Interview by China Law & Practice Q3 2018
William Marshall of Tiang & Partners speaks to Jacelyn Johnson about the exciting times of being a trade lawyer amidst a burgeoning trade war between US and China, the impact of tariffs, and what lawyers should expect and be mindful of when negotiating or advising on export and import matters, foreign investments and tax and customs regulation.
William is a partner at Tiang & Partners., an independent law firm in Hong Kong. Tiang & Partners. is associated with PwC Legal International (a foreign legal practice) in Singapore and works closely alongside PwC member firms in mainland China Xin Bai and Rui Bai. This gives us access to 3,500 lawyers across 100 countries. Tiang & Partners. also regularly works alongside professionals in other lines of service at PwC.
What is it like being a trade lawyer in China today?
Marshall: Trade lawyers in China have been in heavy demand over the past several years. The relevant government authorities in China have matured and grown in sophistication at a rate unheard of anywhere in the world. This development brings with it increasingly complex and nuanced regulatory schemes governing all aspects of foreign investment, manufacturing, import and export, distribution and tax related cross-border operations. We are in a privileged position to be at the centre of these exciting developments in the most dynamic economy in the World.
What is most encouraging for multinational clients is the increasing ability and willingness of the Chinese authorities to engage in technical discussions on these regulatory provisions. This is a clear sign that the Chinese authorities are quickly becoming more comfortable with the international legal and regulatory norms our clients have grown accustomed to elsewhere. From advanced opinions to even disputes and controversies, these mechanisms are developing, maturing, and becoming more commonplace over time. This bodes well for the increasing value we, trade lawyers in China can offer our clients with clear and reliable regulatory advice and even guiding successful investigation and dispute response strategies.
Would a trade – war effectively change the legal landscape of China?
Marshall: It is unlikely that a trade war with the US or anyone else would broadly change the legal landscape in China. The fact is that China is a huge and complex country that is shaped and developed as a result of myriad factors—mostly domestic. It is certainly not a single-issue country and external affairs are a bit less impactful than many might otherwise imagine.
That said, China and the US are engaged in a struggle for control over technology, which is clearly strategically important from a national security standpoint but it is also where real value can be found in the modern global supply chain. Patents, trademarks and manufacturing technology form the lion’s share of the total value across the supply chain of products, from wearing apparel to consumer electronics and heavy machinery. This struggle does impact on law and policy both in China as well as the US. We will continue to see global efforts to capture and protect this value even beyond China and the US.
Export control laws, foreign investment controls, even tax and customs regulations will continue to be proliferated, expanded and more broadly enforced in furtherance of this effort worldwide. In that respect, the trade war may impact the legal landscape of China as it is likely to do worldwide.
How do you think the tariffs will impact the rise and growing economy of China?
Marshall: There have been public examples of Chinese companies whose very existence has been under threat as a result of the long reach of US trade regulatory control. This is an existential threat, in China’s view, to its quickly expanding technology and telecommunications industry. As these industries are squarely in the centre of the ongoing trade dispute, there is likely to be a significant impact on these specific sectors in China.
The acquisition and development of critical technologies will continue to be a priority for China and Chinese companies. From the US perspective, and even the EU, to a lesser extent, the protection of key technologies from Chinese acquisition or from being otherwise usurped in an effort to develop such technologies will drive the expansion of foreign investment controls and the increasingly aggressive enforcement of export control and sanctions laws.
The tariff measures imposed on these items from China into the US and on key imports from the US into China are likely to impact the consumer more so than the overall development of these sectors. What we have seen so far is a negative impact to the bottom line of our clients exporting and importing affected merchandise and this has already resulted in price increases to the consumer.
What would the newly implemented US Tariffs affect a lawyer’s general day to day work?
Marshall: We have already seen significantly increased work surrounding alternative sourcing efforts for affected merchandise. Many of the companies impacted by these tariff measures have not previously had experience with duty liabilities to any significant extent, if at all. As a result, we are spending a lot of time with high tech and telecommunication clients in basic supply chain, customs duty efficiency analysis, and planning projects that have been undertaken in other sectors for more than 25 years.
This has a trickle-down effect to all aspects of our client’s global operations, from discipline and precision in their transfer pricing policies and practices to specificity and efficiency in licencing, royalty, and other inter-company agreements. All of these aspects have a direct impact on the basis upon which these tariff measures are calculated and therefore the extent of the financial impact on our clients.
What would be the impact on global law firms? What type of clients will be affected?
Marshall: Global law firms can no longer offer isolated advice in narrow technical legal silos. Transactional services, legal advice or day-to-day regulatory guidance must be done from a more holistic perspective, considering trade regulatory developments, export control on technology and foreign investment controls.
