China-U.S. Trade Law

China-U.S. Trade Law

Insights & commentary on active trade disputes between China and the U.S.

U.S., China Clash Over Internet Great Wall 中美决战互联网长城

Posted in WTO

        U.S. Trade Representative Ron Kirk announced, on October 20th, 2011, that the United States, pursuant to World Trade Organization (“WTO”) rules, is requesting China to provide more information on its Internet restrictions. More than a week passed with Chinese media and the public paying the request little attention.

        It is not surprising that China is giving this sensitive request the silent treatment. Although Kirk claimed that the WTO request relates “specifically to commercial and trade impact of the Internet disruptions,” China is likely to perceive it from a geopolitical point of view. Public communications, or propaganda, is one of the three pillars of the ruling Chinese Communist Party. Moreover, the timing of this request, whether deliberate or coincidental, is less than ideal – submitted in the wake of the Arab Spring, in which the mass public was mobilized by social media via Internet and mobile phones. Most importantly, China has little if anything to lose in extending this process, even if it could lead to a WTO dispute settlement proceeding.

Why China?

        According to Google’s White Paper – Enabling Trade in the Era of Information Technologies: Breaking Down Barriers to the Free Flow of Information, more than 40 governments engage in broad-scale restriction of online information. Yet, the Office of U.S. Trade Representative (“USTR”) singled out Chinese Internet restrictions for a WTO request.

        Internet based services companies, such as Apple, Facebook and Google, are playing a central role in the U.S. economy and probably in the submission of this request. Apple reported $6.62 billion in third-quarter profits, slightly below quarterly earnings expectations for the first time in years. Google’s third quarterly earnings soared to $9.72 billion and rebounded to its highest growth rate since before the 2008 financial crisis. It also added more than 2,500 jobs in the same period.

        Expanding overseas is crucial to these companies’ growth. For instance, more than half of Google searches come from outside the United States, and revenues from abroad totaled $5.3 billion, representing 55 percent of its total revenues in the third quarter of 2011.

        China is the largest market in terms of Internet population. The number of China’s Internet users has exceeded 500 million, according to the Economist Intelligence Unit’s data, which is larger than the total population of the European Union, and roughly twice the size of the U.S. market. More importantly, the Chinese number has been growing at double-digit rates since 2008, far exceeding the 2.5 percent to 4.5 percent U.S. growth rate. 

        No other market will be able to reach the size of the Chinese market any time soon. For instance, the second most populous country, India, has only 83 million Internet users, less than one third of the U.S. size. The growth rate of India’s Internet population is lagging behind the Chinese as well.

        U.S. companies face challenges from Chinese Internet entrepreneurs in the Chinese market. A Silicon Valley venture capital investor – Dave McClure – recently praised his Chinese hosts as “most likely smarter and more aggressive” than their U.S. competitors. He probably went too far because the best-known Chinese Internet companies are copies of the leading U.S. high-tech companies. RenRen, which was modeled after Facebook, went public this year and is now valued at $2.25 billion as reported by the Financial Times’ Kathrin Hille. But McClure responded that, due to the vast size of the Chinese market, “it would be foolish not to copy” an idea that works.

China’s Internet Great Wall

        USTR stated that the WTO request focuses solely on “commercial and trade impact of the Internet disruptions,” but it also pointed out that “the United States believes that economic and social development of the Internet globally is best served by policies that encourage the free flow of information and prioritize individual empowerment and responsibility” in its letter to the Chinese Ambassador to the WTO. Thus, the United States is aware that it is pressing China on one of its most sensitive policy issues. 

        Richard McGregor, Washington Bureau Chief and former Beijing Bureau Chief of the Financial Times, and author of the widely acclaimed book The Party: The Secret World of China’s Communist Rulers, has written, “[t]he party is like God. He is everywhere [in China]. You just cannot see him.” He pointed out, at a Washington, DC seminar last July, that the Chinese Communist Party actively utilizes “3Ps” – personnel (the Central Organization Department, the world’s most powerful human resources outfit), propaganda, and PLA (the People’s Liberation Army) to maintain its power. The Party has fully realized the importance of the Internet in the digital era. Not surprisingly, outsiders have complained that “China has devoted extensive resources to building one of the largest and most sophisticated filtering systems in the world.” 

        The United States has been actively advocating human rights abroad and sees Internet freedom as an extension of traditional human rights contained in the universal declaration of human rights: free speech, free assembly, free association and freedom of the press. Secretary of State Hilary Clinton last year stepped in when Google clashed with the Chinese government over its Internet restrictions. After Google briefed the State Department, Secretary Clinton issued a statement: “[w]e look to the Chinese government for an explanation.” Despite USTR’s reference to commerce and trade, U.S. policy on human rights is bound up with the Internet.

        As propaganda plays such an important role in China, Chinese policy makers most likely would perceive the Google incident and the USTR request as events in a series of plots against China orchestrated by the U.S. government. China looks warily upon the destabilizing implications of the Arab Spring for authoritarian governments. In both China and the United States these revolutions are thought to have been fueled by Google and Facebook. It would be foolish to think that the Chinese government perceives the WTO request related only to the commercial and trade impacts of its Internet policies.

What’s Next?

        USTR submitted its informational request under paragraph 4 of Article III of the General Agreement on Trade in Services (“GATS”): “Each Member shall respond promptly to all requests by any other Member for specific information on any of its measures of general application or international agreements within the meaning of paragraph 1.” According to the BNA International Trade Daily, this request could lead to a formal consultation request, which is the first step toward a WTO Dispute Settlement Body (“DSB”) proceeding. Paragraph 1 of GATS Article XXIII says: “If any Member should consider that any other Member fails to carry out its obligations or specific commitments under this Agreement, it may with a view to reaching a mutually satisfactory resolution of the matter have recourse to the DSU.”

        China has little if anything to lose if it were not to respond to the U.S. request promptly. As we pointed out in previous blog articles, both the United States and China tend to exaggerate the significance of WTO DSB proceedings, and the United States treats every WTO defeat as sui generis, applicable to the immediate case and no others. Consequently, although the DSB Appellate Body issued a panel report favoring the United States in the case of market access to foreign audiovisual products (WTO DS363), China stalled for four years before taking action that would satisfy the United States. There is nothing to stop China from doing the same thing again were the United States to prevail, eventually, in an Internet case.

        WTO DSB proceedings are notoriously prolonged. For instance, in Brazil’s challenge of U.S. upland cotton subsidies (WTO DS267), it took the two sides almost eight years to enter a framework for a mutually agreed solution. In the case of China, the United States spent four years trying to tackle China’s restrictions on market access of foreign audiovisual products. The United States submitted a consultation request in April 2007, and the WTO Appellate Body did not circulate its report until December 2009. In the following months, the United States “expressed concern over the lack of any apparent progress by China in bringing its measures into compliance” at DSB meetings. It was not until April 2011 that the two sides reported to the DSB their agreed procedures to implement the panel recommendations. 

        The United States-based Internet services companies are not likely to gain much while waiting four years for a favorable outcome, and they are not waiting. Instead, Silicon Valley venture capitalists are continuing frequent visits to China seeking investment opportunities. The WTO case may create political theater, but is not likely to achieve a legal resolution to a political problem. 
 

China-U.S. Investment Forum 2011 2011美中投资论坛

Posted in CFIUS and Investment

Editor’s Note: Dr. Elliot Feldman on October 5, 2011 presented the following speech at China-U.S. Investment Forum 2011.

Our firm has published a treatise, in English and Chinese, entitled Mergers & Acquisitions in the United States: A Practical Guide for Non-U.S. Buyers. I am one of the authors and the overall editor. My status as Senior Partner in the firm has made me a book peddler.

