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

Qianmen Zhengyang Gate Wide Tiananmen Square Beijing China Night“TRADE IS A TWO WAY STREET”

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR NEWSLETTER—JULY 23, 2014

Dear Friends,

My monthly blog post on the US China Trade War will be issued later this month. There have been some recent developments of interest, however.

IMPORT ALLIANCE FOR AMERICA/IMPORTERS’ LOBBYING COALITION

BEIJING ORGANIZATIONAL MEETING

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.

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.

As indicated above, 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 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 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 along with the powerpoint FINAL WEB BEIJING IMPORT ALLIANCE POWERPOINT we used to describe the Import Alliance, the specific provision in the US China WTO Agreement and the Trade War in general.

TRADE

SOLAR CASES—POSSIBLE SETTLEMENT??

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%. The Antidumping Preliminary determinations against China and Taiwan are not due to come out until July 24th.

On July 25th, the Commerce Department announced its preliminary determination in Chinese solar products case levying, in effect, 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.  See AD Prelim Factsheet Below.

On August 8th, the Commerce Department gave the Chinese government until today August 15th to propose a settlement agreement.  As I understand it, today, August 15th, the Chinese government did file a letter at Commerce expressing interest in a suspension agreement, but no proposed formal agreement has been filed with the Department.

AUGUST ANTIDUMPING ADMINISTRATIVE REVIEWS

On August 1, 2014, Commerce published in the Federal Register the attached notice REVIEW REQUEST NOTICE AUGUST that will be posted on my blog regarding antidumping and countervailing duty cases for which reviews can be requested in the month of August. The specific antidumping cases against China are:

Floor-Standing, Metal-Top Ironing Tables and Parts Thereof, Laminated Woven Sacks, Light-Walled Rectangular Pipe and Tube, Petroleum Wax Candles, Polyethylene Retail Carrier Bags, Sodium Nitrite, Steel Nails, Sulfanilic Acid, Tetrahydrofurfuryl Alcohol, Tow-Behind Lawn Groomers and Parts Thereof, and Woven Electric Blankets.

The specific countervailing duty cases are:

Laminated Woven Sacks, Light-Walled Rectangular Pipe and Tube, Sodium Nitrite, and Tow-Behind Lawn Groomers and Parts Thereof.

For those US import companies that imported Ironing Tables, Laminated Woven Sacks, Retail Carrier Bags, Steel Nails, Sulfanilic Acid, Lawn Groomers, and Electric Blankets and the other products listed above from China during the antidumping period August 1, 2013-July 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.

In the recent final determination in the Wood Flooring Case, for example, although the rates were very low for many Chinese exporters, only 5%, 20 Chinese exporters had their rates go to 58% because they did not participate in the review investigation and did not file a no shipment certification, separate rate application or separate rate certification at the Commerce Department.

CHINA TRADE WAR EXPANDS IN LAST FEW DAYS

The US China Trade War in the last several days expanded dramatically.

Today July 29 China time, the Chinese government conducted a dawn raid of Microsoft offices in China, apparently because of antitrust concerns.  Last week the Chinese government’s NDRC declared US company Qualcomm to be a monopoly. Rumors are that the Qualcomm antitrust investigation in China could end at the end of next month with a potential penalty of $1 billion.

On Friday, July 25th, the Commerce Department announced its preliminary determination in Chinese solar products case levying, in effect, 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.

See the attached articles about the antitrust investigations and the factsheet issued by the Commerce Department on Friday in the Solar Products case.  microsoft-china-antitrust-invest us-qualcomm-china-idU Solar Products AD Prelim Fact Sheet 072514 (1)

More information on these cases will be set out in my next blog post.

YES READER WE HAVE A TRADE WAR WITH CHINA

In talking with a number of US government officials, it has become clear that they do not realize that the United States has a trade war with China and guns are being fired on both sides.  These US government officials point to the $4 billion in “dumped” Solar Cells coming from China, but the same government officials do not realize that the Chinese Government through antidumping and countervailing duties have wiped out $2 billion in exports of US produced polysilicon going into those Chinese solar cells. This Chinese government action has resulted in REC Silicon deferring a $1 billion investment into Moses Lake, Washington.

US Government officials have also stated that Chinese companies have to come to the US because the United States has the largest market in the World. What many US government officials do not understand is that with a population of 1.6 billion and a middle/upper class of at least 500 million, China’s market is now larger than the United States. The best-selling car in China is the Ford Fusion. It used to be the Buick. Many officials do not realize that the US Qualcomm company, an American semiconductor company, is making $24 billion a year and $12 billion is from China.  On July 24th, the Chinese government NDRC declared Qualcomm to be a monopoly and there are rumors that the  Chinese government NDRC will fine Qualcomm up to $1 billion for violations of China’s antimonopoly law.

Although the US government has taken China to the WTO for violations of the WTO antidumping and countervailing agreement with regards to imports of chicken from the US and crows about its victories against China, on July 8th in response to the WTO decision China lowered its antidumping duties on broiler chicken products from the U.S. to between 46.6 and 73.8 percent. The high 46.6 to 73.8% rates mean that $1 billion in US chicken exports will continue to be kept out of the Chinese market.

China, however, is just taking its lead from the US Commerce Department, which when facing Chinese victories in the WTO, grudgingly moves antidumping and countervailing duty rates by only small amounts and has had antidumping orders against China excluding certain products from the US market for as long as 30 years.

But as indicated below in the comments of the US Senators and the testimony of Leo Gerard, International President of the United Steel Workers, and Mario Longhi, President of the United States Steel Corporation, in the June 25th Senate Finance Committee hearing, many Washington DC politicians want to be tough on China under intense pressure from US manufacturing companies and unions.  In fact, the US Steel Industry has had a massive impact on the trade policy of the United States, when the employment of the US Steel Industry is lower than one US high tech company.

In a July 7th report, however, Commerce announced that 796,000 US jobs are tied to exports of goods and services to China. What does that give the Chinese government when dealing with the United States on trade issues? What does the Chinese government get when many US companies want to get into the Chinese market?  Leverage.

As one former WTO official stated at a recent Washington DC trade conference, all of WTO law is built on reciprocity. What one country can do under the trade laws can be done back to that same country. When the US government throws trade stones at China, the Chinese government can throw trade stones back and those stones will hurt.

The problem with this trade war, however, is that it is expanding, and when trade wars expand, all sides loose not only economically.  In extreme situations, trade wars can provide a tinder box that can explode into military conflict.  Hopefully, cooler heads will prevail in both the United States and China and call off this trade war and create trade peace before a lot of companies and people in both countries get burned.

SENATE FINANCE COMMITTEE HEARING—ENFORCEMENT OF US ANTIDUMPING AND COUNTERVAILING DUTY LAWS—TRADE WAR GOES ON

Set forth below is a link to the June 25, 2014 hearing of the Senate Finance Committee in Washington DC.  The Senate Finance Committee is the most powerful trade committee in the US Congress.

This hearing will give you an idea of the political situation in Washington DC with regard to China. Move the buffering slider to minute 41 when the hearing starts. There is a recess in the hearing so you need to move the buffering slider to 1 hour 47 minutes when the hearing resumes.

http://www.finance.senate.gov/hearings/hearing/?id=e2227102-5056-a032-5262-9d177c5f753f

During the Senate Finance Committee, Senators asked for aggressive trade enforcement in antidumping and countervailing duty cases, including Steel and in particular Oil Country Tubular Goods (“OCTG”), and against China. The Senators described the importance of the legislation they have introduced to stop transshipment and make sure that antidumping and countervailing duty laws are enforced.

The witnesses were US Steel, the Steel Union, the US Chicken and Soybean industries and Eli Lilly, a pharmaceutical producer. The two most prominent witnesses at the Senate Finance Committee, however, were Leo Gerard, International President of the United Steel Workers (“USW”), and Mario Longhi, President of the United States Steel Corporation.  The USW has brought the OCTG antidumping and countervailing duty cases, started the Solar Cells/Clean Energy Antidumping and Countervailing Duty Cases, and brought the recent $2 billion antidumping and countervailing duty cases against Tires from China.  Mr. Gerard would proudly claim that the USW has brought antidumping and countervailing duty cases blocking billions of dollars in imports from China.

The hearing was stacked with US producers and a union complaining about China and other countries.  No US importers were allowed to testify and present the other side of the argument.  When Congress decides to listen to only one side of the trade argument and when there is no fair and balanced portrayal of the US China Trade Problems, the trade war simply gets worse and everyone loses.

The Witness for the US Soybean industry testified that the major world buyer for US soybeans and corn is China. The US Chicken industry pointed to the problem of the Chinese antidumping and countervailing duty cases against US Chicken exports.  Although the US Government “won” the Chicken AD and CVD cases in the WTO, as indicated below, the victory has resulted in antidumping rates falling only to 40%, still blocking $1 billion in US Chicken exports to China.

Senator Wyden, Chairman of the Senate Finance Committee, opened the Senate Finance Committee hearing by stating in the attached statement 06132014 Wyden Statement on the Need for Strong Trade Enforcement:

“Much of the recent debate in Congress over international trade has focused on agreements currently in the works, including the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership. Not enough time is spent on the trade agreements already in place – have they created American jobs, have they boosted our economy, are they being effectively enforced?

While I intend for the Finance Committee to examine all aspects of U.S. trade policy, today it will focus on enforcement. Without strong enforcement, no trade deal – old or new – is able to live up to its potential for jobs and economic growth. And it becomes extraordinarily difficult to build support for new agreements. Foreign nations will continue locking American goods and services out of their markets.

And foreign companies that get unfair backing from their own governments will continue undercutting our manufacturers, farmers and ranchers, driving hard-working Americans out of businesses and out of their jobs. The latest tactics used by foreign nations and companies to skirt our trade rules seem like they’re ripped from the pages of crime and spy novels. They hide paper trails to make it harder to build cases in trade courts.

