TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – DECEMBER 21, 2018

Dear Friends,

Another difficult newsletter to write as every day there is more news.  Also trying to understand the current state of US China Trade Relations is like trying to tell the future by looking at tea leaves at the bottom of the cup.

At the Trump Xi Meeting on December 1st at the G-20 meeting in Argentina, there was a deal to delay the 301 tariffs for 90 days during which time negotiations would happen between the US and Chinese governments.  The Chinese government was to send a negotiating team to Washington DC on December 15th, but that did not happen.  The latest is that negotiations continue by phone and the Chinese negotiating team will come to Washington DC in January.

Meanwhile, the United States Trade Representative (“USTR”) has issued the attached new notice, MARCH 2 USTR NOTICE PUBLISHED, setting a hard date of March 2nd for US China Trade Deal.  If there is no deal by March 2nd, the tariffs on $200 billion in imports automatically go from 10% to 25%.  The USTR has also issued a new attached Section 301 update, USTR FULLL 301 Report Update.

The core of any US China deal will be provisions to prevent IP Theft, Forced Technology Transfer and cyber hacking for commercial gain.  So, what was a dim hope of a US China trade settlement at the G-20 has brightened the hope a little more, but there is still a very long way to go.

Making the situation more difficult was the December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the founder, in Vancouver, Canada based on an extradition warrant from the United States for bank fraud.  Immediately many Chinese officials took this action as a personal attack on China by Canada and the United States.  Many Chinese commentators saw this action as an attempt by President Trump to increase pressure on China with regards to trade relations.

Readers of this newsletter, however, will remember the point last month that the Justice Department has raised US China trade relations to a new serious level by starting a new initiative to go after China officials, not only from a trade policy point of view, but also with criminal indictments and investigations for IP Theft and other issues.

On December 20th, the Justice Department further increased the pressure by bringing an indictment against two Chinese individuals for cyber hacking.  This is not politics.  This crisis has risen to criminal activity governed by the Rule of Law.

But apparently the Justice Department did pull its punches because it only went after the two individuals and not the corporate entities associated with the hacking.

That is just where 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 in February.  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 Canadian Trade Advisor has stated that this is a Rule of Law question, not China policy issue.

But the problems for Huawei have expanded exponentially.  As many international banks now refuse to do business with Huawei because the risks are too great.

But there are probably bigger issues behind the push by many countries to get Huawei out of their telecommunications networks.  On December 14th, it was reported that all five Western Intelligence Agencies have created a real campaign to kill Huawei’s activities in Western countries.

In addition, however, there has been an effort from the Chinese government to keep the Huawei problems separate from the trade negotiations.  The Chinese government has a real incentive to do this because its economy is facing very strong problems with the sharp decline in the Chinese stock market.  One Chinese economic expert is comparing the Chinese stock market to the 1929 stock market crash in the United States that led to the Great Depression.  That Chinese economist also believes that the Chinese economy is not expanding but contracting significantly because of the US China trade war and the Chinese government’s policy of killing the private industry.

My firm is also representing a number of US importers and fabricators, US producers of downstream products, in the Quartz Surface Products Antidumping and Countervailing Duty case.  As part of that effort, we are trying to persuade US fabricating companies and importers to fill out the questionnaires from the US International Trade Commission’s (“ITC”) so that their voices will be heard.  Those questionnaires are attached below.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

G-20 DIM HOPE BECOMES BRIGHTER HOPE BUT??

The day before the US China meeting in Buenos Aires Argentina, USTR Lighthizer stated that there would probably be a deal.  And that is what happened.

Apparently at the start of the GP-20 meeting, President Xi made a 20-minute speech outlining the steps that the Chinese government was willing to take to end the trade war.

Although China agreed to immediately import US agricultural products, the key to the 301 case is IP Theft and Forced Technology Transfer.  The real issue is what is China prepared to do.

Meanwhile, the United States Trade Representative has issued the attached new notice, MARCH 2 USTR NOTICE PUBLISHED, setting a hard date of March 2nd for US China Trade Deal.  If there is no deal by March 1st, the tariffs on $200 billion in imports automatically go from 10% to 25%.

Apparently, the latest word is that the US and Chinese governments continue to negotiate by phone and the first real face to face meeting will be in January.  But that does not give much time to reach an agreement by March 1st.

Bill Bishop, a known China expert, in his Axios Sinocsim newsletter stated on December 14th:

“I’d already heard that the Chinese are planning to make big concessions, because they understand U.S. Trade Representative Robert Lighthizer won’t “accept warmed-over promises.”

  • And, now it appears this could be true, as indicated by the temporary cuts in tariffs on U.S. autos, mentioned in the intro above.
  • So as long as Trump keeps his resolve there may actually be a chance for some significant concessions on trade, moves that Chinese President Xi Jinping can spin domestically as not due to U.S. pressure but as part of the deepening of reform.”

On the other hand, my partner, who reads the Chinese Press in Chinese, commented on the December 13th speech by Xi Jinping on the anniversary of the market opening by Deng Xiaoping:

“I just read a seminar of a group of Chinese scholars reviewing the Xi Jinping speech. The take away:

1.) Reform is dead: permanently. Here, “reform” means move to an open, market economy with minimal involvement by the CCP and minimal involvement by SOEs. This kind of reform would mean the end of CCP control, and that prospect is dead, permanently.

  1. On the trade war, what the Chinese government hopes is: they will enter into some written agreement with Trump. But Trump will soon be swept away. As soon as that happens, the Chinese will tear up the agreement. This shows a mistaken understanding of the U.S. system: we don’t have one man/one party rule in the U.S. So the Chinese are viewing this from the standpoint of how their own system works. But it is interesting to see how this matter is analyzed in China.

Note this is what the Chinese scholars said. I agree, but this is coming from the Chinese side, not from me.”

Such a misreading of the US trade situation is extremely dangerous.  As mentioned in the last blog post, 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.

But other articles have stated that the US and Chinese governments continue to negotiate by phone and there will be face to face meetings in January.  On the other hand, the word is that the Chinese government will agree to make a number of trade concessions, but not agree to any “structural” changes.

The real question is what is meant by the word “structural”?  Again, the core issues in the Section 301 deal are IP Theft, Forced Technology Transfer and cyber hacking.  If the Chinese government’s intent is to make no enforceable concessions in these areas, these negotiations will fail.  That would be a major blow to China.

As indicated below, the indictment and US and Canadian actions against Huawei have made the negotiations more difficult.  But the Chinese government has attempted to keep the trade negotiations and Huawei situation separate, probably because of the big problems with the Chinese economy as explained below.

IP THEFT, FORCED TECHNOLOGY TRANSFER AND CYBER HACKING REMAIN THE CORE ISSUES OF THE 301 CASE

The core of the Section 301 case is intellectual property, rights which are Constitutionally protected rights.  Stealing intellectual property (“IP”) is piracy, pure and simple.

As the United States Trade Representative states on page 4 of its attached full 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER:

The Federal Register Notice described the focus of the investigation as follows:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies.  Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.

Second, the Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology- related negotiations with Chinese companies and undermine U.S. companies control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non- market terms in licensing and technology contracts.

Third, the Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

The Section 301 Report then goes on to list ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, including the recent 2016 agreement between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China.  See page 8 of the USTR 301 report above.

On November 20, 2018, before the G-20 meeting, the USTR issued the attached an interim report in the Section 301 case, USTR FULLL 301 Report Update.  The Update states, in part:

“USTR has undertaken this update as part of its ongoing monitoring and enforcement effort. In preparing this update, USTR has relied upon publicly available material, and has consulted with other government agencies. As detailed in this update, China fundamentally has not altered its acts, policies, and practices related to technology transfer, intellectual property, and innovation, and indeed appears to have taken further unreasonable actions in recent months.

Section II describes how China continues its policy and practice of conducting and supporting cyber-enabled theft and intrusions into the commercial networks of U.S. companies and those of other countries, as well as other means by which China attempts illegally to obtain information. This conduct provides the Chinese government with unauthorized access to intellectual property, including trade secrets, or confidential business information, as well as technical data, negotiating positions, and sensitive and proprietary internal business communications.

Section III describes how, despite the relaxation of some foreign ownership restrictions and certain other incremental changes in 2018, the Chinese government has persisted in using foreign investment restrictions to require or pressure the transfer of technology from U.S. companies to Chinese entities. Numerous foreign companies and other trading partners share U.S. concerns regarding China’s technology transfer regime.

Section IV describes China’s discriminatory licensing restrictions and how the United States has requested consultations and is pursuing dispute settlement under the WTO in China Certain Measures Concerning the Protection of Intellectual Property Rights (WT/DS542). China continues to maintain these discriminatory licensing restrictions.

Section V describes how, despite an apparent aggregate decline in Chinese outbound investment in the United States in 2018, the Chinese government continues to direct and unfairly facilitate the systematic investment in, and acquisition of, U.S. companies and assets by Chinese entities, to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by state industrial plans. Chinese outbound investment is increasingly focused on venture capital (VC) investment in U.S. technology centers such as Silicon Valley, with Chinese VC investment reaching record levels in 2018.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my October 1, 2018 blog post for a detailed explanation of the 301 case, three outstanding lists and opportunity to request a product exclusion request.  The three lists of tariffs cover $250 billion in imports from China.

CANADA’S ARREST OF HUAWEI CEO MENG WANZHOU—YOU CAN RUN BUT NOT HIDE FROM US EXTRADITION WARRANTS

As stated above, making the US China trade negotiations more difficult was the December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the founder, in Vancouver, Canada based on an extradition warrant from the United States for criminal offenses.

Although many Chinese officials took this action as a personal attack on China, when one digs down into the details, it becomes apparent that this action raises a major rule of law issue – bank fraud to get around Iran sanctions.

INTERNATIONAL EXTRADITION AND JUDGMENT AGREEMENTS ARE IMPORTANT

US judgments are not enforceable in China. Also, US extradition warrants are not enforceable in China.

With regards to the Huawei situation, one Hong Kong commentator complained that the United States is not arresting Chinese criminals in the US.  But the reason that the US does not arrest Chinese criminals is that the Chinese government has determined that it does not want to have an international agreement with the United States to allow for mutual enforcement of judgments or mutual extradition warrants for criminals.

Many Chinese commentators may believe that the China does not have to follow the international agreements that it signed because it is a developing country and/or the agreements are unequal treaties.  Other countries, such as US, Canada, EU, Japan, Korea, and even Taiwan, however, take these international agreements very seriously and understand the importance of a country keeping its word in international negotiations.

These countries have mutual agreements with the United States to enforce judgments and extradite criminals.  This is called the Rule of Law.

The United States does intend to extradite Chinese individuals, who break US laws, to face judgment in US courts.  As Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division stated on November 1, 2018 with regard to extraditing Chinese individuals for stealing US Intellectual Property:

“The Criminal Division fully supports the Attorney General’s initiative to counter Chinese economic aggression.   Every day, the Chinese engage in efforts to steal American trade secrets and commit other illegal acts intended to enrich their economy at the expense of American businesses. . . .

We see it time and again: Chinese actors have stolen wind turbine technology in Wisconsin, agricultural research in Kansas, cancer drug research in Pennsylvania, and software source code in New York.

Wherever we see examples of this kind of criminal behavior, the Department will investigate it and prosecute it to the fullest extent possible. We also will continue to work hard to ensure that offenders face justice in U.S. courts.

Our Office of International Affairs is the focal point for all extraditions around the globe. In just the past few years, the Department has successfully extradited nine Chinese individuals, including two for theft of trade secrets. Long prison terms for these offenders help to create much-needed deterrence. . . .”

Emphasis added.

US JUDGMENTS NOT ENFORCEABLE IN CHINA GIVE CHINESE COMPANIES AND INDIVIDUALS A FALSE SENSE OF SECURITY

But 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 also gives Chinese individuals a false sense of security.

The US government cannot touch me because I am in China Ha Ha.  Chinese companies, however, are no longer small or even medium companies in the Chinese countryside.  Many Chinese companies, such as Huawei, are multinational companies and in Huawei’s case with operations in over one hundred countries.  As soon as the Chinese individual takes a step out of China, however, he or she can be arrested.  You can run, but eventually you cannot hide from US extradition warrants and judgments.

Ms. Meng Wanzhou knew she was under criminal indictment in the United States.  She probably had even seen the indictment.  Ms. Meng also has a husband and several houses in Vancouver, Canada.  One of her children is going to school in Boston, Massachusetts.  As soon as Ms. Meng decided to visit her family outside of China, she is a target.  She, therefore, should have taken the criminal indictments very seriously.

Apparently, Huawei has now hired two very large US law firms to defend itself and hopefully Ms. Meng in the US.  Ms. Meng needs a very good US criminal lawyer because in all probability Canada will extradite Ms. Meng to face criminal proceedings.

THE CHARGES AGAINST HUAWEI AND MS. MENG ARE SERIOUS –BANK FRAUD AND VIOLATIONS OF IRAN SANCTIONS

One key point to keep in mind is that like ZTE, Huawei uses US semiconductor chips and other high technology in its products.  Selling Huawei phones to Iran with American semiconductor chips in them is a violation of the US law regarding exports to Iran.

On December 9, 2018, the Wall Street Journal in an article entitled “Silicon Valley Helped Build Huawei Washington Could Dismantle It” stated that Silicon Valley giants, such as Intel, Broadcom and Qualcomm, are supplying $10 billion in high tech products, including semiconductor chips, every year.  As the article states:

“These interdependencies show how any U.S. actions against Huawei for alleged sanctions violations, which could go as far as a ban on it buying from American suppliers, could devastate Huawei’s operations, and curtail business for U.S. tech companies.”

Moreover, the key allegation against Ms. Meng is bank fraud.  As the Wall Street Journal explained on December 10th in an article entitled “Two British Banks Ensnared in Huawei Dispute”:

“To comply with banking and anti-money-laundering laws, banks must collect information from clients on their business and financial activities, and do additional due diligence and monitoring of high-risk clients. But in a twist to the usual narrative, the banks in this matter haven’t been accused of any wrongdoing and are instead portrayed as victims in court filings.

The court filings in Canada allege that at least three other global banks were misled by Huawei employees and representatives about the relationship between Huawei and Skycom.

One filing describes an August 2013 meeting and presentation by Ms. Meng to an executive at one bank—identified Friday as HSBC by Ms. Meng’s lawyer. Ms. Meng came to the meeting with an English interpreter and a PowerPoint presentation written in Chinese, and made a series of statements.

In an English translation delivered to the HSBC executive soon after, Ms. Meng stated in the presentation that Huawei complied with international sanctions laws and had sold shares it previously held in Skycom. The relationship was one of “normal business cooperation,” Ms. Meng stated, according to the filing.

Her lawyer said Friday the idea Ms. Meng engaged in fraud would be “hotly contested.”

As a fast-expanding telecom giant, Huawei’s access to global banks was paramount in helping it supply equipment across dozens of countries’ telecom networks. For the banks, the growing Chinese client produced a steady stream of fees. Dealogic data shows HSBC and Standard Chartered were two of Huawei’s biggest financing partners, with top roles on most of its $17 billion in loan and bond sales in the past decade. Citigroup Inc., Australia & New Zealand Banking Group Ltd., DBS Group Holdings Ltd. and Bank of China were among the other main arrangers.  . . .

Canadian prosecutors said the alleged conspiracy between Ms. Meng and other Huawei representatives to mislead banks was driven by the company’s need to move money out of sanctioned countries through the international banking system.

In the court filings, authorities alleged that the misrepresentations by Huawei to banks “violated their internal policies, potentially violated U.S. sanctions laws and exposed the banks to the risk of fines and forfeiture.” Banks carried out transactions for Huawei through New York and Europe, exposing them to “serious harm” and decisions made without knowing Huawei’s true risk, the filings said.”

As the Wall Street Journal explained on December 10 in an article entitled “Arrest of Huawei CEO Hinges on Offshore Puzzle”:

“Ms. Meng said she had served on the Skycom board to ensure it complied with trade rules, according to newly released defense filings that cite the 2013 PowerPoint presentation to HSBC Holdings Ltd.

Ms. Meng’s lawyer said Friday that she and Huawei severed ties to Skycom in 2009 and can’t be held responsible for its activities in the years that followed.

U.S. prosecutors say Skycom remained under Huawei’s control; between 2010 and 2014, they say, Skycom was used as a front for Huawei’s dealings with Iran in an arrangement that duped banks into approving millions of dollars in transactions that violated sanctions.

Canadian officials arrested Ms. Meng, the 46-year-old daughter of Huawei’s billionaire founder Ren Zhengfei, on Dec. 1 at the request of the U.S., which is seeking her extradition to face multiple criminal charges that each carry up to 30 years in prison, a move that has enraged the Chinese government.  . . .

The case could hinge on a large piece of the Skycom puzzle: Who ultimately controlled the company after 2009?

The answer is shrouded in mystery in part because of the opaque ownership of Skycom during the time Ms. Meng served on its board. A Wall Street Journal examination of Hong Kong corporate records found that Canicula Holdings Ltd., a company registered in the Indian Ocean island nation of Mauritius, bought Skycom from a Huawei subsidiary in November 2007.  Canicula retained ownership until Skycom was dissolved last year. . .