The treatise contains twenty chapters covering how to make a deal, how to paper it, how to arrange for the best tax situation, due diligence for labor, pensions, intellectual property and government contracts, dealing with national security issues and reviews, the Foreign Corrupt Practices Act, export controls, trade, customs, immigration, tax and bilateral investment treaties, Sarbanes-Oxley, antitrust, products liability – all focusing on issues arising from foreign ownership of corporations and subsidiaries in the United States. We have paid special attention to Chinese investors. One might say that this treatise has been written for you.

The overwhelming message of this conference is that your investments are welcome in the United States. People here, people you may engage to help you, want you to succeed. We all understand and recognize the importance of your mission for you and for us.

Good wishes and good will count a great deal in producing success, but business is business. It is competitive and it can be tough. As China has embraced capitalism it has come to understand competition. In every business dealing, your adversary is potentially your friend, and your friend is potentially an adversary. Because of this paradox, we memorialize just about everything in legal documents.

Perhaps more than in any other country, the American tradition has been to rely on legal systems to prevent, or alternatively, to resolve business disputes. An inability to appreciate this aspect of American culture can become a competitive disadvantage, even a liability.

For these reasons, I want to begin our discussion with three things the treatise does not say, at least not explicitly, and I want to present these points as questions:

First, welcome to the United States. Do you have a lawyer? In the United States, business is not conducted without lawyers. My partners, in writing the treatise, constantly wanted to say, “Don’t try this on your own,” or “You need a lawyer to understand the labor laws,” for example. I removed all of that language in editing because I thought it obvious that, in a book written about law by lawyers, once a corporate decision-maker understands generally the subject matter, he would know to get a lawyer. The decision-maker would know that there is a wide range of legal issues that may affect the success of an acquired investment – the point of the book—and he would ask informed questions of a lawyer so he could understand the impact of those issues on his particular investment. He then would make well-informed decisions and would know that it is most efficient for the lawyer, first, to provide counsel, and then to handle the details and documents necessary to execute decisions. My experience, however, at least with China, has been that these conclusions are not so obvious. So, I am telling you. You can’t enter complex transactions – you can’t make deals here – without a lawyer.

A recent issue of the China Business Law Journal makes this point. Entitled “Culture Clash,” the article notes, “Chinese businesspeople may still prefer to do deals on a handshake and a prayer, rather than to do their homework,“ and “our research suggests that foreign and even Hong Kong companies are more likely than their Chinese counterparts to engage advisers to tackle pre-merger due diligence. They are also more likely to seek external help with issues involving human resources, and other matters that can be the key to the success or failure of a merger or acquisition.” Your partners and your competitors for investment opportunities in the United States seek competitive advantages based in large part on the knowledge and advice they take from lawyers. You will miss opportunities for success if you are not equally well informed and advised.

Second question, in two parts: do you have a lawyer in China? Do you trust her? I ask these questions because there is an important cultural difference between China and the United States when it comes to lawyers. Here, lawyers owe a fiduciary duty to their clients. They take an oath to be loyal to their clients, and they take their oath seriously. It is not only a business matter. It is a matter of ethics. Lawyers here frequently tend to be trusted advisers and confidantes because information provided to the lawyers typically cannot be disclosed to the government, and because the more information the lawyer has, the more accurate, insightful and valuable is the advice that the lawyer can give. In China, in our experience, at least, lawyers are treated more like employees. They are used for technical purposes, not as trusted advisers. The relationship, and the expectations, are different here.

Third question: If you were to be dissatisfied with the legal services your lawyer might provide, would you expect to pay the lawyer’s bill? For lawyers, time is money, and when you use your lawyer’s time, even if you don’t like the result, you need to pay for it. Chinese companies unfortunately have acquired a reputation in the United States for not paying their legal bills, even when the agreed upon advice has been given. Perhaps because of the different relationships and expectations that I mentioned, Chinese companies do not seem to value legal advice as much, and agreements to pay for such advice are given less significance. There are exceptions of course, but it is the overall impression that may matter most. In the United States, engagement of counsel is a contract and bills must be paid. Over time, it will become more difficult for Chinese companies refusing to pay bills to find good counsel, which will become a critical problem for companies seeking valuable advice to keep pace with their competitors.

These are candid, perhaps even tough, opening remarks, especially on a panel of lawyers. But, as you can see, I have been around for awhile, and I am devoted to the proposition that China and the United States must understand each other, learn from each other, and work closely together for the prosperity of the whole world.

Too often, now, I have seen contracts major Chinese corporations have entered with Americans in which the Chinese either engaged inadequate counsel, or no counsel, or did not trust their counsel enough to achieve agreements favorable for their objectives. Such failures lead to resentments, misgivings, and missed opportunities for Chinese corporations to succeed. They are not necessary. So, as you consider investing in the United States, get a lawyer, preferably a legal team of many specialties, and trust them.

I urge you to think strategically about your investments, and for the long term. Even as the United States population is only about 25 percent the size of yours, we continue to be the world’s greatest consumers. Until recently, you have been making things we have been buying, but enormous pressure has built up that Americans need to be making more of the things that Americans are buying. In capitalism, profits still go to the owners of the means of production. There is no reason why Chinese cannot be the owners of some of the means of production in the United States, making things for Americans to consume, and to sell to other parts of the world.

The first wave of Chinese foreign investment has concentrated on the natural resources of other countries, buying and shipping them back to China. China must now embark more seriously on a second wave, not in a race to control the resources of others, but to invest in the long term for everyone’s prosperity. The opportunities for such investment and engagement are without limit.

You must start your quest by determining what it is you want to buy, and how it will fit with who you already are and what you or your company want to be. Americans – lawyers, investment bankers, consultants – can all help you identify specific targets of acquisition or merger, but only when you are able to articulate what you want, why you want it, the form you want it in, and what you can afford to pay for it.

Most of those first considerations are internal to your companies, but if you want a lawyer to understand fully what you are trying to do, you should include a lawyer in the discussions from the beginning. In negotiating the deal and packaging it with proper and legally complete documents, lawyers are not merely draftsmen decorating your thoughts with the right phrases. They are craftsmen making sure your interests are protected under the law. You cannot negotiate agreements and sign documents without lawyers who appreciate fully what you are trying to do.

There is a lot to do before getting to a handshake. We have encountered Chinese companies that understand taxes to be an important part of a deal, but few who have appreciated that the domicile of an enterprise and its structure (whether wholly foreign-owned or a subsidiary or sheltered through an offshore holding company, or a number of other possibilities) can determine whether the deal will be profitable or will lose money and fail. Taxes should not decide whether to make a deal, but certainly must be part of the consideration as to where and how to make it.

In deal-making a favorite phrase is “due diligence.” Conventionally, it refers to examining the financial books of a company – assets in buildings and equipment, liabilities in loans and accounts due, inventory on hand and in the pipeline. Traditional Mergers & Acquisitions lawyers concentrate on these considerations. In our treatise, we think of due diligence a little differently. A great attraction to investing in the United States is the presence of a highly educated and skilled work force. However, the work force can also be a serious liability. You need to know, before entering a deal, whether the labor force is unionized, whether there are health and pension plans that must be honored. There is a law in the United States – the WARN Act — that prevents you from taking over a company and firing all the workers. Due diligence requires knowing all about the work force and its contractual and legal entitlements.

As the United States has become a service-based economy, the value and importance of intellectual property has become so important that it often exceeds, by far, the value of factories and inventory. In our view, potentially the greatest value in a deal will be found in intellectual property. However, intellectual property can also be contested. Before you invest, you need a complete inventory of the intellectual property. You need to know who owns it, whether and how it will convey in a merger or acquisition, and whether it is subject to pending or potential patent or trademark or trade secret lawsuits. Losing such lawsuits can destroy the value of a company.