They intimidate witnesses, forcing American businesses to relocate factories or surrender intellectual property and threatening retaliation if they speak out against unlawful behavior. They even spy on our trade enforcers and companies to undermine efforts at holding them to the rules.  And after they’ve been caught breaking the rules, they engage in outright fraud to avoid punishment.  They play cat and mouse with customs authorities, using shell companies and fraudulent records to exploit weaknesses in our system.

The global economy is more interconnected than ever, which means there’s more at stake for American workers and businesses.  China, India, Brazil – the list of critical markets with serious enforcement challenges has grown.  As that process has played out, for example, currency manipulation has hit American workers and businesses harder than it did in previous decades – particularly when it comes to China.  Currency manipulation makes any product manufactured in the U.S. – any product – artificially expensive.  In effect, it’s a way for China to keep a finger planted on the scale, costing the U.S. jobs and making it harder to recover further from the Great Recession. . . .

The challenges of the modern, global economy simply do not always fit neatly within our aging enforcement system.  American trade enforcement needs to be brought into the 21st century.  For example, when the Chinese government gives its domestic solar companies massive subsidies, the U.S. needs to respond quickly and with all available resources.  In practice, the response took years, and was too little and too late to protect thousands of American jobs and home-grown technologies.  The Chinese solar companies had already crippled their American competitors.

That’s why a more effective enforcement authority is needed.  Better enforcement tools would identify and stop a problem more quickly before it costs American jobs.

The same goes for enforcement at our borders.  When fake tennis shoes or counterfeit computer chips arrive in the U.S., Customs often appears too focused on security rather than its trade mission.  This is especially damaging since foreign companies and governments are finding new ways to mask where products come from before they show up at our doorstep.  For example, Chinese companies avoid anti-dumping duties by routing merchandise through a place like Singapore before it heads to the U.S.  The schemes are becoming even more complex, sometimes involving shell companies that appear one day and disappear the next without leaving any paper trail.

The ENFORCE Act, bipartisan legislation I first introduced 2011, would mount a stronger defense against those practices.  It would set up a standardized process to move investigations forward, and it would establish better lines of communication between agencies to get information in the right hands.  It would also refocus Customs so that its trade mission doesn’t get short shrift.

Proper trade enforcement is an increasingly difficult job.  It takes time, and the fact is that it’s impossible to stand up a trade case in a single day.  But it’s essential for enforcement agencies to have the resources needed to do their jobs effectively.  Too often, when these cases lag, American workers are losing their jobs and businesses are closing their doors.  Succeeding in the global economy is already challenging enough; the U.S. cannot add to the difficulty by underfunding its enforcement efforts. . . .”

Republican Senator Hatch, the ranking member of the Senate Finance Committee, stated in the attached statement, 6.25.2014 Hatch State at Finance Committee Hearing on Trade Enforcement2:

“. . . .Some of the most important trade enforcement tools we have are U.S. safeguard, anti-dumping, and countervailing duty laws. For companies like U.S. Magnesium, which operates in Salt Lake City and Rowley, Utah, our trade laws are essential to their ability to compete against imports that unfairly benefit from foreign government interference in the market.

I want to ensure that these laws remain effective tools in our international trade arsenal.

That is one reason the Bipartisan Congressional Trade Priorities Act which I introduced with former Senator Baucus in January includes – as a principle negotiating objective – a directive to preserve the ability of the United States to rigorously enforce our trade laws.

I also want effective trade enforcement at the border. That’s why I worked with Chairman Wyden to craft a version of the ENFORCE Act that gained unanimous bipartisan support in the Finance Committee. This bill provides new tools to help stop circumvention of our trade remedy laws. . . .

Senator Portman, when he was the U.S. Trade Representative, brought the first WTO dispute against China in which China was found to have breached its WTO commitments. Before that case, China was imposing restrictions on imports of U.S. auto parts that were harming U.S. companies and workers. By effectively employing the WTO dispute settlement system, we were able to get China to reverse course and remove those restrictions. As you can see, we have a system that works. . . .”

Leo W. Gerard, International President, United Steelworkers (“USW”), stated in the attached statement, GERARD 14 06 25 Testimony – Trade Enforcement Challenges and Opportunities2:

“USW members and non-union workers alike know firsthand the pain inflicted by foreign predatory, protectionist and unfair trade practices. In industry after industry, they have seen other nations target the U.S. market to fuel their own economic policies, to create jobs for their people and capture the dollars of our consumers. These practices have increasingly resulted in the downsizing of manufacturing and the loss of good family supportive jobs, as companies have offshored and outsourced their production.

The USW has been as successful as it can be in its efforts to counter unfair trade, but it’s a losing game. Indeed, the only way we win is by losing. Lost profits, lost jobs, closed factories, hollowed out communities – that is the price the trade laws demand to show sufficient injury to provide relief.  In the year or more it takes to bring a trade case and obtain relief, foreign companies can continue to flood the market.  By the time that relief may be provided, the industry is often a shadow of its former self, too many workers have lost their jobs and their families and the communities in which they live have paid a heavy, and often irrevocable, price. . . .

Today, more and more, we find that the USW has to go it alone. Our government should be taking more of the lead. While we appreciate what they are doing, it is far from sufficient.  And, let’s recognize that some of the most successful efforts, like the Section 421 case on tires, were because the USW initially brought the case. We’d vastly prefer that government do its job so our members can do their jobs. . . . This Administration has done more to improve our nation’s trade enforcement efforts since any Administration since the Reagan years. . . .

First, as many of the Members of the Committee know, the USW is fighting to ensure that the Department of Commerce carefully review the facts in the Oil Country Tubular Goods (OCTG) case in which they issued a preliminary finding that imports from South Korea would not be subject to dumping margins. We believe this preliminary finding is flawed.  Indeed, Senators sent a letter to the Administration asking for a careful review and that effort was mirrored by more than one-third of the House joining in that call. . . .

The second issue, and a critical one, is the issue of currency manipulation.  China is the worst culprit, but other nations are following their lead.  China has been able to essentially subsidize its exports and tax imports into its market through currency cheating.  Everyone knows it. Every six months the Treasury Department issues a report saying that China isn’t doing the right thing, it’s not based on market principles but stops short of making the critical finding that would only require consultation.  This Administration and the last said that dialogue and engagement were the appropriate course to pursue. Some say that China is taking steps to bring its currency into equilibrium. They point to a widening of the trading bands.  Well, China’s currency is still dramatically undervalued and is a tool China uses to fuel its export-led growth strategy and limit imports into its market.

China makes small changes when political pressure rises here but then goes right back to business as usual. Some experts opine that asking China to do more will only destabilize its economy.  Well, I’m sick and tired of American workers and domestic industries having to pay the price for China’s trade and economic policies.  The time for talk is over.  If the Administration won’t act, Congress must prioritize passing legislation to give private parties the power to seek relief from China’s currency manipulation, or that of any other country.  Congress must not leave town for campaign season before passing this critical legislation.  If it can act earlier, great, but, at election time, this Congress will be judged by our members on whether they stood by their sides, or continued to allow China and others to cheat them out of their jobs and their futures. . . .

The USW is proud of its efforts in this area and has been public in commending the Administration for doing more than any previous Administration in making enforcement more important.  There have been real successes, like in the Section 421 case on Chinese tires.  But, much, much, much more needs to be done.  And, we can never let up.  Right after relief ended under the Section 421, China resumed flooding our market with tires – dumped and subsidized tires.  Just a few weeks ago, the USW filed an AD/CVD case against Chinese tires which have increased from about 24 million units to more than 50 million.  Their market share has doubled.  During that period, domestic production has gone down as China captured all of the market growth, and then some. . . .

Just eliminating the data or changing how it’s reported doesn’t change the facts, no matter how hard people try. Too much of our production is being offshored or outsourced and our trade laws aren’t doing enough to ensure that the rules are fair.

Another critical issue is simply using the words and actions of our trading partners to identify what they’re up to. Sometimes, of course, it’s difficult to discern or identify what they’re up to. But, in many cases, they are quite open about it. China is way ahead of others on this point.  It has published its 12th Five Year Plan which clearly indicates what its priorities are and what it intends to do. It announced that it will spend $1.5 trillion to achieve those goals.  It has developed lists of national champions and strategic sectors that it will support. It has many other open source documents identifying technological roadmaps, performance stands, export credits in violation of OECD standards and countless other programs.

Why don’t we take them at their word? Why aren’t we taking those lists and determining what our interests are.

A perfect example was identified by the New York Times just last week. In the past several years, the U.S. has indicated that it wants to phase-out the use of incandescent lighting in the U.S. and move towards more energy-efficient technologies like LEDs. China has taken this technology, developed by the U.S., and created a mammoth production base to try and fill their own needs, and those of others around the globe. They are building up extensive capacity and can soon be expected to flood the U.S. and world markets with these products that will probably be sold at dumped and subsidized prices.

Yet, no one acts. Isn’t it time we took trade seriously and did more to build public confidence that trade agreements are in their interest rather than just pathways for companies to outsource and offshore production?

ENFORCEMENT

There’s a reason that trade agreements and topics like fast track are viewed so negatively by the public. Trade isn’t working for them.

The Steelworkers have taken action where we can and are proud that we have been the single-leading force in seeking to have trade rules properly enforced and that the terms of trade are fair.  Since 2000, we have filed or supported dozens of cases. Among them are:

Section 201 safeguard action on steel.

Coated free sheet paper cases.

Section 301 action against Chinese currency manipulation.

Section 301 action on Chinese workers’ rights violations.

Section 301 case on Chinese protectionist and predatory actions on green technology.

Identification of Chinese predatory trade practices in the auto parts sector.

Section 421 case on Chinese tires.

Oil Country Tubular Goods antidumping case.

We do not look at filing trade cases as a sign of success: Far from it. Under our trade laws, there has to be injury, often significant injury or threat of injury, before any relief might be offered.  In essence, we win by losing.

A perfect example of this is the coated free sheet paper trade problem.  The USW filed a case and, while dumping was found, the injury was determined not to be significant enough for relief.  Several years later, we filed essentially the same case but, by that time, more than 7,000 workers had lost their jobs, capacity was shut down and companies were on the brink.

