By Dan Harris
Our China lawyers are constantly getting asked how China’s slowing economy and all that is going on between China and the United States will impact foreign business with China. We get asked this by clients, by reporters, and even by friends and those who ask us usually expect a simple answer, like “not well.” It is though more complicated than that. We have been seeing the following (some of which we predicted, some of which we did not):
- The Chinese government — for the most part — seems to be bending over backwards to get foreign companies to set up WFOEs and Joint Ventures in China or to stay in China, at least for now. See The China-US Trade War. It’s All Good Inside China! China seems to recognize that its declining economy very much needs foreign capital.
- The Chinese government has done nothing to stop foreign companies from registering their IP (trademarks, copyrights, patents, and licensing agreements) in China.
- The Chinese government seems to be doing whatever it can to stop money from leaving China for investments in the United States, but this started even before the trade war. See Getting Money Out of China: NOT This Way.
- Foreign companies with Chinese employees are facing increasing pressure not to lay off or terminate employees and doing so has gotten considerably more difficult. See Terminating Your China Employees Just Got Tougher.
- Foreign companies that do any sort of deal with Chinese companies are facing more IP theft than ever. See below.
- Foreign companies that are operating in China illegally are getting in trouble. Big trouble. See below.
- Foreign companies that sell their products in China are getting worried, many of them just assuming they will face a steep downturn, but will they? See below.
Increased IP Theft. The big thing our China lawyers are seeing these days is an increase in Chinese companies sacrificing their relationships with foreign companies by stealing foreign company IP. We wrote about this previously in Your China Factory as your Toughest Competitor, but it is not just factories. Our China IP lawyers are seeing this in all industry sectors, especially technology. Why are China companies so willing to risk losing out on future business? When times are bad, greater risk becomes necessary to pay employee wages and to stay alive. We’ve become fond of pointing out that “since you will essentially be educating your Chinese counter-party in how to compete with you, you need contracts that will at least limit what they can do when they do so.”
Many China businesses have been hard hit by China’s slowing economy and by international businesses mover to lower wage and tariff-free countries in Southeast Asia. Many Chinese companies rightly believe they need to start competing with their foreign customers and partners just to survive.
Our law firm is getting roughly triple the usual number of emails/calls from foreign companies seeking help in trying to remedy/stop their Chinese suppliers and customers and partners from using their IP. We have have gotten more inquiries in the last three months from companies whose China factories are now directly competing with them than in probably the three years before that combined. Without a good contract and/or good international IP registrations, there is little we can do. See China Contracts: Make Them Enforceable Or Don’t Bother and 8 Reasons to Register Your Trademarks in China. The best way (essentially the only way) to protect against this is to do so early, when you still have leverage and before your Chinese counter-party has run off with your product, your software, your design, and/or your customers. For what you can do to protect yourself from this sort of competition see China NNN Agreements and China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1.
Increased Legal Enforcement in China. In every China downturn for the last twenty years, the Chinese government has gone after foreign companies operating illegally there and this one has been no different. Why should the Chinese government allow illegal businesses to compete with their businesses without paying taxes, especially in a downturn? It shouldn’t and it doesn’t and going after illegally operating foreign businesses is a popular thing to do and it is exactly what the Chinese government has ultra-aggressively been doing for months now. In particular, China goes after foreign companies that are paying individuals in China without paying the required employer and employee taxes. This time around, however, this downturn’s round-up of illegally operating foreign businesses has stepped up a notch and the Chinese government has become quicker to arrest and imprison people on criminal charges. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. If you have “independent contractors” in China, please, please, please do not go there until you change how you are doing business in China. See Doing Business in China with Deportation or Worse Hanging Over Your Head and Hiring A Chinese Employee Without A Chinese Entity. Good Luck With That.
What is always saddest about these crackdowns is that some businesses that thought they were operating legally are not, either because they misunderstood the laws or because someone lied to them about having done the required registrations and paid the required taxes. Now is the time for to make sure you are doing everything legally in China. Do you really have a WFOE or Joint Venture? See How’s Your China WFOE? Please Check. Does the scope of your China entity (your WFOE or Joint Venture) really include exactly what you are doing? See Forming a China WFOE: Scope is Key. Are you really paying all your taxes? China has gotten quite good at finding and punishing foreign companies that do not pay what they owe in taxes.
You would likely be shocked at how often foreign companies are deceived by their own people into believing that what they are doing in China is legal when it is not or that they have paid for something required when they have not. And then there are still those who operate illegally “because everyone does it.” See China Compliance: A Basic Checklist for the basics you should be checking in an effort to avoid China legal problems.