Doing Business In China Has Been Through Evolution, But It's Still Not The Same As Home

Tuesday, December 1, 2009 - 01:00

The Early Years

At our law firm we have been regaled with stories from some of the old time China traders, who were buying goods in China back in the day when there was no direct transportation route to the United States. Logistics was a nightmare. Goods had to be trucked to Hong Kong and then put on a slow boat from China, and it would take a couple of months before their goods would get here. Many people worked through trading companies in those days, as direct contact with the factories was very difficult. It took forever to physically travel to the factories, and communication with the vendors was not easy. Few people spoke English and we did not have modern conveniences like fax machines and the Internet that have made China closer and more accessible.

In addition, back in that day, not every Chinese manufacturer had permission to export goods to other countries, so working through trading companies with export privileges was really the only option. The quality of goods was another problem. Would the goods be up to spec? Would you get rocks in your containers? It was business based on faith or relationships, and if the importer was disappointed or defrauded, there was no chance of getting some compensation from the foreign vendors. Sometimes we were able to go to court to stop payment on the letters of credit, but that only worked if the bank would cooperate and fraud was evident. These were difficult years.

Bumps In The Road

Over the years many things have changed, but it has not been without hitting many land mines along the way. During the years textile quotas were in place, some Chinese factories established "manufacturing facilities" in other countries that were ultimately found to be nothing more than transshipment or relabeling operations. Importers who were involved in these schemes found themselves the targets of criminal investigations. International traders who were unaware of these illegal transactions, but who did not actually visit these newly founded manufacturing operations, were surprised when they found that their goods were excluded from entry into the United States because the U.S. Customs believed that the goods were made in China. Sometimes U.S. Customs did not have hard evidence, but they had doubts as to the origin of the goods. Other times Customs actually traced the goods from China to the transshipment point, or there were tell-tale signs, like China markings on the containers, or two labels, which would clearly condemn the shipments. The best outcome for such an instance would be that the goods would be released upon the presentation of detailed and voluminous records. Unfortunately, this would usually delay release of the goods until the importers lost their orders. If things went badly, the goods would be rejected or seized. The trader's best hope was that they had not paid for them yet, because if they had, then they would be out their payments and there would be no hope of recovery.

Now that textile quotas are gone, the emphasis has shifted to other areas. Classification and valuation are critical because in our very competitive world, even a 1.5 percent duty rate can make a difference in being able to make it in certain industries. So, while prohibitively high duty rates have disappeared on many items, the lower duty rates continue to present make-or-break payments for many traders. Yes, goods can be legitimately designed to fall within lower duty rate provisions of the tariff, and purchase transactions can be properly structured to reduce dutiable values, and there are a plethora of free trade programs, foreign trade zones, and drawback programs that can be used to lower duties. In addition, there are reviews that can be undertaken to reduce or eliminate antidumping duty and countervailing duty assessments on imports from certain countries.

But, in spite of all of these opportunities, there are the companies that find it easier, faster, and cheaper, to work their own self-help fixes to eliminate or minimize duties. As a result, from time to time we see articles about smuggling, undervaluation, and transshipment. We hear about shipments marked for export that are switched at bonded warehouses in the U.S., and apparel, which usually has higher duty rates, imported as parts of furniture. Sometimes the companies that engage in these activities are Chinese companies that work with a different cultural background and that are immune from U.S. criminal and civil penalty laws. Other times U.S. companies are willing to take these risks, and they do not understand the jeopardy in which they are placed.

Some international traders actively participate in these schemes; others take the ostrich approach, which means that they believe that what they don't know won't hurt them. But most, fortunately, take the high road even though it may put them at somewhat of a commercial disadvantage. Under the Customs penalty law, any person who causes goods to be imported could be liable to Customs penalties. If the prices seem too good to be true, there must always be a reason. The question is whether you want to take the risks that are associated with the too-good-to-be-true price. It might work for a while, but sooner or later these things end. The question that remains is how bad the fallout will be from the benefits that have been received.