Skycom was registered in Hong Kong in 1998 by people whose names matched those of Huawei executives, according to corporate records. The Chinese city is one of the world’s easiest places to set up businesses, allowing companies to register with minimal documentation in as fast as a day and for as little as a few hundred U.S. dollars.

Unlike some corporate havens, Hong Kong records show directors and provide other basic information.

In the decade before Ms. Meng joined, Skycom had six directors. The names of five of them and another person identified as an early shareholder match the names of executives who worked at Huawei.

By the time Ms. Meng was named director in 2008, corporate filings show that the shares in Skycom owned by Hua Ying Management Co. Ltd., a wholly owned unit of a Huawei investment company, had been transferred to Canicula.

Ms. Meng’s lawyers said Skycom was sold in 2009, without specifying who bought it. U.S. authorities said in their indictment against Ms. Meng that Huawei continued to control Skycom after that year, and that Skycom employees were also Huawei staffers. Skycom workers used Huawei email addresses and badges, official Skycom documents bore the Huawei logo, and multiple Skycom bank accounts were controlled by Huawei employees, court documents say.

Employees in Iran used different sets of stationery stating “Huawei” or “Skycom” for different business purposes, according to court documents.

The Wall Street Journal reported in 2011 that an employee at an accounting firm listed in Skycom’s Hong Kong records said Huawei owned the company.

In court documents including an extradition request to Canada, U.S. prosecutors allege that multiple banks engaged in millions of dollars of transactions between 2010 and 2014 that they wouldn’t have otherwise been involved with as a result of Ms. Meng’s misrepresentations.”

But who brought Huawei to the attention of the US government—Hong Kong Shanghai Bank Corp.  As stated in the December 6. 2018 Dow Jones Newsletter:

“A federally appointed overseer at HSBC Holdings PLC flagged suspicious transactions in the accounts of Huawei Technologies Co. to prosecutors seeking the extradition of the Chinese company’s finance chief, people familiar with the matter said.

A monitor charged with evaluating HSBC’s anti-money-laundering and sanctions controls in recent years relayed information about the Huawei transactions to federal prosecutors in the Eastern District of New York, the people said . . .

The Journal reported in April that the Justice Department had launched a criminal probe into Huawei’s dealings in Iran, following administrative subpoenas on sanctions-related issues from both the Commerce Department and the Treasury Department’s Office of Foreign Assets Control.

HSBC in 2012 agreed to pay the U.S. $1.9 billion and enter into a five-year deferred- prosecution agreement over its failure to catch at least $881 million in drug- trafficking proceeds laundered through its U.S. bank and for concealing transactions with Iran, Libya and Sudan to evade U.S. sanctions. . . .”

Now the other shoe is dropping as the Wall Street Journal reported on December 20, 2018 in an article entitled “Some Global Banks Break Ties with Huawei”, these same foreign banks are now severing ties with Huawei because there is simply too much risk:

“Huawei Technologies Co., targeted as a national security threat by the U.S. and other governments, faces a new risk: reduced access to the global financial system.

Two banks that helped power the Chinese company’s rise as a global technology supplier, HSBC Holdings and Standard Chartered PLC, won’t provide it with any new banking services or funding after deciding that Huawei is too high risk, people familiar with those decisions said.

While HSBC made its decision last year, Standard Chartered moved more recently as concerns about Huawei escalated this year from a Justice Department investigation into whether the company violated U.S. sanctions on Iran, some of the people said. . . .

Huawei, active in about 170 countries, relies on international banks to manage cash, finance trade and fund its operations and investments. For more than a decade, HSBC, Standard Chartered, and Citigroup plugged Huawei into the global financial system as it entered new markets, providing it with everything from foreign currencies to bond funding from Western investors. Chinese banks finance Huawei in some markets but don’t have the reach to service it globally.

Standard Chartered recently decided it had to sever business with Huawei, people familiar with the matter said. Its relationship with the company dates back to the 2000s, and includes providing regional and global cash pools that free up excess cash in local Huawei units and let it pay suppliers in multiple currencies.

HSBC stopped working with Huawei last year, people familiar with the matter said, after the bank and a court-appointed monitor flagged suspicious transactions by the company to U.S. prosecutors in 2016. According to Canada court filings, HSBC was one of at least four global banks that Ms. Meng or other Huawei executives allegedly misled about Huawei’s ties to Skycom Tech, a Hong Kong company operating in Iran. The bank is still a mortgage lender on two homes Ms. Meng and her husband own in Vancouver, according to Canada property records. . . .

Other banks that have provided funding or services to Huawei, including JPMorgan Chase & Co., Australia & New Zealand Banking Group Ltd. and ING Group NV, declined to comment on whether they would enter into new business. An ANZ spokesman said it takes its due diligence responsibilities very seriously and has detailed policies and processes in place for use when engaging clients. A spokesman for ING, whose subsidiary Bank Mendes Gans runs a cash pool for Huawei in Europe, said the bank takes its sanctions policy extremely seriously and continually assesses clients for risks.”

Indictments are very serious legal problems that cannot simply be ignored because the individual thinks he or she is a high level Chinese official and that will protect him or her from arrest. High Level Chinese Government and Companies do not get a pass from US and other countries laws and regulations because they are from China.

On December 17, 2018, the Canadian Press in an article entitled “Freeland says corners could not be cut with U.S. arrest request of Huawei exec” stated:

“Cutting corners to avoid arresting a Chinese executive at the request of the Americans simply was not an option to keep Canada out of a difficult political situation, Foreign Affairs Minister Chrystia Freeland said Monday.

In an interview with The Canadian Press, Freeland said that type of tactic would erode Canada’s commitment to the rule of law at a time when it is under threat across the globe.

“I think people need to be very careful when they start to suggest that corners be cut when it comes to the rule of   law and when it comes to international treaty obligations,” said Freeland.

“That is one of the core foundations of everything that’s great about our country, one of the core foundations of our democracy,” she added.

“It’s not an accident that among our heroes are the RCMP.” . . . .

Freeland rejected that notion outright, saying it would undermine Canada’s credibility with other countries, including Canada’s “extradition partners.”

The Chinese government and state-run media have vilified the Canadian decision to arrest Meng, and ridiculed the rule-of-law argument. U.S. President Donald Trump also undermined Canada’s position when he mused in  an interview last week he might intervene in the Meng case if it would help him get a trade deal with China.

“You might call it a slippery slope approach; you could call it a salad bar approach,” Freeland said. “The rule of law is not about following the rule of law when it suits you.”

But there are probably bigger political issues when it comes to Huawei.  On December 14th, Bill Bishop, a China expert, reported in his Sinocism Axios newsletter that there is a real campaign to kill Huawei’s operations in many countries.  Mr. Bishop cited to a December 13th article from the Sydney Morning Herald in Australia, entitled “How the “Five Eyes’ cooked up the campaign to Kill Huawei” which states:

“In the months that followed that July 17 dinner, an unprecedented campaign has been waged by those present – Australia, the US, Canada, New Zealand and the UK – to block Chinese tech giant Huawei from supplying equipment for their next-generation wireless networks. . . .

Not all agreed to speak publicly about China when they returned home, but all were determined to act. And the Five Eyes network would include allies like Japan and Germany in the conversation.

This coming in from the cold was viewed as a countermeasure to China and its many proxies, who have long argued fears over its rising power and influence were a fiction, or worse still, signs of xenophobia.

Since that July meeting there has been a series of rare public speeches by intelligence chiefs and a coordinated effort on banning Huawei from 5G networks. It began with one of Malcolm Turnbull’s last acts as Prime Minister.

The Sunday before he was deposed Turnbull rang the US President Donald Trump to tell him of Australia’s decision to exclude Huawei and China’s second largest telecommunications equipment maker ZTE from the 5G rollout.

Australia’s statement on the rules it would apply to building next-generation wireless networks was released on August 23 and largely lost in the leadership maelstrom.

Huawei was not named but it ruled out equipment being supplied by “vendors who are likely to be subject to extra judicial directions from a foreign government”. . . .

Washington’s sharp focus on Beijing plays into Trump’s obsession with trade wars but it would be wrong to think it’s solely driven by the President. Over the past two years Republicans and Democrats in Congress and the Departments of Defense, State and the security agencies have come to the conclusion China is a strategic threat.

US prosecutors have filed charges against Chinese hackers and, in an audacious sting in April, American agents lured Chinese Ministry of State Security deputy director Yanjun Xu to Belgium, where he was arrested for orchestrating the theft of military secrets.

There is also speculation further indictments are imminent over a concerted Chinese hacking campaign known as “Operation Cloud Hopper”, which is believed to have penetrated networks across the globe, including Australia.

In addition the White House used its bi-annual report on China, last month to say Beijing had “fundamentally” failed to change its behavior around cyber espionage giving it unfair access to intellectual property, trade secrets, negotiating positions and the internal communications of business.

The report added weight to revelations in The Age and Sydney Morning Herald the same week that China had diverted internet traffic heading to Sydney and its peak security agency had overseen a surge in attacks on Australian companies.

This industrial scale cyber theft is just part of a form guide which convinced the Five Eyes intelligence chiefs that Beijing would not hesitate to recruit Huawei to its cause and the company would have no choice but to comply.

All the evidence before the spy bosses at the dinner in Canada pointed to a rising superpower mounting the most comprehensive campaign of espionage and foreign interference that any had witnessed.

The Party was aggressively exporting a worldview that was hostile to democracy and actively sought to undermine it.

A new Great Game was afoot and the West had been slow to act. But it is acting now.”

Although the press has been focused on China cyber hacking US and other Western targets, what goes around comes around.  The Chinese government and companies must expect many other countries, including the US, EC, Australia, Canada, Japan and other countries, to be cyber hacking China.  How did the US government get internal company documents of ZTE to go after it for sales to Iran of US technology?  What evidence does the United States and other countries have on Huawei?

In n October 19, 2915, blog post . I made this point citing testimony of James R. Clapper, Director of National Intelligence under President Obama.  More specifically, on September 29, 2015, in response to specific questions from Senator Manchin in the Senate Armed Services Committee, James R. Clapper, Director of National Intelligence, testified that China cyber- attacks to obtain information on weapon systems are not cyber- crime. It is cyber espionage, which the United States itself engages in. As Dr. Clapper stated both countries, including the United States, engage in cyber espionage and “we are pretty good at it.” Dr. Clapper went on to state that “people in glass houses” shouldn’t throw stones. See http://www.armed-services.senate.gov/hearings/15-09-29-united-states-cybersecurity- policy-and-threats at 1 hour 8 minutes to 10 minutes.

In response to a question from Senator Ayotte, Director Clapper also specifically admitted that the attack on OPM and theft of US government employee data is state espionage and not commercial activity, which the US also engages in. See above hearing at 1 hour 18 and 19 minutes.

But when the Chinese government cyber hacks US companies to obtain trade secrets and other intellectual property for commercial gain, that is another matter.  That is the core of the cyber hacking Agreement that President Xi and President Obama signed and the core of the Section 301 case.

But James Clapper’s testimony shows that when the Chinese government plays cyber hacking games, the US and many other governments will cyber hack China and its companies back and they are pretty good at it.  Huawei and ZTE are legitimate espionage targets because of their relationship to the Chinese military and their evasion of Iran Sanctions and US export control laws.

The US government, I am pretty sure, will cyber hack companies if it leads to a Justice Department indictment for criminal activity.  The US will not cyber hack to turn over commercial information to a US competitor, but they will cyber hack when it is in the interest of the US government to do so and that means criminal prosecution.  So, officials in those Chinese companies must take care.

And that brings us to the recent Justice Department indictments against Chinese individuals for cyber hacking for commercial gain.

MORE JUSTICE DEPARTMENT INDICTMENTS AGAINST CHINESE GOVERNMENT’S CYBERHACKING AND IP THEFT

In my last blog post, I stated that although the Chinese government denies, denies and insists that Chinese companies do not steal US IP and then brags about stealing IP, the Justice Department disagrees and has taken these issues to another level—criminal investigations resulting in prison time.  On November 1, 2018, Attorney General Jeff Sessions announced a new case and a new initiative to combat Chinese economic espionage for stealing IP on semiconductor technology from Micron.  The Justice Department statements related to those indictments are attached, JUSTICE DEPARTMENT ANNOUNCEMENT IP THEFT SESSIONS ANNOUNCEMENT NEW CHINA INITIATIVE IP THEFT ANOTHER JUSTICE DEP ANNOUNCE IP THEFT.  This China initiative began under the Obama Administration and has bipartisan support.

On December 20th, the Justice Department raised the issue even higher issuing an attached announcement, JUSTICE DEPARTMENT INDICTMENT AGAINST CYBER HACKINGw, of new indictments stating:

Two Chinese Hackers Associated With the Ministry of State Security Charged with Global Computer Intrusion Campaigns Targeting Intellectual Property and Confidential Business Information

Defendants Were Members of the APT 10 Hacking Group Who Acted in Association with the Tianjin State Security Bureau and Engaged in Global Computer Intrusions for More Than a Decade, Continuing into 2018 . . . .

The unsealing of an indictment charging Zhu Hua (朱华), aka Afwar, aka CVNX, aka Alayos, aka Godkiller; and Zhang Shilong ( 张 士 龙 ), aka Baobeilong, aka Zhang Jianguo, aka Atreexp, both nationals of the People’s Republic of China (China), with conspiracy to commit computer intrusions, conspiracy to commit wire fraud, and aggravated identity theft was announced today. . . .

Zhu and Zhang were members of a hacking group operating in China known within the cyber security community as Advanced Persistent Threat 10 (the APT10 Group).   The defendants worked for a company in China called Huaying Haitai Science and Technology Development Company (Huaying Haitai) and acted in association with the Chinese Ministry of State Security’s Tianjin State Security Bureau.

Through their involvement with the APT10 Group, from at least in or about 2006 up to and including in or about 2018, Zhu and Zhang conducted global campaigns of computer intrusions targeting, among other data, intellectual property and confidential business and technological information at managed service providers (MSPs), which are companies that remotely manage the information technology infrastructure of businesses and governments around the world, more than 45 technology companies in at least a dozen U.S. states, and U.S. government agencies. The APT10 Group targeted a diverse array of commercial activity, industries and technologies, including aviation, satellite and maritime technology, industrial factory automation, automotive supplies, laboratory instruments, banking and finance, telecommunications and consumer electronics, computer processor technology, information technology services, packaging, consulting, medical equipment, healthcare, biotechnology, pharmaceutical manufacturing, mining, and oil and gas exploration and production. Among other things, Zhu and Zhang registered IT infrastructure that the APT10 Group used for its intrusions and engaged in illegal hacking operations.

“The indictment alleges that the defendants were part of a group that hacked computers in at least a dozen countries and gave China’s intelligence service access to sensitive business information,” said Deputy Attorney General Rosenstein. “This is outright cheating and theft, and it gives China an unfair advantage at the expense of law-abiding businesses and countries that follow the international rules in return for the privilege of participating in the global economic system.”

“It is galling that American companies and government agencies spent years of research and countless dollars to develop their intellectual property, while the defendants simply stole it and got it for free” said U.S. Attorney Berman. “As a nation, we cannot, and will not, allow such brazen thievery to go unchecked.”

“Healthy competition is good for the global economy, but criminal conduct is not. This is conduct that hurts American businesses, American jobs, and American consumers,” said FBI Director Wray. “No country should be able to flout the rule of law – so we’re going to keep calling out this behavior for what it is: illegal, unethical, and unfair. It’s going to take all of us working together to protect our economic security and our way of life, because the American people deserve no less.”

“The theft of sensitive defense technology and cyber intrusions are major national security concerns and top investigative priorities for the DCIS,” said DCIS Director O’Reilly. “The indictments unsealed today are the direct result of a joint investigative effort between DCIS and its law enforcement partners to vigorously investigate individuals and groups who illegally access information technology systems of the U.S. Department of Defense and the Defense Industrial Base. DCIS remains vigilant in our efforts to safeguard   the integrity of the Department of Defense and its enterprise of information technology systems.”

According to the allegations in the Indictment unsealed today in Manhattan federal court . . . .

Over the course of the MSP Theft Campaign, Zhu, Zhang, and their co-conspirators in the APT10 Group successfully obtained unauthorized access to computers providing services to or belonging to victim companies located in at least 12 countries, including Brazil, Canada, Finland, France, Germany, India, Japan, Sweden, Switzerland, the United Arab Emirates, the United Kingdom, and the United States. The victim companies included at least the following: a global financial institution, three telecommunications and/or consumer electronics companies; three companies involved in commercial or industrial manufacturing; two consulting companies; a healthcare company; a biotechnology company; a mining company; an automotive supplier company; and a drilling company.