The supply chain has risen in importance for our large multinational clients. Tactical and strategic excellence in supply chain operations are now frequently the differentiating point between competitive advantage and failure of our clients. Regulators across all areas are likewise focusing on the global supply chain operations of multinational corporations. The key take-away here is that trade regulatory issues and developments in the trade dispute between China and the US must now be a key consideration in a broad spectrum of matters for multinational corporate clients.
What are the industries most affected? And what should in-house counsels know?
Marshall: While there are many industries that are affected by the tariff measures and related retaliations, the sectors that seem most heavily hit are those that did not previously manage significant customs duty liabilities. Primarily, high technology, telecommunications, and even to some extent the automotive sector.
Companies in these sectors face some unique challenges as their supply chains are complex, highly technical and do not often lend themselves to easy mobility or other restructuring efforts in the near term. Additionally, unlike apparel and footwear companies, these companies had generally not spent much time on customs duty analysis and efficiency projects that could mitigate duty impact.
While the instinct of many of our clients has been to hope that cooler heads will prevail and that punitive tariffs and retaliatory duties would be rolled-back, it is now clear this is not likely to be the case. To remain competitive, or gain an advantage, affected companies do should take immediate steps to reduce or mitigate their duty burden in this environment. There are many options available to lessen the bottom line impact but companies must be proactive and drive these initiatives sooner rather than later.
Made in China 2025 – what do international trade law practitioners need to know?
Marshall: China’s Made in China 2025 plan is a long-term strategic plan to help China stay in a leading economic position in what it coins as the “fourth industrial revolution.” There are many affected industries but technological advancement and development of high-end intellectual property is at the core of this effort.
We see a number of areas of impact from this strategic plan. First, it is driving some outbound Chinese investment into areas of strategic importance. This, in turn, is motivating a wave of foreign investment national security reviews and even blocks in some cases. As a result, trade issues, export control laws, sanctions, and foreign investment restrictions have taken centre stage in discussions of large scale M&A deals and other corporate transactions.
Secondly, the US Section 301 tariff measures on certain Chinese exports are specifically targeting those items covered by China’s 2025 plan. The US believes that China’s plan is at the expense of the IP and technology developed by US companies and that Chinese companies have been effectively usurping this IP through unfair regulatory requirements for licenses and permits as well as certain foreign direct investment restrictions.
This area is a major area of concern for our clients and assisting them in mitigating or attempting to avoid the impact of these tariff measures is a key objective.
The Made in China 2025 plan also provides lawyers with a roadmap of possible areas of contention in upcoming trade regulatory schemes yet to be enacted. For example, we have a very extensive draft export control law under legislative consideration now in China. This export control law may give China extrajurisdictional reach over Chinese technology similar to the US export control laws over US technology and inputs. If passed in its current or similar form, we can see that the Made in China 2025 plan is likely to provide a roadmap of the areas of focus for enforcement under this new law, of which our clients may be most heavily impacted.
How do you think China’s retaliatory plans would measure up?
Marshall: China’s position is informed by its interpretation of the World Trade Organization Agreement. Under the WTO agreement, a member state is able to take proportional retaliatory measures in response to safeguard measures imposed by other member states. While the US tariff measures have not been framed as safeguard but rather as national security measures (in the case of Iron and steel tariffs) or remedies of unfair trade practices (in the case of the Section 301 tariffs on a broad spectrum of Chinese exports relating to IP rights protections), China’s position is that these measures are merely safeguard measures regardless of what the US may call them and therefore proportional retaliation is completely within its rights under the WTO agreement.
The US has challenged this position of China—an identical position taken by the EU, Canada and Mexico all of which are also being challenged by the US—stating that its tariff measures were not safeguards within the meaning of the WTO agreement but were well within US and international law for the protection of legitimate US national security interests and fair-trade principals. It remains to be seen how a WTO dispute settlement panel will rule on this question but China is holding to its position that proportional actions taken by it in response to the several tariff measures imposed by the US are permissible retaliatory measures allowable under the WTO agreement.
Foreign investment restrictions – what do lawyers need to know on how to proactively advise their clients?
Marshall: Foreign investment reviews and related national security concerns have been increasing substantially over the last few years. The past three years have seen new records set in the US for reviews and investigations on foreign transactions by the Committee on Foreign Investment in the United States (CFIUS).
The US just enacted the Foreign Investment Risk Review Modernisation Act (FIRRMA) in a dramatic expansion to the jurisdiction of CFIUS over foreign transactions, particularly those involving China and strategic technology. The United Kingdom is moving towards a similar path. The substantial increase in types of transactions covered by this jurisdiction has made CFIUS filings mandatory in certain circumstances.
