On Being a China Lawyer and on Doing Business In China: An Interview

I was interviewed last year by Jason Aquino of Scouts Consulting (link to ) as part of an ongoing interview series on strategy and innovation in business, sports, and national security. Jason will be releasing this series of interviews in the future, but in the meantime he is allowing me to publish mine here, mostly after I begged him to be able to do so because I loved it so much.

The first part of my interview dealt mostly with the legal industry and the second part dealt with mostly with being a China lawyer. I am flipping the two around and providing the China portion today and the legal industry portion tomorrow.

Dan Harris is the founder of Harris Moure, an international law firm with offices in Seattle, Portland, and Beijing. He represents and seeks to protect companies doing business in China and other emerging economies in Asia. His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, overseeing dozens of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

Dan and colleague Steve Dickinson co-author the China Law Blog, which discusses the practical aspects of Chinese law and how it impacts foreign companies doing business there. China Law Blog has been a mainstay of ABA Journal’s Blawg top 100 law blogs, and in 2013 was named to the Blawg 100 Hall of Fame. It is an indispensable resource for lawyers and companies seeking to do business in or around China. Dan’s perspectives on international legal issues have appeared in such publications and media outlets as The Wall Street Journal, Forbes, Fortune, Business Week, The Economist, The New York Times, The Washington Post, CNBC, and BBC News.  

Last April Dan was a keynote speaker at the Oregon Law Review Symposium on Disruptive Innovation in Law and Technology, where he discussed how lawyers could better position themselves in the evolving legal marketplace. He talked about the aversion many lawyers have to marketing, as well as the need for lawyers to become more business-minded, which legal training traditionally hasn’t encouraged. You can find Dan’s paper from the symposium here (p. 881).

How did you get into doing China work?

We’ve done a lot of international maritime and international litigation work, and we were known as the firm that could get things done in Russia. The Wall Street Journal did a cover story on some very unusual work we did for Caterpillar Financial. The contract provided that if Caterpillar didn’t get paid, it could seize these three ships without having to go to a court. We spent about six months planning, went to Russia and got the ships out. It got a lot of press, and then everybody started hiring us for those things.

Soon China started entering into that equation. I ended up going to China on behalf of a big Singaporean fuel supplier that was owed a lot of money. We also arrested fish product in China from a Danish company that owed our client money. While in China I became friendly with a lawyer in Qingdao, and also realized that China was where it’s at. The same thing started happening in a host of other industries. Our clients who had been focused on Korea or Russia or Japan started getting serious about China.

I convinced a friend of mine, Steve Dickinson (who had headed up the international law group at a big firm where both of us had worked, but was now teaching Chinese law at the University of Washington) to get back into the real world. We sent him to China, and it just took off from there. It was amazing how quickly it happened. There was such a demand for a law firm that would help small- and medium-size businesses deal with China. These companies were lost.

How would you describe the ethos of the Chinese legal system?

China’s legal system is geared to achieve harmony. Harmony has a lot in common with fairness, but it’s not the same thing. It’s closer to the legal conception of equity: if you and I are in a lawsuit, equity is what’s fair for you, what’s fair for me, what’s fair for society, what’s going to cause the least amount of waves. That’s China.

Also, Americans are so focused on substance over form. The ethos of an American company, especially a tech company, is to “just do it” and then deal with any problems in the foundation later. That doesn’t work for China.

A lawyer once called me and asked how much capital it would take for his client to form a company in China. I said, “It’s hard to know, I’d have to check, but I’m guessing it would probably cost $5-10 million because you’re going to have to buy the equipment and that’s going to be a lot of money.”

He goes, “Right, but we’ve already bought the equipment. And we’ve already sent it to China.”

“You have?”

“Yeah. So we can use that equipment towards our minimum capital, right?”

“No, you can’t.”

“Well, we spent $10 million on that equipment. Are you saying we have to spend another $10 million on equipment?”

