TRADE IS A TWO-WAY STREET
“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 20, 1986
US CHINA TRADE WAR – SEPTEMBER 21, 2019
Dear Friends,
SEPTEMBER 21, 2019 UPDATE — SEPTEMBER 30 SPEECH AT THE PETROLEUM CLUB IN HOUSTON TEXAS
On September 30, 2019, I will be speaking on China trade in Houston, Texas, on September 30 at a Techonomics Symposium. My topic will be: Current Topics Regarding Trump/China: Trade War, Fact & Fiction.
This symposium is dedicated to advanced topics in intellectual property, IP strategy, IP monetization and IPR trade issues with a global perspective. The intended audience is corporate leadership and in-house counsel responsible for developing, using and managing IP assets on a worldwide basis. It will be a day of high-level IP strategy for maximizing intangible asset performance and focusing on real-world issues. The symposium will emphasize the development and use of IP portfolios for ROI and monetization through global trade and commerce, for those truly accountable for results.
One can learn more about the symposium at the link above. See also https://www.eventbrite.com/e/symposium-on-global-ip-strategic-planning-ip-monetization-trade-tickets-70660335967.
In addition, my partner, Dan Harris, has written a blog post on the event at https://www.chinalawblog.com/2019/09/global-ip-strategic-planning-ip-monetization-trade-september-30-2019-in-houston.html.
AUGUST 7, 2019 BLOG POST
This blog post signals a change. Recently I brought in Fred Rocafort, a young attorney, to help me with the trade practice and this newsletter. Fred worked for the State Department in China and speaks fluent Chinese and Spanish. He then worked for years in China and Hong Kong as an Intellectual Property lawyer.
In this blog post, we will discuss briefly the Section 301 case and the ongoing negotiations, the transshipment problem, the False Claims Act and impact on importers and competitors, the impact of the Fabricated Structural Steel from China case on the US construction industry, the highest antidumping rate in history, and new Section 337 cases.
Finally, this has been a very difficult newsletter to write because of this very difficult period in US China relations. Because of constant criticism of China in Trump’s campaign to be President, one knew that Trump would be very tough on China. Meanwhile, on the China side, as described in more detail below, President Xi Jinping has made dramatic changes in Chinese society to create a more statist economy in order to preserve the power of the Communist Party. These two very different approaches have led to the trade conflict.
The objective of this blog is not to take one side or the other in the dispute but to focus on the reality as exists now in US China relations and spot and explain the issues so that readers can better understand the situation. Since I am a US trade lawyer, it is easier for me to find US sources and understand better where the US is coming from.
But the rhetoric has become so heated on both the US and China sides that readers may think I am trying to favor one side over the other. That is not my intent. My intent is to focus on the real issues so that both sides can better understand each other.
Although the US China situation does not look good now, Dan Harris, my partner, has recently written an article entitled “Why NOW Is A Very Good Time to Double Down on Doing Business in China”.
No situation is every truly black and white. It is grey.
Best regards,
Bill Perry
DEVELOPMENTS SINCE LAST BLOG POST
TRADE NEGOTIATIONS STOP IN MAY AS TARIFFS ON THE $200 BILLION GO FROM 10% TO 25%, POTENTIAL TARIFFS ON THE REMAINING $300 BILLION FROM CHINA GO 10% SEPTEMBER 1ST BECAUSE TRADE NEGOTIATIONS AFTER G-20 MEETING SHOW NO MOVEMENT CHINA RETALIATES ON AUGUST 5TH
Although the US and China were close to a trade deal with reportedly a 120 to 150 page agreement, in May 2019 China backtracked and redlined out much of the proposed trade deal. In particular, apparently the Chinese government backtracked on commitments to deal with Intellectual Property Theft and Forced Technology Transfer.
As stated in the last blog post:
it is very clear that the key issues discussed in the trade talks are: Forced Technology Transfer, IP Theft and Enforcement of any trade agreement. Trump and USTR Robert Lighthizer are not going to settle for an agreement with broad meaningless promises from the Chinese government, which are not kept. The US wants tangible results and promises that can be enforced.
In response to the Chinese government’s retreat, on May 9, 2019 in the attached Federal Register notice,MAY 9 FED REG 25% 200 BILLION, the US government raised tariffs on the third $200 billion in imports from 10 to 25%.
On May 17, 2019, in the attached Federal Register notice, MAY 17 USTR REQUEST FOR COMMENTS ON TARIFFS $300 BILLION, the USTR started the process of imposing a 25% tariff on the remaining $300 billion from China.
On June 24th, in the attached Federal Register notice, June 24.2019.Procedures_for_Requests_to_Exclude_Particular_Products_from_the_September_2018_Action, the United States Trade Representative (“USTR”) set up an exclusion process for the 25% tariffs on the $200 billion.
As a result of the meeting between Presidents Xi and Trump at the G-20 in Japan on June 28th, President Trump agreed to postpone the 25% tariffs on the remaining $300 billion with the promise that trade negotiations would start up again.
Trade negotiations started up on July 30 and 31st, but there has been very little progress. The Chinese government’s apparent new strategy is to wait for the US Presidential Election in November 2020 and hope for a better deal. But all indications are that the Chinese economy is hurting so we will have to wait and see.
In response to the Chinese strategy, on August 1, 2019, President Trump announced 10% tariffs on the remaining $300 billion in imports from China effective September 1, 2019. At that point in time, all of China’s exports to the US will be covered by tariffs.