Relief was provided and many of the remaining workers have their jobs as a result.  But, a substantial portion of the industry will never come back.

These cases are difficult to bring and expensive to pursue.  There are countless issues that must be addressed and, these days, many companies refuse to participate.  Some refuse because they have offshored their production, abandoning the U.S. market and want to protect the subsidized and dumped products they now sell in the U.S. that they use to make here.

Other companies are worried about retaliation.  Several years ago, in a sector that will remain nameless, an antidumping/subsidy case was being prepared that the Chinese found out about. The Chinese government called in the managers of foreign-invested enterprises operating in China in the sector and indicated that, if a case went forward, those companies’ operating permits would be revoked.  None of those companies, of course, dared come forward.

Under our trade laws, if a company refuses to provide data, it may be tough to develop the information needed to pass the injury test.  So, as companies become more globalized, the workers, families and communities who are at risk from foreign predatory and protectionist trade practices may find that they have no recourse.

Those standards underlying how a trade enforcement case can be brought, who has standing, and other intricacies of the law need to be updated. For example, state and local governments should be given standing under our trade laws as participants. Often, the only entity that has standing under the trade law that actually cares about jobs in America are workers and their representatives. That’s why the USW is the lead on so many cases.

But, state and local governments also care whether their local plants are being victimized by unfair trade. They should have the ability to be petitioners in trade cases. And certainly, necessary information must be made available to injured parties and not kept secret behind corporate walls.

There are many other issues which the trade bar is working on deserving serious consideration by this Committee and the Congress. It’s time to update our laws as they haven’t been seriously reviewed in more than 25 years. And, it’s vital that Congress recognize the damage that unfairly priced and traded imports have had all across this country.

Importers don’t care whether America makes anything, they only care about the profits they can make from the products they sell. It’s important to view all of these changes by asking the question: “Whose side are you on?” . . .

Unfortunately, too many companies scour the globe looking for the cheapest place to produce, even it means despoiling the environment or trampling on workers’ rights. Proper enforcement of workers’ rights helps create opportunity, helps ensure a growing middle class, helps reduce the economic divide and, indeed, promotes greater trade.”

Mario Longhi President, United States Steel Corporation stated in the attached statement, US STEEL CORP Longhi Testimony – Senate Finance Committee – 06.23.141:

“The approach and manner in which foreign companies are dumping thousands of tons of products into the U.S. market leads business leaders such as me to conclude that American steel companies are being targeted for elimination. . . .

Mr. Chairman, your leadership in introducing the ENFORCElegislation is most welcomed. We concur that the Customs and Border Protection Agency should be empowered and strengthened to take swift action when dumping or countervailing duty orders are evaded through transshipment, misclassification, misreporting, or outright falsification of import documents. This should be one of many tools in our trade toolbox. . . .Unfortunately Mr. Chairman, this is not the world in which we operate.

According to the United States Trade Representative, there are currently 56 pending antidumping (AD) and countervailing (CVD) cases, of which 73% involve steel products. There are 117 existing AD and CVD cases, of which 40% involve steel related products. . . . At any given time, our industry is pursuing over 30 active anti-dumping and countervailing duty cases against an ever-growing list of foreign competitors who are supported – tacitly or openly – by their own governments. . . .

In 2013, almost 150,000 jobs were directly attributed to the steel industry. Within the value chain, it is estimated that more than 1 million jobs are steel-related jobs.  So when our industry is harmed, so too are the local vendors, markets, restaurants, dry cleaners, and other local service providers, schools and community organizations.

Let me illustrate for you how this harm occurs. . . . A year ago, U. S. Steel and other domestic Oil Country Tubular Goods (OCTG) producers filed a trade case against nine countries based on the enormous 113-percent increase of imported OCTG products into this market between 2010-2012. Primarily South Korean companies are the main violators, but companies from India, Vietnam, Turkey and several other countries also dump very significant volumes. . . .

China tried to do the same thing in 2008. We fought and won an OCTG dumping case in 2009, but not before many facilities were idled, thousands of steelworkers lost their jobs, and our communities and our families sustained significant and long-lasting injury.  After we won the case, Chinese producers essentially abandoned the U.S. OCTG market, a clear sign that they could not compete when the playing field was leveled.

As the American economy and our energy demands rebounded, American steel companies spent billions of dollars to improve OCTG facilities across the country. In the past 5 years, U. S. Steel spent more than $2.1 billion across our facilities, $200 million on new facilities at our Lorain Tubular Operations in the last two years alone. However, the respite for the OCTG industry from illegally dumped products was short-lived.  Foreign producers quickly seized this opportunity and began flooding our market.

The only difference between 2009 and today is that South Korean and other foreign OCTG producers are cleverer.  South Korean companies are effectively targeting our market since they do not sell this product in their own home market or (in substantial volumes) to other nation.  Over 98% of what is produced in South Korea is exported directly to the U.S.

Earlier this year, the Department of Commerce issued disappointing preliminary findings that failed to recognize and punish illegally dumped South Korean products. After decades of dumping practice, it appears that these companies have learned to circumvent our trade laws and illegally dump massive amounts of steel products in this market with ease and agility.

So it is not surprising that in advance of the impending final decision by the Department of Commerce, last month, the total OCTG imports hit a high of 431,866 net tons, a 77.4% percent change year/year. The South Koreans exported to the U.S. nearly 214,000 net tons of OCTG in May, an increase from the monthly average of 27,000 net tons in the prior 12 months. They are trying to dump as much product as they can before the final ruling.  The South Korean gamesmanship of our system of laws is disquieting. Their efforts are unchecked and repugnantly effective. . . .”

Kevin J. Brosch, the National Chicken Council in the attached statement, NCC Senate Finance Testimony 062514:

“. . . .The U.S. is the most efficient producer of poultry products in the world. U.S. production value in 2013 was $30.7 billion. We are the world’s second largest exporter, only narrowly behind Brazil, and in 2013 we exported nearly 20% of our total volume of production, with an export value of more than $4.7 billion. U.S. poultry is our 6th most important agricultural export, with product being exported to nearly 100 countries each year. It has also been an important growth sector for U.S. agriculture with exports increasing from 5.2% of production volume in 1990, to nearly 20% in 2013. . . .

In specifically addressing the issue of enforcement, I should begin by thanking the Obama Administration for a very significant and recent success. China is the best example we can point to of vigorous and timely trade enforcement.  In 2009, China imposed antidumping duties on U.S. chicken using the so-called “weight-based cost of production” theory. . . . Immediately after China announced its decision to impose antidumping duties, the Obama Administration requested dispute settlement, and aggressively litigated the case before the WTO. Last summer a WTO panel ruled in our favor. China elected not to appeal that decision and we are currently awaiting China’s announcement of how it will change its antidumping decision to come into compliance with WTO rules. Hopefully, China will act in good faith and honor its WTO commitments, but there are no assurances.  . . . .

(Even with USTR’s efforts, the China case cost U.S. industry millions of dollars in legal fees to pursue). China represented a 700,000 MT market for U.S. poultry at the time the antidumping duties were imposed, and is potentially an even larger market for our products in the future. We have been out of the market now for several years, and hope that China will lift its restrictions now that an international legal panel has ruled against it.  In our view, the prosecution of the China antidumping case before the WTO represents U.S. trade policy at its best; enforcing those trade rights we have already negotiated for. . . .”

Richard Wilkins, Treasurer of the American Soybean Association, stated in the attached statement, Statement on Trade Enforcement for Biotech Exports:

“I would like to return to my earlier comment on the importance of China as a market for U.S. biotech commodities and products. China is by far the largest buyer of U.S. soybeans, importing over one-fourth of our annual production. The Department of Agriculture forecasts that China will also become the world’s largest corn importer by 2020. U.S. agriculture is a long-term committed partner in working with China to meet its food security needs. . . .

It is critically important for the Administration to engage the Government of China at the highest level to reach a mutually beneficial understanding on trade in biotech commodities.”

TRADE DEFICIT DECLINES AS US EXPORTS INCREASE AND US JOBS SUPPORTED BY US EXPORTS TO CHINA RISE TO 796,000

As the Congress continues to bash China and listen to the Steel Union and US Steel, statistics show a much different story. On July 7, 2014, the Commerce Department announced the US trade deficit had dropped to $44 billion “bolstered by record high exports of a broad swath of consumer goods and services such as telecommunications, car parts and travel”. In effect, the trade deficit had dropped 5.6 percent drop from a $47 billion gap in April as US exports hit a record $195.5 billion.

U.S. Secretary of Commerce Penny Pritzker said that the numbers show the economy is growing healthier because “Today’s strong export numbers are yet another sign that more American businesses are seizing the opportunity to sell their world-class products and services to the 95 percent of consumers who live outside the United States.”

Where are those exports going? China.  According to the attached July 7th Report issued by the Commerce “ Jobs Supported by Export Destination 2013”, COMMERCE TRADE JOBS China is number 3 for US export destinations behind Canada and Mexico. The US jobs created by US exports of goods to China are 796, 000 (588,000 goods and 207,000 services) with Japan at 605,000 and United Kingdom at 587,000.

Although many Government officials apparently do not seem to understand this simple fact, the premise of this blog is that Trade is a two way street. Although many officials and political leaders at the Washington DC level want to continually criticize China, many local US government officials want the US companies to continue exporting to China and want Chinese investment in their towns, cities and states.

WTO RULES AGAINST THE US IN COUNTERVAILING DUTY CASES AGAINST CHINA

On July 14, 2014, in the attached decision and summary, PANEL REPORT SUMMARY the WTO upheld China’s claims that certain US countervailing duty cases against China were inconsistent with the WTO Agreement. The dispute involves 17 Commerce Department countervailing duty investigations against China on approximately $7.2 billion dollars of imported products, such as solar panels; wind towers; thermal paper; coated paper; tow-behind lawn groomers; kitchen shelving; steel sinks; citric acid; magnesia carbon bricks; pressure pipe; line pipe; seamless pipe; steel cylinders; drill pipe; oil country tubular goods; wire strand; and aluminum extrusions.

