US CHINA TRADE WAR – SECTION 301 TARIFFS, TRANSSHIPMENT FALSE CLAIMS ACT, ANTIDUMPING AND 337 CASES

White House Fence Summer Red Flowers Fountain Pennsylvania Ave Washington DC

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR – AUGUST 7, 2019

Dear Friends,

This blog post signals a change.  Recently I brought in Fred Rocafort, a young attorney, to help me with the trade practice and this newsletter.  Fred worked for the State Department in China and speaks fluent Chinese and Spanish.  He then worked for years in China and Hong Kong as an Intellectual Property lawyer.

In this blog post, we will discuss briefly the Section 301 case and the ongoing negotiations, the transshipment problem, the False Claims Act and impact on importers and competitors, the impact of the Fabricated Structural Steel from China case on the US construction industry, the highest antidumping rate in history, and new Section 337 cases.

Finally, this has been a very difficult newsletter to write because of this very difficult period in US China relations.  Because of constant criticism of China in Trump’s campaign to be President, one knew that Trump would be very tough on China.  Meanwhile, on the China side, as described in more detail below, President Xi Jinping has made dramatic changes in Chinese society to create a more statist economy in order to preserve the power of the Communist Party.  These two very different approaches have led to the trade conflict.

The objective of this blog is not to take one side or the other in the dispute but to focus on the reality as exists now in US China relations and spot and explain the issues so that readers can better understand the situation.  Since I am a US trade lawyer, it is easier for me to find US sources and understand better where the US is coming from.

But the rhetoric has become so heated on both the US and China sides that readers may think I am trying to favor one side over the other.  That is not my intent.  My intent is to focus on the real issues so that both sides can better understand each other.

Although the US China situation does not look good now, Dan Harris, my partner, has recently written an article entitled “Why NOW Is A Very Good Time to Double Down on Doing Business in China”.

No situation is every truly black and white.  It is grey.

Best regards,

Bill Perry

DEVELOPMENTS SINCE LAST BLOG POST

TRADE NEGOTIATIONS STOP IN MAY AS TARIFFS ON THE $200 BILLION GO FROM 10% TO 25%, POTENTIAL TARIFFS ON THE REMAINING $300 BILLION FROM CHINA GO 10% SEPTEMBER 1ST BECAUSE TRADE NEGOTIATIONS AFTER G-20 MEETING SHOW NO MOVEMENT CHINA RETALIATES ON AUGUST 5TH

Although the US and China were close to a trade deal with reportedly a 120 to 150 page agreement, in May 2019 China backtracked and redlined out much of the proposed trade deal.  In particular, apparently the Chinese government backtracked on commitments to deal with Intellectual Property Theft and Forced Technology Transfer.

As stated in the last blog post:

it is very clear that the key issues discussed in the trade talks are: Forced Technology Transfer, IP Theft and Enforcement of any trade agreement.  Trump and USTR Robert Lighthizer are not going to settle for an agreement with broad meaningless promises from the Chinese government, which are not kept.  The US wants tangible results and promises that can be enforced.

In response to the Chinese government’s retreat, on May 9, 2019 in the attached Federal Register notice,MAY 9 FED REG 25% 200 BILLION, the US government raised tariffs on the third $200 billion in imports from 10 to 25%.

On May 17, 2019, in the attached Federal Register notice, MAY 17 USTR REQUEST FOR COMMENTS ON TARIFFS $300 BILLION, the USTR started the process of imposing a 25% tariff on the remaining $300 billion from China.

On June 24th, in the attached Federal Register notice, June 24.2019.Procedures_for_Requests_to_Exclude_Particular_Products_from_the_September_2018_Action, the United States Trade Representative (“USTR”) set up an exclusion process for the 25% tariffs on the $200 billion.

As a result of the meeting between Presidents Xi and Trump at the G-20 in Japan on June 28th, President Trump agreed to postpone the 25% tariffs on the remaining $300 billion with the promise that trade negotiations would start up again.

Trade negotiations started up on July 30 and 31st, but there has been very little progress.  The Chinese government’s apparent new strategy is to wait for the US Presidential Election in November 2020 and hope for a better deal.  But all indications are that the Chinese economy is hurting so we will have to wait and see.

In response to the Chinese strategy, on August 1, 2019, President Trump announced 10% tariffs on the remaining $300 billion in imports from China effective September 1, 2019.  At that point in time, all of China’s exports to the US will be covered by tariffs.

On August 5, 2019, the Chinese government retaliated letting the Chinese currency drop in value to 7 yuan to the dollar, cheapening the Chinese currency so that Chinese exports will be cheaper to offset the US tariffs.  Also the Chinese government stopped all purchases of US agricultural products.

See Donald Trump Accuses China of Currency Manipulation as Yuan PlungesSee also China to suspend purchases of US farm products in retaliation for ‘serious violation’ of trade deal between Xi Jinping and Donald Trump.

FRED’S TAKE—FRED ROCAFORT ARTICLE ON SECTION 301 AND TRADE NEGOTIATIONS

USTR Lighthizer and SecTreas Mnuchin are heading to Shanghai next week for trade talks. The choice of Shanghai is interesting. One analyst suggested that China was sending a message that “trade should be trade, and politics should be politics”. Even SecTreas Mnuchin invoked the spirit of the 1972 Shanghai Communiqué, which paved the way from rapprochement between the U.S. and China—and ironically the current mess in which the two countries find themselves. Perhaps the hosts are thinking of a different kind of optics. There is arguably no image that is more associated worldwide with China’s economic miracle than the Lujiazui skyline—look up “china economic miracle” on Google Images for confirmation. It is hard to reconcile the portrait of China as an economic villain with the Pearl of the Orient’s vibrancy.

Before delving into the prospects for the upcoming talks, it is worth taking a step back and remembering how we got to this point. As mentioned above, the Shanghai Communiqué that Mnuchin celebrated set in motion a process that would over time entangle the Chinese economy with those of the United States and other nations in an unprecedented way. Though Cold War realities were initially foremost in America’s thinking, soon China policy became undergirded by the idea that increased engagement with the U.S. and its democratic, free-market allies would inexorably take China down their same path.

There was certainly much change, but only to the extent that it allowed China to become an export powerhouse. One can imagine the thrill felt by foreign executives as they saw the first cases of Coke cross the Shenzhen River into Mainland China in 1979, representing a symbolic first step towards the final realization of the long-standing Western dream of opening up China. Yet 30 years later, in some fundamental ways little has changed for foreign business. Sure, it has been a relatively smooth ride for the KFCs, Colgates and Nikes of the world, who contribute mightily to the state coffers. But for most foreign businesses, the China experience has been a negative one. As a longtime China expat, I heard so many tales of woe that I became jaded. Business partners colluding with local authorities to edge out foreign investors. Rampant counterfeiting and infringement of foreign brands. Continued restrictions on market access. Capricious immigration policies. China nightmares remain unabated despite repeated government assurances of coming improvements. Mr. China remains as much of a cautionary tale today.

Ultimately, the Chinese leadership viewed and continues to view Reform and Opening as a transactional mechanism. Reform and Opening themselves were never the objectives; continuity of Party rule has always been. This is why China continues to pick and choose when it comes to reform, in a way that has led to a collision with the United States.  By the time the 2016 U.S. presidential campaign got underway, it was clear to most China-watchers that the country would not follow the path of South Korea and Taiwan towards democracy, negating the one hope that secured for China so much patience over the years. In this environment, a certain Donald Trump decided that it was time to bring this issue to the forefront.

The current trade war’s first salvo was fired in March 2018, when President Trump directed the USTR to propose a list of products to be subjected to tariffs, in response to the findings of the USTR Section 301 investigation launched in August 2017. Ultimately 1,300 types of products were listed.

China retaliated with tariffs on 128 U.S. products and asking the WTO for consultations on the U.S. tariffs. After a visit to Washington by Vice Premier Liu He, China’s point man on trade, the two countries announced that there “was a consensus on taking effective measures to substantially reduce the United States trade deficit in goods with China”. This led SecTreas Mnuchin to declare that the trade war was “on hold”. However, and perhaps reflecting disagreements within the Trump team, shortly thereafter 25% tariffs on $50 billion worth of imports were announced. These tariffs went into effect on June 6 ($34 billion) and August 8 ($16 billion).  China retaliated in kind.

In September 2018, the U.S. announced 10% tariffs on $200 billion worth of Chinese products, which were raised to 25% on May 5, 2019. China’s expected retaliation came on June 1, in the form on tariffs on $60 billion worth of U.S. imports.

Presidents Trump and Xi met during the G-20 summit in Osaka, Japan and announced a truce. The upcoming talks in Shanghai are the first high-level encounter since then.

The smart money is on keeping expectations low. As an analyst quoted by the SCMP noted, the “talks will only result in a small step”. Still, even a small step would be a welcome respite from the spiral of escalation we have seen over the past year. The key question is, what exactly would that small step be?

A rollback in tariffs is one option. The Chinese have previously demanded that all tariffs be eliminated before a deal can be reached. This is surely a no-starter for the Trump team, which in fact would like to keep some tariffs in place even after a deal is made. However, having slapped tariffs on $250 billion worth of Chinese imports, the U.S. side has plenty of room for maneuver, allowing it to simultaneously eliminate the tariff burden considerably, while still leaving meaningful tariffs in place.

On the issue of Huawei, the introduction of a bipartisan bill in Congress that would lock the Shenzhen-based telco into the Commerce Department’s blacklist complicates matters. Paradoxically, however, the Democrats jump onto the Huawei bandwagon could help the Trump negotiators in two ways. First, it moves the goalposts in a way that allows the administration to do a lot without accomplishing anything when it comes to Huawei. Second, Lighthizer and Mnuchin can now point to concrete evidence that a Democratic victory in 2020 might not deliver the Chinese from American wrath. Better the devil you know…

As for China’s side of the bargain, hopes of placating the U.S. with purchases of agricultural goods seems to have faded, as the Chinese come to realize that no amount of sorghum is going to get the U.S. to ease up on its core demands. It is critical to remember that the Section 301 investigation that provided the legal basis for the tariffs concerned Chinese government practices “related to technology transfer, intellectual property, and innovation”. In the absence of meaningful Chinese concessions on these areas, it is hard to see the U.S. budging at all on tariffs or Huawei.

The Section 301 investigation report provides a clear picture of what the U.S. would like to see happen with regard to these critical areas. Last month, China announced it will open up new sectors to foreign investment, and it may offer further liberalization. On the other hand, it is hard to envision the Chinese undertaking to amend laws such as JV Regulations at American behest.

As difficult as it may be for some Dragon Slayers to accept, not every single line of Chinese jurisprudence has been drafted with a nefarious, China-first agenda in mind. For instance, when Article 43(1) of the JV Regs call for “fair and reasonable” fees for the use of technology, it is reflecting the basic principle that, “In civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility shall be observed” (Art. 4, General Principles of Civil Law). Meanwhile, “Vaguely worded provisions and uncertainty about the applicable rules” are a hallmark of Chinese legislation, and serve as powerful levers with implications that go far beyond FDI.

One intriguing, if unlikely, possibility would be the introduction of more specific investment terms into a bilateral treaty (such as the income tax treaty or the consular convention). This could include language that places Chinese investment into the U.S. under additional scrutiny. It could also provide for special procedures that allow companies such as Huawei to obtain technology while providing certain safeguards. This approach would allow the Chinese to save face as far as its own legislation is concerned, while pleasing the Americans (who, given the current tenor in Washington, are unlikely to care too much about any protestations from Brussels or Ottawa regarding this side deal).

Speaking of unconventional wisdom, the possibility of non-trade elements playing a role in a deal cannot be discarded. In the leadup to the talks, Secretary Pompeo called China’s treatment of Uighurs in Xinjiang “the stain of the century”, while Vice President Pence tweeted a condemnation of China’s record on religious freedom. This simultaneous push on trade and human rights is consistent with the “whole of government” approach against China called for in the—ironically-named—John S. McCain National Defense Authorization Act for Fiscal Year 2019.

Admittedly, it is hard to see where China can budge, especially in the kind of public way that the Trump team needs to be able to claim some kind of victory. That said, if it gives him some oxygen on tariffs and Huawei, President Xi might be willing to pull something out of his hat on North Korea or even the South China Sea.

CORE ISSUE OF THE 301 CASE AGAINST CHINA IS IP THEFT, FORCED TECHNOLOGY TRANSFER, AND ENFORCEMENT

The section 301 case started in the spring of 2018.  The core of the complaint is China’s aggressive campaign to steal intellectual property (“IP”)  from US and other foreign companies.  See the attached Full Section 301 Report and Interim Report

If the Chinese government can compromise on IP Theft and Forced Technology Transfer in an enforceable agreement, I suspect that a deal can be reached.

