China Business Update 2024

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all right looks like we are live now so in the interest of of keeping the discussion Lively and moving we will get started my name is Jonathan bench I am a partner with Harris Sliwoski in Salt Lake City I’m joined today with my partner Dan Harris who is our one of our namesake partners of course and  our colleague Fred Rocafort coming from Florida so we have good geographical array within the us but also and a good array of expertise I think  I I mostly am a a corporate or commercial attorney I do business deals  with Chinese companies and with us companies and other foreign companies in China um a lot of my work centers around setting up the relationships the right way or sometimes dismantling the relationships when things have gone bad or we need to adjust for one reason or another which happens quite a bit now as as we’ve seen a lot of supply chain CH disruptions  Dan Harris is a  Dan you are a litigator by trade but I think you become much more of a generalist probably as you as you’ve do as you have dove into China maybe I’m misstating that but you always come from a litigator perspective but I think your your overall business sense  very sharp and that’s coming from someone with much less experience than you in life  but someone who’s been in a lot of conversations with you around  international business and then Fred Rocafort is our  Fred’s my IP guy he’s my go-to for everything IP whether it’s in the US or China or anywhere else in the world  and so when we’re going the format of this today we’re gonna have Dan start with an introduction kind of a good overview of what he’s seeing from his perspective uh in China business generally then I will talk a little bit about uh some of the significant legal developments in China uh particularly since Xi Jinping took power in 2012 and then uh and then Fred will will give us a perspective on trade and what this what the supply chain retooling is meant for his practice in kind of the global uh market so Dan Fred if I misstated anything or I just didn’t do you justice feel free to add some comments as it’s it’s your turn to speak but let’s kick it over to Dan to start thank you Jonathan and I guess I do probably come after everything from a litigator perspective in that I’m always very skeptical and very worried and believe that U research can conquer just about everything so um I’m going to be talking today about the economic challenges facing China using facts and data and what our Law Firm has been seeing um China’s economy is in serious trouble since 2021 on its stock market has declined by around $6 trillion to put that in perspective that is more than the total gross domestic product of Japan and Spa Spain combined foreign investment in China’s stock market is down nearly 85% since 2021 China’s largest real estate company ever Grand is default is in default on around $325 billion in debt and it recently began liquidating I personally know several people who simply cannot sell their properties in China closer to home from 2003 to 2018 our Law Firm would each year help five to 15 foreign companies form subsidiary companies in China so they could legally conduct business in China since 2020 we have not formed a single such company many companies previously committed to going into China with a subsidiary company with its own employees are now opting to stay at home and license their technology or brand names to Chinese companies or contract with Chinese companies to have them distribute their products in China though we’ve seen a downtick in company formation s we have seen a big uptick in such transactions involving licensing and distribution as foreign companies seek to reduce their China risk also close to home our Law Firm has been getting a ton of phone calls from companies owed money by Chinese companies and municipalities these are not easier or cheap cases and it is therefore critical that we choose which of these cases are worth pursuing back to the big picture in June 2023 China’s jobless rate among youth hit 21.3% after having climbed for six consecutive months this was a record high in response to this China stopped reporting its youth unemployment numbers and the government made clear that anyone who discussed those numbers would be at risk of going to jail then a few weeks ago I’m sorry a few months ago the Chinese government came out with a new much lower number that was calculated entirely differently than the old one so as to not allow for any meaningful comparisons and to render it essentially useless to make matters worse those who conduct their own economic research or report what they are seeing of China’s economy are at risk of being imprisoned if their economic reporting is is contrary to what the CCP wants people to believe and just last week China’s State security Ministry made clear that it would be strengthening China’s economic propaganda and it would be on the lookout for those disseminating negative views on China’s economic and market prospects can investment Banks and financial analysts go to jail for issuing sell orders or for predicting that def in China is likely to continue what about warning investors that a particular Chinese company is cooking its books nobody really knows whether these sorts of things are going to be allowed which is exactly the way the CCP likes it I can tell you that I would not be giving this talk in China it is also becoming increasingly difficult to find essential information about individual Chinese compan companies if you are going to pay a Chinese company millions of dollars for goods or services or provide a Chinese company with millions of goods or services millions of dollars worth of goods or services you are at minimum going to want to be sure that that Chinese company exists and is properly licensed by the Chinese government and you also likely will want information about that company’s ass sets number of employees intellectual property government fine history litigation history Etc in other words you are going to want to do your due diligence on any Chinese company with which you are contemplating doing any substantial business my Law Firm used to provide this sort of what we call Basic due diligence for $1,000 because it usually took us only a couple of hours we would spend very little time getting onto and downloading government documents and then we would spend the rest of the time interpreting those documents and crafting an English language