US CHINA TRADE WAR–CHINA STOCK MARKET CRASH, TRADE, IP/PATENT, SECURITIES

Zhengyang Gate from Qianmen Gate Tiananmen Square Beijing ChinaTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR NEWSLETTER JULY 30, 2015

Dear Friends,

Since the last blog post focused on trade policy and trade and customs issues, with extensive coverage of the Trade Promotion Authority fight in the US Congress, after addressing the trade area briefly, this blog post plays catch up and follows the other issues, products liability, patents/IP, antitrust and most important securities.

With the dramatic plunge in the Chinese stock market, there is real lesson to be learned from all the US securities cases reported in this blog against Chinese companies that have listed in the United States. There is a fundamental difference between the US and Chinese stock markets.

Best regards,

Bill Perry 

CHINA STOCK MARKET CRASH—WARNINGS FROM THE UNITED STATES

On July 27, 2015, both CNN and the Wall Street Journal reported a sharp drop in the Chinese stock market of 8.5%. This drop took place after a drop of 32% in the Shanghai exchange, wiping out almost $3 trillion in value. As CNN stated on July 27th:

China stocks drop 8.5% in massive rout…China’s Shanghai Composite index shed 8.5% on Monday, a bone-rattling decline that raises questions about the government’s ability to prevent a crash. Beijing managed to stabilize markets with a dramatic rescue in late June and early July, intervening in a number of ways to limit losses for investors.

But the rout has now resumed: Monday’s slump was the biggest daily percentage decline since 2007. The vast majority of companies listed in Shanghai, including many large state-owned firms, fell by the maximum daily limit of 10%. Losses in Shanghai, and on the smaller Shenzhen Composite index, accelerated into the close. Shenzhen, which is heavy on tech stocks, closed down 7%.

Investors are worried about a possible withdrawal of stock market support by Beijing, and signs of a sharper slowdown in China’s economy.

Industrial profit data released Monday indicate that factories in the world’s second-largest economy are losing momentum. Profits dropped 0.3% in June, compared to the same period last year, the government said.

On Friday, an early measure of China’s manufacturing activity for July came in below analyst expectations. The reading was the lowest in 15 months.

China’s stock markets have been extremely volatile this year. The first signs of trouble came in June, after the Shanghai Composite peaked at more than 5,100 points, a gain of roughly 150% over the previous 12 months. When the bubble burst, the index lost 32% of its value in just 18 trading sessions.

As the Wall Street Journal reported on the same day, “The combined value of China’s stock markets eclipses many of the world’s biggest exchanges…” In reporting the July 27th stock plunge in China, the Wall Street Journal also stated:

Chinese shares suffered their biggest one-day drop in over eight years, wiping out hundreds of billions of dollars of market value and calling into question the effectiveness of Beijing’s recent efforts to prop up the market. . . .

Traders and analysts listed several reasons for the sudden slide, which came amid relatively thin trading volumes. Some cited fears of the effect of an unwinding of heavy investor borrowing to buy shares, while others pointed to concern that the government could soon pull back on its recent attempts to underpin the market. . . . .

Monday’s big decline shows investors have become skeptical of the market and of the government’s ability to control it. The move fits with the history of the volatile Chinese market, where government-engineered bull markets have often ended with spectacular selloffs that left stocks languishing for years. . . .

“The cat is out of the bag when it comes to China, and the collapse in the stock market overnight has confirmed that Beijing’s stabilization polices are not working,” says David Madden, market analyst at brokerage IG. “I feel that confidence will be difficult to get back, no matter how much money they throw at it.” . . .

The market-rescue measures could mean more harm down the road, they say, by reinforcing the idea that the government will come to the rescue whenever there is a crisis, undermining the progress China has made in allowing more room for risk in its financial system. . . .

To put the Chinese stock market drop in perspective, in the Charts accompanying the Article, the Wall Street Journal reported that the New York Stock Exchange has a total value of $19.7 trillion with NASDAQ being $7.4 trillion for a total of $27.1 trillion. In contrast, the Wall Street Journal reported that the composite China Stock Exchange value is $14.2 trillion, but this includes the Hong Kong Exchange of $4 trillion, which is run by much stricter rules than Shanghai and Shenzhen. The Shanghai and Shenzhen stock exchanges total $10.3 trillion, with the Shanghai stock exchange at $5.9 trillion and the Shenzhen stock exchange being $4.4 trillion. The $10.3 trillion dollar value, however, is still greater than the $5 trillion stock market of Japan and the $1.8 trillion of Germany.

With the 30 percent drop in the Chinese stock market since June, the loss in Chinese stock is about $3 trillion. This Chinese stock bubble is so big that it is very difficult for any government, even the Chinese government, to control the market. The United States faced this problem in 1929, which led to the Great Depression, and the Japanese government faced a stock market collapse in the early 1990s, which led to the lost decade. Stock market bubbles can get so large that no government can control the situation.

As Donald Straszheim, head of China research at New York-based Evercore ISI, a well- known US analyst on the Chinese stock market, recently stated, “The markets in China now are not really markets. They are government operations.”

Because of this problem, on July 27th it was widely reported that the International Monetary Fund (“IMF”) has told the Chinese government that while interventions in the stock market in general are appropriate to prevent major disorder, prices should be allowed to settle through market forces.   Chinese officials reportedly assured the lender that the measures should be considered temporary. But that statement alone creates instability in the market because no one knows when the Chinese government will terminate the measures.

Before the IMF announcement, as reported in the Wall Street Journal on July 23, 2015, many US hedge fund managers, who had been bullish on China, have changed their story:

The world’s biggest hedge fund has turned on the world’s fastest-growing economy. Bridgewater Associates LP, one of Wall Street’s more out-spoken bulls on China, told investors this week that the country’s recent stock market rout will likely have broad, far reaching repercussions.

The fund’s executives once had been vocal advocates of China’s potential. But that was before panic in the country’s stock markets shaved a third of the value off Shanghai’s main index . . . “Our views about China have changed” Bridgewater’s billionaire founder, Raymond Dalio, wrote with colleagues in a note sent to clients earlier this week. “There are now no safe places to invest.” Bridgewater, which has $169 billion under management, is renowned for its ability to navigate global economic trends . . . .

The move adds Mr. Dalio and Bridgewater to a growing chorus of high-profile investors who are challenging the long-held view that China’s rise will provide a ballast to a whole host of investments, from commodities to bonds to shares in multinational firms. . . . .

Kingdon Capital Management ILC, a nearly $3 billion New York hedge-fund firm, told clients this week it had sold all its shares in Chinese companies listed on the Hong Kong exchange. It said it was spooked by the fallout from a surge in China in the use of borrowed money to purchase stocks, particularly after authorities cracked down on the practice, helping drag down Kingdon’s investments.

The firm said it would wait until the level of such borrowing in the market drops further before going in anew.

The shifts by Kingdon and Bridgewater follow a series of concerns raised publicly last week about China by other high profile hedge-fund managers, including Elliott Management Corp. founder Paul Singer, Perry Capital LLC founder Richard Perry and Pershing Square Capital Management LP founder William Ackman. . . .

“It looks worse to me than 2007 in the United States,” Mr. Ackman said during an investment conference in New York, pointing to the unreliability of the government’s economic statistics. ”Much worse.”

But there is a more fundamental problem with the Chinese stock market. Before the recent crash there was already indications/warnings in this blog that the Chinese stock market could drop significantly. The warning/indication is the very significant number of private class action securities cases brought in the United States and cases brought by the Securities and Exchange Commission (“SEC”) against Chinese companies that have listed their stock on US exchanges. In contrast to the Chinese system, the SEC’s job is not to pump up the US stock market and intervene in its actions. The SEC’s job is to protect the integrity of the market, which means that the earnings and statements of public companies must be accurate and truthful. This is important because real investments in stock of public companies require that the actual earnings and assets of the company be real, not fake.

The same could be said of the Hong Kong Stock Exchange, which in contrast to the in-China Exchanges, is heavily regulated by the Securities and Futures Commission of Hong Kong (“SFC”). In contrast to China, this year the SFC is reporting another record year of investment in the fund management business and that the market growth since 1999 can be attributed to the “robust regulatory regime . . .[which] is fundamental to Hong Kong’s development as an international asset management centre. . .” and the SFC’s continued cooperation and work with international regulators. See http://www.secactions.com/sfc-reports-hong-kongs-growth-as-international-investment-hub/.

In contrast to the SEC and the SFC, however, the role of the China Securities Regulatory Commission, according to its spokesman Zhang Xiaojun, is to “continue efforts to stabilize market and investor sentiment, and prevent systemic risk.” The state-owned China Securities Finance Corp apparently has pledged to loan 21 Chinese securities firms about $42 billion to purchase shares. This reaction has left the Chinese government heavily invested in its own stock market. The China Securities Finance Corp had borrowed a stunning 1.22 trillion renminbi from commercial banks to buy stocks as of July 13, according to financial media Caixin, and is now one of the top 10 shareholders of many listed firms.

But the key economic criterion in judging the health of a stock market is valuation, which is comparing the earnings of various companies and their stock price. As Alex Frangos of the Wall Street Journal stated in an opinion piece on July 27th:

A main critique of the government’s plan is that it is simply unsustainable. Beijing may have hoped that it could prop up the market long enough for economic and earnings growth to catch up and make valuations more reasonable. . . .

And valuations are still extremely high. The overall Shanghai market trades at 15 times forward earnings, near its long-term average. Yet stripping out China’s banks, which investors have shunned for fear of hidden bad loans, ratios look much higher. The tech heavy Shenzhen market, for instance, traded at 31 times forward earnings, 65% above its historical average, before Monday’s fall. . . . It is clearly a dangerous game for investors to stick around in Chinese stocks while that happens.

Other Chinese stock experts have stated that price-to-earnings ratios in China — a measure that indicates whether a company is fairly valued — have been well over 100 this year, in the neighborhood of values on the NASDAQ when the U.S. dot-com bubble burst.

But the problem with that statement is that it assumes that the earnings stated by Chinese companies, in fact, are accurate. People can truly invest in stock with confidence only when they know that the company statistics are factual and true earnings of a company are available to the public.

I have one family member, who has done very well in the US stock market, buying Microsoft, for example, when it was a very young company, at $3 a share. But she charts stocks and uses graphs to determine the predicted earnings growth and compares the charts against the stock price to determine whether a company’s stock is undervalued or overvalued.

She started out in an investment club run by the National Association of Investment Clubs (“NAIC”). One can find their website at http://www.betterinvesting.org. The NAIC describes its fundamental principle of value investing, followed by such stock experts as Warren Buffet, as follows:

This is the Golden Rule for most investors who employ fundamental analysis and have a long term perspective. Buy stocks of high-quality companies at good prices and continue holding them as long as the companies’ performance merits doing so.

Sales drives earnings; earnings drives the stock price. That’s what it comes down to for fundamental investors. You might hear of different ways to buy and sell stocks, and countless books have touted systems that promise great returns. But over the long term fundamental analysis is what works in building wealth.

Fundamental analysis comes down to studying a company’s financial performance. Broadly, there are those who look for growth stocks and those who look for value equities, but the line between value and growth investing is gray: As Warren Buffett says, value and growth “are joined at the hip.”

Value investing, as practiced by Buffett and his mentor Benjamin Graham, is a time-tested method involving fundamental analysis that has served many investors well. But for the typical person . . . fundamental analysis focused on growth stocks might be more appropriate.

This is because individual investors can spot a good growth company quickly. . .

The Three Most Important Ideas:

Management, Management, Management

The individual investors who belong to Better Investing ask two questions when studying a stock:

  • Is this a well-managed company?
  • Is its stock reasonably priced?

 We seek great management because talented, capable executives know how to ensure their company thrives over the long term amid competitive battles and periodic downturns. These are the people, in other words, who are responsible for driving the sales and growth increases that fuel stock prices.

See http://www.betterinvesting.org/Public/SingleTabs/BI+Mag/Articles+Archives/0210publiccs.htm for more information.

But value investing is based on comparing actual company earnings to stock prices.

Although certain Chinese companies do not play with their earning and numbers, the number of securities cases in the United States against Chinese companies, which have listed in the United States, indicate that many do. When the faulty earnings are coupled with a Chinese government approach not to protect the integrity of the market but to simply puff up the market, bubbles are created, and when bubbles burst many individuals and companies are badly burned.

The difference between investing in the United States and investing in China is the difference between investing and gambling. In the United States, many analysts believe that the US stock market is not overvalued because the earnings to stock price do not indicate a vastly overpriced market. When I was in college, the Dow Jones Industrial Average for the New York Stock Exchange was at 700. It is now on July 27th at 17,440. What justifies that high stock average is not speculation or simply attempts by the US government to puff up the market, it is significantly increased earnings by US companies, but that means that the earnings reported by US public companies must be real and accurate.

In addition, when a professional gambler goes into the casinos in Las Vegas and Macau, he knows the odds/risks associated with each different gambling game and which game gives him the best chances of winning. So professional gamblers will often play blackjack or poker, because the odds are much better than with slot machines.

But in the Chinese stock market, one does not even know the odds of winning. In China, an investor does not have a government agency committed to making sure that the earnings and assets reported by a Chinese company are accurate. In fact, in China the actual earnings and assets of companies, especially state-owned companies, may be confidential available only to management and not to investors in the Chinese stock market.

As one Chinese stock analyst in Shanghai recently stated, the severity of an 8.5 percent drop in the Shanghai Composite Index is bad enough, but what angers him the most is not knowing why it tumbled so much. In a market where unprecedented intervention has made government money one of the biggest drivers of share prices, authorities are not transparent enough for investors to make informed decisions. Thus Chinese markets are not real markets; they are government gambling operations in which real corporate earnings are often confidential and not based on reality.

The Chinese stock market can only recover and become stable when the Government truly protects the integrity of the market by making sure that the earnings/numbers reported by Chinese companies that list on the markets are true and accurate.

For further information on this issue, please see article below on the Puda Coal case and the other US Securities cases filed against Chinese companies.

TRADE POLICY

The Trans Pacific Partnership (“TPP”) negotiations are ongoing in Maui, Hawaii with 13 countries, including the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Although Japanese Prime Minister Shinzo Abe will attend, the chance of actually sealing a final agreement is a long shot at best. Many issues need to be finalized including access to the Canadian Dairy and Poultry markets and to the Japanese rice market.

In addition to the Japanese Prime Minister, several US Senators and Representatives will be there, including Representative Rosa DeLauro, a staunch opponent of the agreement.

Although election year politics in 2016 are a concern in the US, the Canadian National Election is in this October of 2015 making it very difficult for the Canadian government to cave on dairy and poultry issues. Canadian officials along Congresswoman DeLauro are all arguing that the negotiations need to slow down. Congresswoman DeLauro has stated:

The administration has indicated they want to wrap up negotiations in this round. My colleagues and I are here to say that is altogether too fast a schedule. The agreement itself is riddled with problems. Congress, industry, advocates still have enormous concerns which the administration has done little or nothing to resolve.

But for Congress to vote on the Agreement before Christmas and 2016, an election year, the Agreement has to be completed by September or October at the latest. Paul Ryan has predicted a final agreement in late fall, which would be after the Canadian elections in mid-October.

TRADE AND CUSTOMS ENFORCEMENT BILL STILL AT THE CONFERENCE COMMITTEE STAGE

The new Trade and Customs Enforcement Bill, which was passed by both the House and Senate, is still at the Conference Committee stage to iron out the differences between the two bills. The Senate has appointed conferees- Senators Hatch, Cornyn, Thune, Isakson, Wyden, Schumer, and Stabenow.

On July 29, 2015, the House Ways and Means issued the attached Press Release, HOUSE WAYS AND MEANS TRADE CUSTOMS BILL, stating:

WASHINGTON, DCLast month, the House passed the Trade Facilitation and Trade Enforcement Act, important legislation to update and strengthen the enforcement of our trade laws. This followed the passage of a Senate version of the bill in May. Today, Ways and Means Committee Chairman Paul Ryan (R-WI) released the following statement on the status of the legislation.

“Since the passage of customs and trade enforcement legislation in the House and Senate, work has taken place to resolve the differences between the two chambers’ bills. I am pleased that we have made significant progress, and I expect this will allow us to move to a formal conference committee soon after Congress returns from this district work period. I am confident the bill we send to the president will include important House priorities and provide the United States the enforcement tools needed to ensure American workers and businesses are competing on a level playing field.”

Effectively this means that the new Customs and Trade Enforcement bill will have to wait until after the August legislative recess.

TRADE

NEW STEEL CASE FILED

On July 28, 2015, a new steel case was filed against Cold-Rolled Steel Flat Products from China, Brazil, India, Japan, Korea, Netherlands, Russia, and the United Kingdom.

In the attached Federal Register notice, ITC FED REG NOTICE COLD ROLLED STEEL, the US International Trade Commission (“ITC”) has set the preliminary injury conference on August 18. 2015.

The decision to bring the large antidumping and countervailing duty case coincided with U.S. Steel’s announcement that it had posted a $261 million net loss in the second quarter of 2015.

U.S. Steel President and CEO Mario Longhi stated:

“We’ve taken aggressive and decisive actions to address the extremely challenging conditions we continue to face in North America.  Our Carnegie Way efforts, combined with short-term cost improvements, have helped to partially offset the continued depressed volumes and low prices in both the tubular and flat-rolled markets as well as the negative impact of tremendously high levels of imports.”

COUNTRY DUMPING MARGINS ALLEGED

Brazil 50.07 – 59.74 percent

China 265.98 percent

India 42.28 percent

Japan 82.58 percent

South Korea 93.32 – 176.13 percent

Netherlands 47.36 – 136.46 percent

Russia 69.12 – 320.45 percent

United Kingdom 47.64 – 84.34 percent

See ITC announcement below:

Docket Number 3080

Received: 

Tuesday, July 28, 2015

Commodity: 

Cold-Rolled Steel Flat Products

Investigation Number: 

701-TA-540-544 and 731-TA-1283-1290

Filed By: 

Alan H. Price; Jeffrey D. Gerrish; Roger B. Schagrin; R. Alan Luuberda; and Stephen A. Jones

Firm/Organization: 

Wiley Rein LLP; Skadden, Arps, Slate, Meagher & Flom LLP; Schagrin Associates; Kelley Drye & Warren LLP; King & Spalding LLP

Behalf Of: 

AK Steel Corporation, Arcelor Mittal USA LLC, Nucor Corporation, Steel Dynamics Inc., and United States Steel Corporation

Country: 

Brazil, China, India, Japan, Korea, Netherlands, Russia, and the United Kingdom

Description: 

Letter to Lisa R. Barton, Secretary, USITC; requesting the Commission to conduct an investigation under sections 701 and 731 of the Tariff Act of 1930 regarding the imposition of countervailing and anti-dumping duties on Certain Cold-Rolled Steel Flat Products from Brazil, China, India, Japan, Korea, Netherlands, Russia, and the United Kingdom.

IMPORT ALLIANCE FOR AMERICA

This is also why the Import Alliance for America is so important for US importers, US end user companies and also Chinese companies.  The real targets of antidumping and countervailing duty laws are not Chinese companies.  The real targets are US companies, which import products into the United States from China.

As mentioned in prior newsletters, we are working with APCO, a well-known lobbying/government relations firm in Washington DC, on establishing a US importers/end users lobbying coalition to lobby against the expansion of US China Trade War and the antidumping and countervailing duty laws against China for the benefit of US companies.

On September 18, 2013, ten US Importers agreed to form the Import Alliance for America.  The objective of the Coalition will be to educate the US Congress and Administration on the damaging effects of the US China trade war, especially US antidumping and countervailing duty laws, on US importers and US downstream industries.

See the Import Alliance website at http://www.importallianceforamerica.com.

We will be targeting two major issues—working for market economy treatment for China in 2016 as provided in the US China WTO Agreement for the benefit of importers and working against retroactive liability for US importers.  The United States is the only country that has retroactive liability for its importers in antidumping and countervailing duty cases.

We are now in the process of trying to gather importers to meet with various Congressional trade staff as soon as possible to discuss these issues.  If you are interested, please contact the Import Alliance through its website or myself directly.

BUSINESS DEALS AND INVESTING IN IRAN?

Nelson Dong, Larry Ward, and Clint Foss of the Dorsey Export Controls/National Security Group have written an article on when sanctions might be lifted against Iran. The primary point they make is:

In the “best case” scenario, if all the involved governments approve the [Joint Comprehensive Plan of Action] (“JCPA”), Iran cooperates, and the IAEA is eventually then able to establish the Implementation Day so that the European Union and the United States will then alter their respective sanctions regimes, what should the U.S. business community expect? Does this mean anything close to “business as usual” for U.S. exports and trade with, and investments in, Iran?

The short answer to this “what” question is “Absolutely not!” Careful and thoughtful strategic planners in U.S. companies need to be aware of the extremely limited effect that “lifting sanctions” will have for those U.S. companies after that Implementation Day.

See the full article at http://www.dorsey.com/eu-us-business-interests-2015-iran-nuclear-settlement (emphasis in the original).

CHINA ANTIDUMPING

On May 21, 2015, in the attached notice, US OPTICAL FIBER MOFCOM PRELIM, the Chinese Ministry of Commerce (“MOFCOM”) announced preliminary antidumping duties on imports of Optical Fiber Preform from Japan and the United States. The Antidumping rates are listed below:

Japanese companies:

1. Shin-Etsu Chemical Co., Ltd. 8.9%
2. Sumitomo Electric Industries, Ltd. 7.8%

3. Fujikura Ltd. 8.3%

4. Furukawa Electric Co., Ltd. 8.3%

5. ALL Others 8.9%

U.S. companies:

  1. Corning Incorporated 39.0%
  2. OFS Fitel, LLC. 16.9%
  3. ALL Others 39.0%

PRODUCTS LIABILITY

MORE CASES AGAINST LUMBER LIQUIDATORS

The cases against Lumber Liquidators keep rolling on.

False Advertising and Consumer Protection

On May 29, 2015, Dennis Chapman filed the attached class action complaint  against Lumber Liquidators for false advertising and consumer protection violations. CHAPMAN LUMBER LIQUIDATORS

On June 9, 2015, Melanie Jeffcoat filed the attached class action complaint against Lumber Liquidators for false advertising and consumer protection violations. JEFFCOAT LUMBER LIQUIDATORS

On July 29, 2015, Laura Gonzalez filed the attached complaint, GONZALEZ LUMBER LIQUIDATORS, against Lumber Liquidators for false advertising and consumer protection violations.

IP/PATENT AND 337 CASES

NEW 337 COMPLAINTS

On June 12, 2015, a new 337 patent case was filed against Containers for Lip Balm. The ITC Notice is set forth below:

Received:

Friday, June 12, 2015

Commodity:

Lip Balm Products, Containers for Lip Balm

Investigation Number:

337-TA-961

Filed By:

Louis S. Mastriani

Firm/Organization:

Adduci, Mastriani and Schaumberg LLP

Behalf Of:

eos Products, LLC and The Kind Group LLC

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain Lip Balm Products, Containers for Lip Balm, and Components Thereof. The proposed respondents are: OraLabs, Inc., Parker, CO; CVS Health Corporation, Woonsocket, RI; CVS Pharmacy, Inc., Woonsocket, RI; Walgreens Boots Alliance, Inc., Deerfield, IL; Walgreen Co., Deerfield, IL; Dollar Tree, Inc., Chesapeake, VA; Dollar Tree Stores, Inc., Chesapeake, VA; Five Below Inc., Philadelphia, PA; Wuxi Sunmart Science and Technology Co., Ltd., a/k/a Wuxi Sunmart Group Co., Ltd., a/k/a Wuxi Shengma Science & Technology Co., Ltd., China; and Wuxi Sunmart Plastic Co., Ltd., China.

PATENT AND OTHER INTELLECTUAL PROPERTY CASES

NEW PATENT AND TRADEMARK CASES AGAINST CHINESE, HONG KONG AND TAIWAN COMPANIES

On June 5, 2015, Xerafy Ltd. filed the attached patent infringement complaint, ZHEJIANG PATENT CASE, against Sensestone Technologies Co., Ltd. and Zhejiang Jiakang Technologies Co., Ltd.

On June 10, 2015, Wenger SA filed the attached trademark infringement complaint, WENGER FUZHOU TMK COMPLAINT, against Fuzhou Hunter Product Import and Export Co., Swiss Digital USA, Krummholz International, Swissgear SARL, and Zhijian “Hunter” Li.

On June 19, 2015, Fellowship Filtering Technologies filed the attached patent complaint, BAIDU PATENT, against Baidu, Inc. Beijing Baidu Netcom Science & Technology Co. and Baidu USA LLC.

On July 1, 2015, Personalized Media Communications filed the attached patent complaint, TOP VICTORY, against Top Victory Electronics (Taiwan) Co. Ltd., TPV Int’l (USA), Inc., Envision Peripherals, Inc., Top Victory Electronics (Fujian) Co. Ltd., TPV Electronics (Fujian) Co. Ltd., TPV Technology Ltd. and Vizio, Inc.

On July 1, 2015, China International Marine Containers (Group) Ltd., Columbian Boiler Company LLC and Gaz Liquifieds Industrie filed the attached patent complaint, MARINE PATENT CASE, against Jiangzi Oxygen Plant Co., Ltd.

On July 14, 2015, Conair Corp and Babyliss Faco filed the attached patent complaint, CONAIR, against Taizhou Jinba Health Technology Co., Ltd.

ANTITRUST

There have been developments in the China antitrust area.