The WTO decision states that with regard to 12 countervailing duty investigations that the United States acted inconsistently because it found that certain state-owned enterprises were public bodies or government entities and thus the sales of certain raw material inputs by these companies, in effect, were subsidized by the Chinese government. The WTO recommended that the US bring its decisions in line with the WTO Agreement. The WTO ruled for China in certain cases and against China in certain cases so it is something of a mixed result.

Also the WTO determined that Commerce “improperly found that the alleged provision of goods for less than adequate remuneration conferred a benefit upon the recipient, and improperly calculated the amount of any benefit allegedly conferred, including. . . its erroneous findings that prevailing market conditions in China were “distorted” as the basis for rejecting actual transaction prices in China as benchmarks in certain investigations.”

Since China is considered a nonmarket economy country, Commerce in countervailing duty cases against China refuses to look at free market bench markets for interest rates or other prices in China. In one case, which was overturned in part by the WTO, to value dirty factory land in Shandong, China Commerce used the value of land for a shopping center in Thailand.

As a result, the WTO Panel recommended that the United States should bring its measures into conformity with its obligations under the WTO Agreement. What does the WTO decision mean and what impact will it have on future countervailing duty cases against China. The answer is not much.

Just like the response of the Chinese government to the WTO’s decision in the Chicken case, Commerce will make a few changes to its methodology and explain its decision more, but there will be no real change to past or future countervailing duty cases against China.

Also the impact of this WTO decision on US methodology in future Countervailing duty (“CVD”) cases against China is not clear yet because this panel decision will be reviewed by the WTO Appellate Body, which has frequently overturned panel decisions in trade remedy cases. Just like the Chinese chicken case, any change in methodology still means that the US government will issue CVD rates against China. Those rates will just decline a little.

On July 18, 2014, in the attached statement, MOFCOM STATE MOFCOM Minister Hucheng Gao stated in response to the WTO decision on US CVD cases:

“The United States abusive use of trade remedy measures severely impaired the legitimate rights and interests of Chinese enterprises. . . .I strongly urge the United States to confront its long-standing systematic violations of the WTO rules through its trade remedy related legislations and practices, to implement the rulings of the WTO Dispute Settlement Body in good faith, to correct its abusive use of the trade remedy rules in a timely and complete fashion, and to strive to become a role model who abides by the rules strictly, rather than a negative influence who breaches the rules . . . .

The economic and trade relations between China and the United States are the ballast stone and engine of overall China-U.S. ties.”

SOLAR CASES

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 are attached to the last post 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%. The Antidumping Preliminary determinations against China and Taiwan are not due to come out until July 24th.

The Scope issue, what specific products are covered by this decision, is simply not clear yet. On May 30, 2014, two US senators sent the attached letter to Commerce, SENATOR LETTER, specifically requesting that Commerce come up with the correct “scope” determination and not to change past definitions. In other words, the two Senators request the Department to “preserve” the existing country of origin standard, which means that the country of origin of the solar cell would determine the country of origin of the module and panel. The Commerce Department’s July 3rd response, however, was noncommittal.

In the letter, however, the two Senators acknowledged, “While we hope that: a negotiated settlement can be reached between the affected parties, the Chinese government, and our government, that is not a likely outcome at this point.” Under the US Antidumping and Countervailing Duty Law, since there is no public interest test, the petitioner, SolarWorld, would ultimately have to agree to any settlement/suspension agreement reached between the U.S. and China.

Thus on June 24th in a letter to 23 Congressmen, Solar World pushed back on Congressional efforts to obtain a settlement agreement and responded to a May 28 letter by 23 House members to President Obama urging him to broker a unified position among elements of the solar industry that “remove existing trade restrictions.”

One route to settling a trade remedy case is a suspension agreement, but SolarWorld said that there is no active discussion of that option now.  On July 1st Solar World filed a letter at Commerce urging it to probe the trade implications of alleged cyber espionage by the Chinese military involving the company. So this case is not going to Agreement any time soon.

OCTG

As stated in prior newsletters and above, US Steel Corp along with the Steel Union have brought follow up cases against Steel Oil Country Tubular Goods (“OCTG”), Steel Pipes used in oil wells from a number of different countries. US Steel and the Steel Union first attacked China and were able to drive them out of the US market with 47% dumping rate, not based on actual prices and costs in China. Instead, Commerce used values from Indian import statistics to throw the Chinese out of the US market.

In the Chinese antidumping case on US Chicken, the US government complained that China used a “weight based cost of production” theory to calculate US antidumping rates.  But at least the Chinese government used actual prices and costs in the United States to calculate US antiduping rates, not like the US Commerce Department, which refuses to even use actual prices and costs in China to calculate antidumping rates for Chinese companies.

But as indicated above in the testimony of Mr. Gerrard of the USW Workers, China was replaced by imports from Korea, Taiwan, India and many other countries. So USW and US Steel filed antidumping and countervailing duty cases against those countries. But in the preliminary dumping determination against Korea and other countries, when Commerce had to use actual prices and costs in Korea and other countries to calculate antidumping and countervailing duty rates, what antidumping rates did Commerce come up with? 0s for Korea, 0 to 2.65 for Taiwan, 0 for one producer in India, 2.92% for Saudi Arabia and 8.9% for Philippines.

As indicated above, however, the USW and US Steel through the Congress put immense political pressure on Commerce to change its preliminary determination, especially with regards to Korea. With regards to OCTG, however, one should understand that the first OCTG cases were filed in the early 1980s against Korea and other countries followed by additional cases in the mid-1990s. Since Korea has been a target of OCTG cases in the past and since Commerce must use actual prices and costs in Korea to determine whether the companies are dumping, one can expect that Korean OCTG producers will monitor their prices and costs very closely to make sure that they are not dumping. When foreign companies are in market economy countries, where Commerce must use actual prices and costs in those countries to determine dumping, foreign companies can use computer programs to make sure that they are not dumping.

Thus it is not surprising that Commerce calculated 0% dumping rates for Korea in the OCTG preliminary determination. But with very substantial Congressional pressure on the Commerce Department, as suspected, Commerce came out with an affirmative antidumping determination in the Korea case.

On July 11, 2014, in the attached decision, factsheet-multiple-OCTG-ad-cvd-final-071114, Commerce issued its final determination pushing Korea’s AD rate to 9.89 to 15.75%, Taiwan 0 to2.52%, Saudi Arabia 2.69%, Philippines 9.88%, Ukraine 6.73% and an India CVD rate from 5 to 19%.

The point, however, is that these are not shut out rates, and in contrast to China, all of these countries will continue to export OCTG steel products to the United States in substantial quantities.

On July 15th at the US International Trade Commission’s (“ITC”) injury hearing, 4 US Senators testified about the importance of the ITC reaching an affirmative injury determination in the case.

TIRES

As mentioned in my last newsletter, on June 3, 2014, the USW union filed an antidumping and countervailing duty case aimed at $2 billion in imports of automobile and truck tires from China. The case is specifically described as Certain Passenger Vehicle and Light Truck Tires from the People’s Republic of China. A short form of the petition is attached to my last post on this blog.

At the end of June Commerce postponed the initiation of the case so it could survey the US industry because of standing concerns. But on July 15, 2014, the Commerce initiated the antidumping and countervailing duty investigations. See the attached fact sheet.  DOC Tires Initiation Fact Sheet

With the 20 day postponement, however, fully extended out, the Commerce Department preliminary countervailing duty determination will come out as soon as November 20, 2014, exposing the US importers to liability for Chinese tire imports, followed by the antidumping preliminary determination on January 19, 2015.

On July 16, 2014, the Commerce Department issued the the quantity and value questionnaire for Chinese companies, which is due August 1, 2014 at Commerce.  prc-qvq-tires-071614.  See also the attached separate rate application for Chinese companies.  prc-sr-app-20140429

On July 22, 2014, the ITC issued a preliminary injury determination in the case. See the attached announcement. ITC AFFIRMATIVE PRELIMINARY. The ITC will issue its formal determination and opinions to Commerce on August 1, 2014.

ACTIVATED CARBON

On June 24, 2014, in the attached decision, Jacobi Carbons et al. v. United States, the Court of International Trade affirmed the Commerce Department in the Activated Carbon fourth administrative review investigation.  ACTIVATED CARBON CIT

WOODFLOORING

In the Woodflooring case, there have been two Court decisions, not favorable to the respondents.

On July 14, 2014, in the attached decision, Changzhou Hawd Flooring Co. v. United States, the Court of International Trade rejected an attempt by a number of Chinese separate rate companies to participate in the appeal of the initial investigation. During the appeal, it became apparent that the Chinese separate rate companies might have an opportunity to obtain a 0% dumping rate and be completely excluded from the case.  CHANGQHOU HAWD FLOORING

On July 16, 2014, in attached decision, Swiff Train v. United States, the Court of International Trade affirmed the International Trade Commission in its injury determination stating that it had made a “but for” determination in the injury remand determination.  SWIFF TRAIN

TRADE NEGOTIATIONS—TPA, TPP, TTIP/TA AND DOHA ROUND

As mentioned in past newsletters, in the trade world, the most important developments may be the Trans Pacific Partnership (TPP) and Trans-Atlantic (TA)/ the Transatlantic Trade and Investment Partnership or TTIP negotiations.  These trade negotiations could have a major impact on China trade, as trade issues becomes a focal point in Congress and many Senators and Congressmen become more and more protectionist.

This is particularly a problem because the protectionism is coming from the Democratic side of the aisle. Democratic Senators and Congressmen are supported by labor unions. To date, President Obama cannot get one Democratic Congressman 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 mid-term elections as soft on trade.

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

To summarize, on January 9, 2014, the Bipartisan Congressional Trade Priorities Act of 2014, which is posted on my February blog 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, other than more oversight by Congress and input by the Public in the trade negotiations.

Now the story continues . . . .

