The air is getting hotter
There’s a rumbling in the skies
I’ve been wading through the high muddy water
With the heat rising in my eyes
Everyday your memory grows dimmer
It doesn’t haunt me like it did before
I’ve been walking through the middle of nowhere
Trying to get to Heaven before they close the door
You broke a heart that loved you
Now you can seal up the book and not write anymore
I’ve been walking that lonesome valley
Trying to get to Heaven before they close the door.
When you think that you’ve lost everything you find out you can always lose a little more.
The above is from Nobel Prize Winner Bob Dylan’s song, Trying to Get to Heaven, and I apologize for quoting so much from it, but it is just so spot-on regarding the US-China cold war.
1. The US-China Trade War will continue and probably accelerate.
Way back in 2018, in China, the United States and the New Normal, we wrote how companies that sell Made in China products to the United States need to recognize there will be no quick end to the US-China trade dispute and to start preparing accordingly. This post led to more than the usual volume of hate mail, most of this coming from “China consultants” who prefer to blame our blog for putting their China gravy train at risk, rather than recognizing that the downslide in China-US relations is doing that.
Right around that same time we got a bunch of emails from readers and clients essentially asking how far we see this movement out of China going and how we see the US-China trade war ending.
My answers to both of these questions have so far remained pretty much the same and they are as follows:
I see many foreign companies leaving China now and I see that exodus continuing. It would hardly be an exaggeration to say that on at least one level, nearly all of our clients would like to cease having their products made in China. Part of this is due to the hassles and the hard times they have gone through in China and part of this is due to the grass always being greener on the other side. But to a large extent, these (hurt) feelings are mostly irrelevant. What’s relevant is whether these companies can do their manufacturing in a country other than China and whether their company would be better off doing so. In large part the answer to the second question will more often be yes than no but the answer to the first and more important part will more often be no than yes. Put simply, most of the companies currently having their products made in China have no choice but to continue having their products made in China. No country comes close to matching China for its combination of manufacturing sophistication and low cost and until this changes, the overwhelming bulk of companies having their products made in China will continue to do so.
I do not see an end to the US-China trade war and that is why I call it the new normal. The US will not back down unless and until China truly opens up its economy and I do not see that happening. Instead I see the tariffs sticking and maybe even increasing. President Trump has said trade wars are easy to win and it would seem he truly believes this. He believes he can only win this trade war with China because China will either back down or Western (especially US companies) will move their manufacturing out of China due to its increased costs. But see How to Lower your Product Costs: This is China, for how China is lowering costs and for how you as a product buyer can take advantage of this. JP Morgan today forecasts tariffs will eventually be put on all US-China trade and I essentially see the pretty much the same thing. See JPMorgan is now forecasting tariffs on all trade between China and the US — and it could cause havoc for Chinese stocks.
2. How to protect your company when leaving China.
If you are going to leave China for another country, you will need the very same protections in whatever country you go as you need for China, but specifically tailored for whichever country to which you are going. This may include the following:
1. NNN Agreements before you reveal your product specifications or design or customers or any other trade secret.
2. Mold/Tooling Ownership Agreements if you will be bringing your molds or tooling from China to the new country or if you will be paying (either directly or indirectly) for new molds or tooling in the new country.
3. Product Development Agreements if you will be working with your new manufacturer to modify an existing product or create a new one.
6. You will need to register your trademark to protect your brand name and your company name and your logo in whatever new country you will be going. This will likely be the most important thing you do.
3. The future of US-China trade relations.
Pretty much since day one of the tariffs, we have viewed the trade war between China and the United States as being about a lot more than trade. If it were really a trade war, it would be about money and it would have ended by now. It is instead — at minimum — a fight about how the United States sees China operating unfairly on the world economic stage by severely restricting (rigging?) its domestic market against foreign companies in large part to purloin foreign intellectual property. China has vehemently denied doing this and accused the United States of being against free trade.
The United States Trade Representative (USTR) yesterday came out with its Update Concerning China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation. Per this Report, China has made clear — both in public statements and in government-to-government communications –-that it will not change its policies in response to the initial Section 301 action. Indeed, China has largely denied there are any problems with its policies involving technology transfer and intellectual property. The report goes on to note how China’s State Council issued a 71-page “White Paper” in September 2018 that dismissed the Section 301 investigation’s findings and denounced U.S. actions as “trade bullyism” and how China has attempted to harm the U.S. economy by increasing duties on U.S. exports to China.
According to the USTR, these actions reveal the initial tariffs are “no longer appropriate to obtain the elimination of China’s unfair trade acts, policies, and practices. In addition, the burden or restriction on United States commerce of these acts, policies, and practices continues to increase, including following the one-year investigation period. Accordingly, under direction of the President, USTR imposed additional tariffs on approximately $200 billion of imports from China on September 24, 2018.”
I see this “no longer appropriate” phrase as meaning the U.S believes it must do more than just impose tariffs on Chinese goods entering the United States and we now see the United States engaging in some or all of the following against China:
1. Increasingly blocking Chinese investment into the United States.
2. Seeking to have China removed from the WTO.
3. Seeking to block high end technology from going to China. See the just released proposed Federal rules for accomplishing this.
4. Seeking to isolate China as much as possible. We see a situation where the United States will be presenting the world with a “you are either with us or against us” situation similar to the US-Russia cold war.
We take no pleasure from the above as China has been a massive part of our law firm’s Asia legal practice over the last two decades — we started this China Law Blog in 2006! But at the same time, as international lawyers, we need to remain nimble and we now focus as much on the rest of Asia and on Europe and on Latin America as on China.
What are you doing to prepare for the above? See Would the Last Company Manufacturing in China Please Turn Off the Lights. Where will you be going? Thailand? Mexico? Vietnam? The Philipines? Taiwan? India?