“I’m not saying you need to spend another $10 million on equipment, but I’m saying that the $10 million that your client has already spent isn’t going to count. For anything that you’re buying, you have to get approval – a valuation or an appraisal –  before it can count for the capital requirement. You haven’t done that, and you can’t do it after the fact.”

“Well, that’s ridiculous. That’s putting form over substance.”

Whenever lawyers say that to me, I don’t know what to say. What can I say? It’s Chinese law. It is putting form over substance, but Chinese law is a lot of times based on that. China does not want its bureaucrats to have much discretion, because with discretion comes bribery.

What is also fascinating is that American companies think of China as the wild, wild west far too often. We had a company that makes a product with chemicals in it, and it took them – I’m going to make this up because I don’t really remember – $3 million and a year to get U.S. EPA approval to use the chemicals in the product. They go over to China, they build this factory, it’s all ready to go, and then they call us up and say that they’re being blocked from bringing these chemicals into China.

They didn’t realize that they would have to get their chemicals independently approved in China. It cost them three or four more months. It never occurred to them that China would be like the United States. The U.S. is not going to say, “Oh yeah, go ahead, put those chemicals in this product because it’s allowed in Malaysia.” That’s not how the U.S. works. That’s not how China works, either. So you get this situation where people assume that China’s completely different from the United States.

Other times, they will assume it’s the same. Here’s where we see that the most: you can fire somebody in the U.S. for good reason, bad reason, or no reason at all. You can’t do that in China. We are constantly getting calls from companies that are being threatened by ex-employees because they fired them. China is a communist country. It’s got major workers’ rights. You don’t fire somebody without getting a settlement and release. You just don’t. It’s not the U.S., and American companies have trouble grasping that.

As best you know, how does China’s history and culture shape or inform its legal norms?

This whole idea of harmony is very much a Chinese cultural phenomenon. China has 1.5 billion people. They need to get along.

What’s fascinating about the Chinese government is that it’s not a democracy like in the U.S., but it does answer to its people. It does listen to its people; not on everything, but on a lot of things. Legitimacy is very important to the Chinese government, and its legal system helps them maintain legitimacy. It’s very tailored to its history, and to the future it wants to shape.

How would you describe the Chinese style of negotiation?

Well, it ain’t win-win. It’s win-lose. In fact, if you talk about win-win, they’re just going to think you’re disingenuous, and that you’re using it as a tactic to crush them.

They can be very tough negotiators, and Americans are not used to that. It’s a completely different style of negotiation.

As you’ve learned more about China, what has surprised you the most?

What surprised me was that if I were to pick a country China is most like, it would be the United States. I dealt with Korea and Japan for many years before I started dealing with China intensively, and it is more like the United States than either of them.

In Japan, Tokyo is everything. In Korea, Seoul is everything. They are homogeneous countries, and China is not homogeneous. It is a big country like the United States, and a lot of the ways that Americans look at the world, the Chinese do too.

You can become a really big company without ever really leaving the United States. You can become a really big company without ever leaving China, too. What happens with Chinese companies is that they get really big and really successful in China, and then they come to the United States and try to do the exact same thing and it’s a complete disaster. American companies are getting better at this, but they still tend to do it in China sometimes. Americans and Chinese have the most difficulty making adjustments because they really haven’t had to.

Is there something about doing business in China that lawyers believed to be true, but never was?

People will say you can’t trust the Chinese, and that’s never been true. A lot of times, what Americans view as dishonesty is either miscommunication or cultural differences.

Take something as simple as, “Can you get me this product in 30 days?” The Chinese manufacturer will say, “No problem.” But they don’t think it means, literally, 30 days every time. They think it means we’ll try to get it to you in 30 days; sometimes it will be 45. It’s a cultural difference. It’s not dishonesty.