If not, however, US has imposed 25% tariffs on $250 billion in imports from China with potentially another 25% tariff on the remaining $300 billion, which means by September 1st all imports from China will be hit with a 10 to 25% tariff.   See the Federal Register notices above.

It should be noted that the tariffs on the first $50 billion in imports is to offset the harm caused to the United States and US companies because of the IP Theft and Forced Technology Transfer.  The tariffs on the $200 billion are in direct response to the Chinese government’s decision to retaliate against the US tariffs.

President Trump’s and USTR Lighthizer’s firm belief is that because of a US trade deficit and a Chinese trade surplus of $350 billion and total Chinese exports of $550 billion plus, the US could weather a trade war much better than China.

Enforcement of any agreement with China is also a big issue. At the beginning of the Section 301 Report, it lists ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, which the Chinese government has ignored.  The last two agreements are the recent 2016 agreements between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China and to stop cyberhacking for commercial gain.  According to the USTR, the Chinese government ignored both Agreements.  See page 8 of the attached USTR 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER.  All those agreements between the US and China were breached.

China’s failure to follow through on past trade agreements is not just a Trump issue.  Recently, former USTR Charlene Barshefsky, a good Democrat, who negotiated the US China WTO Agreement under President Clinton, has stated that the Chinese government broke all the WTO Agreements it signed.

SECTION 301 PROCEDURES AND THE JUNE 24, 2019 EXCLUSION PROCESS FOR THE $200 BILLION

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

The deadlines to file an exclusion request for the first $50 billion have past.  The exclusion process for the third $200 billion list just started up on June 24th and the deadline is September 30, 2019.

Also the process has started to impose 25% tariffs on the remaining $300 billion from China.

Theoretically, if the negotiations go well, all or some of the 301 tariffs could be lifted so there will be no need for exclusion requests.  If the duties remain in place, then the USTR will have an exclusion process.

FRED ROCAFORT ARTICLE ON THE JUNE 24TH EXCLUSION PROCESS FOR THE TARIFFS ON THE $200 BILLION

Back in June, Adams Lee (one of my fellow international trade lawyers) urged those who manufacture products in China for the U.S. to Get Going on Your China Tariff Exclusion Requests Now. 

Adams’ advice has clearly not gone unheeded. These days, client calls to discuss exclusion requests are as much a part of my morning routine as my first cup of joe. The deadline for filing List 3 exclusion requests is September 30, 2019, though one wonders why the United States Trade Representative (USTR) is even bothering with a deadline. According to Roll Call, the process for reviewing exclusion requests has “slowed to a painful crawl” and “USTR in July up to the 19th had completed work on just 60 of the total 2,900 requests for tariff waivers on [List 2] tranche requests”.  Not a promising sign when trying to determine how long it will take to sort out the 60,000 List 3 requests for which USTR is bracing — never mind the looming List 4 requests, when essentially all China imports will be subject to tariffs.

Our clients are understandably interested in any patterns that are emerging regarding approvals. Thanks to the Mercatus Center, we know List 1 requests for capital goods have been approved at a higher rate than intermediate goods or consumer goods, but for List 2 requests, consumer goods were approved at a higher rate than either capital or intermediate goods. It is important, however, to keep in mind that consumer goods account for only a fraction of the List 1 and 2 requests. More on this later.

Turning to the substance of the requests, after reviewing many of the requests adjudicated by USTR, approved requests tended to clearly articulate why the product for which an exclusion was sought cannot be sourced from anywhere other than China. I emphasize cannot because what trips up many requestors is that they end up explaining why they do not want to source from elsewhere.

For instance, take this denied tariff exclusion request from List 1:

[Company X] respectfully requests that you grant its request for an exclusion.

While we cannot seek exclusions on every component that we source from China, we are pursuing exclusions for several higher value and/or larger volume components, including this product.

[Company X’s] sourcing decisions are guided by a number of factors including availability of the part; quality of the part; landed cost… desire to work with a particular supplier; capacity of a supplier to produce volume needed on deadline; supply chain risk management; and minimizing capital investment.

*    *    *    *

Failure to grant [Company X’s] exclusion request will increase the company’s production costs. As a result, the company will reduce its margins, pass the additional cost onto consumers… negatively affect… the 60,000+ American workers [Company X] employs… (emphasis added)

Readers from my generation may remember the The Far Side, a brilliant comic created by Seattle’s own Gary Larson. One of my favorite cartoons juxtaposed what an owner said to his dog (“You stay out of the garbage! Understand, Ginger?”) with what Ginger actually heard (“blah blah Ginger blah”). To USTR (Ginger) this request is screaming, “I don’t want to pay more, blah blah”.

To be sure, paying more for products manufactured in China is a completely legitimate concern and I am not trying to make light of the real struggles faced by Company X and others that have their products made in China. But we are right now in a large-scale trade war with China (with no end in sight) and in the same way our great-grandparents were expected to buy Liberty bonds during World War I, the USTR expects businesses that ship China-manufactured products to the United States (and  the buyers of those products) to bear economic burdens as the country “max[es] out [its] economic power.”

Company X’s tariff exclusion request (above) does passingly mention availability of its product outside China, but it fails to flesh out how that forces it to get that product from China. Is the product not available at all in a third country? Or is it available, but not at the sufficient volume or necessary quality?

It is worth keeping in mind that USTR largely avoided consumer goods in Tariff Lists 1 and 2, but consumer goods account for more than 30% of the List 3 products (compared to less than 1% in the first two lists). This shift could bring about a sea change in tariff exclusion rejection patterns. USTR has rejected just over 60% of the List 1 tariff exclusion requests and 45% of the List 2 requests it has received.

My suspicion is that the move towards consumer goods in List 3 will cause tariff exclusion rejection numbers to increase from Lists 1 and 2. One of the key issues for USTR when it considers exclusion requests is the following:

Whether the particular product [for which the tariff exclusion is being sought] is available only from China. In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.

A familiar theme in this blog is the shift of manufacturing activity out of China, primarily to Southeast Asia and to Mexico.  In How to Stop Manufacturing in China: Try Harder, we wrote how in many instances (but certainly not all), it is neither difficult nor expensive to move manufacturing outside China:

This probably sounds harsh, but many companies would benefit from moving their manufacturing out of China that have not yet done so for reasons more related to inertia than to economics or anything else. I realize change is hard but if you are in a situation where you are essentially paying 25% more than your competitors and at huge risk of your products being slapped with retroactive duties ranging from 20% to 250%, inertia is not a good excuse.

Of course, there are companies that have almost no choice but to have their products made in China. China has been developing its export-oriented capabilities for decades and its manufacturers enjoy access to a massive internal market and to levels of government assistance that cannot be matched in other low-cost destinations. As per a Quartz article:

Then there are the products the US almost exclusively gets from China. Raising tariffs on these goods will likely cost American consumers, and leave importers in a bind to find substitutes in the short-term—in the long-run, manufacturers may look to produce these goods outside China. We identified 11 product categories that China supplied 95% of US imports worth at least $100 million in 2018 by analyzing data from the US Census Bureau. All 11 product categories were on the list of goods for which the US has threatened to raise tariff rates by 25%. The US has since agreed to delay these hikes as part of negotiations.

By contrast, China’s manufacturing competitors have been flooding the lower ends of the value chain. Simply put, it is easier to set up a sneaker factory than a chemical processing plant. Back to Quartz:

The US imports about $100 million dollars in soy sauce every year. China supplies 42%. But it also gets a lot of soy sauce from Japan (17%), Hong Kong (14%) and Thailand (7%). If the US raises tariffs on Chinese soy sauce, importers might shift their buying to these other countries to avoid cost increases.

This means that when it comes to consumer goods, we expect fewer U.S. importers will be able to answer “No” to the key question in the exclusion request form: “Is this product, or a comparable product, available from source[s] in third countries?”. As a result, it can be fully expected that USTR will deny a higher rate of List 3 and List 4 requests.

What all of this means is that if you really need to source your products from China, you need to ensure that your tariff exclusion requests are as strong as they can be. On the flip side, what is happening with the tariff exclusion process is another reminder that the conversation about getting out of China needs to happen now, especially because we do not see the United States eliminating its China tariffs soon, if ever:

If your company is thinking there will be a solution to the US-China trade war and that solution will obviate any need to move your manufacturing from China, you are very likely engaging in wishful thinking. The US-China trade war has been going on for more than a year now and, if anything, we are farther away from resolution than when it started.

What is happening with the tariff exclusion process underscores this point. By now, everyone should have disabused themselves of any notion that  tariff exclusions would be an effective workaround. They will not, unless you can truly show that your product cannot be sourced in a third country. This is the time to recognize the difference between needing to source your product from China and preferring to do so.

If you need to stick with China and you are looking down at the tariff barrel, make sure you look at some of the approved tariff exclusion requests for inspiration and be sure to clearly spell out why you do not have a China alternative, remembering that “I would have to pay more” is not going to cut it. On the other hand, if you can source your product from somewhere other than China at comparable cost and quality, it is probably time for you to move on.

I will in the meantime be working on completing and submitting more tariff exclusion requests.

BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE

The Chinese government’s apparent strategy in the trade negotiations is to wait and see what happens in the next Presidential election in November 2020 and hope for a better deal with a new Administration.  But after the two recent debates by Democratic candidates, Democratic pundits complain that no Democratic Presidential candidate to date can beat Donald Trump. With that situation in mind, Chinese government officials might want to rethink that strategy.

Moreover, contrary to many commentators in China and elsewhere, the tough position against China in these trade negotiations is not just President Donald Trump.  After Trump’s announcement of a potential 10% tariff starting September 1 on the remaining $300 billion imported from China, New York Senator Chuck Schumer, who leads the Democrats in the Senate, came out in favor of the Trump tariffs telling President Trump to stand tough on China.

In light of these facts, the Chinese government should not expect a change in the tough US position on China trade policy if there is a change in US government. US China Trade Policy is not just a Republican issue.  It is bipartisan issue.  Traditionally, the Democratic party is much more protectionist than the Republican party, because the Democratic party is supported by the labor unions.

In the 2019 State of Union in Congress, President Trump spoke of a need for a strong US trade response against China and a strong structural trade agreement with China because of decades of IP theft.  This point provoked a bipartisan standing ovation from Republicans and Democrats.  Democrats hate Trump, but they agree completely on a tough response to China.  See the following video of the State of the Union at https://www.youtube.com/watch?v=OSy9NcPRSGs.

Although a President Biden, whose son Hunter Biden has a billion-dollar deal in China, might be easier on China, the rest of the Democratic field will be very tough on China.  Based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China.  This trade situation is not going to change any time soon no matter what party is in power.

FORMER DEMOCRATIC CONGRESSMAN DON BONKER TRADE ARTICLE ON THE DEMOCRATIC RESPONSE TO TRUMP ON TRADE

On May 21, 2019, my friend Don Bonker, a former Democrat Congressman, published an article in the Wall Street Journal entitled “On Trade, Where Are My Fellow Democrats?” stated in part:

President Trump’s latest round of punishing tariffs on China, with threats of more to come, will have a devastating effect on the world’s two largest economies. His actions are contrary to the Republican Party’s usual doctrine of free trade, and they have alarmed business leaders, farmers and the American sectors and regions that will most acutely feel the pain of the tariff increases and China’s targeted retaliation.

So where are the Democrats? Until Mr. Trump arrived on the scene, the Democratic Party had itself been sojourning down the path of protectionism, driven by organized labor. Since then, the president has ripped up the Trans-Pacific Partnership, overhauled the North American Free Trade Agreement, and hit even U.S. allies with harsh tariffs-all while Democrats have been strangely silent. It seems as if they either tacitly support Mr. Trump’s reckless trade policies or simply lack an alternative.

Sidestepping the Constitution, which clearly assigns to Congress the power to “regulate commerce with foreign nations,” the Trump administration is using executive orders and national-security statutes to impose punishing tariffs. If a President Bernie Sanders were doing this, Senate Republicans would protest furiously. Yet Republicans and Democrats alike are letting the president do what he wants. . . .

The U.S. has tens of thousands of domestic companies that would be highly competitive in foreign markets if they could collaborate in marketing and shipping their products abroad. In 1982 I worked with Secretary of Commerce Malcolm Baldrige to resolve this problem by passing the Export Trading Company Act, enacted with bipartisan support, that included a waiver to allow these companies to team up without being in violation of the antitrust laws.