On June 27, 2014, it was reported that there were still many tough issues outstanding in the TPP talks, including Agriculture, especially with Japan. Japan’s commitment to full tariff elimination in the agricultural sector appears to be very weak. Questions remain whether Japan will ever fully open its sensitive food sectors such as beef, pork, wheat, rice and dairy. There are warnings that the bilateral struggles between the U.S. and Japan have had ripple effects with other TPP partners using the impasse to hold off on tabling their best market access offers, not only for agriculture but also for other areas as well. In addition, the failure to pass the TPA has made it more difficult for the US trade negotiators to get a better deal.

Apparently the gaps between the US and Japanese negotiators on agricultural products are very wide. The U.S. had demanded that Japan’s beef and pork tariffs be lowered as close to zero as possible, and as a trade-off to accept low tariff rates. Japan has floated the idea of allowing it to activate safeguard measures that would trigger sharply higher tariffs for an extended period when import quantities reach certain thresholds, while the US position remains the same.

On July 9th seven House Democratic Congressmen, Rep. George Miller (D.-Calif.), Reps. Rosa DeLauro (Conn.), Louise Slaughter (N.Y.), Loretta Sanchez (Calif.), Mark Pocan (Wis.), Donna Edwards (Md.) and Peter DeFazio (Ore.) questioned whether Congress should grant the administration trade promotion authority (TPA)—particularly in light of what they called a lack of transparency during the talks.

The Democrats argued that an Administration deadline to conclude the TPP talks by the Nov APEC meeting was simply unrealistic because there are too many issues that must be resolved before a TPP agreement would win congressional approval.

On July 15th it was reported that Japan and the US had been able to narrow the gaps in negotiations on agricultural products, specifically rice, beef and pork, dairy, wheat and sugar—as well as safeguards.

On July 16th, it was reported that Deputy USTR Mike Punke spoke at a hearing of the House Ways and Means stating: “We agree with those who say that TPA needs to be updated and we look forward to working with this committee and Congress as a whole to secure a TPA that has as broad bipartisan support as possible.” Punke also stated: “We are very committed to getting TPA. I think Ambassador Froman has practically camped up here over the course of the last six weeks in terms of the outreach that he’s done personally.”

On July 17, 2014, at a Senate Finance Committee hearing about Technology and Trade, http://www.finance.senate.gov/hearings/hearing/?id=565ec6a8-5056-a032-526e-77a13f9f56e5, Republican Senator Orin Hatch, the Ranking Member, spoke about the importance of the TPA and the Enforce Act.

On July 17th, all Republican members of the House Ways and Means Committee sent the attached letter, HOUSE REPS WAYS MEANS, to USTR Froman 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. In the letter, the Members stated:

“We are strong supporters of the Trans-Pacific Partnership (TPP) negotiations. . . .While progress has been made in the TPP negotiations, there is a long way to go to finalize an acceptable deal. Therefore, we were surprised when the President recently announced an ambitious timeline for completing the TPP negotiations, potentially by November, without mentioning how he would ensure the enactment into law of Trade Promotion Authority (TPA) before concluding TPP negotiations. TPA must be enacted into law before the President completes TPP for two important reasons.

First, TPA shows our trading partners that the U.S. government speaks with one voice. Without TPA, the Administration simply is not in the strongest position in its negotiations with our trading partners. That means that any agreement reached cannot be the best agreement obtainable for American workers, farmers, and businesses. The positions that many of our trading partners are taking in the negotiations are unacceptable, demonstrating that the Administration has not yet been able to achieve the necessary market access and rules outcomes to ensure a successful TPP negotiation. We believe that if the Administration were negotiating with the authority of TPA, it would be able to achieve a stronger agreement worthy of Congressional support.

Second, the Administration negotiates trade agreements under a delegation of authority from the Congress. TPA is the process by which Congress gives the Administration that authority and sets out negotiating objectives, strengthening and reinforcing the consultative relationship between Congress and the Administration. Concluding TPP or any major trade agreement without TPA undermines the Constitutional role of Congress over trade policy. Only Administrations that work closely with Congress and make it an equal partner in the negotiations are successful in passing and implementing trade deals.

Because of the critical importance of TPA in ensuring a successful outcome in the TPP negotiations, we will not support TPP if the agreement, even an agreement in principle, is completed before TPA is enacted. Once TPA is enacted, we will have laid the necessary groundwork to bring to conclusion a solid TPP agreement that will pass Congressional muster, and we will work with you to achieve this goal. Congress will not approve a TPP agreement that does not meet the objectives Congress first establishes through TPA. Therefore, TPA is the key to achieving the outcome we all want to see.

We call on the Administration to continue to push our trading partners to improve upon their current offers in the TPP negotiations. At the same time, we call for the entire Administration, including the President, to immediately and fully engage with the House, the Senate, and stakeholders to achieve enactment of the Bipartisan Congressional Trade Priorities Act (H.R. 3830) well before the end of 2014. Progress should continue with our TPP partners even as we work domestically with you and the President now to build support for- and ultimately pass TPA.”

CHINA ANTIDUMPING

CHICKEN

On July 8, 2014, the Chinese Ministry of Commerce (“MOFCOM”) announced that as a result of a WTO decision it would lower anti-dumping and countervailing duties on U.S. chicken imports to between 46.6 and 73.8 percent for producers like Tyson Foods Inc. and Butterfield Foods Co.

Under the previous anti-dumping duty orders, MOFCOM levied rates ranging from 50.3 to 53.4 percent for U.S. producers who responded to its investigation, while assigning an “all others” duty rate of 105.4 percent.

As for countervailing duties, MOFCOM said it would lower CVD rates between 4 and 4.2 percent from 4 to 12.5 percent with an “all others” rate of 30.3 percent

The duties were imposed in 2010 and two years later, in August 2013, a WTO panel sided with the US.

Although MOFCOM lowered the rates, the rates will still shut out most US chicken from China. As a result of the MOFCOM decisions on US chicken, U.S. exports of chicken to China have fallen 90 percent over the past four years, costing US chicken exporters an estimated $1 billion after China imposed the high antidumping duties in 2010.

PATENT/IP AND 337 CASES

337 CASES

LOOM KITS

On July 1, 2014 Choon’s Design Inc. filed a section 337 patent case against imports of certain loom kits for creating linked articles against China respondents:. Wangying of China, Yiwu Mengwang Craft & Art Factory of China; Shenzhen Xuncent Technology Co., Ltd of China; Hong Kong Haoguan Plastic Hardware Co., and Itcoolnomore of China.  See the attached ITC notice.  LOOM KITS

NEW PATENT AND TRADEMARK CASES AGAINST CHINESE COMPANIES, INCLUDING HUAWEI

On June 26, 2014, Orlando Communications filed the attached complaint for patent infringement against Huawei Technologies Co., Ltd., Huawei Technologies USA, Inc., Huawei Device USA, Inc. and T-Mobile US, Inc.ORLANDO HUAWEI

On July 9, 2014, Charles C. Freeny III, Bryan E. Freeny and James P. Freeny filed the attached complaint for patent infringement against ZTE (USA) Inc.  Freeney ZTE complaint

On July 9, 2014, Charles C. Freeny III, Bryan E. Freeny and James P. Freeny filed the attached complaint against Huawei Device USA, Inc. for patent infringement.  Freeny v Huawei complaint

PRODUCTS LIABILITY–DRYWALL

On July 17, 2014 in the attached Drywall Products liability case, 7-17-14 Taishan contempt In Re: Chinese Manufactured Drywall Products Liability Litigation, US Federal Judge Eldon E. Fallon in Louisiana barred a Chinese manufacturer from doing business in the U.S. until it shows up in court to answer questions about its failure to pay a $2.7 million default judgment in multidistrict litigation over defective drywall, holding the company in both civil and criminal contempt.  Taishan Gypsum Co. Ltd. must also cover $15,000 in attorneys’ fees for the plaintiffs in the case and pay a $40,000 fine, and should the company defy the injunction, it will get hit with another penalty equaling 25 percent of its annual profits.

As Judge Fallon states in the attached order:

“From 2005 to 2008 a housing boom coincided with the destruction caused by Hurricanes Katrina and Rita to sharply increase the demand for construction materials in the Gulf South and East Coast.  In response, Chinese companies manufactured, and sold to homeowners throughout the United States, considerable quantities of gypsum wallboard which came to be known as “Chinese drywall.” Homeowners experienced problems with the drywall. Specifically, the drywall emits various sulfide gases, damages structural mechanical and plumbing systems of the home, and damages other appliances in the home. The affected parties sued the entities involved in the manufacturing, importing, and installing the Chinese drywall. The cases multiplied and the Judicial Panel on Multidistrict Litigation (“MDL”), declared the matter an MDL and transferred the cases to this Court. After a period of discovery, it became clear that there were two principal manufacturers, (1) the Knauf Entities, and (2) the Taishan Entities. There are four cases in particular in which Taishan Entities have been served (via international means at the Hague, costing at least $100,000 per service of process).  . . . Defendant. Taishan refused to participate in any of these proceedings.   . . .so such judgment has become final and enforceable.  In order to execute the judgment, Plaintiffs moved for a Judgment Debtor Examination. The Court ordered Taishan to appear in open court on the morning of July 17 . . .Taishan failed to appear . . . has refused to appear in open court for the Examination.

As a consequence of Taishan’s refusal to appear at this Judgement Debtor Examination, in direct, willful violation of this Court’s June 20, 2014 order, the Court holds Taishan in contempt of court, both criminally and civilly. This refusal to appear is a direct contemptuous act occurring in open court after actual notice of the proceedings. Such disobedience of the Court’s order harms both the many other parties in this case and the decorum of the Court. Due to the “affront to the Court’s dignity [that] is[] widely observed,” it is necessary to summarily punish Taishan’s contempt. . . .

In punishing Taishan’s contempt, the Court “has broad discretion in assessing sanctions to protect the sanctity of its decrees and the legal process.” . . . In this massive suit, the harm from Taishan’s noncompliance is high and requires strong sanctions to coerce compliance and restore integrity to these proceedings. . . .

IT IS FURTHER ORDERED that Taishan, and any of its affiliates or subsidiaries, is hereby ENJOINED from conducting any business in the United States until or unless it participates in this judicial process. If Taishan violates this injunction, it must pay a further penalty of 25% of the profits earned by the company or its affililates who violate the order, for the year of the violation. . . .”