China’s culture is much more relationship-based than ours. Once you’re in a good relationship with a Chinese company, there’s usually hyper-honesty. There are companies out there that have had 20-year relationships with Chinese companies that have worked beautifully, where there’s huge amounts of trust.  We have had 10-plus-year relationships with a number of Chinese law firms without even the slightest hitch.

You do have to look at the culture and the history in that it’s more difficult for Chinese to trust because there’s been so much rapid change.

What do peers in your practice area think, say, or do all the time that strikes you as wrongheaded?

I remember a bankruptcy trustee who hired us to get money in China. We got them some money, and it wasn’t all that hard. The trustee said, “Wow. I had always heard that there basically was no legal system in China. I just wish I’d come to you sooner, because I’ve probably had five other cases where we could have gotten money.”

There is a legal system in China. There are lawyers who believe there isn’t, that “of course we need to set up our contracts so that all disputes are resolved in a Chicago court because if we go to China we’ll get slaughtered.” They put that in the contract, and they’ve just harmed the client because there’s never a way to collect. Chinese courts do not enforce U.S. judgments.

So, that’s one belief that is wrong. Most errors stem from the belief that everything needs to be done the American way.

Looking at your practice area, what has been the biggest development in the last five years?

Things that American and European companies could get away with in China five years ago, they can’t anymore. China now has sophisticated tax and tax collection systems. China has gotten a flavor of what it means to collect taxes, and they love it. Like all governments, they want your money. And if you’re not going to pay them the money that they believe they are owed, they will make your life miserable beyond any conception of the word miserable.

Americans and Europeans are getting in major trouble for this. We see it in two areas constantly.

An American or European company will hire, say, three “independent contractors” in China. The Chinese government will come to the American or European company three years later and say, “What are you doing? You have three employees but haven’t paid employer taxes for the last three years or withheld employee taxes. We’re going to say that you’re doing business in China because you have these three employees, so you owe company income taxes. And by the way, employer taxes and benefit taxes equal, like, 40% of what you paid them in salary for the last three years. And we’re going to charge you interest and a penalty. And if you don’t pay, we will shut down your business here and we may not let you leave the country.”

“What? They’re just independent contractors,” the Americans or the Europeans will argue. Well, guess what? If they’re not your cleaning person, or your plumber who’s coming to fix your sink for two days, and you’re paying them money and they don’t have a company, they are your employees.

The other thing is that Americans will set up a company in China that sells a service or a product back to the parent company in the United States. They set it up so that the company in China makes no profit. It is called transfer pricing. But the Chinese government will come in and say, “People don’t run businesses for no profit. We’re going to impute a 30% profit, and you need to pay the last three years’ taxes on that plus penalties, plus interest.” And the Americans freak out.

What you should do is bring on accountants who understand transfer pricing and they will figure out that the typical profit margin is, say, 6-10%, so maybe they put you down for 8%. The Chinese tax authorities will look at that and won’t mess with you. But if they have to come in and you’re making no profit, they don’t start at 8%. They come in at 30%.

That’s how governments always work. Americans need to start realizing that what American companies got away with five years ago, that era is no more. And the things Chinese companies down the street are getting away with? Well, you’re not a Chinese company.

Oh, and we are seeing a lot more disputes between foreign and Chinese companies that are no longer just getting shoved under the carpet. Both sides are realizing that it sometimes makes sense to litigate or arbitrate.

Looking out five years, what concerns you the most? What excites you the most?

It concerns me that American companies are getting on the wrong side of the Chinese legal system. But it also excites me because China’s legal system is becoming more developed, more advanced, and more secure – more real. That means an increased need for lawyers. Every time China tightens a screw our China lawyers get more work.

What also excites me is that I am seeing this happen to Chinese companies, too. That’s more important for China than that it just be happening to foreign companies. China does want to reduce corruption. Big Chinese companies pay their employees; they pay their employer taxes. A lot of them operate similarly to foreign companies, and it’s being pushed down to other Chinese companies.