report for our clients we now charge $1,500 for that and we should really be charging way more for this considering how difficult and time consuming it has become to gather this information China has tried to stop foreigners from being able to see this information at all but we have convoluted methods for getting around the various government blocks but the time and degree of difficulty has gone up and I know many other law firms that are no longer able to get this access at all in July in a piece entitled Wall Street gets a Chinese education the Communist party control always trumps the needs of investors the Wall Street journal’s editorial board stated that the big surprise from this week’s slump in Chinese company’s stocks is that people are claiming to be surprised president Xi Jinping has made plain for years that he intends to bring ever greater swas of China’s private economy under the state’s control guess what Wall Street he meant it that was all a quote from the Wall Street Journal and the right because for the CCP the Chinese Communist Party the economy is a means to an end with the end being a socialist State fully controlled by the CCP do not forget Xi Jin ping and the CCP are marxists and marxists believe that after capitalism comes socialism and after that comes stateless communism China has been moving along Marxist stages of development since Ma and Xi Jinping appears to believe China is nearing the socialism stage so it can start jettisoning more and more capitalist elements and China’s increasing restrictions on expectation on information are just one part of that another part of that I just read this yesterday is that there’s an investment Bank in China which anonymously has complained that they are spending onethird of their time reading Xi Jinping thought because they’re required to do so um I mean China is becoming more and more more and more Marxist and that tells me that we should not expect things to get better in China soon with respect to its economy but not everything about China’s economy going down is necessarily bad for foreign companies China has also been ass set by deflation for the last four months but this has led many of its factories to reduce their prices last week I wrote a blog post about how my Law Firm has clients that have gotten their Chinese factories to reduce Pro product prices by as much as 25% by agreeing either to buy more product or to buy product for longer we also have clients who have gotten 15% price reduction s just by asking I would though urge anyone who is Seeking a factory price reduction from their Chinese Factory to be very careful in doing so because doing this incorrectly can lead your factory to determine that it no longer wants to do business with you and just keep your molds your money and your IP and whatever else you might have with them including maybe keep one or more of your employees hostage in China despite all of China’s problems most of our law firms clients that are making money in China plan to stay in China until they are no longer profitable there I mean why not if they’re making money there now a lot of them are lightening their footprint there so that they can keep making money while reducing the risk but virtually all of them are still there now as for our clients that have their products made in China most of those companies would like to leave China but mostly because it can be difficult to find a good substitute for a Chinese Factory moving production entirely out of China is not going as quickly as I would have thought it would if you had asked me in 2018 um what percent of our clients would have left China by now I probably would have said at least 50% but it’s it’s definitely not that high uh China is still a global manufacturing Powerhouse with a skilled Workforce that is unmatched in scale and it still produces a huge number of products better and cheaper than any other country but in the last year and especially in the last six months we have gotten so much New Mexico business that it would not surprise me if our Mexico manufacturing work starts outpacing our China manufacturing work by the end of this year I mean just last week Mexico surpassed China in product sales to the United States um Fred Jonathan and I were talking about this before we went live um yesterday I spoke in Utah and one of the other speak speakers a professor talked about how China was still the leading supplier of product to the United States by revenue and I turned to another speaker and whispered I thought Mexico surpassed China just last week and he said yes and I looked it up and it’s true so that’s um a pretty amazing statistic and it’s a statistic most people are not aware of uh and I think that’s uh due in part to the fact that many American Business people have essentially been trained not to speak ill of China because if you’re going to China you really shouldn’t be doing that um well in closing my key takeaway with respect to China’s economic Outlook is that things are Grim from declining foreign investment to ballooning corporate and Municipal debt the warning signs are flashing red and prudent risk management is essential and if you’re doing business in China or with China I am not telling you to get out entirely but I am telling you to check what you’re doing and try to figure out ways to reduce your risk uh big companies are definitely doing that um and we’ve seen a lot of companies do that since um Russia invaded Ukraine a lot of our clients have started realizing that what happened there could happen to them in China with respect to um Taiwan so um that concludes my portion I will turn it back over to Jonathan and Fred thank you everybody thanks Dan and just in terms of format everyone we are leaving a large chunk of time at the end of this for Q&A we already have um a good handful of questions that we got ahead of time from some of you and uh I know I’ve seen some of you active in the chat already so if you have any questions that come up as as we’re speaking feel free to chime in we’ll keep an eye on that and we’re happy to Banter about the prepared part of our remarks is probably the least interesting part I think what you’ll enjoy is the fireworks as we as we dissect some of the questions that you throw at us uh so my part of this presentation is uh it it’s actually G me a really interesting uh bird’s eye view into China’s legal development uh particularly over the last 15 years or so I’ve been practicing law for 12 years now and um but been paying attention to China