Lead counsel for the plaintiffs vowed to trace the company’s funds through its banks and make sure that the 4,000 homeowners involved in the litigation receive money to remediate their houses, which he said will cost between $200,000 and $300,000 per home. Levin added that the plaintiffs will also go after Taishan’s parent corporations, one of which, CNBM Group, is allegedly controlled by the Chinese government.

COMPLAINTS

On July 15, 2014, Vincent Dondson filed the attached products liability case against Beijing Capital Tire Company, Ltd. and World Wide Distribution Inc.  BEIJING TIRES CASE

CFIUS—CHINESE INVESTMENT IN THE US

On July 15, 2014, the Federal DC Circuit Court of Appeals in the attached Ralls Corp. v. Committee on Foreign Investments (“CFIUS”), RALLS VS CFIUS issued a very surprising decision reversing the Presidential/CFIUS decision to invalidate Ralls and a Chinese company’s attempt to acquire four Oregon wind firms that were close to a US military base on national security grounds.

There is a presumption that Presidential decisions with regard to foreign policy are given deference by the court, so it is unusual for the Court to overturn a Presidential decision, such as this decision by CFIUS. The president was first granted the authority to block proposed deals in the name of national security by the Exon-Florio Amendment in 1988.

The DC Circuit overturned the CFIUS decision on due process procedural grounds:

“In sum, we conclude that the Presidential Order deprived Ralls of constitutionally protected property interests without due process of law. We remand to the district court with instructions that Ralls be provided the requisite process set forth herein, which should include access to the unclassified evidence on which the President relied and an opportunity to respond thereto. . . . Should disputes arise on remand––such as an executive privilege claim––the district court is well-positioned to resolve them.”

Appeal is likely, either through a petition for en banc review or a petition to the U.S. Supreme Court.

The CFIUS review process, however, has been described as a black box into which foreign investors feed information, only to get out a yes or no answer with no way of appealing the decision. The DC Circuit’s decision, however, will require the President and CFIUS at a minimum to explain why the decision was made and grant the company respondent access to the unclassified evidence used to come to that decision and give the company an opportunity to rebut the evidence.

GENERAL LITIGATION–CONTRACT

On July 18, 2014, in the attached complaint Saint Jean Industries Inc. filed a breach of contract case against ZF Chassis Components LLC, ZF Lemforder and ZF Lemforder Shanghai Chassistech Co.  ZF CHASSIS SHANGHAI

ANTITRUST

VITAMIN C AND AUO OPTRONICS

On July 8, 2014 the Plaintiffs, US Purchasers of Vitamin C products, filed the attached brief, VITAMIN C PLAINTIFFS BRIEF 2ND CIRCUIT, urging the Second Circuit to reject the arguments in their briefs by the two Chinese companies and the Ministry of Commerce to overturn the $153 million jury award against them over price-fixing claims. Plaintiffs argued that the Chinese companies lack any evidence they were compelled to fix prices by the Chinese government. The purchasers argued that no Chinese law required any alleged co-conspirator to fix prices at high levels for vitamin C imported into the U.S.

As the Brief states:

“Regardless of the proper interpretation of Chinese law in this case, the facts as determined by the jury. . . showed that no entity, governmental or not governmental, acted to compel the conduct at issue here; rather, the jury found Appellants liable for their own voluntary conduct. . . .

The district court afforded deference to statements by the Ministry, and properly determined that Appellants did not meet their burden to prove the Chinese government compelled them to violate the Sherman Act as a matter of law. The jury had an ample evidentiary basis to conclude that the Chinese government did not compel Appellants’ cartel agreements as a factual matter. . . .

NCPG is liable for participating in the price-fixing conspiracy. The district court properly exercised personal jurisdiction over NCPG because NCPG participated in the vitamin C conspiracy targeting the United States. The “effect” of NCPG’s participating in price-fixing meetings in China, which caused buyers in the U.S. to purchase vitamin C at inflated prices, is sufficient to establish minimum contacts with New York. And the district court properly held that Appellees presented sufficient evidence for the jury to conclude that NCPG participated in the cartel.

The litigation dates back to 2005 and 2006, when the vitamin C purchasers began accusing Chinese manufacturers and their affiliates of taking part in an illegal cartel to fix prices and limit supply for exports. In March 2013 a jury determined that NCPG and HeBei met with competitors between December 2001 and June 2006 to coordinate pricing in China’s vitamin C industry, awarding the plaintiffs $54.1 million. Judge Cogan later trebled the damages, pushing the companies’ liability to $162.3 million.”

U.S. District Court Judge Brian Cogan refused to throw out the case based on MOFCOM’s argument of the so-called foreign sovereign compulsion defense that the Chinese government compelled the Chinese companies to set the export price.  In MOFCOM’s April brief to the 2nd Circuit, which was posted on my May blog post, the Ministry argued that the District Court’s decision should be thrown out because of the failure to defer to the Chinese government’s interpretation of Chinese law.

In the attached brief, the Plaintiffs responded:

“The Ministry and Appellants ask this Court to find Appellants immune from antitrust liability, despite a trial on the merits, because the Ministry says so. But no matter what level of deference is accorded to the Ministry’s statements concerning Chinese law, under Rule 44.1 this Court must determine itself whether that law provides a defense to claims of damages under the Sherman Act. . . .

The extent of deference sought by the Ministry in this case is breathtaking. The deference is not limited to how a regulation should be read, but seeks to include what factually happened, i.e., whether the Ministry or the Chamber actually exercised any compulsion.

For its current position, the Ministry ignores the contrary positions that the Chinese government has taken with the WTO, namely that in 2002 it gave up “export administration . . . of vitamin C. . . . .

The predicate for application of the act of state doctrine only exists when the suit “requires the Court to declare invalid . . . the official act of a foreign sovereign.” . . . . This Court need not declare invalid any official act of the Chinese government because (as the district court and the jury found) there was no official act of the Chinese government compelling Appellants’ actions. As the district court explained: “Chinese laws themselves were not placed on trial. Rather, the jury was only required to determine whether the Chinese government acted, not the propriety of its actions. . . .

Defendants that engage in antitrust conspiracies that affect a forum state have established the requisite “minimum contacts” for purposes of due process. . . .”

On July 15, 2014, the 9th Circuit Court of Appeals in the attached decision United States v. Hsiung and Au Optronics Corp. (“AUO”), AUO OPTRONICS, affirmed the convictions of all defendants, in a criminal antitrust case that stems from an international conspiracy between Taiwanese and Korean electronics manufacturers to fix prices for Liquid Crystal Display panels known as TFT-LCDs in violation of the Sherman Act. The Court also affirmed the $500 million fine imposed on AUO.

On July 16, 2014, the Plaintiffs argued that the recent 9th Circuit ruling in the AUO case supports their claims in the Vitamin C case against the Chinese companies. In particular, the 9th Circuit’s interpretation of the Foreign Trade Antitrust Improvements Act supports their argument that the FTAIA does not bar claims from vitamin C buyers who purchased the product directly for delivery in the U.S.

COMPLAINTS

HONG KONG EXCHANGE

In a series of antitrust cases that have been posted on my blog, companies are suing banks, including the Hong Kong Exchanges & Clearing Ltd, for triple damages under Section 1 and Section 2 of the Sherman act for conspiring to drive up prices of aluminum and zinc through the London Metal Exchange.  On July 8, 2014, the attached new antitrust complaint was filed by Galvanizers Company against the London Metal Exchange and number of other Metal Exchange companies, including the Hong Kong Exchanges & Clearing Ltd.  HONG KONG EXCHANGE

FOX CONN

On July 9, 2014, the attached new antitrust complaint was filed by Joseph Lai dba Ultra Tek against USB-Implementers Forum, Inc, Hon Hia Precision Industry Co., Ltd. and Foxconn International Holdings Ltd., including Foxconn (Kunshan) Computer Connect.  HON HAI FOX CONN ANTITRUST

CHINA ANTITRUST CASES

MOFCOM–SHIPPING DISAPPROVAL

As US antitrust cases have been on the rise in the United States, they are also rising in China. On June 17, 2014, in direct contrast to the US and EC, which had approved the merger, China’s Merger Office in the Ministry of Commerce known as MOFCOM blocked a proposed alliance among Danish shipping giant A.P. Moller-Maersk A/S and two of its partners to pool ships used on Eurasian trade routes.

MOFCOM declared that the merger agreement violated China’s anti-monopoly law because it excludes the effect of restricting competition in the European container liner shipping routes services market. As a result, Maersk and its partners agreed to stop work on the merger.

On June 20, 2014, MOFCOM issued the attached announcement,SHIPPING DISAPPROVAL, stating:

“On June 17, Ministry of Commerce announced its disapproval after the anti-monopoly investigation in the concentration of undertakings of Maersk, Mediterranean Shipping Company S.A. and CMA CGM establishing an Internet center. The large-scale collaboration of the three largest shipping companies in the world will bring profound influence to global shipping industry, and attract high attention from all circles. A leading official of Anti-monopoly Bureau of Ministry of Commerce made an explanation about the case.

The official said Ministry of Commerce has no objection to enterprises gaining advantageous market position through its competitiveness. For those enterprises who have already possessed certain market prowess and want to further strengthen the forces and achieve dominant market position through the concentration of undertakings, the impact on market competition should be analyzed seriously. After assessment of related market share, market control, market access and industrial features, Ministry of Commerce believes that after the concentration, the three companies will form a tight combination, and their share of transport capacity of Asia-Europe container liner transportation will reach 47%, with remarkable increase of market concentration.

The official said that during the investigation, Ministry of Commerce stated to the declarer that the concentration of undertakings may have the impact of competition elimination and restriction, and had several consultations on how to reduce the adverse impact of the concentration of undertakings to competition. The declarer submitted several remedy plans. After evaluation, Ministry of Commerce considered that there were no legal basis and convincing evidence to support the remedy plans, and it cannot be proved that the concentration of undertakings has more positive effect than adverse effect or accord with public interests. Therefore, according to the Antimonopoly Law of People’s Republic of China, Ministry of Commerce decided to forbid this concentration of undertakings.”