Antidumping Duties And Countervailing Duties

Cases involving antidumping duties ("ADD") and countervailing duties ("CVD") on goods from China continue to present major hurdles for international traders. If a petition is filed by a domestic manufacturer claiming that goods are being "dumped" and/or subsidized overseas, it immediately creates tremendous uncertainty for the traders purchasing those goods. There are numerous problems with these cases. First, they take a long time before they are resolved and ADD/CVD assessments are retroactive, with the amount of duty deposited at the time your goods arrive in the United States, not necessarily the amount which ultimately is due. In most cases before one set of additional duty assessments are finalized, the government is commencing its next annual review. ADD Orders have now been in place on certain Chinese products since 1983, with new cases filed each year, and with reviews of "old" cases taking place on a yearly basis.

Second, the potential duty assessments for these claims are unlimited, and have ranged as high as 300-400 percent of Chinese export value. Thus, unless these claims can be significantly reduced, they result in duty assessments that are prohibitive, effectively driving foreign competition out of the U.S. market. Third, the costs and time necessary to defend against a complaint are substantial, and the complexity of U.S. ADD/CVD law requires the assistance of experienced, specialized U.S. trade counsel. These cases should not be turned over to beginners or to law firms interested in part-time work because billing in other areas may be down. In the absence of a quick victory before the International Trade Commission, they require a long-term commitment (and long-term expenditures) which many Chinese companies may not appreciate. Finally, liability for paying ADD/CVD falls on the "Importer of Record," which normally is a U.S. company, who may have little or no influence on its Chinese vendor's willingness to participate in the ADD/CVD investigation. And to add insult to injury, a Chinese exporter is not allowed to reimburse the importer for ADD payments.

Many petitions have been filed with respect to Chinese products, and there are now 82 ADD and 12 CVD Orders in place on a wide variety of Chinese exports, ranging from consumer goods (candles, pencils, etc.), food (garlic, mushrooms, honey, shrimp) and bedroom furniture, to steel and chemicals. Seven other petitions currently are being considered by the U.S. Department of Commerce (DOC) and the International Trade Commission (ITC), the two U.S. agencies responsible for administering the ADD/CVD laws. If a China case is not terminated shortly after filing based on a no reasonable indication of material injury decision issued by the ITC (which takes place in no more than 10 percent of all cases filed), then submissions will have to be filed with the DOC detailing sales to the U.S. and the cost of manufacturing the products under review. As China is still considered to be a Non Market Economy (NME), Chinese costs are based on "surrogate values," that is, costs of materials, labor, overhead, etc., of companies located in market economy countries similar to China (generally, India), rather than actual costs in China. The DOC is especially hard on the Chinese producers in these cases, and invariably (at least according to lawyers representing the Chinese) selects the highest surrogate values on the record. These cases are also difficult because all submissions must be in English and they must follow certain formats that are often not used by the Chinese manufacturers.

In order to work in this hostile environment we have forged partnerships with local law firms, hired Chinese accountants, and opened an office in Hong Kong. In addition, we have developed pre-dumping and CVD review programs which will enable a manufacturer to see how they would fare in the event that an ADD or CVD case is filed. Finally, we have Chinese-speaking personnel on our staff in the United States, and we hired an Indian Customs attorney who works out of our office in Washington D.C. and who regularly commutes back to India, because India is often the surrogate value country of choice in these matters. Having a person on staff from India enables us to obtain favorable surrogate values to which we would not otherwise have access.

Continuing Issues Limited Only By Imagination

These are only some of the issues that we have encountered in counseling Chinese traders. It does not include assistance to those companies that have found that someone in China has registered their trademarks with local Customs officials so that they could no longer export their goods, or that someone has stolen their identity and has entered or attempted to enter counterfeit trademark goods using their company name. Nor does it include companies that needed to use Chinese Foreign Trade Zones to move goods into and out of China without subjecting themselves to Chinese tax or duties. These are the evolving issues of the day as China becomes more accessible to our country and the cultures of the West meet the cultures of the East.

Robert B. Silverman is a Partner in the firm Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP.

Please email the author at rsilverman@gdlsk.com with questions about this article.