On August 5, 2019, the Chinese government retaliated letting the Chinese currency drop in value to 7 yuan to the dollar, cheapening the Chinese currency so that Chinese exports will be cheaper to offset the US tariffs. Also the Chinese government stopped all purchases of US agricultural products.
See Donald Trump Accuses China of Currency Manipulation as Yuan Plunges. See also China to suspend purchases of US farm products in retaliation for ‘serious violation’ of trade deal between Xi Jinping and Donald Trump.
FRED’S TAKE—FRED ROCAFORT ARTICLE ON SECTION 301 AND TRADE NEGOTIATIONS
USTR Lighthizer and SecTreas Mnuchin are heading to Shanghai next week for trade talks. The choice of Shanghai is interesting. One analyst suggested that China was sending a message that “trade should be trade, and politics should be politics”. Even SecTreas Mnuchin invoked the spirit of the 1972 Shanghai Communiqué, which paved the way from rapprochement between the U.S. and China—and ironically the current mess in which the two countries find themselves. Perhaps the hosts are thinking of a different kind of optics. There is arguably no image that is more associated worldwide with China’s economic miracle than the Lujiazui skyline—look up “china economic miracle” on Google Images for confirmation. It is hard to reconcile the portrait of China as an economic villain with the Pearl of the Orient’s vibrancy.
Before delving into the prospects for the upcoming talks, it is worth taking a step back and remembering how we got to this point. As mentioned above, the Shanghai Communiqué that Mnuchin celebrated set in motion a process that would over time entangle the Chinese economy with those of the United States and other nations in an unprecedented way. Though Cold War realities were initially foremost in America’s thinking, soon China policy became undergirded by the idea that increased engagement with the U.S. and its democratic, free-market allies would inexorably take China down their same path.
There was certainly much change, but only to the extent that it allowed China to become an export powerhouse. One can imagine the thrill felt by foreign executives as they saw the first cases of Coke cross the Shenzhen River into Mainland China in 1979, representing a symbolic first step towards the final realization of the long-standing Western dream of opening up China. Yet 30 years later, in some fundamental ways little has changed for foreign business. Sure, it has been a relatively smooth ride for the KFCs, Colgates and Nikes of the world, who contribute mightily to the state coffers. But for most foreign businesses, the China experience has been a negative one. As a longtime China expat, I heard so many tales of woe that I became jaded. Business partners colluding with local authorities to edge out foreign investors. Rampant counterfeiting and infringement of foreign brands. Continued restrictions on market access. Capricious immigration policies. China nightmares remain unabated despite repeated government assurances of coming improvements. Mr. China remains as much of a cautionary tale today.
Ultimately, the Chinese leadership viewed and continues to view Reform and Opening as a transactional mechanism. Reform and Opening themselves were never the objectives; continuity of Party rule has always been. This is why China continues to pick and choose when it comes to reform, in a way that has led to a collision with the United States. By the time the 2016 U.S. presidential campaign got underway, it was clear to most China-watchers that the country would not follow the path of South Korea and Taiwan towards democracy, negating the one hope that secured for China so much patience over the years. In this environment, a certain Donald Trump decided that it was time to bring this issue to the forefront.
The current trade war’s first salvo was fired in March 2018, when President Trump directed the USTR to propose a list of products to be subjected to tariffs, in response to the findings of the USTR Section 301 investigation launched in August 2017. Ultimately 1,300 types of products were listed.
China retaliated with tariffs on 128 U.S. products and asking the WTO for consultations on the U.S. tariffs. After a visit to Washington by Vice Premier Liu He, China’s point man on trade, the two countries announced that there “was a consensus on taking effective measures to substantially reduce the United States trade deficit in goods with China”. This led SecTreas Mnuchin to declare that the trade war was “on hold”. However, and perhaps reflecting disagreements within the Trump team, shortly thereafter 25% tariffs on $50 billion worth of imports were announced. These tariffs went into effect on June 6 ($34 billion) and August 8 ($16 billion). China retaliated in kind.
In September 2018, the U.S. announced 10% tariffs on $200 billion worth of Chinese products, which were raised to 25% on May 5, 2019. China’s expected retaliation came on June 1, in the form on tariffs on $60 billion worth of U.S. imports.
Presidents Trump and Xi met during the G-20 summit in Osaka, Japan and announced a truce. The upcoming talks in Shanghai are the first high-level encounter since then.
The smart money is on keeping expectations low. As an analyst quoted by the SCMP noted, the “talks will only result in a small step”. Still, even a small step would be a welcome respite from the spiral of escalation we have seen over the past year. The key question is, what exactly would that small step be?
A rollback in tariffs is one option. The Chinese have previously demanded that all tariffs be eliminated before a deal can be reached. This is surely a no-starter for the Trump team, which in fact would like to keep some tariffs in place even after a deal is made. However, having slapped tariffs on $250 billion worth of Chinese imports, the U.S. side has plenty of room for maneuver, allowing it to simultaneously eliminate the tariff burden considerably, while still leaving meaningful tariffs in place.