Unfortunately, the law has since been largely ignored by recent administrations, including Mr. Trump’s.The White House has tried plan after plan to restrict imports and punish trading partners. But focusing on the export side is a better way to ensure that American companies get a larger share of the world market. Over the years, Congress has established agencies and mandates to help U.S. companies go international, but they exist more like fiefdoms.  There is no global strategy and no coherence.

I’d also advise a presidential candidate to reorganize all the trade agencies-the Export-Import Bank, Overseas Private Investment Corporation, Trade and Development Agency, U.S. Commercial Service and others-under one umbrella with a new mandate to make America more competitive.

In the 2020 election, the Trump administration will continue to offer protectionist policies and ongoing threats that may provoke a repeat of the 1930 Smoot-Hawley Tariff Act, which precipitated the collapse of the world trading system. Democrats need to give voters a clear alternative: Elect a president who will take America back from the brink, make exports a much higher priority, and adopt policies to make U.S. companies far more competitive in the global economy.

Congressman Bonker has some very good points, but the Democratic party does not appear to be listening to his advice.  Many Democratic Senators and Congressmen agree with President Trump’s tough stance on trade, especially with regards to China.

LONG TERM IMPACT OF TRADE WAR ON US CHINA RELATIONS, THE XI JINPING BACKLASH AND THE DECOUPLING WITH CHINA

Recently, many books have been written by Chinese experts in the United States and elsewhere about the substantial political change in China and the decision by President Xi Jinping to move China back from a free market with private companies to a state-controlled economy.  Tax rates on Chinese entrepreneurs are reportedly as high as 65%.

See the January 2019 book by Nicholas Lardy, a US expert, entitled “The State Strikes Back The End of Economic Reform in China”, which states:

“The fundamental obstacle to implementing far-reaching economic reforms in China is the top leadership’s view that, while state-owned firms may be a drag on China’s economic growth, they are essential to maintaining the position and control of the Chinese Communist Party and achieving the party’s strategic objectives (Economy 2018, 15–16).”

State Strikes Back at p, 507-508 (2019).

A more influential book is the most recent book by Richard McGregor “Xi Jinping The Backlash”.  See https://www.cnn.com/2019/07/16/opinions/xi-jinping-backlash-opinion-intl-hnk/index.html.  McGregor in his book describes in detail the movement of President Xi Jinping to recentralize decision making authority in Beijing and move China back to a more authoritarian State run completely by the Chinese Communist Party.

This dramatic political change in China has now resulted in a major reassessment by many US politicians of relations with China.  See podcast by Newt Gingrich, one of the elder statemen in the Republican Party and an advisor to President Trump, “China How We Got It Wrong”.  https://podcasts.apple.com/us/podcast/newts-world/id1452065072?i=1000438763243.

Gingrich is a free trader, but recent developments in China have led him to completely change his outlook of China.  The movement by President Xi Jinping to a more authoritarian, State Run society, in China has caused many US and other Western politicians to believe that China is not moving in the right direction.  That is not a good sign for future US/Western Democracy relations with China.

Moreover, the long-term effect of the Trump trade war and the change in policy in China regarding the treatment of private companies and foreign companies is leading to a decoupling in supply chains between the US and China and also a decoupling of many foreign companies from China suppliers.  Although some foreign companies will continue to have operations in China, many others are moving.  See August 5, 2019 South China Morning Post article, Japan’s Sony, Ricoh and Asics join manufacturers’ mass exodus from China’s factories as US tariffs on made-in-China products bite,

Many US importers are moving or looking to move supply to a third country.  US companies that have operations in China are moving or looking to move all or almost all of their production from China.  The reports are that Apple and Fox Conn have succeeded in moving all of their Chinese production to Vietnam.

We are working with Chinese, foreign and US companies that want to move production or supply to a third country, including Vietnam, Malaysia and Thailand.  This major decoupling with China will have a major impact on the Chinese economy and on China’s foreign relations with other countries.  That is the simple reality of the situation.

But at the same time, as stated above, Dan Harris, my partner, has recently written an article entitled “Why NOW Is A Very Good Time to Double Down on Doing Business in China”.

THE RISE OF TRANSSHIPMENT AND HOW INDIVIDUALS AND COMPANIES CAN PROFIT FROM RIVALS TRANSSHIPMENT: IMPORTERS BEWARE

MOIETY  AND THE FALSE CLAIMS ACT

In response to these trade actions, many Chinese companies have attempted to transship products through third countries to the United States.  The Wall Street Journal recently published a piece on transshipment.  See https://www.wsj.com/articles/trump-to-impose-additional-10-tariff-on-chinese-goods-11564681310?mod=hp_lead_pos1.  In the video attached to the article, my partner Steve Dickinson, describes the transshipment problem in detail.

Many US importers, however, many not realize that importing goods through transshipment is a crime, which can land importers in prison.  In fact, two of my past clients went to prison for importing transshipped Chinese products through a third country.

When an importer imports products into the United States, he must submit a Section 7501 Customs form to the US Customs and Border Protection, which requires the importer to specifically declare the country of origin.  If a false 7501 Customs form is submitted to the US government and the importer knew the country of origin was false, that is Customs fraud, which can trigger significant civil and criminal penalties.

In fact, recently, a US importer contacted me because he had received an e-mail from a Chinese chemical producer/exporter, saying buy my chemical product, which is covered by a US antidumping (“AD”) order.  The Chinese producer told the US importer not to worry about the AD duties because the Chinese company would simply ship the product through Taiwan, call it Taiwan product and no problem.  The importer was very angry because he knew that transshipment is a crime, and he the US importer could find himself criminally liable for such a scheme.

Another importer recently stated that he intended to get around a US trade order by triangulation, simply shipping the Chinese product to a third country and then changing the country of origin from China to the third country.  I told the importer that this was Customs fraud and could lead to criminal and civil prosecution.

In another situation, several importers have contacted me because to get around trade orders, including antidumping and the Section 301 tariffs, Chinese companies are telling their US importers not to worry because they will just label the country of origin as Hong Kong or Singapore.  Import games, such as switching the country of origin, can lead to civil and criminal violations, which can lead to enormous penalties and even prison time.

Chinese companies and US importers have different interests.  The Chinese company wants to ship to the US.  The US importer wants to stay out of Customs trouble and avoid additional liability, be it civil or criminal.

But the question for many individuals and companies, be they Chinese or US, is how can we profit from this if we know competitors, including Chinese producers and US importers, are not playing by the rules?

Anyone, including companies in China or US importers, can profit if they discover Chinese exports or US imports that violate US Customs and Trade laws by using transshipment, shipping through a third country to change the country of origin.

Under 19 USC 1619, the Moiety statute, any person can receive compensation not to exceed 25% of the recovery, up to $250,000, for providing to any Customs officer or US attorney:

“original information concerning .. . any fraud upon the customs revenue, or any violation of the customs laws or the navigation laws which is being, or has been, perpetrated or contemplated by any other person and such information leads to a recovery of . . .any duties withheld, or … any fine, penalty, or forfeiture of property incurred . . . .”

Many US and foreign individuals and companies, including US importers and even Chinese producers/exporters, can profit even more from transshipment under the False Claims Act.   Under Title 31, United States Code, Section 3729 (G), et. seq., any person, including companies, currently face triple damages and a penalty of $11,000 per claim for any of the following acts:

“(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”

Section 3730 of the False Claims Act (“FCA”) provides a private right of action, that is a private person may sue for a violation of section 3729 on behalf of the US government, such as Customs fraud.  The private party called a relator can be a competitor, such as a US importer or foreign producer, or an insider, such as a secretary or a filing clerk.  The relator files a copy of the complaint and written disclosure of all material evidence and information possessed by the person under seal in the Federal District Court to show that certain US importers and foreign producers/exporters have committed fraud on the US government by transshipping products covered by antidumping and other trade orders to avoid the duties.

The complaint is brought on behalf of the United States and the Department of Justice.  The complaint and the evidence supporting the complaint are not served on the defendants, but on the US government, which has 60 days to determine whether or not to intervene in the case.

If the government decides to intervene and prosecute the action, the private party is entitled to 15 to 25 percent of any recovery.  If the government decides not to prosecute the case and the private party goes forward, the private parties are entitled to 25 to 30 percent of any recovery.

The remedy in a False Claims Act case is triple damages and in many AD and countervailing duty (“CVD”) cases, especially against China, the missing AD or CVD duties can be well over 100 to 300% on imports over the last 5 to 6 years.  In one recent preliminary antidumping determination against mattresses from China, the antidumping rate is 1,731%, the highest antidumping rate in history.

If total annual imports have come in from the transshipment country are over $15 million, for example, the total damages could be well over $100 million to $200 million with a potential payout to the relator of millions of dollars.

Relators, be they a competitor or an individual, can become very rich because of a False Claims Act case.  We presently have an ongoing False Claims Act case, where the total award is $62.4 million.  We are in the process of negotiating a multi-million dollar settlement for the relator in that case.  In a medical FCA case here in Seattle, a young clerk made several million dollars because of a False Claims Act case.

Although President Donald Trump and many in Congress scream about evasion of US AD and other trade orders because of transshipment, they often do not realize that there are already legal hammers to crush transshipment in the US legal arsenal and that is the Moiety Statute and the False Claims Act.

HUAWEI’S PROBLEMS CONTINUE

At the G-20 meeting between Presidents Xi and Trump, the Huawei issue was raised.  But to date, the Commerce Department has not done anything concrete to help Huawei and at the most has talked about making it easier for US companies to export products to Huawei that do not damage US national security.

But the major problem for Huawei is the criminal cases and to date nothing has been done from the US side to stop these cases.  More specifically, on January 28, 2019, the Justice Department issued two indictments against Huawei.  One indictment was filed in the Federal District Court in the Eastern District of New York and is entitled United States of America Vs Huawei Technologies Co., Ltd., Huawei Device USA, Skycom Tech Co., Ltd., Wanzhou Meng, also known as Cathy Meng and Sabrina Meng and a number of unknown defendants.

This indictment detailed allegations against Huawei, Huawei USA, Meng Wanzhou, the Huawei CFO and daughter of the owner, and several unnamed co-defendants alleging evasion of Iran sanctions, bank fraud, and obstruction of justice.

Ms. Meng finds herself—immersed in a criminal action exposing her to 30 years in prison for bank fraud.  Although Ms. Meng received bail and is staying at her Vancouver house, she is due back in Canadian Court.  And there is probably a good chance that Ms. Meng will be extradited to the United States, where she will face even tougher problems.

The second indictment against Huawei took place here in Seattle when Huawei stole key robot technology from T-Mobile.  One of the most important parts of the T-Mobile indictment, which will have a direct impact on the US China 301 negotiations, is that Huawei has in place a bonus program to reward employees who steal foreign intellectual property.

In fact, Christopher Wray, the head of the FBI, recently announced that it has 1,000 investigations into Chinese IP theft.  See https://www.scmp.com/news/china/article/3019829/fbi-has-1000-probes-chinese-intellectual-property-theft-director

THE PROBLEM FOR CHINESE FACING CRIMINAL PENALTIES IS THAT US ARREST WARRANTS AND EXTRADITION REQUESTS ARE ENFORCEABLE IN MANY DIFFERENT COUNTRIES

Recently, the Wall Street Journal published an article about a Chinese aluminum mogul, Liu Zhongtian, who was indicated in the US for evading $2 billion in tariffs in the Aluminum Extrusions from China Antidumping and Countervailing Duty case.  The indictment focuses on fraud and international money laundering, which carries a maximum prison sentence of 465 years.  See https://www.wsj.com/articles/chinese-billionaire-indicted-in-u-s-in-alleged-tariff-evasion-scheme-11564586470?mod=hp_lead_pos4.

The problem Mr. Liu faces, like Meng Wanzhou, is that although he cannot be arrested in China, as soon as he takes a step outside of China, he is vulnerable.

As stated in past newsletters, the Chinese government’s decision not to have any agreement with the United States or other countries with regards to the enforcement of judgments or extradition warrants in China gives Chinese individuals a false sense of security.  Many Chinese individuals feel they are immune to laws in other countries and can break them with impunity and they can apply the “Chinese way” of playing games in international and commercial transactions in many countries.

Chinese companies, however, are now international operations.  As soon as the Chinese individual takes a step out of China, he or she can be arrested.  US judgments are enforceable in many other countries, including Taiwan, Canada and until recently Hong Kong.

HIGHEST ANTIDUMPING RATE IN HISTORY AND THE CRITICAL CIRCUMSTANCES TRAP

As mentioned above, on July 10, 2019, in the Mattresses from China Antidumping case, Commerce issued the highest preliminary antidumping rate in history of $1,733%.  This can be a very difficult problem if there is a critical circumstances situation.  In the recent Quartz Surface Products from China Antidumping and Countervailing Duty case, we have been representing a substantial number of US importers.