The Technology Theft Campaign

Over the course of the Technology Theft Campaign, which began in or about 2006, Zhu, Zhang, and their coconspirators in the APT10 Group successfully obtained unauthorized access to the computers of more than 45 technology companies and U.S. Government agencies based in at least 12 states, including Arizona, California, Connecticut, Florida, Maryland, New York, Ohio, Pennsylvania, Texas, Utah, Virginia and Wisconsin. The APT10 Group stole hundreds of gigabytes of sensitive data and information from the victims’ computer systems, including from at least the following victims: seven companies involved in aviation, space and/or satellite technology; three companies involved in communications technology; three companies involved in manufacturing advanced electronic systems and/or laboratory analytical instruments;   a company involved in maritime technology; a company involved in oil and gas drilling, production, and processing; and the NASA Goddard Space Center and Jet Propulsion Laboratory.   In addition to those   victims who had information stolen, Zhu, Zhang, and their co-conspirators successfully obtained   unauthorized access to computers belonging to more than 25 other technology-related companies involved   in, among other things, industrial factory automation, radar technology, oil exploration, information technology services, pharmaceutical manufacturing, and computer processor technology, as well as the U.S. Department of Energy’s Lawrence Berkeley National Laboratory.

Finally, the APT10 Group compromised more than 40 computers in order to steal sensitive data belonging to the Navy, including the names, Social Security numbers, dates of birth, salary information, personal phone numbers, and email addresses of more than 100,000 Navy personnel.

*              *              *

Zhu and Zhang are each charged with one count of conspiracy to commit computer intrusions, which carries a maximum sentence of five years in prison; one count of conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison; and one count of aggravated identity theft, which carries a mandatory sentence of two years in prison. . . .

INTERNATIONAL COALITION TO ISOLATE CHINA ON IP THEFT, FORCE TECHNOLOGY TRANSFER AND CYBER HACKING

As stated in my last blog post, although many Chinese and US commentators believe that the only country pushing back on China in the IP area is the United States, that simply is incorrect.   Many other countries are jumping on the Trump band wagon when it comes to IP violations by the Chinese government.

In fact, these US China trade negotiations are simply a prelude to negotiations China will have with many other countries.  The early 2000 process of China joining the WTO started, not with “multilateral” negotiations of China with many countries.  Instead, first China negotiated a WTO Agreement with the United States and then other countries, including the EC, negotiated a WTO agreement based in large part on the Agreement China had negotiated with the United States.

One should expect to see the same process here.  First China negotiates these issues with the United States and then with many other countries.

As mentioned in the last newsletter, on IP, China will face a united front against IP Theft, Forced Technology Transfer and Cyber Hacking by the US, EC, Canada, Mexico, Japan and probably Korea against it.

CHINESE GOVERNMENT NEEDS A TRADE DEAL BECAUSE MANY PROBLEMS IN THE CHINESE ECONOMY

One reason that the Chinese government has not linked the Meng/Huawei problem with the US trade negotiations is that President Xi and the Chinese government need a deal.  The Chinese economy is hurting, and the situation has gotten much worse and faster than anyone in China predicted.

As my last blog post stated, the Chinese economy appears to be changing from a private economy with a smaller state-owned economy to an economy dominated by State-Owned companies.  The Chinese saying has changed from Guo Tui Min Jin to Guo Jin Min Tui.

Private entrepreneurs in China are reportedly facing taxes as high as 60%.  When the private entrepreneurs cannot pay their taxes, the Government simply buys the company out and takes over.  80% of Chinese employees, however, are employed by the private sector.

Recently, the Chinese government has stated that in 2019 it will cut taxes and pour more money into the system.  But the problem is that many in China do not believe the Chinese government.

On December 20, 2018, in an article entitled, China stock market meddling will be reduced after bad year, vows Beijing” the South China Morning Post stated:

“Financial Stability and Development Commission, part of the People’s Bank of China, says the heavy hand of intervention will be replaced by the light touch China pledges to attract more funds into stocks after the market reported one of the world’s worst performances in 2018

China’s heavy-handed intervention in stock trading will cease and investment funds will be encouraged to buy into its equity market, as Beijing hopes to boost a stock market that has been among the world’s worst performers this year.

The Financial Stability and Development Commission, part of the People’s Bank of China, announced on Thursday that the world’s second largest economy must fully implement “market principles” to “reduce administrative intervention in stock trading”.

The decision followed a meeting with the country’s financial regulators and major banks, brokerage houses and fund managers, chaired by deputy central bank governor Liu Guoqiang.

The conference agreed that China must follow “international practices” to cultivate “medium- and long-term investors” as well as allow various new asset managers access to the capital market.

It was not enough to boost market sentiment immediately, as the benchmark Shanghai Composite Stock Index closed on Thursday at a two-month low.

Beijing’s efforts to draw fresh funds into stocks may not work, due to weakening confidence in China’s economic growth outlook, according to Hao Hong, managing director and head of research at Bocom International in Hong Kong.

“Beijing has eased the intensity of its crackdown on shadow banking, and has pumped ample liquidity into the interbank market. But the money is just circulating between banks [and not reaching the real economy],” he said.

“There is no sign of an economic rebound in the near term.”. . .  .

China’s benchmark Shanghai stock index has so far lost 25 per cent in 2018. Compared to its peak in the summer of 2015, the index has lost more than 50 per cent, and China’s stock market capitalization has fallen below that of Japan’s.

In fact, the Chinese stock market has fallen like a rock and many average Chinese simply do not trust it anymore.

On December 21, 2018 the Epoch Times in an article entitled “ China May Be Experiencing Negative GDP Growth” reported on a December 16 speech by Xiang Songzuo, Deputy Director and Senior Fellow of the Center for International Monetary Research at China’s Renmin University, who reportedly has stated that the Chinese stock market is looking like the US stock market in 1929 just before the Great Depression:

Xiang challenged the figure given by the National Bureau of Statistics, which claims that China’s rate of GDP growth is at 6.5 percent. According to some researches, Xiang said, the real growth rate could be just 1.67 percent, while more dismal estimates say that China’s economy is actually shrinking.

In his speech, Xiang said that the Chinese regime leadership had made major miscalculations, especially in terms of the Chinese Communist Party’s (CCP) stance in the Sino-U.S. trade war. He criticized propaganda slogans aired by Party- controlled mass media, such as “The Americans are lifting rocks only to have them smash on their own feet,” “China’s victory is assured,” or “China will stand and fight” as being overly confident and ignorant of the real difficulty that the country faces.

Beyond the CCP’s stubborn attitude towards U.S. demands, a second cause for the recent downturn in the Chinese economy was the severe hit to private enterprises this year, Xiang said. Private investment and investments into private enterprises have slowed sharply, severely impacting confidence among entrepreneurs.

Various official statements implying the eventual elimination of private business and property have reduced private sector confidence. This includes the idea, put forward by some Party-backed scholars, that the market economy has already fulfilled its role and should retreat in favor of planned, worker-owned economics.

Xiang said: “This kind of high-profile study of Marx and high-profile study of the Communist Manifesto, what was that line in the Communist Manifesto? The elimination of private ownership—what kind of signal do you think this sends to entrepreneurs?”

Chinese law, social governance, and state institutions are rife with their own problems, he said. Xiang noted that even on the 40th anniversary of China’s “reform and opening up”—the term of the economic reforms started by former CCP leader Deng Xiaoping—current leader Xi Jinping still had to explicitly suggest greater protections for individual and corporate property.

Xiang said that a huge challenge for China is the Sino-U.S. trade war. He believes that it is no longer a trade war, but a serious conflict between the Chinese and American systems of values. The China-U.S. relationship is at a crossroads, he said, and so far there has been no solution found to resolve their differences.

In the short term, China faces drops in consumption across the board, from auto sales to real estate. Exports are also hard-hit due to the trade war and the gradual shift in the global supply chain.

Xiang criticized the Chinese regime’s reliance on increasing domestic consumption in order to keep the economy growing. Falling investment cannot be offset by consumption.

Throughout 40 years of market economic reforms, Xiang said, Chinese consumption patterns have demonstrated five phases. The first was to satisfy the demand for basic necessities like food and clothing; the second to satisfy demand for the “three new must-have items” (watches, bicycles, and radio sets); the third to supply non-essential consumer goods; the fourth to match demand for automobiles, and the fifth being real estate consumption.

However, each of these phases have all but come to an end. The Chinese authorities are hard-pressed to stabilize the exchange rate, foreign exchange reserves, and housing prices, Xiang said. Given these challenges, it will be even more difficult to stabilize investment, exports, the stock market, and employment rate.

Xiang said that in the first three quarters of 2018 before October, corporate bond defaults have exceeded 100 billion yuan ($14.51 billion). According to official data, the corporate defaults will exceed 12 billion yuan ($1.74 billion) this year, while a large number of enterprises have gone bankrupt.

Cao Dewang, a Chinese billionaire entrepreneur and the chairman of Fuyao, one of the largest glass manufacturers in the world, said that now a large number of enterprises have closed, as well as state-owned enterprises. Bohai Steel Group Company Limited, one of the world’s top 500 enterprises, went bankrupt. Its liability ratio reached 192 billion yuan ($27.86 billion).

Surging local Chinese government debt is another source of crisis. According to the National  Audit Office, local authorities owed 17.8 trillion yuan ($2.58 trillion), but He Keng, deputy director of the Financial and Economic Affairs Committee with China’s National People’s Congress, said that the real figure is 40 trillion yuan (about $5.8 trillion).

Xiang warned that China’s poorly performing stock market has come to resemble conditions during the Wall  Street Crash of 1929.

The devastating Wall Street stock market crash lasted for more than a decade, with most stocks falling 80 or 90 percent, Xiang said. The stocks of 83 firms fell by over 90 percent, 1,018 fell by over 80 percent, 2,125 by over 70 percent, and 3,150 by around 50 percent.

While unsound regulatory policy has exacerbated the problems, Xiang does not believe they are the underlying cause of the developing crash.

“Look at our profit structure,” he said. “Frankly speaking, China’s listed companies don’t really make money. Then who has taken the few profits made by China’s more than 3,000 listed companies? Two-thirds have been taken by the banking sector and real estate. The profits earned by 1,444 listed companies on the SME board and growth enterprise board are not even equal to one and half times the value of the Industrial and Commercial Bank of China. How can this kind of stock market become a bull market?”

Xiang made reference to a report comparing the profitability of Chinese and U.S. companies. American listed companies are in the billions, but among numerous Chinese tech and manufacturing companies, only one—Huawei—had profits in excess of $10 billion, but it was not a listed company.

The root problem concerning the Chinese economy, Xiang said, was that the majority of Chinese businesses rely on arbitrage, or taking advantage of price differences between markets, to make profits.

Official data claims that in the past ten years, IPOs (initial public offerings or stock market launches) have increased by more than 9 trillion yuan ($1.31 trillion), Xiang said. “Forty percent of it went to the stock market, speculation, and financial companies, but not investment into main businesses. Then can this be considered a good situation for listed businesses? Now you can say goodbye to the equity pledges, game over.”

“I’m acquainted with many bosses of listed companies. Frankly speaking, quite a few of them didn’t use their equity pledge funds to do real business, but just play at arbitrage,” he said. “They have many tricks: our listed companies buy financial management firms and housing. The government makes official announcements saying that our listed companies invested one to two trillion yuan in real estate. Basically China’s economy is all dealing with virtual money, and everything is overleveraged.”

“Starting in 2009, China embarked on a path of no return. The leverage ratio has soared sharply. Our current leverage ratio is three times that of the United States and twice that of Japan. The debt ratio of non-financial companies is the highest in the world, not to mention real estate,” he said.

As the economic downturn pressure is huge, the authorities have resorted to their old methods: loosening monetary policy, employing radical credit schemes, loosening fiscal policies, and using radical capital policies, said Xiang.

However, he thinks that the short-term adjustment of credit and currency cannot fundamentally solve the economic imbalances and gaps in development mentioned above.

“We are still trapped within the box of the old policy,” he said. “The key to whether transformation will be successful is the vitality of private enterprises—that is, whether policy can stimulate corporate innovation. We have been making a game of credit and monetary tools for so many years; isn’t this the reason we are saddled with so many troubles today? Speculation has driven housing prices so high.”

The core challenge facing private enterprises is not financing difficulty, though there are problems in this area, Xiang said. The fundamental problem is fear of unstable government policy.

“The leaders in the State Council said it clearly in the meeting of the Standing Committee: in China, the government is what can be least trusted. Therefore, in order to solve the debt problem, first, the debts that the government owes businesses need to be resolved, followed by the problem of state-owned enterprises owing private enterprises, and then that of large private enterprises owing smaller ones,” he said.”

Mr. Xiang’s speech dovetails what I have heard from friends who recently returned from China.  Their friends in China have told them that management in China companies has been telling its workers to be prepared to “chi ku” eat bitter, for the next ten years because of the poor economy and save their money.  Saving money in China does not result in increased consumption.

The problem with the Chinese government’s policy of stealing Intellectual Property is it sends a very clear message to Chinese entrepreneurs and its own inventors—your work, your inventions mean nothing because everything is owned by the State.  With Chinese scientists on average being paid $85,000 a year from the South China Morning Post and a campaign of belittling intellectual property, how can China grow and prosper?

That is the real problem facing China.  The Chinese government needs a trade deal before true disaster hits.

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES

We are in the process of representing a substantial number of US importers and fabricators, US producers of downstream products, in the Quartz Surface Products from China Antidumping and Countervailing Duty case.  Quartz Surface Products are used to produce kitchen countertops, shower stalls and many other downstream products.

The Commerce Department recently issued a critical circumstances determination exposing thousands of importers to millions of dollars in liability and bankruptcy in a situation in which the US International Trade Commission (“ITC”) goes no critical circumstances in over 90% of the cases.

Cambria, the Petitioner in the case, has taken the position that it not only represents the producers of the slab, the raw material, but also all the producers of the downstream products, the fabricators.  We have learned that there are more than 4,000 fabricators of the downstream producers with 1000s of jobs at stake.  Cambria essentially argues that it is the sole representative of an industry with more than 4,000 companies.

Cambria’s objective in this case is very clear—drive up the prices of the raw material so as to drive out the fabricators, the downstream producers, all 4,000 of them.  We are working to include the fabricators in the domestic industry, but the fabricators have to be willing to answer the ITC questionnaires so as to have their voices heard.

Attached are the ITC questionnaires in the case, Foreign producers–Quartz surface products (F) US importers–Quartz surface products (F) US producers–Quartz surface products (F) Questionnaire Transmittal Letter QSP US purchasers–Quartz surface products (F)to my blog, www.uschinatradewar.com.

If anyone would like help with these questionnaires, please feel free to contact me.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, Huawei problem, the Quartz Surface Products case, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact me.

Best regards,

Bill Perry

https://uschinatradewar.com/6102-2/

US CHINA TRADE WAR –301 IP CASE NOT GOING AWAY, LONG COLD WINTER US CHINA TRADE RELATIONS, TRUMP XI MEETING DIM HOPE, JUSTICE DEPARTMENT CHINA IP INVESTIGATIONS, 301 PROCEDURES, NEW NAFTA

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR – NOVEMBER 19, 2018

Dear Friends,

This has been a difficult blog post to write because the US China Trade Relations are at a turning point.  Also every day there has been more news, most of it bad.

Although my hope is for a quick settlement, in all probability the US China trade relations are entering a long cold winter. The core of the Section 301 case is the IP Theft and Forced Technology transfers of US/foreign companies by Chinese entities under the direction of the Chinese government.  With no proposals/action plans from the US government and no real proposal from the China side until November 15th, which apparently was just a list of areas for possible negotiation, I do not see how this trade war ends soon.

Although there will be a Trump Xi meeting at the G-20 in Argentina on November 30 to December 1st, as of November 16th, there has been no real movement to a settlement.  Maybe an agenda can be created before the meeting, but usually those agendas are set up at lower level meetings and the issues are preliminarily negotiated before the meeting of the principles.  To date those real negotiations have not taken place.

Although there has been talks with the Treasury Secretary, Treasury will not make the decision in the Trade War embodied in the Section 301 case.  That decision will be made by the United States Trade Representative (“USTR”) Robert Lighthizer and Donald Trump.  To date, there have been no negotiations on the 301 case between China and USTR.

On October 29th, Bloomberg reported that sources in the White House indicated that the if there is no breakthrough at the Trump Xi meeting, President Trump will impose tariffs on the remaining $275 billion in imports from China, in effect, covering all imports from China, which in 2017 were close to $505 billion.

The US China Business Council and the American Chamber of Commerce in Beijing have both told the Chinese government to come up with an action plan to provide the US government to settle this dispute.  This action plan would specifically spell out the steps that the Chinese government is prepared to deal with the core of the Section 301 case  — intellectual property (“IP”) theft and forced technology transfer.  Although I hope that an agreement between the US and China is possible, as indicated below, my partner, Steve Dickinson, who represents many US companies in China, believes that the situation is not likely to change in the near future.

Making it more difficult, on November 13th Vice President Pence told the Washington Post:

In addition to trade, Pence said China must offer concessions on several issues, including but not limited to its rampant intellectual property theft, forced technology transfer, restricted access to Chinese markets, respect for international rules and norms, efforts to limit freedom of navigation in international waters and Chinese Communist Party interference in the politics of Western countries.