CHINA ANTI-MONOPOLY CASES

T&D JULY REPORT

In early May and July T&D sent us their attached May and June reports on Chinese competition law. T&D Monthly Antitrust Report of May 2015 TD Monthly Antitrust Report of June 2015

SECURITIES

PUDA COAL

In light of the recent China stock market crash, it is informative to review the latest US developments in the Puda Coal case. In various newsletters and blog posts in 2013 and 2014, I reported complaints filed by the SEC and various Private parties in class action securities cases against Puda Coal, a Chinese company listed on the US Stock Exchange. Puda Coal defrauded investors by taking their one asset, a Chinese coal mine, and transferring a 49 percent stake in Shanxi Coal to a private equity fund controlled by state-owned firm CITIC Group, which then sold interests to Chinese investors. They took this action without notifying their US investors.

In April 2013, I reported a class action securities case was brought in the Federal Court in the Southern District of New York against Puda Coal Inc. and CITIC Trust Co., Ltd.  The complaint alleged that CITIC is “the largest Chinese private equity fund and merchant bank, which, by means of a transfer of 49% ownership interest and a 51 % pledge as security for a loan, now controls Puda’s sole operating subsidiary and its only source of revenues.”

The complaint further alleged that “this action arises from a fraudulent scheme in which Puda insiders improperly transferred the Company’s only revenue-producing, operating subsidiary to CITIC and then, with the assistance of CITIC, falsely portrayed to investors in Puda that the Company still possessed its operating subsidiary.”

In March of 2013 I sent out an article by our China office about the famous bench decision by the Delaware Court in In Re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013). In that attached February 3, 2013 decision, PUDA COAL STRINE RULING DELAWARE, Chancellor Leo Strine, Jr., of the Delaware Court of Chancery refused to dismiss a claim for breach of fiduciary duty against independent directors of Puda Coal Inc., a Delaware corporation with primary assets and operations in China. Plaintiffs alleged that the independent directors “had failed to detect the unauthorized sale of the company’s assets by its chairman. “

In the opinion Chancellor Strine bluntly reminded independent directors that they must be capable of fulfilling their fiduciary duty of oversight, no matter where the company’s assets or operations are located. As Chancellor Strine stated in several quotes from the opinion:

“[I]f you’re going to have a company domiciled for purposes of its relations  with its investors in Delaware and the assets and operations of that company are situated in China … in order for you to meet your obligation of good  faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you  actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained  accountants and lawyers who are fit to the task of maintaining a system of controls over a public company.”

“Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors … [I]f the assets are in Russia, if they’re in Nigeria,  if they’re in the Middle East, if they’re in China, that you’re not going to be able to sit in your home in the U.S. and do a conference call four times a  year and discharge your duty of loyalty. That won’t cut it.”

“There’s no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they’re a monitor.”

Strine also had a message for independent directors who, like the independent directors of Puda Coal, thought they could avoid responsibility by resigning. He suggested that the act of resignation itself could be a breach of fiduciary duty. “And that’s another reason for sustaining the complaint.”

The Puda Coal story continues, and on July 24, 2015, the U.S. Securities and Exchange Commission (“SEC”) won a $250 million default judgment against two former executives of China-based Puda Coal Inc. for allegedly defrauding U.S. investors, after the defendants failed to appear in New York federal court to face the claims.

During a brief hearing in Manhattan court, Judge Denise Cote ordered former Puda Coal chairman Ming Zhao and CEO Liping Zhu to jointly pay $116 million in disgorgement and $17.6 million in prejudgment interest. The judge also ordered Zhao to pay a $116 million penalty and Zhu to pay a $1.2 million penalty.

In the February 2012 complaint, the SEC alleged that Zhao secretly transferred Puda Coal’s sole revenue-producing asset to himself and then sold a large portion to CITIC. Puda Coal then conducted two public offerings without telling U.S. investors that it was a shell company.

The SEC in its motion for a default judgment argued that the defendants’ refusal to face the allegations in New York “evinces a cavalier attitude toward these proceedings and the harm caused by their conduct.”

The SEC also said in its June 8 court filing that the scheme had caused U.S. investors to lose $499 million in market capitalization. “Here, defendants came into the U.S. public markets to raise capital for their coal mining venture and then absconded with the proceeds, leaving the shareholders of Puda with an empty shell,” the SEC wrote. “In short, they stole the coal company for their own purposes and fraudulently used the U.S. capital markets to finance their expansion plans.”

UPDATES ON US SECURITIES CASES AGAINST CHINESE COMPANIES

Private securities class actions continue to plague Chinese companies whose securities are traded through American Depositary Shares (ADS’s) in the United States. Chinese companies frequently use ADS’s to trade their shares, which may involve fewer required disclosures than issuance of stocks in the United States. This practice does not immunize these companies from securities litigation, as illustrated by several recent noteworthy class actions.

  • Alibaba

The federal courts system recently centralized eight class actions against Alibaba, the largest e-commerce online service in China, in the U.S. District Court for the Southern District of New York.[1] Alibaba entered the U.S. securities market last year amidst great fanfare, as the Alibaba IPO was reputedly the largest ever in the United States, raising $25 billion for the company, surpassing the previous record held by the Agricultural Bank of China.[2]

Having entered the U.S. market, the company found itself the target of class actions filed in federal courts in California and New York filed over the past several months. After hearing arguments from the litigants, the U.S. Judicial Panel on Multidistrict Litigation determined that centralization of the litigation in New York best served the interests of justice, citing the fact that the relevant documents and witnesses are available in New York.[3] Judge Colleen McMahon will preside over the cases.

The attached complaints, Khunt v Alibaba (SDNY) Klein v Alibaba (SDNY) Ziolkowski v Alibaba (SDNY) MING HUANG ALIBABA Rand v Alibaba (SDNY), generally allege that all purchasers of Alibaba ADS’s suffered harm from misstatements by the company. On Jauary 28, 2015, media outlets reported that the State Administration of Industry and Commerce, a Chinese regulator, had discussed with Alibaba some concerns over the company’s business practices in July 2014, prior to the IPO. The regulator allegedly discussed the use of Alibaba’s online services by some vendors to market counterfeit goods, among other alleged infractions. On January 29, Alibaba also reported earnings that were lower than previously expected. According to the complaints, these disclosures contributed to a sharp decline in share prices, which led to the lawsuits.

  • Xunlei

In an action filed in federal court in California, the plaintiff alleges that Xunlei, an internet platform for digital content in China, released misleading public statements that harmed investors in the company’s ADS’s that are traded on Nasdaq.[4] In this case, the plaintiff targets not only the Chinese firm, but also the U.S. financial companies that acted as underwriters for the company’s IPO. The complaint names J.P. Morgan Securities, Citigroup, and Oppenheimer as co-defendants.

The complaint alleges that the company’s registration statement filed in connection with the IPO contained misstatements. The allegations focus on the company’s efforts in developing a new product that would enable crowd sourcing of unused bandwith and data storage. The complaint alleges that the company failed to disclose in its prospectus the risks associated with that project, which contributed to lower earnings and lower share prices.

  • Yingli

Two class actions have been filed in federal court in California against Yingli Green Energy, a major producer of solar energy products in China.[5] Both complaints accuse Yingli of misstatements in its releases of quarterly and annual financial reports from March 2014 to March 2015. The allegations focus on a drop in the value of Yingli’s ADS’s on the New York Stock Exchange after the March 25, 2015 news release. The complaints allege that the company misrepresented its financial outlook in its earlier public statements.

Unlike the above cases alleging public misstatements in connection with ADS’s, a recent case in the District of Nevada takes issue with the fact that the company said nothing at all (i.e., “going dark”). The case against China Mining alleges that the company failed to make timely securities filings in the United States despite a contractual obligation to make such filings pursuant to an agreement in connection with the sales of over-the-counter securities. The complaint further alleges that the company’s principal used the proceeds of the sale for personal uses in breach of the agreement. The plaintiffs assert state-law contractual and fiduciary claims in addition to private claims for alleged securities fraud under federal law.

Besides private enforcement, federal regulators also have been busy prosecuting persons affiliated with Chinese interests. Here are some recent developments as reported by the blog post, “SEC Actions”:

  • Former Qualcomm Executive Sentenced For Insider Trading:

Jing Wang, a former Qualcomm Inc. Executive Vice President, began by constructing a cover-up. Then he engaged in insider trading, using inside information taken from his employer. The scheme failed. Mr. Wang has been sentenced to 18 months in prison and directed to pay a $500,000 fine after pleading guilty to securities fraud based on his insider trading, money laundering tied to his efforts to evade detection and admitted to obstruction. U.S. v. Wang, 3:13-cr-03487 (C.D. Calif. Filed Sept. 20, 2013).

(http://www.secactions.com/former-qualcomm-executive-sentenced-for-insider-trading/)

  • SEC Brings First Unregistered Broker Charges Based on EB-5 Program:

The EB-5 program was designed to create a path to becoming a permanent residence in the U.S. for certain immigrants while facilitating job creation in the United States. Initiated in 1990, the program gives a foreign applicant a path to permanent residency following an investment of $1 million, or $500,000 in a targeted employment area. The investment must be in a USCIS approved U.S. commercial enterprise, defined as any for-profit activity formed for the ongoing conduct of lawful business. The applicant obtains a conditional green card following the investment. It is good for two years. If the investment creates or preserves at least 10 full time jobs during the two year period the applicant may obtain a permanent green card.

While the program has been successful at spurring investment in the U.S. and giving applicants an opportunity to obtain a permanent green card, there have been difficulties. In the past the SEC has brought fraud actions based on the investment program. Now the Commission has brought its first action charging individuals with acting as unregistered brokers in connection with the EB-5 program. In the Matter of Ireeco, LLC, Adm. Proc. File No. 3-16647 (June 23, 2015).

See http://www.secactions.com/sec-brings-first-unregistered-broker-charges-based-on-eb-5-program/.

  • SEC Files Another Suspicious Trading Case:

Outsized trades continue to draw SEC scrutiny and enforcement actions – even where the agency does not have the evidence to fully plead a claim. Despite the difficulties of these so-called “suspicious” trading cases, in many instances the Commission is able to develop the evidence to support its allegations. In the meantime the trading profits are typically held in a frozen account.

SEC v. Luo, (S.D.N.Y. Filed June 23, 2014) is a “suspicious” trading case. The action centers on the buy-out announcement for Qihoo 360 Technology Co, Ltd, by its Chairman and CEO and a consortium of other affiliates, announced on June 17, 2015. Defendant Hijian Luo is a resident of Guangzhou, China. He is the CEO of 4399 Co., Ltd., an online game company that provides single, multiplayer and children’s games along with animation through the internet.

See http://www.secactions.com/sec-files-another-suspicious-trading-case/.

[1] O’Silva v. Alibaba Group Holding Ltd., No. 15-05002 (N.D. Cal.); Ziolkowski v. Alibaba Group Holding Ltd., No. 15-01405 (S.D.N.Y.); Chao v. Alibaba Group Holding Ltd., No. 15-05020 (C.D. Cal.); Rand v. Alibaba Group Holding Ltd., No. 15-00991 (S.D.N.Y.); Huang v. Alibaba Group Holding Ltd., No. 15-04991 (C.D. Cal.); Klein v. Alibaba Group Holding Ltd., No. 15-00811 (S.D.N.Y.); Khunt v. Alibaba Group Holding Ltd., No. 15-00759 (S.D.N.Y.)

[2] R. Mac, Alibaba Claims Title for Largest Global IPO Ever with Extra Share Sales, Forbes, Sept. 22, 2014.

[3] Transfer Order, In re Alibaba Group Holding Ltd. Sec. Litig., MDL No. 2631 (U.S. Jud. Panel on Multidistrict Litig. June 24, 2015).

[4] Keally v. Xunlei Ltd., No. 15-04524 (C.D. Cal.)

[5] Mangla v. Yingli Green Energy Holding Co., No. 15-04600 (C.D. Cal.); Knox v. Yingli Green Energy Holding Co., No. 15-04003 (C.D. Cal.).

FOREIGN CORRUPT PRACTICES ACT

Recently, Dorsey& Whitney LLP issued its attached July 2015 Anti-Corruption Digest, Anti-Corruption-Digest-July2015.

NEW SEC, SECURITIES, AND COMMODITIES CASES AGAINST CHINESE COMPANIES FOR FRAUD

On May 28, 2015, Kevin T. Fox filed a class action securities action against Yingli Green Energy Holding Co. Ltd., Liansheng Miao, and Yiyu Wang in the U.S. District Court for the Central District of California (Case No. 15-4003). Bhimsain Mangla filed a similar complaint in the same court on June 17, 2015 (Case No. 15-4600).  See attached complaints.  YINGLI SECURITIES MANGLA YINGLI COMPLAINT

On June 15, 2015, Doug Keally filed the attached class action securities complaint, XUNLEI SECURITIES ACTION, against Xunlei Ltd., Sean Shenglong Zou, Tao Shomas Wu, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Oppenheimer & Co., Inc. in the U.S. District Court for the Central District of California (Case No. 15-4524).

On June 16, 2015, Euro Pacific Capital, Inc. filed the attached complaint , SECURITIES GOING DARK CHINA MINING, on behalf of a large group of individual investors against U.S. China Mining Group, Inc. and Hongwen Li in the U.S. District Court for the Southern District of New York under the federal securities law and state contract and fiduciary law (Case No. 15-4636) because the company decided to go dark and delist from the US exchanges.

On June 23, 2015, Maverick Fund, L.D.C. filed the attached first thin film solar complaint, FIRST SOLAR THIN FILM, against First Solar Inc., Michael J. Ahearn, Robert J. Gilette, Mark R. Widmar, Jens Meyerhoff, James Zhu, Bruce Sohn, and David Eaglesham, alleging violations of federal securities law in the U.S. District Court for the District of Arizona (Case No. 15-1156).

On July 1, 2015, the US Commodity Futures Trading Commission filed the attached complaint, KERING CAPITAL, against Yumin Li and Kering Capital Ltd. for violations of the Commodities Exchange Act

On July 6, 2015, the Securities and Exchange Commission filed the attached securities complaint, LUCA SECURITIES,  against Luca International Group, LLC, Luca Resources Group, Luca Energy Fund, LLC, Entholpy EMC, Inc., Bingqing Yang, Lei (Lily) Lei, Anthony Pollace, Yong (Micahael) Chen, Luca Operation LLC, Luca Barnet Shale Joint Venture, Luca to Kalon Energy LLC, Luca Oil, J&Q Int’l Trading, Inc., Skyline Trading LLC and Xiang Long Zh

If you have any questions about these cases or about the US trade, trade adjustment assistance, customs, 337, patent, US/China antitrust or securities law in general, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–DEVELOPMENTS IN TRADE , TAA, 337/IP, ANTITRUST AND SECURITIES

US Capitol South Side Fountain Night Stars Washington DC TRADE IS A TWO WAY STREET”

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR NEWSLETTER NOVEMBER 25, 2014

DECEMBER 12, 2014 UPDATE–SOLAR NEGOTIATIONS AND NEW SOLAR ANTIDUMPING AND COUNTERVAILING DUTY CASE IN CANADA

Dear Friends,

On January 21st, I will be speaking at the Brooklyn Law School in New York City on US China Trade Disputes. The invitation to the speech is set forth below.

I look forward to seeing any of my friends at the speech.

Best regards,

Bill Perry

Wednesday, January 21, 2015 * Subotnick Center, 250 Joraelmon Street * Brooklyn Law School

2 FREE CLE credits

Two judges from the US Court of International Trade * partners from two leading law firms handling China trade disputes * professors from four law schools * former chairman of Federal Trade Commission * former congressman focused on US-China trade * former general counsel of MasterCard

REGISTRATION PROGRAM RECEPTION
5:30 PM 6-8 PM 8 PM onward

WELCOME Professor Nicholas W. Allard

Joseph Crea Dean and Professor of Law, Brooklyn Law School

INTRODUCTION

Professor Robin Effron

Co-Director, Dennis J. Block Center for the Study of International Business Law, Brooklyn Law School

FIRST PANEL: PURE TRADE DISPUTES

MODERATOR

Geoffrey Sant, Esq.

Adjunct Professor, Fordham Law School

Special Counsel, Dorsey & Whitney LLP

PANELISTS

The Honorable Donald Pogue

Senior Judge, US Court of International Trade

Professor Bill Kovacic

Global Competition Professor, George Washington Law School

Former Chairman of Federal Trade Commission

  

Bill Perry, Esq.

Partner, Dorsey & Whitney LLP

Formerly in Office of General Counsel, US International Trade Commission; Office of Chief Counsel and Office of Antidumping Investigation, U.S. Department of Commerce

Don Bonker

Executive Director, APCO Worldwide, Inc.

Former US Congressman (D-WA); former Chairman of Subcommittee on International Economic Policy and Trade

SECOND PANEL: DISPUTES BETWEEN TRADE PARTNERS

MODERATOR

  1. Augustine Lo, Esq.

Dosey & Whitney LLP

PANELISTS

Chris Cloutier, Esq.

Partner, King & Spalding LLP

Former Acting Deputy Director of Trade Remedy Compliance, US Department of Commerce (at US Embassy in Beijing, China)

Professor Thomas Lee

Leitner Family Professor of International Law, Fordham Law School

Noah Hanfft, Esq.

President; CEO of International Institute for Conflict Prevention and Resolution

Former General Counsel of MasterCard

Professor Zhao Yun

Director of the Center for Chinese Law, University of Hong Kong

CLOSING REMARKS The Honorable Claire Kelly

Judge, US Court of International Trade

Trustee, Brooklyn Law School

RECEPTION

8 PM onward

THIS EVENT IS FREE, BUT RSVPS ARE REQUIRED

RSVP to events@cblalaw.org

About the Program The United States and China are major trading partners. Trade issues between the two nations take center stage as leaders negotiate new trade treaties and struggle to resolve disputes under existing legal frameworks. Brooklyn Law School and the Chinese Business Lawyers Association present an evening of dialogue among leading practitioners and professors who will examine current issues in trade disputes between the U.S. and China.

Sponsored by the Dennis J. Block Center for International Business Law, Chinese Business Law Association (CBLA), ABA Section of International Law, and the Trade Secrets Institute(TSI).

WE EXPECT ALL SEATS TO BE RSVP’D.  TO ATTEND, PLEASE RSVP AS SOON AS POSSIBLE TO events@cblalaw.org OR TO www.brooklaw.edu/tradedisputes

For directions, please visit: www.brooklaw.edu/directions

Thank you!

Geoffrey Sant, Director

Chinese Business Lawyers Association

This course provides two (2) CLE credits in the State of New York. Partial credit is not available. The credits are transitional and non-transitional and the category is Professional Practice.

US CHINA SOLAR NEGOTIATIONS

Several companies have asked me about a possible US-China settlement in the Solar Cells/Solar Products cases.  Today, December 12th, USTR Michael Froman acknowledged that Washington and Beijing have held talks about the Solar cases for “some time”.  During a conference call with Reporters, Froman stated that a stable environment for trade in solar products and polysilicon would have three components.  The first is to ensure that trade laws are being enforced. The second and third components are to enable the further deployment of clean technology and address issues like climate change, and “to maintain world class industries in both our countries to manufacture these important products.”

But knowledgeable people stated that talks have slowed in recent weeks, following a period of intense engagement prior to President Obama’s state visit to China in November, which ended without an agreement.  A major reason for this failure is because SolarWorld Americas, the petitioner in the U.S. trade remedy cases, stated that it could not accept the parameters that Chinese producers were willing to offer, and the U.S. government was unwilling to push the company to give ground.  In contrast to Europe, Canada, many other countries and even China, the United States does not have a public interest test in its US antidumping and countervailing duty laws and, therefore, the US government has less power to push a settlement.

The deadline for Commerce to accept a potential agreement to suspend the ongoing antidumping (AD) or countervailing duty (CVD) cases against Chinese solar panels has long passed. Thus settling the dispute will require a broader agreement, such as in 2006 U.S.-Canada Softwood Lumber Agreement, under which Canada agreed to impose export taxes and/or quotas on its exports of softwood lumber to the United States, in return for the U.S. government stopping the collection of trade remedy duties on those products.

SolarWorld has stated that it could accept a package that would do away with the various trade cases if four key conditions were met. The first three are that the agreement be enforceable by Commerce, set a floor price on imports of Chinese solar cells, and include a quantitative restriction on the volume of imports. The fourth condition is that the floor price on imports of Chinese solar cells be indexed to the market price for polysilicon.  Knowledgeable sources, however, have said that the floor price is key sticking point.

Commerce Secretary Penny Prtizker also stated that she did not expect the final Solar Products determination to have any impact on the JCCT negotiations, which will soon take place in Chicago.

The bottom line is that the Solar Products case will go to Antidumping and Countervailing Duty order and any deal would have to be extremely unique, such as the US Canadian Lumber Agreement.  The chance of such an agreement is probably small.

CANADA SOLAR CASE

An importer has contacted me about a new Solar Module and Panel Antidumping and Countervailing Duty Petition filed in Canada. On December 5, 2014, the Canadian government initiated the investigation. See the attached petition and announcement of the Canadian government.  CANADIAN SOLAR COMPLAINT CANADIAN SOLAR ANNOUNCEMENT

The Solar Trade War with China is now beginning to follow a similar pattern with other trade wars against Chinese products. An antidumping/countervailing duty case is filed in the US or the EU followed by many, many cases around the World.

In the early 1990s, a US antidumping case was brought against Garlic from China. I represented a number of US importers in the case and tried to represent the Chinese exporters/producers. In a very unusual situation, an official at the Chinese Chamber of Commerce refused to let any Chinese company respond to the US antidumping case and since the Chamber controlled export licenses, the official had the power to stop participation.

As a result, the Commerce Department levied antidumping duties of 376% against Chinese garlic, and that antidumping order is in place today, almost 20 years after the petition was filed.  But that was not the worst part of the case, the Garlic case spread to numerous other countries, including EU, India, Japan, Korea, Brazil, Mexico and other countries. Pretty soon 20 to 30 countries had trade orders against Chinese garlic blocking all exports of Chinese garlic, and Chinese garlic prices dropped like a rock. Garlic was very cheap in Beijing.

Chinese solar cells and panels appear to be on the same trade path as Europe, the US, India and now Canada have brought antidumping and countervailing duty cases against China. Many countries may soon block Chinese solar cells and panels out of their market.

If anyone has any questons about this case or the ongoing US Solar Cells and Solar Products case, please feel free to contact me.

If anyone wants specific help on the Canadian case, please let me know and I will put them in touch with Canadian trade counsel.

NOVEMBER 25, 2014 POST

There have been major developments in the trade politics, trade, trade agreements, trade adjustment assistance, 337/IP, US/Chinese antitrust, and securities areas.

This month the blog post has grown substantially because there have been so many developments in the trade and political area, especially with regards to China.

TRADE POLITICS AND TRADE AGREEMENTS WITH CHINA

THE REPUBLICAN WAVE ELECTION CHANGES THE TRADE POLITICAL LANDSCAPE IN WASHINGTON DC

No matter whether you are a Republican or a Democrat, in looking at trade issues, including the trade laws and the relationship between the US and China, one must deal with political reality in Washington DC. Elections have consequences, and the November 4th Republican wave election will have consequences for years to come.

Not only did the Republicans take the Senate, but no one expected the Republicans to take 8 seats with potentially another coming from Louisiana so Republicans at the end of January 2015 will control the Senate 53 or 54 to 47 or 46.

In the House of Representatives with 5 races still undecided Republicans gained 12 sets. They now hold 245 seats to 187. One can see how the political map has changed in the House by looking at http://www.politico.com/2014-election/results/map/house/. In the House, the United States has turned into a red Republican sea.

As it stands now, this is the largest Republican majority since 1946. If 3 of the 5 outstanding House seats go Republican, it will be the largest Republican majority since the 1930s under Herbert Hoover, before Franklin Delano Roosevelt was President. To say that this election was historic is an understatement.

As Dana Milbank, a Washington Post columnist, who is not viewed as a Republican/conservative partisan, states in his November 14th Washington Post column:

“There are five 2014 House races still to be decided before we can answer the question of historical interest:

Was this the worst election for House Democrats since 1928? Or was it merely their worst since 1946?

Either way, the results do not reflect well on the House Democratic leader, Nancy Pelosi – a conclusion that seems to have escaped Nancy Pelosi.

“I do not believe what happened the other night is a wave”, the former speaker informed Politico. . . . She preferred to describe what happened in the House elections as an “ebb tide.”

If Democrats lose three of the five undecided races, they will have ebbed all the way back to the day Herbert Hoover won the Presidency. To fail to see that as a wave, Pelosi must be far out to sea.”

The 2014 election for Democrats was not a wave. It was a tsunami, and now the political reality has changed dramatically in Washington DC. The most dramatic impact will be in the trade area because that is the one area that Senate and House Republicans can work on together with President Obama.

As indicated below, under the Trade Agreements discussion, President Obama’s problem in the Trade area is not with the Republicans, but with the Democrats. Although many Democrats want to call themselves progressive, because of substantial Union support, a number of powerful Democrats do not want progress on trade. They are opposed to Free Trade Agreements that lower barriers to imports. In fact, several Democrats want to raise barriers to imports.

Most Republicans are not opposed to the Free Trade Agreements because they firmly believe that Free Markets will result in more business and a substantial increase in economic activity for US companies and more jobs for US workers.

On November 5th the day after the election, many former US government officials were predicting that Trade Promotion Authority (“TPA”), which will lead to the Free Trade Agreements, such as the Trans Pacific Partnership (“TPP”), would be one of the first issues taken up by the new Republican majority.   TPA is the centerpiece of the administration’s trade policy, as it will set forth negotiating priorities for the next several years.

While a bipartisan TPA bill emerged earlier this year, Senate Majority Leader Harry Reid, D-Nev refused to introduce the bill on the floor. The change of the majority to the trade-friendly Republicans removes that problem.