for much longer than that and I um I cataloged I didn’t catalog I I took everyone else’s work great work there’s there are a lot of good um think tanks out there that are keeping tabs on on China’s legal developments for a variety of reasons a lot of the human rights perspective um but in terms of I’d say material laws that really matter to uh foreign companies doing business in China there are let’s say 20 or so on the books that really matter kind of from a Global Perspective and then there specific industry specific laws as well U but in terms of these laws uh from from the time that Xi Jinping took over as head of the CCP in 2012 uh it’s been it’s been 12 years so basically my whole legal career and there have been some significant revisions China has started if you put these all on a on a map or on a a timeline uh so the earliest laws were passed in the 80s an acceleration in the 90s is trying to gear it up to join the WTO a good number that were passed in 20012 2002 as a direct result of China joining the WTO and but I’m most interested in the laws that have been amended recently passed or amended recently for instance some of the the most uh I’d say the scariest laws that have been passed there have been six passed since 2014 2014 the counter Espionage law 2015 counterterrorism law 2015 National Security Law 2016 cyber security law 2017 and then amended a year later National Intelligence law and then cryptography law in 2019 so to me this all speaks to uh the risk in and around doing business in China or with Chinese companies uh because we know with social credit system in China that these are all very important um enforcement mechanisms let’s call them to to get the uh you know any Chinese citizen whether they’re at home or abroad to cooperate uh with State intelligence so certainly there are issues um I’ve had some interesting conversations with us law enforcement that are focused on uh on China it’s called the China threat in the US and these are all very real and they happen it doesn’t make these don’t make the news all the time and certainly companies don’t like to dis close when they’ve been breached or when they’ve had some kind of security incident uh but these are these are real risks so those are kind of highlight and those all uh were pasted 2014 to 2019 so I’d say kind of a Xi Jinping coming and putting a big exclamation point in terms of what his focus is in terms of domestic security and International Security National Security uh some of the some of the other laws that have been passed uh passed or amended recently um have been the let’s say since 2018 so forgive me for reading through this laundry list but e-commerce law passed in 2018 food safety law was amended in 2018 uh advertising 2018 product quality 2018 import export Commodities amended twice in 2018 unfair competition law 2019 foreign investment law 2019 electronic signature law which made our lives quite a bit easier and probably yours too doing business in China um security ities law was amended in 2019 and I assume we’re going to see some more amendments to that as the uh public Securities markets have not been not been reacting well to to the news coming out of China or the lack thereof uh trademark law 2019 and then most recently the the company law was amended uh last year taking effect in 2024 uh in July of this year so certainly a lot of uh and this is only the laws mind you okay this is not the regulations we have laws and then we have implementing Reg ulations and so maybe I need to uh agree to do another webinar in in a month or two and just canvas all of the implementing regulations that that dovetail into these because that’s really where things happen um even though you know in China laws are very generally written the regulations also quite generally written um but they’re still very informative in terms of what uh economic policies are being enshrined in law and uh enforcement policies as well uh and and I always love to mention this that in every Chinese law that I’ve read in my career so far I’ve been at the firm for about five years uh every one of them has a national security and Public Safety carveout so that basically anything and this is only commercial laws that I’ve been reading but basically any law in China can be used uh as a national security uh Shield or The National Security can be used as a shield to implement the law uh or enforce the law disproportionately against any companies so that’s kind of par for the course it’s always fun when I finally come across that as I’m reading these in English and Chinese and I and I find the you know the gong anen carve out so it’s a lot of I’d say it’s fun but it’s it’s uh it’s academically it’s fun but realistically it’s I don’t like seeing that of course uh so in terms of the company law two uh I just want to focus on two significant changes uh this applies to all domestic foreign invested companies in China there uh these center around Capital contributions and corporate governance uh Capital contributions typic typically have not been really enforced for many years you know you set up a company in China your Capital contribution says 100,000 or a million USD or the equivalent and you have 40 years to pay in the capital contributions uh we represent some private Equity clients that have done deals in China and and that always comes up uh and we we sometimes we adjust for it but because it hadn’t been implemented or hadn’t been uh enforced uh we we were that was one of the items that we were okay kicking down the road uh but that is not the case anymore uh under these the new capital contribution requirements uh C companies only have five years within which to make sure the company is is capitalized sufficiently and unlike in the US you actually have to uh you us we can set up a company with $100 you don’t there’s no Capital contribution requirement or enforcement uh but China has significant Capital contribution requirements so we’ll still wait for the implementing rules around this but five years maximum for for all new Enterprises we don’t know how that’s going to be applied to existing Enterprises in China yet um the and uh I don’t know if it’s scary but it certainly is problematic for us or other foreign companies doing business in China the the the enforcement mechanisms for this are are quite strong so any the company itself can enforce this if if the capital contributions haven’t been met can so the company can enforce against the owners creditors uh can also enforce against the company