If Beijing doesn’t come up with significant and concrete concessions, the United States is prepared to escalate economic, diplomatic and political pressure on China, Pence said. He believes the U.S. economy is strong enough to weather such an escalation while the Chinese economy is less durable.

If the US demands that China, in effect, must concede on every issue and completely change its economy to settle the 301 case, which is not focused on the South China sea and other issues, China will stand up and refuse to back down.

On the other hand, if a proposal to settle IP Theft and Forced Technology Transfer, the core of the 301 case, can come from the Chinese side, there is a chance that the 301 case can be settled.

In addition, IP Theft has risen to another level with the Justice Department initiative below to criminalize the actions and threaten the Chinese companies and the individuals involved with criminal fines and prison time.

If there is no settlement of the IP issue, this trade war will go on and on.  My hope is that the Chinese government makes a pragmatic/practical decision to deal with the IP Theft and forced technology transfer issues and settles this 301 case before the damage becomes too great.

On November 4th, former Treasury Henry Paulson, a true friend of China, at an economic conference in Singapore at which Wang Qishan attended made clear his fear that the US and China are entering into a cold war and “that is why I now see the prospect of an Economic Iron Curtain—one that throws up new walls on each side and unmakes the global economy, as we have known it.”  That statement should make the Chinese government understand how serious this situation is.

Meanwhile, the Chinese government appears to be turning away from the private market and to more of a state-owned market causing many private Chinese companies to look at alternatives in third countries.

Because of this trade war, US importers, US and foreign companies with manufacturing operations in China and even Chinese private companies must make contingency plans to deal with this US China Trade War, which could block all Chinese exports from the US market.  My law firm has set up a new group of consultants in Vietnam, Thailand and Philippines to look for third country sources of supply.  Our lawyers have expertise in drafting contracts to help them import products from those countries and also to set up manufacturing operations in those countries. Products coming from countries, such as Thailand and Philippines, also get an advantage under the US General System of Preferences eliminating normal Customs duties on products, which can range from 4 to 6.5%. This gives those imported products from GSP countries a financial advantage over products from China and elsewhere.

This newsletter will describe the 301 and IP issues in detail.  At the end of the newsletter, the technical details of the Section 301 case will be set up with the three lists and the possibility of filing for a product exclusion request.

Finally, will make some brief comments on the new US Mexico Canada Trade Agreement.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

THE US CHINA TRADE WAR IS NOT GOING AWAY SOON

To date the Chinese government appears to have dug in its heels, denied any IP theft or forced technology transfer and refused to provide any specific action plan to the US Government to deal with the IP issue.  The November 15th Chinese proposal apparently was just areas for possible future negotiation.

The attached full Section 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, lists the IP Agreements between the US and China, which China has not followed through on.  The 301 report is based on studies done by the US China Business Council and the American Chamber of Commerce in China.

I have personally talked to US companies, who have had intensive pressure from Chinese companies to turn over IP.  That pressure from Chinese companies apparently is coming directly from the Chinese government.

Some of those US companies are leaving China.  In fact, because of the Trump tariffs and the IP problems, there are reports that 60% of US companies are planning to move all or some of their production out of China.  The Trump tariffs have been the spark, but the gunpowder is the Chinese government/companies’ aggressive attempts to take US companies’ intellectual property.

The Chinese government may believe that it can weather this trade storm and wait it out.  But my discussions with Chinese companies indicate that it is becoming a long, hard winter.  Despite the tariffs, the US stock market has hit record highs since the Trump election in 2016.  Unemployment is at record low levels.

In contrast, China has seen an enormous drop in the Shanghai stock exchange of 25%.  Although exports are up because the tariffs on the $200 billion are only 10%, many experts are expecting a sharp drop when the tariffs go up to 25% on January 1st.

The US may be hurt by a US China trade war, but all the economic indicators are that China will be devastated. See the November 1st article from the South China Morning Post about the dramatic slowing in the Chinese economy at https://www.scmp.com/news/article/2170966/chinese-manufacturing-activity-slows-more-expected-trade-war-intensifies.

The question for the Chinese government is does China want to be a friendly competitor or a strategic rival bent on becoming the hegemon, which will dominant all of Asia.  My hope is that China wants to join the international community as a friendly competitor.  If China wants to be a friendly competitor, it has to demonstrate a committed policy of rejecting IP theft and forced technology transfer.  Otherwise it will be regarded as an international outlaw and strategic rival, and the US and many countries in the World will push back, devastating the Chinese economy and setting back the Chinese economy by decades.

The question for the Trump Administration is do you want to settle the 301 case and deal with the IP issues or simply use the 301 case as an excuse to shut down all trade with China.

Chinese officials argue that they do not know what US government officials to negotiate with and what the core issues are in the Section 301 case.  The core issues are IP Theft and Forced Technology Transfer.  The US government officials to negotiate with are: President Donald Trump, USTR Robert Lighthizer and possibly President Trump’s son in law, Jared Kushner, who played a pivotal role in negotiating the US Mexico Canada Trade Agreement.  But USTR is the agency in charge of the negotiations and the entity the Chinese government has to negotiate with.  Negotiating with Treasury Secretary Mnuchin is not going to settle the 301 case because that case comes out of USTR.

Moreover, it is not just the US that China has to worry about on intellectual property.  Europe has already agreed to work with the US against China on IP theft and forced technology transfer.  Mexico and Canada will join the Coalition.  Japan will also join because it strongly believes that the Chinese government stole their intellectual property for the bullet train.  This is not a pretty situation for China.

THE IP CORE OF THE 301 CASE AND SIGNED CHINESE IP AGREEMENTS VIOLATED

The core of the Section 301 case is intellectual property, rights which are Constitutionally protected rights.  Stealing intellectual property (“IP”) is piracy, pure and simple.

As the United States Trade Representative states on page 4 of its attached full 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER:

The Federal Register Notice described the focus of the investigation as follows:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies.  Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.

Second, the Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology- related negotiations with Chinese companies and undermine U.S. companies control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non- market terms in licensing and technology contracts.

Third, the Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

The Section 301 Report then goes on to list ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, including the recent 2016 agreement between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China.  See page 8 of the USTR 301 report, which is attached above.

The international IP agreements China signed between 2010 to 2016 are NOT unequal treaties.  These are agreements that the Chinese government negotiated with the US and other foreign countries and then simply refused to follow through on.

See the article from the South China Morning Post on how China’s rampant intellectual property theft overlooked by the US sparked the trade war https://www.scmp.com/magazines/post-magazine/long-reads/article/2170132/how-chinas-rampant-intellectual-property-theft.

Moreover, the argument from some Chinese government officials and academics that China is a “developing” country and does not have to follow the international agreements that it signed is simply ridiculous.  China is now the second strongest economy in the World.

WHY IP PROTECTION SO IMPORTANT FROM THE US POINT OF VIEW

Many do not realize that IP rights, specifically copyrights and patents, are Constitutionally protected rights in the United States.  Article I Clause 8 of the US Constitution states:

“The Congress shall have power: “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

When I was in the Commerce Department in the mid 1980s during the Reagan Administration, Commerce Secretary Malcolm Baldrige believed that his job was to protect the crown jewels of American Manufacturing, the High-Tech industry.

In July 2018, USTR Lighthizer at the Senate Appropriations Committee responded to a question from Senator Schatz of Hawaii questioning the 301 case, by strongly stating the importance of protecting US intellectual property for future generations.  See https://www.appropriations.senate.gov/hearings/review-of-the-funding-priorities-for-the-office-of-the-us-trade-representative.

The United States views its high technology as the crown jewels, and crown jewels have to be protected. On June 15th, in the Section 301 case against China’s misappropriation to US intellectual property rights, through the United States Trade Representative (“USTR”), President Trump announced tariffs on $34 billion of Chinese imports.  The USTR announcement announcing the tariffs stated:

“We must take strong defensive actions to protect America’s leadership in technology and innovation against the unprecedented threat posed by China’s theft of our intellectual property, the forced transfer of American technology, and its cyber attacks on our computer networks,” said Ambassador Robert Lighthizer. “China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025.’ Technology and innovation are America’s greatest economic assets and President Trump rightfully recognizes that if we want our country to have a prosperous future, we must take a stand now to uphold fair trade and protect American competitiveness.”

DENY, DENY DENY—CHINESE GOVERNMENT RESPONSE

Recently, here in Seattle, the head of the San Francisco Chinese Consulate responded to the Section 301 case by simply denying all the allegations.  The Chinese government is not engaged in IP Theft and does not force companies to transfer their intellectual property when in China.

In an August 8, 2018 editorial, “China will not surrender to US threatening tactic”, the Chinese Daily, which is an arm of the Chinese government, stated:

But it created a new tactic of accelerating the trade war while advertising its willingness for talks. The mainstream opinion is that the US wants to use carrot-and- stick diplomacy to bully China into unilateral trade concessions, while some others hold that the hardliners in the White House overwhelm those calling for talks.

However, both groups share the same goal: to defeat China, no matter they prefer trade war or negotiation. But there is no way for them to be satisfied. . . .

But China will eventually defeat the trade blackmail of the US and it is impossible to force China into surrender to the US coercion. . . .

On October 16, 2018, in an editorial entitled “Commentary: Washington’s accusing China of “forced technology transfer” not grounded in facts” the China Daily stated:

BEIJING, Oct. 16 (Xinhua) — In its recent round of mud-slinging against China, the United States has once again resorted to such hackneyed charges as “forced technology transfer” and “intellectual property theft.”

Those allegations are detached from the facts, insulting to China’s technological achievements, and nothing but a pretext for the global hegemon to stymie the ascent of the world’s largest developing country.

China’s remarkable scientific and technological development allows no belittlement. It stems from the hard work of generation after generation of Chinese researchers, and benefits from international cooperation under the country’s long-standing opening-up policy. . . .

Meanwhile, as witnessed by the international community, China has made great strides in formulating and improving its laws and regulations on intellectual property rights (IPR) protection in recent years.

World Intellectual Property Organization Director General Francis Gurry said just two months ago that in the past 40 years, China has established a high-level IPR protection system that regards intellectual property as the driving force for innovation and economic development and treats Chinese and foreign companies equally.  Without any doubt, technology transfer abounds between Chinese and foreign entities, but that is rooted in the transferring parties’ pursuit of maximum profits.

As a matter of fact, U.S. companies have made huge gains in China over recent years from technology transfer and licensing. According to the U.S. Bureau of Economic Analysis, China paid 7.95 billion U.S. dollars in 2016 and 8.76 billion dollars in 2017 to the United States for the use of intellectual property.

Thus, such condemnation of normal commercial practices is a mockery of the spirit of contract. More ironically, one of Washington’s frequently used weapons to curb other countries’ development is to impose high-tech export bans.

Authoritative research reports have repeatedly suggested that should the United States relax its strict restrictions on high-tech exports to China, its trade deficits would decrease significantly. But Washington has continued to be obstinate.

As many have pointed out, the ongoing trade frictions between China and the United States betray Washington’s anxiety over China’s increasing scientific and technological strength.

That angst is self-inflicted. Beijing is committed to peaceful development and win-win cooperation. What’s more, if China and the United States, the top two economies and investors in scientific and technological research on the planet, can join forces, the whole world will benefit, including both countries.

Given that, it is high time that Washington abandon its zero-sum mentality and embark upon the path of win-win cooperation instead.

CHINA’S REASONS FOR NOT GIVING IN ON INTELLECTUAL PROPERTY

But we need to go deeper to understand China’s determination not to give in on the IP issues.  In past newsletters and this newsletter, I have advocated strongly that China needs to negotiate and deal with IP Theft and Forced Technology Transfer Issues.  I know for a fact that this happens in China.

Recently, I gave a speech in Houston, Texas about the Section 301 case.  At the end of the speech, an engineer from an oil refining company talked to me about the IP issue.  She has done projects all over the World.  The engineer told me that she has told her bosses that she refuses to do any more projects in China because of the constant aggressive attempts of the Chinese partners to steal the company’s IP.  Another senior manager at a major high tech company confirmed this point.

We know how the Chinese government helps Chinese companies get the IP.  IP for high technology cannot be sold to China by a service.  The policy of Chinese state-owned companies and Chinese banks, which are owned by the Government, is that the IP must be brought to China.  Then the US company cannot set up a wholly owned subsidiary in China to hold the IP.  No, the US company must have a joint venture, often with a direct Chinese competitor.  Once the Joint Venture is established, the Chinese company simply breaches the IP licensing agreements and takes the IP for the high technology.

Simply denying the IP problems will not solve the Section 301 case and make the tariffs go away.  But my partner, Steve Dickinson, who represents many US companies in China, has told me that the Chinese government cannot give in.  Steve speaks and reads Chinese fluently and follows the Chinese press closely:

“The trade and investment relationship between the U.S. and China is going through permanent change. The current round of tariffs is just the start. As the tariffs fail to bring a resolution, other restrictive measures will be implemented: prohibition on a) sale or license of technology to China, b) on Chinese purchase of U.S. technology companies, c) on education of Chinese students in U.S. schools, d) of hiring of Chinese nationals in U.S. business, and e) on cooperative research programs with Chinese scholars and researchers.

This is the “new normal” in China/U.S. business relations. U.S. companies that do business must adjust to this new normal as quickly as possible. Many companies are waiting to react because they believe that this conflict is just a temporary political problem that will soon blow over. This view is a mistake.

The tariff measures are the first step in a much more general conflict over the entire Chinese system. The U.S. objects to virtually every aspect of the current Chinese economic/trade/investment system. Rather than take on the entire Chinese system as a first step, the current tariff dispute with China has been narrowly defined.

The USTR 301 Report bases the tariffs on two concrete issues: forced technology transfer and IP theft. Rather than respond constructively on how these issues can be resolved, the Chinese government response has been to simply deny every claim in the 301 Report. In its White Paper in response to the 301 Report, the Chinese government flatly denied every claim in the report. On forced technology transfer: it does not happen. Companies that transfer their technology to China do it voluntarily based on their own business calculation. On IP theft: it does not happen and all the accusations of trade secret theft and cyber-hacking are simply lies.

This complete denial of every statement in the 301 Report has been consistently maintained by every layer of the Chinese government. There has been no movement at all. For example, in the forced transfer area, the Chinese government has refused to even consider opening the network, e-commerce and cloud computing markets in China to foreign based businesses. In the IP theft area, the Chinese government has refused to cooperate in investigation and extradition on the recent U.S. indictments in several high profile cases.

In the face of these consistent denials, there is no room now for the Chinese government to back down. There is a reason for this position. The forced transfer and IP “assimilation” regimes are at the core of the Chinese economic system. Any government leader who proposed to change those regimes in a serious and effective way would simply be removed from power. The current leaders of China understand this and that is why they cannot even suggest a compromise on this critical issues that go to the heart of the current Chinese system.

So the only short term resolution of the trade war is for the U.S. trade team to capitulate. The U.S. has capitulated in the past. What reason is there to believe that the U.S. will not capitulate now? The reason the U.S. is not likely to capitulate is that U.S. businesses have waited now for 20 years to see real improvement in the Chinese system. The result has not been improvement. Over the past decade the situation has grown steadily worse. As a result, China has lost its former supporters in the U.S. business community. Since China has lost its main body of support in the U.S., there is no pressure on the U.S. trade team to back down. It is therefore unlikely that they will.

The situation is critical and U.S. businesses that operate in China must begin an analysis on how to deal with the trade situation and then make concrete plans to deal with the impact of the situation on their business operations. Many companies believe that they are faced with a black or white decision: either abandon China or pretend that nothing is happening. This approach is a mistake.

The response is far more complex. Some companies will continue to work with China based on the situation that has been in place for the past decade. For those companies, the major adjustment is that they can quit dreaming that anything will change. For other companies, developing supply relations outside of China will become critical. For other companies, China will no longer be attractive and a move will be required.

What is consistent is that every company that operates in China will be required to evaluate its operations in China under the new normal of current and increasing restrictive trade and investment measures. Some of the analysis that must be performed is:or companies that purchase products from China: how will current and future tariffs impact the business. For some of our clients, the tariffs are largely irrelevant. For others, the impact is severe.

When tariffs have an impact: what can be done? Is an exclusion from the tariffs possible? Will the Chinese factory agree to a price adjustment? Should sales be directed to countries outside the U.S. where tariffs are not imposed.

If the supply chain must be moved to another country, a careful analysis is required. Will you need to build a factory or can you purchase from an existing supplier or contract manufacturer? Is the infrastructure and legal system in the target country adequate for your needs? How long will it take to move and what will be the cost? In the end, after the analysis is complete, the result may be that a move from China is not cost effective.

China currently requires many technology companies to license their technology into China. For example, such licensing is required in the network, cloud, SaaS sector, e-commerce and fin-tech sectors. The Chinese government has made it clear that this policy will not change. Companies in this sector that have held off on China in the hopes of a change in policy must now make a decision: accept the licensing requirement or abandon China as a market.