According to former United State Trade Representative (“USTR”) Clayton Yeutter, with the Obama administration pushing for a final 12-nation Trans-Pacific Partnership as soon as possible, securing TPA will be the number one objective and will likely rise to the top of the Republican agenda. As former USTR Yeutter stated:

“The challenge will be to get fast-track done as early as possible and I believe that all the folks in congressional leadership positions understand that fully. I would look for it to be one of the very first issues on the Congressional agenda next year.”

Present USTR Michael Froman also expressed optimism, stating:

“I think ultimately this is an area where there’s a lot of bipartisan support for trade. It’s one of the areas that cuts across party lines, one area that we think we can make progress in, and we look forward to working with Congress after the election on Trade Promotion Authority and on our trade agenda more generally, in a way that has broad bipartisan support.”

In addition, the new Chairman of the Senate Finance Committee will be Republican Senator Orrin Hatch of Utah and he has a close working relationship with the present Chairman, Democratic Sen. Ron Wyden of Oregon. As indicated in past newsletters, Senator Hatch has been very open about the need to pass TPA through the Congress and he will be very active on this issue.

The chances of passing a fast-track bill in the upcoming lame-duck session of Congress are slim because the objective according to recent reports is to end the session on December 11th.  In the new Congress, however, TPA will be very important because Republicans have publicly warned the Administration not to conclude the TPP talks before TPA is concluded. As indicated below, without TPA no final deal will be concluded because countries like Japan and Canada will not put their best proposals on the table.  Japanese Prime Minister Shinzo Abe, for example, in particular, will be reluctant to strike a deal if there is a chance it could be altered legislatively at a later date.

As former USTR Yeutter stated:

“It will be exceedingly difficult to wrap up TPP without TPA. Abe and Japan don’t want to have to make tough political decisions twice.”

As a further example, in the attached e-mail, WAYS AND MEANS TRADE A PLUS on November 13, 2014, the House Ways and Means Committee released an article by Bryan Riley from The Hill stating:

Free Trade is a Winner in Recent Elections

By Bryan Riley, The Hill contributor

Riley is the Heritage Foundation’s Jay Van Andel Senior Policy Analyst in Trade Policy.

In Georgia, Iowa, Massachusetts and North Carolina, the midterm elections proved that candidates shouldn’t be afraid to talk about the benefits of trade. They also demonstrated that candidates tempted to employ protectionist scare tactics in their campaigns should think twice.

In Iowa, Republican Senate candidate Joni Ernst’s campaign argued: “Congressman [Bruce] Braley’s Anti-Free Trade Votes are bad for Iowa Farmers.”

According to Politico: Iowa Republicans, in one of the tightest Senate races in the country, are trying to capitalize on Democratic Rep. Bruce Braley’s record of voting against trade agreements to help hand their candidate, Joni Ernst, the victory. Braley, whose state is heavily dependent on farm exports, voted against free trade pacts with South Korea, Colombia and Panama in 2011, even after President Barack Obama’s administration re-negotiated several provisions to round up more Democratic support. “The South Korean trade deal was huge,” Agriculture Secretary Bill Northey told POLITICO in an interview. “Everyone knew it was a clear, clear win for agriculture and it would have been a terrible not to have it. For him to vote against that I just think is a major red flag.”

Ernst defeated Braley, 52.2 percent to 43.7 percent.

In North Carolina’s Senate race, Democratic incumbent Kay Hagan said:

“Unfair trade agreements have contributed to the loss of more than 286,000 North Carolina manufacturing jobs in the last decade — the fourth-largest decline in the nation. It is time we start protecting jobs here at home.” Her campaign spokesman added: “Kay opposed trade agreements that ship North Carolina jobs overseas because she will always put North Carolina jobs first.”

Her Republican opponent, Thom Tillis, disagreed: “As agriculture exports increase, Thom believes we must promote policies that make trade with other nations free and efficient in order to stimulate our economy and allow North Carolina farmers and ranchers to expand their businesses.”

Tillis defeated Hagan, 49.0 percent to 47.3 percent.

In Massachusetts, the Democratic Governors Association released an ad attacking Republican gubernatorial candidate Charlie Baker: “Baker won the Outsourcing Excellence Award at the ‘Oscars of Outsourcing’ for his work destroying jobs here at home.” Baker replied that outsourcing some jobs to India allowed Massachusetts insurer Harvard Pilgrim to save thousands of jobs at home. Former Massachusetts Attorney General Thomas F. Reilly (D) called the outsourcing attacks “exactly the kind of nonsense that drives people away from the political process.”

Baker defeated Democrat Martha Coakley, 48.5 percent to 46.6 percent.

In Georgia, Democratic senatorial hopeful Michelle Nunn attempted to smear her Republican opponent David Perdue for outsourcing jobs to other countries: “David Perdue, he’s not for you,” her ad proclaimed. When a reporter asked Perdue to defend his use of outsourcing, he replied: “Defend it? I’m proud of it. … It’s the lack of understanding of the free enterprise system that I’m running against here.”

Perdue beat Nunn, 53.0 percent to 45.1 percent.

After the Massachusetts and Georgia elections, Computerworld reported:

“Offshore outsourcing fails as election issue: A longtime Democratic bludgeon isn’t enough to move needle.” In contrast, candidates who embraced the benefits of trade, like Joni Ernst and Thom Tillis, emerged victorious.

Promoting free trade is good economics, too. A comparison of trade policy around the world, developed by the Heritage Foundation and The Wall Street Journal in the annual Index of Economic Freedom, shows a strong correlation between trade freedom and prosperity.

Washington Post columnist Steven Pearlstein observed that outsourcing saves U.S. businesses and consumers billions of dollars each year:

“Those savings and those extra profits aren’t put under the mattress. Most of it is spent or invested in the United States in ways that are hard to track but have surely created hundreds of thousands of jobs in other companies and other industries. Those who hold those jobs would have no reason to know that they are beneficiaries of the process of outsourcing and globalization. But in a very real sense, they are.”

Most economists agree that criticizing trade is bad policy. Last week’s election results suggest it may be bad politics, too.

But as also indicated below, that is where Trade Adjustment Assistance for Firms/Companies comes into play.  Trade Agreements are a result of Government action that will change the market, not only around the World but also in the United States. With market barriers dropping in a number of different countries, many US competitive companies will see their exports increase.  Experts predict that the TPP, for example, could increase economic activity by $1 trillion.

But this Government action will also change the US market place, and a number of US companies will face a market that has completely changed, a trade tsunami created by Government action.  Because Government action has created the trade tsunami, the Government has an obligation to help companies adapt to the new marketplace conditions.  When I say companies, I mean not just the management, but the workers in the company too.

As explained more below, the Government has a responsibility to help US companies swim in the new competitive marketplace sea that has been created by the Trade Agreements.

FORMER CONGRESSMAN DON BONKER’S CHINA DAILY ARTICLE ON THE IMPACT OF THE ELECTION ON US CHINA RELATIONS

APCO Executive Director Don Bonker, a former Democratic Congressman and an expert on the political issues in US China Trade Relations, published the following November 7th article in the China Daily on the election, which can be found at http://usa.chinadaily.com.cn/us/2014-11/07/content_18881045.htm.  Don puts the November 4th election into a historical perspective:

Election results a mixed blessing for China

By Don Bonker (China Daily USA)

Republicans exceeded early predictions scoring big time in Tuesday’s election, taking full control of the US Senate, increasing their margin in the House of Representatives along with many victories across the country.  For the next two years, the United States will have a truly divided government with the Republicans claiming a new mandate to push an alternative agenda.

While many factors were in play in the 2014 election (Obama’s poor ratings, huge amounts of campaign spending, etc), the fundamentals in recent history clearly favored the Republican Party.  The party of whoever occupies the White House in mid-term elections suffers nominal loses of Senate and House seats and predictably weakens the President’s political standing. As we are reminded by David Schanzer and Jay Sullivan in the New York Times, “This is a bipartisan phenomenon; Democratic presidents have lost an average of 31 House seats and between 4-5 Senate seats in mid-terms; Republican presidents have lost 20 and 3 seats respectively.”

How will the election results affect the US-China relationship?

Neither Republicans nor Democrats have well-defined or predictable policies toward China. In recent years, a small group in Congress has attacked China on a select number of issues but such actions are not part of either Congressional leader’s agenda.  Existing Federal laws, such a CFIUS, provide opportunities for a single Congressman to go after China, often to lend support to a company in his state.

Republicans, known to be pro-trade and pro-business, taking control of the Senate should be a healthy sign in building closer relations with China, especially since governors in their states are leading trade missions to China, seeking Chinese investments and pursuing markets for their exporting companies.

However, individual Republican Senators have sent letters to CFIUS and other Federal agencies opposing China-related investments and transactions. Many senior Republicans in Congress have expressed skepticism over China due to its government’s Communist Party control, reported human rights concerns, US support of Taiwan and Japan, China’s military build-up, economic espionage and geopolitical or national security threats that could put pressure on the Obama Administration to be more assertive with China.

Several well-positioned Republican Congressmen have caused the biggest headaches for China. The issue, or fear, is rooted in cybersecurity threats and economic espionage that has led to Congressional investigations and legislation that greatly restrict China companies, such as Huawei and ZTE, from having access to telecommunication and related technology markets in the US. The two Congressmen who were responsible for these actions are retiring at the end of this year. The question is whether their replacements will continue such policies.

A related concern is the so-called Tea Party’s growing influence that has put Republican Congressional leaders in a difficult position given the Tea Party’s enduring political base and its extreme views on major issues (education and trade). It will likely affect the China relationship in negative ways, particularly on trade (“protect American jobs”) and on cyber and economic espionage issues.

The Democrats have their own agenda which occasionally proves hostile to China. Several occupy leadership positions on committees that preside over government agencies and assert their political clout to press for higher import tariffs and related trade restrictions. This has more to do with politics than economics, particularly in the election season when labor unions pressure, if not intimidate Democratic candidates to “protect American jobs”. Such protectionist policies are now prompting China to take reciprocal actions that may be placing China and America on the path of a trade war.

Despite the encouraging bilateral discussions on the Bilateral Trade Agreement (BIT), there is no guarantee what happens once it arrives on the doorstep of the US Capitol.

Overall, the newly established Congress preparing for 2015 may be more favorable to China given the departures of some if its Capitol Hill critics, but a great deal of anxiety about China will continue – mistrust, economic and security threats and China’s economy surpassing the US’ in the foreseeable future.

In the Senate, the Republicans taking control will create a different political paradigm but with little indication on how it will play out over the next two years. The new political alignment will offer a narrow window for Congressional Republicans to provide stronger leadership and promote their own agenda and could result in more favorable actions (approval of TPP and TTIP trade pacts).

But that is in the short-term. It is unlikely the Republicans maintain the Senate majority in the 2016 elections, but the House of Representatives will comfortably stay in Republican control (given the shape of Congressional districts) for some time into the future. With a Democrat occupying the White House this will likely guarantee continued gridlock in Washington for the next decade.

The 2016 presidential election may be more favorable to Democrats for the same reasons the Republicans scored well this year. Barack Obama is not on the ballot and the Democrats will be far more unified (under Hillary Clinton) than the Republicans (the party may likely be split).

In 2016, the Republicans will have 23 Senate positions on the ballot compared to 10 for Democrats (also likely retirements/resignations). And the voter turn-out will jump back to 53 percent, which greatly favors Democrats in presidential elections. So whether political history will prevail and the Democrats re-take the Senate in 2016 or Republicans will defy the odds and remain in power is the big question going forward.

BILATERAL US CHINA TRADE AGREEMENTS

APEC AND PRESIDENT OBAMA’S TRIP TO BEIJING

Right after the mid-term elections, President Obama made a major trip to Beijing, China for the Asian Pacific Economic Cooperation (“APEC”) meeting.  As indicated below, President Obama’s Administration had set a target date for completing the Trans Pacific Partnership (“TPP”) talks at the APEC meeting. That did not happen, but there were several historic agreements that did come out of the meetings with the US and Chinese Government.

In the attached White House Statement and Fact Sheet, WHITE HSE STATE CHINA VISIT PRESS CONF CHINA US the US and Chinese governments announced that China will now grant 10 year visas to US businessmen and tourists and that there will be enhanced enforcement against counterfeit goods.

During the attached Joint Press Conference, the two Presidents announced a new Information Technology Agreement (ITA) and an agreement on Climate Change. President Obama stated that a strong, cooperative relationship with China is at the heart of the United States’ policy to Asia, and stated that the United States needs the world’s second-largest economy and the most populous nation on Earth as its partner in order to lead in addressing global challenges. As President Obama stated, “[I]t is a fact that when we work together, it’s good for the United States, it’s good for China, and it is good for the world.”

President Xi Jinping of China made several important points in response to questions, but several of the most important are:

“The strategic significance of China-U.S. relations is on the rise. . . . Both President Obama and I believe that when China and the United States work together, we can become an anchor of world stability and a propeller of world peace. China stands ready to work with the United States to firm up our confidence, exercise our wisdom, and take action to strengthen our coordination and cooperation bilaterally, regionally and globally; and to effectively manage our differences on sensitive issues so that we can make new gains in building the new model of major-country relations between China and the United States, which serves the fundamental interests of our two peoples and the people elsewhere in the world.

China and the United States have different historical and cultural traditions, social systems, and faces of development. So it’s natural that we don’t see eye to eye on every issue. But there have always been more common interests between China and the United States than the differences between us. Both sides respect each other’s core interests and major concerns and manage our differences in a constructive fashion, full dialogue and consultation so as to uphold the overall interests of stable growth of China-U.S. relations. . . .

China and the United States are different countries in the world. It’s perfectly normal for there to be different views expressed about us in the international media. And I don’t think it’s worth fussing over these different views. And I don’t see any of the regional free-trade arrangements as targeting against China. China is committed to open regionalism. And we believe the various regional cooperation initiatives and mechanisms should have positive interaction with each other, and that is the case at the moment.”

On Tuesday November 12th, President Obama’s state visit to China ended with the ITA and Climate agreements, joint pledges to continue talks on a bilateral investment treaty (BIT), a new international deal curbing export credits, and continued dialogue regarding their persisting differences over the use of agricultural biotechnology.

President Obama had planned to press China on several other issues, including alleged discriminatory enforcement of its anti-monopoly law (AML), intellectual property (IP) protections, including cyber theft of IP, and China’s slow approval process for biotechnology traits. Only biotechnology, however, was addressed in a White House fact sheet on U.S.-China economic relations, stating:

“The United States and China reached consensus to intensify science-based agricultural innovation for food security. The United States and China commit to strengthen dialogue to enable the increased use of innovative technologies in agriculture.”

At the Press Conference, President Obama stated that he did address IP, “I stressed the importance of protecting intellectual property as well as trade secrets, especially against cyber-threats.”

The other major announcement that came out of Obama’s visit to China was in the area of climate change. On that issue, the two sides reached an agreement on the targets for the cuts they will make to carbon emissions post-2020.

Last week CSPAN, the US Public Affairs station, did a 45 minute interview with Dorsey Partner, Tom Lorenzen on the US China Climate Change agreement. Until joining Dorsey in 2013, Tom was at the Justice Department from 2004 where he was the Assistant Chief in the U.S. Department of Justice’s Environment and Natural Resources Division (ENRD). During that time, he supervised the federal government’s legal defense of all Environmental Protection Agency rules, regulations and other final actions judicially reviewable under the various federal pollution control statutes. See the video at http://www.c-span.org/video/?322770-3/washington-journal-thomas-lorenzen-uschina-carbon-reduction-deal.

On November 12th, the China Daily stated with regards to the Information Technology Agreement (ITA):

“The two countries reached a breakthrough on Tuesday in Beijing to accelerate the expansion of the World Trade Organization’s Information Technology Agreement (ITA), which could help eliminate $1 trillion in tariffs on high-tech product sales globally. The deal would allow the “swift conclusion” on talks to enlarge the ITA at the WTO meeting in Geneva later this year.”

USTR Michael Froman stated in Beijing that it was good news for US companies that are keen to see global tariffs further cut on products such as medical equipment, GPS devices, video game consoles and next generation semiconductors.  The agreement now covers more than $4 trillion in annual trade.

With regards to ITA, the US government announced on November 10th that it had convinced China to eliminate tariffs on tech goods like advanced semiconductors and medical devices. The Chinese government has agreed to U.S. demands to eventually eliminate tariffs on advanced semiconductors known as MCOs, magnetic resonance imaging (MRI) machines, and high-tech testing equipment, but the deal does not include tariff elimination on flat-panel displays.

But the Agreement between China and the United States in the High Tech area will lead to additional negotiations with other countries at the WTO in Geneva, which are scheduled to resume in December. The ITA negotiations broke down in November 2013, after the U.S. and other participants rejected China’s tariff offer as insufficient. Since then, the U.S. and European Union have been trying to persuade China to come back to the table with a better offer.

The agreement between the U.S. and China does not mean the ITA talks are concluded. The two parties will now have to go back to the more than two-dozen other participants – including the European Union, Japan and South Korea – to negotiate a final ITA package. But sources in Geneva are cautiously optimistic that the deal could move forward. The expanded ITA would also eliminate import duties on a range of additional technology products including high-tech medical devices, video cameras, and an array of high-tech ICT testing instruments.  A White House fact sheet stated that the expansion of the ITA pact would eventually eliminate tariffs on roughly $1 trillion in annual global sales of information technology products and boost the annual global GDP by an estimated $190 billion.

On November 14th it was reported that sources in Geneva predicted that the ITA agreement could result in a final deal this December. Although other countries are not expected to block the deal, other countries will push for changes. EU Trade Commissioner Cecilia Malmstrom stated that she welcomed the U.S.-China understanding and that the EU “[intends] to take all necessary steps to finalize the agreement in the coming weeks.”

If the agreement is completed, it will take very little for the U.S. to implement the lowered tariffs. This is because Congress had already authorized further tariff reductions when it passed the Uruguay Round Agreements Act in 1994. This is in contrast to the TPP and the Transatlantic Trade and Investment Partnership (“TTIP”), which are two new agreements that would require congressional authorization before they went into effect.

On November 12th, President Obama and President Xi also announced an agreement to speed up talks on a comprehensive Bilateral Investment Treaty (“BIT”), which is considered to be the foundation for future United States-China trade agreements. At the Press Conference President Xi announced that “We agreed to accelerate the negotiations of the BIT, and we will make efforts to reach agreement on the core issues and the major articles of the treaty text.” The two countries also agreed to “work together to promote innovation in agriculture and food security.”

Trade pundits were reporting that the Republican victory along with the movement in Beijing will give a much-needed boost to the WTO and Obama’s ambitious trade agenda. This has led to a bullish optimistic attitude about the next two years of trade policy.

As indicated below, this victory in Beijing with the close of the APEC meeting was followed on November 13th by a break through with India on the Trade Facilitation Agreement (“TFA”), which the Indian Government had held up on food security grounds.  On November 13th U.S. and Indian trade officials announced they had reached a deal to end the impasse over the WTO trade facilitation Agreement.  Under the deal, India agreed to drop its opposition to the trade facilitation pact in exchange for a commitment from the U.S. to keep in place a so-called peace clause that would shield developing countries’ food security programs from legal challenges until the WTO agrees on a new set of rules governing those programs.

Numerous observers, including new European Union Trade Commissioner Cecilia Malmstrom, hailed the bilateral agreement as a boost for the WTO, which had been criticized as irrelevant as a forum for global trade talks in light of the trade facilitation breakdown. Commissioner Malmstrom stated, “I am particularly pleased today as the breakthrough gives new momentum to the WTO and restores trust among members and the credibility of multilateral trade negotiations.”

TRADE NEGOTIATIONS—TPA, TPP, TTIP/TA AND BALI/DOHA ROUND—NO FINAL DEAL AT APEC MEETING IN BEIJING

TPA FACED HEADWINDS IN CONGRESS BUT THEN THE ELECTION HAPPENED

As mentioned in past newsletters, in the trade world, the most important developments may be the Trans Pacific Partnership (TPP), Trans-Atlantic (TA)/ the Transatlantic Trade and Investment Partnership or TTIP negotiations and the WTO.  The TPP is a free trade agreement being negotiated by officials from the U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. These trade negotiations could have a major impact on China trade, as trade issues become a focal point in Congress and many Senators and Congressmen become more and more protectionist.

This has been a problem because the protectionism is coming from the Democratic side of the aisle.  Democratic Senators and Congressmen are supported by labor unions.  Although Democratic Congressmen have expressed interest in the TPP, to date, President Obama cannot get one Democratic Congressman in the House of Representatives to support Trade Promotion Authority (“TPA”) in Congress. Without bipartisan/Democratic support for these Trade Agreements, Republicans will not go out on a limb to support President Obama and risk being shot at by the Democrats during the elections as soft on trade.

As mentioned in prior newsletters, on January 29, 2014, the day after President Obama pushed the TPA in his State of the Union speech in Congress, Senate Majority leader Harry Reid stated that the TPA bill would not be introduced on the Senate Floor.

But then came the November 4th Republican wave election changing the Trade Politics dramatically in Washington DC.  Elections have consequences and in 2015 Republicans will take the Senate and increase their numbers in House.

To summarize, on January 9, 2014, the Bipartisan Congressional Trade Priorities Act of 2014, which is posted in my February post, was introduced into Congress. The TPA bill gives the Administration, USTR and the President, Trade Promotion Authority or Fast Track Authority so that if and when USTR negotiates a trade deal in the TPP or the Trans-Atlantic negotiations, the Agreement will get an up or down vote in the US Congress with no amendments.

Under the US Constitution, Congress, not the President, has the power to regulate trade with foreign countries. Article 1, Section 8, Clause 3, of the Constitution empowers Congress “to regulate Commerce with foreign nations” Thus to negotiate a trade agreement, the Congress gives the Executive Branch, the Administration/The President and United States Trade Representative (“USTR”), the Power to negotiate trade deals.

Because trade deals are negotiated with the foreign countries, the only way to make the system work is that under the TPA law when the Trade Agreement is negotiated, the Congress will agree to have an up or down vote on the entire Agreement and no amendments to the Agreement that has already been negotiated will be allowed.

On April 9, 2014, the new Senate Finance Committee Chairman Senator Ron Wyden announced at a speech to the American Apparel & Footwear Association Conference that he was introducing a new TPA bill, what Senator Wyden calls Smart Track.  But to date no details have been given about exactly what Smart Track will mean, and the Republican victory on November 4th probably means that Smart Track will be washed away by the Republican wave.

On July 17th, all Republican members of the House Ways and Means Committee sent the attahed letter to USTR Froman, HOUSE REPS WAYS MEANS, urging the Administration to build support for Trade Promotion Authority (TPA) and directing the Administration not to complete the Trans-Pacific Partnership (TPP) before TPA is enacted into law.

Now the story continues . . . .

On October 15th in Tokyo, acting Deputy U.S. Trade Representative Wendy Cutler emerged from four days of meetings in Tokyo stating that both sides are working “as hard and creatively as possible” to resolve their bilateral issues. She went on to state:

“We were encouraged by the progress we made this week during our negotiations, but we need to underscore that the issues before us are tough. The issues range from achieving meaningful market access across all agricultural products to establishing a strong and effective dispute settlement mechanism in the auto sector.”

The difficult negotiating areas include five agricultural categories—rice, wheat and barley, beef and pork, dairy products and sugar—as well as autos and auto parts.

After ending the talks with his counterpart, Japanese negotiator Hiroshi Oe added, however, that both sides have “mountains of work to do. We are far from saying, ‘We did it.’ We still have the most difficult areas that have yet to be resolved.”

The U.S.-Japan meetings closed just a day after Mexico’s top trade official, Mexican Economy Minister Ildefonso Guajardo, speaking in Washington, D.C. made clear that the rest of the TPP countries view the US Japan negotiations as a critical step toward progress in the full negotiations,  “It is clear for anybody that knows about trade negotiations that if these two big trading partners, Japan and the U.S. do not come to an agreement, it has domino consequences on the rest of the 12 countries.”

But then came Sidney and then Beijing with no breakthrough in part because of no TPA Agreement.

Meanwhile, on October 16th, according to analysis of the document by Public Citizen, it was reported that a leaked draft of the TPP Intellectual Property Chapter obtained by WikiLeaks could lead to delayed access to pharmaceutical drugs in a dozen countries, including the U.S., and would contradict White House policies aimed at cutting Medicare and Medicaid costs. According to Public Citizen, at issue in the draft is a U.S. proposal to give an advantage to the pharmaceutical industry and “provide long automatic monopolies for biotech drugs or biologics” contradicting the pledge included in past White House budgets to shorten the same monopoly periods to reduce cost burdens on Medicare and Medicaid.

Public Citizen said it remains concerned that these provisions would give large brand-name drug firms a way to “impose rules” on Pacific Rim economies that “will raise prices on medicine purchases for consumers and governments. If the TPP is ratified with this U.S.-proposed provision included, Congress would be unable to reduce monopoly periods without risking significant penalties and investor-state arbitration.”

In Sidney the leaked IP draft resulted in a number of civil society organizations and Australian lawmakers voicing opposition to the deal citing many trouble spots.  A group of Australian politicians along with public health and copyright experts convened at Australia’s Parliament house lawn to condemn possible TPP trade-offs as talks resumed in Canberra.  Australian green party Sen. Peter Whish-Wilson stated that “the leaked documents indicate that the government is on course to hand over protections for human rights, public health, the environment and Internet freedom.”