as well if if there are commercial uh commercial requirements and the company hasn’t been sufficiently capitalized um and there’s joint and several liability for all business owners uh so if one of your shareholders doesn’t Pony up their Capital contribution it comes jointly and severly to all the others owners so you need to pick your business partners wisely uh and then for board members they have to send the demand letter to the shareholders for the capital contributions that are missing or they will be held personally liable for the contribution and and um uh and then the the result is of course for the shareholders that if you if you fail to make your Capital contribution it’s very easy for the company or the board to cut you out so uh as a corporate attorney this is uh depending on which side of the table I’m on I either love or hate these requirements so uh just depends on who I’m working for but very serious uh very serious requirements in terms of corporate governance there was one other thing I wanted to mention for any amid to large scale companies that are not state owned Enterprises with 300 employees or more they have to have one employee representative on the board of directors unless they have a Board of Supervisors so this was a requirement before for all state owned Enterprises but now any company that has 300 employees or more has to have an elected employee representative on the board so uh there actually quite a few other changes that I don’t have time to talk about right now but uh I consider these very sign significant from corporate governance perspective and from uh company capitalization or foreign direct investment um standpoint so I think that’s all I wanted to talk about certainly uh we have a lot more we can talk about but I want to save Fred some time and certainly save time for Q&A as well so Fred I’m gonna kick it over to

you well thank you Jonathan and just to give a little bit more context uh as far as my own Focus uh I primarily focus on intellectual property matters as as Jonathan mentioned also get more involved D in or or get get involved more generally um in manufacturing matters and other China business relationships my I lived in China for uh about 13 years uh and during that time I spent uh a few years working in the in the trenches of the anti-counterfeiting or the fight against counterfeiting so that certainly gave me a a quite a perspective on not only the sorry the risks associated with intellectual property protection in China but just more generally the the business culture in the country and the risks that accompany um business business activities there so I’d like to start off by giving offering some thoughts on where things are as far as um intellectual property protection um as Jonathan mentioned the the trademark law was amended in 2019 and last year I believe the the um the Chinese government basically shared a proposed draft of yet another revision to the to the trademark law um the public comment period for that has closed haven’t heard anything since but this uh the law the Amendments as proposed could bring some some important changes to not only to trademark practice but to this the strategies that companies need to follow when doing business in China uh for example one of the proposed changes is to um establish a requirement to certify use of a trademark at the moment in China you do not need to use a trademark um in order for in order for you to register it and then you can you can keep an unused trademark indefinitely uh or keep that registration indefinitely um even though there there there are avenues for third parties to challenge that but if if no such challenge is presented then you could potentially have a a trademark registration for a trademark that you don’t use for uh you know for for many years and this can be useful um because you can use those registrations in uh defensive fashion right you maybe you don’t want to use a particular name but you don’t want someone else using it so this is something that that might change uh one of the other Focus areas of the proposed amendments have to do with combating bad faith um trademark applications and registrations the um the more the most common example of bad faith in the trademark um world are what are what are called trademark squatters so basically someone in China takes your trademark and registers it with the authorities before you get a chance to do it and then once it’s your your time to your turn to try to register it you discover that someone else already did and it can be very difficult and costly um to try to get that trademark uh back in your own name and sometimes it’s not possible so uh it’s good it’s hardening to see the authorities paying more attention to the to this issue there have been moves uh positive Moves In This regard but there’s still a lot of work to to be done in terms of making sure that um opportunistic parties don’t get to make profits out of playing with the with the IP of of others um in on that note it is important to mention that IP violations IP infringements continue to to be a part of the Chinese business landscape um again there there have been positive developments in terms of enforcement but there are still there are still problems and and that’s important to keep in mind and for a company doing business in China or about to enter the Chinese market uh for the first time it is absolutely critical to pay attention to these IP issues you do not want to be in a situation where your your lack of registered trademark prevents you from not only selling your products but potentially entering into uh lucrative business relationship so definitely on the on the very short list of of China musts as um either you you start doing business there or you assess where you are currently and and what you and audit your your legal your legal needs some some other some good news uh in terms of this speed at which um trademark applications so applications to register trademarks are being examined um it is quite fast in some cases it is shockingly fast how how how quickly we hear back from from the China trademark office um it is frankly embarrassing that here in the United States um processing times have um have multiplied and in length and contined to to do so um and of course you know I understand that the the Chinese government has policy tools at its disposal that our government doesn’t but still let’s just looking at the bride side you don’t have to worry about those um delays in China if you’re trying