Many U.S. companies engage in co-development of technology and products in China, working with many types of Chinese entities. Over the past 15 years, the Chinese court system has been receptive to protecting the contractual rights of foreign entities, provided that the contracts are properly drafted. Will this support continue? Or will U.S. companies need to look to different ways to protect their innovations that do not rely on the Chinese legal system?

For U.S. companies that want to sell or license technology to Chinese person, will new rules make that difficult or impossible? For U.S. companies that want to bring in Chinese investment, what will be the impact of restrictions that are currently being proposed. For U.S. companies that rely on hiring large numbers of Chinese professionals, what will be the restrictions. For U.S. education and research institutions that want to work with Chinese researchers, will that be possible? What about Chinese scholars who have become naturalized citizens of other countries: will they also be banned?

The questions above must be faced by every party from the U.S. that works with China in any way. The new normal with China is just that: China will not be permanently cut off from business relations with the U.S. But the nature of the relationship has changed. The situation is fluid and the final configuration of the U.S/China business relationship has not been settled. Businesses that wait until after a final resolution is reached will be left behind.

Now is the time to evaluate and take action.

As explained below, because of the great change in US China trade relations, we are working to help US companies, importers and even Chinese private companies set up operations in third countries, such as Vietnam, Thailand and Philippines.  We now have arrangements with consultants on the ground in these countries to help establish manufacturing operations or develop second sources of supply.On the legal side, we have substantial experience drafting foreign manufacturing agreements and supply agreements in these other countries to help companies wanting to move to a third country or source products from those countries.

See more information below.

To understand why we are so pessimistic of a short term settlement, on November 7th, the China Academy of Social Sciences, which is part of the Chinese government, posted an article on what they continue to pose as the ideal Chinese domestic innovation/assimilation of foreign IP project: the high speed rail/bullet train project: http://ex.cssn.cn/djch/djch_djchhg/zggdxlbdly_91788/The PRC high speed rail project was one of the most notorious examples of IP theft in the modern era. Chinese companies stole from 4 different companies breaching IP license agreements with the European and Japanese companies.  Not only did the Chinese companies break their agreements to purchase foreign technology, they are now attempting to sell their illegal clones right back into foreign markets in competition with the companies from whom they stole the technology.

When challenged by Hitachi and others, the Chinese companies responded:

1). The licenses were unfair, so breach was justified.

2). Foreign patents, other IP and formal license agreements are all just unfair means foreigners use to keep China down.

3). The foreign companies should be happy that China is making cheap imitations, since that expands the market for the high speed rail products.

Books have been written about this project in China, where the perpetrators of the theft are lauded as national heroes. They describe in detail exactly how the foreign companies were tricked into giving away their technology. No one hides what was done. Instead, the Chinese government brags about how smart the Chinese companies were compared to the fool foreign companies who thought that formal licenses, IP registration and the rule of law would protect them. In effect, the Chinese Academy of Social Sciences says what fools the foreign companies are.

Although the Chinese Academy of Social Sciences/the Chinese government may think that stealing foreign IP is the way to go, Japanese companies, such as Kawasaki Heavy, disagree.  In the April article entitled Did China Steal Japan’s High Speed Train, http://fortune.com/2013/04/15/did-china-steal-japans-high-speed-train/, Fortune states:

One China defender recently claimed his countryman’s “bandit innovators” could be good for the world. That was small consolation for the Japanese, who say that China pirated their world-famous bullet train technology.

“Don’t worry too much about Chinese companies imitating you, they are creating value for you down the road,” said Li Daokui, a leading Chinese economist at the Institute for New Economic Thinking’s conference. Such “bandit innovators,” he expanded, would eventually grow the market, leading to benefits for everybody.

Kawasaki Heavy Industries (KHI), maker of Japan’s legendary Shinkansen bullet trains, bitterly disagrees. After signing technology transfers with CSR Sifang, the builder of China’s impressive, new high-speed rail, KHI says it deeply regrets its now-dissolved partnership.

The key point is that the Chinese Academy of Social Sciences/the Chinese government posted its high-speed rail article on November 7th, right in the middle of the trade war and just prior to the Trump/Xi G-20 meeting.

It should be noted that the Chinese approach to IP is directly contrary to the Japanese approach to IP.  In the 1990s, Japanese companies were among the top 10 companies getting US patents with Hitachi getting more patents in some years than IBM.  The Japanese know how to develop IP right—invent and patent.

THE JUSTICE DEPARTMENT DISAGREES—CRIMINAL ECONOMIC ESPIONAGE CASES AGAINST CHINESE COMPANIES AND CHINESE INDIVIDUALS

Although the Chinese government denies, denies and insists that Chinese companies do not steal US IP and then brags about stealing IP, the Justice Department disagrees and has taken these issues to another level—criminal investigations resulting in prison time.  On November 1, 2018, Attorney General Jeff Sessions announced a new case and a new initiative to combat Chinese economic espionage.  In the attached statement, SESSIONS ANNOUNCEMENT NEW CHINA INITIATIVE IP THEFT, Attorney General Sessions stated:

But under President Donald Trump, the United States is standing up to the deliberate, systematic, and calculated threats posed, in particular, by the communist regime in China, which is notorious around the world for intellectual property theft.

Earlier this year, a report from U.S. Trade Representative Robert Lighthizer found that Chinese sponsorship of hacking into American businesses and commercial networks has been taking place for more than a decade and is a serious problem that burdens American commerce.

The problem has been growing rapidly, and along with China’s other unfair trade practices, it poses a real and illegal threat to our nation’s economic prosperity and competitiveness. . . .

From 2013 to 2016, the Department of Justice did not charge anyone with spying for China.

But since the beginning of 2017, we have charged three people with spying for China or attempting or conspiring to do so. And when it comes to trade secret theft, we are currently prosecuting five other cases where the theft or attempted theft was for the benefit of the Chinese government.

In 2015, China committed publicly that it would not target American companies for economic gain. Obviously, that commitment has not been kept.

Just ask GE Aviation, or Trimble, of Sunnyvale, California.

Today I am announcing another economic espionage case against Chinese interests. . . .

I am announcing that a grand jury in San Francisco has returned an indictment alleging economic espionage on the part of a Chinese state-owned, government owned, company, a Taiwan company, and three Taiwan individuals for an alleged scheme to steal trade secrets from Micron, an Idaho-based semi- conductor company.

Micron is worth an estimated $100 billion and controls about 20 to 25 percent of the dynamic random access memory industry—a technology not possessed by the Chinese until very recently.

One of the defendants served as president of a company acquired by Micron in 2013. He left the company   in 2015 and went to work for the Taiwan defendant company—from where he is alleged to have orchestrated the theft of trade secrets from Micron worth up to $8.75 billion.

The Taiwan defendant company then partnered with a Chinese state-owned company—so that ultimately China could steal this technology from the United States and then use it to compete against us in the market. This is a brazen scheme.

If convicted, the defendants face up to 15 years in prison and $5 million in fines. The companies could face forfeiture and fines worth more than $20 billion.

This week the Commerce Department added the Chinese company to the Entity List to prevent it from buying goods and services in the United States, to keep it from profiting from the technology it stole.

And today the Department of Justice is filing a civil action to seek an injunction that would prevent the Chinese and Taiwan companies from transferring the stolen technology, or exporting products based on it to the United States.

We are not just reacting to crimes—we are acting to block the defendants from doing any more harm to our U.S. based company, Micron. . . .

As the cases I’ve discussed have shown, Chinese economic espionage against the United States has been increasing—and it has been increasing rapidly.

We are here today to say: enough is enough. We’re not going to take it anymore.

It is unacceptable. It is time for China to join the community of lawful nations. International trade has been good for China, but the cheating must stop. And we must have more law enforcement cooperation; China cannot be a safe haven for criminals who run to China when they are in trouble, never to be extradited. . . .

I am announcing that I have ordered the creation of a China Initiative led by Assistant Attorney General John Demers, who heads our National Security Division . . . .

This Initiative will identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them, and make sure that we bring them to an appropriate conclusion quickly and effectively. . . .

This will help us meet the new and evolving threats to our economy. Today, we see Chinese espionage not just taking place against traditional targets like our defense and intelligence agencies, but against targets like research labs and universities, and we see Chinese propaganda disseminated on our campuses.

And so I have directed this initiative to focus on these problems as well and to recommend legislation to Congress if necessary.

China—like any advanced nation—must decide whether it wants to be a trusted partner on the world stage—or whether it wants to be known around the world as a dishonest regime running a corrupt economy founded on fraud, theft, and strong-arm tactics. Our wish is to have a trusted partner.

The President has made clear that this country remains open to friendship and productive relationships with China. Nothing is more important for the world. We want our relationships to improve, not get worse.

But these problems must be solved. These threats must be ended.

This Department of Justice—and the Trump administration—have already made our decision: we will not allow our sovereignty to be disrespected, our intellectual property to be stolen, or our people to be robbed of their hard-earned prosperity. We want fair trade and good relationships based on honest dealing.  We   will enforce our laws—and we will protect America’s national interests.

Emphasis added

For those Taiwan and Chinese individuals that believe that they cannot be touched by Justice Department warrants in the United States, another think coming.  As Assistant Attorney General Brian A. Benczkowski of the Criminal Division stated on November 1, 2018 in the attached statement, JUSTICE DEPARTMENT ANNOUNCEMENT IP THEFT:

The Criminal Division fully supports the Attorney General’s initiative to counter Chinese economic aggression.   Every day, the Chinese engage in efforts to steal American trade secrets and commit other illegal acts intended to enrich their economy at the expense of American businesses. . . .

We see it time and again: Chinese actors have stolen wind turbine technology in Wisconsin, agricultural research in Kansas, cancer drug research in Pennsylvania, and software source code in New York.

Wherever we see examples of this kind of criminal behavior, the Department will investigate it and prosecute it to the fullest extent possible. We also will continue to work hard to ensure that offenders face justice in U.S. courts.

Our Office of International Affairs is the focal point for all extraditions around the globe. In just the past few years, the Department has successfully extradited nine Chinese individuals, including two for theft of trade secrets. Long prison terms for these offenders help to create much-needed deterrence. . . .

Emphasis added.

Although Chinese individuals may not be touched in China, once they leave the country and go to Europe or any other country, Justice Department extradition warrants can easily take hold.  The individual may find himself arrested on entry to Europe or some other country based on a US extradition warrant.

Taiwan individuals are subject to Justice Department extradition warrants, as are Hong Kong individuals.  In an antitrust case for price fixing of LCDs against many Taiwan high tech companies, Taiwan extradited high ranking company officials to the United States to face prison time.  Two executives at AU Optronics were sentenced to three years in Federal Prison and served the time.

As Assistant Attorney General for National Security John C. Demers further stated on November 1, 2018 in the attached statement, ANOTHER JUSTICE DEP ANNOUNCE IP THEFT:

Just two days ago, in United States v. Zhang Zhang-Gui, et al., we charged ten defendants, including co- opted company insiders, working for or acting on behalf of the Jiangsu Ministry of State Security, also known as the “JSSD,” an arm of the Chinese intelligence services. According to the charging documents from the Southern District of California, the defendants conspired to hack U.S. and European defense and aerospace contractors in order to steal information to develop a Chinese version of a commercial airplane turbofan engine.

Just over three weeks ago, in the Southern District of Ohio, we obtained the extradition of a JSSD intelligence officer who was also alleged to have attempted to co-opt an employee of a defense contractor in order to steal trade secrets related to commercial airplane engines.

In September, in the Northern District of Illinois, we charged an individual here in the United States who acted as a source for a JSSD intelligence officer, helping him, among other things, to assess engineers and scientists for recruitment.

In August, in the Northern District of New York, we charged an individual with stealing turbine technology and sending it to China.

And so it goes.

Taken together, these cases, and many others like them, paint a grim picture of a country bent on stealing its way up the ladder of economic development—and doing so at American expense. This behavior is illegal. It’s wrong. It’s a threat to our national security. And it must stop. . . .

On November 16, 2018, the LA Times, a well-known Democratic newspaper, in an article entitled” China has taken the gloves off in its theft of U.S. Technology secrets”¸ http://www.latimes.com/politics/la-na-pol-china-economic-espionage-20181116-story.html, stated:

“They want technology by hook or by crook. They want it now. The spy game has always been a gentleman’s game, but China has taken the gloves off,” said John Bennett, the special agent in charge of the FBI’s San Francisco office, which battles economic spies targeting Silicon Valley.

“They don’t care if they get caught or if people go to jail. As long as it justifies their ends, they are not going to stop.” . . .

Alperovitch and U.S. officials also have noticed a shift in who is behind the attacks. China’s military is no longer directing the bulk of the hacks. It appears China’s chief civilian intelligence agency, the Ministry of State Security, has taken the lead instead.

The trend is troubling because the spy service employs more sophisticated and seasoned hackers than the military . . . .

“The problem here is the scale and scope of the threat,” said John Demers, the Justice Department’s assistant attorney general for national security. ”It is both impressive and frightening. The Chinese are methodical, persistent and well- resourced. It’s a concerted effort to steal and gather the know-how to produce . . . .”

MIDTERM ELECTIONS WILL NOT SAVE CHINA—IP THEFT AND FORCED TECHNOLOGY TRANSFER HAVE UNITED THE REPUBLICANS AND THE DEMOCRATS IN WASHINGTON DC

The Chinese government may think that the Democratic Victory in the House of Representatives in the Midterm Elections will save China.  But as these newsletters have been saying for years, the only one more tough on China than Donald Trump and the Republicans is the Democrats.

The new Speaker of the House is Nancy Pelosi.  Many Chinese may not remember that Nancy Pelosi demonstrated in Tiananmen Square against the Chinese government in 1991.  See https://www.chicagotribune.com/news/ct-xpm-1991-09-06-9103070091-story.html.  Nancy Pelosi is no real friend of China.

On November 17, 2018, Nicholas Kristof, a New York Times Columnist and no friend of Donald Trump, in an article entitled “The Dangerous Naïveté of Trump and X” stated:

“Trump is right (I can’t believe I just wrote those three words!) that China has not played fair. The best response would have been to work with allies to pressure China simultaneously from all sides; instead, Trump antagonized allies so that we are fighting this battle alone.

Why have I and so many others soured on China?

This is larger than Trump and Xi. China’s admission to the World Trade Organization in 2001 was meant to integrate the country into the global trading system as an increasingly responsible world power. But after moving mostly in the right direction under Deng Xiaoping and Jiang Zemin, China stalled under Hu Jintao and has moved backward under Xi.

China has stolen technology and intellectual property even as it has become more aggressive militarily in the South China Sea and curbed freedom at home. Xi offends global values by detaining more than one million Muslims in the Xinjiang region, arresting lawyers and Christians, and steadily squeezing out space for free thought. I used to report from China each year but now find the limits on a journalist visa so onerous that it’s not worthwhile. And I’m supposed to be the lao pengyou, or old friend, of China.”

On November 8, 2018, the Wall Street Journal reported on a November 7th speech in Singapore in an article by Greg Ip entitled “Henry Paulson Delivers a Sobering Message” that:

“Few people have championed U.S. engagement with China as forcefully or successfully as Henry Paulson, first at Goldman Sachs Group Inc ., later as Treasury Secretary, and now as elder statesman.

So when Mr . Paulson concludes engagement is failing and an “economic Iron Curtain” may soon descend between the two, it’s a sobering statement of the perilous state of relations between the two economic superpowers.

In a speech delivered Wednesday in Singapore, Mr. Paulson warns China its behavior has alienated American friends and unified the American public against it. He is less critical of the U.S. but nonetheless believes it has unrealistic expectations of China and of its own allies. If neither changes course, the result will be “a long winter in U.S.-China relations” and “systemic risk of monumental proportions.” . . .”

In 2006 Paulson became the Treasury Secretary for George W. Bush, where he pushed a US China initiative, the “strategic economic dialogue” because he believed that the US China economic relationship is the most important economic relationship in the World. He then founded the Paulson Institute to smooth bilateral relations with China.

In the attached speech, PAULSON SPEECH, at the November 7th Economic Forum in Singapore at which Wang Qishan and other high level Chinese officials attended, Paulson stated:

Today, this region must look warily at the prospect that what, until now, has been a healthy strategic competition will tip into a full-blown cold war. . . . .

Taken together, these and other drivers, such as China’s cyber practices and island building in the South China Sea, have fueled a new consensus in Washington that China is not just a strategic competitor but very possibly our major long-term adversary.

America’s longstanding “engagement” policy is now widely viewed as being of little use for its own sake. . . .

Unless these broader and deeper issues are addressed, we are in for a long winter in US-China relations.

Let’s just take the economics.

The United States played the decisive role in facilitating China’s entry into the World Trade Organization. Yet 17 years after China entered the WTO, China still has not opened its economy to foreign competition in so many areas. . . .

But it also helps explain why so many influential voices now argue for a “decoupling” of the two economies, especially with respect to technology- related trade and investment that will disrupt supply chains.

These arguments will not go away anytime soon.