In that case, the Commerce Department found antidumping rates ranging from 265 to 333% and countervailing duty rates ranging from 45 to 190%. More importantly, the Commerce Department made critical circumstances determinations exposing many importers to millions of dollars in retroactive liability for imports 90 days prior to the Preliminary Determinations.

For critical circumstances (“CC”) to stick, however, the US International Trade Commission (“ITC”) had to determine that the increased imports would “undermine seriously” the remedial effect of the antidumping and countervailing duty orders to be issued.  This is a very high statutory standard and, therefore, in over 90% of the cases, the ITC reaches a negative CC determination.  In the Quartz Surface Products case, luckily for many US importers, the ITC did reach a negative CC determination.

For almost 8 months before the ITC ruling, however, US importers were under immense pressure from US Customs and Border Protection to pay the millions in outstanding cash deposits during the CC period.  In fact, a number of US importers received notices of liquidated damages for failure to pay the cash deposits in the CC period, when the ITC ultimately reached a negative CC determination.

This CC situation created a number of sleepless nights for US importers.

FABRICATED STRUCTURAL STEEL FROM CHINA AND IMPACT ON US CONSTRUCTION INDUSTRY

Another problem has risen in the US Construction industry for the ongoing antidumping and countervailing duty case on Fabricated Structural Steel from China.  Many developers, who may not be importers but have set construction contracts, have called because of exposure to the CVD Preliminary Determination and rates of 36 to 179% and the potential AD rates of 222%.

If there are CC determinations by Commerce in the Fabricated Structural Steel case, this could put importers and downstream developers into a very difficult situation.

RECENT SECTION 337 PETITIONS

Two recent Section 337 petitions, which may be of interest are the following.

LIGHT EMITTING DIODES

On July 30, 2019, the Regents of the University of California filed a Section 337 case against imports of Filament Light-Emitting Diodes and Products.  The proposed respondents are:

Amazon.com, Inc., Seattle, WA; Amazon.com Services, Inc., Seattle, WA; Bed Bath & Beyond Inc., Union, NJ, IKEA of Sweden AB, Sweden; IKEA Supply AG, Switzerland; IKEA Distribution Services Inc., Conshohocken, PA; IKEA North America Services , LLC, Conshohocken, PA; Target Corporation, Minneapolis, MN; and Walmart Inc., Bentonville , AR.

CHILD RESISTANT CLOSURES

On July 22, 2019, Reynolds Presto Products Inc. filed a Section 337 case against imports of Child Resistant Closures with Slider Devices Having a User Actuated lnsertable Torpedo for Selectively Opening the Closures and Slider Devices.  The proposed respondents are:

Dalian Takebishi Packing Industry Co., Ltd., China; Dalian Altma Industry Co., Ltd., China; Japan Takebishi Co., Ltd., Japan; Takebishi Co., Ltd., Japan; Shanghai Takebishi Packing Material Co., Ltd., China; and Qingdao Takebishi Packing Industry Co., Ltd., China.

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

Best regards,

Bill Perry and Fred Rocafort

US CHINA TRADE WAR — SECTION 301 NEGOTIATIONS, NOT JUST TRUMP, ASIA SOCIETY REPORT, HUAWEI INDICTMENTS, HONG KONG EXTRADITION, CHINA’S LONG TERM ECONOMIC PROBLEMS, GOVERNMENT SHUTDOWN, QUARTZ SURFACE PRODUCTS

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – FEBRUARY 21, 2019

Dear Friends,

At the outset of this newsletter, I want to address one complaint.  Some have criticized my blog for being too tough on China.  The objective of this blog post is not to be tough on China, but to describe the actual US China trade relations as it is.  Sounding happy about the US China trade relationship will not solve the problems between the US and China in the trade area.

In reality, the US and China are going through a very tough situation right now with 10 to 25% tariffs on $250 billion in imports from China. The trade problem has risen to a crisis situation.  President Xi in his recent letter to President Trump at the end of January emphasized the importance of this specific time in US China relations.  President Xi is correct.  This is a critical time for US China trade relations but as explained below, it is not just President Donald Trump.  Both the US and China need to settle this trade dispute.

More importantly, to illustrate the actual situation, I quote from actual government documents and news reports, which are attached to this blog. I want readers to understand the actual trade situation between the US and China not because I Bill Perry am describing it that way, but because the US government or credible news reports are describing the actual situation that way.

US China trade problems can only be solved if both the US and Chinese government understand the actual issues.  My job as a US lawyer is to predict the future and warn my clients and the readers of this blog post both in the United States and China about upcoming problems so the problems can be dealt with and hopefully settled.  Like a navigator on a boat my job is to spot the rocks and hazards before the boat hits an unexpected rock and sinks.

With regards to this specific blog post, I wanted to write it after the couple of rounds of talks in Washington DC to give my take on the situation.  From the White House Statement and even the Chinese statement from Xinhua, it is very clear that the key issues discussed in the trade talks are: Forced Technology Transfer, IP Theft and Enforcement of any trade agreement.  Trump and USTR Robert Lighthizer are not going to settle for an agreement with broad meaningless promises from the Chinese government, which are not kept.  The US wants tangible results and promises that can be enforced.

In the February 5th State of the Union speech, one of the few times President Trump received bipartisan applause from both the Republican and Democratic Congressmen and Senators was when he mentioned that he was negotiating a tough trade deal with China.

The most important point to understand is that US China Trade problem is not just Donald Trump.  As stated before, Trump may be the spark, but its China’s changing economic and political policies that are the gunpowder.  This is clearly illustrated by the recent Asia Society Task Force report “Course Correction: Toward An Effective and Sustainable China Policy” by very famous China hands and career diplomats that US China relationship has reached an inflexion/turning point and has to change.

As described more below, the Asia Society report is echoed by a report from John Garnaut of Australia, who says that President Xi Jinping and his clique have decided to move China back to the time of Mao and Stalin.

Another key point is the December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the Huawei founder, in Vancouver, Canada based on an extradition warrant from the United States for bank fraud.  The key point is that the arrest of the Huawei CFO was not a topic of conversation during the first rounds of negotiations.  In the Fourth Round of negotiations in Beijing, the Chinese government suggested a separate round of negotiations solely on the Huawei issue but so far the US has not accepted the offer. I suspect that Trump will be reluctant to intervene.

The ZTE situation was very different from the current Huawei situation.  ZTE was still at the administrative level before the Commerce Department.  In contrast, criminal indictments have been issued in two different Federal Courts, one in Seattle with regards to the T-Mobile theft of intellectual property and the second indictment in the Eastern New York for bank fraud against Ms. Meng.

Criminal indictments against Huawei have raised these issues up to a much higher rule of law issue.  That makes it more difficult for President Trump to intervene.  As President, Trump controls the Executive Branch of the US Government, including the Commerce Department, but President Trump does not directly control the Courts, which is the Judicial Branch of the US Government.

One key point of the Huawei situation is the idea in China that they can apply the Chinese “way” to doing business internationally.  The numerous indictments against Chinese companies and the enforcement of extradition requests, not only in Canada, but also in Hong Kong, indicate that the Chinese way is not going to work internationally.  If Chinese executives can be arrested in Hong Kong, that clearly illustrates the real vulnerability of Chinese corporate officials, who do not follow international rules, especially if the Chinese company is a multinational, such as Huawei.

It is also very clear that China’s economy is still hurting.  Even if China is able to get a trade deal with US, that will not stop the dramatic economic fall in the Chinese economy.  The Chinese government has decided to attack private industry and return to Statism.  That policy is hurting China very badly.

Another issue complicating the negotiations is the recent Government shut down, which has caused the deadlines in all ongoing trade cases to be pushed up 40 days at Commerce and 35 days at the ITC.

My firm is also representing a number of US importers and fabricators 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.  Have uploaded blank copies of those questionnaires to this blog below.

One big issue in the Quartz decision is the Commerce Department’s critical circumstances determination, which has caused Customs to reach back and try to get cash deposits of millions of dollars in imports prior to the Preliminary Determination.  Such a Customs action could well drive 100s if not 1,000s of US importers when the ITC in all probability will reach a negative critical circumstances determination as it does in close to 90% of the cases. This action raises the question whether the Antidumping and Countervailing Duty laws are truly just remedial statutes.

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

Best regards,

Bill Perry

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CORE ISSUE OF THE 301 CASE AGAINST CHINA IS IP THEFT, FORCED TECHNOLOGY TRANSFER, AND ENFORCEMENT

The section 301 case started in the spring of 2018.  The core of the complaint is China’s aggressive campaign to steal intellectual property (“IP”)  from US and other foreign companies.  See attached Full Section 301 Report USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER and Interim Report USTR FULLL 301 Report Update.  See more details below.

In the summer of 2018, the US first imposed 25% tariffs on $15 billion in imports from China.  China retaliated against US exports of agricultural and other products, including Soybeans

The US then in September imposed 25% tariffs on second $35 billion in imports from China in response to China retaliation.  China retaliated again.

US then imposed 10% tariffs on $200 billion in imports from China with a trigger of January 1, 2019 for tariffs to go to 25%.   See the Federal Register notices on my blog, www.uschinatradewar.com, for more details.

It should be noted that the tariffs on the first $50 billion in imports is to offset the harm caused to the United States and US companies because of the IP Theft and Forced Technology Transfer.  The tariffs on the $200 billion are in direct response to the Chinese government’s decision to retaliate against the US tariffs.

President Trump’s and USTR Lighthizer’s firm belief is that because of a US trade deficit and a Chinese trade surplus of $350 billion and total Chinese exports of $500 billion plus, the US could weather a trade war much better than China.

China’s response to the Section 301 case was “deny, deny, deny” and that the US was simply trying to contain China.  The Chinese Government’s decision to retaliate and refuse to deal with the US trade complaints led to the US escalation of the trade war to cover $250 billion in imports from China.

The full 301 report started and makes it clear that two key issues are IP Theft and Forced Technology transfer.  The attached 301 Federal Register notice starting the Section 301 case, FED REG PRESIDENTIAL DETERMINATION 301 CHINA, states:

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. . . .

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.

Enforcement of any agreement with China is also a big issue. At the beginning of the Section 301 Report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, it lists ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, which the Chinese government has ignored.  The last two agreement are the recent 2016 agreements between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China and to stop cyberhacking for commercial gain.  According to the USTR, the Chinese government ignored both Agreements.  See page 8 of the USTR 301 report.  All those agreements between the US and China were breached.

See statement by former USTR Charlene Barshefsky below that the Chinese government’s failure to follow the WTO agreements signed in the early 2,000s means that China should actual follow the Agreements or leave the WTO.  The Chinese government has run out of time.

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 the issue of product exclusion requests.  The three lists of tariffs cover $250 billion in imports from China.

The deadlines to file an exclusion request for the first $50 billion have past.  Moreover, USTR Lighthizer has stated that there will no exclusion requests for the $200 billion until there is an outcome of the negotiations with the Chinese government.  If the negotiations go well, all or some of the 301 tariffs could be lifted so there will be no need for exclusion requests.  If the duties remain in place, then the USTR will have an exclusion process.

NEGOTIATIONS START AND THE FOURTH ROUND IS PRESENTLY ONGOING IN WASHINGTON DC

Because of the enormous pressure on the Chinese economy, as described more below, in November the Chinese government pushed for a meeting between President Xi and President Trump.  On December 1st, at a meeting in Buenos Aries at G-20, President Xi made a long presentation leading President Trump and USTR Lighthizer to believe that a structural deal could be struck with China regarding IP theft and forced technology transfer.  That discussion resulted in the US postponing the increase in the 10% tariffs on $200 billion until March 1st.

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

But there are conflicting views as to whether the follow up negotiations in four rounds, first with Deputy USTR Jeffry Gerrish in Beijing and then in Washington DC with USTR Lighthizer, followed by additional negotiations in Beijing and the fourth round now in Washington DC indicated a Chinese government’s willingness to actually deal with IP Theft and Forced Technology Transfer issues and make any “structural” agreement truly enforceable.

A 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 US and Chinese governments consider IP Theft and Forced Technology Transfer to be “structural’ issues, it appears that there is no deal yet in these areas.

There are reports in the Press that trying to persuade the Chinese government to compromise on the structural issues has been like “pulling teeth”.  But if the Chinese government were not willing to compromise on IP Theft and Forced Technology Transfer, in all probability the negotiations would have already ended.