Foreign ownership can mean the termination of contracts with the U.S. government. You need to know whether the company in which you are considering investment does business with the government, how dependent it is on that business, and whether the kind of business it is doing will be impacted by your financial intervention. A thorough examination of government contracts is also part of the due diligence process.

China is not unfamiliar with proposed projects implicating national security in the United States. There is a myth in China, however, that these projects always and must turn out badly. In fact, they can and usually do succeed, but there must be proper preparation, not only as to the legal process known as “CFIUS,” but the political process that lines up popular support. My partner Mike Oxley dealt with these issues intensively in Congress, and has written a chapter for our treatise all about them.

There is much more, of course, but I have no more time. I urge you to leap the first hurdle and get lawyers you trust and will engage from the very first steps in your journey. Then, start the journey with a detailed check list of what you need to know in order to make a deal. Finally, be prepared to make the deal. Become an investor here. Share in the profits of operating in the most technologically and economically advanced place in the world.

 

SPIL Mumbai Calls For Papers On International Trade SPIL孟买欢迎贸易投稿

Posted in China and India

This blog occasionally posts articles regarding international trade issues with respect to India that are connected to China – US trade issues.  In that spirit we wish to bring to our readers’ attention a recent call for papers to be presented at the 3rd Government Law College International Law Summit, organized by the Students for the Promotion of International Law (SPIL), Mumbai, in association with the Indian Merchants Chambers. The Summit is scheduled to take place from the 3rd – 5th February, 2012. SPIL Mumbai is calling for papers across the full spectrum of the Summit’s theme, which this year is International Trade Law and Economic Policy. In particular, they are looking for papers on international trade law, international investment law, international taxation, and competition law. Please click here for more information on this call for papers.

Times Change 风水轮流转

Posted in WTO

A year ago, American sentiment toward China, at least as expressed by many Members of Congress, was decidedly negative. Pending legislation included denunciations of China’s subsidization of exports and currency manipulation. Some Members of Congress wanted to restrict all Chinese imports. The slow American economic recovery was blamed to a significant degree on China.

Now, with Americans more focused on domestic economic woes than on any other single concern, complaints about China have receded. Illegal immigrants in the United States seem more of a target than anyone outside the country, even though there is no evidence at all that they have contributed to unemployment or economic stagnation. Historically, Americans tend to blame foreigners for economic hardship and there is a spike in trade remedy actions against foreign products. Not this time. Neither China nor anyone else but Americans themselves (and perhaps the aliens within), especially congressional leaders, seem to be blamed.

Still, China remains an available target, or at least a convenient means for collateral attacks on other trade priorities. The Obama Administration recognizes three pending trade agreements, with Korea, Colombia, and Panama, as potential stimuli for an expansion of exports that would create jobs. After three years renegotiating them to satisfy moderate Democrats as well as trade unions, the Administration declared them ready for congressional passage many months ago. Republicans, claiming to be champions of free trade, zealously advocated for their immediate passage until the Administration was satisfied with them. Then, Republicans launched a political campaign to deny workers displaced by trade agreements the Trade Adjustment Assistance (“TAA”) that for many years had enjoyed bipartisan support because the Administration linked TAA to passage of the trade deals.

The Administration may have pacified Democrats with the renegotiations and persuaded them that the trade agreements would bolster the economy, but not enough to prevent the insinuation of China as a barrier to final congressional approval. House of Representatives Minority Leader Nancy Pelosi (D-Calif.) has demanded a House vote on a bill retaliating against alleged Chinese currency manipulation as a pre-condition for voting on the trade deals. Her gambit, moreover, seems to have some companion support on the other side of Capitol Hill, where a small group of Senators plans to introduce a similar bill to retaliate against alleged Chinese currency manipulation. No such bill currently is pending, and none was passed in the last year, but Senator Jay Rockefeller (D-W. Va.) is proposing one, focused as much on a complaint about the WTO’s Appellate Body as on China.

With a crowded legislative agenda, bills on Chinese currency not yet fully conceptualized are not likely ever to become law. The very threat of them, however, could impede other international trade. The attempted linkage to the trade agreements with Korea, Colombia, and Panama is typical of congressional legislative tactics, but also a desperate sabotage of the Administration by its own political party.

The Administration wants and needs the trade deals. Republicans have wanted these trade deals, but have not wanted President Obama to enjoy the satisfaction and potential electoral help from passing them. The President could not pass them relying on his own party. At the moment when he seemed to have struck an agreement with Republicans to pass both TAA and the three free trade agreements, some Democrats seem to be seeking ways to stop him. Their general weapon of choice appears to be China, which Obama has not wanted to antagonize, and more specifically the currency, which his economists generally have advised not to pursue more than diplomacy has been pursuing already.

China, then, is no longer the principal target in bills about currency manipulation. In the Senate, the more fundamental complaint is about the WTO, and in the House the intended target is trade liberalization. In neither case is China likely to be used effectively, but it surely must be to China’s dismay that it is being used in these debates at all.

Other pending legislation regarding China arises more in the context of national security or simple nationalism: a resolution that would ban Chinese manufacture of parts for the President’s helicopter fleet; a ban on technology transfer from NASA. There is more than one “sense of” resolution, which has no legal consequence. Meanwhile, the Administration is promising China more from its export control reform than it can or will deliver, but at least it is actively gesturing in a desired direction.

Unlike a year ago, the legislative spotlight illuminating grievances over the economy and trade is not on China. Indeed, what some call the “Manchurian Candidate” for President, former Ambassador to China Jon Huntsman, has suggested that the United States must look to itself before looking to China for explanations of economic difficulties. The current focus should not be misinterpreted: the bills about China are not about China.

There are many reasons why. The most important is domestic. The summer spectacle of eighty-seven congressional freshmen holding the country’s debt ceiling hostage concentrated minds at home. Imminent possible failure of European banks, and of whole countries, has shifted focus from east to west. Renewed Wall Street bonuses and continuing home foreclosures are reminders of domestic greed, not foreign malevolence. The national conversation is not about China.

There is also a powerful explanation in the deliberate foreign policy toward China of the Obama Administration. Much has been done to routinize U.S.-China diplomacy and reduce earlier tensions. Even as there have been few concrete accomplishments, there have been many calming meetings. The Strategic and Economic Dialogue convened successfully. A summit of Presidents in Washington in January helped Obama recover from his doubtful Asian outing last November, and squads of potential Chinese investors have been visiting the United States, nurturing hope that some of the massive foreign reserves accumulated by China may yet find their way back to the United States. Better in the form of investments than loans or purchased bonds. China, at least rhetorically, has recognized that it cannot continue to attract foreign investment without making some foreign investments of its own.

In November, while in Asia, Obama called for resumption of the Doha Round. His Administration now admits that this objective is not likely to be fulfilled. With its failure will be a failure to capitalize on the imagined global trading rewards that might have energized the world’s economy, and diminish even more the instruments thought to be available for economic recovery. In place of multilateralism, bilateralism is a modest but nonetheless significant alternative.

Successful partnership with China becomes more important with every multilateral setback. Diplomacy that routinizes the relationship, that removes it from a critical spotlight, inevitably makes the partnership more attractive to China. The trick, however, must be to avoid appearing weak, or desperate, to China. As much as the United States needs China, China needs the United States. As congressional complaint about China is not about China, friendship with China is not necessarily so much about China either. Both are about solving economic problems felt at home but driven by forces as foreign as domestic.

And so it is for China, too. China needs the United States as much for China as for the United States, for domestic as well as foreign purposes.