SED TALKS–CHINESE COMPETITION POLICY

On July 3, 2014, it was reported that US business associations demanded that in the upcoming US-China Strategic & Economic (“S&ED”) talks with China that the US raise the problems US companies are facing with the Chinese anti-monopoly law. The allegation was made that “it has become increasingly clear that the Chinese government has seized on using the AntiMonopoly Law (“AML”) to promote Chinese producer welfare and to advance industrial policies that nurture domestic enterprises.”

On July 12, 2014 at the end of the 6th meeting SED talks, the Treasury Department released the attached fact sheet, TREASURY DEPARTMENT ANNOUNCEMENT, about the outcome. With regards to the Chinese Anti-Monopoly law, the Treasury Department stated:

“Competition Law: In response to concerns of U.S. companies and government officials regarding enforcement of China’s Anti-Monopoly Law, China recognized that the objective of competition policy is to promote consumer welfare and economic efficiency, rather than to promote individual competitors or industries, and that enforcement of its competition law should be fair, objective, transparent, and nondiscriminatory. We are also encouraged by China’s commitment to provide any party under investigation with information about the competition concerns with the conduct or transaction, as well as an effective opportunity to present evidence in its defense.”

SECURITIES

CHINESE COMPANIES STRIKE BACK!—RECENT SECURITIES VICTORY BY DORSEY LAWYERS FOR CHINESE COMPANY

Dorsey lawyers Geoffrey Sant, Kent Schmidt, Bryan McGarry, Ray Liu, and Ted Farris representing Haiting Li and Pacific Bepure had a major victory for Chinese clients.As Mr. Sant states:

“For years, plaintiff law firms in the US have brought a seemingly endless stream of securities lawsuits against Chinese companies that are either listed or traded in the US.

  • In 2010, securities litigations against Chinese companies represented 46.8% of all US securities suits against non-US companies
  • In 2011, securities litigations against Chinese companies represented 59.6% of all US securities suits against non-US companies
  • In 2012, securities litigations against Chinese companies represented 47% of all US securities suits against non-US companies
  • In 2013, securities litigations against Chinese companies represented 45.7% of all US securities suits against non-US companies.

Last week, in what appears to be the first instance of its kind ever, a Chinese company sued under the securities laws in the United States not only achieved a dismissal of the lawsuit brought against it, but also obtained damages from the lawyers who sued the company. Specifically, in the attached Great Dynasty International Financial Holdings Ltd. v. Li order, GREAT DYNASTY Sanctions Order, the Court sanctioned the attorneys who brought a $5 million dollar claim against the company (Pacific Bepure), ordering the plaintiffs’ law firm and its lead attorneys to pay all of the legal expenses of the defendant. Past securities lawsuits against Chinese companies have resulted in many settlements and at least one massive $882 million default judgment. But last week’s ruling is the first time that a Chinese company has succeeded in not only dismissing securities litigation against it, but also obtaining payment from the very plaintiffs’ firm that brought the litigation. This may make plaintiff firms more hesitant or careful when bringing lawsuits against Chinese companies. Dorsey & Whitney represents Pacific Bepure, the company that won the sanctions award against the opposing attorneys.

In the Court’s decision sanctioning the plaintiffs’ law firm and attorneys, the Court stated:

  • Page 12-13.  “The Court finds that there is clear and convincing evidence that GDI’s counsel, Ms. Sally W. Mimms and Mr. John F. Kloecker of Locke Lord, LLP (collectively ‘Counsel’), assertion of federal securities law claims, including violation of section 10(b) and Rule 10b-5 and section 20(a), on behalf of GDI as well as most Assignor Shareholders, was both reckless and frivolous, and amounted to conduct tantamount to bad faith.”

第12-13页。“本院裁定有明确且令人信服的证据证明高汉的法律顾问即美国洛克律师事务所律师Sally W. Mimms女士和John F. Kloecker先生(统称‘法律顾问’)代表高汉以及大多数转让股东提出的联邦证券法索赔主张(包括违反第10(b)条和规则10b-5及第20(a)条的行为)是鲁莽且无法律事实依据的,等同于恶意的行为。”

  • Page 13.  “Counsel’s conduct was reckless and frivolous because a reasonable and competent inquiry into the law would have revealed that GDI and most Assignor Shareholders could not demonstrate (1) standing to assert federal securities fraud claims or (2) a causal connection between the purchase or sale [of] the PBEP securities in reliance on the alleged misrepresentations, and an economic loss.”

第13页。“法律顾问的行为是鲁莽且无法律事实依据的,因为对法律进行合理且合适的调查后将会发现高汉及大多数转让股东不能证明(1)坚持主张联邦证券欺诈索赔或(2)依赖于被指称的不实陈述的宝飘证券的购买或出售与经济损失之间的因果关系。”

  • Page 14.  “Counsel had all necessary facts in their possession of which to evaluate whether the claims could be asserted; although GDI clearly lacked standing and could not demonstrate a causal connection, Counsel asserted the claims.  Such conduct by Counsel was at the very least reckless and frivolous, because the claims had no basis in fact and Counsel failed to make a reasonable and competent inquiry into the law.”

第14页。“法律顾问拥有所有必要的事实来评估是否能提出诉讼请求;尽管高汉明显没有立场并且不能证明因果关系,法律顾问仍旧提出了诉讼请求。法律顾问的这种行为最起码是鲁莽且无依据的,因为索赔没有事实依据并且法律顾问未能对法律进行合理且合适的调查。”

  • Page 19.  “Here, the Court finds Ms. Mimms, Mr. Kloecker, and Locke Lord LLP jointly and severally liable for Defendants’ attorneys’ fees and costs in connection with litigating the frivolous federal securities fraud claims in both the complaint and the FAC.  Such an award would both vindicate the Court’s judicial authority while also mak[ing] Defendants whole for expenses incurred to defend the frivolous claims.”

第19页。“在此,本院裁定,对于被告在就诉状和FAC中的无依据联邦证券欺诈索赔进行诉讼时产生的律师费,Mimms女士、Kloecker先生和美国洛克律师事务所承担连带责任。此项裁决将维护本院的司法权威并同时使被告承担就无依据索赔进行辩护时产生的全部费用。”

This ruling may encourage some Chinese companies to more vigorously defend themselves, and in appropriate circumstances – such as meritless lawsuits – to fight the lawsuit rather than settle or to default. This, in turn, may cause plaintiff law firms to be less eager to bring lawsuits against Chinese companies.”

FOREIGN CORRUPT PRACTICES ACT (“FCPA”)

In the attached June edition of the FCPA Digest, Anti_Corruption_Digest_June2014, Dorsey lawyers report on a corruption investigation involving China stating:

“Serious Fraud Office (“SFO”) Investigates GlaxoSmithKline

Further to the April and May Digests which reported GSK investigations in Poland and China, it has been reported that the director of the SFO has opened a criminal investigation into the commercial practices of GlaxoSmithKline plc and its subsidiaries.

The SFO action follows the Chinese police announcement on 14 May that they had charged the former British boss of GSK’s China business and other colleagues with corruption, after an investigation disclosed evidence of a scheme to bribe doctors and hospitals.”

On July 10, 2014, David Richardson and Alesya Tepikina, two Dorsey lawyers, also issued the attached article entitled “Anti-Corruption Campaign in China – Causes of Corruption, and Hope? – Part One,” eu-cm-china-anti-corruption-campaign-brib, about the ongoing bribery and corruption investigations in China. In the Article they state:

” “I have seen corruption boil and bubble Till it o’er-run the stew.” – William Shakespeare, Measure for Measure

Corruption in the People’s Republic of China (“China”) presents a major administrative and financial burden on businesses operating in China and creates an unfavorable business environment (by undermining the operational efficiency of businesses and raising the costs and risks associated with doing business in China). As noted by some researchers, corruption is so widespread in China that it has become a norm, an unwritten law, and a way of living. Corruption threatens the vitality and international credibility of China’s emerging new economy. Out of 2,700 firms surveyed from November 2011 through March 2013, 19.2% reported that they were expected to give gifts to obtain import licenses, 18.8% said they were expected to give gifts to obtain construction permits, 10.9% reported they were expected to give gifts to tax inspectors and 10.7% said they were expected to give gifts to public officials “to get things done”. Bribery incidence (i.e., a percentage of firms that experienced at least one bribe payment request) was 11.6% and bribery depth (i.e., a percentage of public transactions where a gift or informal payment was requested) was 9.9%.

Since President Xi Jinping announced a crackdown on corruption among government officials in China in November 2012, multiple anti-graft and ant-extravagance regulations have been passed by government agencies at the central and local levels. The regulations allowed the Xi administration to single out officials for punishment, starting at the local level and moving up the ranks of party hierarchy.

This eUpdate is the first part in a series of eUpdates on topics related to the present anti-corruption campaign in China. It focuses on the social practices which allow corruption to thrive in China, and on economic reforms (and a developing legal system) which could reign in such corruption.

Extent of corruption

In 2013, the Transparency International’s Corruption Perceptions Index (the “Index”), which ranks countries based on the perception of corruption in their public sector, ranked China at 40.6 placing it in the 80th place out of 175 countries surveyed, on a par with Greece. China was ranked less corrupt than El Salvador, Jamaica, Panama, Russia and Peru, but more corrupt than Brazil and more developed countries. Over the past fourteen years, China’s rank remained at the lower range of the Index. For example, in 2008, China was ranked at 3.6 (on a scale of 0 – 10 used by the Index at that time), placing it in the 70th place out of 163 countries surveyed, and in 2000, China was ranked at 3.1, placing it in the 63rd place out of 90 countries surveyed. China historically ranked less corrupt than India, Russia and Venezuela, but more corrupt than Zambia, Colombia, Mexico, Ghana and South Korea.

As elsewhere, power over transactions and wealth in China appears to lead inevitably to corruption and corrupting behavior, or, in the words of Lord Acton, “power tends to corrupt and absolute power corrupts absolutely”. These words seem to apply perfectly to China, where the Communist Party has had a monopolistic power on politics and economics of the country for a prolonged period of time.