On October 24th, in a letter six Congressmen, including Sens. Ron Wyden, D-Ore., Orrin Hatch, R-Utah, Jay Rockefeller, D-W.V., and John Thune, R-S.D., the ranking members of the Senate Finance and Commerce committees, stated that USTR Michael Froman should oppose any proposals in the TPP negotiations that would needlessly limit internet traffic, including the cross-border transfer, storage or processing of data, and protect the unfettered transfer of commercial data and digital trade.  According to the letter, eight countries, including TPP members Mexico and Vietnam, have or are considering policies to limit their Internet traffic.

As a result of all these concerns, Rep. Sander Levin, D-Mich, ranking Democratic Congressman on the House Ways and Means Committee, traveled to Sydney, Australia, to closely observe the status of the TPP talks. Levin took the unusual step of arranging meetings with trade ministers from the TPP nations during their Oct. 25-27 session in an effort to gather more information about TPP’s more contentious unsettled areas. Levin, who is from Detroit, has long been an advocate of the U.S. automotive industry, which has been blocked out of the Japanese market for decades. More broadly, Levin also called for the final TPP to bind its member countries to upholding the highest possible environmental, labor and human rights protections.

On October 27th in Sidney, Australia trade ministers for countries negotiating the TPP hailed “significant progress” in the talks during their three-day meeting in Australia, but stopped short of announcing a breakthrough.  Opening the meeting, USTR Michael Froman stressed that the outstanding TPP issues are among the most contentious in the agreement, but that negotiators have taken efforts to ensure that they are resolved as smoothly as possible.  President Obama had targeted the APEC meeting in Beijing on November 10th as a “deadline” to conclude the negotiations, but critical to the conclusion of the 12-nation TPP talks are the bilateral deliberations between the U.S. and Japan, which also continued in Australia.

After returning from Sidney, Congressman Levin expressed his concern about the current status of the TPP talks in Australia calling for more transparency in negotiations and an increased focus on its details.  Levin stated that “it is “vital to have an open door for a broad understanding and involvement on how they should be resolved, with increased transparency.”

Levin said that although a compromise he helped negotiate, referred to as the “May 10 agreement,” had significantly improved the TPP in the realms of workers’ rights, environmental protections and access to medicines, it is “vital that TPP build on them, not weaken them.” Levin noted the opportunities and challenges inherent with the diversity of economies represented within the TPP membership, pointing out Malaysia’s and Vietnam’s “very different” economies from the U.S.

On October 27th, following the negotiations in Sidney, the Ministers and Heads of Delegation for the TPP countries issued the attached statement, TPP ACTUAL JOINT STATEMENT AUSTRALIA, which provides in part:

“We consider that the shape of an ambitious, comprehensive, high standard and balanced deal is crystallizing. We will continue to focus our efforts, and those of our negotiating teams, to consult widely at home and work intensely with each other to resolve outstanding issues in order to provide significant economic and strategic benefits for each of us. We now pass the baton back to Chief Negotiators to carry out instructions we have given.”

On October 30, 2014, despite a push from numerous business groups, it was reported that it would be very difficult to pass TPA in the lame duck session, which is the time between the election on November 4th and the inauguration of the new Congress in January 2015.

On October 31st, USTR Mike Froman made clear that the 12 nations negotiating the TPP deal did not expect a final deal at the Asia-Pacific Economic Cooperation (“APEC”) conference in Beijing. As Froman stated:

“No, we do not expect to have a final agreement on TPP at APEC. All the TPP leaders will be present, so it will be a good opportunity to have conversations with each other about TPP, about whatever outstanding issues are left … and to give more political impetus to getting it done.”

Froman said that negotiators are still at work on the deal:

“We are making very good progress in closing out issues, narrowing the differences on remaining issues but we still have a ways to go and we are going to continue to work. We think the substance of the negotiation ought to drive the timetable. We’re not going to live by an arbitrary deadline but we are all focused on getting it done as soon as possible.”

On November 6th, after the election, business Leaders announced that they were increasing pressure to take up the TPA during the lame duck, but Mike Dolan, Teamsters’ legislative representative, said that fast track “won’t go anywhere during Lame Duck.” A broad coalition of labor, consumer groups sent over half a million petition signatures to Congress opposing TPA for the pending TPP.

In response to a question about the chance for a vote in the remaining weeks of the current Congress, Senate Finance Committee ranking Republican Orrin Hatch (R-Utah) stated, “Whether that happens during the lame duck is ultimately up to Democratic leadership.” Senator Hatch also stated that he believes there would be strong support to pass trade promotion authority in the “lame duck” session of Congress if Senate Democratic leaders decide to allow a vote. Senator Hatch, the new Chairman of the Senate Finance Committee, introduced the TPA bill along with former Senate Finance Chairman Max Baucus, now the U.S. ambassador to China, and House Ways and Means Chairman Dave Camp, R-Mich.

On November 10th in Beijing President Barack Obama and the leaders of the other 11 countries negotiating the TPP stated that a final agreement is now “coming into focus,” but declined to set a firm deadline for the completion of the talks. The 12 leaders, meeting on the sidelines of the APEC summit in Beijing, issued a joint statement commending the progress made by their negotiating teams over the past several weeks and kept up the pressure to finalize the TPP in the near future. The leaders stated:

“With the end coming into focus, we have instructed our ministers and negotiators to make concluding this agreement a top priority so that our businesses, workers, farmers and consumers can start to reap the real and substantial benefits of the TPP agreement as soon as possible.”

On November 11th, John Ivison, a Canadian reporter, issued an opinion piece in the National Post of Canada stating that any “‘significant progress’ made on the Trans-Pacific Partnership trade deal is pure bureaucratic BS.” See http://fullcomment.nationalpost.com/2014/11/11/john-ivison-any-significant-progress-made-on-the-trans-pacific-partnership-trade-deal-is-pure-bureaucratic-bs/.

As Ivison stated:

Trade sources suggest two major problems with negotiations that run contrary to the sunny optimism of the official statement.

One is that the Americans have approached the talks on a bilateral basis, preferring to hammer out deals country by country. “This is a typical U.S. approach, trying to run it like a hub-and-spoke negotiation,” said Mr. Clark.

Without knowing the outcome of talks between the two largest TPP participants — the U.S. and Japan — no one else has tabled a serious offer.

“Things are no closer than they were six months ago. No country will make an offer setting the starting point for ‘level of ambition’ without knowing the ambition levels of the U.S. and Japan.  You only give further from your first offer,” said one person with knowledge of the negotiations.

The second impediment to real progress is lack of Trade Promotion Authority — fast-track — on the part of President Barack Obama. No one wants to strike a deal that then becomes a bargaining chip in the internecine politics between the president and Congress.

There have been some suggestions that the newly empowered Republicans in the Senate might offer fast-track authority, in return for the president giving the Keystone XL pipeline the green light. But for now, President Obama cannot sign off on a deal using his executive authority.

Canada’s intransigence on supply management of poultry and dairy is likely to become a problem at some point.

In Beijing, TPP trade ministers highlighted the four areas where issues remain unresolved in the proposed deal: intellectual property, state-owned enterprises, the environment and investment. The ministers called intellectual property “one of the most complex and challenging areas of the agreement.”

On November 13th, over 200 business groups sent a letter to leaders of both the House and Senate, urging them to pass a new fast-track trade bill during the lame-duck legislative session this year. Specifically, the Trade Benefits America Coalition sent the letter urging passage of bipartisan Trade Promotion Authority (TPA) legislation to House Speaker John Boehner, R-Ohio, Senate Majority Leader Harry Reid, D-Nev., House Majority Leader Nancy Pelosi, D-Calif., and Senate Minority Leader Mitch McConnell, R-Ky., on behalf of more than 200 U.S. associations and companies including the American Farm Bureau, National Foreign Trade Council and National Association of Manufacturers.  The letter concluded, “With 95 percent of potential customers outside the United States and more than one in five American jobs supported by trade, we need to seize on opportunities — such as ongoing and future U.S. trade agreements — to expand U.S. commerce with other countries.”

On November 15th President Obama vowed to continue pushing toward a swift TPP deal, which he said has the potential to yield a “historic” trade deal. At the G20 meeting Obama stated:

“It is our chance to put in place new, high standards for trade in the 21st century that uphold our values. It’s about a future where instead of being dependent on a single market, countries integrate their economies so they’re innovating and growing together. That’s what TPP does. That’s why it would be a historic achievement.”

On November 18th, Prime Minister Abe in Japan called a snap election on December 14th to seek a mandate for his economic decisions, but this too will complicate the TPP negotiations.

On November 18th Deputy USTR Robert Holleyman stated that the U.S. is seeking provisions in the TPP requiring civil and criminal responses to the theft of trade secrets. As Holleyman stated:

“Many in this room have certainly paid attention to the damage that’s being caused by the theft of valuable trade secrets in foreign marketplaces. And in the TPP agreement, we’re seeking both civil and criminal responses to this problem, including to the issue around the growing problem of cyber-theft of trade secrets.”

TTP FOR CHINA??

But what about China? Could it eventually join the TPP?

On October 15th, the Peterson Institute for International Economic (”IIE”) released a study touting the benefits of a theoretical free trade agreement between China and the United States, including increased income and export gains, while also acknowledging that such an agreement could lead to 500,000 to 1 million lost U.S. jobs over a 10-year span.

There are clear signs that China is interested in joining TPP. Citing an unnamed high-ranking U.S. official, Bergsten of IIE said “not a week goes by” that the administration does not receive an inquiry from China about TPP. But China has not officially sought entry into the initiative because it believes it would be denied at this stage in the negotiations. U.S. officials have made clear they want to close the deal with the current 12 participants.

The study predicts that a comprehensive agreement between China and the U.S. would create income gains for the U.S. of up to $130 billion while creating $330 billion in income gains for China. Under the agreement, the U.S. is projected to achieve export gains of $373 billion, and China — $472 billion. Similarly, U.S. exports to China would increase 108 percent and Chinese exports to the U.S. would increase 40 percent, according to the study.

But the study also finds that if a bilateral agreement is reached, the U.S. would suffer “adjustment costs” in the magnitude of 50,000 to 100,000 U.S. workers losing their jobs each year over a 10-year period. In other words, the deal could cost the U.S. economy up to a million job losses over a decade.

That is where Trade Adjustment Assistance for Companies comes into play. The Peterson study contends that because the economic benefits equate to roughly $1.25 million in national income gains per job lost, the U.S. should consider policy alternatives to offset job loss rather than simply abandon an FTA with China. Such alternatives could include a bolstered trade adjustment assistance program, lengthy phase-ins of the liberalization of sensitive sectors, and larger wage-loss insurance and training and relocation programs.

Over the past year, China has undergone a radical shift in its stance on TPP because Beijing realizes it stands to suffer financial losses if it is not a member of the agreement, according to the authors of the study. The study claims that if TPP is concluded, China would lose $82 billion in gross domestic product and $108 billion in export revenue due to diverted trade flows.

CHINA AUSTRALIA FTA

To add more fuel to the fire, on November 17th, Australia and China signed a free trade agreement to allow greater Australian agricultural exports and greater investment in China and increased Chinese exports to Australia. According to the Australian Prime Minister, the Agreement is predicted to add billions to the Australian economy create jobs and drive higher living standards.

Prime Minister Tony Abbott stated:

“It greatly enhances our competitive position in key areas such as agriculture, resources and energy, manufacturing exports, services and investment. Australian households and businesses will also reap the benefits of cheaper goods and components from China, such as vehicles, household goods, electronics and clothing, placing downward pressure on the cost of living and the cost of doing business.”

When the deal takes effect, more than 85 percent of Australian goods exports will be tariff free and that number will climb to 95 percent. Those goods were previously saddled with tariffs of up to 40 percent. US companies that attempt to export products to China can face very high tariffs, some in the 40 to 60 plus percent range.

China, meanwhile, will face less scrutiny in its investments in Australia per the deal. The Chinese government told Australia it estimates it will spend $1.3 trillion over the next decade in investments in Australia.

TTIP FTA WITH EUROPE

Meanwhile the TTIP FTA with Europe moves forward on November 16th with President Obama and prominent EU leaders ordering their respective negotiating teams to continue negotiations. A Joint Statement provides:

“We remain committed, as we were when we launched these negotiations in June 2013, to build upon the strong foundation of our six decades of economic partnership to promote stronger, sustainable and balanced growth, to support the creation of more jobs on both sides of the Atlantic and to increase our international competitiveness.”

But former USTR Clayton Yeutter predicted that despite the problems, the negotiations would likely finish up after Obama leaves office in early 2017. As Yeutter stated:

“There were a lot of miscalculations as to how long TTIP was going to take. This is not a negotiation that’s going to conclude anytime soon. In my view there is no practical chance of doing it during the Obama presidency.”

On November 18th the new EU Trade Commissioner Cecilia Malmstrom responded to criticisms that the TTIP will only serve the interests of large multinational Corporations by stating that the Agreement must benefit consumers:

“Trade agreements can lower prices, widen choice and create high-quality jobs. TTIP must do exactly that.”

Malmstrom also called for the negotiations to be more transparent, stating that the agreement needed input from “the whole range of civil society groups: trade unions, business associations, environmental organizations and, of course, consumers.”

INDIA BILATERAL DEAL WITH THE US MOVES TRADE FACILITATION AGREEMENT NEGOTIATED IN BALI FORWARD

Many World Trade Organization (“WTO”) and US officials have warned that India’s decision to block the implementation of the Trade Facilitation Agreement (“TFA”) negotiated in Bali has had a “freezing effect” on the WTO’s work in a number of different areas. But after substantial pressure from the APEC countries, India and the US announced a breakthrough in the negotiations over the Agreement.

On July 31st, the WTO announced that the Trade Facilitation Agreement negotiated in Bali would not be implemented on schedule because of the substantial opposition from developing nations led by India as a result of food security initiatives.

On September 30th, in his first meeting with President Obama, although indicating that a solution should come soon, Indian Prime Minister Modi reaffirmed his government’s position linking the WTO Trade Facilitation Agreement with support for the deal to act on food security issues.

On October 16, WTO Director-General Roberto Azevêdo reported to the Trade Negotiations Committee:

As a result we missed the deadline for the adoption of the protocol of amendment on the Trade Facilitation Agreement, which was the first deadline that Ministers set us in Bali. I said at the time that I feared there would be serious consequences. . . . as I feared, this situation has had a major impact on several areas of our negotiations. It appears to me that there is now a growing distrust which is having a paralyzing effect on our work across the board. . . .

it is my feeling that a continuation of the current paralysis would serve only to degrade the institution — particularly the negotiating function. . . . This could be the most serious situation that this organization has ever faced. I have warned of potentially dangerous situations before, and urged Members to take the necessary steps to avoid them. I am not warning you today about a potentially dangerous situation — I am saying that we are in it right now.

At the Trade Negotiations Committee meeting, Deputy USTR and U.S. ambassador to the WTO Michael Punke slammed India and the other opponents of the TFA protocol for perpetuating an “unnecessary and counterproductive crisis.” Those members’ inability to concede their position on food security has “significantly undermined” the entire Bali package and may doom any prospects for a “fully multilateral agreement.”

Although some of the trade pundits were suggesting that India be dropped off the back of the bus and the TFA move forward without India, others indicated that the real role of the TFA was symbolic—a way to get the WTO negotiating function going again.

On October 31st, Director-General Roberto Azevêdo reported to heads of delegations that there had been progress, and on November 10th, Azevedo asked APEC members, who were meeting in Beijing, to help push the TFA Agreement through. On that same day trade ministers for the 21 APEC countries, including China, vowed to throw their full weight behind resolving the current stalemate in the World Trade Organization surrounding the implementation of a trade facilitation agreement and the expansion of a tariff-cutting pact. In the attached statement released in Beijing, APEC ANNOUNCEMENT BALI TPP, the APEC Ministers stated:

2014 APEC Ministerial Meeting

  1. We, the Asia-Pacific Economic Cooperation (APEC) Ministers, met on 7-8 November 2014, in Beijing, China. The meeting was co-chaired by H.E. Wang Yi, Minister of Foreign Affairs of the People’s Republic of China, and H.E. Gao Hucheng, Minister of Commerce of the People’s Republic of China. . . .
  1. We welcome the participation in the meeting of the Director General of the WTO . . . .
  1. We reaffirm our confidence in the value of the multilateral trading system and stand firmly to strengthen the rules-based, transparent, non-discriminatory, open and inclusive multilateral trading system as embodied in the WTO.
  1. We highly commend the Bali Package achieved at the 9th Ministerial Conference (MC9) in Bali, Indonesia. We express our grave concern regarding the impasse in the implementation of the Trade Facilitation Agreement (TFA) which has resulted in stalemate and uncertainties over other Bali decisions. These developments have affected the credibility of the WTO negotiating function. In finding solutions to the implementation of the Bali decisions, APEC will exert creative leadership and energy together with all WTO members in unlocking this impasse, putting all Bali decisions back on track, and proceeding with the formulation of Post-Bali Work Program, as a key stepping stone to concluding the Doha Round.
  1. Bearing in mind that open markets are vital for economic growth, job creation and sustainable development, we reaffirm our commitment and recommend that our Leaders extend a standstill until the end of 2018, and roll back protectionist and trade-distorting measures. We remain committed to exercising maximum restraint in implementing measures that may be consistent with WTO provisions but have a significant protectionist effect and to promptly rectifying such measures, where implemented. In this context, we support the work of the WTO and other international organizations in monitoring protectionism.

Emphasis added.

Significantly, India is not a member of APEC, and the ministers’ statement made clear that they would exhaust all resources in order to convince New Delhi to change its stance and enable the WTO to carry on with its more substantive work.

On November 12th, in Beijing President Obama expressed optimism saying that he was “actually confident that there’s an opportunity for us to resolve them fairly soon.”

On November 13th, the US and India announced that they had reached an agreement to move the TFA forward. Under the bilateral deal, India agreed to drop its opposition to the TFA to streamline international customs procedures while the U.S. agreed to leave a so-called peace clause shielding India’s food stockpiling measures from legal challenges in place until the WTO crafts a permanent solution on that issue.

On November 14th Azevedo predicted that the implementation of a deal streamlining global customs procedures would earn quick approval from the WTO members within two weeks following the Indian government’s move to drop its opposition to the pact.

On November 16, the G-20 leaders in Australia welcomed “the breakthrough” between the U.S. and India that would allow for the “full and prompt” implementation of the TFA. The leaders also pledged to implement other agreements in Bali and swiftly define “a WTO work program on the remaining issues of the Doha Development Agenda to get negotiations back on track,” which it said would “be important to restore trust and confidence in the multilateral trading system.”

A 21st TRADE ADJUSTMENT ASSITANCE PROGRAM—A MODEST PROPOSAL—RESPONSE TO OPPOSING ARGUMENTS

As stated in my last newsletter and in my October blog post, I have made the case for the Trade Adjustment Assistance Program for Firms/Companies, which is presently funded at $16 million nationwide. With only a relatively small part of that low budget, the Northwest Trade Adjustment Assistance Center (“NWTAAC”) has been able to save 80 percent of the companies that participated in the program since 1984.

In my last newsletter and my blog, I also argued that President Reagan himself indirectly approved of the TAA for Firms/Companies (“TAAF”) program because it does not interfere with the market in any ways and yet has been able to save a number of US companies. In fact, the TAA programs could be funded by the over $1 billion collected every year by the US government in antidumping and countervailing duties.

But there are two programs. The first program is the $500 million to $1 billion program of TAA for workers and then there is the $16 million TAAF program for companies. Congress should consider reworking the two programs to accomplish the objective of saving the jobs and the companies that are hurt by trade liberalization. There needs to be more coordination between the two programs.

One way to adjust the programs is put the TAAF for Companies program first and give it more funding so it can help larger companies, such as Steel and Tire Companies, where more jobs are located. TAAF for Companies could be used to create a program where the best of technologies and advisory services could be brought to bear to help US companies challenged by globalization and trade liberalization. The Worker program then comes afterwards, after the jobs have been lost. Data that is needed for the Worker program can be supplied as part of the Company program.

But several questions have been raised that need to be answered.

  1. Isn’t TAAF for Companies crony capitalism?

Many opponents might argue that TAAF for Companies is simply crony capitalism. Under the TAAF program, however, very little money actually goes to the companies. Most of the money goes to business consultants that can help the company change its business model or change its marketing strategy.

In fact, as it stands now, the Program only provides $75,000 in matching funds, which means the Company itself must put in the matching $75,000. Although relatively small, the Federal money has been critical in helping US companies develop a strategy to deal with the new import competition in the market place and adjust to market conditions.

The TAAF program also cannot provide hard assets to the company, just business strategy advice and help on soft projects, such as help designing a marketing website, developing software for the company in its production process or designing a dam for an Idaho sheep farm. This is not corporate welfare because the company has to put much of its own assets in both money and labor into the assistance.

WTO also does not consider this a subsidy. No money or assets go to the company. The amount is low and does not harm international trade.

Although the TAAF program could be strengthened so that it could provide TAA for larger companies, such as Steel and Tire companies, the matching funds provision and the limitation on providing only soft projects and consulting is important so that the program cannot be targeted as simply another government subsidy.

TAAF for companies is not another Solyndra program.

  1. Isn’t TAA for Firms/Companies picking winners and losers in the market?

Any company that has been injured by imports/is being impacted by trade competition can apply to enter the program. At its core, the TAAF for companies program provides advice to the company on how to swim in the newly competitive marketplace from business experts, who know how to turn a company around.

In addition, the initial write up of the application is done by experts at TAA Centers around the country, who work with the companies at the local level on a one to one basis to develop a plan to fit the specific needs of the company. Because the program is implemented at the local level by neutral officials, there is no picking winners and losers. Although the final adjustment plan must be approved at Commerce, by that time the politics has been bled out of the situation and the question is can the company meet the criteria in the statute.

  1. Why shouldn’t TAA money go to workers and not companies?

TAA for firms/companies is not TAA for management. The company includes both the management and the workers. If you talk to workers, which have been hit by trade competition, they would rather have their job then just take assistance from the Federal Government.

Although Unions have pushed unfair trade cases, in fact, many of these unfair trade cases do not work. They do not protect the companies, and more importantly the workers from import competition. It is impossible to bring antidumping and countervailing duty cases against every country in the World.

I have met workers at a company that has been saved by the TAA for Firms/Companies program, which helped the company adjust its business plan to compete in the new trade impacted market. The worker in question had been at the factory for over 30 years and was very grateful that the program had saved his job.

In fact, the split between workers and management may be one of the problems that should be addressed by TAA. Often with the small companies, however, the employees and management have been together for years and look upon each other as one in the same. They are all in the company boat together.

Also TAA for Firms/Companies is not an entitlement, a net flow out of the US government. The TAAF program keeps the company alive and keeps the taxes from the company and the company’s management and workers flowing to the US and State Treasuries, which is money going into the US and State treasuries. That is real bank for the buck.

  1. Why can’t Private Investment/Equity funds pick up the slack and thus there is no need for TAA for Firms/Companies?

Private investment companies are often targeting short term profits so if the company cannot achieve short term profits, the company is closed and the assets are sold. Mitt Romney’s company, Bain Capital LLC, invested substantial money into GS Industries, the parent company of Georgetown Steel.  Although Bain made money, it did so by cutting more than 1,750 jobs, closing a division that had been around for 100 years and eventually Georgetown Steel sank into bankruptcy.

TAAF for companies is working long term to save the company and the jobs that go with that company. This is the only long term assistance program in the US government. So the short term profitability of the company is not the issue. The issue is can the company be turned around so that it can become profitable and very profitable in the long term.

Private Equity Firms and TAAF have very different objectives.

  1. What makes TAA for Firms/Companies different from other Economic Assistance to US companies?

TAAF for companies is a trade program, not just a Government assistance program. Trade problems for companies often happen because Government action has changed the US market, be it a free trade agreement, such as the TPP, or a change in government regulations, which has exposed the US companies to import competition.

Since the Government has created the problem in the short term by its own action, it has a responsibility to help US companies and workers that have been impacted by this Government action.

Under the Constitution Congress controls trade, not the President. TAAF is a program that was started to allow Congress and the Administration to negotiate international trade deals, which help the US economy as a whole, but have the effect of creating winners and losers in the US market.

To help building public support for these Free Trade Agreements, TAA has been provided to companies and workers to help them adjust to increased import competition. Although over time, the TAAF for companies program has declined in funding, with the new trade agreements, such as the TPP and the TTIP, the program needs to be built up again to help companies that have been hurt by changes in the US trade laws, which encourage US exports, but also imports from other countries. As stated at the top of this newsletter, trade is a two way street.

In addition, the TAAF program is the only long term assistance program in the US, and it monitors the companies to make sure they implement the plans that they have agreed to.

  1. The TAAF Program Is Too Small To Be Effective

The $16 million TAAF program may be small, but it is very effective.  Since 1984, NWTAAC has been able to save 80% of the companies in the program.

The 2013 NWTAAC report from Commerce points out that all the companies that entered the program since 2011 are still alive today.

In fact, TAAF should be expanded so it can help larger companies, such as Steel and Tire companies, deal with increased competition in the US market as trade agreements reduce barriers to imports.

  1. Why help old line US industries and companies that technology and changing trade patterns have left behind and should die a natural death?

This is the basic creative destructionism argument from famous Harvard economist, Joseph Schumpeter, and it is true if companies do not change with changing market conditions, they will die a natural death.

But TAAF for companies gives companies the opportunity to change and adapt to the changing market conditions. Many TAAF employees that have been working at the Centers for years firmly believe that any company that enters the program can be helped. It may be a new marketing strategy or a change in company equipment, or improvements in their business strategy.  The staff has seen too many success stories to not believe in the power of the program.

In Seattle we had a company making ceramic flowerpots that was being injured by imports of flower pots from Mexico. The company came into the program and as a result started producing ceramic molds for titanium parts for Boeing.  Changing the business plan is one of the best strategies to keep the company alive and the jobs that go with that company.