Changes in American politics about China from a year ago say more about the United States than about China or U.S.-China relations. It will be important for both countries to recognize and understand the impact of domestic politics on their relations, and on the needs they have for each other.

 

Click Here for Chinese Translation

Europe Leaps Ahead Of United States In Bilateral Investment Treaty Negotiations With China 双边投资协定谈判,欧洲领先一步

Posted in CFIUS and Investment

中文请点击这里

The European Union has moved ahead of the United States in negotiating a bilateral investment treaty with China, as predicted previously here on Baker Hostetler’s China U.S. Trade Law blog. Chinese Commerce Minister Chen Deming and EU Trade Commissioner Karel De Gucht made the announcement on Thursday, July 14, 2011 in Beijing following the 25th meeting of the joint economic and trade commission between China and the European Union.

Both China and the European Union expressed concerns that likely will be key topics of the negotiations. As reported by Xinhua, Europe’s primary concerns are compulsory certification regulations, export credits, and exports of raw materials. For China, primary concerns are high tech trade, registration of herbal medicine, and Europe’s policies applying anti-subsidy, or countervailing duties, to China. These issues are unlikely to stand in the way of a treaty agreement, however, because China has demonstrated a significantly increased commitment to its economic relationship with Europe and is eager to continue attracting foreign investment.

Even before this month’s news about raising the United States’ debt ceiling, China appears to have been shifting its trade and investment focus away from the United States and toward Europe. Economists tracking China’s purchases of U.S. Treasury debt have observed an unexplained gap between the decrease of those purchases and an increase in China’s foreign exchange reserves. The Chinese government remains guarded about its foreign exchange holdings, but some economists believe the gap can be explained by a redirection of foreign investment to Europe.

The announcement of bilateral investment treaty negotiations also comes on the heels of Premier Wen Jiabao’s five-day tour of Hungary, Germany and England, which began on June 24. Trade between the EU and China has risen rapidly this year—twenty-one percent higher than last year, when bilateral trade totaled $480 billion (by comparison U.S.-China trade in 2010 totaled $457 billion). And China is reported to be the fastest rising destination for European exports.

Twelve agreements were signed between China and Hungary during the visit, and China has shown interest in purchasing Hungarian state bonds, as well as investing in the government-owned airline and rail companies. The China Development Bank reportedly has made a one billion euro credit available for joint business ventures with Hungary.

China and Britain reached trade agreements worth $2.2 billion and set goals for doubling trade between the two countries to $100 billion by 2015. British natural gas company, the BG Group, signed a $1.5 billion financing deal with Bank of China.

China and Germany signed agreements worth more than $15 billion, including purchases of aircraft and collaborative automobile investments. China already has a trade deficit with Germany, and German exports of high-technology goods continue to increase.

China also has given Europe repeated assurances that it would invest in European sovereign debt, including purchases of Greek government bonds, in order to continue to support Europe and the euro. EU Trade Commissioner De Gucht has maintained that China cannot be the solution for Europe’s debt crisis, but admits that the Chinese investment “certainly helps.”

Meanwhile, China is urging the United States to act responsibly and protect the interests of debtholders in deciding whether to raise the U.S. debt ceiling. Chinese ratings agencies have downgraded U.S. sovereign debt, which might be dismissed were it not for the fact that the three largest U.S. credit rating agencies lean ever more in that direction with the August 2 deadline fast approaching with no agreement in the U.S. Congress to raise the debt ceiling.

Europe has the attention of the Chinese for the moment. The United States will have to get its economic house in order, before it can start courting China again for an investment treaty. It also would not hurt for the United States to approve Free Trade Agreements with Colombia, Panama and South Korea, which have been in limbo since they first appeared to be concluded during the George W. Bush administration in 2006 and 2007, to show that a politically sensitive agreement like a U.S.-China investment treaty ultimately can get done. Perhaps the EU-China negotiations will lead to additional Chinese reforms that will help pave the way for a future U.S.-China treaty, but for now it would seem the United States has a lot of catching up to do.
 

Click Here for Chinese Translation

As Fragile As A China Doll 脆弱的中国娃娃

Posted in CVD

中文请点击这里

China As An Echo Of Japan

Many Americans worry today about China much the way they worried about Japan over a quarter century ago. Then, Harvard scholar Ezra Vogel’s Japan As Number One: Lessons for America, extolled the virtues of a controlled economy in a tightly-wound bureaucracy. Vogel exhorted Americans to copy Japan, whose students recorded higher scores on standardized tests, whose companies exported the larger part of their production with ever better quality, whose economy seemed to be growing exponentially as the economy in the United States was suffering stagflation.

Japan loved Vogel’s message. The Japanese translation of his book is still the best-selling non-fiction work in Japanese history. Yet, of course, he was wrong.

Japan’s controlled economy and centralized Ministry of International Trade and Industry triggered much of the philosophy and design behind changes in the countervailing duty laws to account for predatory targeting of foreign markets. The trade remedy tools for antidumping did not seem adequate to take on the wealth and power of the Japanese government. American concerns had focused on semiconductors and steel, but there were many other products ranging from portable typewriters to the most sophisticated computers. The slogan was that American companies could compete with any foreign private enterprise, but not with foreign governments. The perceived solution was to concentrate on challenging Japanese subsidies that were intended to put foreign (American) competition out of business.

Ironically, American producers rarely took advantage of these new tools under the countervailing duty laws to address concerns about imports from Japan. Instead, they continued to rely almost exclusively on the antidumping law, using these countervailing duty tools, originally created with Japan in mind, against other countries, most recently China. The sloganeering, however, remains the same – that it is one thing to compete with foreign private enterprise, and quite another to compete with a foreign government.

Japan was determined to move up the production value chain, from the manufacture and export of cheap knick-knacks to the premier rungs of automobiles and electronics. Generally, Japan succeeded under state direction, but the move up led to offshoring jobs for assembling and finishing sophisticated goods, and to the loss of jobs related to lower-cost production in textiles, transistor radios, and other items that had contributed to the reputation of “Made in Japan.”

There were many congressional calls in the United States for tough enforcement of the trade laws in order to guarantee a “level playing field” for American manufacturers. It was not the retaliatory trade laws, however, that slowed the Japanese engine. Instead, it was the stultifying bureaucracy, the government’s replacement of the market to pick winners and losers, the dominance of imitation over innovation favored by the students with high standardized test scores. It was the cost associated with graduating from cheap to more expensive and sophisticated goods. The robust economy turned stagnant, and lost years became lost decades. No one today in the United States would want to have been emulating Japan, even before the devastation of the 2011 earthquake and tsunami.

There are echoes from Japan in today’s global response to China, whose astonishing growth and achievement during the very period when Japan’s economy was failing has challenged some American beliefs in the free private enterprise system. China’s major producers are state-owned enterprises; the economy is subject to central control and management. China has proved Milton Friedman as wrong as Vogel: democracy is not a sine qua non for successful capitalism. An authoritarian state with a centralized economy can, at least under some circumstances and for some period of time, prosper.

 

Some, including many Chinese, argue that Americans should be learning from China how to recover from recession and manage an economy. Many Chinese are as enamored of the image of a surging China as the Japanese had been with the Vogel version of Japan. Two years of aggressive foreign policy at the end of the last decade meant, at least in part, to suggest to the United States that China had plenty of muscle of its own, a new self-confidence and independence.