On the issue of Huawei, the introduction of a bipartisan bill in Congress that would lock the Shenzhen-based telco into the Commerce Department’s blacklist complicates matters. Paradoxically, however, the Democrats jump onto the Huawei bandwagon could help the Trump negotiators in two ways. First, it moves the goalposts in a way that allows the administration to do a lot without accomplishing anything when it comes to Huawei. Second, Lighthizer and Mnuchin can now point to concrete evidence that a Democratic victory in 2020 might not deliver the Chinese from American wrath. Better the devil you know…
As for China’s side of the bargain, hopes of placating the U.S. with purchases of agricultural goods seems to have faded, as the Chinese come to realize that no amount of sorghum is going to get the U.S. to ease up on its core demands. It is critical to remember that the Section 301 investigation that provided the legal basis for the tariffs concerned Chinese government practices “related to technology transfer, intellectual property, and innovation”. In the absence of meaningful Chinese concessions on these areas, it is hard to see the U.S. budging at all on tariffs or Huawei.
The Section 301 investigation report provides a clear picture of what the U.S. would like to see happen with regard to these critical areas. Last month, China announced it will open up new sectors to foreign investment, and it may offer further liberalization. On the other hand, it is hard to envision the Chinese undertaking to amend laws such as JV Regulations at American behest.
As difficult as it may be for some Dragon Slayers to accept, not every single line of Chinese jurisprudence has been drafted with a nefarious, China-first agenda in mind. For instance, when Article 43(1) of the JV Regs call for “fair and reasonable” fees for the use of technology, it is reflecting the basic principle that, “In civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility shall be observed” (Art. 4, General Principles of Civil Law). Meanwhile, “Vaguely worded provisions and uncertainty about the applicable rules” are a hallmark of Chinese legislation, and serve as powerful levers with implications that go far beyond FDI.
One intriguing, if unlikely, possibility would be the introduction of more specific investment terms into a bilateral treaty (such as the income tax treaty or the consular convention). This could include language that places Chinese investment into the U.S. under additional scrutiny. It could also provide for special procedures that allow companies such as Huawei to obtain technology while providing certain safeguards. This approach would allow the Chinese to save face as far as its own legislation is concerned, while pleasing the Americans (who, given the current tenor in Washington, are unlikely to care too much about any protestations from Brussels or Ottawa regarding this side deal).
Speaking of unconventional wisdom, the possibility of non-trade elements playing a role in a deal cannot be discarded. In the leadup to the talks, Secretary Pompeo called China’s treatment of Uighurs in Xinjiang “the stain of the century”, while Vice President Pence tweeted a condemnation of China’s record on religious freedom. This simultaneous push on trade and human rights is consistent with the “whole of government” approach against China called for in the—ironically-named—John S. McCain National Defense Authorization Act for Fiscal Year 2019.
Admittedly, it is hard to see where China can budge, especially in the kind of public way that the Trump team needs to be able to claim some kind of victory. That said, if it gives him some oxygen on tariffs and Huawei, President Xi might be willing to pull something out of his hat on North Korea or even the South China Sea.
CORE ISSUE OF THE 301 CASE AGAINST CHINA IS IP THEFT, FORCED TECHNOLOGY TRANSFER, AND ENFORCEMENT
The section 301 case started in the spring of 2018. The core of the complaint is China’s aggressive campaign to steal intellectual property (“IP”) from US and other foreign companies. See the attached Full Section 301 Report and Interim Report
If the Chinese government can compromise on IP Theft and Forced Technology Transfer in an enforceable agreement, I suspect that a deal can be reached.
If not, however, US has imposed 25% tariffs on $250 billion in imports from China with potentially another 25% tariff on the remaining $300 billion, which means by September 1st all imports from China will be hit with a 10 to 25% tariff. See the Federal Register notices above.
It should be noted that the tariffs on the first $50 billion in imports is to offset the harm caused to the United States and US companies because of the IP Theft and Forced Technology Transfer. The tariffs on the $200 billion are in direct response to the Chinese government’s decision to retaliate against the US tariffs.
President Trump’s and USTR Lighthizer’s firm belief is that because of a US trade deficit and a Chinese trade surplus of $350 billion and total Chinese exports of $550 billion plus, the US could weather a trade war much better than China.
Enforcement of any agreement with China is also a big issue. At the beginning of the Section 301 Report, it lists ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, which the Chinese government has ignored. The last two agreements are the recent 2016 agreements between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China and to stop cyberhacking for commercial gain. According to the USTR, the Chinese government ignored both Agreements. See page 8 of the attached USTR 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER. All those agreements between the US and China were breached.
China’s failure to follow through on past trade agreements is not just a Trump issue. Recently, former USTR Charlene Barshefsky, a good Democrat, who negotiated the US China WTO Agreement under President Clinton, has stated that the Chinese government broke all the WTO Agreements it signed.
SECTION 301 PROCEDURES AND THE JUNE 24, 2019 EXCLUSION PROCESS FOR THE $200 BILLION
As to the procedures in the Section 301 case, please see my October 1, 2018 blog post at for a detailed explanation of the 301 case, three outstanding lists and the issue of product exclusion requests. The three lists of tariffs cover $250 billion in imports from China.
The deadlines to file an exclusion request for the first $50 billion have past. The exclusion process for the third $200 billion list just started up on June 24th and the deadline is September 30, 2019.
Also the process has started to impose 25% tariffs on the remaining $300 billion from China.
Theoretically, if the negotiations go well, all or some of the 301 tariffs could be lifted so there will be no need for exclusion requests. If the duties remain in place, then the USTR will have an exclusion process.