They will drive a variety of new approaches from this administration and its successors.

Both Democrats and Republicans are saying so.

And this negative view of China unites politicians from both left and right who agree on nothing else. . . .

In large part because China has been slow to open its economy since it joined the WTO, the American business community has turned from advocate to skeptic and even opponent of past US policies toward China. American business doesn’t want a tariff war but it does want a more aggressive approach from our government.

How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?

The answer lies in the story of stalled competition policy, and the slow pace of opening, over nearly two decades. . . .

It is not just that foreign technologies are being transferred and digested.

It is that they are being reworked so that foreign technologies become Chinese technologies through an indigenization process that many of the multinational CEOs I talk to believe is grossly unfair to the innovators and dreamers at the heart of their companies.

Pervasive technology theft, forced technology transfer, including within joint ventures, and different models of internet governance and cross-border data flows are also contributing factors. . . .

So, such a balkanization of technology could further harm global innovation, not to mention the competitiveness of firms around the world.

Meanwhile, the integration of people, especially the brightest young students, could also stall — as Washington potentially bans Chinese students from studying whole categories of science and engineering subjects.

If all this persists—across all four baskets of goods, capital, technology, and people—I fear that big parts of the global economy will ultimately be closed off to the free flow of investment and trade.

And that is why I now see the prospect of an Economic Iron Curtain—one that throws up new walls on each side and unmakes the global economy, as we have known it.

Emphasis added.

Although former Secretary Paulson talks about a general opening up of the Chinese economy, I believe that he has taken his eye off the ball.  At the same Economic Conference Henry Kissinger stated that the both the US and China must tell the other country what the red lines are.  The key red line in the 301 case and in US China economic policy in general is IP Theft and Forced Technology Transfer.

The fact that Republicans and Democrats are united in opposing China is illustrated by a November 4th Editorial in the Washington Post entitled “The US Must Take Action to Stop Chinese Industrial Espionage”, which stated:

“SPEAKING IN the White House Rose Garden in September 2015, Presidents Barack Obama and Xi Jinping announced a breakthrough. The United States and China pledged that neither nation “will conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information for commercial advantage.” But Mr. Xi’s promises were flimsy and short-lived. The agreement has collapsed. China is again trying to steal its way to greatness, and that calls for a resolute response.

The latest sign of trouble, but hardly the only sign, came in the indictments unsealed last week by the Justice Department. The United States charged that a state-owned Chinese company attempted to steal trade secrets from Micron, a semiconductor company based in Idaho that is the only U.S. maker of “dynamic random-access memory,” or DRAM, vital memory chips for computers, mobile devices and other electronics. . . .

China lacked DRAM technology until recently, and the Micron case is another example of China’s quest to climb the ladder of economic development by stealing overseas technology and copying, re-engineering and manufacturing it, leapfrogging what would otherwise be decades of difficult and expensive work. This is not the sort of espionage seeking state secrets that all countries undertake, but a very targeted stealing to help China’s companies profit and conquer markets. The companies also receive robust capital infusions from the state. After the 2015 Rose Garden announcement, the Chinese stealing subsided for a while, so fewer U.S. companies were hit, but then the pace accelerated again in 2017.

Mr. Sessions insisted that “cheating must stop.” Mr. Obama had also insisted: “I indicated that it has to stop.” In fact, China’s industrial espionage is not a passing fancy but the pillar of a long-term drive to become a global economic, military and political power, with ambitions to rival the United States. Sadly, the hopes of the past two decades, that Beijing would become a fair competitor playing by international rules, have been dashed.

It is a good first response to indict the perpetrators in the Micron case, and for Mr. Sessions to bolster resources and attention to the threat. Beyond that, however, the United States must see the Chinese espionage for what it truly represents: the pursuit of superpower might by stealing the labor and investment of others. The economies of the United States and China are inexorably entwined, which will make confronting the espionage threat even harder. But it must be done. In the end, China will respond only to compulsion.

Emphasis added

The key point of the Washington Post editorial is that the Post is owned by Jeff Bezos, CEO of Amazon and a good Democrat. The Washington Post is a very pro- Democratic newspaper.  When the Washington Post is saying that the only way to end China’s IP theft is “compulsion”, that means both Republicans and Democrats are saying the same thing.  When two ends of a very divided nation unite against China, that is not good for China.

COALITION TO ISOLATE CHINA-OTHER COUNTRIES JUMP ON THE US IP TRAIN

Although many Chinese believe that the only country pushing back on China is the United States, that simply is incorrect.  In July 2018 Jean Claude Juncker, the European Commission President, met with President Trump to discuss a potential trade war.  Juncker made it clear that he came to Washington to make a trade deal, and that the EC would work with the US against China on IP theft, forced technology transfer and overcapacity.

At the end of the recently negotiated US Mexico Canada Trade Agreement, there is a specific Article 32.10 “Non-Market Country FTA”, which provides that “a Party shall inform the other Parties of its intention to commence free trade agreement negotiations with a non-market country.”  China is a non-market country.

Section 32.10 (3) goes on to provide:

“Entry by any Party into a free trade agreement with a non-market country, shall allow the other Parties to terminate this Agreement on six-month notice and replace this Agreement with an agreement as between them (bilateral agreement).”

In other words, if Canada or Mexico negotiate a FTA with China, the United States can terminate the new Mexico Canada Trade Agreement.

Also as indicated above, China stole Japanese technology for the high speed rail network.  In all likelihood, Japan will work with the US and other countries to oppose China’s policy of IP theft and Forced Technology Transfer.  On IP, China will face a united front by the US, EC, Canada, Mexico, Japan and probably Korea against it.

XI TRUMP MEETING END OF NOVEMBER at G-20

President Xi and President Trump are expected to meet on the side of the G-20 meeting in Buenos Ares, Argentina on Nov 30 to December 1st.  As indicated above, the recent proposal from the Chinese government appears to be only an outline of the areas the Chinese government is willing to negotiate on and the areas it is not willing to negotiate on.

If the Chinese proposal was a concrete proposal and action plan, the Chinese government would be meeting now with the United States Trade Representative.  Until USTR Lighthizer is involved in the US China negotiations, I do not expect any deal to get done.

The question is whether Xi Trump meeting can lead to a detailed outline of the areas of negotiation to the extent that Trump is willing to postpone the increase on tariffs to 25% on January 1st.  There is no indication that the United States and China are anywhere near that stage.

On November 19, 2018, the South China Morning Post published the attached article, https://www.scmp.com/news/china/diplomacy/article/2174026/after-apec-tensions-expect-extra-pressure-when-xi-jinping-and, about how the recent APEC meeting has put even more pressure on the Trump/Xi meeting at the end of November at the G-20:

After Apec tensions, expect ‘extra pressure’ when Xi Jinping and Donald Trump meet at G20 . . .

Atmosphere described as ‘extremely tense’ at Pacific nations summit, and observers say it reflects reality of rivalry between China and the US.  Washington will be seeking to maximise pressure on Beijing ahead of crunch meeting at G20 summit, according to analysts

Beijing should prepare for tough talks when Chinese President Xi Jinping and US President Donald Trump meet at the G20 summit after open hostility between the two nations at the Apec gathering, observers say.

That hostility resulted in the 21 Pacific Rim leaders for the first time failing to reach a consensus on a formal declaration at the Asia-Pacific Economic Cooperation meeting in Port Moresby over the weekend, and it is expected to overshadow future trade negotiations between Beijing and Washington.

The rift was on full display when Xi and US Vice-President Mike Pence traded barbs at the summit on Saturday, neither of them listening to each other’s speeches and both lashing out about the trade war, Xi attacking America’s protectionism and Pence taking aim at Beijing’s “Belt and Road Initiative”.

Three delegates from Papua New Guinea described the atmosphere between China and the United States at the summit as “extremely tense”.

Chinese delegates on Saturday left the hall after Xi made his speech, and before Pence gave  his.

“Some left the venue, but those who were still at the venue were just standing outside the hall – they chose not to listen to Pence’s speech,” one of the delegates from Papua New Guinea said. . . .

Liu Weidong, a China-US affairs specialist from the Chinese Academy of Social Sciences, said while the trade war was hurting both China and the US, Beijing may face more pressure.

“This meeting [between Xi and Trump] means more to China than to the US, but negotiators and decision-makers from both sides will come under extra pressure in the next fortnight.”

Xi has tried to position China as a champion of free trade in the face of Trump’s “America first” protectionism, but according to analysts he will have a difficult time convincing leaders of major powers like Germany, France and the European Union, who share many of Washington’s concerns about China – even if  they are worried about being caught in the middle.

“Beijing needs to be prepared,” Liu said. “[The Western powers] may not firmly stand with either China or the US, but they would tacitly approve of some of the US measures that could further press China.”

Liu added that Beijing would have to do something about intellectual property rights protection and lower tariffs to end the trade war.

It is interesting to note that Liu is from the same Academy of Social Sciences that says that stealing the high speed rail technology is the way China should proceed in the future.

Moreover, the fact that the Chinese side refused to even listen to Pence’s speech indicates how far the countries are to any resolution.  If one side refuses to even listen to the arguments, no resolution can be reached.

IN XIAO SHI DA

My hope and prayer is that China truly wants to be a friendly competitor with the United States, not a strategic rival or even an adversary.

Four-character Chinese sayings are an old form of conveying deep thoughts about China.  This situation reminds me of the old Chinese saying, “In Xiao Shi Da”, because of the little, lose the big.  Because of the Chinese desire to steal foreign technology, Chinese companies may lose the entire US market, the $500 billion plus US market.  The Chinese government’s actions may result in Chinese exports being shut out of the US market for years at the cost of trillions of US dollars.

GUO TUI MIN JIN BECOMES GUO JIN MIN TUI

Meanwhile, the Chinese economy appears to be changing from a private economy with a smaller state-owned economy to an economy dominated by State-Owned companies.  When China joined the WTO, China’s economic genius was Zhu Rongyi.  In the following November 14th article, https://www.scmp.com/news/china/politics/article/2173020/inside-story-propaganda-fightback-deng-xiaopings-market-reforms, the South China Morning Post states that the reason Zhu came to power was Deng Xiaoping.  As the article states:

“Liu, who had first-hand knowledge of the articles, said Deng was spending the Lunar New Year holiday in Shanghai in 1991 when he asked then Shanghai party boss Zhu Rongji to go to the Xijiao Hotel where he was staying.

“He summoned Zhu Rongji and talked about the market economy and reform. It was a personal conversation. It was in- depth and not the official line. It was the true thoughts [of Deng] – that is, if you want to reform you have to introduce a market economy,” he said.

Liu said Zhu was very excited that Deng confided his thoughts to him, and relayed the conversation to his secretary and Shi Zhihong in the car on their way back from the hotel.”

At the time that China joined the WTO and Premier Zhu was in charge, the four character saying was “Guo Tui Min Jin”, “State-Owned phase out, private sector phase in”.  The new four character saying under Xi Jinping is “Guo Jin Min Tui”, “State Owned phase in, private sector phase out”.

In the attached November 19th article,  https://www.scmp.com/business/companies/article/2173678/can-communist-partys-unprecedented-endorsement-calm-frayed-nerves, the South China Morning Post is asking whether the Chinese government is suffocating the private industry:

Private entrepreneurs have borne the brunt of Beijing’s diktats, everything from a policy to cut excess industrial capacity in steel and coal, to crackdowns on corruption and pollution, with non-state companies forming nearly all of the 11,000 firms that vanished since 2016, China Merchants Bank International’s chief economist Ding Anhua said in September.

Profit growth is plunging at private enterprises. Bond defaults have surged to a new high. Scores of listed companies have sold controlling stakes to the government for a financial lifeline this year. And a string of China’s richest businessmen have been swept up in corruption probes.

The last straw that sent public sentiment tumbling came in September, when an obscure blogger named Wu Xiaoping wrote that the private sector “had completed its historic mission” of reinvigorating state-owned enterprises, and should now “fade away.”

The essay, which brought back memories of Mao Zedong’s purge of capitalists half a century before, went immediately viral on China’s internet, riding on widespread fears that such radical thinking might be re-emerging.  . . .

But many are sceptical that Xi’s prescription is enough to calm jitters in the business community. Nor enough to answer the high-stakes question hovering: is the powerful state suffocating the most dynamic, vigorous part of China’s economy, at the very time when growth is slowing down amid a trade war with the world’s largest economy?

“Private enterprises are in a dire moment now,” said Sheng Hong, executive director of the independent Chinese think tank Unirule Institute of Economics. “The country could risk a great recession.” . . . .

The private sector accounts for 60 per cent of China’s gross domestic product and 80 per cent of jobs, according to official statistics.

But figures could be even higher by independent estimates. A study led by Sheng of Unirule concluded that more than 90 per cent of the newly added national output since 2016 came from the private sector, which is also the source of all new jobs created since 2000. . . .

Corporate taxes account for 67 per cent of all commercial profits, the 12th highest tax in 190 economies, much higher than the 44 per cent in the US or the 31 per cent in the UK,   according to the World Bank.

In contrast to private owned companies, state owned companies pay almost no taxes at all.

The United States and many countries fear that the new Chinese model is to focus on the State-Owned industry, funnel government monety to those state-owned companies to target foreign technology.

TSUNAMI, BIG WAVE, OF CHANGE US IMPORTERS, FOREIGN COMPANIES AND EVEN CHINESE COMPANIES MOVE TO THIRD COUNTRIES TO ESCAPE TRADE WAR

The US China trade war along with the internal war in China against private industry, however, have led to a tsunami, tidal wave, of change as US Importers look for second sources of supply, and US and foreign companies in China and even private Chinese companies look to move some or all of their production out of China to third countries.

WE CAN HELP

Because of this tidal wave of change, my firm has formed alliances with consultants on the ground in Vietnam, Thailand, Philippines and even Ukraine to help companies find second sources of supply in those countries.  We are now working with consultants on the ground in those countries to help find second sources of supply and set up manufacturing sites.

Steve Dickinson and other partners at Harris have substantial experience drafting supplier contracts for US importers to minimize risk, and drafting contracts to set up manufacturing operations in other countries.  The Trade and Customs group can also help importers meet the requirements under the trade and customs laws and General System of Preferences so as to reduce and in the case of GSP eliminate ordinary Customs duties on imported products.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my last blog post at https://uschinatradewar.com/us-china-trade-war-trump-trade-war-speech-301-tariff-200-billion-in-imports-301-product-exclusion-process-widening-ad-cvd-orders-exclusions-section-201-nafta-us-eu-agreement-new-ad-case/ for a detailed explanation of the 301 case, three outstanding lists and opportunity to request a product exclusion request.

There are presently three separate lists. Depending upon which list imports are on, different options are available.

List 1 is for the 25% tariff on the initial $34 billion in imports, FIRST SET OF $34 BILLION.  If your imported product is on this list, your only option was to file a product exclusion request by October 9th.  According to a November 12th Politico article, to date:

“U.S. companies have filed close to 10,000 requests for certain products to be excluded from a 25 percent tariff that Trump imposed on $34 billion worth of Chinese goods in July.  . . . About 816 of requests have been denied and around 370 have been tentatively approved, subject to a final sign-off by U.S. Customs and Border Protection. The others are still in either Stage 1 or Stage 2 of the review process.”

List 2 is for the 25% on the $16 billion in imports, USTR OFFICIAL $16 BILLION PRESS RELEASE.  If your products are on that list, the 25% tariffs took effect on August 23rd.  Your only option is to file a product exclusion request by December 18th.  According to the November 12th Politico article:

“Companies have also filed close to 500 requests for products to be excluded from a second batch of tariffs on $16 billion worth of Chinese goods that went into effect in August.

List 3 is for the 25% on the $200 billion in imports, $200 BILLION USTR NOTICE.  No exclusion process has been set up yet for products on the $200 billion list.

BRIEF COMMENTS ON NEW NAFTA NOW US MEXICO CANADA TRADE AGREEMENT

As many will know because of the press updates, the United States and Canada reached agreement with Mexico on a New NAFTA, now known as the USMCA, the US Mexico Canada Agreement. To see the text of the New USMCA go to this link at the United States Trade Representative, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico.

Note that the term “Free Trade” has been removed.  Trump has made one point clear in these trade negotiations.  Despite the fancy statements, these trade agreements are not “free trade agreements”.  They are government managed trade.

If the North American Free Trade Agreement (“NAFTA”) were truly a free trade agreement, Canada would not have had 275% tariffs on exports of dairy products to Canada.

But the US Mexico Canada Trade Agreement (“USMCA”) does have many changes and yes, the US is a beneficiary.

Besides the Nonmarket Economy Provision mentioned above, the new agreement reduces substantially the 275% on US dairy product exports to Canada.

With regards to automobiles, North American content goes up to 75%,

There is also a requirement that to qualify for North American content, the labor wages must be $16 an hour or higher, which means less jobs going to Mexico.

Another area, which is near and dear to my heart, is that Canada and British Columbia have reduced its very high tariffs and import restrictions on US wine, including Washington State Wine.