 

Japan Not Then And China Not Now

Exponential extrapolation has always been seductive to social scientists. Uri Dadush and William Shaw, in Juggernaut: How Emerging Markets Are Reshaping Globalization, project annual 5 percent growth for China for the next forty years, neglecting the exercise of looking back forty years to ask whether anything predicted then would make sense now. China in 1970, in a Cultural Revolution banishing intellectuals and celebrating peasants, becoming the world’s leading exporter of manufactured goods, with more than 300 million people lifted out of poverty and expanding cities? The Soviet Union, instead of the great nuclear rival and threat to western capitalism, going out of business altogether? The type of predictions in Juggernaut rightly scare Americans. Some, who think they must compete with the juggernaut, consider imitation more than flattery.

Americans should no more consider imitating China today than they should have been learning many lessons from Japan in the 1970s and 1980s. It does not diminish the Chinese accomplishment to conclude that it should not be emulated, and that it will not last, in this form and this way, forever (nor even forty years). Japan’s great growth and achievement was a sustained progression from the devastation of World War II. It took around thirty years. China’s growth follows the Cultural Revolution. Once launched by Deng Xiao Ping it, too, took around thirty years.

This assessment does not mean that China has run its course, but it does mean that there is much that should (and does) worry China. There is much that is not right in the economy, and many warning signs immediately ahead.

Fragile China

There has been much commentary about China’s fears of instability. The Government reports tens of thousands of protests around the country every year, many violent and involving masses of people. Such protests seem surprising in an authoritarian state with a growing middle class and manifest materialism. From the outside looking in, the Chinese government is in control and the state is not legitimately threatened. The Chinese Government, however, does not see the protests that way.

China is on the precipice of a demographic challenge unlike any ever seen on such a scale by any country before, especially one induced by government policy. While the population is graying rapidly, there are few replacement workers because the one-child policy formalized in 1980 still applies. Its enforcement has been fitful, and there have been tens of thousands of breaches, but China estimates having prevented as many as 400 million births. Less apparent to authorities, however, are the consequences.

The Chinese population between 15 and 24 years old has been falling precipitously since 2000, to barely 12 percent of the population in 2011. The population over 65 is only 8 percent in 2011, but it will rise to 20 percent by 2040 while the population between 15 and 24 will be just over 10 percent. In a state that provides almost no social welfare net — no pensions, no health care – the growing prosperity that is producing an aging population will evaporate for the elderly, who will depend on a diminishing population to care for and support them.

There are economic forces that will compound this demographic challenge. China is determined to move up the value chain in production, just as Japan did in the 1960s and 1970s. Such movement, however, carries at least two consequences: wages rise, and the number of jobs declines. It already is well-known that Chinese enterprises, and foreign enterprises operating in China, have been offshoring jobs to Bangladesh and Indonesia and Malaysia and Vietnam because of soaring labor costs. The growing middle class is expanding a gap leaving the poor behind, making it more difficult for China to raise the next 100 million from poverty, and the rate of enterprises opening or expanding in China in order to benefit from cheap labor is in decline.

To keep the economy growing and an increasing population (despite the one-child policy) housed and fed, China is becoming the leading consumer of energy and the leading producer of carbon emissions on the planet. It will take a long time for China to catch up to the United States as a per capita consumer and polluter, but not to be the leader in both in sheer volumes and values.
The Chinese Government is very aware of the dangers presented by this twin challenge. It is addressing the carbon emissions problem aggressively by subsidizing the development of alternative fuels and power, but for the medium if not long term it cannot escape a dependence on coal for which there seems to be no technical fix as a source of significant pollution. China, like most other countries, has been discouraged by events in Japan from pursuing nuclear alternatives.

The energy challenge has been the focus of Chinese foreign direct investment. China is using accumulated foreign reserves to buy natural resources around the globe and ship them back to China. Not a small amount of resentment is building, however, against this raid on the rest of the world’s natural resources.

China faces a revolution of rising expectations that requires ever-growing quantities of energy, and a permanent challenge to create more jobs and increase wages simultaneously, another feat that appears impossible to sustain. The numbers of protests inevitably will rise in this environment that puts a premium on jobs and private responsibility.

There is also a fear of international contagion. The revolutions of colors (orange, lavender) have bled into seasons (the Arab spring). While outsiders may see no palpable threat to China, Chinese authorities are taking no chances. There is instability all around the Chinese neighborhood, from Chechnya to North Korea to Thailand to Pakistan. There are potential challenges on the peripheries (Tibet, Uighurs); there is a domestic Moslem population. There are daily battles over the seizure of land from peasants for speculation and development, all conditions that, Chinese authorities fear, could ignite something beyond control. And control is important in a country whose history in the absence of central control has been tragic.

The situation in China is inherently unstable because of the unyielding need to keep the economy expanding, employment and the middle class growing. World circumstances do not help. China has suppressed speech and responded forcefully to protests, but has delivered economically. Now, Chinese authorities must deliver economically lest more attention be drawn to the limitations on speech and the prevalence of protest. More individual freedoms surely will come with more prosperity and more international travel and global exposure, but authorities reasonably worry that they cannot maintain the breakneck speed that has produced the greatest improvement in living standards for the greatest number of people in the shortest period of time in the history of the world.

The Fragile China Doll

China has become a power in the world economy. It wants to be recognized for its economic importance, but forgiven as a new and developing country. It wants a place at every table, but not necessarily the burdens of responsibility that others at the table think it should share. It wants to project accomplishment and confidence (the Beijing Olympic ceremonies and the Shanghai Expo being the most outward indications), but it wants to be relieved of pressure. It is, domestically and internationally, layers of paradox.

China dolls are to be admired but not much handled, appreciated but not loved because they are too fragile to hold. Some Chinese authorities seem to perceive China now as a China doll, admirable but fragile, durable only as long as it is not handled. China dolls, however, are finished products, and China is a power in the making with a long way to being admired on a shelf. It will remain fragile, but must be ready for rough handling ahead.
 

Click Here for Chinese Translation

Export Controls And Investing In The United States 出口控制以及对美投资

Posted in China and India, Export Controls

This text is based on presentations on this subject made recently by Mr. Burke to the American Chamber of Commerce in Beijing and the American Chamber of Commerce in Shanghai.

Export Controls And The China-U.S. Trade Relationship

One of the leading Chinese complaints about the trade relationship between China and the United States is that U.S. export controls, according to China, unnecessarily limit what China can buy from the United States. The Obama Administration, apparently seeing some merit in China’s complaint, is seeking substantial reform of U.S. export controls as part of the President’s initiative to double U.S. exports in five years. This blog will report on those reform efforts in a future article. This article discusses the impact those export controls have on foreign investment in the United States, including Chinese, and the current state of U.S. export controls.

Export Controls Impact Investment

Export controls impact foreign investment in the United States both directly and indirectly. They impact investment directly because export control considerations are incorporated into national security reviews of foreign investment by the Committee on Foreign Investment in the United States. This issue is discussed in greater detail in National Security And Chinese Investment In The United States, which we published on this blog in May 2011.

Export controls indirectly affect foreign investment because they may limit the ability of the foreign parent to manage and obtain the full economic benefit from its newly acquired U.S. business. If the to–be-acquired U.S. company is registered with the State Department as a manufacturer or exporter of defense articles or supplier of defense services, that company must notify the State Department 60 days before ownership of the company can be transferred to a foreign person. The State Department could revoke the company’s registration and outstanding export licenses should it disapprove of the new foreign owner. Also, depending upon the company’s technology, export licenses may be needed from either the State Department or the Commerce Department in order for the company to disclose that technology to non-U.S. persons, even non-U.S. management personnel installed by the new owners. Similarly, export licenses may be needed to export the company’s products and technology to its new foreign affiliates, reducing the economic value of the deal to the new parent.

None of these requirements is peculiar to Chinese buyers of a registered American company. They apply to all foreign persons, regardless of nationality.