FRED ROCAFORT ARTICLE ON THE JUNE 24TH EXCLUSION PROCESS FOR THE TARIFFS ON THE $200 BILLION
Back in June, Adams Lee (one of my fellow international trade lawyers) urged those who manufacture products in China for the U.S. to Get Going on Your China Tariff Exclusion Requests Now.
Adams’ advice has clearly not gone unheeded. These days, client calls to discuss exclusion requests are as much a part of my morning routine as my first cup of joe. The deadline for filing List 3 exclusion requests is September 30, 2019, though one wonders why the United States Trade Representative (USTR) is even bothering with a deadline. According to Roll Call, the process for reviewing exclusion requests has “slowed to a painful crawl” and “USTR in July up to the 19th had completed work on just 60 of the total 2,900 requests for tariff waivers on [List 2] tranche requests”. Not a promising sign when trying to determine how long it will take to sort out the 60,000 List 3 requests for which USTR is bracing — never mind the looming List 4 requests, when essentially all China imports will be subject to tariffs.
Our clients are understandably interested in any patterns that are emerging regarding approvals. Thanks to the Mercatus Center, we know List 1 requests for capital goods have been approved at a higher rate than intermediate goods or consumer goods, but for List 2 requests, consumer goods were approved at a higher rate than either capital or intermediate goods. It is important, however, to keep in mind that consumer goods account for only a fraction of the List 1 and 2 requests. More on this later.
Turning to the substance of the requests, after reviewing many of the requests adjudicated by USTR, approved requests tended to clearly articulate why the product for which an exclusion was sought cannot be sourced from anywhere other than China. I emphasize cannot because what trips up many requestors is that they end up explaining why they do not want to source from elsewhere.
For instance, take this denied tariff exclusion request from List 1:
[Company X] respectfully requests that you grant its request for an exclusion.
While we cannot seek exclusions on every component that we source from China, we are pursuing exclusions for several higher value and/or larger volume components, including this product.
[Company X’s] sourcing decisions are guided by a number of factors including availability of the part; quality of the part; landed cost… desire to work with a particular supplier; capacity of a supplier to produce volume needed on deadline; supply chain risk management; and minimizing capital investment.
* * * *
Failure to grant [Company X’s] exclusion request will increase the company’s production costs. As a result, the company will reduce its margins, pass the additional cost onto consumers… negatively affect… the 60,000+ American workers [Company X] employs… (emphasis added)
Readers from my generation may remember the The Far Side, a brilliant comic created by Seattle’s own Gary Larson. One of my favorite cartoons juxtaposed what an owner said to his dog (“You stay out of the garbage! Understand, Ginger?”) with what Ginger actually heard (“blah blah Ginger blah”). To USTR (Ginger) this request is screaming, “I don’t want to pay more, blah blah”.
To be sure, paying more for products manufactured in China is a completely legitimate concern and I am not trying to make light of the real struggles faced by Company X and others that have their products made in China. But we are right now in a large-scale trade war with China (with no end in sight) and in the same way our great-grandparents were expected to buy Liberty bonds during World War I, the USTR expects businesses that ship China-manufactured products to the United States (and the buyers of those products) to bear economic burdens as the country “max[es] out [its] economic power.”
Company X’s tariff exclusion request (above) does passingly mention availability of its product outside China, but it fails to flesh out how that forces it to get that product from China. Is the product not available at all in a third country? Or is it available, but not at the sufficient volume or necessary quality?
It is worth keeping in mind that USTR largely avoided consumer goods in Tariff Lists 1 and 2, but consumer goods account for more than 30% of the List 3 products (compared to less than 1% in the first two lists). This shift could bring about a sea change in tariff exclusion rejection patterns. USTR has rejected just over 60% of the List 1 tariff exclusion requests and 45% of the List 2 requests it has received.
My suspicion is that the move towards consumer goods in List 3 will cause tariff exclusion rejection numbers to increase from Lists 1 and 2. One of the key issues for USTR when it considers exclusion requests is the following:
Whether the particular product [for which the tariff exclusion is being sought] is available only from China. In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
A familiar theme in this blog is the shift of manufacturing activity out of China, primarily to Southeast Asia and to Mexico. In How to Stop Manufacturing in China: Try Harder, we wrote how in many instances (but certainly not all), it is neither difficult nor expensive to move manufacturing outside China:
This probably sounds harsh, but many companies would benefit from moving their manufacturing out of China that have not yet done so for reasons more related to inertia than to economics or anything else. I realize change is hard but if you are in a situation where you are essentially paying 25% more than your competitors and at huge risk of your products being slapped with retroactive duties ranging from 20% to 250%, inertia is not a good excuse.
Of course, there are companies that have almost no choice but to have their products made in China. China has been developing its export-oriented capabilities for decades and its manufacturers enjoy access to a massive internal market and to levels of government assistance that cannot be matched in other low-cost destinations. As per a Quartz article:
Then there are the products the US almost exclusively gets from China. Raising tariffs on these goods will likely cost American consumers, and leave importers in a bind to find substitutes in the short-term—in the long-run, manufacturers may look to produce these goods outside China. We identified 11 product categories that China supplied 95% of US imports worth at least $100 million in 2018 by analyzing data from the US Census Bureau. All 11 product categories were on the list of goods for which the US has threatened to raise tariff rates by 25%. The US has since agreed to delay these hikes as part of negotiations.