The Agreement also provides for a sunset review.  Ever six years, the three countries will meet to decide whether to keep the Agreement going and more importantly whether to re-negotiate certain provisions.

The Agreement will also expire in 16 years, which will lead again to more negotiations.

In other words, there are many changes in the US Mexico Canada Trade agreement and companies should follow the link above to see how the Agreement will affect each company.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, movement to third countries, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact me.

Best regards,

Bill Perry

 

US CHINA TRADE WAR–TRUMP TRADE WAR, SPEECH, 301 TARIFF $200 BILLION IN IMPORTS, 301 PRODUCT EXCLUSION PROCESS, WIDENING AD/CVD ORDERS, EXCLUSIONS SECTION 201 NAFTA, US EU AGREEMENT, NEW AD CASE

Arrow Watch Tower Forbidden City Beijing China

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE-OCTOBER 1, 2018

 

Dear Friends,

As many will know because of the press updates, yesterday the United States and Canada reached agreement with Mexico on a New NAFTA, now known as the USMCA, the US Mexico Canada Agreement.  Note that the term “Free Trade” has been removed.  As President Trump has so clearly illustrated, Free Trade Agreements or FTAs are not truly free trade agreements, they are government managed trade.

To see the text of the New USMCA go to this link at the United States Trade Representative, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR – SEPTEMBER 19, 2018

Dear Friends,

This blog post will go into detail about the Section 301 China IP case and the September 17th decision to impose the 10 TO 25% tariffs against an additional $200 billion in imports from China, the Product Exclusion process for tariffs on the $16 billion, the growing orbit of US antidumping (“AD”) and countervailing duty (“CVD”) cases, and more exclusions n the Section 201 Solar case.  Will then comment briefly on the NAFTA, Europe negotiations and the new AD case against Mattresses from China.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

OCTOBER 9TH SPEECH HOUSTON TEXAS TRUMP & US CHINA TRADE WAR

On October 9, 2018, I will be speaking at a Trade and Intellectual Property symposium at the Petroleum Club in Houston Texas.  The specific topic of my speech will be Current Topics Regarding Trump/China, Trade War Or Trade Agreements, Fact & Fiction.

Attached is information about the speech and the Symposium.  9_8 HOUSTON IP Symposium Invite If anyone is interested, please feel free to contact me.

TRUMP’S TRADE WAR AND THE SECTION 301 CASE – 10% TARIFFS ON $200 BILLION EFFECTIVE SEPTEMBER 24TH

On September 17th, President Trump announced his decision to impose a 10% tariff on the third list of $200 billion in imports from China effective September 24, 2018.  On January 1, 2019, the 10% tariff will rise to 25%.  The list of items on the $200 billion list subject to the 25% tariff is attached. Tariff List_09.17.18 in $200 billion

With regard to the third $200 billion list in the Section 301 case, in August there were five days of hearings with over 300 US companies and over 9,000 companies and groups of companies filed written comments by September 6, 2018.  Those comments were to try and persuade USTR to exclude certain tariff categories from the list of subject tariff items.  Product exclusion requests are filed after the USTR issues its determination to try and get specific products out of the tariff line item subject to the 25% tariff.

By September 6th, we filed numerous comments for importers and groups of importers of products ranging from wood doors and cabinets to aluminum curtain wall and paper gift bags.  In many instances, there is no production of these specific items in the United States.

In the attached Presidential Proclamation, PRESIDENTIAL DECISION $200 BILLION, President Trump stated:

“Today, following seven weeks of public notice, hearings, and extensive opportunities for comment, I directed the United States Trade Representative (USTR) to proceed with placing additional tariffs on roughly $200 billion of imports from China. The tariffs will take effect on September 24, 2018 and be set at a level of 10 percent until the end of the year. On January 1, the tariffs will rise to 25 percent. Further, if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.

We are taking this action today as a result of the Section 301 process that the USTR has been leading for more than 12 months. After a thorough study, the USTR concluded that China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing United States companies to transfer technology to Chinese counterparts. These practices plainly constitute a grave threat to the long-term health and prosperity of the United States economy.

For months, we have urged China to change these unfair practices, and give fair and reciprocal treatment to American companies. We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly. But, so far, China has been unwilling to change its practices. To counter China’s unfair practices, on June 15, I announced that the United States would impose tariffs of 25 percent on $50 billion worth of Chinese imports.

China, however, still refuses to change its practices – and indeed recently imposed new tariffs in an effort to hurt the United States economy.

As President, it is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country itself. My Administration will not remain idle when those interests are under attack.

China has had many opportunities to fully address our concerns. Once again, I urge China’s leaders to take swift action to end their country’s unfair trade practices. Hopefully, this trade situation will be resolved, in the end, by myself and President Xi of China, for whom I have great respect and affection.

The core issue in this Section 301 is Intellectual Property (“IP”) and forced technology transfer of IP to Chinese companies.  As USTR states in the attached press release, USTR PRESS RELEASE:

Washington, DC – As part of the United States’ continuing response to China’s theft of American intellectual property and forced transfer of American technology, the Office of the United States Trade Representative (USTR) today released a list of approximately $200 billion worth of Chinese imports that will be subject to additional tariffs. In accordance with the direction of President Trump, the additional tariffs will be effective starting September 24, 2018, and initially will be in the amount of 10 percent. Starting January 1, 2019, the level of the additional tariffs will increase to 25 percent.

The list contains 5,745 full or partial lines of the original 6,031 tariff lines that were on a proposed list of Chinese imports announced on July 10, 2018. Changes to the proposed list were made after USTR and the interagency Section 301 Committee sought and received comments over a six-week period and  . . . as a result, determined to fully or partially remove 297 tariff lines from the original proposed list. Included among the products removed from the proposed list are certain consumer electronics products such as smart watches and Bluetooth devices; certain chemical inputs for manufactured goods, textiles and agriculture; certain health and safety products such as bicycle helmets, and child safety furniture such as car seats and playpens.

The USTR cited to the attached original March 2018 Section 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, and then went on to describe the core issues in the Section 301 case stating:

Specifically, the Section 301 investigation revealed:

China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to require or pressure technology transfer from U.S. companies.

China deprives U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations.

China directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets to generate large-scale technology transfer.

China conducts and supports cyber intrusions into U.S. commercial computer networks to gain unauthorized access to commercially valuable business information.

After separate notice and comment proceedings, in June and August USTR released two lists of Chinese imports, with a combined annual trade value of approximately $50 billion, with the goal of obtaining the elimination of China’s harmful acts, policies and practices. Unfortunately, China has been unwilling to change its policies involving the unfair acquisition of U.S. technology and intellectual property. Instead, China responded to the United States’ tariff action by taking further steps to harm U.S. workers and businesses. In these circumstances, the President has directed the U.S. Trade Representative to increase the level of trade covered by the additional duties in order to obtain elimination of China’s unfair policies. The Administration will continue to encourage China to allow for fair trade with the United States.

CHINESE GOVERNMENT RETALIATES

Although the Presidential Proclamation and the decision to raise the tariff to 25% on January 1st would appear to pressure China to the negotiating table, that is not what happened. As one senior Chinese official recently stated, “China is not going to negotiate with a gun pointed to its head.”

In response to the tariffs on the $200 billion, on September 18th the Chinese government predictably retaliated and imposed tariffs on $60 billion in imports from the US, risking an escalation of the trade war by Trump.  China announced 5 to 10% tariffs effective September 24th on $60 billion in imports from the US ranging from imports of farm products and machinery to chemicals.

On September 18th, anticipating the China response, President Trump warned in a tweet:

“China has been taking advantage of the United States on Trade for many years. They also know that I am the one that knows how to stop it. There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!”

BACKGROUND OF THE 301 CASE AND PRODUCT EXCLUSION REQUEST FOR THE $16 BILLION

With regards to the Section 301 case, to date in the Section 301 IP case, USTR has issued 25% tariffs on imports of $50 billion from China.  The first $34 billion went into effect in June 20, 2018, FIRST SET OF $34 BILLION.  USTR issued its determination in the second $16 billion, target list, in the Section 301 case on August 7th and made the tariffs effective August 23rd , PRODUCTS ON $16 BILLION LIST

On September 18th USTR in the attached notice, EXCLUSION REQUEST 16 BLLION FED REG NOTIICE, set up a product exclusion process for the $16 billion.  The due date for products exclusion requests is December 18th.  Thus, for products on Lists 1, $34 billion, and 2, $16 billion, and eventually 3, $200 billion, companies will have a second chance to exclude individual products out of the target lists in the product exclusion process.

USTR’s first round of comments were focused more on excluding specific tariff subheadings from the target list, while this second round of requests gives parties a second chance to explain why their specific particular products should be excluded from the tariffs.  The List 1 product exclusion requests are due by October 9, 2018, 301 EXCLUSIONS FED REG NOTICE.  The List 2 product exclusion requests are due by December 18th.  The products and deadlines for the List 3 product exclusion requests have not been established yet.

List 1 Exclusion Process

Exclusion Request Conditions

USTR will accept requests from all interested US persons, including trade associations. Exclusion requests must identify a “particular” product with supporting data and rationale for an exclusion. Interested persons seeking an exclusion for multiple products must also submit a separate request for each particular product.

Factors for USTR Consideration in Granting Exclusion Requests

In granting an exclusion request on a product-by-product basis, USTR will consider whether the product is available from a source outside of China, whether the additional tariffs would cause severe economic harm to the requestor or other U.S. interests, and whether the particular product is strategically important or related to Chinese industrial programs including “Made in China 2025.”  USTR is unlikely to grant any exclusion requests that undermine the objective of the Section 301 investigation.

USTR will consider each request on a product-by-product basis.  Exclusions will be granted on a product basis, meaning any individual exclusion should apply to all imports of that particular product (not just to products imported by the requestor).

            Exclusion Request Schedule for List 2. 

The USTR notice for list 2 provides:

  • Product exclusion requests are to be filed by no later than December 18, 2018.
  • Following public posting of the filed request (in docket number USTR–2018–0032 on www.regulations.gov) the public will have 14 days to file responses to the product exclusion.
  • At the close of the 14-day response period, any replies responses are due within 7-days.
  • Any exclusions granted will be effective for one year upon the publication of the exclusion determination in the Federal Register, and will apply retroactively to August 23, 2018.

            The schedule for product exclusion requests for the $200 billion in List 3 will be similar to the schedule for Lists 1 and 2.

Making Exclusion Requests – Requirements

The USTR notice provides that each request must address the specific factors set out in the bullet-point summaries listed below.  See the Product Exclusion Process and Criteria, EXCLUSION REQUEST 16 BLLION FED REG NOTIICE.

  • Identification of the particular product in terms of the physical characteristics (e.g., dimensions, material composition, or other characteristics) that distinguish it from other products within the covered 8-digit subheading.  USTR will not consider requests that identify the product at issue in terms of the identity of the producer, importer, ultimate consumer, actual use or chief use, or trademarks or tradenames.  USTR will not consider requests that identify the product using criteria that cannot be made available to the public.
  • Interested persons seeking to exclude two or more products must submit a separate request for each.
  • The 10 digit subheading of the HTSUS applicable to the particular product requested for exclusion.
  • Requesters also may submit information on the ability of U.S. Customs and Border Protection to administer the exclusion.
  • Requesters must provide the annual quantity and value of the Chinese-origin product that the requester purchased in each of the last three years. If precise annual quantity and value information are not available, USTR will accept an estimate with justification.

Exclusion requests should address the following factors:

  • Whether the particular product 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.
  • Whether the imposition of additional duties on the particular product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
  • Requesters may also provide any other information or data that they consider relevant to an evaluation of the request.

All exclusion requests must be accompanied by a certification that the information submitted is complete and correct.  USTR strongly encourages interested persons to submit exclusion requests on its attached prepared request form to simplify exclusion request filings.

Products that are not produced or cannot be adequately supplied by domestic producers would have a better chance at exclusion.  Domestic producers have a chance to oppose any exclusion requests and likely would challenge any exclusion request for Chinese products that are competing with their products.

HOW DOES CHINA KILL THIS TRADE WAR? 

The Chinese government complains that it does not know which government official will make the final decision on any US China trade deal.

When looking at the Section 301 negotiations between the US and China, despite the recent move by Treasury Secretary Mnuchin, the key officials in the decision making are President Donald Trump and USTR Robert Lighthizer.  Lighthizer is the United States Trade Representative, and the Section 301 case was started by USTR so final decisions will be made by Trump and Lighthizer.

Treasury Secretary Mnuchin may be able to advise, but another Trump official who will also have influence is Larry Kudlow, the National Economic Council Director and a President Reagan free trader.  Kudlow stated on September 17th on MSNBC that President Trump has “not been satisfied” with trade talks with China and confirmed the U.S. was preparing additional tariffs because Beijing’s economic reforms were moving in the wrong direction.

CHINA HAS NOT MADE A PROPOSAL TO DEAL WITH THE CORE 301 ISSUES—IP AND FORCED TECHNOLOGY TRANSFER

But even if the Trump Administration had given a clear policy direction as to its ultimate targets in trade negotiations, apparently to date China has not given the US any indication that it will address the U.S. core complaints on the theft of intellectual property and forced technology transfers.  Without concrete proposals from the Chinese government on these two core issues, there will be no Section 301 agreement.  Simple buying missions from the Chinese government are not going to solve this deep trade crisis.

The Chinese government complains that the United States is trying to “contain” China and prevent its rise. The real issue, however, is that the US is trying to “isolate” China by teaming up with a number of different countries, including the EC, Australia, Mexico, Canada and Japan, when it comes to stealing the intellectual property of foreign companies and forcing foreign companies to turn over technology to Chinese companies and the Chinese government.

In response, one Chinese friend has told me, “The issue is China government cannot do that! That is the core for getting China Strong!”

If the Chinese government cannot give up stealing the IP of foreign companies to make China strong, the Chinese government should expect to become very isolated and to risk ostracism by the international community.

On the other hand, Trump cannot expect the Chinese government to change its entire economic system for the US.  But the Chinese government has to keep in mind that its economic system could create other problems.

Reports are that the US, Japan and the EC have held meetings aimed at dealing with China with a potential target of pushing China out of the WTO.  When China entered the WTO, Premier Zhu Rongji was in charge of the economy and pushing China to become a market economy country.  That was over 15 years ago.

After Premier Zhu retired, however, China slipped backwards, and that backward movement has accelerated under President Xi Jinping into more of a State-Ownership, State Control of the economy.  The problem is that other countries in the WTO are market economy countries.  The purpose of the countervailing duty law is that private companies should not have to compete against governments.  But if the Chinese government has decided to take over the economy and funnel money directly into companies to compete against private foreign companies, that obviously is a problem for many market economy countries, including the EC and the US.

In a September 18th editorial in the Wall Street Journal entitled “Imperialism Will Be Dangerous for China”, Walter Russell Mead, a well -known academic and opinion writer, spoke in detail about the problems China faces by its own expansionist Imperialistic policy and the fact that the well-known Communist Lenin identified China’s problem long ago:

“China’s real problem isn’t the so-called Thucydides trap, which holds that a rising power like China must clash with an established power like the U.S., the way ancient Athens clashed with Sparta. It was Lenin, not Thucydides, who foresaw the challenge the People’s Republic is now facing: He called it imperialism and said it led to economic collapse and war.

Lenin defined imperialism as a capitalist country’s attempt to find markets and investment opportunities abroad when its domestic economy is awash with excess capital and production capacity. Unless capitalist powers can keep finding new markets abroad to soak up the surplus, Lenin theorized, they would face an economic implosion, throwing millions out of work, bankrupting thousands of companies and wrecking their financial systems. This would unleash revolutionary forces threatening their regimes.

Under these circumstances, there was only one choice: expansion. In the “Age of Imperialism” of the 19th and early-20th centuries, European powers sought to acquire colonies or dependencies where they could market surplus goods and invest surplus capital in massive infrastructure projects.

Ironically, this is exactly where “communist” China stands today. Its home market is glutted by excess manufacturing and construction capacity created through decades of subsidies and runaway lending. Increasingly, neither North America, Europe nor Japan is willing or able to purchase the steel, aluminum and concrete China creates. Nor can China’s massively oversized infrastructure industry find enough projects to keep it busy. Its rulers have responded by attempting to create a “soft” empire in Asia and Africa through the Belt and Road Initiative.

Many analysts hoped that when China’s economy matured, the country would come to look more like the U.S., Europe and Japan. A large, affluent middle class would buy enough goods and services to keep industry humming. A government welfare state would ease the transition to a middle-class society.

That future is now out of reach, key Chinese officials seem to believe. Too many powerful interest groups have too much of a stake in the status quo for Beijing’s policy makers to force wrenching changes on the Chinese economy. But absent major reforms, the danger of a serious economic shock is growing.

The Belt and Road Initiative was designed to sustain continued expansion in the absence of serious economic reform. Chinese merchants, bankers and diplomats combed the developing world for markets and infrastructure projects to keep China Inc. solvent. In a 2014 article in the South China Morning Post, a Chinese official said one objective of the BRI is the “transfer of overcapacity overseas.” Call it “imperialism with Chinese characteristics.”