TAA REAUTHORIZATION NEEDED BY DECEMBER 31ST

On November 20th, in the attached announcements CONGRESS E-MAIL Reauthorize Trade Adjustment Assistance Before It Expires on December 31 REAUTHORIZATION SEAL, House and Senate Democrats urged Congress to reauthorize TAA before it expires December 31st. Although the emphasis is on the TAA for Workers program, the Reauthorization would also apply to TAA for firms/companies. As it stands now, as of January 1, 2015, TAA will no longer be able to provide trade adjustment assistance to new companies that want to enter the program. If TAA for Companies is not reauthorized by June 1, 2015, all the TAAC centers around the country will close their doors and the program will cease to exist.

As indicated below, funding TAA is the essence of compassionate conservatism.

CONGRESSIONAL E-MAIL NOTICES

Reauthorize Trade Adjustment Assistance Before It Expires on December 31, 2014

From: The Honorable Adam Smith Sent By: Mina.Garcia@mail.house.gov Bill: H.R. 4163 Date: 11/20/2014

November 20, 2014

Reauthorize Trade Adjustment Assistance Before It Expires on December 31, 2014

Dear Colleague,

We write to draw to your attention to five stories that illustrate the importance of reauthorizing the Trade Adjustment Assistance (TAA) program. TAA provides financial support and re-employment training for workers whose jobs are lost due to trade. It also provides assistance to U.S. companies that have been injured by imports so they can continue to remain competitive and not resort to mass lay-offs or closures.  Funding for service workers expired at the end of 2013. Funding for the remainder of the program – which supports manufacturing workers, farmers, ranchers, fishermen, and firms – will expire on December 31 unless we act to renew it.

In 2013, 100,000 workers qualified for TAA and the results prove the program’s success.  More than 75% of workers who completed the program found jobs within six months, and of those, 90% were still employed a year later.  More than 75% of workers who completed training in 2013 received a degree or industry-recognized credential.   Here are five TAA success stories:

  •  A 74 year-old Seattle die forging firm experienced trade impact and entered the Trade Adjustment Assistance for Firms program (TAAF) in the mid 2000’s. With the assistance of the Northwest Trade Adjustment Assistance Center (NWTAAC), the firm implemented a strategy of adopting certain innovations to develop capabilities in advance of competitors worldwide. NWTAAC assisted the firm in three ways that relied heavily on outside expertise: implementation of a data management system; commercialization of a new alloy; and a revision of the Firm’s website. Two years after completing TAAF, the Firm has increased employment by 11% and sales by 141%.
  •  Rodney Cox worked for 13 years on machinery, most recently at a local hospital in rural Oregon.  He was laid off in September 2010 and could not find another job.  With only a GED, he realized he would need more education to make the wage he had earned as a millwright.  Working with a TAA case manager, he opted to attend a community college that offered an Associate’s degree in Biomedics.  His TAA benefits allowed him to live, temporarily, near the training facility 177 miles away from his home (and family).  Rodney earned his degree and accepted a position as a Bio-Medical Equipment Technician.  He is earning a wage higher than what he earned when he was a millwright.  Of TAA, Rodney said, “Things couldn’t have worked out better for me.  My case managers helped me every step of the way.  I was hired two days after I moved back home with my family.”
  •  Kim Franklin is a single mother with two children.  She worked for a manufacturing company.  When she was laid off, she could not find a similar job.  She realized she needed to consider a new career and to get new skills. Through TAA, she completed Medical Assistance training.  She is now employed as a medical assistant at a health clinic in her community.
  •  Juan Bustamante worked as a machine operator in California for over 11 years making aluminum rims for cars.  When the nearby car facility moved operations out of the country, Juan – and 300 of his colleagues – lost their jobs.  Through TAA, Juan was able to obtain remedial education in English, Math, and Speech at the Los Angeles Valley College Job Training Center.  After completing the coursework, Juan qualified for the Transportation Metro Bus Operator Bridge Training Program.  After completing that program, he received a position with LA Metro and has full benefits.
  •  Judith Fischer worked for a publishing firm in New York and lost her job.  Through TAA, she explored career options and decided to pursue occupational therapy, concentrating on the psychological effects of diminished quality of life issues.  She earned an Associate’s Degree and received a job as a Community Rehabilitation Instructor and Case Manager, working with the developmentally disabled.  Judith plans to pursue a Master of Science in Social Work.  Of her new career, Judith said that it is “rewarding in every way, especially being able to connect with these children and I feel all the love they have to give.”

These examples demonstrate that TAA helps workers find new jobs and firms stay in business when they face new competition from abroad. We urge you to extend the program before it expires on December 31.

/s/                                                                             /s/ SANDER LEVIN                                                         ADAM  SMITH Member of Congress                                                   Member of Congress

/s/                                                                             /s/ CHARLES B. RANGEL                                               DEREK KILMER Member of Congress                                                   Member of Congress

/s/ RON KIND Member of Congress

 United States Congress

SECOND CONGRESSIONAL NOTICE

FOR IMMEDIATE RELEASE

Thursday, November 20, 2014

Contact: Rep. Smith- Ben Halle, (202) 570-2771

            Rep. Levin- Caroline Behringer, (202) 226-1007

            Rep. Kilmer- Jason Phelps  (202)-225-3459

            Rep. Rangel- Hannah Kim, (202)-225-4365

House Dems Urge Congress to Reauthorize TAA Before it Expires December 31st

Washington, D.C.- Today, Senator Sherrod Brown introduced a Senate companion bill to the Trade Adjustment Assistance (TAA) Act of 2014, introduced by Representatives Adam Smith (D-WA), Sander Levin (D-MI), Derek Kilmer (D-WA), and Charles B. Rangel (D-MI). These bills would renew TAA, which is set to expire on December 31, 2014. Reps. Smith, Levin, Rangel, and Kilmer released the following statement calling for the immediate passage of the TAA:

“It is critical that Congress pass Trade Adjustment Assistance legislation before it expires at the end of the year. Both the House and Senate TAA bills provide critical work training, income support, and health care to help dislocated American workers transition and learn new skills for new careers in competitive industries.  This vital assistance helps American workers and businesses adapt and compete in a rapidly evolving world economy.”

Background: Congress created the TAA program in 1962 in response to the loss of jobs among hard-working Americans as a result of increasing global competition, as well as to promote American competitiveness.  TAA benefits have several components: training assistance, income support while in training, and job search and relocation assistance.  The program assists workers dislocated by the elimination of tariffs and other barriers to trade.  Additional programs assist farmers, fishermen, and firms with the development and implementation of business plans to enable them to regain a competitive foothold. Click here for the full text of the Trade Adjustment Assistance (TAA) Act of 2014.

TAA by the numbers:

  • 2,192,910:  The number of workers served by TAA since it was created in 1974
  • 104,158:  The number of workers eligible to apply for TAA in 2013
  • 50:  The number of states with workers eligible for TAA benefits in 2013
  • 75%: The percentage of TAA workers who got a job within six months of finishing the program
  • 90%: The percentage of those TAA workers who remained employed at the end of the year

ANTIDUMPING, COUNTERVAILING DUTY AND OTHER TRADE CASES

THE MAGNESIUM CASE — WHY MARKET ECONOMY IN ANTIDUMPING CASES AGAINST CHINA IS SO IMPORTANT FOR US PRODUCERS

As stated in numerous past newsletters, market economy for China is important for US end user production companies. The importance of market economy for the United States is illustrated by the Magnesium from China antidumping case. Recently a large Western company came to me because they were thinking of exporting Chinese magnesium to the United States to help the US magnesium die casting industry. But after discussions, at least in the short term, the company gave up because there is no longer a viable magnesium die casting industry in the United States. The Antidumping Order on Magnesium from China has killed the downstream industry.

In antidumping cases Commerce does not use actual prices and costs in China to determine whether a company is dumping. Dumping is defined as selling at prices in the United States below prices in the home market or below the fully allocated cost of production.

As mentioned before, however, in contrast to Japan, Korea, India, Iran and almost every other country in the World, China is not considered a market economy country in antidumping cases. Commerce, therefore, refuses to look at actual prices and costs in China to determine whether a Chinese company is dumping. Instead Commerce constructs a cost for the Chinese company by taking consumption factors from the Chinese producer for all inputs used to produce the product in question, including raw materials, energy, and labor, and then goes to a Third Surrogate Country to get Surrogate Values often from Import Statistics in the surrogate country to value those consumption factors.

In the past Commerce looked for surrogate values in only one country, India, but recently Commerce looks at numerous countries, including Indonesia, Thailand, Philippines, Bulgaria, Columbia, and Ukraine to name a few and those countries and import values can change from annual review investigation to annual review investigation.

Thus, it is impossible for the Chinese company to know whether it is dumping because it cannot know which surrogate value that Commerce will pick to value the consumption factors and thus the US importer cannot know whether the Chinese company is dumping.

In the Magnesium from China antidumping case, one of the key inputs is electricity. Electricity from hydro power in China, where many of the Chinese companies are located, can be as low as 3 cents a kilowatt hour. The average electricity cost in the US is 6 cents a kilowatt hour. What price did Commerce use as a surrogate value for electricity in the recent Magnesium review investigation? 7 cents a kilowatt hour.

This is very important because as of February 2014, there were 121 Antidumping and Countervailing Duty orders. 75 of those orders are for raw material products, such as metals, chemicals and steel, which go into downstream US production.

The Commerce Department has broad discretion to determine surrogate countries and values and their choices can change from annual review investigation to annual review investigation, exposing US importers to millions of dollars in retroactive liability based on a process, which is inherently arbitrary, because Commerce does not look at actual prices and costs in China.

Not only is there a problem with retroactive liability for US importers, US end user companies are often blocked from using the competitive Chinese raw material input, which, in turn, exposes the US downstream producers, such as foundries, automobile and chemical producers, to competition from Chinese companies and foreign companies that do have access to the lower cost raw materials. In other words, the US antidumping and countervailing duty laws, rob Peter to pay Paul.

One example of the devastating impact of the US Antidumping Law is the impact of the US Magnesium from China antidumping case on the US Magnesium Die Casters. As the North American Die Casting Association stated in June 2010:

North American Die Casting Association

June 7, 2010 ·

NADCA Supports Magnesium Die Casters with a Filing to Help Lift Tariffs

May 27, 2010 by NADCA in NADCA News Wheeling, IL

NADCA recently filed a response to the International Trade Commission (ITC) in hopes to help lift ITC’s tariffs on imported magnesium alloy. Since many die casters have been harmed by the excessive prices being charged by the sole magnesium alloy producer in the U.S., NADCA has filed this response in regards to the Sunset Review of this particular ITC tariff. . . .

NADCA is concerned about magnesium die casters having access to alloy magnesium in the U.S. at globally competitive prices. The antidumping duty orders effectively bar Russian and Chinese alloy magnesium from the U.S. market. Prices for alloy magnesium are higher in the U.S. than elsewhere due to the antidumping duty orders currently in place in the U.S. but not in other major consumer markets.

The lack of effective competition in the U.S. market ― there is only one significant U.S. producer of alloy magnesium, US Magnesium LLC ― has harmed die casters since the imposition of the antidumping duty orders in 2005. NADCA estimates that as many as 1,675 direct jobs and 8,000 supporting jobs have been lost in the die casting industry due to the imposition of these orders.

US Magnesium has not made significant efforts to maintain or increase its sales of alloy magnesium in the U.S. since the imposition of the antidumping duty orders. For example, US Magnesium has not joined in efforts initiated by magnesium end-users to develop new uses of magnesium.

Thus an antidumping order to protect more than 450 production jobs in Utah has resulted in the loss of 9,657 jobs in the downstream market.

What did the ITC do in the face of this argument?

Left the antidumping order against magnesium from China in place for another five years.

Now in 2014, what has been the effect of the ITC’s decision to leave the Antidumping Order on Chinese Magnesium in place—more closed companies and more lost jobs. In 2004-2005 43 US companies sold magnesium die castings in the US market.   According to NADCA, less than 12 US companies now produce magnesium die castings in the United States.

NADCA estimates that 31 US companies have ceased pouring magnesium in the United States because of the antidumping order against magnesium from China.  US companies, such as Lunt in Illinois, simply went out of business because of the Magnesium from China Antidumping order. In 2010, when NADCA did the survey, it estimated a job loss of 1,675 direct jobs. Now the jobs loss has swelled to over 2,000 and closer to 10,000 supporting jobs.

12 companies have survived because they fall into two categories. The major market for magnesium die casting is auto parts. The first set of companies use the magnesium die castings that they produce ( i.e. Honda).

The second set of US companies are those strong in other metals, such as aluminum, and have shifted from producing magnesium die castings to aluminum die castings.

Where did the magnesium jobs and companies go? Many companies and projects simply moved to Mexico or Canada.

Many OEM magnesium auto parts manufacturers moved all their production to Mexico. Five Tier 1 steering wheel manufacturers, for example, have magnesium die casting and wheel assembly plants in Mexico, including TRW, AutoLiv, Takata, Key Safety Systems and Neaton.

The other impact of the antidumping order on Magnesium from China has been to push North American car companies away from magnesium auto parts, necessary for light weight cars, especially powertrain, mainly because of the supply uncertainty.   Lack of access to 80% of the world’s production of magnesium in China and not having globally priced metal inputs is a huge risk to car companies. Magnesium powertrain die casters, such as Spartan, have simply switched to aluminum further reducing magnesium die casting capacity and expertise in the US.

This further diminishes US auto makers acceptance of magnesium auto parts.  This US situation greatly contrasts with Europe where magnesium powertrain components are more than 50% of the magnesium auto applications. EU OEMs are much more advanced at building lighter cars now than their US peers.

Now NADCA has given up because it is “simply too difficult to fight city hall”. My potential client also told me that it was just not worth it to fight the Magnesium antidumping order because the downstream market for the product had simply died in the United States.

The Antidumping law in truth is a jobs destroyer, not a jobs creator.

THE WOODEN BEDROOM FURNITURE ANTIDUMPING CASE—NO HELP TO THE DOMESTIC INDUSTRY BUT 100S OF MILLIONS OF DOLLARS IN RETROATIVE LIABILITY FOR US IMPORTERS AND BANKRUPTCIES

On November 18, 2014, in Mark David, a Division of: Baker, Knapp & Tubbs, Inc. et al v. United States, CIT MAOJI, the Court of International Trade (“CIT”) affirmed a Commerce Department decision of a 216% rate for Maoji, a major Chinese exporter, in the Wooden Bedroom Furniture case creating probably 10s of millions of dollars in retroactive liability for US importers.

In that decision, Judge Tsoucalis stated:

“Maoji does not dispute that they failed to participate fully in the review, and that they therefor can be subjected to an AFA rate. The issue before the court is instead whether Commerce’s application of the 216.01% PRC-wide AFA rate to Maoji was reasonable. Plaintiff argues that the 216.01% PRC-wide AFA rate was neither reliable nor relevant. . . . According to Plaintiff, Commerce applied an “outdated” and “unsupported” margin that did not reflect Maoji’s commercial reality. . . .

Plaintiff does not appear to dispute Commerce’s finding that Maoji failed to rebut the presumption of government control in the Final Results. During the review Maoji notified Commerce that it was not practicable for it to provide a response to the Section D questionnaire or the supplemental Section A questionnaire. . . . Commerce determined that Maoji was a part of the PRC-wide entity. . . . Because Maoji failed to respond to Commerce’s questionnaires regarding its separate rate eligibility during the review, Commerce reasonably concluded that Maoji failed to demonstrate its absence of government control. . . .

Unlike Orient in Lifestyle I, here, Maoji failed to qualify for separate rate status. As a result it received the PRC-wide AFA rate. Because Maoji was part of the PRC-wide entity, Commerce was not required to calculate a separate AFA rate relevant to Maoji’s commercial reality. . . . Commerce was only required to corroborate the rate to the PRC-wide entity. . . . Therefore, Plaintiff’s reliance on Lifestyle I is misplaced. Lifestyle I does not call into question the PRC-wide rate as applied to the PRC-wide entity, rather it only discredits its application to Orient, which successfully established the absence of both de jure and de facto government control.”

Several years ago, an importer asked me to meet with Maoji in Shanghai and talk to them about the Wooden Bedroom Furniture case. From talking to the importer, I knew that Maoji was exporting a lot of furniture from different Chinese manufacturers and asked the Manager from Maoji, what would happen if Commerce picked Maoji as a mandatory respondent in the review investigation and it had to report factors of production/consumption factors from all Maoji’s suppliers? Instead of replying, the Manager got mad and started yelling at me, “Who told you we would have to supply production information for all our suppliers?” End of conversation.

In this case, apparently Maoji could not supply its response to Section D of the questionnaire because it was not practicable. Section D of the questionnaire requires the exporters to report consumption factors for its wooden bedroom furniture suppliers/producers. Too many producers apparently did not want to cooperate with Maoji and supply their production information.

But now all the importers that imported from Maoji are exposed to retroactive liability of 216% on imports. Based on my past experience, this means that importers will owe millions and possibly 10s of millions of dollars on these imports.

A month ago while in Beijing during a meeting with the Chamber of Light Industrial Products, a Chinese Chamber official told me that he regarded the Wooden Bedroom Furniture case as a victory for Chinese companies. My response was that this same case has created retroactive liability of close to, if not more than, $1 billion for US importers. Last year, exports of furniture from Vietnam went by exports of furniture from China. So if the Wooden Bedroom Furniture case was a victory, I would hate to see a loss. In fact, this case has been a disaster.

But this case along with the comments of the Chamber official indicate that Chinese companies simply do not understand the impact of these cases on US importers and in some cases, simply do not care. I have met with company owners in High Point, North Carolina, who have seen their entire $50 million dollar blow up because they had the temerity to import Chinese wooden bedroom furniture from China under an antidumping order.

The irony of the Wooden Bedroom Furniture case is illustrated by the December 2010 ITC determination in the Wooden Bedroom Furniture from China Sunset Review investigation, where ITC Commissioner Pearson stated the antidumping order has not helped the US industry:

this investigation . . . raises some troubling questions. . . . This industry would have faced difficulties during the period of review under any circumstances, given the depth of the recession and its extensive effects on the housing market. But even before the recession began, the industry was not apparently gaining much benefit from the imposition of the order. The domestic industry’s market share continued to decline after the order, as did production, capacity utilization, and employment. In the long run the domestic industry might have been expected to struggle to retain any benefits from this order as importers and retailers sought supply in other, lower-cost markets outside China. But the record here suggests that the domestic industry gained little even before those adjustments began to be made. . . .

I am mindful that the law does not require that an antidumping order or countervailing duty order be shown to benefit the domestic industry in order to reach an affirmative finding in a five-year review. . . .In this particular investigation, additional costs and distortions have been added by the use of the administrative review and settlement process, with little evidence that these distortions have yielded any benefits to the industry overall, the U.S. consumer, or the U.S. taxpayer.

So if the antidumping order does not benefit the US industry, why doesn’t the US industry simply lift the order? Two reasons, first the US industry and the lawyers representing the industry have made money from private settlements with Chinese companies and US importers. Second, although the AD order may not have helped the US industry directly, it has had the effect of eliminating a number of the US industry’s direct competitors, which are US importers forcing them into bankruptcy because they imported furniture under an antidumping order against China.

IMPORT ALLIANCE FOR AMERICA

This is why the Import Alliance for America is so important for US importers, US end user companies and also Chinese companies. As mentioned in prior newsletters, we are working with APCO, a well-known lobbying/government relations firm in Washington DC, on establishing a US importers/end users lobbying coalition to lobby against the expansion of US China Trade War and the antidumping and countervailing duty laws against China for the benefit of US companies.

On September 18, 2013, ten US Importers agreed to form the Import Alliance for America. The objective of the Coalition will be to educate the US Congress and Administration on the damaging effects of the US China trade war, especially US antidumping and countervailing duty laws, on US importers and US downstream industries.

Recently, the Import Alliance established its own website. See http://www.importallianceforamerica.com.

We will be targeting two major issues—Working for market economy treatment for China in 2016 as provided in the US China WTO Agreement and working against retroactive liability for US importers. The United States is the only country that has retroactive liability for its importers in antidumping and countervailing duty cases.

The key point of our arguments is that these changes in the US antidumping and countervailing duty laws are to help US companies, especially US importers and downstream industries. We will also be advocating for a public interest test in antidumping and countervailing duty cases and standing for US end user companies.

Congressmen have agreed to meet importers to listen to their grievances regarding the US antidumping and countervailing duty laws. In addition to contacting US importers, we are now contacting many Chinese companies to ask them to contact their US import companies to see if they are interested in participating in the Alliance.

At the present time, Commerce takes the position that it will not make China a market economy country in 2016 as required by the WTO Accession Agreement because the 15 years is in a treaty and not in the US antidumping and countervailing duty law. Changes to the US antidumping and countervailing duty law against China can only happen because of a push by US importers and end user companies. In US politics, only squeaky wheels get the grease.

On August 7, 2014, we held an organizational meeting in Beijing, China at the headquarters of China Ocean Shipping Company (“COSCO”) with interested Chambers of Commerce and Chinese companies to explain the project in more detail and to seek help in contacting US importers about the Alliance.

We spoke to about 40 attendees, including attendees from the legal departments of the top 10 chambers of commerce, including Chemicals, Machinery and Electronics, Light Industrial Products, and Food, and the Steel, Wood Products and Hydraulics and Pneumatics & Seals Association.

In addition to describing the Import Alliance and the issues regarding 2016 in the US China Accession Agreement, we also discussed the US China Trade War in general. Introductory videos for the Organizational Meeting from Cal Scott of Polder Inc., the President of the Import Alliance, can be found at the following link https://vimeo.com/103556227 and for former Congressmen Don Bonker and Cliff Stearns of APCO can be found at the following link https://vimeo.com/103556226. The PowerPoint we used to describe the Import Alliance, the specific provisions in the US China WTO Agreement and the Trade War in general is attached FINAL BEIJING IMPORT ALLIANCE POWERPOINT.

TRADE

SOLAR CASES—POSSIBLE SCOPE EXPANSION TO INCLUDE PANELS PRODUCED IN CHINA AND TAIWAN FROM THIRD COUNTRY SOLAR CELLS AND SEPARATE RATES PROBLEM

SOLAR PRODUCTS

On June 3, 2014, Commerce issued its preliminary countervailing duty determination against China in the Solar Products case. The fact sheet and preliminary Federal Register notice have been posted on my blog. The Countervailing Duty Rates range from 18.56% for Trina to 35.21% for Wuxi Suntech and all other Chinese companies getting 26.89%. On July 25th, the Commerce Department announced its preliminary antidumping determination in the Chinese solar products case establishing 47.27% combined rates (20.38% Antidumping, 26.89% Countervailing Duty) wiping out billions of dollars in imports of Chinese solar products into the United States.

Posted on my October blog post are the Commerce Department’s Factsheet, Federal Register notice, Issues and Decision memo from the Antidumping Preliminary Determination along with Commerce instructions to Customs in the Solar Products Antidumping and Countervailing Duty cases, which will help importers understand what products are covered by this case. Also attached to the October blog post is the ITC scheduling notice for its final injury investigation in the Solar Products case. The ITC hearing is scheduled for December 8, 2014.

On August 15th, after an extension, the Chinese government filed a letter at Commerce, which is posted on my blog, expressing an interest in a suspension agreement, but no proposed formal agreement has been filed with the Department. Although some preliminary discussions have been held, no Agreement has been released for comment as required by the Antidumping and Countervailing Duty law.

Meanwhile, the case moves on and expands. In an October 3, 2014 memo, which is posted in my October post, on its own motion Commerce has proposed to expand the scope of the Solar Panels case to cover all panels produced in Taiwan and China from third country solar cells.

On October 16, 2014, on behalf of two importers that import solar panels with third country solar cells in it, we filed a brief to argue that a change this late in the Solar Products investigation expanding the products subject to investigation violates due process because of the lack of notice to US importers and Chinese exporter and producers. The problem with changing the scope this late in the antidumping and countervailing investigation is that Commerce Department’s record is now closed and those Chinese companies that exported solar panels with third country solar cells in them along with the US companies that import those products have no opportunity to prove that the Chinese companies are separate and independent from the Chinese government. The Chinese companies, therefore, will automatically get an antidumping rate of 167%.

Moreover, the entire antidumping and countervailing duty proceedings at Commerce as well as the injury investigation at the US International Trade Commission (“ITC”) are based on the premise that the products covered by this investigation are solely those solar panels that have solar cells wholly or partially produced in the subject countries, Taiwan or China. If Commerce accepts the proposal, that will no longer be the case. The Solar Products cases will cover Chinese and Taiwan solar panels with third country solar cells in them when there is no specific determination at the Commerce Department that those Chinese and Taiwan solar panels with third country solar cells, in fact, were dumped or that the Chinese companies producing those panels received subsidies and no determination at the ITC that the solar panels with third country solar cells in them caused injury to the US industry.

One reason that Commerce may have decided to expand the scope is because the AD and CVD orders will be difficult to administer and enforce. It will be difficult for Customs officials at the border to determine where the components of a solar cell in a particular panel from China or Taiwan originated. But that is a problem with the scope in Solar World’s initial petition that it filed in this case. Substantially changing the game at this stage in the proceedings raises enormous due process questions in this proceeding.

We now await the Commerce Department’s final determination on December 16th.