By contrast, China’s manufacturing competitors have been flooding the lower ends of the value chain. Simply put, it is easier to set up a sneaker factory than a chemical processing plant. Back to Quartz:
The US imports about $100 million dollars in soy sauce every year. China supplies 42%. But it also gets a lot of soy sauce from Japan (17%), Hong Kong (14%) and Thailand (7%). If the US raises tariffs on Chinese soy sauce, importers might shift their buying to these other countries to avoid cost increases.
This means that when it comes to consumer goods, we expect fewer U.S. importers will be able to answer “No” to the key question in the exclusion request form: “Is this product, or a comparable product, available from source[s] in third countries?”. As a result, it can be fully expected that USTR will deny a higher rate of List 3 and List 4 requests.
What all of this means is that if you really need to source your products from China, you need to ensure that your tariff exclusion requests are as strong as they can be. On the flip side, what is happening with the tariff exclusion process is another reminder that the conversation about getting out of China needs to happen now, especially because we do not see the United States eliminating its China tariffs soon, if ever:
If your company is thinking there will be a solution to the US-China trade war and that solution will obviate any need to move your manufacturing from China, you are very likely engaging in wishful thinking. The US-China trade war has been going on for more than a year now and, if anything, we are farther away from resolution than when it started.
What is happening with the tariff exclusion process underscores this point. By now, everyone should have disabused themselves of any notion that tariff exclusions would be an effective workaround. They will not, unless you can truly show that your product cannot be sourced in a third country. This is the time to recognize the difference between needing to source your product from China and preferring to do so.
If you need to stick with China and you are looking down at the tariff barrel, make sure you look at some of the approved tariff exclusion requests for inspiration and be sure to clearly spell out why you do not have a China alternative, remembering that “I would have to pay more” is not going to cut it. On the other hand, if you can source your product from somewhere other than China at comparable cost and quality, it is probably time for you to move on.
I will in the meantime be working on completing and submitting more tariff exclusion requests.
BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE
The Chinese government’s apparent strategy in the trade negotiations is to wait and see what happens in the next Presidential election in November 2020 and hope for a better deal with a new Administration. But after the two recent debates by Democratic candidates, Democratic pundits complain that no Democratic Presidential candidate to date can beat Donald Trump. With that situation in mind, Chinese government officials might want to rethink that strategy.
Moreover, contrary to many commentators in China and elsewhere, the tough position against China in these trade negotiations is not just President Donald Trump. After Trump’s announcement of a potential 10% tariff starting September 1 on the remaining $300 billion imported from China, New York Senator Chuck Schumer, who leads the Democrats in the Senate, came out in favor of the Trump tariffs telling President Trump to stand tough on China.
In light of these facts, the Chinese government should not expect a change in the tough US position on China trade policy if there is a change in US government. US China Trade Policy is not just a Republican issue. It is bipartisan issue. Traditionally, the Democratic party is much more protectionist than the Republican party, because the Democratic party is supported by the labor unions.
In the 2019 State of Union in Congress, President Trump spoke of a need for a strong US trade response against China and a strong structural trade agreement with China because of decades of IP theft. This point provoked a bipartisan standing ovation from Republicans and Democrats. Democrats hate Trump, but they agree completely on a tough response to China. See the following video of the State of the Union at https://www.youtube.com/watch?v=OSy9NcPRSGs.
Although a President Biden, whose son Hunter Biden has a billion-dollar deal in China, might be easier on China, the rest of the Democratic field will be very tough on China. Based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China. This trade situation is not going to change any time soon no matter what party is in power.
FORMER DEMOCRATIC CONGRESSMAN DON BONKER TRADE ARTICLE ON THE DEMOCRATIC RESPONSE TO TRUMP ON TRADE
On May 21, 2019, my friend Don Bonker, a former Democrat Congressman, published an article in the Wall Street Journal entitled “On Trade, Where Are My Fellow Democrats?” stated in part:
President Trump’s latest round of punishing tariffs on China, with threats of more to come, will have a devastating effect on the world’s two largest economies. His actions are contrary to the Republican Party’s usual doctrine of free trade, and they have alarmed business leaders, farmers and the American sectors and regions that will most acutely feel the pain of the tariff increases and China’s targeted retaliation.
So where are the Democrats? Until Mr. Trump arrived on the scene, the Democratic Party had itself been sojourning down the path of protectionism, driven by organized labor. Since then, the president has ripped up the Trans-Pacific Partnership, overhauled the North American Free Trade Agreement, and hit even U.S. allies with harsh tariffs-all while Democrats have been strangely silent. It seems as if they either tacitly support Mr. Trump’s reckless trade policies or simply lack an alternative.
Sidestepping the Constitution, which clearly assigns to Congress the power to “regulate commerce with foreign nations,” the Trump administration is using executive orders and national-security statutes to impose punishing tariffs. If a President Bernie Sanders were doing this, Senate Republicans would protest furiously. Yet Republicans and Democrats alike are letting the president do what he wants. . . .
The U.S. has tens of thousands of domestic companies that would be highly competitive in foreign markets if they could collaborate in marketing and shipping their products abroad. In 1982 I worked with Secretary of Commerce Malcolm Baldrige to resolve this problem by passing the Export Trading Company Act, enacted with bipartisan support, that included a waiver to allow these companies to team up without being in violation of the antitrust laws.