What’s also exciting is the Chinese who come to the U.S. and then return to China. They are more international-thinking than typical Chinese. They go to Chinese companies and make them more international. But very, very slowly.

Is there work that you don’t really do a lot of today that you expect to see more of in the future?

Yes. That would be representing Chinese companies doing business in the U.S. or elsewhere. We’re very well equipped to represent them. We have around a half-dozen lawyers fluent in Chinese and we have two Chinese lawyers. We’re efficient and small, so Chinese companies tend to like us.

The problem is that we’re not willing to reduce our fees for them. A lot of firms will cut their rates to rock bottom to bring in Chinese companies, in the belief that they’ll be able to raise their rates later. We’re not willing to do that. We charge our regular rates to Chinese companies, and if they don’t like it they can walk.

A lot of them don’t like it, and our attitude is that we have plenty of business representing North American and European and Australian and even Korean and Japanese companies at these rates. We tell the Chinese companies to come see us in a year or two, and sometimes they do. We have not made any effort to bring in Chinese clients because it would take so much effort, and Chinese clients right now are very difficult clients.

Right now we prefer North American, European, Australian, South American, and Latin American clients. But I expect that’s going to change as Chinese companies become more international. It happened with Russia and Korea. We used to not like Russian or Korean clients because they tended to be unsophisticated in how they used lawyers. Now we love Korean clients, we love Russian clients, and eventually we’ll come to love Chinese clients.

What do you mean when you say Chinese clients are very difficult clients?

I’ll backtrack a little and tell you the problems American companies often have with Chinese lawyers.

An American company will hire a Chinese lawyer and tell the Chinese lawyer, “I want to do ‘A,’” and the Chinese lawyer will do “A.”

Three months later the American company will learn that no one’s doing “A” anymore. They’re all doing “B.” So it will go back to the Chinese lawyer and say, “Look, we did ‘A.’ Now everyone’s telling me that wasn’t a good idea.” The Chinese lawyer will then say, “Right, it was not a good idea.”

“Then why did we do ‘A’?”

“Because you told me to do ‘A.’”

It drives American companies nuts. If you had called up an American lawyer, he or she would have said, “Why do you want to do ‘A’? We do ‘B’ 99% of the time. Let’s talk about it.” When somebody tells me they want to do something, I don’t just say, “Yes.” I ask them 10 questions because I want to make sure that’s the right way to go.

The typical dynamic between Chinese companies and Chinese lawyers is, “I’m the boss. You’re my scrivener.”

One time we were brought in to help a Chinese company. Twenty years ago it had formed an American company, and then that American company had formed a Chinese company. It’s called a “roundtripper.” China once gave all sorts of preferences to foreign companies; Chinese nationals would form American companies, then go back to China to get the preferences. Not legal, but it was very common.

This Chinese company had gotten huge. They had a company in the United States that was formed by somebody’s cousin, had never paid taxes, and maybe had aspirations of going public. They needed to clean up their act. It was hugely complicated, and we brought in an international accounting firm to help on the tax side.

My colleague Steve Dickinson is based in China, and one of the lawyers we work with there invites him out to lunch. Steve is thinking, “That’s weird. This lawyer never invites me to lunch.” Steve goes to the lunch and the client’s there, and the client has this idea on how to solve the problem in about 1/10 the time and at about 1/100 the cost of what we have said needs to be done.

Steve tells the client (nicely, I presume), “Are you kidding me? You know nothing about U.S. laws, you know nothing about U.S. taxes, you’re not a lawyer or an accountant in China, and you think you’ve just solved the problem? Give me a break.” Why was Steve brought to this lunch? Because the Chinese lawyer knew it was absurd, but he just was not comfortable telling this to his client because that is not his role.

When Chinese companies come over here to the United States, they often want to tell us exactly what to do. Once we took on a case where as soon as we were paid, the Chinese company told us how we were going to handle it. We told them that what they were asking us to do would be the dumbest thing we could possibly do. (I talked with about 10 other lawyers and they were like, “Seriously?”)

