples of clients that have moved out of China and are loving it. We perpetually tout other Asian countries like Thailand, Malaysia, Vietnam, Indonesia, the Philipines, Pakistan, and India for manufacturing. We are also big believers in Mexico (and not just because we have an office there) and many other countries in Latin America. Ditto for Poland and other countries in Eastern Europe and for Spain (where we also have offices) and Portugal and other countries in the EU. Last but not least, our United States foreign direct investment lawyers are increasingly working with companies moving their China/Hong Kong operations to North America.
The media tends to focus on manufacturing leaving China for elsewhere because that is easiest to measure. But with Hong Kong in a political-economic free-fall, plenty of companies are moving some or all of their operations from Hong Kong and Mainland China to Singapore, North America, Latin America and Europe. Western companies are moving out of China and for every one of our clients that has already moved out, there are four or five planning to do so whenever COVID will allow it.
2. The Paycheck Protection Program and China
I hope you read some of the above history, because if you did, you can see why the restricting companies that do business with China from participating in the second round of the PPP program is indeed small potatoes.
But if you are looking to get a PPP loan from this latest tranche, you need to be aware of how Congress is targeting companies that do business with China.
The relevant statute states provides with “significant operations in the People’s Republic of China or the Special Administrative Region of Hong Kong, [or that] owns or holds, directly or indirectly, not less than 20 percent of the economic interest of the business concern or entity, including as equity shares or a capital or profit interest in a limited liability company or partnership, or that retains, as a member of the board of directors of the business concern, a person who is a resident of the People’s Republic of China.”
Some of the statute and loan form is clear, but some of it is not. What is clear is that if your company owns more than 20 percent of a PRC or Hong Kong company, your company cannot receive a PPP loan. I read this to mean that if your company owns a China WFOE or a Hong Kong subsidiary or more than 20 percent of a China JV or a Hong Kong entity, your company is a n0-go for a PPP loan. I estimate these restrictions will apply to about half of our clients because so many of them that do business in China own a China WFOE and virtually all of them that own an interest in a China JV own more than 20 percent of it. And a fairly large number of our clients that do their manufacturing in China still have a quality control or purchasing office in Hong Kong.
What is not clear is what constitutes “significant operations” in China. Does it include a US company that has $200 worth of components made in China for its $15,000 widget? Probably not. Does it include an e-commerce company that has all of its products made in China for sale around the world? It very well might, and a heckuva lot of our clients fit this description.
What is the time frame by which offending ownership and operations are measured? Can a company give back its ownership in a China Joint Venture (many of these are not profitable for the American company anyway) today and apply for a PPP loan tomorrow? Can a company that buys 50% of its products from China today qualify for a PPP loan two weeks from now if it switches its supplier to Vietnam during that time? None of this is clear, but as our domestic lawyers — in tandem with our China lawyers — start working through these issues for and with our clients, we will report back to you on the results.