SOLAR CELLS—THE SEPARATE RATES ISSUE

On November 20, 2014, in the attached Jiangsu Jiansheng Photovoltaic Technology Co., Ltd. v. United States decision, CIT JIANGSU SEPARATE RATES, the Court of International Trade (“CIT”) granted the Commerce Department’s request to take another look at the separate rates issue regarding certain “state-owned” Chinese companies. In doing so the Court stated that even though there was a possibility of government influence that was not enough to deny a Chinese company separate rates. As indicated below, this decision seems to be at odds with the Diamond Sawblades case and the Tetrafluoroethane case.  As the Court stated:

“Specifically, SolarWorld argues that Commerce gave insufficient weight to evidence that Chinese laws permit the government to intervene in Chinese companies’ operations in a variety of ways. But by definition, the laws of an NME country will generally permit the government of such country to intervene in the operations of its companies. Thus to require NME companies to prove complete legal autonomy would introduce an internal inconsistency into the analysis. Instead, as Commerce explained in this case, the agency determines whether the legal possibility exists to permit the company in question to operate as an autonomous market participant, notwithstanding any residual authority for potential governmental intervention, and if so, whether that company should be exempted from the NME system-wide analysis because it in fact managed its production, pricing, and profits as an autonomous market participant. Here, Commerce first determined that, as a matter of de jure possibility, the respondents in question could have acted as sufficiently autonomous market participants to deserve separate rates; then, having made this threshold determination, Commerce determined that the evidence in the record reasonably supported the conclusion that these respondents in fact did act sufficiently autonomously in terms of managing production and profit and setting prices during the POI.

Commerce requests and is granted permission to reconsider the record evidence regarding whether certain respondents were sufficiently autonomous from the Chinese government in the conduct of their export activities as to qualify for rates separate from the PRC-wide entity. In doing so, Commerce need not require proof of complete freedom from any mere legal possibility of government control. . . .

Commerce has determined that the weight of the evidence suggests the contrary conclusion, and SolarWorld has not pointed to any specific nonspeculative evidence to cast doubt upon this determination. Accordingly, because Commerce has considered and relied upon sufficient evidence to reasonably support the agency’s conclusion that the respondents in question were sufficiently autonomous from government control over their export activities to qualify for a separate rate, and because SolarWorld presents no specific evidence to impugn these reasonable determinations Commerce’s findings with regard to these separate-rate recipients are supported by substantial evidence.. . . ,

SolarWorld also argues that Commerce’s decision to grant separate-rate status to these respondents was arbitrary because, in the past, Commerce has denied such status to respondents who submitted ownership evidence that was later contradicted at verification. But the issue presented here is not analogous to the prior decisions on which SolarWorld relies because the respondents in those cases had submitted ownership information that was contradicted at verification, whereas here there was no similar impeachment of any of the evidence submitted by the challenged separate-rate recipients . . . .

Essentially, SolarWorld believes that the potential for governmental control through such managers or board directors categorically precludes a finding that such companies in fact acted autonomously in conducting their own export activities. The core of SolarWorld’s argument is that these respondents failed to establish de facto autonomy because 1) some of these companies’ shareholders are SOEs (i.e., wholly state-owned companies), with the power to recommend or appoint the company’s board members and senior managers; and 2) some of these companies’ senior managers or board directors contemporaneously also held membership or positions within organizations such as the CPC, NPC, and/or CPPCC. But these facts alone are not dispositive of the de facto autonomy inquiry, because they speak solely to the possibility for governmental control over export activities through these persons, not whether such control was in fact reasonably likely to have been exercised during the POI.

Fundamentally, SolarWorld’s arguments regarding the de facto autonomy of the challenged separate-rate recipients suffer from the same analytical defect as its arguments regarding de jure autonomy – namely that, in an NME country, there will usually be state involvement and authority to intervene in these respondents failed to establish de facto autonomy because 1) some of these companies’ shareholders are SOEs (i.e., wholly state-owned companies), with the power to recommend or appoint the company’s board members and senior managers; and 2) some of these companies’ senior managers or board directors contemporaneously also held membership or positions within organizations such as the CPC, NPC, and/or CPPCC. But these facts alone are not dispositive of the de facto autonomy inquiry, because they speak solely to the possibility for governmental control over export activities through these persons, not whether such control was in fact reasonably likely to have been exercised during the POI. . . .

But this fact alone does not necessarily lead to the conclusion that all NME producers and exporters should be categorically treated as in fact setting their prices according to some centralized strategy. Here, each of the challenged separate-rate recipients submitted evidence that “(1) [t]heir [export prices] are not set by, and are not subject to, the approval of a governmental agency; (2) they have authority to negotiate and sign contracts and other agreements; (3) they have autonomy from the government in making decisions regarding the selection of management; and (4) they retain the proceeds of their export sales and make independent decisions regarding the disposition of profits or financing of losses.” Moreover, “[a]ll of the separate rate respondents at issue reported that neither SASAC nor the government was involved in the activities of the board of directors.”

Footnotes omitted, emphasis added.

TETRAFLUORETHANE CASE—COMMERCE FINDS VERY HIGH ANTIDUMPING MARGINS, BUT ITC SAYS NO INJURY AND DISMISSES THE ENTIRE CASE

On October 15, 2014 in the attached fact sheetfactsheet-prc-1112-Tetrafluoroethane-ad-cvd-final-101514, Commerce found dumping and countervailable subsidization of Imports of 1,1,1,2-Tetrafluoroethane from the People’s Republic of China with antidumping rates for all of China of 280%, in part, by refusing to give Chinese state-owned companies their own antidumping rates. Such a high antidumping rate meant that all 1,1,1,2-tetrafluoroethane from China would be excluded from the US market.

On November 12, 2014, however, the US International Trade Commission based on a 4-2 vote in the attached fact sheet, ITC NO INJURY VOTE TETRFLUORETHANE, determined that the US industry was not injured by reason of imports of 1,1,1,2-Tetrafluorethane from China. The case, therefore, is dismissed and no antidumping and countervailing duty orders will be issued.

CAFC SAWBLADES CASE—NO SEPARATE ANTIDUMPING RATES FOR CHINESE STATE OWNED COMPANIES

On October 24th, in the attached one-sentence opinion, DIAMOND SAWBLADES CAFC DECISION, the Court of Appeals for the Federal Circuit (“CAFC”) in Advanced Technology & Materials Co. v. United States affirmed a decision by the CIT that found Chinese diamond saw blade companies had not done enough to show their independence from China’s government to deserve their own anti-dumping order rates, overturning 20 years of past cases by the Commerce Department. The CAFC affirmed the Commerce Department’s determination to provide Advanced Technology a 164.1 percent margin as the China-wide rate, not the 2.82 percent rate that had been assigned to them separately.

As stated in the September newsletter, in response to the CIT decisions in the Diamond Sawblades case, which are attached to my September blog post, Commerce is making it more difficult for Chinese state owned companies that are under the supervision of the PRC’s State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”) to get their own separate antidumping rate. Commerce continued that position in the 1,1,1, 2 Tetrafluoroethane from China case, but ITC threw out the case for no injury.

TIRES FROM CHINA ANTIDUMPING AND COUNTERVAILING DUTY CASE

Although Senator Kay Hagan sent a letter to Commerce regarding the Tires case, she lost her reelection fight in North Carolina to Republican Tom Tillis apparently, in part, because of her position on trade issue. But there will still be substantial political heat on the Commerce Department over the Tires case.

On November 22, 2014, Commerce announced its preliminary determination in the Tires countervailing duty investigation.  Attached are the Federal Register notice and Commerce Department factsheet  factsheet-prd-passenger-vehicle-light-truck-tires-cvd-prelim-112414 Tires PRC CVD Prelim FR as signed (3). The CVD rates ranged from moderate to very high, with the average rate being moderate.  GITI Tire (Fujian) Co., Ltd. and certain cross-owned companies received 17.69%; Cooper Kunshan Tire Co., Ltd and certain cross-owned companies 12.50%; Shandong Yongsheng Rubber Group Co., Ltd. 81.29% and all other Chinese exporters receiving a rate of 15.69%.

Commerce has found critical circumstances applying countervailing duties to imports 90 days prior to the preliminary determination to cover imports as early as late August.  As it stands now, imports since late August will now be covered by the Countervailing Duty case exposing importers to millions of dollars in retroactive liability.

ALUMINUM EXTRUSIONS

CIRCUMVENTION OF ALUMINUM EXTRUSIONS ORDER??

On the other hand Senator Mitch McConnell sent a May 8th letter about circumvention of the aluminum extrusions antidumping order followed by a letter from Senator Orrin Hatch. Senator Mitch McConnell in January will be the Senate Majority leader as the ranking Republican in the Senate, and Senator Orrin Hatch will be the new Chairman of the Senate Finance Committee. So both Senators will have enormous influence in the new Congress.

On September 4, 2014, Assistant Secretary for Enforcement and Compliance Paul Piquado in a letter posted on my October blog post assured the lawmakers that the agency is “committed to the robust enforcement of the trade remedy laws” to help provide U.S. firms and workers the opportunity to “compete on a level playing field.”

CARBON AND ALLOY STEEL WIRE ROD FROM CHINA FINAL ANTIDUMPING DETERMINATION

On September 2, 2014, in a factual statement, which is posted on my September blog post, the Department of Commerce (Commerce) announced its affirmative preliminary determination in the antidumping duty (AD) investigation of imports of carbon and certain alloy steel wire rod from the People’s Republic of China (China).  Since the Chinese companies failed to respond to the Commerce Department’s questionnaire, they received a preliminary dumping margin of 110.25 percent with the separate rate steel companies receiving a preliminary dumping rate of 106.19 percent.

Because no Chinese companies participated in the initial investigation, on November 13, 2014, in the attached fact sheet, factsheet-prc-carbon-certain-alloy-steel-wire-rod-ad-cvd-final-111314, Commerce announced its final determination finding dumping and Countervailable Subsidization of Imports of Carbon and Certain Alloy Steel Wire Rod from the People’s Republic of China. Commerce handed out 110.25 percent “adverse facts available” anti-dumping duty rates, countervailable subsidies ranging from 178.46 percent for Hebei Iron & Steel to 193.31 percent for Benxi Steel. All other Chinese producers not named were assessed a CVD rate of 185.89.

The agency found critical circumstances that warranted remedial, retroactive duties to be paid by US importers for imports of carbon steel wire rod three months prior to the Commerce Department’s preliminary determination from all Chinese companies in the CVD investigation and all but three Chinese exporters in the AD investigation.

ITC AFFIRMATIVE FINAL INJURY DETERMINATION MONOSODIUM GLUTAMATE FROM CHINA

On November 17, 2014, in the attached Federal Register notice, ITC MONOSODIUM Glutamate, the ITC determined that the US industry was materially injured by reason of imports of monosodium glutamate from China and Indonesia and antidumping and countervailing duty orders will be issued in that case.

COMMERCE DEPARTMENT AFFIRMATIVE PRELIMINARY ANTIDUMPING DETERMINATION—DOMESTIC DRY SEA CONTAINERS FROM CHINA

On November 20, 2014, in the attached fact sheet, factsheet-prc-53ft-domestic-dry-containers-ad-prelim-112014, Commerce announced its affirmative preliminary antidumping determination in the 53-foot domestic dry containers (domestic dry containers) from China case finding dumping margins ranging from 24.27% to 153.24%.

NOVEMBER ANTIDUMPING ADMINISTRATIVE. REVIEWS

On November 3, 2014, Commerce published in the Federal Register the attached notice, NOV REVIEWS, regarding antidumping and countervailing duty cases for which reviews can be requested in the month of October. The specific antidumping cases against China are: Certain Cut-to-Length Carbon Steel Plate, Certain Hot-Rolled Carbon Steel Flat Products, Certain Coated Paper Suitable for High-Quality Print Graphics Using Sheet-Fed Presses, Diamond Sawblades and Parts Thereof, Fresh Garlic, Lightweight Thermal Paper, Paper Clips, Polyethylene Terephthalate Film, Sheet and Strip, Pure Magnesium in Granular Form, Refined Brown Aluminum Oxide, Seamless Carbon and Alloy Steel Standard Line, and Pressure Pipe, Seamless Refined Copper Pipe and Tube.

The specific countervailing duty cases are:

Certain Coated Paper Suitable for High-Quality Print Graphics Using Sheet-Fed Presses, Lightweight Thermal Paper, Seamless Carbon and Alloy Steel Standard, Line, and Pressure Pipe.

For those US import companies that imported Carbon Steel Plate, Coated Paper, Diamond Sawblades, Garlic and the other products listed above from China during the antidumping period November 1, 2013-October 31, 2014 or during the countervailing duty review period of 2013 or if this is the First Review Investigation, for imports imported after the Commerce Department preliminary determinations in the initial investigation, the end of this month is a very important deadline. Requests have to be filed at the Commerce Department by the Chinese suppliers, the US importers and US industry by the end of this month to participate in the administrative review.

This is a very important month for US importers because administrative reviews determine how much US importers actually owe in Antidumping and Countervailing Duty cases. Generally, the US industry will request a review of all Chinese companies. If a Chinese company does not respond in the Commerce Department’s Administrative Review, its antidumping and countervailing duty rate could well go to the highest level and for certain imports the US importer will be retroactively liable for the difference plus interest.

In my experience, many US importers do not realize the significance of the administrative review investigations. They think the antidumping and countervailing duty case is over because the initial investigation is over. Many importers are blindsided because their Chinese supplier did not respond in the administrative review, and the US importers find themselves liable for millions of dollars in retroactive liability. Recently in the Shrimp from China antidumping case, for example, almost 100 Chinese exporters were denied a separate antidumping rate.

On October 30, 2014, in the attached notice, OCT REVEW INVESTIGATIONS, based on requests in September, Commerce initiated several review investigations against a substantial number of Chinese companies in the Lined Paper Products, Kitchen Appliance Shelving and Racks, Certain New Pneumatic Off-The-Road Tires, Freshwaters Crawfish Tailmeat, and Narrow Woven Ribbons with Woven Selvedge cases.

NEW ANTIDUMPING AND COUNTERVAILING DUTY CASE AGAINST MELAMINE FROM CHINA

On November 12, 2014, Cornerstone Chemical Company filed a new antidumping and countervailing duty petition against Melamine from China and Trinidad and Tobago.  The petition alleges antidumping rates of 263.76 to 374.14 on imports of Chinese melamine.

Melamine is “a fine, white crystalline powder that is used primarily to manufacture amino resins, the major end uses of which include surface coatings, laminates, molding compounds, paper treatment, adhesives, and textile-treatment applications in the automotive, appliance, dinnerware, furniture, fabric, and wood paneling industries.

Attached are  a short version of the petition along with an Extract which includes a list of the Chinese companies and US Import Companies that are the targets of this case,  Petition on Melamine from PRC & Trinidad and Tobago ExtractPage1. The targeted Chinese companies are listed below.

Allied Chemicals Inc. China, Anhui Garments Shoes & Caps Industrial Group Co. China, Anhui Jinhe Industrial Co., Ltd., Anhui Sunson Chemical Group Co., Ltd., ChemChina, China Haohua (Group) Corp., Chengdu Yulong Chemical Co., Ltd., CNPC Urumqi Petrochemical General Factory, CNSG Anhui Hong Sifang Co., Ltd., Dalian Rion Chen Intl. Trade Co. Ltd. China, Dezhou Defeng Chemical Co., Ltd., Far-Reaching Chemical Co., Ltd. China, Forwarder Chinese, Fujian Sangang (Group), Full Shine Group Co., Ltd. China, Future Foam Asia Inc. China, Hebei Jinglong Fengli Chemical Co., Ltd., Hefei Tianfeng Import & Export Co Ltd China, Henan Jinshan Chemical Group Co., Ltd., Henan Yuhua Fine Chemical Co., Ltd., Henan Zhongyuan Dahua Group Co., Ltd., Holitech Technology Co., Ltd. China, Hubei Huaqiang Chemical Group Co., Ltd., JianFeng Chemicals, Jiangsu Heyou Group Co., Ltd., Jiangsu Sanmu Group Corporation, Kaiwei Investment Group, Kingboard (Panyu Nansha) Petrochemical Co., Ltd., M And A Chemicals Corp China, Nanjing Deju Trading Co Ltd China, Nanjing Jinxing Petrochemical Enterprise, Nantong Zixin Industrial Co., Ltd., OCI Trading (Shanghai) Co., Ltd. China, Panjin Zhongrun Chemical Co., Ltd., Puyang San’an Chemical Co., Ltd., Qingdao Shida Chemical Co., Ltd. China, Shandong Jinmei Mingshui Chemical Co., Ltd., Shandong Liaherd Chemical Industry Co. Ltd., Shandong Luxi Chemical Co., Ltd., Shandong Sanhe Chemical Co., Ltd., Shandong Shuntian Chemical Group Co. China, Shandong Xintai Liaherd Chemical Co., Ltd., Shandong Yixing Melamine Co., Ltd., Shanxi Fenghe Melamine Co., Ltd., Shanxi Tianze Coal Chemical Group Co., Ltd., Sichuan Chemical Works Group Ltd., Sichuan Golden-Elephant Sincerity Chemical Co., Ltd., Sichuan Meifeng Group Co., Ltd., Sichuan Jade Elephant Melamine Scientific and Technological Co., Ltd., Sinopec Jinling Petrochemical Co., Ltd., Well Hope Enterprises Limited, Xinji Jiuyuan Chemical Co. Ltd. China, Zhejiang Fuyang Yongxing Chemical Co., Ltd., Zhejiang Medicines & Health Product Imp. & Exp. Co. Ltd. China, Zhongyuan Dahua Group Company Ltd China, Zhucheng Liangfeng Chemical Co., Ltd.

RUSSIA—US SANCTIONS AS A RESULT OF UKRAINE CRISIS

On September 3, 2014, I spoke in Vancouver Canada on the US Sanctions against Russia, which are substantial, at an event sponsored by Deloitte Tax Law and the Canadian, Eurasian and Russian Business Association (“CERBA”). Attached are a copy of the powerpoint for the speech and a description of our Russian/Ukrainian/Latvian Trade Practice for US importers and exporters. US SANCTIONS RUSSIA RUSSIAN TRADE PRACTICE

There is a great deal of confusion and uncertainty surrounding business with Russian companies. As sanctions continue to expand against Russia, any company interested in doing business with Russia must constantly check the regulations and hire legal counsel. Every single transaction with Russian entities is a potential target of the sanctions, and, therefore, any US company interested in doing business with Russia must be extremely vigilant. The US regulations mirror regulations in Canada and the EU, but there are differences.

There are two groups of US regulations. The most powerful regulations are administered by Treasury—Office of Foreign Assets Control (“OFAC”). A second group of regulations have been issued by the Commerce Department’s Bureau of Industry and Security (BIS) blocking exports of certain energy-sector technologies.

With regards to the sanctions administered by OFAC, US Presidential Executive Orders 13660, 13661, and 13662 define how U.S. Government will identify targets of sanctions (e.g., financial services, energy, metals and mining, engineering, and defense sectors and government agencies and officials). The specific OFAC regulations regarding Ukraine are set forth in 31 CFR 589 –”Blocking”/“Asset Freezing” sanctions prohibiting transactions with specific persons and entities. The regulations have been posted on my blog, but they do change as the sanctions evolve.

Pursuant to the OFAC regulations, U.S. persons are prohibited from conducting transactions, dealings, or business with Specially Designated Nationals and Blocked Persons (SDNs). A US person must also block the property or interest in property of SDNs that they hold or that is located in the United States. The blocked persons list can be found at http://sdnsearch.ofac.treas.gov/. See also: www.treasury.gov/resource-center/sanctions/programs/pages/ukraine.aspx . The list includes the Russian company, United Shipbuilding, and a number of Russian Banks, including Bank Rossiya, SMP Bank, Bank of Moscow, Gazprombank OAO, Russian Agricultural Bank, VEB, and VTB Bank.

On July 29, 2014, OFAC issued a new “Sectoral Sanctions Identification List” (the “SSI List”) that identifies specific Russian persons and entities covered by these sectoral sanctions. See: www.treasury.gov/resource-center/sanctions/SDN-List/pages/ssi_list.aspx. U.S. persons are prohibited from engaging in certain transactions with persons and entities on the SSI List, but are not required to “freeze” or “block” property or interests in property of such persons and entities as if they were SDNs.

Thus companies or persons on the SSI list may become named SDNs in the future. SSI and SDN Lists are not static but evolving. Lists will likely expand and have expanded based on Russian behavior in Ukraine. Everything could change overnight. Do not rely on a dated list. Keep checking. www.treasury.gov/resource-center/sanctions/SDN-List/pages/ssi_list.aspx

On September 11, 2014, the US and the European Union announced new restrictions on Russian access to capital market. The new sanctions target Russian financial, energy and defense companies and make it more difficult to make loans to the five Russian state-owned banks, by tightening debt financing restrictions by reducing the maturity period of the new debt issued by those institutions from 90 days to 30 days. The companies targeted in the new round of OFAC sanctions include OAO Gazprom, Roseneft, Lukoil OAO, pipeline operator, Transneft, and Rostec, a Russian institution dealing in industrial technology products, along with the nation’s largest financial institution, Sberbank of Russia.

OFAC also added another set of Commerce export restrictions on certain oil development technologies by broadening the scope of the items that are banned and adding Gazprom, Lukoil and three other energy firms to the list of specifically banned export destinations.

On November 11, 2014, the White House indicated that the latest fighting between the Ukraine, which has been triggered by Russian aid to the separatists, is likely to trigger another round of sanctions. Deputy National Security Adviser Ben Rhodes stated, “What Russia will find is, if they continue to do that, it’s a recipe for isolation from a broad swath of the international community.”

Putin’s isolation was indicated by his presence at the G20 talks in Australia, where he was given a very “frosty” reception, which, in part, led to a decision to leave the talks early.

CUSTOMS

We have observed many instances where Customs is cracking down on imports of Chinese solar panels with third country solar cells in them. Customs forces the company to provide extensive documentation to prove that the third country solar cells are actually in the Chines solar panels. Many importers are not able to comply and face antidumping rates as high as 250% on imports.

IP/PATENT AND 337 CASES

337 CASES

There have been developments at the US International Trade Commission (“ITC”) in 337 cases and patent area.

SUPREMA CASE—INDUCED PATENT INFRINGEMENT 337 CASES

On October 15th, the ITC filed the attached brief, ITC COMMISSION BRIEF, at the Court of Appeals for the Federal Circuit (“CAFC”) in the En Banc appeal in the Suprema Inc. V. US International Trade Commission case. In the prior panel decision, the CAFC held that the ITC could not use induced patent infringement to issue an exclusion order because at the time of the infringement, the imported products did not directly infringe the patents in question. The imported products infringed the patent only after arriving in the United States and being combined with other products in the United States. The ITC asked the entire CAFC to review the panel determination, and the CAFC agreed to an en banc proceeding before all the CAFC judges.

In the brief the ITC argues that the case will have “significant implications for patent holders that rely on inducement liability for protection of their inventions, especially those that hold claims to inventive methods and those that operate industries in the United States.”

The Commission went on to state in the brief:

“Appellants contend that when Congress prohibited the importation of “articles that—infringe” a patent under section 337, Congress meant to excuse the importation of articles intended to induce patent infringement. There is absolutely no support in the language of the statute or the legislative history of section 337 for Appellants’ construction. The importation of “articles that—infringe” via inducement under § 271(b) of the Patent Act is no less prohibited by section 337 than the importation of “articles that—infringe” directly under § 271(a).

The legislative history of the Tariff Act makes clear that it was intended to prevent “every type and form of unfair practice” in the importation of goods. . . . From the beginning, courts understood inducement of patent infringement to be an unfair practice within the scope of the Act. . . .

The only way the Court could adopt Appellants’ interpretation of section 337 would be to ignore the Patent Act, the language of section 337, the intent of Congress, and decades of established practice. This the Court should not do.

To prove the importation of “articles that—infringe” via inducement under section 337 requires proof of three essential elements: (1) importation of an article that is the means of infringement; (2) an intent that the imported article be used to infringe a patent, or willful blindness to infringement; and (3) an act of direct infringement involving the article. . . . The record on review contains substantial evidence of each element. . . .”

The US Government through the Justice Department filed the attched Amicus Brief, US GOVERNMENT SUPREMA BRIEF, which states in part:

Congress charged the International Trade Commission (“Commission” or “ITC”) with the responsibility to exclude from the United States “articles that . . . infringe a valid and enforceable United States patent.” 19 U.S.C. § 1337(a)(1)(B)(i). The Commission reasonably interprets that statutory command to prohibit the importation not merely of fully assembled patented inventions, but of all articles for which infringement liability may be imposed under the Patent Act. No one disputes that, in an ordinary civil action for infringement in district court, a person who imports articles in an intentional scheme to induce infringement of a patent within the United States “shall be liable as an infringer.” 35 U.S.C. § 271(b). The Commission sensibly construes Section 337 in pari materia with that undisputed interpretation of the Patent Act, treating the articles imported in such an infringing scheme as “articles that . . . infringe.”

The Commission acted well within its discretion in adopting that construction of the Tariff Act. The Commission has no choice but to exercise interpretative judgment in applying Section 337(a)(1)(B)(i). As appellants recognize . . ., nothing in the Tariff Act defines the phrase “articles that . . . infringe.” Nor do the patent laws speak in terms of infringing “articles.” Under the Patent Act, persons infringe, not things.  The article by itself cannot literally “infringe” under Section 271 any more than a tract of land can trespass. Thus, in enacting Section 337(a)(1)(B)(i), Congress necessarily expected and intended that the Commission would interpret “articles that . . . infringe” in a manner that appropriately translates the domestic in personam liability provisions of the Patent Act into the in rem framework of exclusion proceedings under the Tariff Act.

The Commission’s construction of Section 337 reasonably resolves that conceptual dilemma by construing the phrase “articles that . . . infringe” to encompass any article whose importation would support infringement liability under the Patent Act, including articles imported for the purpose of inducing patent infringement. That interpretation is consistent with the plain language of both Section 337 and Section 271(b) and with the underlying policies and purposes of the trade laws.