On January 31, 2019, however, after the second round of negotiations in Washington DC, The White House issued the attached statement, WHITE HOUSE STATEMENT, as follows:

“The talks covered a wide range of issues, including: (1) the ways in which United States companies are pressured to transfer technology to Chinese companies; (2) the need for stronger protection and enforcement of intellectual property rights in China; (3) the numerous tariff and non-tariff barriers faced by United States companies in China; (4) the harm resulting from China’s cyber-theft of United States commercial property; (5) how market-distorting forces, including subsidies and state-owned enterprises, can lead to excess capacity; (6) the need to remove market barriers and tariffs that limit United States sales of manufactured goods, services, and agriculture to China; and (7) the role of currencies in the United States–China trading relationship. The two sides also discussed the need to reduce the enormous and growing trade deficit that the United States has with China. The purchase of United States products by China from our farmers, ranchers, manufacturers, and businesses is a critical part of the negotiations.

The two sides showed a helpful willingness to engage on all major issues, and the negotiating sessions featured productive and technical discussions on how to resolve our differences. The United States is particularly focused on reaching meaningful commitments on structural issues and deficit reduction. Both parties have agreed that any resolution will be fully enforceable.”

This White House Statement indicates that the structural issues of IP Theft, Forced Technology Transfer and enforcement were indeed the subject of the first two negotiation rounds.

At the same time in late January, the Chinese Government’s mouthpiece, Xinhua, stated in the attached article, XINHUA STATEMENT TRADE TALKS, as follows regarding the Washington DC negotiations:

“Liu, also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, led the Chinese delegation for the two-day trade talks that concluded on Thursday in Washington.

Liu delivered a message from Chinese President Xi Jinping to Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.

Xi said when he and Trump met in Argentina last December, the two heads of state agreed to jointly advance the China-U.S. relationship featuring coordination, cooperation and stability.

“According to the consensus we have reached, economic teams from both sides have since conducted intensive negotiations and achieved positive progress,” said Xi. . . .

On the China-U.S. trade talks, the Chinese vice premier said that teams from both sides have spared no time in implementing the important consensus between the two heads of state.

He noted that during the latest round of talks, the two sides held candid, specific and constructive discussions about issues of common concern, which included trade balance, technology transfer, protection of intellectual property rights and a two-way enforcement mechanism, as well as other issues of concern to the Chinese side.”

Note that the Chinese side has acknowledged the importance of the IP theft, Forced Technology Transfer and enforcement issues.  Note also that at the meeting in the Second Round between Trump and Liu He at the White House at the end of January, USTR Lighthizer stated that the name of the game is “enforcement, enforcement, enforcement”, which would counter the original Chinese Government strategy of “deny, deny, deny”.

After the third round of negotiations in Beijing, there were newspaper accounts that it was like “pulling teeth” to get the Chinese government to give in on structural issues, including Forced Technology Transfer.  But there was also an agreement that any deal would come forth in a Memorandum of Understanding and that there would be a framework agreement between China and the US.  The big stumbling block seems to be Forced Technology Transfer.

Most experts, including Senator Rob Portman, expect there to be an interim agreement of Understanding by March 1st, which would allow Trump to state that the duties at least will not be raised to 25% as a more comprehensive agreement is further negotiated.

Trump has stated several times that the March 1st deadline could slide depending upon the negotiations and that a face to face, Trump/Xi meeting could happen soon.  In talking to many trade experts, the universal belief is that the US government will punt.  Have a short Memorandum of Understanding as the negotiations continue.

Some Chinese and other commentators believe that Trump will back down in the Xi and Trump meeting.  I do not think so.  Trump cannot back down on the IP issues, which are the core of the 301 case.

OTHER COUNTRIES AGREE WITH TRUMP ON US CHINA TRADE DISPUTE

Although the Chinese government and observers may think that the trade war is only coming from Trump and the United States, many other countries have jumped on US band wagon with regards to IP Theft and Forced Technology Transfer by China.  The countries include EC, Canada, Australia, Japan, South Korea and many other countries, because China has stolen their IP too.

Through its Made in China Program the Chinese government has focused on acquiring foreign technology/intellectual property by any means necessary from many different countries, not just the United States.

.        The technology for high speed trains was stolen from Germany and Japan.

.        Semiconductor technology was stolen from Australia and the US.

In fact, the systematic attacks on their IP have caused many companies to look at moving production out of China to other countries.

As described below, there have been aggressive attacks on US and foreign intellectual property by such companies as Huawei, which has bonus programs for employees to encourage theft of IP

In the United States, these aggressive attacks on IP have led to a new China initiative at the Justice Department and criminal prosecutions of Chinese companies and Chinese nationals for the theft of intellectual property.  These Justice Department criminal cases have led to the extradition of various Chinese nationals to face prison time in the United States.

Some commentators have suggested that the US dropped the ball by not going the WTO Route.  The USTR issued the attached report in February 2019, USTR REPORT WTO CHINA, stating, in effect, that using the WTO to deal with China has not worked.

Moreover, there were never multilateral negotiations with China, i.e. China at a one table with a number of different countries.  In fact, we are seeing a similar process to the WTO Agreement with China, which started first with the bilateral negotiations and the US China WTO Agreement.  That US WTO Agreement was followed up with agreements between China and many other countries.  In other words, any US China 301 Agreement will probably be a blueprint for future bilateral negotiations and result in similar bilateral agreements negotiated between China and other countries to stop international IP theft and forced technology transfer.

BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE

Contrary to many commentators in China and elsewhere, the tough position against China in these trade negotiations is not just President Donald Trump.  The Chinese government should not expect a change in the tough US position on China trade policy if there is a change in US government. US China Trade Policy is not just a Republican issue.  It is bipartisan issue.  Traditionally, the Democratic party is much more protectionist than the Republican party, because the Democratic party is supported by the labor unions.

In the 2019 State of Union, President Trump spoke of a need for a strong US trade response against China and a strong structural trade agreement with China because of decades of IP theft.  This point provoked a bipartisan standing ovation from Republicans and Democrats.  Democrats hate Trump, but they agree completely on a tough response to China.  See the following video of the State of the Union at https://www.youtube.com/watch?v=OSy9NcPRSGs.

Cyber hacking is another example where the Chinese government made an agreement with the United States and President Obama and then proceeded to ignore it, break the agreement and continue aggressive cyber hacking to steal US IP.  In fact, many trade experts believe that the Chinese government believed that President Obama could be played.

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.

THE ASIA SOCIETY REPORT ON CHINA SUPPORTS THE BIPARTISAN TOUGH US TRADE POLICY AGAINST CHINA

Many Chinese and US commentators may believe that the trade fight with China is just Trump.  That simply is not true.

In February 2019, the Asia Society published the attached report entitled “Course Correction: Toward An Effective and Sustainable China Policy”, ASIA SOCIETY REPORT COURSE CORRECTION. The authors of the report are some of the most famous “China” hands in the United States, including Orville Schell, who has written dozens of books on China, former USTR Charlene Barshefsky, who negotiated the US China WTO Agreement, and Winston Lord, the Ambassador to China under Ronald Reagan and later the Assistant Secretary of State for East Asia under President Bill Clinton.  These are “old friends” of China.

Many of the members of the Task Force writing the Report speak fluent Chinese and have held very high positions in the US government dealing with China in Democratic and Republican Administrations.  These experts believe that the United States and China are at a true “inflexion”/turning point.  When “old China friends” are stating that the Chinese government needs to beware, it should be careful of the situation.

The report is very, very tough against China stating in part:

“The United States and China are on a collision course. The foundations of goodwill that took decades to build are rapidly breaking down. Many American opinion makers are starting to see China as a rising power seeking to unfairly undercut America’s economic prosperity, threaten its security, and challenge its values, while their Chinese counterparts are starting to see the United States as a declining power seeking to prolong its dominance by unfairly containing China’s rise. Beijing’s recent policies under Xi Jinping’s leadership are primarily driving this negative dynamic, so the Trump administration is right to counter those Chinese actions that defy norms  of fair economic competition, abrogate international law, and violate fundamental principles of reciprocity. The Trump administration is justified in pushing back harder against China’s actions, but pushback alone isn’t a strategy. It must be accompanied by the articulation of specific goals and how they can be achieved. . . .

The Report goes on to criticize the Trump policy of using tariffs to get China’s attention, but then says:

As the Trump administration stands up to China, it must also clearly express a willingness to pursue negotiated solutions by spelling out specific steps that could restore equity and stability to the relationship. Otherwise, the United States risks an irreparable, and possibly avoidable, rupture in this crucially important bilateral relationship. To avoid such a breakdown, the United States and China should seek negotiated solutions to priority issues whenever possible and erect prudent guardrails—including the appointment of specially designated officials—to keep the relationship from running further off the tracks. An adversarial United States-China relationship is in no one’s interest. More responsible statecraft is required both to protect American interests and to increase the chances of avoiding that no-win outcome.

At the same time, China’s increasingly unfair business practices have generated growing international criticism, especially from the very businesspeople who have traditionally been most enthusiastic in their support   of engagement with China. One of their most serious concerns is the way Beijing has ramped up its massive state drive to dominate the technologies of the future, both at home and abroad. This has included not just legitimate forms of Chinese innovation and investment, but also the acquisition of foreign technology through illegitimate means such as cyber theft, intellectual property violation, and forced technology transfer. As market reforms stalled or were reversed and the Chinese state’s role in the economy has grown, it has become increasingly clear that China is no longer converging with global norms of fair market competition but is in fact steadily diverging from them.

Xi Jinping’s revival of personalistic autocratic rule, including the scrapping of presidential term limits and his refusal to adhere to precedent for the peaceful turnover of political power for top leadership positions, makes China a less predictable and trustworthy partner and accentuates the political and values system gap that makes finding common ground more difficult. The Chinese Communist Party has tightened its control over information and society. It enforces ideological orthodoxy, demands political loyalty, and screens out foreign ideas, particularly in education and the media. Moreover, by arresting rights lawyers, incarcerating and indoctrinating Muslim minorities in the Xinjiang region, and repressing independent Christian congregations throughout the country, the regime has attracted increased international opprobrium as a human rights violator and set itself more explicitly in opposition to liberal values. . . .

This new dynamic that emanates from Beijing has precipitated a deep questioning—even among those of us who have spent our professional careers seeking productive and stable U.S.-China ties—about the long-term prospects of the bilateral relationship. We view this current period as unprecedented in the past forty years of U.S.-China relations. In the past, good sense usually prevailed and American and Chinese policymakers and scholars always managed to overcome severe bilateral strains triggered by specific incidents. We saw such a recovery even after the 1989 Tiananmen Square crackdown, as well as after the 1995-96 Taiwan Strait crisis, the 1999 accidental bombing of the Chinese embassy in Belgrade, and the 2001 collision between a U.S. surveillance plane and a Chinese fighter jet. By contrast, the current downturn in relations is deeper and more systemic in scope. What is more, it is occurring at a time when the U.S. and China’s economic and military capabilities have become more evenly matched, making the dangers of overt conflict far greater. . . .

Unfortunately, by the midpoint of the Trump administration’s first term, the negative trends in Chinese behavior that were highlighted in our earlier report have only grown more pronounced and worrisome. If the three most harmful trends identified below are now to be effectively addressed, a more robust and proactive U.S. policy toward China is required.

(1)           China’s pursuit of a mercantilist high-tech import-substitution industrial policy

 The Chinese state ramped up its clearly scripted and lavishly funded strategy to dominate the technologies of the future, not just through its own innovation but also by acquiring foreign technology by inappropriate means. This is not a standard industrial policy in which the government merely enables or channels spontaneous market activity. Instead, the policy aims to help Chinese firms control targeted sectors of technology markets both at home and abroad, dominate a wide range of cutting-edge industries deemed “strategic,” and put systemic limits on the operation of foreign competitors in its own domestic markets. As a result of this strategy, many foreign firms are pressured to transfer technology in order to conduct business in China, while others become victims of cyber theft by Chinese state actors. Despite decades of reform, discriminatory treatment of foreign firms is still deeply embedded in the Chinese system of bureaucratic protectionism.

As a result of intensified state control, the Chinese economy is diverging from global market norms. While rhetorically China’s leaders espouse an open global economic order, domestically the party-state is now dominating the economy more than it has at any time since the Mao era. Market reforms and the opening of the country to imports and inbound investment have stalled. At the same time, China’s government funds outbound investments by private as well as state firms to bring home technology and know-how in areas like robotics, chip fabrication, artificial intelligence, aerospace, ocean engineering, advanced railway equipment, new energy vehicles, power equipment, agricultural machinery, new materials, and biomedicine and medical devices. The goals of China’s industrial policy as expressed in the government’s major plans, such as “Made in China 2025” and “Civil-Military Integration,” are not just to help China achieve high-tech import substitution and dominate global markets in tech sectors, but also to enhance the country’s military power.