Unfortunately, the law has since been largely ignored by recent administrations, including Mr. Trump’s.The White House has tried plan after plan to restrict imports and punish trading partners. But focusing on the export side is a better way to ensure that American companies get a larger share of the world market. Over the years, Congress has established agencies and mandates to help U.S. companies go international, but they exist more like fiefdoms. There is no global strategy and no coherence.
I’d also advise a presidential candidate to reorganize all the trade agencies-the Export-Import Bank, Overseas Private Investment Corporation, Trade and Development Agency, U.S. Commercial Service and others-under one umbrella with a new mandate to make America more competitive.
In the 2020 election, the Trump administration will continue to offer protectionist policies and ongoing threats that may provoke a repeat of the 1930 Smoot-Hawley Tariff Act, which precipitated the collapse of the world trading system. Democrats need to give voters a clear alternative: Elect a president who will take America back from the brink, make exports a much higher priority, and adopt policies to make U.S. companies far more competitive in the global economy.
Congressman Bonker has some very good points, but the Democratic party does not appear to be listening to his advice. Many Democratic Senators and Congressmen agree with President Trump’s tough stance on trade, especially with regards to China.
LONG TERM IMPACT OF TRADE WAR ON US CHINA RELATIONS, THE XI JINPING BACKLASH AND THE DECOUPLING WITH CHINA
Recently, many books have been written by Chinese experts in the United States and elsewhere about the substantial political change in China and the decision by President Xi Jinping to move China back from a free market with private companies to a state-controlled economy. Tax rates on Chinese entrepreneurs are reportedly as high as 65%.
See the January 2019 book by Nicholas Lardy, a US expert, entitled “The State Strikes Back The End of Economic Reform in China”, which states:
“The fundamental obstacle to implementing far-reaching economic reforms in China is the top leadership’s view that, while state-owned firms may be a drag on China’s economic growth, they are essential to maintaining the position and control of the Chinese Communist Party and achieving the party’s strategic objectives (Economy 2018, 15–16).”
State Strikes Back at p, 507-508 (2019).
A more influential book is the most recent book by Richard McGregor “Xi Jinping The Backlash”. See https://www.cnn.com/2019/07/16/opinions/xi-jinping-backlash-opinion-intl-hnk/index.html. McGregor in his book describes in detail the movement of President Xi Jinping to recentralize decision making authority in Beijing and move China back to a more authoritarian State run completely by the Chinese Communist Party.
This dramatic political change in China has now resulted in a major reassessment by many US politicians of relations with China. See podcast by Newt Gingrich, one of the elder statemen in the Republican Party and an advisor to President Trump, “China How We Got It Wrong”. https://podcasts.apple.com/us/podcast/newts-world/id1452065072?i=1000438763243.
Gingrich is a free trader, but recent developments in China have led him to completely change his outlook of China. The movement by President Xi Jinping to a more authoritarian, State Run society, in China has caused many US and other Western politicians to believe that China is not moving in the right direction. That is not a good sign for future US/Western Democracy relations with China.
Moreover, the long-term effect of the Trump trade war and the change in policy in China regarding the treatment of private companies and foreign companies is leading to a decoupling in supply chains between the US and China and also a decoupling of many foreign companies from China suppliers. Although some foreign companies will continue to have operations in China, many others are moving. See August 5, 2019 South China Morning Post article, Japan’s Sony, Ricoh and Asics join manufacturers’ mass exodus from China’s factories as US tariffs on made-in-China products bite,
Many US importers are moving or looking to move supply to a third country. US companies that have operations in China are moving or looking to move all or almost all of their production from China. The reports are that Apple and Fox Conn have succeeded in moving all of their Chinese production to Vietnam.
We are working with Chinese, foreign and US companies that want to move production or supply to a third country, including Vietnam, Malaysia and Thailand. This major decoupling with China will have a major impact on the Chinese economy and on China’s foreign relations with other countries. That is the simple reality of the situation.
But at the same time, as stated above, Dan Harris, my partner, has recently written an article entitled “Why NOW Is A Very Good Time to Double Down on Doing Business in China”.
THE RISE OF TRANSSHIPMENT AND HOW INDIVIDUALS AND COMPANIES CAN PROFIT FROM RIVALS TRANSSHIPMENT: IMPORTERS BEWARE
MOIETY AND THE FALSE CLAIMS ACT
In response to these trade actions, many Chinese companies have attempted to transship products through third countries to the United States. The Wall Street Journal recently published a piece on transshipment. See https://www.wsj.com/articles/trump-to-impose-additional-10-tariff-on-chinese-goods-11564681310?mod=hp_lead_pos1. In the video attached to the article, my partner Steve Dickinson, describes the transshipment problem in detail.
Many US importers, however, many not realize that importing goods through transshipment is a crime, which can land importers in prison. In fact, two of my past clients went to prison for importing transshipped Chinese products through a third country.
When an importer imports products into the United States, he must submit a Section 7501 Customs form to the US Customs and Border Protection, which requires the importer to specifically declare the country of origin. If a false 7501 Customs form is submitted to the US government and the importer knew the country of origin was false, that is Customs fraud, which can trigger significant civil and criminal penalties.