In China, as is often the case elsewhere, corruption is also a consequence of deeper stresses and changes. Underlying corruption is a growing tension between new policies and economic realities on the one hand, and traditional values, customs and established political system on the other, in the context of a political and institutional framework poorly-suited to handle such tension.

Understanding the characteristics and reasons underlying corruption in traditional China is crucial to comprehending the nature of the relationship between politics and economics in contemporary China, and to envisioning the future direction of reforms.

As described by some researchers, “post-reform corruption is a complex mixture of universal, transitional socialist and unique Chinese characteristics in its origins, consequences, as well as definitions.”

Definition and characteristics of corruption

One of the most general definitions of corruption, which seems to apply to China as well, describes it as ultimately “the use of public office for private gain”. It is also commonly understood as “behavior which deviates from the formal duties of a public role because of private-regarding (personal, close family, private clique) pecuniary or status gains; or violates rules against the exercise of certain types of private regarding behavior”.

Corruption can be characterized by the following features:

Power exploited for personal gain which includes monetary and non-monetary rewards;

An implicit contract concluded via a specific transaction, i.e. the transference of property rights, which because of its illegality is not subject to any officially legitimized institutional executive or sanctioning instance; and

At least two economic subjects interacting in the above transference of property right; this explicitly excludes the theft or embezzlement of state property as well as influencing of the political process to preserve power.

Guanxi networks

Corruption has deep roots and a long history in China. To understand the phenomenon of corruption as it applies to contemporary China, the historical role of patron-client and instrumental-personal ties in traditional China must first be analyzed.

The spread of corruption in traditional China is often connected to the Confucian concept of renzhi, or “government of the people,” as opposed to “government of law.” Chinese social behavior leading to corruption can be partly understood in terms of the hierarchical roles taught by Confucianism. These roles dictate the obligations an individual has in five cardinal relationships.

Among them is the filial responsibility of son toward father, which is the template for other hierarchical relationships in the system of Confucian ethics, such as that of subject-to-emperor and student-to-teacher. This hierarchical system of ethics was transplanted into the workplace, where it became the basis of a pervasive “organized dependency” of society upon the communist state. It evolved into an unofficial method utilized by workers to secure access to scarce goods and services (e.g., food, housing, or admission to schools) which were selectively distributed by shop officials. As benefits and resources were allocated directly by the planning bureaucracy in factories, workers relied on an informal “natural economy” of personal connections based on the exchange of gifts and favors in order to build privileged interactions with the gatekeepers who controlled them: factory officials.

Traditional Confucian values also emphasize consensus, lasting authority and clearly-defined personal relationships, a unity of state and society, and a socially encompassing moral order. These values led to social and cultural practices based on the extended personal-exchange and patron-client relationships encompassed by the term guanxi, which means interpersonal connections in order to secure favors in personal relations.

 Guanxi networks can be seen as institutions that arose centuries ago to secure trade relations in an environment that was only insufficiently covered by the legal system. An individual was able to expand his radius of economic relations, backed up by guanxi networks, to include various networks each with different resources.

A targeted expansion of an individual’s network to a counterparty which was regarded as useful for the pursuit of common interests could also be achieved by the giving of a gift or service. By accepting the gift or service, the counterparty obligated itself to perform an undefined reciprocal service at an unspecified time in the future. In this way, an implicit contract was concluded the fulfillment of which was linked to the particular network.

Guanxi networks can also be seen as clubs that guarantee their members the enforceability of available property rights in an institutionally disorderly environment, thus lowering transaction costs. To a certain extent, guanxi networks through personal connections and cooperation over a long period acted as a substitute for the market and the legal-institutional environment that supported it. At a later stage, connections served as a coordinating mechanism that allowed for a more efficient allocation of shortage goods than that provided by the fissures and fault lines of the communist economy. “This pattern is the result of structural features common to all communist factories: the workers’ economic dependence on the enterprise; political dependence on party and management; and, most important, the wide discretion of shop officials over promotion, pay, direct distributions, and sociopolitical services”.

Developed over centuries, guanxi networks were strongly anchored in traditional China and had an important function not only on an economic, but also on a political and social, level. They are still a factor in numerous areas in contemporary China, and virtually every Chinese person is connected to at least one guanxi network.  As noted by some researchers, guanxi networks stood in an antagonistic relationship to the Western system of legal rights. In the West, Christianity combined with pre-existing institutions to produce clear jurisdictional lines of top-down personalized authority. In the economic sphere, this led to legal definitions of property and ownership. Chinese institutions, however, rested on relationships and not jurisdictions, on obedience to one’s own roles and not on bureaucratic command structures. “Both jurisdictional principles and the autonomous individuals are historically absent in the Chinese worldview, and thus were not incorporated in Chinese institutions. Instead, Chinese society consists of networks of people whose actions are oriented by normative social relationships.”

Guanxi networks and economic reforms in China

With the advent of the “open-door policy” in China in 1978 and the subsequent reform period, guanxi networks underwent a gradual but substantial transformation from vertical relationships between officials and the rank and file to vertical relationships between officials and business. This change was brought about by the introduction of a market economy that was permitted to run in parallel with the old command economic mode. Following the implementation of the dual-track system, old central-administrative mechanisms were abandoned, often without putting in place new market-oriented substitutes capable of governing the transition. In this new hybrid system, the coexistence of guanxi networks and an emerging product market blurred the limits between regular economic transactions and corruption.

To a certain extent, guanxi networks advanced development of division of labor in the economic process and development in Chinese society over the centuries, and existed as complementary and parallel mechanisms for orderly economic interaction.

In the reform period, organization of economic activities by guanxi networks regained importance. Guanxi networks created governance structures that forced contract-honoring behavior of the transaction partners, analogous to vertical integration solutions.

Guanxi networks thus managed to provide an infrastructure in which the transaction partners could safeguard themselves from the ex post opportunism of one side. For some time, guanxi networks appeared to be an efficient and transaction-cost lowering co-ordination mechanism for regulating transactions in an environment characterized by high institutional uncertainty.

The reforms were aimed at the dissolution of established, central-administrative orderly mechanisms and development of the legal system. However, the first contract law did not take effect until July 1982, four years after the reform period had begun. The law was still strongly bound to the old central administrative system and quickly came into contradiction with subsequent laws and decrees, but was not revised until 1993. A comprehensive contract law only came into effect in October 1999. Even more problematic than this delayed enactment of laws was the poor enforcement of the existing laws mainly due to the administrative interventions and insufficient training of the officials enforcing the law.

The continuing liberalization of the Chinese economy requires a developed legal system which would provide a well framed regulatory and institutional framework for regulating financial and commercial transactions, testing them against principles of anti-corruption and offering legal security at a supra-individual level beyond social relationships. Such legal system would remove uncertainty as to enforcement of contractual rights and would therefore eliminate reliance on guanxi networks to safeguard transactions. However, transaction partners would need to regard such legal system as performing more effectively than guanxi networks before they could view it as preferable for regulating transactions. In addition, as noted by some researchers, pressure by political decision-makers would be required in order for the legal system to displace guanxi networks. Thereafter, as transaction costs for corrupt transactions would increase, guanxi networks would gradually lose importance and ultimately disappear, and incidences of corruption would decline.

TO BE CONTINUED”

SECURITIES COMPLAINTS

On June 16, 2014, Roger Artinoff filed the class action securities case against China Ceramics Co., Ltd., Huang Jia Dong, Su Pei Zhi, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky and Su Wei Feng.  CHINA CERAMICS

On June 20, 2014, Darryl Reitan filed a class action securities case against China Mobile Games & Entertainment Group, Ltd., Ken Jian Xiao, Ying Shuling, Credit Suisse Securities USA LLC, Barclays Capital, Inc., Jeffries LLC, Brean Capital LLC, and Nomura Securities International.  CHINA MOBILE

On June 26, 2014 Sophia Chang filed a class action securities case against China Mobile Games & Entertainment Group, Ltd., Ken Jian Xiao, Ying Shuling, Credit Suisse Securities USA LLC, Barclays Capital, Inc., Jeffries LLC, Brean Capital LLC, and Nomura Securities International.  CHINA MOBILE

On June 30, 2014, Michael H. Resh filed a class action securities case against China Agritech Inc., Yu Chan, Yau-Sing Tang, Gene Michael Bennett, Xiao Rong Teng, Ming Fang Zhu, Lun Zhang Dai, Charles Law, and Zheng Anne Wang. CHINA AGRITECH

On July 2, 2014, Richard Finlayson filed a class action securities case against China Ceramics Co., Ltd, Huang Jia Dong, Su Pei Zhu, Hen Man Edmund, Ding Wei Dong, Paul K. Kelly, Cheng Yan Davis, William L. Stulginsky, Su Wei Feng and Jianwei Liu.  CHINA CERAMICS LIU JIANWEI

On July 8, 2014, the SEC sued Child Van Wagoner & Bradshaw PLLC, a Salt Lake City accounting firm, for a substandard audit of Yuhe International, a Chinese chicken producer, which later admitted it lied to investors, resulting in millions of dollars in investor losses.  See the attached order.  SEC COMPLAINT YUHE AUDIT COMPANY

The SEC alleged that there was no evidence that the auditor made any inquiries concerning Yuhe’s internal policies related to the prevention of illegal acts or fraud, despite the resignation of the prior auditor, the existence of prohibited related party loans, numerous suspect accounting entries, a weak or nonexistent control environment and the use of personal bank accounts for Yuhe payments.

On July 15, 2014, Sungw An Yang filed a class action securities case against China XD Plastics Co., Ltd., Jie Han, and Taylor Zhang.  CHINA PLASTICS

On July 16, 2014, Shawn Tompkins filed a class action securities case against China XD Plastics Co., Ltd., Jie Han, and Taylor Zhang. TOMPKINS CHINA PLASTICS

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

Best regards,

Bill Perry

Law Blog Development & Digital Marketing by Adrian Dayton & Company