Beijing’s approach is forcing the United States and other advanced industrial countries to reassess their open and market-based commercial relationships with China in order to discipline mercantilist and zero-sum Chinese practices, preserve their own economic competitiveness, and protect their defense industrial bases. . . .

3.     China’s hardening authoritarianism

Under Xi Jinping’s leadership, China has been reversing what had been a slow and sometimes halting process of social and political liberalization by turning back toward more authoritarian forms of political control. For three decades after Mao Zedong’s death in 1976, China’s party-state gradually lessened its ideological controls on social and economic life. This progress created domestic support in both countries for U.S.-China cooperation. By making a U-turn back to personalistic dictatorship, Leninist party rule, and enforced ideological conformity, Xi has created new obstacles to engagement with the United States and other liberal democracies around the world, while also erecting barriers to Chinese interactions with foreign civil society institutions such as universities, think tanks, and non-governmental organizations (NGOs). . . .

More specifically, with regards to trade, as former USTR Charlene Barshefsky states in the following presentations on the Report, if China will not follow the WTO Trade rules, it should leave the WTO.  See https://asiasociety.org/video/chinas-decisive-turn-toward-statism and https://www.youtube.com/watch?v=uT01OGl7uG0.

HUAWEI IN A WORLD OF HURT FACING TWO MAJOR CRIMINAL INDICTMENTS IN TWO FEDERAL COURTS, WHICH COULD GROW TO THREE

As stated above, Huawei was not the topic of the January negotiations in Washington DC.  In the most recent negotiations in Beijing, the Chinese government proposed a separate negotiations track on Huawei, but to date the US government has not accepted

In fact, on January 28, 2019, the day before the negotiations began in Washington DC, the Justice Department issued two attached indictments against Huawei.  The first attached bank fraud indictment, ACTUAL HUAWEI IRAN INDICTMENT, was filed in the Federal District Court in the Eastern District of New York and is entitled United States of America Vs Huawei Technologies Co., Ltd., Huawei Device USA, Skycom Tech Co., Ltd., Wanzhou Meng, also known as Cathy Meng and Sabrina Meng and a number of unknown defendants.

The indictment was filed in the Federal District Court in the Eastern District of New York and provides detailed allegations against Huawei, Huawei USA,  Meng Wanzhou, the Huawei CFO and daughter of the owner, and several unnamed co-defendants alleging evasion of Iran sanctions, bank fraud, and  obstruction of justice.

One commentator in Hong Kong stated in an article, that ultimately this first indictment means that Huawei will pay a fine.  No, that is not the point.  Ms. Meng faces years in prison—real jail time.

The second attached indictment, DOJ TRADE SECRETS INDICTMENT HUAWEI, against Huawei took place here in Seattle when Huawei stole key robot technology from T-Mobile.  One of the most important parts of the T-Mobile indictment, which will have a direct impact on the US China 301 negotiations, is that Huawei has in place a bonus program to reward employees who steal foreign intellectual property.

The indictment states:

  1. On July 10, 2013, at the same time that HUAWEI CHINA and HUAWEI USA were falsely claiming that the conduct of A.X. and F.W. was “isolated,” constituted a “moment of indiscretion,” and was contrary to Huawei’ s corporate polices, HUAWEI CHINA launched a formal policy instituting a bonus program to reward employees who stole confidential information from competitors. Under the policy, HUAWEI CHINA established a formal schedule for rewarding employees for stealing information from competitors based upon the confidential value of the information obtained. Employees were directed to post confidential information obtained from other companies on an internal Huawei website, or, in the case of especially sensitive information, to send an encrypted email to a special email mailbox. A “competition management group” was tasked with reviewing the submissions and awarding monthly bonuses to the employees who provided the most valuable stolen information. Biannual awards also were made available to the top three regions that provided the most valuable information. The policy emphasized that no employees would be punished for taking actions in accordance with the policy.
  2. The launch of this HUAWEI CHINA bonus program policy created a problem for HUAWEI USA because it was in the midst of trying to convince T-Mobile that the conduct in the laboratory was the product of rogue employees who acted on their own and contrary to Huawei’s policies. As a result, on July 12, 2013, the HUAWEI USA Executive Director of Human Resources sent an email to all HUAWEI USA employees addressing the bonus program. The email described the bonus program as: “[I]ndicat[ing] that you are being encouraged and could possibly earn a monetary award for collecting confidential information regarding our competitors and sending it back to [HUAWEI CHINA].” The email went on to say: “[H]ere in the U.S.A. we do not condone nor engage in such activities and such a behavior is expressly prohibited by [HUAWEI USA’s] company policies.” The email did not state that the bonus program had been suspended by HUAWEI CHINA. Rather, the email emphasized that “in some foreign countries and regions such a directive and award program may be normal and within the usual course of business in that region.”

The indictments against Huawei are extremely serious, and I would be very surprised if Trump would agree to introduce Huawei into the trade negotiations.

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.

There is also a potential third indictment against Huawei for theft of a US intellectual property for diamond glass used for mobile screens.  Huawei apparently stole the technology, and now the FBI is investigating the situation.  See attached article from Bloomberg entitled “Huawei Sting Offers Rare Glimpse of the U.S. Targeting a Chinese Giant”, HUAWEI GOES AFTER MORE TECHNOLOGY

THE PROBLEM WITH THE CHINESE WAY AND EXTRADITION REQUESTS ARE ENFORCEABLE IN HONG KONG

As stated in the past blog post, 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.  Many Chinese individuals feel they are immune to laws in other countries and can break them with impunity and they can apply the “Chinese way” of playing games in international and commercial transactions in many countries.

Chinese companies, however, are now international operations.  As soon as the Chinese individual takes a step out of China, however, he or she can be arrested.  You can run, but eventually you cannot hide from US and other foreign extradition warrants and judgments.

The attached January 14th article in the South China Morning Post entitled “A Chinese math prodigy turned hedge fund coder and the stolen strategies that cost him his freedom”, ARREST CHINESE NATIONAL IN HONG KONG, described a Chinese graduate from Hubei , who stole” intellectual property from a UK company.  The article described the situation where a Chinese national in Hong Kong had fled the United Kingdom (“UK”) after stealing intellectual property from a UK company.  The Chinese individual was arrested in Hong Kong on a UK extradition warrant.  If a Chinese national can be arrested in Hong Kong on an extradition warrant from the UK, can US criminal extradition warrants be enforced in Hong Kong?

LONG TERM PROBLEMS AND IMPACT ON CHINESE ECONOMY

On January 31, 2019, during the US China negotiations, Premier Liu delivered a letter from Chinese President Xi Jinping to President Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.  This is absolutely true.  This is a crucial point in history not only for relations between the US and the rest of the Western/Democratic countries but for China itself because it is facing a steep economic decline. 

As a result of the US Trade War and more importantly the Chinese government’s decision to strongly favor state run companies and aggressively attack the Chinese private industry, there is a real decline in the Chinese economy.  Major Chinese economists in and out of China are predicting a potential recession in China in the next year.

See below statements from Nicholas Lardy and Professor Xiang Songzuo. If the subsequent statement by John Garnaut’s on Xi’s ideology being similar to Stalin is correct, however, these changing economic and political policies will not end any time soon.

There has been enormous changes in the political and economic thinking in China in the last two to three years.  The first historical political and economic change in China began with the end of the Cultural Revolution, the Death of Mao Tse Tung and the rise of Deng Xiaoping.  Deng Xiaoping believed in term limits, decentralization of economic power and the move to a market economy.  This was a major change in the economic and political philosophy in China.

One of Deng’s most famous says is it does not matter whether the cat is black or white so long as it catches mice.  As indicated below, however, that is not the philosophy of President Xi Jinping.

The perception of the United States and many countries was that China was moving to a more open Democratic society with a strong market economy and that reform would press forward.  This transition would take substantial time, but China was moving in the right direction.

With the decision of Xi Jinping to become leader for life in China, like Mao Tse Tung, however, the situation in China has changed dramatically and the perception of China by the United States and many other countries has changed.

Recently, within the last two years, the Chinese government has started an attack on private industry in China.  State-owned companies can get loans and many advantages and have become more powerful in China.  In bad economic times, such as the present, private companies cannot get the loans to stay alive.

Meanwhile, the Chinese government has cracked down on private industry making it more difficult to operate in China in the form of substantial regulatory and tax pressure on private industry.  Private companies face very high taxes, which on entrepreneurs are as high as 60%.

The real threat to President Xi’s economic decision, however, is that 80% of employment in China is in the private industry, which has been the engine of most of the change.

Chinese experts in and out of China have warned the Chinese government that the Chinese economy is in a very perilous situation.  See statements of Nicholas Lardy and Professor Xiong in Beijing below.

The three pillars that have held the Chinese economy up in the past are gone—exports (China the factory of the World), infrastructure and real estate spending (debt is enormous).

The only one left is increased consumption by Chinese consumers.  But that is not appearing.  Too many average Chinese are feeling future bad economic times.  In bad economic times, the average Chinese does not spend.  He or she saves.

NICHOLAS LARDY — US EXPERT ON THE CHINESE ECONOMY

In January 2019, Nicholas Lardy, a US expert, who has been studying the Chinese economy for decades, through the Paulson Institute, published a new book entitled “The State Strikes Back The End of Economic Reform in China”.  Some of the important quotes from that book are as follows:

“Since 2012, however, this picture of private, market-driven growth has given way to a resurgence of the role of the state in resource allocation and a shrinking role for the market and private firms. Increasingly ambitious state industrial policies carried out by bureaucrats and party officials have been directing investment decisions, most notably in the program proclaimed by President Xi Jinping known as “Made in China 2025.”  . . .

“This book mobilizes a wealth of data to evaluate this resurgence in the role of the state, applying an analysis of China’s medium-term growth potential and the implications of this growth for the global economy. Its core conclusion is that absent significant further economic reform returning China to a path of allowing market forces to allocate resources, China’s growth is likely to slow, casting a shadow over its future prospects. Of major importance for the rest of the world newly dependent on China’s economic ups and downs, the goal of reducing financial risks, which have accumulated in the years since the global financial crisis”. . . .

The fundamental obstacle to implementing far-reaching economic reforms in China is the top leadership’s view that, while state-owned firms may be a drag on China’s economic growth, they are essential to maintaining the position and control of the Chinese Communist Party and achieving the party’s strategic objectives (Economy 2018, 15–16). These strategic objectives are outlined in the Made in China 2025 program and other industrial policies and include achieving domestic dominance and global leadership in a range of advanced technologies. Other strategic objectives are international, notably the Belt and Road Initiative, where state-owned construction companies such as the China State Construction Engineering Corporation Limited are major contractors for building roads, rail lines, power plants, ports, and other infrastructure in countries participating in the initiative.”

State Strikes Back at pp 46, 47, 49 and 507-508 (2019).

XIANG SONGZUO-CHINESE EXPERT ON THE CHINESE ECONOMY

As mentioned in a previous newsletter, on December 21, 2018 the Epoch Times in an article entitled “China May Be Experiencing Negative GDP Growth” reported on a December 2018 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.  The article goes on to state:

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?” . . ..

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. . . .

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 with 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.

AUSTRALIAN EXPERT, JOHN GARNAUT, THE MAJOR PROBLEM IS THAT XI FOLLOWS STALIN AND MAO IDEOLOGY AND THAT WILL IMPACT THE LONG TERM RELATIONSHIP BETWEEN CHINA AND THE US AND OTHER WESTERN/DEMOCRATIC COUNTRIES FOR YEARS TO COME

On January 17th, Bill Bishop, a China expert in the US, under the brand Sinocism, released a long speech by John Garnaut, one of the top journalists covering China before joining the Australian Government.  The blog post, Engineers of the Soul: Ideology in Xi Jinping’s China is long.  But if the analysis is correct, it illustrates in detail why over many years so long as Xi and others like him with this ideology are in power, the US, Australia, EC and the Western and other Democratic countries will oppose China.  The article below is extensive, but it is very enlightening.  See the entire article by clicking on the link above.  This is the political reason for the Western/Democratic problems with China now:

“Regular Sinocism readers are no doubt familiar with John Garnaut, one of the top journalists covering China before he joined the Australian government, first as a speech writer for Prime Minister Malcolm Turnbull and then as a China policy advisor. John led the Australian government’s analysis of and response to PRC/CCP interference and influence efforts in the country, and his work has since had significant influence in other Western capitals.

