Tag: China

New Rules Offer Clarity On China’s Outbound M&A Crackdown

On August 18, 2017, China’s State Council issued guidelines clarifying rules passed a year ago by the State Administration of Foreign Exchange (SAFE) limiting outbound investments as cover-up to move money out of China.

The new guidelines provide different policies for Chinese companies’ investment overseas, broadly dividing overseas investment into three categories:

  • investments in “real estate, hotels, entertainment, sport clubs, [and] outdated industries” are restricted;

  • investments in sectors that could “jeopardize China’s national interest and security, including output of unauthorized core military technology and products” and investments in gambling and pornography are prohibited; and

  • investments in establishing R&D centers abroad and in sectors like high-tech and advanced manufacturing enterprises that could boost China’s Belt and Road Initiative, and investments that would benefit Chinese products and technology will be encouraged by Chinese outbound regulators.

These guidelines are new and we have to wait and see how they will be interpreted and implemented by regulators. Still, there may be reasons to believe they will have a net positive effect on the China-U.S. M&A market. The new guidelines bring about greater certainty to buyers, lenders and targets on whether a deal will get approved by Chinese regulators.

The volume and size of Chinese outbound M&A is already on an upward trajectory in the second quarter of 2017, as buyers are already getting more acclimated to SAFE rules announced at the end of 2016 restricting the outflow of Chinese capital. Chinese buyers completed 94 deals totaling $36 billion in Q2, compared to the 74 deals totaling $12 billion in Q1. The current Chinese outbound M&A trend, coupled with greater certainty under the new guidelines, is likely to result in more Chinese outbound M&A deals during the last quarter of 2017, as well as in 2018.

This post was written by Shang Kong & Zhu Julie Lee of Foley & Lardner LLP © 2017

For more legal analysis go to The National Law Review

US Launches Investigation into China’s Technology Transfer & IP Practices

United States Trade Representative (“USTR”) Robert E. Lighthizer launched an investigation under Section 301 of the Trade Act of 1974 (“Section 301”) into acts, policies, and practices of the Chinese government as they relate to “technology transfer, intellectual property [IP], and innovation.” The August 18 announcement of the investigation came just days after President Donald Trump signed a memorandum directing the USTR to consider whether to launch an investigation of China’s IP laws and practices that “may inhibit United States exports, deprive United States citizens of fair remuneration for their innovations, divert American jobs to workers in China, contribute to our trade deficit with China, and otherwise undermine American manufacturing, services, and innovation.”

While Section 301 was a frequently used tool between the 1970s and 1990s (including when Ambassador Lighthizer was Deputy USTR during the 198os), the number of such investigations declined significantly after the World Trade Organization (WTO) dispute settlement system was established. Use of Section 301, however, is consistent with this Administration’s apparent willingness to use a broader range of trade tools to more aggressively combat potential unfair trade practices.

Section 301 allows—and, in certain circumstances, requires—the USTR to investigate and take unilateral retaliatory action in response to certain trade-related harms. The USTR must take appropriate action if the rights or benefits of the United States under any trade agreement are denied, violated, or otherwise harmed, or if its international legal rights are infringed in a way that burdens or restricts U.S. commerce. The USTR may take action at his or her discretion if an act, policy, or practice is unreasonable or discriminatory and burdens or restricts U.S. commerce. Among other things, a Section 301 action may be taken if a foreign country denies adequate and effective intellectual property protection or fair and equitable market opportunities, even if its behavior is consistent with its obligations under the World Trade Organization’s (“WTO”) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).

The Federal Register notice launching the investigation highlights concerns that the Chinese government uses the transfer of foreign technology and intellectual property to advance its industrial policy goals. The USTR investigation will first examine acts, policies, and practices of the Chinese government that fall into the following four categories:

  1. The use of “a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China, in order to require or pressure the transfer of technologies and intellectual property to Chinese companies;”

  2. Acts, policies, and practices that “reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies and undermine U.S. companies’ control over their technology in China;”

  3. Direction and/or unfair facilitation of “systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans;” and

  4. Conduct or support of “unauthorized intrusions into U.S. commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information” (as well as the harm they may cause to U.S. companies and the competitive advantages they may bring to Chinese companies).

