TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – DECEMBER 21, 2018

Dear Friends,

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

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

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

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

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

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

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

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

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

The Canadian Trade Advisor has stated that this is a Rule of Law question, not China policy issue.

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

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

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

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

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

Best regards,

Bill Perry

G-20 DIM HOPE BECOMES BRIGHTER HOPE BUT??

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

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

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

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

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

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

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

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

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

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

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

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

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

Such a misreading of the US trade situation is extremely dangerous.  As mentioned in the last blog post, based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China.  This trade situation is not going to change any time soon no matter what party is in power.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 301 PROCEDURES

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

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

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

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

INTERNATIONAL EXTRADITION AND JUDGMENT AGREEMENTS ARE IMPORTANT

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

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

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

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

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

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

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

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

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

Emphasis added.

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

But the Chinese government’s decision not to have any agreement with the United States or other countries with regards to the enforcement of judgments or extradition warrants also gives Chinese individuals a false sense of security.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Technology Theft Campaign

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

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

*              *              *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES

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

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

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

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

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

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

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

Best regards,

Bill Perry

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

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

Arrow Watch Tower Forbidden City Beijing China

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE-OCTOBER 1, 2018

 

Dear Friends,

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

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

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

Best regards,

Bill Perry

US CHINA TRADE WAR – SEPTEMBER 19, 2018

Dear Friends,

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

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

Best regards,

Bill Perry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Specifically, the Section 301 investigation revealed:

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

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

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

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

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

CHINESE GOVERNMENT RETALIATES

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

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

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

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

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

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

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

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

List 1 Exclusion Process

Exclusion Request Conditions

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

Factors for USTR Consideration in Granting Exclusion Requests

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

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

            Exclusion Request Schedule for List 2. 

The USTR notice for list 2 provides:

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

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

Making Exclusion Requests – Requirements

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

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

Exclusion requests should address the following factors:

  • Whether the particular product is available only from China.  In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.
  • Whether the imposition of additional duties on the particular product would cause severe economic harm to the requester or other U.S. interests.
  • Whether the particular product is strategically important or related to “Made in China 2025” or other Chinese industrial programs.
  • Requesters may also provide any other information or data that they consider relevant to an evaluation of the request.

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

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

HOW DOES CHINA KILL THIS TRADE WAR? 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HUGE SEA CHANGE IN US CHINA TRADE RELATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

WOODEN CABINETS AND HARDWOOD PLYWOOD ANTIDUMPING AND COUNTERVAILING DUTY ORDERS

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

In its decision, Commerce made two important points:

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

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

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

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

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

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

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

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

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

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

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

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

MORE EXCLUSIONS SECTION 201 SOLAR CASE

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

Exclusions  From  the  Safeguard  Measure

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

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

Annex

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

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

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

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

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

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

NEW NAFTA NEGOTIATONS—THE CANADIAN DAIRY PROBLEM

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

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

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

NEW EUROPEAN TRADE AGREEMENT

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

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

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

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

NEW ANTIDUMPING CASE

MATTRESSES FROM CHINA

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

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

Best regards,

Bill Perry

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