John is now out of government and has allowed me to share with you a speech he gave at an internal Australian government seminar in August 2017. . . .

I knew John a little in Beijing and besides having tremendous respect for his work, and especially his access to Princelings at a level I am not sure any other foreign correspondent has ever had, I always found him to be a reasoned and thoughtful chronicler of the PRC.

Some now say he has become a China hawk, but I see it as more the evolution of a sophisticated China watcher who believes in seeking truth from facts, no matter how difficult it may be to accept the reality of the direction Xi and the CCP appear to be taking China. This is a trajectory I have found myself on, along with many of the most experienced foreign China watchers I know.

I wish I could say I find John’s arguments unconvincing, but in fact they only seem more accurate now, over a year after the 19th Party Congress, than they did when he gave this talk in 2017.

On to John’s thought-provoking talk:

Asian Strategic and Economic Seminar Series

Engineers of the Soul: what Australia needs to know about ideology in Xi Jinping’s China

As some of you know I’ve just spent the past eight months as a model public servant on my very best behavior: biding time, concealing opinions and strictly respecting the bureaucratic order.

Now I get to go unplugged.  . . .

But in the meantime I’m here as someone who was born into the economics tribe and has been forced to gradually concede ground to the security camp. This retreat has taken place over the course of a decade, one story at a time, as I’ve had to accept that economic openness does not inevitably lead to political openness. Not when you have a political regime that is both capable and committed to ensuring it doesn’t happen.

Politics isn’t everything but there’s no country on earth where it is more omnipresent, with the exception of North Korea. And there is no political system that is as tightly bound to ideology.

In the work I was doing upstairs in this building I went out of my way to remove ideology from my analysis of how China is impacting on Australia and our region. It was simply too alien and too difficult to digest. In order to make sense to time-poor leaders it was easier to “normalise” events, actions and concepts by framing them in more familiar terms.

This approach of “normalising” China also served to sidestep painful normative debates about what China is, where it is going and what it wants. It was a way of avoiding a food fight about who is pro-or-anti China. Taking the “Communist Party” out of “China” was a way of de-activating the autoimmune response that can otherwise kill productive conversation.

This pragmatism has worked pretty well. We’ve taken the China conversation to a new level of sophistication over the past year or so.

But by stripping out ideology we are giving up on building a framework which has explanatory and predictive value.

At some point, given the reach that China has into Australia, we will have to make a serious attempt to read the ideological road map that frames the language, perceptions and decisions of Chinese leaders. If we are ever going to map the Communist Party genome then we need to read the ideological DNA.

So today I’m stepping into the food fight.

I want to make these broad points about the historical foundations of CCP ideology, beyond the fact that it is important: 

  1. Communism did not enjoy an immaculate conception in China. Rather, it was grafted onto an existing ideological system – the classical Chinese dynastic system.
  2. China had an unusual veneration for the written wordand acceptance of its didactic value.
  3. Marxism-Leninism was interpreted to Mao and his fellow revolutionaries by a crucial intermediary: Joseph Stalin.
  4. Communism – as interpreted by Lenin, Stalin and Mao – is a total ideology. At the risk of being politically insensitive, it is totalitarian.
  5. Xi Jinpinghas reinvigorated ideology to an extent we have not seen since the Cultural Revolution.  . . .

 A Dynastic Cosmology

It was clear from my work as a journalist and writer in New China – to use the party speak – that the formal ideology of communism coexists with an unofficial ideology of old China. The Founding Fathers of the PRC came to power on a promise to repudiate and destroy everything about the dark imperial past, but they never really changed the mental wallpaper.  . . .

So this is my first observation about ideology – ideology in the broadest sense, as a coherent system of ideas and ideals: the founding families of the PRC are steeped in the Dynastic System.

Admittedly, communism and feudal imperialism are uneasy bedfellows. But they are not irreconcilable. The formula for dynastic communism was perfected by Chen Yun: their children had to inherit power not because of privilege but because they could be counted upon to be loyal to the revolutionary cause. Or, as he put it: “at least our children will not dig up our graves”.

Xi Jinping has exercised an unwritten aristocratic claim to power which derives from his father’s proximity to the founder of the Red Dynasty: Chairman Mao. He is the compromise representative of all the great founding families. This is the starting point for understanding the worldview of Xi Jinping and his Princeling cohort.

In the view of China’s princelings – or “Revolutionary Successors”, as they prefer to be known – China is still trapped in the cycle which had created and destroyed every dynasty that had gone before. In this tradition, when you lose political power you don’t just lost your job (while keeping your super) as you might in our rather gentrified arrangement. You lose your wealth, you lose your freedom, you probably lose your life and possibly your entire extended family. You are literally erased from history. Winners take all and losers lose everything.

With these stakes, the English idiom “life-and-death-struggle” is far too passive. In the Chinese formulation it is “You-Die, I-Live”. I must kill preemptively in order to live. Xi and his comrades in the red dynasty believe they will go the same way as the Manchus and the Mings the moment they forget.

China’s veneration of the written word

A second point, related to the first, is that China has an extraordinary veneration of the written word. Stories, histories and teachers have great moral authority.  . . . What is more certain is that China was particularly receptive to Soviet ideology because Chinese intellectuals found meaning in Russian literature and texts earlier and more readily than they did with other Western sources. “Russian literature was our guide (daoshi) and friend,” said Lu Xun.

In classical Chinese statecraft there are two tools for gaining and maintaining control over “the mountains and the rivers”: The first is wu (weapons, violence – 武) and the second is wen (language, culture – 文).

Chinese leaders have always believed that power derives from controlling both the physical battlefield and the cultural domain. You can’t sustain physical power without discursive power. Wu and wen go hand-in-hand.

The key to understanding the allure of the Soviet Commintern in Shanghai and Guangzhou in the 1920s is that their (admittedly brilliant) agents told a compelling story. They came with money, guns and organizational technology but their greatest selling point was a narrative which promised a linear escape from the dynastic cycle. . . .

Mao’s discursive advantage was Marxist-Leninist ideology. Language was not just a tool of moral judgment. It was an instrument for shaping acceptable behavior and a weapon for distinguishing enemies and friends. This is the subtext of Mao’s most famous poem, Snow. Communist ideology enabled him to “weaponise” culture in a way his imperial predecessors had never managed.

And it’s important to remember who was the leader of the Communist world during the entire quarter of a century in which Mao rose to absolute power.

The “Great Genius” Comrade Stalin. 

Mao knew Marxist Leninist dogma was absolutely crucial to his enterprise but he personally lacked the patience to wade through it. He found a shortcut to ideological proficiency with Joseph Stalin’s Short Course on the History of the Bolsheviks, published at the end of Stalin’s Great Terror, in 1938.  According to Li Rui, when interviewed by historian Li Huayu, Mao thought he’d found an “encyclopaedia of Marxism” and “acted as if he’d discovered a treasure”.

At the time of Stalin’s death, in March 1953, The Short Course on the History of the Bolsheviks had become the third-most printed book in human history. After Stalin’s death – when Stalin was eulogised as “the Great Genius” on the front page of the People’s Daily – the Chinese printers redoubled their efforts. It became the closest thing in China to a religious text.

The Short Course is hard reading but it offers us the same shortcut to understanding Communist ideology as it did for Mao.

Stalin’s problem was different to Lenin’s. Lenin had to win a revolution but Stalin had to sustain it. . . .

Stalin’s Short Course is a manual for perpetual struggle against a roll call of imagined dastardly enemies who are collaborating with imagined Western agents to restore bourgeois capitalism and liberalism. It is written as a chronicle of victories by Lenin and then Stalin’s “correct line” over an endless succession of ideological villains. It is perhaps instructive that many of the most “vile” internal enemies were said to have cloaked their subversive intentions in the guise of “reform”. . . .

The most original insight in Stalin’s Short Course on the History of the Bolsheviks is that the path to socialist utopia will always be obstructed by enemies who want to restore bourgeois capitalism from inside the party. These internal enemies grow more desperate and more dangerous as they grow increasingly imperilled – and as they collaborate with the spies and agents of Western liberalism.

The most important lines in the book:

  • “As the revolution deepens, class struggle intensifies.”
  • “The Party becomes strong by purging itself.”

You can imagine how this formulation was revelatory to a ruthless Chinese leader like Mao who had mastered the “You Die, I Live” world into which he had been born – a world in which you choose to either kill or be killed – and who was obsessed with how to prevent the decay which had destroyed every imperial dynasty before.

What Stalin offered Mao was not only a manual for purging his peers but also an explanation of why it was necessary. Purging his rivals was the only way a vanguard party could “purify” itself, remain true to its revolutionary nature and prevent a capitalist restoration.

Purging was the mechanism for the Chinese Communist Party to achieve ever greater “unity” with revolutionary “truth” as interpreted by Mao. It is the mechanism for preventing the process of corruption and putrefaction which inevitably sets in after the founding leaders of each dynasty leave the scene.

Crucially, Mao split with Khrushchev because Khrushchev split with Stalin and everything he stood for. The Sino-Soviet split was ideological – it was Mao’s claim to ideological leadership over the communist world. Marx, Lenin, Stalin, Mao. It was Mao’s claim to being Stalin’s true successor.

We hear a lot about how Xi and his peers blame Gorbachev for the collapse of the Soviet state but actually their grievances go much further back. They blame Khrushchev. They blame Khrushchev for breaking with Stalin. And they vow that they will never do to Mao what Khrushchev did to Stalin.

Now, sixty years on, we’re seeing Xi making his claim to be the true Revolutionary Successor of Mao.

Xi’s language of “party purity”; “criticism and self-criticism”; “the mass line”; his obsession with “unity”; his attacks on elements of “hostile Western liberalism”, “constitutionalism” and other variants of ideological “subversion” –  this is all Marxism-Leninism as interpreted by Stalin as interpreted by Mao.

This is the language that the Deep Red princelings spoke when they got together and occasionally when I interviewed them and crashed their gatherings in the lead up to the 18th Party Congress.

And this was how Xi spoke after the 18th Party Congress:

‘‘To dismiss the history of the Soviet Union and the Soviet Communist Party, to dismiss Lenin and Stalin, and to dismiss everything else is to engage in historic nihilism, and it confuses our thoughts and undermines the party’s organizations on all levels.’’

Today, the utopian destination has to be maintained, however absurd it seems, in order to justify the brutal means of getting there.  Xi has inserted a couple of interim goals – for those who lack revolutionary patience – but the underlying Marxist-Leninist-Stalinist-Maoist logic remains the same.

This is the logic of his ever-deepening purge of peers who keep getting in the way.

The purge of the princeling challenger Bo Xilai; the security chief Zhou Yongkang; the two vice chairs of the PLA Central Military Commission Xu Caihou and Guo Boxiong; the Youth League fixer Ling Jihua; the potential successor Sun Zhengcai just a fortnight ago.

None of this is personal. It’s dialectical. And inevitable.

It’s pushing and accelerating China’s journey along the inexorable corkscrew-shaped course of history.

“History needs to pushed along its dialectical course,” said Xi, in his speech to mark the party’s 95th birthday in 2015. “History always moves forward and it never waits for all those who hesitate.”

The same logic applies outside the party as within.

“The decadent culture of the capitalist class and feudalistic society must be opposed,” said the authoritative Guangming Daily, expanding on another of Xi’s speeches.

The essence of Maoism and Stalinism is perpetual struggle. This is the antidote to the calcification and putrefaction that has destroyed every previous dynasty, dictatorship and empire. This is why Xi and his Red Successor peers believe that Maoism and Stalinism is still highly relevant today. Not just relevant, but existential.

Xi has set in motion a purification project – a war against the forces of counter-revolution – that has no end point because the notional utopian destination of perfect communism will always be kicked a little further down the road.

There is no policy objective in the sense that a Wall Street banker or Canberran public servant might understand it – as a little more energy market efficiency here, or compression of the Gini coefficient there. Rather, this is how you restore dynastic vigour and vitality. Politics is the ends.

This is what Mao and Stalin understood better than any of their peers. This is what Xi Jinping’s Deep Red Restoration is all about. And why the process of extreme politics will not stop at the 19th Party Congress.

Which brings us to the title of this seminar.

Engineers of the human soul

At my first team bonding session in this building I asked who was the world leader who described artists and authors as “engineers of the human soul”.

Was this word image the creation of Stalin, Mao or someone else?

If you’re thinking Joseph Stalin, then you’re right:

“The production of souls is more important than the production of tanks…. And therefore I raise my glass to you, writers, the engineers of the human soul”.

To me this is one of the great totalitarian metaphors: a machine designed to forge complete unity between state, society and individual.