The U.S. Export Control Regime

The primary export control agencies are the State Department’s Directorate of Defense Trade Controls (“DDTC”) and the Commerce Department’s Bureau of Industry and Security (“BIS”). DDTC is responsible for the International Traffic in Arms Regulations (“ITAR”), which control exports of military items and satellites. BIS is responsible for the Export Administration Regulations (“EAR”), which control exports of civilian items.

The ITAR covers items specifically designed, developed, configured, adapted, or modified for a military application. It also covers firearms and commercial satellites. Many items, originally designed for military purposes, now have widespread commercial uses, but remain subject to the ITAR even when they will be used in commercial applications. Such items remain subject to the ITAR until such time as DDTC makes a commodity jurisdiction determination that they can be released from the ITAR.

Companies that manufacture or export items subject to the ITAR must be registered with DDTC and the export of such items almost always requires a license or other written authorization from DDTC. These requirements impair U.S. export trade with China, in particular, because the United States has an arms embargo against China. As a result, items controlled under the ITAR may not be exported to China and ITAR-controlled technical data may not be disclosed to Chinese nationals even in the United States. This restriction is one of the most contentious in Chinese-U.S. relations.

The EAR, in contrast to the ITAR, has a much more limited impact on U.S. exports to China. The EAR covers exports and re-exports of almost all civilian items. However, no licenses are required for most products to most destinations, including China. Although licenses are needed for some products to some destinations or for certain end-uses or end-users, these requirements cover an extremely small percentage of U.S. exports.

EAR Export Licensing Steps

There are four basic questions to ask in determining whether an export license from BIS is needed for a particular transaction. Those questions are:

1. Is the transaction subject to the EAR?
2. How is the product classified?
3. Is the product controlled to the planned destination?
4. Can a license exception be used?

Transactions are subject to the EAR when they involve products or technical data not controlled by other U.S. agencies, such as DDTC, that are being exported from the United States, or are U.S.-origin products or technology being re-exported from one foreign country to another. The EAR also covers deemed exports and re-exports, which occur when technical data controlled by the EAR is disclosed to a foreign national in the United States or a third country national in the original country of export. The EAR does not cover the transfer or disclosure of information in the public domain.

Companies classify their products for export control purposes by determining which entry on the Commerce Control List matches their product. The Commerce Control List contains several hundred Export Commodity Classification Numbers (“ECCN”). Each ECCN contains detailed technical parameters describing the items covered. When the product does not fit within any of the ECCNs listed, it is classified as “EAR99.”

Products classified as EAR99 require export licenses only when the destination is a comprehensively embargoed country, such as Iran, or the specific end-use or end-user is prohibited for purposes of non-proliferation of chemical, biological or nuclear weapons. For other products, the exporter must match the destination and the reason for control on the Commerce Country Chart to determine whether the product is controlled to the planned destination. The following is an illustrative excerpt from the Commerce Country Chart:

The ECCN that covers the product will state the reason or reasons for control. When the only reason listed is National Security 2 (NS2), then, by looking at the Commerce Country Chart, the exporter can determine that the product is not controlled for export to Australia, but is to China and Sudan. In most cases the answer to the third question, as determined from the Commerce Country Chart, is “no” (the item is not controlled to the destination) and the transaction can go forward without an export license.

When the answer to the third question is “yes,” the exporter must move on to the fourth question and determine whether it can use an exception to the license requirements. There are 16 license exceptions listed in the EAR – were any to apply, the product could be exported to that destination without a license. One of the most popular exceptions used for exports to China is License Exception CIV, which allows exports to civilian end-users in China where the ECCN listing for product contains the legend “CIV – Yes.”

When the answer to the fourth question is “no” (no license exceptions are available), the company must apply to BIS for an export license. In most cases, BIS issues a license. Out of the 21,660 applications in Fiscal 2010, BIS approved 18,020, returned 3,513 without action (usually when the application was incomplete or no license was needed) and denied only 127. The average processing time was 29 days.

Conclusion

The export controls under the EAR have not been a major impediment to U.S. exports, including exports to China. By contrast, the export controls under the ITAR are a significant impediment to increasing U.S. exports to China. It is unlikely that the arms embargo against China would be lifted soon. However, there are numerous products currently subject to the ITAR that could be exported for commercial end-uses in China with no negative impact on U.S. national security. Reforms of the export control regime that move as many of these products as possible from control under the ITAR to control under the EAR, could pave the way for substantially increasing U.S. exports to China.
Click Here for Chinese Translation

National Security And Chinese Investment In The United States 国家安全审查及中国对美投资

Posted in CFIUS and Investment

This text is based on presentations on this subject made recently by Mr. Burke to the American Chamber of Commerce in Beijing, the American Chamber of Commece in Shanghai, and the CCH/Wolters Kluwer conference for in-house legal counsel in Beijing.

Some Chinese Mistakenly Think They Are Unwelcome

Chinese direct investment in the United States is increasing. Last year Chinese companies doubled the amount of money they invested in the United States compared to 2009.

There are many reasons why Chinese companies would want to acquire or set up operations in the United States. Most costs of doing business in the United States, other than labor, are now cheaper than in areas of China with the advanced infrastructure that modern industrial operations need. Production in the United States often provides better access to customers; allows companies to take advantage of Buy American provisions when selling to government agencies; and enables companies to avoid trade barriers, such as antidumping or countervailing duties assessed on imports from China.

Notwithstanding these reasons for investing in the United States, many Chinese companies are hesitant to do so because of media reports on national security reviews of foreign investment that have given the impression the United States is hostile to foreign investment, or at least investment from China. The media have created the impression that Chinese companies are forced to abandon acquisitions in the United States because of political opposition and national security reviews by the Committee on Foreign Investment in the United States (“CFIUS”).

The reality is that the United States welcomes most Chinese investment. The United States has no restrictions on greenfield investment by foreigners, except for some state (non-federal) laws that limit the ability of foreign persons to purchase farmland. Thus, foreigners may create new U.S. businesses on the same basis as Americans. Recent examples of Chinese greenfield investments in the United States include Tianjin Pipe’s steel pipe mill in Texas; Suntech Power’s solar panel assembly plant in Arizona; and American Yuncheng’s gravure cylinder plant in South Carolina.

CFIUS national security reviews apply only to the acquisition of existing U.S. businesses. Even in those circumstances, only three to seven percent of foreign acquisitions each year go through the CFIUS process. Blocked acquisitions are rare; projects blocked presented unique challenges.

Chinese Transactional Failures Have Been Exceptions

A handful of Chinese acquisitions have been abandoned as a result of CFIUS review, or political opposition. However, circumstances unique to each transaction, not general hostility to Chinese investment, caused those deals to fail.

One failure was Northwest Non Ferrous International Investment Co. Ltd.’s attempted acquisition of Firstgold Corp., a gold mining company in Nevada. That acquisition was abandoned just before the end of a CFIUS review due to the expectation of an unfavorable CFIUS recommendation. Questions had been raised because of sensitive military and intelligence installations adjacent to the mines. Had those mines been located elsewhere, the acquisition likely would have sailed through the national security review.

The failed acquisitions receiving the most press attention recently include Huawei Technologies Co. Ltd.’s attempt to acquire 3Com and, more recently, assets from 3Leaf Systems. Huawei bought intellectual property rights from 3Leaf Systems, a developer of cloud computing, without filing a notification with CFIUS. CFIUS learned about the transaction and self-initiated a national security review that resulted in a recommendation that Huawei be ordered to divest.