And it has the significant benefit of preventing importers from evading the prohibitions of the Tariff Act through “the most common and least sophisticated form of circumvention, importation of the article in a disassembled state.”

There is little doubt, moreover, that the Commission’s interpretation best effectuates Congress’s intent in 1988 when it enacted Section 337(a)(1)(B)(i). . . . In an uncodified portion of the 1988 legislation, Congress expressly found that Section 337 “has not provided United States owners of intellectual property rights with adequate protection against foreign companies violating such rights,” and declared that the purpose of the 1988 legislation was “to make [Section 337] a more effective remedy for the protection of United States intellectual property rights.”. . . .

That statutory declaration of purpose is impossible to reconcile with the panel’s view that Congress intended to render the Commission “powerless to remedy acts of induced infringement.” . . . By the time of the 1988 amendments, the Commission had for many years construed Section 337 to prohibit, as an unfair trade practice, the active inducement of patent infringement in the United States. It is difficult to imagine why a Congress seeking to enhance the protection of intellectual property rights in Commission proceedings would simultaneously have acted to strip the Commission of its power to redress such infringement.

And it is even more doubtful that Congress would have done so silently and obliquely, without any explanation or even acknowledgment in the legislative history. Congress does not, as the Supreme Court has observed, “hide elephants in mouseholes.” . . . .

In sum, the Commission construes Section 337 to provide remedies against the same forms of infringement at the border that district courts are empowered to redress through in personam infringement actions within the United States. Because that interpretation is reasonable and consistent with “the language, policies and legislative history” of the Tariff Act, it is entitled to deference. . . .

In addition, the atthached briefs were filed by ITC Trial Lawyers Association and Nokia in support of the ITC, ITC TLA Suprema BRIEF Nokia Suprema BRIEF.

SECTION 337 COMPLAINTS

NEW 337 COMPLAINT AGAINST FOOTWARE PRODUCTS FROM CHINA

On October 14th, Converse Inc. filed a new 337 IP case against footwear products/sneakers from China for infringement of Converse’s registered and common law trademarks. Relevant parts of the petition are posted on my October blog post along with the ITC notice. The respondent companies are set forth below:

Description: Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain Footwear Products . The proposed respondents are: Skechers U.S.A., Inc., Manhattan Beach, CA; Wal-Mart Stores, Inc., Bentonville, AR; A-List, Inc., d/b/a Kitson, Los Angeles, CA; Aldo Group, Canada; Brian Lichtenberg, LLC, Los Angeles, CA; Cmerit USA, Inc., d/b/a Gotta Flurt, Chino, CA; Dioniso SRL, Italy; Edamame Kids, Inc., Canada; Esquire Footwear, LLC, New York, NY; FILA U.S.A., Inc., Sparks, MD; Fortune Dynamic, Inc., City of Industry, CA; Gina Group, LLC, New York, NY; H & M Hennes & Mauritz LP, New York, NY; Highline United LLC d/b/a Ash Footwear USA, New York, NY; Hitch Enterprises Pty Ltd d/b/a Skeanie Unit 3, Australia; Iconix Brand Group, Inc., d/b/a Ed Hardy, New York, NY; Kmart Corporation, Hoffman Estates, IL; Mamiye Imports LLC d/b/a Lilly of New York, Brooklyn, NY; Nowhere Co., Ltd. d/b/a Bape, Japan; OPPO Original Corp., City of Industry, CA; Orange Clubwear, Inc., d/b/a Demonia Deviant, Westminster, CA; Ositos Shoes, Inc., d/b/a Collection’O, South El Monte,CA; PW Shoes Inc., Maspeth, NY; Ralph Lauren Corporation, New York, NY; Shenzhen Foreversun Industrial Co., Ltd (a/k/a Shenzhen Foreversun Shoes Co., Ltd), China; Shoe Shox., Seattle, Washington; Tory Burch LLC, New York, NY; Zulily, Inc., Seattle, Washington; Fujian Xinya I & E Trading Co., Ltd., China; Zhejiang Ouhai International Trade Co., Ltd., China; and Wenzhou Cereals Oils & Foodstuffs Foreign Trade Co., Ltd., China.

On November 12, 2014, the ITC in the attached notice instituted the 337 case against Footwear from China, ITC INSTITUTION CONVERSE CASE. Chinese companies must respond to the complaint in about 30 days. If the Chinese companies fail to respond, they can be found in default and exclusion orders against their products can be issued.

On the same day that Converse filed the section 337 case, it also filed a trademark complaint for damages in the Federal District Court in Brooklyn, which is attached to my October blog post.

NEW 337 CASE AGAINST SEMICONDUCTOR CHIPS FROM TAIWAN AND HONG KONG

On November 21, 2014, Samsung Electronics Co., Ltd. and Samsung Austin Semiconductor,LLC filed a section 337 case against Graphics Processing Chips, Systems on a Chip. The respondent companies are listed below:

NVIDIA Corporation, Santa Clara, California; Biostar Microtech International Corp.. Taiwan; Biostar Microtech (U.S.A.) Corp., City of Industry, California; Elitegroup Computer Systems Co. Ltd., Taiwan; Elitegroup Computer Systems, Inc., Newark, California; EVGA Corp., Brea, California; Fuhu, Inc., El Segundo, California; Jaton Corp., Fremont, California; Mad Catz, Inc., San Diego, California; OUYA, Inc., Santa Monica, California; Sparkle Computer Co., Ltd., Taiwan; Toradex, Inc., Seattle, Washington; Wikipad, Inc., Westlake Village, California; ZOTAC International (MCO) Ltd., Hong Kong; ZOTAC USA, Inc., Chino, California.

PATENT AND IP CASES IN GENERAL

INTERDIGITAL WINS JURY CASE AGAINST ZTE

On October 28, 2014, in the attached jury form, ZTE Verdict, a Delaware federal jury determined that smartphones made by Chinese company, ZTE, infringed three patents of InterDigital Communications. The Jurors also determined that ZTE failed to prove the patents obvious. This jury verdict came after a series of setbacks for InterDigital, which lost a series of cases, including a 337 case at the ITC.

InterDigital creates revenue by licensing thousands of patents it develops to various high tech companies and filing cases against companies, such as ZTE and Nokia, that refuse to pay licensing fees.

MADE IN THE USA—FTC AND CALIFORNIA FALSE ADVERTISING PROBLEM

Recently cases involving the Made in US requirement have increased because of stricter requirements by the State of California. FTC guidelines state that an unqualified “Made in USA” label can go on any goods that are “all or virtually all” made domestically in the United States, but the words “virtually all” are open to interpretation based on the specific facts of the case.

But California has stricter guidelines than the FTC requiring the entire product to be made in the US. If even one small part of a product is foreign, California state law says calling the product “Made in the USA” amounts to false advertising. This law has provoked a number of consumer/class action lawsuits filed in California against US manufacturers and retailers.

The California law was passed in 1961 to shield domestic producers from competitors who might get a pricing edge by using large amounts of cheap imported parts to manufacture goods labeled “Made in USA.” The problem is that it has become increasingly difficult to avoid using at least some imported content in a US product.

COURT REFUSES TO DISMISS JEANS CASE AGAINST NORDTROM AND MADE IN USA JEANS

On October 27th, in the attached David Paz v. AG Adriano Goldschmeid Inc. et al, JEANS COURT ORDER, a California Federal Judge refused to dismiss a case for falsely marketing jeans as Made in USA, which they actually contain foreign parts. The Judge stated:

“Although the laws set out different standards for the use of “Made in U.S.A.” labels, it would not be impossible for Defendants to comply with both laws. Outside California, Defendants could use the “Made in U.S.A.” labels, but inside California, they could not. This may be burdensome for Defendants, but it is not impossible for them to do so.” . . .

LAND’S END

On October 29th in the Elaine Oxina v. Lands’ End Inc. case, Elaine Oxina  filed a new Made in USA class action case against clothing retailer Lands’ End Inc. accusing the company of labeling foreign-made apparel as produced in the U.S., a tactic that a California consumer alleges has allowed the business to sell items at a higher price. The complaint alleges:

“Consumers generally believe that ‘Made in USA’ products are of higher quality than their foreign-manufactured counterparts. Due to Defendants’ scheme to defraud the market, members of the general public were fraudulently induced to purchase Defendant’s products at inflated prices.”

The complaint says that Oxina purchased a necktie from Lands’ End’s online store under the assumption that the product was produced domestically. The necktie “was described using the ‘Made in U.S.A.’ country of origin designation, when the product actually was made and/or contained component parts made outside of the United States.”

The complaint also states that an inspection of a fabric tag attached to the necktie revealed that the item “is wholly made” in China. The complaint asserts claims against Lands’ End for false advertising and violations of California’s business code, adding that the alleged damages are in excess of $5 million.

Many retailers are now facing class actions over California’s tough “Made in the USA” labeling law. Retailers are allegedly selling apparel marketed as being American-made, but including foreign-made fabrics, zippers, buttons, rivets and other components.

The lawsuits also illustrate why California differs from the Federal Trade Commission, which also oversees product labeling but has a more relaxed position that is followed by other states. Unlike California, which says every component must be domestic, the FTC allows for some flexibility, saying a “Made in the USA” label can be used if “all or virtually all” of a specific product is made domestically. Getting every component of a piece of clothing from the U.S. has become increasingly difficult as business supply chains have become global.

NEW PATENT AND TRADEMARK CASES AGAINST CHINESE AND TAIWAN COMPANIES

On October 22, 2014, in the attached complaint, CHINA COY SUES US COY PATENT INFRINGE, a Chinese company sued Dongguan Prestige Sporting Products Co., Ltd. V. Merits Co. Ltd., a Chinese company, and Merits Health Product Inc., a Florida corporation, for patent infringement of a folding seat rack.

On October 30, 2014, in the attached compliant, CHINA TRADEMARK CASE, Samsung Techwin America, Inc. filed a grey market trademark case against Xtreme Micro LLC and Zhangzhou Peiyu Jinhe Trading Co., Ltd.

On November 5, 2014, Robert Bosch filed the attached patent case, NINGBO WINDSHIELD WIPER CASE, for wiper blades against Ningbo Xinhai Aiduo Automobile Wiper Blade Manufactory Co., Ltd.

On November 7, 2014, Aztrazeneca Pharmaceuticals LP and Astrazeneca UK Ltd. filed the attached pharmaceutical patent case, TAIWAN PHARMA COMPLAINT, against a Taiwan company, Pharmadax USA, Inc., Pharmadax Inc., and Pharmadax Guangzhou Inc.

On November 10, 2013 Dura-Lite Heat Transfer Products Ltd., a Canadian corp., Glacier Radiator Manufacturing Ltd., and Philip Lesage filed the attached patent case, ZHEJIANG MACHINERY, against Zhejiang Yinlun Machinery Co., Ltd. and Yinlun USA, Inc.

On November 14, 2014, the attached complaint, CHANGZHOU KAIDI, was filed by Linak A/S and Linak U.S., Inc. v. Changzhou Kaidi Electrical Co. and Kaidi LLC for patent infringement of innovative electric linear actuator systems for use in many product sectors, including hospital and healthcare equipment.

On November 17, 2014, Tenax SPA filed the attached trademark case, WUHAN TRADEMARK against Wuhan Keda Marble Protective Materials Co., Ltd. for imports of adhesive resins.

PRODUCTS LIABILITY

On October 17, 2014, Joan Kazkevicius filed the attached products liability case, CHINA PRESSURE COOKER CASE, regarding pressure cookers against HSN, Inc., HSNI LLC, W.P. Appliances, Inc., Wolfgang Puck Worldwide, Inc., W.P. Productions, Inc., Zhanjiang Hallsmart Electrical Appliances Co., Ltd., and Guangdong Chuang Sheng Stainless Steel Products Co., Ltd.

FOOD AND FDA RESTRICTIONS

US LIFTS RESTRICTIONS ON CHICKEN AND CITRUS IMPORTS

Despite objections from public consumer groups, on November 5th, the U.S. Department of Agriculture’s Food Safety and Inspection Service stated that it had certified four Chinese poultry product producers to export processed chicken products to the U.S. The USDA accepted the certification of the facilities to export chicken products as long as they are heat-treated or cooked and made from birds originally slaughtered in the U.S. or another approved country such as Canada. The facilities still must be certified for this purpose by Chinese authorities.

The irony is that the Chinese government continues to block US chicken using its antidumping law.

Despite objections from US citrus growers, the U.S. Department of Agriculture (USDA) has proposed to open the continental United States to imports of citrus fruits from China. US citrus companies argue that the Chinese imports could introduce devastating pests to U.S. orchards and invite heavy economic competition from subsidized Chinese farmers.

SEAFOOD

On November 12th, the FDA announced that it may decrease port-of-entry inspections of farm-raised seafood from China and increasingly entrust Chinese authorities with verifying that the country’s aquaculture exports are free of illegal animal drug residues.

CHINESE RESTRICTIONS ON US FOOD PRODUCTS

On Aug. 22, 2014, Agriculture Secretary Tom Vilsack announced that California citrus farmers will be able to resume exports to China this season. A series of scientific exchanges between the USDA’s Animal and Plant Health Inspection Service (APHIS) and China’s General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) resulted in an agreement for California citrus to again be exported to China. APHIS and USDA’s Foreign Agricultural Service worked closely with the U.S. citrus industry to ensure the successful outcome.

In April 2013, California-origin citrus was suspended from entering the Chinese market due to interceptions of brown rot (Phytophthora syringae), a soil fungus that affects stored fruit. Over the next year, USDA worked with China to address China’s plant health concerns and reopen the market for California citrus exports.

In a statement following the USDA announcement, Western Growers Association Executive Vice President Matt McInerney said China was the third-largest market for California citrus exports before the ban. The USDA release said California citrus exports have a total annual value of $30 million.

On September 15th, it was announced that USDA and USTR officials were in Beijing to discuss the implementation of the Trade Facilitation Agreement (TFA) and in particular a meeting of the sanitary and phytosanitary (SPS) working group of the U.S.-China Joint Commission on Commerce Trade (JCCT), where the agenda will likely touch upon issues like China’s ban on U.S. beef and its regulatory process for approving biotechnology traits. China closed its beef market to U.S. exports due to a 2003 outbreak of bovine spongiform encelopathy (BSE) – or “mad cow” disease — and has since set a number of preconditions for opening it, including a U.S. livestock traceability system.

CHINA LIFTS RESTRICTIONS ON WASHINGTON APPLES

On October 31, 2014, in the attached statement from Washington State, CHINA LIFTS WASHINGTON APPLE SUSPENSION, Agriculture Secretary Tom Vilsack announced that China is lifting its suspension of red and golden delicious apple imports from Washington State. The Chinese market for Washington apples was valued at $6.5 million in calendar year 2011.

In 2012, China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) suspended access for Washington red and golden delicious apples due to the repeated interception of three apple pests AQSIQ considers significant: speck rot, bull’s-eye rot, and Sphaeropsis rot. To lift this suspension, USDA’s Animal and Plant Health Inspection Service (APHIS) worked with the U.S. apple industry to develop additional safeguarding measures that address China’s concerns about these pests. Some of these new measures include cold storage of apples and visual inspection of apples prior to shipping to ensure there is no evidence of disease.

CHINESE INVESTMENT AND PRODUCTION IN UNITED STATES

See the very powerful video about Chinese investment in the US creating 70 to 80,000 US Production Jobs. The investment is in the billions and includes textiles.

http://money.cnn.com/video/news/economy/2014/10/23/we-the-economy-made-by-china-in-america.cnnmoney/index.html?iid=HP_River

ANTITRUST—SOLAR AND MAGNESITE

There have been major developments in the antitrust area both in the United States and in China.

SOLAR ANTITRUST CASE DISMISSED

On November 3, 2014, a Federal Judge in Michigan, in the attached opinion, ACTUAL ORDER DISMISS CHINESE SOLAR ANTITRUST CASE, dismissed a $950 million antitrust lawsuit accusing several Chinese solar panel producers of participating in a price-fixing scheme by finding that the US company have failed to establish standing. The US Judge ruled that the Chinese companies did not have the power to set up barriers to entry into the solar panels market and therefore could not eventually charge supracompetitive prices to recoup losses from selling solar panels at below cost in order to gain market share. As the Judge stated: “The court finds that plaintiff has failed to allege a dangerous probability of recoupment and, therefore, has failed [to] allege antitrust standing.”

On November 17th, in the attached complaint, RECONSIDERATION SOLAR CHINA PRICE FIX, Energy Conversion Devices Inc. urged a Michigan federal judge on Friday to reconsider his decision. ECD accused the Chinese companies of orchestrating a complex price-fixing scheme to sell inferior solar panels in the U.S. at artificially low prices by dumping their products in the US and thereby achieve market domination. The Judge’s original dismissal opinion had found that below-cost pricing alone is not enough to prove antitrust injury.

NEW MAGNESIUM ANTITRUST COMPLAINT

In response to the Court order dismissing the Magnesium Antitrust case, with options to amend the complaint, which is attached to my last blog post, on November 3, 2014, Animal Science Products, Inc., Resco Products, Inc., and S&S Refractories filed the attached new antitrust complaint, NEW MAGNESIUM COMPLAINT. The complaint, which will be attached to my blog, is against Chinese magnesium companies, Xiyang Fireproof Material, Co., Ltd., Sinosteel Corp., Sinosteel Trading Co., Liaoning Jiayimetals & Minerals Co., Ltd., Liaoning Foreign Trade General Corp., Liaoning Jinding Mangnesite Group., Dalian Golden Sun Import & Export Corp., Haicheng Houying Corp., Ltd., and Haicheng Huayu Group Import & Export Co., Ltd, Haicheng Pailou Magnesite Ore Co., Ltd. and Yingkou Huachen (Group) Co., Ltd.

AUTO NEWS — CONFESSIONS OF A PRICE FIXER

On November 16, 2014 Auto News published an interesting article “Confessions of a Price Fixer”. See http://www.autonews.com/article/20141116/OEM10/311179961/confessions-of-a-price-fixer

The article described how a Japanese executive used to the comfortable expat life, was one of dozens of white collar criminals arrested and jailed for what has become the largest price fixing antitrust case brought by the US Justice Department. The article goes on to state that the Japanese executive’s guilty plea and prison time came with a special offer from the Japanese company for which he fixed the prices. You get to keep your job after you leave prison and the company “will support me for the rest of my life.”

Today, the Japanese executive has spent his time in prison, but is now back at work at the company. But that situation is not unusual, the unwritten rule in Japanese culture is that the Japanese executive gets rewarded for not spilling the beans and cooperating with the Government’s investigation.

In America, the case has already made history with record fines more than $2.4 billion. 31 auto parts suppliers, mostly Japanese, have pled guilty to prices for parts from wire harnesses to wiper switches. Forty-six individuals, almost exclusively Japanese, have been charged. No one has challenged the charges in court; 26 individuals agreed to prison instead. Another 20 have yet to enter pleas or are otherwise ignoring their indictments.

But most the executives are still employed by their companies, even though the executives were indicted by the U.S. government on felony charges, which carry a maximum penalty of 10 years in prison and a $1 million criminal fine for individuals.

The corporate leniency has become a major international issue as U.S. Assistant Attorney General William Baer warned that his antitrust division would consider probation and corporate monitors for companies harboring sensitively placed executives who have not answered the charges against them.  As one Justice Department official stated, “A U.S. company would never keep employing those individuals. In the United States, the first thing they would want to do is fire everybody. But that’s not the instinct at Japanese companies.”

The Japanese company did play tough pressuring the Japanese executive to plead guilty because a company can expect lower fines if it cooperates promptly.

In exchange, the company would take care of his family while he was in jail and find a position for him after he was freed.

Price fixing in Japan is an administrative crime and there is no real enforcement in the criminal area, but Japanese companies and executives have become very afraid. Now the Japanese companies are facing private triple damage actions brought by angry consumers.

CHINA ANTI-MONOPOLY CASES

Although this issue was raised by President Obama at the meetings with the Chinese government officials in Beijing, nothing of substance was reported

T&D MICROSOFT ARTICLE

In the October 2014 report on Chinese antitrust law by the Chinese T&D Law Firm, T&D Monthly Antitrust Report of September 2014, Chinese antitrust lawyer John Ren had this to say about the allegation that the Chinese Anti-Monopoly law discriminates against foreign companies:

NDRC Responded to the Query about Unfair Anti-Monopoly Practices: All People Are Equal before Law

October 30, 2014

The Anti-Monopoly Law has been effective since 2008 and was reinforced with respect to law enforcement in 2013, and then several significant anti-monopoly actions caused great sensations this year. Throughout this period, all circles have increasingly focused on ruling markets by law, breaking down monopoly privilege, and ensuring fair competition among market players. In the meantime, law enforcement with regard to anti-monopoly has drawn great attention.

Recently, several foreign-funded enterprises and foreign brands have been under investigation, and some wonder “whether China’s anti-monopoly undertaking only focuses on foreign-funded companies and is thus unfair”. Concerning this situation, Li Pumin, Secretary General of NDRC (National Development and Reform Commission), stressed in today’s “NDRC with regard to Acceleration of Building Rule of Law Authorities” press conference that all people are equal before the law, and anyone violating Chinese law shall be punished, whether they are foreign-funded or domestic companies.

He pointed out that China’s anti-monopoly law enforcement was not just targeting foreign-funded enterprises; NDRC, in line with the Anti-Monopoly Law, enforced the law with regard to those enterprises and actions restraining fair competition, which involved not only domestic enterprises but also foreign-funded enterprises.

”The Anti-Monopoly system has been rigorously designed. A vast number of large enterprises are involved, various market players are concerned about the system, and NDRC has been promoting the system, as well. In the past few years, NDRC kept summing up and exploring, and has enacted regulations on anti-price monopolies and procedure of administrative execution regarding anti-price monopoly” said Li Kang, the Chief in Laws and Regulations Department of NDRC, in regard to the work that NDRC has done in improving anti-monopoly law enforcement.

Li Kang pointed out that anti-monopoly law enforcement shall be quantified, standardized, and elaborated upon, aiming at ensuring fair, just and open anti-price monopoly enforcement. He stated further that NDRC will expand the anti-monopoly law in both substantive and procedural aspects to raise its enforceability, and in the meantime will confine and normalize NDRC’s law enforcement activities. . . .

SECURITIES

CHINESE COMPANY PUDA COAL DEFAULTS IN SECURITIES CASE

On November 18, 2014, in In re: Puda Coal Inc., a Federal District Court entered the attached default judgment, DEFAULT JUDGMENT PUDA COAL. against Chinese company Puda Coal Securities Inc., which had been sued by an investor class, for selling its sole asset to a private equity firm without telling investors for months and lying about in its IPO plans.

FOREIGN CORRUPT PRACTICES ACT (“FCPA”)

DORSEY ANTICORRUPTION DIGEST 0CTOBER 2014

The attached Dorsey’s October 2014 Anticorruption Digest, Anti_Corruption_Digest_Oct2014, had this to say about China:

“National Development and Reform Commission

According to reports, Liu Tienan, former deputy of the National Development and Reform Commission, confessed in court to taking bribes from various companies, including a Toyota Motor Corporation joint venture. The court said that: “The oral representation made by the defendants Liu Tienan on the allegations is: I have taken the initiative to confess to these facts of the allegations.”

He and his son, Liu Decheng, were reportedly charged with taking $5.8 million in bribes. Reports indicated that Mr. Decheng collected most of the bribe money. The allegations indicate that between 2002 and 2011, Mr. Tienan took bribes to facilitate project approvals and filings for a number of companies such as Nanshan Group, Ningbo Zhongjin Petrochemical Co Ltd, Guangzhou Automobile Group, Guangzhou Toyota Motor Co Ltd and Zhejiang Hengyi Group. Mr. Tienan also reportedly aided in the approval procedures for several projects from Guangzhou Automobile Group, which in return hired his son as a special Beijing representative for one of the Group’s subsidiaries.

Mr. Tienan could face life imprisonment. However, reports indicated that he is more likely to receive a lesser sentence as a result of his confession.

Reports indicate that Mr. Tienan was fired from the National Development and Reform Commission after Caijing magazine’s deputy editor Luo Changping accused him of corruption, loan fraud and counterfeiting his degree.

Pharmaceutical sector

Last month, GSK was fined $489 million in China for corruption there. Further to the Changsha Intermediate People’s Court in Hunan province’s verdict, GSK’s Chief Executive, Sir Andrew Witty, reportedly said that: “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this. GSK has been in China for close to a hundred years and we remain fully committed to the country and its people. GSK fully accepts the fact and evidence of the investigation, and the verdict of the Chinese judicial authorities. Furthermore, GSK sincerely apologizes to the Chinese patients, doctors and hospitals and to the Chinese government and the Chinese people. GSK deeply regrets the damage caused.”

In the wake of the Chinese case, other major drugmakers have also been under increased review. It has been reported that Sanofi, the French drugmaker, informed US authorities that it was investigating allegations of employees paying bribes to healthcare professionals in the Middle East and East Africa to persuade them to prescribe its drugs.”

APEC RESOLUTION

At the end of the APEC meeting in Beijing, the APEC members issued the following resolutions about foreign corrupt practices:

“Anti-Corruption

  1. We resolve to strengthen pragmatic anti-corruption cooperation, especially in key areas such as denying safe haven, extraditing or repatriating corrupt officials, enhancing asset recovery efforts, and protecting market order and integrity.
  1. We endorse the Beijing Declaration on Fighting Corruption (Annex H), the APEC Principles on the Prevention of Bribery and Enforcement of Anti-bribery Laws, and the APEC General Elements of Effective Corporate Compliance Programs.
  1. We welcome the establishment of the APEC Network of Anti-Corruption and Law Enforcement Agencies (ACT-NET) with the finalization of its Terms of Reference. We expect to deepen international cooperation, information and intelligence exchange and experience sharing among anticorruption and law enforcement practitioners from APEC member economies through the ACT-NET and other platforms.
  1. We appreciate the efforts of the Anti-Corruption and Transparency Working Group in collaborating with other APEC fora to improve transparency in this region.”