The totalitarian machine works to a predetermined path. It denies the existence of free will and rejects “abstract” values like “truth”, love and empathy. It repudiates God, submits to no law and seeks nothing less than to remold the human soul.

The quote is from Stalin’s famous speech at the home of the writer Maxim Gorky in preparation for the first Congress of the Union of Soviet Writers in October 1932. This marked the end of Stalin’s Great Famine and Cultural Revolution – the prototype for Mao’s Great Famine and Cultural Revolution – in the lead up to Stalin’s Great Terror.

For Stalin, Lenin and the proto-Leninists of 19th Century Russia, the value of literature and art was purely instrumental. There was no such thing as “art for art’s sake”. In their ideology, poetry has no intrinsic value beyond its purpose of indoctrinating the masses and advancing the cause of revolution.

Or, to use the engineering language of the original Man of Steel – Joseph Stalin – literature and art are nothing more nor less than cogs in the revolutionary machine.

But, if you think the answer is Chairman Mao, then you’re also right. Mao extended Stalin’s metaphor a decade later at his famous Yan’an Forum on Literature and Art delivered in two parts in October 1942, and published (in heavily doctored form) one year later:

“[Our purpose is] to ensure that literature and art fit well into the whole revolutionary machine as a component part, that they operate as powerful weapons for uniting and educating the people and for attacking and destroying the enemy, and that they help the people fight the enemy with one heart and one mind.”

This is when Mao made plain that there is no such thing as truth, love or artistic merit except in so far as these abstract concepts can be pressed into the practical service of politics.

Importantly, with contemporary significance, Mao’s talks on literature and art was his way of introducing the Yan’an Rectification Campaign – the first great systematic purge of the Chinese Communist Party. This was a project of orchestrated peer pressure and torture designed first to purge Mao’s peers and then to instil communist ideology deep within the minds of the hundreds of thousands of idealistic students and intellectuals who had flocked to Yan’an during the anti-Japanese war.

Importantly, the Communist Party never sought to “persuade” so much as “condition”. By creating a fully enclosed system, controlling all incentives and disincentives, and “breaking” individuals physically, socially and psychologically, they found they could condition the human mind in the same way that Pavlov had learned to condition dogs in a Moscow laboratory a few years earlier.

This is when Mao’s men first coined the term “brainwashing” – it’s a literal translation of the Maoist term xinao, literally “washing the brain”. Mao himself preferred Stalin’s metallurgical metaphor. He called it “tempering”:

“If you want to be one with the masses, you must make up your mind to undergo a long and even painful process of tempering.”

Mao’s Yan’an Talks on Literature and Art vanished and were then resurrected and republished everywhere at the onset of the Cultural Revolution – the most audacious and successful act of social engineering that the world has ever seen.

And, most relevant to all of us today, if you are thinking President Xi Jinping, then you’re also right.

President Xi, or Chairman Xi to use a more direct translation, was speaking at the Beijing Forum on Literature and Art, in October 2014. Xi’s Forum on Literature and Art was convened on the 72nd anniversary of the young Chairman Mao’s Yan’an Forum on Literature and Art.

Xi was arguing for a return to the Stalinist-Maoist principle that art and literature should only exist to serve politics. Not politics as we know it – the straightforward exercise of organisational and decision-making power – but the totalitarian project of creating unity of language, knowledge, thought and behaviour in pursuit of a utopian destination.

“Art and literature is the engineering that moulds the human soul; art and literary workers are the engineers of the human soul.”

Like Mao’s version, Xi’s art and literature forum speech was not published until one year later.

Like Mao’s speech, the published version made no acknowledgment that large chunks had been added, deleted and revised – to reflect the political imperatives of the times.

Like Stalin and Mao, Xi’s speech marked a Communist Party rectification campaign which included an all-out effort to elevate the respective leaders to cult status. Nothing in Communist Party choreography happens by accident.

It should be noted here that when Mao was rallying the country in 1942 he did so under the banner of ““patriotism” – because the idea of communism had absolutely no pulling power.

It’s no different today. Xi:

“Among the core values of socialism with Chinese characteristics, the deepest, most basic and most enduring is patriotism. Our modern art and literature needs to take patriotism as its muse, guiding the people to establish and adhere to correct views of history, the nation, the country and culture.”

And the old warnings against subversive western liberalism haven’t changed either.

For Lenin, Stalin, Mao and Xi, words are not vehicles of reason and persuasion. They are bullets. Words are weapons for defining, isolating and destroying opponents. And the task of destroying enemies can never end. (This deserves a stand alone discussion of United Front strategy – but I’ll leave this for another day).

For Xi, as with Stalin and Mao, there is no endpoint in the perpetual quest for unity and regime preservation.

Xi uses the same ideological template to describe the role of “media workers”. And school teachers. And university scholars. They are all engineers of ideological conformity and cogs in the revolutionary machine.

Among the many things that China’s modern leaders did – including overseeing the greatest burst of market liberalisation and poverty alleviation the world has ever seen – those who won the internal political battles have retained the totalitarian aspiration of engineering the human soul in order to lead them towards the ever-receding and ever-changing utopian destination.

This is not to say that China could not have turned out differently. Elite politics from Mao’s death to the Tiananmen massacres was a genuine contest of ideas.

But ideology won that contest.

Today the PRC is the only ruling communist party that has never split with Stalin, with the partial exception of North Korea. Stalin’s portrait stood alongside Marx, Engels and Lenin in Tiananmen Square – six metres tall – right up to the early 1980s, at which point the portraits were moved indoors.

For a long time we all took comfort in thinking that this ideological aspiration existed only on paper, an object of lip service, while China’s 1.4 billion citizens got on with the job of building families and communities and seeking knowledge and prosperity.

But it has been much more than lip service.  Since 1989 the party has been rebuilding itself around what the draft National Security Law calls “ideological security” including defending itself against “negative cultural infiltration”.

Propaganda and security – wen and wu, the book and the sword, the pen and the gun – are once again inseparable. Party leaders must “dare to show their swords’’ to ensure that “politicians run newspapers”, said Xi, at his first National Propaganda Work Conference, on August 9, 2013.

Xi has now pushed ideology to the forefront because it provides a framework for “purifying” and regaining control over the vanguard party and thereby the country.

In Xi’s view, shared by many in his Red Princeling cohort, the cost of straying too far from the Maoist and Stalinist path is dynastic decay and eventually collapse.

Everything Xi Jinping says as leader, and everything I can piece together from his background, tells me that he is deadly serious about this totalising project.

In retrospect we might have anticipated this from the Maoist and Stalinist references that Xi sprinkled through his opening remarks as president, in November 2012.

It was made clearer during Xi Jinping’s first Southern Tour as General Secretary, in December 2012, when he laid a wreath at Deng’s shrine in Shenzhen but inverted Deng’s message. He blamed the collapse of the Soviet Union on nobody being “man enough” to stand up to Gorbachev and this, in turn, was because party members had neglected ideology. This is when he gave his warning that we must not forget Mao, Lenin or Stalin.

In April 2013 the General Office of the Central Committee, run by Xi’s princeling right hand man, Li Zhanshu, sent this now infamous political instruction down to all high level party organisations.

This Document No. 9, “Communique on the Current State of the Ideological Sphere”, set “disseminating thought on the cultural front as the most important political task.” It required cadres to arouse “mass fervour” and wage “intense struggle” against the following “false trends”:

  1. Western constitutional democracy – “an attempt to undermine the current leadership”;
  2. Universal values of human rights – an attempt to weaken the theoretical foundations of party leadership.
  3. Civil Society – a “political tool” of the “Western anti-China forces” dismantle the ruling party’s social foundation.
  4. Neoliberalism – US-led efforts to “change China’s basic economic system”.
  5. The West’s idea of journalism – attacking the Marxist view of news, attempting to “gouge an opening through which to infiltrate our ideology”.
  6. Historical nihilism – trying to undermine party history, “denying the inevitability” of Chinese socialism.
  7. Questioning Reform and Opening – No more arguing about whether reform needs to go further.

There is no ambiguity in this document. The Western conspiracy to infiltrate, subvert and overthrow the People’s Party is not contingent on what any particular Western country thinks or does. It is an equation, a mathematical identity: the CCP exists and therefore it is under attack. No amount of accommodation and reassurance can ever be enough – it can only ever be a tactic, a ruse.

Without the conspiracy of Western liberalism the CCP loses its reason for existence. There would be no need to maintain a vanguard party. Mr Xi might as well let his party peacefully evolve.

We know this document is authentic because the Chinese journalist who publicised it on the internet, Gao Yu, was arrested and her child was threatened with unimaginable things. The threats to her son led her to make the first Cultural Revolution-style confession of the television era.

In November 2013 Xi appointed himself head of a new Central State Security Commission in part to counter “extremist forces and ideological challenges to culture posed by Western nations”.

Today, however, the Internet is the primary battle domain. It’s all about cyber sovereignty.

Conclusion

The key point about Communist Party ideology – the unbroken thread that runs from Lenin through Stalin, Mao and Xi – is that the party is and always has defined itself as being in perpetual struggle with the “hostile” forces of Western liberalism.

Xi is talking seriously and acting decisively to progress a project of total ideological control wherever it is possible for him to do so. His vision “requires all the Chinese people to be unified with a single will like a strong city wall”, as he told “the broad masses of youth” in his Labor Day speech of May 2015. They need to “temper their characters”, said Xi, using a metaphor favoured by both Stalin and Mao.

There is no ambiguity in Xi’s project. We see in everything he does and – even in a system designed to be opaque and deceptive – we can see it in his words.

Mr Xi did not invent this ideological project but he has hugely reinvigorated it. For the first time since Mao we have a leader who talks and acts like he really means it.

And he is pushing communist ideology at a time when the idea of “communism” is as unattractive as it has been at any time in the past 100 years. All that remains is an ideology of power, dressed up as patriotism, but that doesn’t mean it cannot work.

Already, Xi has shown that the subversive promise of the internet can be inverted. In the space of five years, with the assistance of Big Data science and Artificial Intelligence, he has been bending the Internet from an instrument of democratisation into a tool of omniscient control. The journey to Utopia is still in progress but first we must pass through a cyber-enabled dystopia in order to defeat the forces of counter-revolution.

The audacity of this project is breathtaking. And so too are the implications.

The challenge for us is that Xi’s project of total ideological control does not stop at China’s borders. It is packaged to travel with Chinese students, tourists, migrants and especially money.  It flows through the channels of the Chinese language internet, pushes into all the world’s major media and cultural spaces and generally keeps pace with and even anticipates China’s increasingly global interests.

In my opinion, if you’re in the business of intelligence, defense or international relations; or trade, economic policy or market regulation; or arts, higher education or preserving the integrity of our democratic system – in other words, just about any substantial policy question whatsoever – then you will need a working knowledge of Marxism-Leninism Mao Zedong Thought. And maybe, after the 19th Party Congress, you’ll need “Xi Jinping Thought” too.

END”

That is the real problem facing China.  Xi and the Chinese government have decided to give up economic reform and go back to the time of Mao and Statin.  This is real Communist ideology.

One may think that John Garnault is exaggerating.  It cannot be that bad.  But as noted above, with the Conference on Statism at the Asia Society, many Chinese experts, old friends of China including Orville Schell and Chrarlene Barshefsky, who was the USTR who negotiated the US China WTO agreement, believe that China has returned to Statism.  That is the same point of Nicholas Lardy above.

When I was in Beijing China in the mid-2,000s, I met many Chinese lawyers.  One lawyer told me in Beijing that there was a saying in China—Mao made China stand up, Deng made China rich and the hope is that the new leader will give China some form of Democracy.  That Chinese lawyer now lives two blocks away from me in Washington State.

Another Chinese lawyer in Beijing believed strongly in the mid-2,000s that China was on the right path to a new opening that might lead to a limited form of Democracy.  He now lives 30 minutes away from me.

Many Chinese have fled China because of the fear of what is going on in China now.

My hope and prayer is that I am wrong, but I do not think so.

GOVERNMENT SHUTDOWN

Because of a major disagreement between President Trump and Congress, a major part of the Government, including the Commerce Department and the US International Trade Commission (“ITC”), were shut down for over a month.  As a result, Commerce and the US International Trade Commission have extended all trade investigation deadlines by 35 to 40 days.

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES AND CRITICAL CIRCUMSTANCES TRAP

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.

The ITC questionnaires in the case are attached US producers–Quartz surface products (F) Foreign producers–Quartz surface products (F) US importers–Quartz surface products (F) US purchasers–Quartz surface products (F) Questionnaire Transmittal Letter QSP INITIAL ITC E-MAIL RETURN INSTRUCTIONS.

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

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