In fact, recently, a US importer contacted me because he had received an e-mail from a Chinese chemical producer/exporter, saying buy my chemical product, which is covered by a US antidumping (“AD”) order. The Chinese producer told the US importer not to worry about the AD duties because the Chinese company would simply ship the product through Taiwan, call it Taiwan product and no problem. The importer was very angry because he knew that transshipment is a crime, and he the US importer could find himself criminally liable for such a scheme.
Another importer recently stated that he intended to get around a US trade order by triangulation, simply shipping the Chinese product to a third country and then changing the country of origin from China to the third country. I told the importer that this was Customs fraud and could lead to criminal and civil prosecution.
In another situation, several importers have contacted me because to get around trade orders, including antidumping and the Section 301 tariffs, Chinese companies are telling their US importers not to worry because they will just label the country of origin as Hong Kong or Singapore. Import games, such as switching the country of origin, can lead to civil and criminal violations, which can lead to enormous penalties and even prison time.
Chinese companies and US importers have different interests. The Chinese company wants to ship to the US. The US importer wants to stay out of Customs trouble and avoid additional liability, be it civil or criminal.
But the question for many individuals and companies, be they Chinese or US, is how can we profit from this if we know competitors, including Chinese producers and US importers, are not playing by the rules?
Anyone, including companies in China or US importers, can profit if they discover Chinese exports or US imports that violate US Customs and Trade laws by using transshipment, shipping through a third country to change the country of origin.
Under 19 USC 1619, the Moiety statute, any person can receive compensation not to exceed 25% of the recovery, up to $250,000, for providing to any Customs officer or US attorney:
“original information concerning .. . any fraud upon the customs revenue, or any violation of the customs laws or the navigation laws which is being, or has been, perpetrated or contemplated by any other person and such information leads to a recovery of . . .any duties withheld, or … any fine, penalty, or forfeiture of property incurred . . . .”
Many US and foreign individuals and companies, including US importers and even Chinese producers/exporters, can profit even more from transshipment under the False Claims Act. Under Title 31, United States Code, Section 3729 (G), et. seq., any person, including companies, currently face triple damages and a penalty of $11,000 per claim for any of the following acts:
“(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”
Section 3730 of the False Claims Act (“FCA”) provides a private right of action, that is a private person may sue for a violation of section 3729 on behalf of the US government, such as Customs fraud. The private party called a relator can be a competitor, such as a US importer or foreign producer, or an insider, such as a secretary or a filing clerk. The relator files a copy of the complaint and written disclosure of all material evidence and information possessed by the person under seal in the Federal District Court to show that certain US importers and foreign producers/exporters have committed fraud on the US government by transshipping products covered by antidumping and other trade orders to avoid the duties.
The complaint is brought on behalf of the United States and the Department of Justice. The complaint and the evidence supporting the complaint are not served on the defendants, but on the US government, which has 60 days to determine whether or not to intervene in the case.
If the government decides to intervene and prosecute the action, the private party is entitled to 15 to 25 percent of any recovery. If the government decides not to prosecute the case and the private party goes forward, the private parties are entitled to 25 to 30 percent of any recovery.
The remedy in a False Claims Act case is triple damages and in many AD and countervailing duty (“CVD”) cases, especially against China, the missing AD or CVD duties can be well over 100 to 300% on imports over the last 5 to 6 years. In one recent preliminary antidumping determination against mattresses from China, the antidumping rate is 1,731%, the highest antidumping rate in history.
If total annual imports have come in from the transshipment country are over $15 million, for example, the total damages could be well over $100 million to $200 million with a potential payout to the relator of millions of dollars.
Relators, be they a competitor or an individual, can become very rich because of a False Claims Act case. We presently have an ongoing False Claims Act case, where the total award is $62.4 million. We are in the process of negotiating a multi-million dollar settlement for the relator in that case. In a medical FCA case here in Seattle, a young clerk made several million dollars because of a False Claims Act case.
Although President Donald Trump and many in Congress scream about evasion of US AD and other trade orders because of transshipment, they often do not realize that there are already legal hammers to crush transshipment in the US legal arsenal and that is the Moiety Statute and the False Claims Act.
HUAWEI’S PROBLEMS CONTINUE
At the G-20 meeting between Presidents Xi and Trump, the Huawei issue was raised. But to date, the Commerce Department has not done anything concrete to help Huawei and at the most has talked about making it easier for US companies to export products to Huawei that do not damage US national security.
But the major problem for Huawei is the criminal cases and to date nothing has been done from the US side to stop these cases. More specifically, on January 28, 2019, the Justice Department issued two indictments against Huawei. One indictment was filed in the Federal District Court in the Eastern District of New York and is entitled United States of America Vs Huawei Technologies Co., Ltd., Huawei Device USA, Skycom Tech Co., Ltd., Wanzhou Meng, also known as Cathy Meng and Sabrina Meng and a number of unknown defendants.
This indictment detailed allegations against Huawei, Huawei USA, Meng Wanzhou, the Huawei CFO and daughter of the owner, and several unnamed co-defendants alleging evasion of Iran sanctions, bank fraud, and obstruction of justice.
Ms. Meng finds herself—immersed in a criminal action exposing her to 30 years in prison for bank fraud. Although Ms. Meng received bail and is staying at her Vancouver house, she is due back in Canadian Court. And there is probably a good chance that Ms. Meng will be extradited to the United States, where she will face even tougher problems.