Beyond the categories enumerated above, which are focused on technology/IP transfer and cyber-theft, the USTR notice also invites submissions of “information on other acts, policies and practices of China relating to technology transfer, intellectual property, and innovation described in the President’s Memorandum,” leaving open the possibility for the investigation to widen. The announced scope of the investigation highlights the discretionary factors to be considered under the statute, indicating that USTR is not focused solely on actual violations of China’s obligations under international trade law.

Consistent with the statute, the notice provides that USTR has 12 months to make a determination as to whether action is warranted. If it is determined that action is warranted, USTR may consider a broad range of retaliatory tools, including the withdrawal of trade concessions, the imposition of duties or other import duties, and “all other appropriate and feasible action within the power of the President that the President may direct the Trade Representative to take…to enforce such rights or to obtain the elimination of such act, policy, or practice…[with actions that may be taken being] within the power of the President with respect to trade in any goods or services, or with respect to any other area of pertinent relations with the foreign country.” Retaliatory actions may be targeted at industries other than those directly linked to the identified harm. USTR also has the discretion to come to an agreement with the foreign country’s government to eliminate or obtain compensation for the identified harm. As required by law, USTR has requested formal consultations with the Chinese government regarding the issues under investigation.

The behavior targeted by this Section 301 investigation reflects concerns of the international business community in China. For instance, 43 percent of companies responding to AmCham China’s annual Business Climate Survey in 2017 reported that reducing the need to engage in technology transfer would have at least a somewhat significant impact on increasing their investment levels in China. These companies may find this investigation to be an opportunity to advance their specific concerns. Meanwhile, Chinese companies that may be at risk for retaliatory action under Section 301, and U.S. companies potentially vulnerable to counter-retaliation by Chinese authorities, should carefully monitor the situation.

The Chinese government has expressed its concerns about the investigation. Suggesting that the United States is sending the wrong signal to the international community, a statement from the Ministry of Commerce asserts, “The United States’ disregard of World Trade Organization rules and use of domestic law to initiate a trade investigation against China is irresponsible, and its criticism of China is not objective.” While launching an investigation of China’s unfair trade practices is not, in and of itself, inconsistent with U.S. WTO obligations, imposition of some—though not all—of the retaliatory measures authorized under U.S. law could potentially violate WTO rules. China’s statements indicate that should the U.S. investigation lead to unilateral retaliatory action, China will respond in various ways, including by considering a challenge to such measures at the WTO.

The USTR notice calls for written comments by interested persons to be submitted by September 28. The interagency Section 301 Committee, which is chaired by the USTR, is scheduled to hold a hearing in Washington, D.C., on October 10. Requests to appear at the hearing are also due on September 28.

Zhijing Yu  contributed to the preparation of this article.

 This post was written by Ashwin Kaja, Gina M. Vetere and Timothy P. Stratford of  Covington & Burling LLP © 2017
For more legal analysis go to The National Law Review

State Department Makes Predictions about EB Cut-Off Date Movement

Notably, the State Department stated with certainty that the EB-2 Rest of the World category likely will retrogress in the coming months.

At a recent American Immigration Lawyers Association meeting, the US Department of State made comments about Employment-Based (EB) cut-off date movement in the final third of the fiscal year. This Immigration Alert summarizes the comments made by the State Department and what they could mean for EB cut-off date movement in the upcoming months.

EB-1: China and India

US Citizenship and Immigration Services announced that the “final action date” of January 1, 2012 will control for the China and India EB-1 categories. These have apparently exhausted close to 50% of the entire EB-1 limit for the 2017 fiscal year. This cut-off date is expected to be maintained until the end of September, when the fiscal year ends. The final action cut-off date for the China and India EB-1 categories may once again become current at the start of the new fiscal year on October 1, 2017, but there is no guarantee that this will happen.