There were several reasons why the 3Leaf transaction ended badly for Huawei. The Pentagon had serious concerns about the technology that were magnified by a lingering mistrust of Huawei following the 3Com transaction and its mishandling of the CFIUS process in the 3Leaf case. The more important reason, however, was a more general mistrust of Huawei in the U.S. Government due to allegations of close corporate connections to the People’s Liberation Army, espionage, intellectual property theft, and support for terrorist regimes (Iran, Iraq and the Taliban). These circumstances were peculiar to Huawei. The Huawei transactional failure does not indicate any general hostility to Chinese investment.

The Legal Framework And Its Operation: CFIUS And FINSA

Congress enacted the Foreign Investment National Security Act Of 2007 (“FINSA”) on July 26, 2007 in reaction to Dubai Ports World and other controversies to improve accountability and transparency in the CFIUS process. FINSA provides that the President may “suspend or prohibit any covered transaction” whenever the President finds credible evidence “that the foreign interest exercising control might take action that threatens to impair the national security.” However, the purpose of FINSA set out in the preamble to the legislation is “[t]o ensure national security while promoting foreign investment ….” Thus, FINSA reinforces that, notwithstanding the need to protect national security, promoting foreign investment in the United States remains the policy of the U.S. Government. The following statistics on CFIUS reviews in the three years (2008 to 2010) since FINSA became law demonstrates that this law is not an impediment to the vast majority of foreign acquisitions of U.S. business:

  •      National security reviews                                                                                313
  •      Extended investigations                                                                                    83
  •      Voluntary withdrawals (most re-filed and subsequently cleared)             42
  •      Cases submitted to the President                                                                    0

To be governed by FINSA a transaction must be a covered transaction, which means that the transaction must involve a foreign person obtaining control over an existing US business. A covered transaction can be blocked only if it would impair national security and that impairment cannot be remedied through some other means.

FINSA defines “covered transaction” to mean “mergers, acquisitions, or takeovers . . . by or with foreign persons which could result in foreign control of persons engaged in interstate commerce in the United States.” It only covers transactions involving an existing US business. As noted previously, greenfield investments, such as the Tianjin Pipe project in Texas, are not covered. It covers an acquisition of one foreign company by another if control of a U.S. business were to change.

The regulations implementing FINSA, which the Treasury Department published for CFIUS, define “control” as:

the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity . . . .

A ten percent passive investment in a U.S. company generally would not be enough to meet this definition of control. However, contractual arrangements that give a foreigner control of important matters can cause a transaction in which the foreign entity does not obtain any equity to be a “covered transaction.”

CFIUS’s implementing regulations define “foreign person” to be “(a) Any foreign national, foreign government, or foreign entity; or (b) Any entity over which control is exercised or exercisable by a foreign national, foreign government, or foreign entity.” This definition includes US subsidiaries of foreign companies.

Neither FINSA, nor the implementing regulations, defines “national security.” Consequently CFIUS has broad discretion to define national security on a case-by-case basis. Other provisions in FINSA, the implementing regulations, the legislative history and CFIUS’s subsequent actions indicate the following key areas in which national security concerns are likely to arise:

  1. Defense industries, which would include companies that provide “defense articles” or “defense services” that are subject to heightened export controls under the International Traffic in Arms Regulations (“ITAR”) and the defense industrial base, which provides products needed for making military items;
  2. Proximity to critical government facilities, as shown in the Firstgold case;
  3. Critical infrastructure, defined in the implementing regulations as “a system or asset, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular system or asset . . . would have a debilitating impact on national security.” The company’s system or assets have to be big enough to make a difference under this definition.
  4. Critical technologies, which would include (a) items controlled under the ITAR, (b) items controlled under Export Administration Regulations for national security, chemical and biological weapons proliferation, nuclear proliferation or missile proliferation reasons (probably only if the item needed a license to be exported to the acquiring company’s home country), (c) items controlled under the Export and Import of Nuclear Equipment and Materials Regulations, and (d) items controlled under the Export and Import of Select Agents and Toxins Regulations (threats to plant, animal or human health);
  5. Energy and other critical resources, including essential raw materials for defense industries and critical infrastructure.

FINSA requires heightened review of proposed transactions in which a foreign government would obtain control of a U.S. business. There is a presumption that transactions by foreign governments or entities controlled by foreign governments receive an additional 45-day extended investigation beyond the initial 30-day review under which CFIUS clears most transactions. This presumption can be waived if the Treasury Secretary and the head of the other agency designated as the lead for the particular CFIUS review “jointly determine . . . that the transaction will not impair the national security of the United States.”

When a transaction is considered to be foreign government-controlled, FINSA requires CFIUS to consider the adherence of the country to non-proliferation control regimes, the U.S. relationship with the country, specifically on cooperation with counter-terrorism efforts, and the potential for diversion of technologies with military applications.

Conclusion

The United States is open to investment, but potential investors do need to pay attention to legitimate national security concerns. For the vast majority of foreign investors, including investors from China, the CFIUS review process is not an impediment. Greenfield investments do not require a CFIUS review. Most cross-border mergers and acquisitions do not require a CFIUS review. Most CFIUS reviews clear the transaction within 30 days. Only a handful of transactions have been abandoned as a result of national security concerns.

 

Unless It’s All Politics, China And The United States Should Tone It Down 若非空谈政治,美中都应放缓语调

Posted in Antidumping, CVD, WTO

The World Trade Organization’s Appellate Body issued a report on March 11, 2011 in which the People’s Republic of China broke a skein of legal losses by recovering some of the ground taken by a WTO panel last autumn. The Chinese Government loudly celebrated a major victory, while U.S. Trade Representative Ron Kirk denounced a “clear case of overreaching” in a “deeply troubling” decision of the Appellate Body.

Were one to listen to the rhetoric of the two governments too closely, one might perceive the WTO proceedings as more of a political than legal affair. The Chinese did not win that much, and the United States did not lose that much. There had to have been powerful political motivations for the over-wrought pronouncements of the two sides.

China elected to consolidate complaints regarding the final Department of Commerce (“Commerce”) determinations in four different antidumping/countervailing duty investigations – hence, eight investigations into four different products – into one WTO complaint. It did not appeal any of the determinations to the U.S. Court of International Trade (“CIT”), and did not challenge any of the four final determinations of the U.S. International Trade Commission in any forum. Hence, what could have been twelve WTO cases and a like number of CIT cases came down to one WTO case.

Double Counting

China complained of many things in the WTO case, but here, too, there was selectivity. The only objection raised regarding the four antidumping final determinations was that Commerce was double-counting remedies, applying duties twice on the same cost or expense. Allegedly subsidized electricity, for example, was countervailed, but also compared to an external surrogate value as an inflated cost in the dumping case and assigned part of the antidumping margin. Meanwhile, China challenged virtually all of the subsidy findings.

The CIT already had ruled that Commerce could not investigate simultaneously for the same merchandise, over the same time period, both antidumping and subsidy allegations, because applying a non-market economy methodology in the antidumping investigation yields a double remedy. Commerce had concluded, in 2007, that it could investigate subsidy allegations in a non-market economy, notwithstanding the definition of subsidies as government financial contributions that are market-distorting.

The CIT did not deny Commerce its desire to conduct subsidy investigations of non-market economies. Instead, it ruled that Commerce would have to figure out how to avoid double-counting when conducting antidumping and countervailing duty investigations simultaneously.

The CIT decision, in the OTR case (GPX Intern. Tire Corp. v. United States, No. 08-00285, 715 F.Supp.2d 1337 (Ct. Int’l Trade 2010)), is on appeal before the Court of Appeals for the Federal Circuit (“CAFC”). The Appellate Body decision ought to strengthen China’s hand in that appeal, albeit that the Chinese Government is not a party. U.S. courts have never treated WTO decisions as dispositive, nor even necessarily persuasive, but a NAFTA panel did apply the Charming Betsy doctrine to require Commerce to interpret U.S. law compatibly with international obligations whenever possible.  The CIT here has said subsidy investigations of non-market economies are permissible, but not in conjunction with dumping investigations. The CAFC, were it to uphold the CIT, would rule consistently with the international obligation articulated in the Appellate Body report. There is no U.S. court ruling putting U.S. law at variance with the international obligation.