“No, we need you to do that,” the Chinese company said.

We responded, “Nope. Here’s your money back.”

As lawyers, we can’t have that. Our reputations are on the line. We’re not going to do something that makes us look silly and just wastes the client’s time and money. We’ll do things for clients even if we disagree, but not when it’s absurd or unethical.

How pervasive is suspected Chinese hacking of law firms?

I don’t know. I just assume that they’re getting into my computer when I’m over there. Before we did a lot of work with China, we did a lot of work with Russia. Our Russian clients would never talk to us about anything important on the phone because they assumed they were being bugged. I always assume the worst and prepare for that.

It’s not just the Chinese government that does these things. It goes on from company to company, and from country to country. I have no idea how much, but are law firms immune? Absolutely not.

What special precautions does your firm take when you’re operating overseas?

We generally do not keep data on our computers. We keep it in the cloud, and we don’t access it when we’re overseas. We also don’t allow access to much of our data from any location other than our own offices. If our lawyers want to get on our network, they have to show up from certain ISP addresses. It makes things more difficult – if they’re at home and their home ISP has not been cleared they can’t get onto our network – but it’s a necessary security measure.

What is it about China that continues to mystify you? What would you like to learn more about?

What’s fascinating about China is that there is no Chinese archetype. China is not monolithic. If you spend a month in Shanghai and come back to the U.S., you’ll describe China in one way that has no reality for most of the rest of China. It is an incredibly diverse country.

That’s what’s exciting about China, and that’s also what’s exciting about the United States. In fact, China has a ton of minorities, just like the U.S.

But what we have over China – and I’m stealing this from a vice president at Microsoft who talked about this – is that China is not diverse in the way the United States is. A company like Microsoft, if it’s having an issue regarding, let’s say, Ethiopia, it can call together ten Ethiopians in Redmond, Washington, and figure out what to do. We have people from so many different countries who want to be here and on whom we can rely to bring their different views. China’s not even close to that level.

I have known so many Americans who have gone to work for Chinese companies to lend an American perspective, and they’re not listened to at all. China is still much more China-centric than the U.S. is U.S.-centric.

What’s a formative experience that has shaped how you make decisions or see the world?

I lived in France for a year when I was in fourth grade, and I lived in Turkey for a year when I was in 11th grade. So, living overseas definitely shaped me. My parents obviously shaped me because they were the ones who took me overseas. They were the kind of people who found it exciting to go to new places that were different. What also has shaped me is meeting all different kinds of people from different parts of the world.

I love the United States. I describe myself as patriotic even though that’s old-fashioned. But we don’t have a lock on things and it’s not good for us to think that we do. It drives me crazy when Americans say stuff like “we have the best healthcare system in the world,” or “we have the best food safety system in the world.” People think we’re the least corrupt country in the world. None of that’s true.

It’s an arrogance that can be destructive – we’re the best; we don’t have to work at it. I’m not saying we should become like China or Denmark or whatever, but I am saying we can and should learn from other countries.

How do you clear your head when life gets hectic?

I enjoy life. I work out every single day. I love eating good food. I love being with my family. I love watching basketball. I love traveling for fun. I love traveling for work. I go to movies. I binge watch TV shows. I voraciously read and listen to the news.

I learned early on not to stress out. When I first started practicing law, I went to a movie and the entire time I was thinking about a particular case. I didn’t enjoy the movie and I didn’t accomplish anything in terms of work, either. What I realized is that either you do one or the other. You go have fun or you work, but if you try to combine the two, it’s not going to work. You really do need to focus. If you have time to go to the movies, enjoy the movie or don’t go. Make your time count. That reduces stress.

The post On Being a China Lawyer and on Doing Business In China: An Interview appeared first on China Law Blog.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.