to register a trademark the the bad news in that regard is that we are seeing increasingly strict um examination standards especially when it comes to uh likelihood of confusion that’s not what they call it in China but that’s the analogous American concept um we are seeing some rather questionable and baffling results that are preventing um companies from abroad from from registering their their trademarks in China we no one from the China trademark office has come out and and said this but the the sense that we are getting is that the the trademark office is adopting the the the Viewpoint that the Chinese consumer is not going to be able to pick up on much uh Nuance when it comes to foreign language Trad marks and there might be something to that to to be honest uh I can only imagine how um your average American would look at two Chinese trademarks and try to figure out whether they’re similar or not um but it is we suspect uh we suspect it’s become a bit of a uh of a crutch for for the China trademark office to to deny trademark applications which is something that I mean they don’t again they’re not they don’t want to deny trademark applications for the sake of denying them but they do want to um trim the size of the China trademark register which by the way is something that USPTO wants to do as well so so just just keep that keep that in mind um more broadly we are seeing more sophistication on the part of Chinese parties when it comes to licensing agreements um I mean to put it to put it very bluntly perhaps 10 years ago the Chinese company wouldn’t have bothered to seek a licensing agreement licensing agreement Chinese style would have been for them to just start using your IP and then see what what happens so we are seeing the that concept of of Licensing and wanting to do things by the book um begin to take um to take root in in China so I’ll leave it there as far as the IP part of it but of course if anyone has any questions I’d be I’d be glad to to take those on some turning to to trade more broadly or to the the China trade relationship or the China relationship more more broadly so one of the I mean taking kind of doing what Jonathan did I mean in terms of of placing ourselves in a in a historical uh um context I was in China when uh I was living in China when when Xi Jinping came to power and in a very short period of time the changes um were palpable uh to be clear um China was no Paradise for foreign businesses or for anyone um prior to to shiin Ping’s um uh arrival um but there were changes um and I think as as as it’s often said when someone tells you that this is what they want to do believe them I mean this as Dan was that that uh that quote from the Wall Street Journal that’s absolutely true I mean um look at the um look at the bios of these leaders look at what they write um it’s it’s very clear that they have a particular Vision um as to how they want the country to to to run um and they’re trying to do all they can to to execute that Vision um I don’t know if I don’t know if our problem is that we can’t quite comprehend how someone would want that to be the vision um for their country to follow or whether we say things that we don’t mean so we assume that the Chinese are the same way but um certainly at the top levels of of the CCP they this is this is what they want um in terms of of trade this might be a bit of an exaggeration but only a bit um if if China could stop relying on outside trade altogether um the CCP would be delighted with that they don’t see free trade as a positive objective in and of itself as as we do to some extent um so so it’s important to look at legal developments in China um through that through that prism as Dan said we we are definitely seeing um quite a trend in the direction of near Shoring and it’s um it’s related Trends so you have reshoring which means bringing back operations to your home country there’s um ally or friend Shoring which is basically taking operations to a country that might not necessarily be that close to to your home country but which shares um certain core values and I would argue that in the case of Mexico in addition to it being the best example of near Shoring because we do share a 2,000 mile border with them there is also that element of Ally Shoring um given given the the the different tonic uh of that of the US Mexico relationship as opposed to the US China relationship um there’s a lot we could talk about in terms of geopolitics in terms of of trade um but I want to I just want to focus on a couple of concrete actionable items so as part of the of the geopolitical struggle that’s going on between mainly the US and China but to a larger extent the west and and China we have seen the the weaponization uh is that the correct um the correct uh noun of uh forced labor laws now the US has had forced labor law on the books for a long time this is this is not something new but what is somewhat new or very new really is their use as as policy tools um in this um geopolitical context uh you can I’m pretty sure that no one but China would be getting um this kind of treatment when it comes to the to the enforcement of forc labor laws and we are seeing we are seeing this become a quite a priority um the irony is that we have Force labor problems here in the United States and they don’t seem to get nearly as much attention as the ones in in China but that’s not to say that the problems in China are not serious and whatever you think of those um of what’s happening in China whether you believe that it’s exaggerated or or not true at all US Government believes it’s true and that’s all that matters and you can you can um you know argue all you want that that this is not what the US government thinks it is but until that um Outlook changes companies that uh import products made in China uh are going to have to be very careful and not just companies that import products made in China and I think this is sort of the new phase we’re entering um products made in other countries might have Chinese components that render them problematic products made in other countries might be suspected by the US government of having components made in China and that’s going to be a problem for you so definitely an issue worth um worth keeping in in mind and this is something with the potential to affect any importer um if you think that your uh import volumes are insufficient to to draw the attention of the of the government well uh I I would not advise uh uh that you do that um we yeah I mean I I