There is an old saying how lawyers do well in good times and in bad times; just not when everything stays the same. Times are mostly bad right now with China, and our China lawyers have in 2019 seen and likely will continue to see in 2020 a lot of the following:
1. China is cracking down like never before on foreign companies that do business in China. See How to Avoid China Prisons: Know YOUR China Risks. China is worried about its falling economy and the concomitant citizen unhappiness that brings. By going after foreign companies, China makes money on fines while reducing competition for its domestic companies, while looking tough and concerned to its own citizens. Add in China’s perpetual anger at any country that dares try to cross it (right now that anger is mostly focused on Sweden, Canada, the United States and Germany and trade from those countries). This crackdown on foreign companies has led many to seek to make sure their China compliance house is in order. Our China IP lawyers are conducting IP audits to make sure foreign company IP is in order. Our China employment lawyers are conducting employer audits to make sure foreign company employment documents and systems are in compliance. Our China business lawyers are conducting audits to make sure China company structures and taxes are in order. And many companies are basically just asking us to do whatever it takes to make sure their companies are in full compliance with all of China’s myriad laws going into 2020.
My law firm just wrapped up its all-firm retreat this weekend where one of the recurring discussions was how we are getting all sorts of new questions from foreign companies that are uber-concerned about not violating China’s laws. The following are some of these new questions:
1. Is it okay for a couple if our employees return to China with laptops purchased from outside China?
2. If we hire someone from XYZ big Chinese company will the Chinese government use this as an excuse to come after us?
3. Is it okay for us to block some of our China employees from seeing XYZ information?
4. Is it okay for us to refuse to sell X product to this State Owned Entity because we don’t trust them not to steal our IP?
The above sort of things were no doubt happening with the same regularity in 2018 as in 2019, but foreign companies are now asking their lawyers these sorts of things because they are (wisely) seeking to do whatever they can not to anger an increasingly vengeful Chinese bureaucracy.
2. China is cracking down on foreign companies like never before. I realize this is the second time I’ve said this, but it absolutely bears repeating. As part of that crackdown, China has instituted an Orwellian company tracking system applicable to all foreign company in China. See China’s New Company Tracking System: Comply, Comply, Comply:
This new database will allow the Chinese government to better “track and monitor the activities of all businesses in China” and to better monitor “how companies comply with the law.” A test version of this new database — called the National “Internet+Monitoring” System — will likely be released this month with a final version due by the end of the year. When completed, this new system will target individual citizens and businesses, and it will consist of three parts: a master database, a blacklisting system, and a structure for punishments and rewards.” It will allow the Chinese government to see whether a company has complied with regulations “or engaged in the potentially vague definition of ‘good behavior.’” The plan is to give scores to every company based on their behavior, with higher scores leading to “lower tax rates, better credit conditions, easier market access, and more public procurement opportunities” and lower scores leading “to the opposite. . . . even blacklisting.” Each company will “bear the burden of tracking whether their business partners, such as suppliers, are adhering to government rules.” It is “no exaggeration to say that the Corporate SCS [Social Credit System] will be the most comprehensive system created by any government to impose a self-regulating marketplace, nor is it inconceivable that the Corporate SCS could mean life or death for individual companies.” The data “companies will need to provide could be ten times more than the current requirement.” Companies that have been “content to drift around in grey areas . . . . can’t do that anymore,” especially since “a simple violation could have significant consequences.”
A foreign company’s China compliance failures can lead to monetary fines, public shaming, and shutdown. You can bet companies will be paying their China lawyers to keep them off this blacklist. See China’s corporate social credit system blacklist that companies pay US$2,500 to avoid and note that none of our China compliance lawyers charge even four figures! China social credit system audits will be flying off the shelves in 2020.
3. The WTO has in many respects ceased to function, and the United States and China are constantly imposing and retracting tariffs. Relations between China and the EU and between the United States and the EU are only slightly better. See China and the West are Decoupling: Please Act Accordingly and U.S., EU And China Could Be In A 3-Way Trade And Sanctions War Within A Year. All of this has been and will keep international trade lawyers incredibly busy handling tariff, duty, and custom of origin issues. My law firm’s U.S. and Spain offices saw a noticeable uptick in this work in 2019, and if the United States does impose the tariffs it has been threatening against the EU and various of its member countries, the amount of this work will shoot off the charts.
4. The US-China Phase One Trade Deal is a ticking time bomb that will probably explode before the Presidential elections truly kick in and certainly before the Beijing Winter Olympics in 2022. The Phase One deal is little more than a well-orchestrated kick the can down the road stalling tactic by both sides. The United States (read President Trump) agreed to this deal for election reasons, and China agreed to this deal to give it more time to stabilize its economy. China is unlikely to make the purchases required under this deal, and that will likely mandate a new US crackdown against China products for election reasons.
There is a fast growing movement to boycott China because of Xinjiang and/or Hong Kong, and that is also generating a movement to boycott the Beijing Winter Olympics. As everyone knows, China is incredibly sensitive to these sorts of things (See what it just did to Arsenal for Mesut Ozil’s human rights stand). China will lash out against those countries that are calling for boycotts (it already has) and it will probably do so in ways that will cause the U.S. and the EU to engage in counter-measures. I see even this micro deal being frittered away either in its entirety or at the edges. And let’s be clear: this tiny deal will not change the geopolitical realities that have caused so much tension and will cause even more in 2020.
Even if things do not worsen as between China and the West, foreign companies will — I am 100% sure — continue to do what they can to move their production out of China in 2020. This generates new legal work for the China side and all sorts of new legal work in the new country or countries in which the manufacturing moves. See How to Leave China AND Survive and How to Avoid Problems When Manufacturing Overseas. In the last few months we are starting to hear more from and about Western companies looking to reduce their China footprint/trade so as to mollify their employees and consumers that have “had it with China human rights violations.”
5. The desire by wealthy Chinese citizens to secure passports in other countries is huge. See e.g. today’s big story on the woman who ran a multi-million dollar operation bringing pregnant Chinese women to the United States so their newborns would have U.S. citizenship. I remain convinced that more than half the incoming U.S. business deals our law firm handles from China are generated in large part by someone’s desire to garner U.S. citizenship. Based on what our United States and Spain foreign direct investment lawyers are seeing and on what we are reading, it is apparent that the desire by Chinese and Hong Kong citizens to secure U.S. and EU visas will continue to accelerate. EB-5 visas are incredibly backlogged in the United States, and our immigration lawyers are seeing a big shift to Chinese individuals seeking other sorts of U.S. visas. E-2 visas via third-party treaty countries like Grenada are and will no doubt continue to shoot through the roof along with Golden Visas in countries like Spain.
Bottom Line: Foreign companies doing business in China will need to spend even more for China compliance help in 2020. Foreign companies that have their products made in China will continue moving production elsewhere and thereby generating new legal work both in and outside China. The trade/technology/political/military/human rights war between China and the United States and between China and the EU will not dissipate in 2020, and they will continue to generate all sorts of tariff, customs, and country of origin issues. Immigration from China/Hong Kong to the United States and to the EU will also pick up in 2020.
What do you see for 2020?