JUSTICE DEPARTMENT SPEECH ON FCPA

On November 19, 2014 Assistant Attorney General Leslie R. Caldwell in the attached speech, DOJ FCPA STATEMENT, spoke about the Foreign Corrupt Practices Act:

“At the Criminal Division, we are stepping up our efforts in the battle against corruption, at home and abroad. . . .

More relevant to this audience, we are also deeply committed to fighting corruption abroad. Now, more than ever, we are bringing to justice individuals and corporations who use foreign bribery as a way to gain a business advantage. In part, we are doing this using the tools and methods that have made our past enforcement efforts so successful – FCPA prosecutions and penalties. . . .

And now we also are prosecuting the bribe takers, using our money laundering and other laws. And, importantly, we have begun stripping corrupt officials of the proceeds of their corruption involving both bribes and kleptocracy, using both criminal and civil authorities. . . .

We also attack corruption at its source – by prosecuting and seizing the assets of the corrupt officials who betray the trust of their people.

Another big change – one that has been building for years but now has really developed momentum – is that we increasingly find ourselves shoulder-to-shoulder with law enforcement and regulatory authorities in other countries. Every day, more countries join in the battle against transnational bribery. And this includes not just our long-time partners, but countries in all corners of the globe.

Together with our foreign law enforcement and regulatory partners we are taking a truly global approach to rooting out international corruption. And make no mistake, this international approach has dramatically advanced our efforts to uncover, punish and deter foreign corruption. . . .

Since 2009, we have convicted more than 50 individuals in FCPA and FCPA-related cases, and resolved criminal cases against more than 50 companies with penalties and forfeiture of approximately $3 billion. Twenty-five of the cases involving individuals have come since 2013 alone. And those are just the cases that are now public. . . .

Fighting corruption is not a choice we have made. It is, increasingly, a global imperative. Given the critical nature of this mission, we are bringing more resources to bear than ever before – and we will continue doing so. We have achieved significant successes using our traditional FCPA enforcement tools. We are building on those successes and continuing to evolve our enforcement efforts. Especially with the power of so many countries now standing by our side, we are determined to use every lawful means available to hold the perpetrators of corruption to account. . . .”

SECURITIES COMPLAINTS

In the attached complaint on October 28, 2014, Dragon State International Inc. filed a class action securities case against Keyuan Petrochemicals, Inc., Chenfeng Tao, and Aichun Li.  KEYUAN PETROCHEMICAL

In the attached complaint, PINGYUAN FISHING, on November 24, 2014, Tyler Warriner fled  a class action securities case against Pingtan Marine Enterprise Ltd., Xinrong Zhou, Roy Yu, Jin Shi, and Xuesong Song.

If you have any questions about these cases or about the US trade, trade adjustment assistance, customs, 337, patent, US/China antitrust or securities law in general, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–TRADE, PATENTS, SECURITIES, ANTITRUST

Jackson Statue Lafayette Park Monument White House After Snow WaDear Friends,

Over the last week, there have been major developments in the Trade, Patents, Securities and Antitrust areas.  The beat of the US China Trade War goes on.

 

TRADE

SOLAR CELLS

Commerce has referred a number of Chinese exporters and US importers to Customs for evasion of the Antidumping and Countervailing Duty Orders through the Third Country Solar Cells issue.  See attached document.  PUBLIC VERSION Solar Cells Referral to CBP  In fact, we are working with one importer now because Customs is requiring the importer to prove that all the solar cells in the Chinese panels and modules are foreign solar cells and have not been commingled with Chinese solar cells.

STEEL SINKS

Unfortunately, the ITC reached an affirmative injury determination in the Steel Sinks case, ignoring the “but for” standard, the higher causation standard set in the Wood Flooring appeal.  The major reason for the loss in this case, however, was the failure of US importers and Chinese producers/exporters to participate in the case.  They gave up too soon.  Attached are the antidumping and countervailing duty orders that were issued in the case.  SINKS AD ORDER FED REG   SINKS CVD ORDER FED REG

COMMERCE DEPARTMENT RULE CHANGE

Attached is a revision to the Commerce Department’s antidumping and countervailing duty regulations regarding the submission of factual information, including surrogate value information, on the record at the Commerce Department, which was published April 10, 2013 in the Federal Register.  COMMERCE RULES CHANGE ON SURROGATE VALUES  The most important change apparently is the decision of the Commerce to eliminate the opportunity to submit surrogate values after the preliminary determination.

This is a real blow to US importers and Chinese producers/exporters because often the Chinese respondents have no idea what critical value Commerce will use until they see the Commerce Department’s preliminary determination.  If, for example, Commerce uses an aberrational surrogate value for a specific raw material input in the preliminary determination, the US importer or the Chinese company had the opportunity to get a more reasonable value and put it on the record.  No longer.

By the way, Commerce’s argument that Petitioners or respondents could not comment on the submission of the surrogate values after the preliminary determination is bogus.  Generally, Commerce takes another 6 months after the preliminary determination to issue its final determination and during that period both Petitioners and Respondents submit case and rebuttal briefs and attend a hearing at Commerce.

Now the chance to counter an aberrational surrogate value has been eliminated making it even more difficult for US importers and Chinese producers/exporters to get a fair determination at the Commerce Department.

CUSTOMS FRAUD

HONEYGATE– HONEY TRANSSHIPMENT

Attached is an article about the Customs fraud investigations in the transshipment of Chinese honey around US antidumping orders.  Honeygatel  The author is Michael Coursey, at the Kelley, Drye law firm.  Mike and I used to work at the Commerce Department together. Mike represents the US producers in the Honey, Mushrooms and Garlic from China antidumping cases so understand that he is looking at antidumping cases from a domestic producer’s point of view.

The point of the article, however, is that US producers are pushing for Customs investigations against transshipment around antidumping orders, and Customs is taking these investigations very seriously. As Mike states in the attached article as just one example of the Customs investigations listed in the Article:

“ICE’s undercover investigation also led to it to uncover another major player in Honeygate: Jun Yang, a wealthy Chinese businessman and purported pillar of the Houston, Texas community who served on advisory boards to the Mayor of Houston and hobnobbed with the rich and famous. Yang is believed to be involved in efforts to avoid dumping duties through the “new shipper” administrative review process at the Commerce Department. Specifically, Yang made millions as owner of honey and seafood importer National Commodity Corp. by brokering sales to Honey Solutions and others of honey that was adulterated or mislabeled as being from India and Malaysia when it really came from China. Yang has agreed to the prosecutors’ recommendation for a 74-month prison sentence, imposition of a $250,000 fine and restitution of $2.64 million. The judge has not yet ruled on the plea agreement. . . .”

“In addition to Honeygate, there is an increasing trend of the U.S. Department of Justice (DOJ) and private citizens fighting customs fraud under the False Claims Act, which allows private citizens to sue on behalf of the United States and share in any recovery if they provide the government with the necessary information and evidence. The first phase of Honeygate marked the DOJ’s first use of Sarbanes-Oxley’s criminal obstruction of justice statute, which includes a 20-year incarceration penalty per offense, in the Alfred L. Wolff prosecutions.

This trend has continued in other customs fraud prosecutions of importers that falsify entry documents and cover-up such fraud in order to avoid paying millions in customs duties.  Much of this area is still evolving, with at least four U.S. federal circuit courts currently split as to whether certain customs fraud and smuggling laws are just civil or also criminal in nature.”

In talking to Mike, he also told me that he is behind the effort to go after the US insurance companies that posted new shipper bonds for Chinese producers/exporters.  Mike estimated that the liability for one US insurance company is close to $200 million.

Attached is also another article about the Honeygate Customs fraud cases.  CANADIAN FOOD WHOLESALER HONEY GATE

PATENTS

HAIER

Attached is a patent complaint that was filed on April 8, 2013 by Guardian Media Technologies against Haier, Desay, Lasonic, Digway, Veehom, Denca and Express Way Ltd. for infringement of certain patents for TVs and DVD players.  HAIER CASE

HUAWEI

Another patent complaint was filed on April 11, 2013 against Huawei by Media Digital.  HUAWEI PATENT MEDIA DIGITAL

337 CASES

A new section 337 case was filed on April 3rd against China on Linear Actuators.  If anyone wants a copy of the complaint, please feel free to contact me.  The notice is below:

Pending Institution

Docket No: 2949

Document Type: 337 Complaint

Filed By: Gorman & Williams

Behalf Of: Okin America Inc. and Dewert Okin GmbH

Date Received: April 3, 2013

Commodity: Linear Actuators

Description: Letter to Lisa R. Barton, Acting Secretary, USITC; requesting

that the Commission conduct an investigation under section 337 of the

Tariff Act of 1930, as amended regarding Certain Linear Actuators. The

proposed respondents are Changzhou Kaidi Electrical Co. Ltd., China and

Kaidi LLC, Easton Rapids, MI.

SECURITIES

FARRIS ARTICLE—DELAWARE COURT DECISION ON ZST DIGITAL NETWORKS

On April 9, 2013, Ted Farris, an international capital markets partner in our New York office, authored an article about Deutsch v. ZST Digital Networks, Inc. (Del. Ch. C.P.A. No. 8014-VCL, March 28, 2013), in which the Delaware Chancery Court authorized seizure of a Chinese company’s assets and a court ordered shareholder buy-out in what should have been a simple books and records case. See attached order.  ZST ACTUAL ORDER  Ted Farris specializes in assisting Chinese companies, acquirers and special committees in considering an exit from U.S. regulatory and reporting requirements in going dark and going private transactions, including delistings from US stock exchanges.  As Ted states in the Article:

 

“Delaware Court Authorizes Seizure of Chinese Company’s Assets in Books and Records Case

China-based companies incorporated and publicly traded in the United States have received another harsh blow from the Delaware Court of Chancery, which appears to be losing patience with failure of Chinese companies to comply with Delaware corporate-law requirements. In Deutsch v. ZST Digital Networks, Inc. (Del. Ch. C.P.A. No. 8014-VCL, March 28, 2013), China-based ZST Digital failed to comply with a December 2012 default judgment ordering it to produce corporate books and records to a U.S. shareholder in Delaware pursuant to Section 220 of the Delaware General Corporation Law. On the shareholder’s motion, Vice Chancellor J. Travis Laster held the company in contempt of court, granted the U.S. shareholder the right to put his shares back to the company at a price based on book value derived from its last SEC financial report, and appointed a receiver for the Chinese company’s assets to enforce the court orders, including payment of the put price. Although, as a practical matter, it may be extremely difficult for the receiver to reach the company’s assets which are all in China, the case unveils a potentially powerful new weapon to enforce U.S. corporate-law standards on Chinese companies that are incorporated in the United States and have shares traded in U.S. markets. The ruling may further encourage China-based companies to consider exiting U.S. securities markets.

Stonewalling a Books and Records Request

ZST Digital is a China-based company that was incorporated in Delaware in 2006. Its business operations are entirely in China where it is engaged in supplying digital and optical equipment to cable equipment operators, including internet-enabled set top boxes, primarily in Henan Province. ZST Digital’s common shares became publicly traded through a 2009 share exchange that was accounted for as a reverse merger. The company filed reports with the Securities and Exchange Commission until August 2012, when it “went dark” by filing a Form 15 with the SEC to terminate its reporting obligations under the Securities Exchange Act of 1934. However, its shares continued to trade in the over-the-counter market. The company’s last SEC filing, its Form 10-Q for the quarter ended September 30, 2011, claimed total revenue exceeding $125 million for the nine months ended September 30, 2011. After that filing, ZST Digital ceased filing financial reports with the SEC. In addition, BDO, the company’s auditor resigned in March 2012, and the company claimed it was therefore unable to provide audited financial statements (although it subsequently hired a new auditor). The company’s share price declined from a high of approximately $11.00 in January 2010 to $1.30 per share in April 2013. The stock’s current 52-week range as of April 5, 2013 was from $6.76 to $0.31 per share.

Peter Deutsch, a ZST Digital shareholder who claimed to own more than 3.9 million shares, brought an action in the Delaware Court of Chancery after ZST Digital “went dark” seeking access to the company’s books and records under DGCL Section 220.  Prior to the lawsuit, the company’s counsel at Pillsbury Madison & Sutro LLP had responded by letter offering access to the books and records at the company’s principal office in China, a common response by China-based companies to such a request. Deutsch was not willing to travel to China to see the documents and filed suit demanding that they be produced in Delaware or New York. ZST Digital ultimately failed to respond, and a default judgment was entered on the Section 220 claim in December 2012.

The default judgment ordered ZST Digital to produce books and records in the State of Delaware that included extensive financial disclosures and company strategic plans, including any plans to “go private.” The court rejected the company’s request that Deutsch travel to China to inspect the information. When ZST Digital failed to comply with the terms of the initial order, Deutsch filed a motion against the company for contempt of court, for grant of a put right at the fair value of his shares and for appointment of a receiver. Vice Chancellor Laster granted the plaintiff’s motion for contempt and also granted Deutsch the extraordinary and unprecedented right to put his shares of ZST Digital back to the company at their supposed book value of $8.21 per share (at a time when the shares were trading for only approximately $1.39 per share).

The value of the court-ordered buy back exceeded $30 million and was based on the Company’s book value derived from the balance sheet included in its last-filed Form 10-Q report for the quarter ended September 30, 2011. The court further ordered the appointment of a receiver for the company’s assets for the purpose of enforcing the court’s orders, including the put right, and ordered ZST Digital to pay all costs and expenses of the action, the receivership and enforcement of the court’s orders. ZST Digital has so far failed to respond to the court’s orders.

In his court filings, Plaintiff Deutsch alleged that ZST Digital and other Chinese companies have “gone dark” and ceased filing reports with the SEC in order to lower their stock prices and make a “going private” transaction less expensive. The court-ordered buy-out option requested by Plaintiff Deutsch was based on court-ordered buy-outs in the context of closely held corporations. Plaintiff conceded the unprecedented nature of the “put” remedy in the public company context. The court’s order will effectively prevent ZST Digital from undertaking a “going private” transaction as many other Chinese companies have done over the last several years. (More than 100 Chinese companies have “gone dark” or “gone private” since January 1, 2008.)  Any effort to cash out U.S. shareholders now would undoubtedly face substantial court obstacles given Deutsch’s put right and the receivership order. What impact this will have on the company’s U.S. shareholders remains to be seen.

As ZST Digital has simply failed to respond to the lawsuit, Deutsch’s extraordinary legal victory may have little practical impact so long as the company stays out of the United States and does not attempt a transaction with its U.S. shareholders. ZST Digital has no U.S. assets for the receiver to seize and has so far shown no inclination to pay the put price required by the court’s order. Nevertheless, the case shows that the Delaware courts are willing to use every conceivable remedy against a Chinese company that they perceive as having flouted court orders and ignored the corporate-law rights of U.S. shareholders. The decision leaves both ZST Digital and its shareholders in limbo.

Conclusion

Chinese companies have often attempted to stonewall U.S. shareholders of their Delaware-incorporated entities under DGCL Section 220 by insisting that U.S. shareholders travel to China to inspect books and records. Vice Chancellor Laster made clear that shareholders can insist on such production in the State of Delaware. Further, the list of documents ordered to be produced under DGCL Section 220 was extremely broad and included detailed financial and strategic information even though ZST Digital was no longer required, as a matter of U.S. securities law, to file any reports or disclose information under SEC reporting requirements. In the absence of a confidentiality agreement with a shareholder, this kind of material, nonpublic information could not, as a practical matter, be disclosed to one shareholder (who might freely trade on it) without making that information available to all shareholders through a public announcement.

If Delaware courts can really require public disclosure of financial information by non-reporting companies pursuant to a shareholder demand under DGCL Section 220, this section could in theory be used to defeat a company’s purpose in “going dark” by deregistering under the Exchange Act. Nevertheless, the extreme remedies of granting a put right (in effect a court ordered buy out), appointing a receiver and effectively requiring public disclosure of financial and strategic information by a publicly traded company may reflect the unusual facts of the case. There is no question that ZST Digital’s refusal to participate in the case and its repeated defaults in responding to court orders motivated Vice Chancellor Laster in shaping these extraordinary remedies. If ZST Digital had instead made an appearance, contested the matter and offered some compromise proposal on the information requested, it could almost certainly have obtained a better result for the company that would not have limited its future flexibility in dealing with U.S. shareholders.

Still, the ZST Digital case means that Chinese companies would be well advised to pay more attention to U.S. legal risks given the Delaware courts’ increasingly tough stances in these areas. It is no longer sufficient for U.S.-incorporated Chinese companies to “go dark” and then ignore compliance with basic requirements of U.S. corporate law. The Delaware courts are not likely to give such companies the benefit of the doubt any longer (if they ever did), and other states regularly follow Delaware’s lead in matters of corporate law.

China-based companies with shares trading in U.S. public markets should carefully consider the implications of the ZST Digital case as part of their determination of whether to remain trading in the United States or to consider an exit through a “going private” transaction.”

 

Attached also an article from “Theasset.com” quoting Mr. Farris on this issue.  FARRIS QUOTE

LONGTOP—DELOITTE

On April 8, 2013, a New York Federal District Court Judge tossed Deloitte out of a class action securities lawsuit against Longtop Financial Technologies for lying to investors and exaggerating the size of its profit margins.  In the attached opinion, the Judge determined that the Plaintiff had failed to sufficiently allege that Deloitte violated federal securities laws in signing off on Longtop accounts between June 2009-May 2011. LONGTOP SECURITIES DECISION TOSSING DELOITTE

CITIC AND PUDA COAL

ON April 8, 2013, a class action securities case was brought in the Federal Court in the Southern District of New York against Puda Coal Inc. and CITIC Trust Co., Ltd.  Attached is a copy of the complaint.  PUDA COAL CITIC

The complaint alleges that CITIC is “the largest Chinese private equity fund and merchant bank, which, by means of a transfer of 49% ownership interest and a 51 % pledge as security for a loan, now controls Puda’s sole operating subsidiary and its only source of revenues.”

The complaint further alleges that “this action arises from a fraudulent scheme in which Puda insiders improperly transferred the Company’s only revenue-producing, operating subsidiary to CITIC and then, with the assistance of CITIC, falsely portrayed to investors in Puda that the Company still possessed its operating subsidiary.”

ANTITRUST

VITAMIN C

The Vitamin C case goes on to the next phase.  The first attack is the motion by Plaintiffs to obtain their legal fees from the Chinese defendants.  The legal fees for Plaintiffs could well be in the millions.  See the attached document asking for an extension to file the motion.  VITAMIN C MOTION TO PAY PLAINTIFF’S LEGAL FEES  The Court granted the extension.

This was followed by an April 11, 2013 Renewed Motion by Hebei Welcome and North China Pharmaceutical Group Corp. that the case be dismissed as a matter of law based on state and foreign sovereign compulsion and international comity.  See attached document.  SHORT HEBEI MOTION JUDGMENT  In the motion, the Chinese defendants go into detail as to MOFCOM regulations issued in the late 1990s purportedly giving the Chamber the authority to set up a group to set prices.  The Court has yet to rule on the Renewed Motion.

On April 12, 2013, Plaintiffs filed the attached injunction motion to enjoin the Chinese defendants from operating the cartel and setting the export prices for Vitamin C.  INJUNCTION MOTION  In the Fact Section of the attached motion, Plaintiffs state:

“Evidence admitted at trial established that after Plaintiffs filed their complaint in January 2005, Defendants continued meeting, exchanging information, and reaching agreements with one another. In November 2005, Wang Qiang of Aland wrote that the defendants “should not have any worry” about the lawsuit whether they won or lost, but that they should “do many things in a more hidden and smart way”:

“This act of deciding production or prices based on coordination is a kind of monopoly whatever the reasons. However, I believe we should not have any worry since the Ministry of Commerce is a friend of the court in the lawsuit. If we won the lawsuit, it would be hard for foreigners to make more trouble. Even if we lost the case, government would take the foremost part of responsibility. After all, we need to do many things in a more hidden and smart way.”

. .  . . (“The recent antitrust lawsuit is unprecedented, but we shall not suspend the coordination mechanism of the VC industry in our country”); (noting that “the antitrust investigation was time-consuming” and that “[e]verybody must pay special attention to relevant matters on confidentiality”).

Wang Qi also testified that after the lawsuit was filed, the defendants discussed the need to keep meetings confidential and to be more careful about what was written down.  . . . And Qiao Haili testified that, as a result of the lawsuit, any notes taken by meeting participants “would be torn apart.” . . . .

Eventually, with trial approaching, the meetings to discuss price subsided. At trial, Wang Qi of Aland testified that in the time since his 2008 deposition, his company had stopped meeting with competitors to discuss prices.  . . . He also testified that he would know if such communications were taking place. . . .”

DOJ ANNUAL ANTITRUST REPORT 2013

On April 11, 2013, the Justice Department issued its annual 2013 antitrust report.  In the report, there are two sections of interest to Chinese companies and US importers because it demonstrates how the Justice Department is going after foreign companies for price fixing of export prices using a cartel in the export of products to the United States.  The point is that antitrust cases against foreign cartels are not just aimed at China.

The Criminal Division of the report states as follows:

Liquid Crystal Display Panels

On March 13, 2012, following an eight-week trial, a jury in the Northern District of California returned guilty verdicts against AU Optronics (AUO), a Taiwan manufacturer of liquid crystal display panels, its American subsidiary, AU Optronics America, and the former president and former vice president of AUO for their participation in a conspiracy to fix the price of thin film transistor liquid crystal display panels (TFT-LCD panels).

The jury was unable to return a unanimous verdict as to one of the subordinates charged. It returned not guilty verdicts against two other subordinates.

The guilty verdicts were notable in that the jury determined that the Division had proven beyond a reasonable doubt that the gain derived from the conspirators for sales into the U.S. was at least $500 million. This was the first time that a jury convicted a corporate defendant under the antitrust laws and applied the “twice the pecuniary gain or loss” alternative fine provision of 18 U.S.C. § 3571(d).

On September 20, 2012, AUO was sentenced to pay a $500 million fine and the convicted executives were each sentenced to serve three years in prison. The $500 million fine matches the largest fine ever imposed against a company for violating the U.S. antitrust laws.

The Division successfully retried the third AUO executive, who was found guilty after a three-week trial, on December 18, 2012. Including these trial convictions, the Division’s LCD investigation thus far has resulted in convictions of ten companies and criminal fines totaling $1.39 billion, as well as convictions of 13 executives, and charges against seven additional individuals (one awaiting trial and six who remain fugitives). . .  .

Ongoing Investigations Continue to Produce Results

Auto Parts

The Division is dedicating significant resources to the ongoing automobile parts investigation. To date, this investigation has yielded charges against nine companies and 12 individuals and more than $809 million in criminal fines for participation in conspiracies to fix prices of and rig bids on automobile parts, including safety systems such as seatbelts, airbags, steering wheels, and antilock brake systems, and critical parts such as instrument panel clusters and wire harnesses. Two of the executives charged are Japanese citizens. Each was sentenced in 2012 to serve two years in prison, the longest sentences imposed on foreign nationals voluntarily submitting to U.S. jurisdiction for an antitrust violation. During FY 2012, this investigation also yielded the third-largest criminal antitrust fine ever imposed—a $470 million fine against Yazaki Corporation. The Division continues to cooperate with its counterparts in Japan, Korea, the EC, and Canada, among others, on this investigation.

To date, the following corporate fines have been obtained:

• U.S. v. Yazaki Corporation, $470 million—the third largest criminal fine ever for an antitrust violation

• U.S. v. Furukawa Electric Company Ltd., $200 million

• U.S. v. DENSO Corporation, $78 million

• U.S. v. Fujikura Ltd., $20 million

• U.S. v. Tokai Rika Co., Ltd., $17.7 million

• U.S. v. Autoliv, Inc., $14.5 million

• U.S. v. TRW Deutschland Holding GMBH, $5.7 million

• U.S. v. G.S. Electech, Inc., $2.7 million

• U.S. v. Nippon Seiki Co., Ltd., $1 million

GENERAL LITIGATION PROBLEMS AGAINST CHINESE COMPANIES

In the attached decision, United States v. Pangang Group Company Ltd. and a group of affiliated Pangang companies, a federal judge in California threw out summonses that the Justice Department issued against titanium and steel producer, Pangang Group Co., and related entities in a criminal suit alleging the Chinese state-owned companies stole trade secrets from DuPont Co. by finding that the U.S. government failed to properly serve the defendants.  PANGANG ORDER

Pangang was allegedly aided by former DuPont employee Tze Chao and others in the U.S. who wanted to sell titanium dioxide trade secrets. These include chemical technology company USA Performance Technology and one of its co-owners Walter Liew and his wife Christina.  The Liews were arrested in July 2011 and indicted in August 2011 on charges that they tampered with witnesses, made false statements and attempted to delay the FBI’s effort to uncover the illegal sale of DuPont’s trade secrets to rival manufacturers, including Pangang.

Chao pled guilty in March 2012 to leaking confidential information from documents he reportedly retained after retiring in 2002.  The Liews pled not guilty in April 2012 to charges over their alleged role in the scheme. In February, a magistrate judge ordered Walter Liew to be freed on $2 million bail after 19 months in custody.

If you have any questions about these cases or about these laws in general, please feel free to contact me.

Best regards,

Bill Perry

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