would I would I would and I would not trust uh China suppliers who say look we definitely we don’t have a problem you don’t have to worry about this right so uh a very serious issue no doubt and finally kind of looking at the big picture in terms of the the economy and these woses that that Dan described we we we are seeing um some of the manifestations of that just yesterday I spoke to someone who is dealing with a dispute of the type we’ve been we’ve been seeing for for a long time but I think now with with the the the economic situation that the pressure on on on Chinese economic actors is is growing um and not only on them it’s also growing um on people elsewhere so for example in this particular situation the um the person I was talking to was facing a collusion of sorts between um his main client and the factory in China um something of a circumvention issue right so um different different man St ations that that can can happen so um on that note uh I’m I’m going to leave it there and I look forward to interacting more with the audience um through the the questions that have been posed thank you thanks Fred so we’ve got about 20 minutes before we’re done let’s let’s kick off with a couple uh couple questions first is it safe to go to China right now that is uh everyone’s asking that and maybe Fred since you have family Connections in Taiwan maybe we add Taiwan as well so is it safe to go to China and Taiwan right now well as far as Taiwan obviously the big risk is concerns what China would do right I mean I I think Taiwan is you know one of the safest places on Earth I mean if the Taiwanese were were left to their own devices they would you know they would continue running uh uh their country in the the same wonderful way that they’ve been doing um but of course it is I mean undeniably it is it is a reality right um part of the problem with with the whole cross Straits um situation is that there is that potential for miscalculation that escalates things right I think often when people analyze when experts analyze a situation they’re looking at things in in in a very controlled way where well if this happens then this is what the Chinese authorities are going to do but all that could you know all that could could um go by the way side if you have God forbid um some incident where you know planes Collide um Taiwanese feel that they need to bring down a Chinese airplane I mean obviously and those are things that that cannot be um cannot be ruled out right um so I was watching a documentary recently about the uh the shoot the the shooting down of a Korean um airliner back in 83 by the Soviets right I mean clearly that’s not what they wanted to do but they did and you know things had the potential to to get um to get out of hand by the way I also learned that that was the second time that the Russians had um that the Russians shut down a Korean Airline or the first time um the pilot managed to to land in in a frozen lake and nothing happened um as far as as far as China um I think I would summarize the risk and I know Dan has um more to say on this but I would summarize it in the following way I think the actual risk of getting in trouble if you go to China uh if as a as a random American going there I think the risk is very low but it’s it’s not zero um so um and and I can tell you that the risk if you go to England the risk if you go to Canada the risk is zero I mean nothing’s going to happen to you just because you you happen to be an American going to Canada that risk is not zero in Canada in China sorry but also and I think here is where people have to be very honest with themselves um not everyone is going to be treated in the same way right so uh if you have if you’re engaged in a in a business dispute with a Chinese company all of a sudden that changes um the the risk uh calculations right um people um like myself who’ve worked for the federal government well um that is something you you have to keep in mind because um you don’t know how the Chinese authorities are going to to to look I mean especially in the case of of someone who also happens to be doing business in China um well people might draw conclusions that are inaccurate uh about what you were really doing for the US government but again that’s something on your resume that’s different uh if you have family in mainland China you have to be very careful about that right because obviously that’s going to create pressure points that others might might not have right also how valuable are your activities in China right I mean sometimes I I do sometimes get questions from from people doing business in China who probably overestimate uh the risks and overestimate how much the Chinese authorities would care about them um but there undoubtedly are people out there that are going to have more uh more complicated situations and we know this to be true because we’ve seen what’s happened with um certain business Executives um and certain you know other other other other people um so that’s that’s my take on it Dan anything you want to

[Music] add Dan you’re

muted I’m sorry what all I will add is that it really depends on who you are China knows who you are they know what you’ve written what you’ve said uh what you’re doing and so if you have any reason whatsoever to believe that you might have problems in China if you have any disputes with anyone in China if you have any sort of background that might um not mix well with China I would Rec we perform something what we call a personal risk assessment where we assess someone’s risk and much of the time we say it’s always low R almost always low risk but there are definitely times where we say look you know we found these things that you wrote um you might want to send somebody

else I agree with that as well uh depends of course we’re all personally gauging our own risk uh if you if you happen to be a on a Blog that that is sometimes critical of China’s governing party you may have to think twice about about when and how you go to China under who invitation uh Dan what what do you see about the I think you read news Well actually Fred reads a ton of news as well um what are your thoughts on this being an election year and and China’s current Outlook in terms of a a Biden win or a trump

win well I’m going to give a very short answer to that and say that

it’s it’s going to be very hard to say I mean if Biden wins obviously things will mostly stay the same if Trump wins we don’t know what’s going to happen that’s my