This Chinese victory, then, already had been won. The CAFC could have, and still could, overturn the CIT. The CAFC could do so without reference to the Charming Betsy doctrine and applicable precedent unless the doctrine were invoked and well-argued by counsel for the Chinese party. Even then, the CAFC ruling, not the Appellate Body report, will determine U.S. law on this question.
Chinese authorities often still insist that the United States cannot investigate subsidies allegations while denying China market economy status. That issue, however, is not in play in the Appellate Body report. Nor would its resolution solve China’s problem with respect to Commerce’s methodology.

Extending a cramped WTO Appellate Body report interpreting Article 14(d) of the Subsidies and Countervailing Measures Agreement in Canada’s complaint against the United States over the use of cross-border benchmarks for analyzing softwood lumber prices, Commerce has treated China in countervailing duty cases the way it attempted to treat Canada. Inasmuch as Canada could not be accused of being a non-market economy, Commerce there established that the methodology of using prices from outside a country in a subsidies case is not exclusive to non-market economies. China did not seem to argue at the WTO any defect in Commerce’s interpretation of the Appellate Body’s softwood lumber report. By accepting the interpretation, it sealed its own fate.

The recognition now of China as a market economy would change very little, if anything, for China in countervailing duty cases. Applying the reasoning applied to Canada, Commerce would continue to select price benchmarks from outside China, thereby utilizing the same methodology it uses now. Indeed, China’s pleading for market economy recognition could lead to Commerce’s solution to the puzzle it was presented by the CIT: as with any other market economy, Commerce could bring dumping and subsidies cases simultaneously against a China recognized as a market economy, and nonetheless could use a countervailing duty methodology founded on the same principles as the NME dumping methodology.

For these reasons – that the CIT already had delivered this victory; that recognition as a market economy could solve Commerce’s problem more than China’s – both China and the United States have exaggerated the significance of the Appellate Body report. There may be powerful political reasons on both sides for the exaggeration, not to be found in a reasoned interpretation of the law.

The Other Chinese Victory

The other Chinese victory accorded by the Appellate Body on March 11 is little more revolutionary than the decision on double-counting, but it may have a greater impact. Commerce has been treating automatically all Chinese state-owned enterprises (“SOE”) as “public bodies,” controlled and directed by the government. This operating assumption enabled Commerce to treat the provision of inputs in the manufacturing process from SOEs as financial contributions because they automatically came from the government. Then Commerce only had to show that the price of the input, when compared to a price from outside China, was less in order to measure the size of the subsidy.

Notwithstanding the automatic treatment of SOEs as public bodies, Commerce already was completing the analysis as to whether SOEs provided inputs at prices that would make them countervailable. The Appellate Body decision will require a more complete analysis every time. Instead of assuming government control, such that the SOE is acting as a public body, Commerce will have to develop evidence that the provision of the input is not a purely economic or commercial act.

The Uruguay Round Agreements recognized that state-owned enterprises could be commercial and had to be treated without assumptions about state direction or control. Commerce’s automatic judgment was at variance with this recognition; the Appellate Body corrected Commerce by requiring it to respect the proposition that state-owned enterprises are legitimate entities in the world trading system. Were it otherwise, the United States would have a very difficult time dealing with General Motors and Chrysler, among other examples. Consequently, the Appellate Body did not take a position that could be considered very remarkable.

The United States pretends that other countries have SOEs, but that all enterprises in the United States are private. As long as that fiction is maintained, the United States will continue to treat SOEs as different and as state-controlled, whether to greater or lesser degrees. Beyond trade, the Appellate Body report theoretically could have additional impact were the definition of the SOE as a non-public body to evolve and become more accepted in the United States, but the Appellate Body report, as a legal matter, pertains only to trade, and only to subsidies disputes, nothing more.

The Losses

China lost everything else. All bank loans from state-owned banks automatically are suspect and subject to comparison for loan terms with banks outside China. There was no effective challenge to the U.S. use of out-of-country benchmarks because China’s complaint was focused on the principle rather than the particulars. The principle of comparing land values to property outside China was endorsed by the panel and left untouched by the Appellate Body; the absurdity of comparing rural Shandong Province to urban Bangkok was permitted without comment. Every other Commerce judgment about subsidies was upheld.

Because none of these issues has been adjudicated in U.S. courts, they all remain subject to challenge. The WTO did not specifically adjudicate them. However, Commerce will continue its practice with respect to all of them, and over the next cases will establish administrative practice difficult for China, as a result of neglect, to overcome.

Winning And Losing Less Than Imagined

The WTO’s decisions have only prospective effect. In addition, the United States treats every defeat as sui generis, applicable to the immediate case and no others. The United States likely will ignore the decision on double remedies, preferring the decision of the Court of Appeals. It may ignore the decision on SOEs except for the administrative reviews in the four cases brought through the WTO appeals process. It likely will promise implementation, take the maximum “reasonable period of time” possible, fail to implement to China’s satisfaction, and oblige China to request a Section 21.5 compliance panel. Consequently, it could take China years to achieve compliance from the Appellate Body decision, and then may enjoy a very limited victory. All the while, the United States Congress will decry the Appellate Body and seek to build pressure against adverse decisions like a bench coach harassing basketball referees. It was not inappropriate, as seen from Congress, that the Appellate Body Report came with March Madness.

Such a limited outcome will be the product of Chinese decisions to rely on the WTO instead of U.S. courts; to consolidate cases instead of appealing them separately; of exaggerating publicly its victory so as to arouse public (and consequently political) resistance in the United States. It will also be the product of the WTO’s institutional weakness, limited to prospective and indirect enforcement, and then only with the cooperation of the parties.

It will be important for both parties to reduce popular expectations and to manage disappointments. Otherwise, in their competition to celebrate the virtues of the WTO, they will undermine the very institution upon which both, for political if not legal and economic reasons, have decided to rely.

Feldman Addresses UNCTAD Conference on Non Tariff Measures and Chinese Foreign Trade 费德门在联合国会议上探讨贸易壁垒及中国对外贸易

Posted in CPSC, WTO

Elliot J. Feldman was the keynote speaker opening an applied International Trade Workshop in Beijing on March 21, sponsored by the University of International Business and Economics of Beijing and the United Nations Conference on Trade and Development (“UNCTAD”). The conference, on “Non Tariff Measures and Chinese Foreign Trade,” comes at a time when there has been growing concern about global protectionism advanced by non-tariff measures, especially in China. UNCTAD is launching a major survey effort to identify non-tariff measures and to design strategies to deal with them.

Dr. Feldman was the only attorney invited to the workshop, the only speaker during the two-day conference from the private sector, and one of only two Americans. Others were university professors, international and Chinese civil servants, almost all economists specializing in trade and international development. The second American on the program was Michael Ferrantino, the Lead International Economist at the United States International Trade Commission.

Dr. Feldman emphasized how difficult it can be to identify non-tariff measures and to distinguish them from legitimate concerns about public health and safety. He shared experiences from his practice in which non tariff measures have played an important role in international trade disputes, applauded the project to create a taxonomy of non-tariff measures globally and to seek a strategy for minimizing them, and urged the workshop participants to promote an understanding of the underlying political and economic motivations for erecting such trade barriers so that compromises can be reached protecting public health and safety legitimately while minimizing impediments to international trade.

Please click here to read the text of Dr. Feldman’s address.