The second indictment against Huawei took place here in Seattle when Huawei stole key robot technology from T-Mobile. One of the most important parts of the T-Mobile indictment, which will have a direct impact on the US China 301 negotiations, is that Huawei has in place a bonus program to reward employees who steal foreign intellectual property.
In fact, Christopher Wray, the head of the FBI, recently announced that it has 1,000 investigations into Chinese IP theft. See https://www.scmp.com/news/china/article/3019829/fbi-has-1000-probes-chinese-intellectual-property-theft-director
THE PROBLEM FOR CHINESE FACING CRIMINAL PENALTIES IS THAT US ARREST WARRANTS AND EXTRADITION REQUESTS ARE ENFORCEABLE IN MANY DIFFERENT COUNTRIES
Recently, the Wall Street Journal published an article about a Chinese aluminum mogul, Liu Zhongtian, who was indicated in the US for evading $2 billion in tariffs in the Aluminum Extrusions from China Antidumping and Countervailing Duty case. The indictment focuses on fraud and international money laundering, which carries a maximum prison sentence of 465 years. See https://www.wsj.com/articles/chinese-billionaire-indicted-in-u-s-in-alleged-tariff-evasion-scheme-11564586470?mod=hp_lead_pos4.
The problem Mr. Liu faces, like Meng Wanzhou, is that although he cannot be arrested in China, as soon as he takes a step outside of China, he is vulnerable.
As stated in past newsletters, the Chinese government’s decision not to have any agreement with the United States or other countries with regards to the enforcement of judgments or extradition warrants in China gives Chinese individuals a false sense of security. Many Chinese individuals feel they are immune to laws in other countries and can break them with impunity and they can apply the “Chinese way” of playing games in international and commercial transactions in many countries.
Chinese companies, however, are now international operations. As soon as the Chinese individual takes a step out of China, he or she can be arrested. US judgments are enforceable in many other countries, including Taiwan, Canada and until recently Hong Kong.
HIGHEST ANTIDUMPING RATE IN HISTORY AND THE CRITICAL CIRCUMSTANCES TRAP
As mentioned above, on July 10, 2019, in the Mattresses from China Antidumping case, Commerce issued the highest preliminary antidumping rate in history of $1,733%. This can be a very difficult problem if there is a critical circumstances situation. In the recent Quartz Surface Products from China Antidumping and Countervailing Duty case, we have been representing a substantial number of US importers.
In that case, the Commerce Department found antidumping rates ranging from 265 to 333% and countervailing duty rates ranging from 45 to 190%. More importantly, the Commerce Department made critical circumstances determinations exposing many importers to millions of dollars in retroactive liability for imports 90 days prior to the Preliminary Determinations.
For critical circumstances (“CC”) to stick, however, the US International Trade Commission (“ITC”) had to determine that the increased imports would “undermine seriously” the remedial effect of the antidumping and countervailing duty orders to be issued. This is a very high statutory standard and, therefore, in over 90% of the cases, the ITC reaches a negative CC determination. In the Quartz Surface Products case, luckily for many US importers, the ITC did reach a negative CC determination.
For almost 8 months before the ITC ruling, however, US importers were under immense pressure from US Customs and Border Protection to pay the millions in outstanding cash deposits during the CC period. In fact, a number of US importers received notices of liquidated damages for failure to pay the cash deposits in the CC period, when the ITC ultimately reached a negative CC determination.
This CC situation created a number of sleepless nights for US importers.
FABRICATED STRUCTURAL STEEL FROM CHINA AND IMPACT ON US CONSTRUCTION INDUSTRY
Another problem has risen in the US Construction industry for the ongoing antidumping and countervailing duty case on Fabricated Structural Steel from China. Many developers, who may not be importers but have set construction contracts, have called because of exposure to the CVD Preliminary Determination and rates of 36 to 179% and the potential AD rates of 222%.
If there are CC determinations by Commerce in the Fabricated Structural Steel case, this could put importers and downstream developers into a very difficult situation.
RECENT SECTION 337 PETITIONS
Two recent Section 337 petitions, which may be of interest are the following.
LIGHT EMITTING DIODES
On July 30, 2019, the Regents of the University of California filed a Section 337 case against imports of Filament Light-Emitting Diodes and Products. The proposed respondents are:
Amazon.com, Inc., Seattle, WA; Amazon.com Services, Inc., Seattle, WA; Bed Bath & Beyond Inc., Union, NJ, IKEA of Sweden AB, Sweden; IKEA Supply AG, Switzerland; IKEA Distribution Services Inc., Conshohocken, PA; IKEA North America Services , LLC, Conshohocken, PA; Target Corporation, Minneapolis, MN; and Walmart Inc., Bentonville , AR.
CHILD RESISTANT CLOSURES
On July 22, 2019, Reynolds Presto Products Inc. filed a Section 337 case against imports of Child Resistant Closures with Slider Devices Having a User Actuated lnsertable Torpedo for Selectively Opening the Closures and Slider Devices. The proposed respondents are:
Dalian Takebishi Packing Industry Co., Ltd., China; Dalian Altma Industry Co., Ltd., China; Japan Takebishi Co., Ltd., Japan; Takebishi Co., Ltd., Japan; Shanghai Takebishi Packing Material Co., Ltd., China; and Qingdao Takebishi Packing Industry Co., Ltd., China.
If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, Huawei problem, the Quartz Surface Products or Fabricated Structural Steel cases, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact us.
Best regards,
Bill Perry and Fred Rocafort