view okay let’s let’s talk uh International because uh that’s what we’ve been thinking about a lot lately and dealing with uh what is the more accurate term for what’s going on now is it is it drisking or decoupling and what what’s the better

strategy um and I I can go first on this okay go ahead yeah did um in my world um it’s always drisking you know everything I do to help clients is drisking we’re going into China but at the same time we’re drisking it’s the it’s the all of my contracts all the contracts that we draft from a commercial perspective are drafting the marriage contract with the prenup written in uh the footnotes right so that’s normal um and I I see every bit uh as as drisking right there are and I think drisking is absolutely the smart play decoupling I think is more of a one that gets thrown around in higher governmental circles uh because anyone with any supply chain ties to China do not want to decouple and and really it’s impossible you know we I was a conversation with a Mexican attorney just last week and talking about some of the inputs uh you know their automotive parts manufacturer I think Fred you and I were on that call together uh Automotive Parts uh and even though all of the substantial transformation for the goods is occurring in Mexico all of the raw materials are still flowing by way of China and so the idea of decoupling uh I think is it may be just a farce it may be not even technically feasible in the next five decades but at least for um you know Dr risking is absolutely the right way to think about all of these and I think companies going to Southeast Asia going into Latin America yeah going into uh Africa as it continues to develop I think that that Dr risking is absolutely what has to be topmost in your mind I I agree drisking makes sense I don’t even know really what decoupling means because people say are we decoupling from China and the answer is yes we definitely are because many companies and our government are trying to reduce our business with China and so if you use decoupling as an ing word then yes we are decoupling but I think people you I don’t know what it means because some people use it to mean are we going to completely cut off everything from China that’s how you seem to use it Jonathan so I don’t like the decoupling word because I don’t think any two people are necessarily using the same definition whereas drisking yeah if you use de-risking like are you trying to minimize reduce your risk then everybody’s doing that and everybody should have been doing that with every country for the last 50 years I agree so what are the tangibly what are companies doing to uh to reduce their risks in and around China we we’ve touched around a few of these but what are some things that you per you two are seeing in your own China work right

now go ahead sure sure I mean sure so so I mean deer risking obviously is such a broad term um for example if if you want to get technical um making sure that you register your your trademark in China is a form of Dr risking right I mean you will be not eliminating uh certain risks but you will be um doing a lot to to to minimize those risks having proper uh contracts in place with your suppliers having proper contracts to govern the manufacturing relationship to govern um the disclosure of confidential information all of that are we could say micro um micro the makings um micro mitigations of  risk more broadly of course then you start getting into um you know some companies are saying okay fine we’re going to move all of our operations to another country but in many instances it it really does derisking really captures it because you have situations where companies are saying okay we’re going to still manufacture in China but we’re going to go into another Market as well to manufacture or you know what 15 years ago we were basically saying forget the rest of the world all the handbags that we need to sell we will sell in China companies now are beginning to say okay you know what um I think we need to start looking at other markets and we need to We Can’t rely entirely on on China for for our success and not only that we’ve seen what happened with Russia and the Ukraine and it’s not as unimaginable now that something like that could happen with with China so companies are saying okay well we do need to you know we can’t put all of our eggs in in that basket what I’ve seen that is interesting can I jump for one second Dan there a couple raised I think and then and then I’ll kick back over to you so one uh Fred you and I talk about this a lot is on the trademark side is we you go straight to the China trademark office for filings because uh of potential problems I know you you mentioned that on several calls that we’ve been on so that’s one thing that I uh you know people that people smart people are doing rather than uh go through the international uh protocols the other one is um and now and now I’ve lost so I may have to kick back over to Dan oh no the other the other is uh I’m in a transaction I’ve been in a transaction recently doing a lot of due diligence International due diligence uh looking at contracts and uh companies valued acquisition targets valued at uh 10 million plus they’re doing several million dollars worth of of um of work s million dollars of purchases from their Chinese supplier all on purchase orders they’ve been doing this for years and so I’m I’m looking through the due diligence packet and I see only purchase orders for large amounts regular purchases and no uh Master Services agreement Master manufacturing agreement to govern anything if it goes wrong it just I mean it it just blows my mind uh some of the things that I see when I’m doing due diligence on whether I’m which whichever side of the of the table we’re sitting on uh you know if companies are still operating on purchase orders and think that that gives them some kind of security or guarantee or anything quality control I mean nothing the purchase orders are functionally a a handshake across the water yeah and what what I’m seeing is that in the last three or four years we’ve had a number of companies have us essentially audit what every single thing they’re doing in China to try to reduce their risks and in every instance we have found some things that should reduce their risks but what I find so interesting is the companies that ask us to do these full-fledged audits they are the companies that are doing almost everything right so it’s not like they woke up one day and said I need an audit um no these