But as Lenin observed a century ago, the attempt to export overcapacity to avoid chaos at home can lead to conflict abroad. He predicted rival empires would clash over markets, but other dynamics also make this strategy hazardous. Nationalist politicians resist “development” projects that saddle their countries with huge debts to the imperialist power. As a result, imperialism is a road to ruin. . . .

Meanwhile, China’s mercantilist trade policies-the subsidies, the intellectual-property theft, and the coordinated national efforts to identify new target industries and make China dominant in them-are keeping Europe and Japan in Washington’s embrace despite their dislike of President Trump.

China’s chief problem isn’t U.S. resistance to its rise. It is that the internal dynamics of its economic system force its rulers to choose between putting China through a wrenching and destabilizing economic adjustment, or else pursuing an expansionist development policy that will lead to conflict and isolation abroad. Lenin thought that capitalist countries in China’s position were doomed to a series of wars and revolutions.

Fortunately, Lenin was wrong. Seventy years of Western history since World War II show that with the right economic policies, a mix of rising purchasing power and international economic integration can transcend the imperialist dynamics of the 19th and early 20th centuries. But unless China can learn from those examples, it will remain caught in the “Lenin trap” in which its strategy for continued domestic stability produces an ever more powerful anti-China coalition around the world.

HUGE SEA CHANGE IN US CHINA TRADE RELATIONS

This is a very different time than any in 30 plus years of US China trade relations.  From this 301 experience, am watching a Tsunami, a huge wave, of change as many, many US importers in the Section 301 $200 billion case are moving to source products in other countries. Products ranging from wood cabinets, wood doors, aluminum curtain wall, paper gift bags, gift wrapping, household thermometers, and quartz surface products.  All of these importers are looking at second sources of supply so as to move out of China.  US importers pay these duties, not the Chinese companies.

Moreover, Chinese companies are also moving to third countries to produce products targeted by trade cases and the Section 301 target lists.  We represented several Chinese companies in a Citric Acid from Thailand AD and CVD case.  In that case, all the Chinese companies moved to Thailand to get out of the cross hairs of a US AD case against Citric Acid from China.

Thailand has many benefits for Chinese companies.  Under US AD and CVD law, Thailand is considered a market economy country, which mean Commerce must use actual prices and costs in Thailand to calculate AD rates.  In that case, therefore, the AD rates for the Chinese companies in Thailand ranged from only 6 to 15%.  In addition, and much to everyone’s surprise Commerce made a negative determination in the CVD case finding that all the subsidies were 0 or de minimis for the Chinese companies in Thailand.

Also in contrast to China, to date Thailand is a GSP country so US importers do not have to pay normal US Customs duties on imports of products from China, which can be in the 6.5% range.

With the raging US China trade war, all of these benefits are going to push more Chinese companies to leave China and move to a third country.  The AD order on Wooden Bedroom Furniture from China resulted in a large part of the Chinese furniture industry moving to Vietnam.  Now Vietnam exports more furniture than China.

Recently, JP Morgan issued a report predicting that if the US China trade war continues, the trade battle will cost at least 700,000 jobs.  If the trade war becomes protracted, the job loss could be as high as 5.5 million jobs.  See https://business.financialpost.com/news/economy/the-trade-war-will-likely-cost-china-700000-jobs-jpmorgan-says.

The point is that truthfully, the Chinese government needs to step up and settle this trade war quickly and put a concrete proposal on the table to deal with the IP and forced technology transfer issue.

Trump is not going to back down.  On September 17th, Trump stated in a tweet:

“Tariffs have put the US in a very strong bargaining position with Billions of Jobs and Dollars flowing into our Country and yet cost increases have thus far been almost unnoticeable.  If Countries will not make fair deals with us, they will be “Tariffed”

In this situation, China needs to take the first step because it has the most to lose.  One friend of mine who knows China well believes that the Chinese government will not settle, but that China is moving to a massive recession similar to Japan’s lost decade.  That lost decade cost the Japanese economy and its people, trillions of dollars.

Moreover, the Chinese government should be careful to not fall into the Japanese trap.  Just before the lost decade, many, many Japanese companies moved out of Japan to foreign countries to get around trade orders on products, such as automobiles, televisions, and auto parts.  This led to the “hollowing out” of the Japanese industry.

This would be very big problem for China becasue it has 1.3 billion people and needs to keep its citizens employed.  Rising unemployment because of the hollowing out of the Chinese industry would put the Chinese government in a very difficult situation.

THE EVER EXPANDING ORBIT OF ANTIDUMPING AND COUNTERVAILING DUTY CASES AGAINST CHINA

IMPORTERS BEWARE — EXPANDING THE SCOPE AND RETROACTIVE LIABILITY IN AD AND CVD CASES TO COVER DOWNSTREAM PRODUCTS AND IMPORTS FROM THIRD COUNTRIES, INCLUDING CANADA

If a US company imports products from China or other countries, which are or maybe covered by an antidumping or countervailing duty order, the importer must be very careful and cannot ignore the situation.  Two recent examples are the Commerce Department’s decision to expand antidumping (“AD”) and countervailing duty (“CVD”) orders on hardwood plywood to cover ready to assemble cabinets sold to the construction industry and the problem of third country/Canadian imports.

WOODEN CABINETS AND HARDWOOD PLYWOOD ANTIDUMPING AND COUNTERVAILING DUTY ORDERS

On September 10, 2018, the Commerce Department issued its final scope ruling on Ready To Assemble (“RTA”) Cabinets in the Hardwood Plywood AD and CVD case.  In that attached decision, DOC FINAL SCOPE DETERMINATION, Commerce decided that the exclusion for RTA cabinets only applied to cabinets sold to the ultimate end user, the consumer, and not RTA cabinets sold to contractors, which install them in high rise buildings.  In effect, Commerce expanded the AD and CVD orders to cover RTA cabinets sold to the construction industry, which many importers thought had been excluded by language in the AD and CVD orders.

In its decision, Commerce made two important points:

“The RTA kitchen cabinet exclusion does not expressly address the manner in which RTA kitchen cabinets must be packaged to be suitable for purchase nor expressly define the term “end-user.” Nevertheless, the exclusion’s unambiguous requirements necessitate that, to qualify for the exclusion, RTA kitchen cabinets must be packaged in a single package suitable for purchase by a retail consumer. The plain language of the scope requires that the RTA kitchen cabinets be “packaged for sale for ultimate purchase by an end-user” and requires that the RTA kitchen cabinets be packaged with “instructions providing guidance on the assembly of a finished unit of cabinetry.” We find that, together, these requirements make clear that the end-user is a retail consumer, as retail consumers are the end users that would require instructions for assembling a finished unit of cabinetry. . . .

We disagree with the U.S. Importers’, Chinese Exporters’, and IKEA’s argument that the requestors’ scope ruling asks Commerce to redefine plywood to include wooden furniture and furniture parts. The petitioners made clear during the investigations that furniture was not covered by their proposed scope for these investigations. This scope ruling does not expand the scope but, rather, clarifies that, to qualify for the RTA kitchen cabinet exclusion, the RTA kitchen cabinet must meet the requirements of the exclusion, and the requirements necessitate that the RTA kitchen cabinet components be in a single package suitable for purchase by an end- use retail consumer.”

Many US importers fought hard against the motion by Hardwood Plywood Petitioners and Master Brands to narrow the exclusion to cover only cabinets sold to retail customers.  But this decision now exposes the US importers of RTA cabinets to millions of dollars in retroactive liability for AD and CVD duties.

Although there are strategies to deal with this problem, including an appeal to the Court of International Trade and other procedures for dealing with this problem, the US cabinet importer that sticks its head in the sand is going to wake up one morning with an enormous bill from the US government.  Old Boy Scout motto “Be Prepared”

IMPORTS FROM CANADA AND THIRD COUNTRIES COVERED BY AN AD AND CVD ORDER ON CHINESE PRODUCTS

We have been involved in several review investigations involving products from China, which are covered by an AD and CVD Order, where the target has been a third country exporter, including a Canadian exporter.  We have seen situations where a Chinese exporter/producer company of a product believes it did not export anything to the US during the review period.

Based on import data into the US, however, the Commerce Department determined that the small Chinese company was a mandatory respondent and had to spend 10s of thousands of dollars responding to the entire Commerce questionnaire and be subject to verification in the case.

The problem was although the Chinese company sold nothing to the US, it did sell to Canada.  Apparently, the Canadian customer then sold the products to the US without realizing that the products would be hit with antidumping and countervailing duties.

Under the US AD and CVD law, sales made by the Chinese company, which are imported into the US, are only considered the sales of the Chinese company if the Chinese company knew at the time it sold the product to a third country that it was destined for the US.  This can be a problem for customers in third countries, including Canada, Hong Kong, and other countries.

In those situations, where the Chinese company sold a product to a third country, such as Canada, where the Chinese company did not know the product was destined to the US, which company is the respondent in the AD and CVD case?  The answer is the third country exporter, which, in effect, has become a “reseller” in the case.  Third country resellers are respondents and can get their own rates in AD and CVD cases against China.

But the problem in a review investigation for a third country reseller, including a Canadian company and its US importer, is that since the Chinese company made no direct sales to the United States, it will probably give up and not participate in the AD and CVD review investigation.  But the US importer of the products from Canada, which can often be a company affiliated with the Canadian company, will find itself owing substantial AD and CVD duties to the US government.  In one situation, we talked to a Canadian company that had to shut down its entire US operations because they exported chemical products from Canada to the US that were covered by US AD and CVD orders.  All of a sudden, the US subsidiary was hit with millions of dollars in retroactive liability because of an AD and CVD case.

US importers that import and Canadian and third country resellers that export products originally from China, which are covered or could be covered by US AD and CVD orders, cannot afford to be complacent and ignore the situation.  The companies must be proactive, or they could wake up one morning and find themselves liable for millions in dollars in retroactive AD and CVD duties.  An ounce of prevention is worth a pound of cure.

MORE EXCLUSIONS SECTION 201 SOLAR CASE

On September 19, 2018, USTR excluded more Solar Products from the Section 201 Solar case.  In the attached Federal Register notice, USTR NOTICE EXCLUDING PRODUCTS FROM 201 CASE, the United States Trade Representative (“USTR”) excluded the following solar products from the Section 201 solar case.  The relevant parts of the notice are:

Exclusions  From  the  Safeguard  Measure

USTR has considered certain requests for exclusion of particular products  and  determined  that  exclusion  of  the  CSPV  products  described in  subdivisions  (c)(iii)(7)  through  (c)(iii)(14)  of  U.S.  note 18  to subchapter  III  of  chapter  99  of  the  HTS,  as  amended  in  the  Annex  to this  notice,  from  the  safeguard  measure  established  in  Proclamation 9693  would  not  undermine  the  objectives  of  the  safeguard  measure.

Therefore, USTR finds  that  these  CSPV  products  should  be  excluded  from the  safeguard  measure.  Accordingly,  under  the  authority  vested  in  the Trade  Representative  by  Proclamation  9693,  the  Trade  Representative modifies  the  HTS  provisions  created  by  the  Annex  to  Proclamation  9693 as set forth in the Annex to this notice. . . .

Annex

The  following  provisions  supersede  those  currently  in  the  HTS  and are  effective  with  respect  to  articles  entered,  or  withdrawn  from  a warehouse  for  consumption,  on  or  after  12:01  a.m.,  EST,  on  September 19,  2018.  The  HTS  is  modified  as  follows:

U.S.  note  18  to  subchapter  III  of  chapter  99  of  the  HTS  is modified:

By  inserting  the  following  new  subdivisions  in  numerical sequence at the end of subdivision (c)(iii):

“(7)  off-grid,  45  watt  or  less  solar  panels,  each  with  length  not exceeding  950  mm  and  width  of  100  mm  or  more  but  not  over  255  mm,  with a  surface  area  of  2,500  cm\2\  or  less,  with  a  pressure-laminated tempered  glass  cover  at  the  time  of  entry  but  not  a  frame,  electrical cables or connectors, or an internal battery;

  1. 4 watt  or  less  solar  panels,  each  with  a  length  or  diameter  of 70  mm  or  more  but  not  over  235  mm,  with  a  surface  area  not  exceeding 539  cm\2\,  and  not  exceeding  16  volts,  provided  that  no  such  panel  with these characteristics shall contain an internal battery or external computer  peripheral  ports  at  the  time  of  entry;
  1. solar panels  with  a  maximum  rated  power  of  equal  to  or  less than  60  watts,  having  the  following  characteristics,  provided  that  no such  panel  with  those  characteristics  shall  contain  an  internal  battery or  external  computer  peripheral  ports  at  the  time  of  entry:  (A)  Length of  not  more  than  482  mm  and  width  of  not  more  than  635  mm  or  (B)  a total  surface  area  not  exceeding  3,061  cm\2\;
  2. flexible and semi-flexible  off-grid  solar  panels  designed  for use  with  motor  vehicles  and  boats,  where  the  panels  range  in  rated wattage  from  10  to  120  watts,  inclusive;
  3.    frameless solar  panels  in  a  color  other  than  black  or  blue with  a  total  power  output  of  90  watts  or  less  where  the  panels  have  a uniform  surface  without  visible  solar  cells  or  busbars;
  1.     solar cells  with  a  maximum  rated  power  between  3.4  and  6.7 watts,  inclusive,  having  the  following  characteristics:  (A)  A  cell surface  area  between  154  cm\2\  and  260  cm\2\,  inclusive,  (B)  no  visible busbars  or  gridlines  on  the  front  of  the  cell,  and  (C)  more  than  100 interdigitated fingers of tin-coated solid copper adhered to the back of  the  cell,  with  the  copper  portion  of  the  metal  fingers  having  a thickness  of  greater  than  0.01  mm;
  2. solar panels  with  a  maximum  rated  power  between  320  and  500 watts,  inclusive,  having  the  following  characteristics:  (A)  Length between  1,556  mm  and  2,070  mm  inclusive,  and  width  between  1,014  mm  and 1,075  mm,  inclusive,  (B)  where  the  solar  cells  comprising  the  panel have  no  visible  busbars  or  gridlines  on  the  front  of  the  cells,  and  (C) the  solar  cells  comprising  the  panel  have  more  than  100  interdigitated fingers of tin-coated solid copper adhered to the back of the cells, with  the  copper  portion  of  the  metal  fingers  having  thickness  greater than  0.01  mm;

14.      modules  (as  defined  in  note  18(g)  to  this  subchapter) incorporating  only  CSPV  cells  that  are  products  of  the  United  States and not incorporating any CSPV cells that are the product of any other country.”

NEW NAFTA NEGOTIATONS—THE CANADIAN DAIRY PROBLEM

The NAFTA negotiations between Mexico and the US have primarily wrapped up, but the question now is whether Canada will be willing to join the party.  The key issue is dairy and the 275% tariff on US dairy products to Canada.

Mexican Economy Secretary Ildefonso Guajard has stated that negotiators need at least 10 days to put together “what’s going to be presented in any of the scenarios.” That means Thursday, Sept. 20 could be the last day for Canadian and American officials to announce a preliminary deal that offers enough time for the technical teams to prepare the text.

U.S. officials are demanding that Canada make major concessions on dairy and the tariffs on US dairy exports to Canada.  Canadian Prime Minister Trudeau’s Liberal Party wants to maintain its allies in Ontario and Quebec where the powerful dairy industry is concentrated. Trump, who is watching the midterms closely, wants to increase support from the farmers, particularly from the hard-hit dairy sector.  So the question is which country will blink first.

NEW EUROPEAN TRADE AGREEMENT

After discussions in Brussels and Washington, both sides know there are major differences over trade policy on cars and farming — meaning a large trans-Atlantic trade deal will have to wait. Instead, in the near-term negotiators will focus on regulatory cooperation on topics such as car blinkers, cosmetics, insurance and driverless vehicles.

USTR Lighthizer is pushing to “finalize outcomes” with the EU by November, as Trump wants a success story for the pending elections. The EU equally wants to create goodwill that will stop Trump from following through on his repeated threats to slap higher tariffs on European cars.

Susan Danger, the Chairman of the American Chamber of Commerce to the EU, said that “one school of thought” for how to move forward is “to do things piecemeal and address the low-hanging fruit.”

The China angle: Strategically, Lighthizer and Republican senators like Lindsey Graham want a swift deal with the Europeans so as to team up with the EU against the bigger mutual target in the trade area: China.

NEW ANTIDUMPING CASE

MATTRESSES FROM CHINA

On September 18th, 2018, Corsicana Mattress Company, Elite Comfort Solutions, Future Foam Inc., FXI, Inc., Innocor, Inc., Kolcraft Enterprises Inc., Leggett & Platt, Incorporated, Serta Simmons Bedding, LLC, and Tempur Sealy International, Inc. filed a new antidumping case against Mattresses from China.

If anyone has any questions about the 301 process, antidumping or countervailing duty law or other trade issues, please feel free to contact me.

Best regards,

Bill Perry

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