This means, it is now imperative for trade lawyers to examine CFIUS rules and foreign investment risks earlier in trade matters involving corporate transactions. Trade issues have moved from a “red flag only” due diligence exercise to a high priority task at the forefront of corporate development and strategic planning.
For its part, China has always had a complex web of foreign investment restrictions. The Ministry of Commerce and the National Development and Reform Commission periodically publish their joint Foreign Investment Catalogue which categorises industries into large buckets from encouraged to restricted foreign investments. Given the climate of trade disputes and the increasing popularity of foreign investment restrictions worldwide, it is unlikely China will dramatically reform its approach. In fact, we may see more movement amongst the industries in each category in order to further develop policies in relation to technological development, national security interests, or for other reasons.
In China, as with US-related transactions, moving the regulatory review and analysis process further upstream to the planning stages of transactions will assist clients in structuring their transactions and other development plans in compliance with the ever-changing law whilst continuing to properly purpose their commercial objectives.
What is the impact of export and import restrictions on China Customs?
Marshall: China customs has traditionally been one of the largest revenue agencies in China. Not long ago, it was responsible for a full 30% of central government collections from import duties, taxes and import VAT. The revenue contribution has dropped as China establishes itself as a more domestic consumption-driven economy, and with the proliferation of large scale free trade agreements to which China is a party. That said, revenue remains a key focus of China customs.
In the National People’s Congress this year, we saw a number of very interesting large-scale restructuring measures affecting State Council agencies. The restructuring efforts aimed at centralising regulatory interpretation and ensure enforcement was more consistent and predictable, nationally. While there may be some adjustments along the way, this can only bode well for an agency that has sometimes been known for certain inconsistencies in interpretation and enforcement from port to port. To be fair, the same is true in the US and Europe when it comes to customs but this seems to be an area China wants to address.
Late last year China customs established and made operational three national post-entry audit centres for the review and import declarations for compliance and revenue protection.
It is clear that China customs is maturing in its ability and willingness to engage in complex discussions and disputes with traders on technical regulatory grounds. They will remain a critically important agency in China and is at the forefront of China’s governmental modernisation. This again puts trade lawyers in China in a position to add significant value to clients by offering critical and insightful guidance and advice in this rapidly evolving environment.
What are some of the key terms or clauses that lawyers should be mindful off when drafting agreements or advising clients on foreign investments and trade deals?
Marshall: Trade regulatory matters should become priority for multinational corporations. This includes export controls globally, sanctions, foreign investment restrictions and their impact on planned transactions, as well as the impact of any trade dispute measures and retaliation.
In general, I would advise clients negotiating agreements to be particularly careful around terms of sale as this is often overlooked and can mean all the difference in which party bears the liabilities directly with respect to punitive tariffs or retaliations.
In addition, maintaining robust internal compliance procedures and making references to such procedures and their key aspects in agreements and other corporate documents should be taken seriously. However, as strategic technology and sanctions enforcement picks up pace, such internal compliance programs reduces the risk of a potentially catastrophic incident.
With respect to foreign investment deals, we really implore clients to take the trade regulatory analysis and foreign investment restriction analysis much further upstream to the planning stages when corporate development teams are determining the economic viability of a transaction. This is critical because it is at this stage that alternative approaches to reap the same or similar benefits can be explored that may raise fewer risks to the transaction or no risks at all ideally. Rather than a few key provisions to bear in mind, this exercise could possibly change the whole structure of a transaction.
As important as supply chain execution has become to the economic performance of our clients, so too should trade regulatory considerations be for the corporate legal departments in-house.
Control of strategic technology – In your opinion, how will China achieve this?
Marshall: China has issued several whitepapers from its Ministry of Commerce over the past two years, recognizing its importance as the primary manufacturing hub for many of the world’s industries and leading companies. In addition, China’s export control law, if enacted as drafted, would be a major development in China’s ability to control strategic technology. The legislation will give China jurisdiction over Chinese technology and inputs, empower it to issue end-user and end-use controls, issue its own economic sanctions, and exercise re-export controls potentially extending its regulatory reach beyond its own borders.
How Chinese technology is defined within the meaning of this regulatory scheme will be a key element we all look to. If this includes certain manufacturing IP and technologies, then China’s control over strategic technology could well be significant.
While that remains unclear, what is clear is that China and Chinese companies feel that they are under the control and political whims of foreign powers and without significant homegrown technology of its own and a strong regulatory framework, it is without sufficient leverage to change that. The Made in China 2025 plan and the draft export control law of China are loud statements that China plans to enter this space strongly.
That said, planning for the impact and possibly competing jurisdictional grounds in regards to export controls and sanctions will be of critical importance to multinationals wherever they are domiciled.