are mostly bigger companies that have essentially been self- auditing every single day and that’s a problem and it’s a problem because as Jonathan raised there are all these companies out there that are just doing absolutely everything wrong and then they they put themselves up for sale or something happens and it it’s it’s bad for them and so um I don’t know how um that can be solved other than to say that if you’re doing business with China um you should figure out um how you can reduce you should try to figure out what your risks are and how you can reduce them what can companies do to protect against forced labor violations that’s a tough one and uh I hate to sound glib but really the if you’re looking for absolute protection against the possibility of getting dinged for forc labor violations I mean you’d have to you’d have to decouple from from China I mean that that would and and that and that is very tough right because even if you said said well I’m going to manufacture in the US and I’m going to use um materials from the US it it’s very very difficult to completely I mean if you’re in in manufacturing it’s going to be very difficult to completely eliminate that um that risk obviously the the closer you are to the problems the the the greater the risk so if if in that scenario that I described where you are manufacturing a product in the US and you have the odd piece that comes from from China the other component that comes from China risks are going to be lower but if you are Manufacturing in China getting finished products from China you’re you’re going to you’re going to have a risk and there are the realistic answer is that there are certain indicators that you can look for that might be able to give you a sense of relative reassurance um but but overall it’s it’s very difficult to completely eliminate that risk the the best you can hope for really is to have a strong compliance program a compliance program that uh that is honest not not just something on paper so that if and when uh a problem arises and US Customs starts looking at your practices you can say well look here’s here’s what we did I mean we we we we genuinely tried um and and and it’s not necessarily that they’re going to say you can continue doing what you’re doing it’s that they’re going to say okay fine we’re not going to you know we’re not really going to punish you for things that happened right but um but it doesn’t mean that you get to go um back to to business as as as usual um one thing to keep in mind question here Fred how many how many layers deep do you have to go in the supply chain um according to the law you’re you need to go all the way all the way to the uh you know if you’re making wine you have to go to the um you know to the to the grapes that were were being um that were being um uh picked uh if you’re making um products with solar panels you’re supposed to go back to the sand that was um you know quarried to make uh you know the the materials that go into the into the panels so yeah you’re supposed to be going back um and that’s a challenge because your Chinese suppliers probably won’t know you know what you know they’ll know one tier they’ll know who the who the tier below them is maybe two tiers um but but if it’s if you’re talking about a product that underwent um uh transformation at different levels um that tracking you know that that that chain of custody is going to get a blurry quick and we’ve been writing those into our uh Master Services agreements lately uh you know in the last year especially developing addendums for our contracts to deal specifically with forced labor making sure the companies have forced labor our clients have for Force labor policies in place uh requiring our our immediate suppliers to consent to that to consent to our audits our information requests and uh you know that’s uh I don’t think we’ve had any that have been pushed at least not in my on my desk I haven’t had any that have been pushed beyond that level but that is certainly the first line of defense is making sure that from the company your from your you outward down the supply chain uh you know push those legal requirements as far down as you can and uh and hopefully that will put you in a better position uh when you need to have that you need to have that in your contracts I mean that is that is um the bare minimum right you need to have for Lang Force labor language in your contracts otherwise I’ve I’ve done audits um not force labor audits but other other compliance Audits and there is there is a particular kind of audit when you open your you know you have your clipboard you take a look at the checklist you ask the first question and the factory gives you a bad answer like for example who’s the person in charge of you know IP security at the at the company we don’t have one you know it’s going to be a long day so it’s the same thing if US Customs comes knocking and they say okay let’s just let’s just start with the basics give us a sample of your you know your your supplier agreements oh there’s no mention here of forced labor you know it’s only going to get worse from there which is why it’s so dangerous to just be buying your product another reason why it’s dangerous to be buying your product on just POS because I don’t think I’ve ever seen a PO with forced labor language no definitely not Dan we’ve got time for one more question we actually don’t have time but I still want to ask you um can you comment on the bias of Chinese courts against Western companies litigating in China what’s the let’s just say take it as a more General generality what’s the best way to litigate disputes or prepare to litigate disputes in China okay um I would say that 98% of the time the courts are fair if you’re litigating um over an IP dispute involving your rubber ducky you’ll probably get a fair trial if it’s involving Cutting Edge semiconductors or something else of a national security interest or political or military interest to China you won’t get a fair trial great thanks Dan uh if we I think we had some Q&A we didn’t get to we certainly will uh we can address those in future blog posts at chinal law blog.com thanks everyone for tuning in hope we had a good time we’ll I think this we’ll definitely make this an annual thing and certainly we’ll have other webinars uh this year that will address this and maybe we’ll be lucky enough to speak and see some of you in person thanks very much everyone thank you thank you

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