BREAKING: Alleged US-China “Micro” Deal Does Not Mean a Thing for Most

Since May, US-China relations have swung from bad to worse, with the United States blacklisting multiple Chinese companies and China tightening the screws on foreign companies. See China’s New Cybersecurity System: There is NO Place to Hide and China’s New Company Tracking System: Comply, Comply, Comply. Most importantly, see Can Your Business Afford/Stomach the China Risks?

2. Reducing Your China Footprint is Good Business

Why are we being so negative? Because we have seen the impact the trade/cold/technology war has had on our own clients, which can be summarized as follows: those of our clients that immediately worked on reducing their China footprint have, almost without exception, benefited from having done so. On the other hand, most of our clients that chose to wait for a deal are suffering. Most, but not all, as we do have some clients involved with China for whom the trade war has had little to no impact. One client of ours pays ten cents per widget that it then sells wholesale for eight dollars. Even a 30% tariff for this company is almost meaningless. But other of our clients in a whole host of industries are most definitely hurting for having remained in China, some really badly. The ones hurting the most are the ones that stayed in China while their competitors left.

The two clients I describe below are “poster-children” for the benefits of getting out of China. In describing them, I need to be vague so as not to reveal their identities.

The first company is a big U.S. company that makes electronics and I cannot get more specific than that. The head of this company “loves” geopolitics and from day one he was convinced there would not be a quick deal between the United States and China and, most importantly, no trade deal would solve the issues between China and the U.S. and problems between the two countries would be ongoing for decades. This person declared that his company would within six months reduce its purchases from China by 50% and he wanted my law firm’s help to achieve this. What he wanted from us was the following:

1. Help in deciding the countries to target for its purchases.
2. Help in figuring out how to pressure its existing China-based suppliers to move outside China.
3. Help in figuring out whether to manufacture on its own in countries outside China.
4. Help in protecting its IP outside China.
5. Drafting its manufacturing contracts with the companies outside China.
6. Help in making sure that its products that would be made outside China would truly and legally qualify as having been made outside China.

Our lawyers were thrilled to work on a project(s) with such a wide scope, but I have to confess now (I have confessed this to the client previously so no worries there) that I did not believe this company’s 50% goal was achievable, in large part because of the nature of this company’s products: electronics. If it had been shoes or clothes or furniture or even doors or toasters I would have thought it could move 100%. But electronics, no way.

But this client has now moved about 80% of its production outside China and it has made clear to its few remaining China suppliers that if they cannot supply our client with their products from factories outside China (and soon), our client will cease to buy from them. In other words, this company — in the electronics industry — will soon be buying all of its products from outside China. And what has this move out of China done for this company? It has improved its positioning when making sales because it can and does tell potential buyers that its products do not come from China and therefore its pricing is not dependent on which way the US-China trade war winds are blowing.

The second company is a start-up that makes children’s products. This company initially came to us for a China NNN Agreement. I asked whether his products would be subject to any of what I call the Trump tariffs and he said yes. I then asked why then he was having them made in China, rather than Thailand (I picked Thailand both because it seemed like a really logical product to be made in Thailand and because a number of our lawyers have a lot of experience doing manufacturing deals with Thailand — we even have a lawyer and a Thai Business Specialist who speak Thai. His response to my Thailand suggestion was very positive, but he said that he didn’t even know where to start with Thailand. I said that we could help pretty much every step of the way and we did and the new products will soon be coming to market, with costs LESS than they would have been in China and 100% tariff free. I am guessing this client too will use its made-in-Thailand-ness as a selling point, because let’s face it, American and European consumers tend to have a much better “feeling” about Thailand than they do about China.

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.