EB-1: Rest of the World

The EB-1 Rest of the World category (i.e., countries other than China, India, Mexico, the Philippines, El Salvador, Guatemala, and Honduras) should remain current for the foreseeable future.

EB-2: India

A slight advancement in the EB-2 India category will occur in June, but it is unlikely that this category will once again reach the most advanced final action cut-off date that was reached last year. The State Department stated that it may maintain the existing final action date through the end of September, but there is no guarantee that this will occur.

EB-2: China

EB-2 China will advance by less than one month to March 1, 2013 in June. The State Department noted that the EB-2 China category should continue to advance slowly and will probably exhaust its per-country limit before the end of the year.

EB-3: China

EB-3 China’s final action date of October 1, 2014 will continue to apply in June. As a result of a significant EB-3 downgrade volume, retrogression in this category is possible in the final months of the fiscal year.

EB-2: Worldwide

The State Department noted that the EB-2 category has experienced significant usage, and stated with certainty that a final action cut-off date will be imposed for the EB-2 Rest of the World category in August—or even as early as July. This cut-off date, once imposed, should remain unchanged through the end of September, with a small advancement possible in September and a return to currency in October.

EB-3: Rest of the World

The EB-3 Rest of the World category will move forward by one month in June to April 15, 2017. The State Department expects further forward movement in this category for the rest of the fiscal year.

EB-3: India

The State Department noted that the EB-3 India category will advance in June from March 25, 2005 to May 15, 2005. Continued forward movement is expected in July and August. The State Department predicts that the July cut-off date for the EB-3 India category will advance to October 15, 2005.

How This Affects You

It is highly likely that the cut-off date movement predicted by the State Department will occur. Persons seeking permanent residence through the EB process should take note of this predicted movement and plan accordingly. In particular, persons in the EB-2 Rest of the World category may wish to consider filing adjustment of status applications before the anticipated retrogression in this category occurs in July or August. Once this retrogression occurs, only persons with priority dates before the new cut-off date will be able to file such applications.

This post was written by A. James Vázquez-Azpiri of Morgan, Lewis & Bockius LLP.

Trump, Xi Kick Off Economic Relationship

china economic relationshipOn Friday, April 14, the U.S. Department of Treasury published a widely anticipated semi-annual report detailing the foreign exchange practices of America’s major trading partners. Although he regularly called for China to be labeled as a “currency manipulator” as a candidate, President Donald J. Trump and his administration declined to use the occasion of this report to do so. Mr. Trump previewed this decision days earlier in an interview with the Wall Street Journal, reflecting the consensus among economists that the Chinese “are not currency manipulators.” While, according to many economists, the Chinese government did keep the value of the Renminbi (“RMB”; also known as the “Chinese yuan”) at an artificially low level for many years, Chinese policymakers have been hard at work trying to prop up the currency since 2014 due, in part, to a strengthening U.S. dollar and surging capital outflows.

The decision not to label China as a currency manipulator comes on the heels of the first in-person meeting between Mr. Trump and Chinese President Xi Jinping. On April 6 and 7, Mr. Trump hosted Mr. Xi at his Mar-a-Lago estate in Florida for a two-day summit, an important weather vane for near-term relations between the United States and China. Despite concerns that strategic differences over thorny issues such as North Korea and the South China Sea or harsh rhetoric regarding U.S.-China trade relations from Mr. Trump in advance of the meeting might sour the mood, both sides came out of the meetings with a buoyant step. The two sides agreed to implement a new, comprehensive framework for bilateral negotiations that will shape U.S.-China engagement in the years to come. Further, U.S. and Chinese officials announced a plan to reach agreement, within 100 days, on steps that can be taken to address trade-related frictions between the two countries.

For much of the Obama presidency, bilateral negotiations between the U.S. and China were centered around two main events: the U.S.-China Strategic and Economic Dialogue (“S&ED”) and the Joint Commission on Commerce and Trade (“JCCT”). During this first face-to-face encounter, Mr. Trump and Mr. Xi agreed to a new framework for high-level negotiations called the “U.S.-China Comprehensive Dialogue,” which is to cover four main tracks: diplomacy and security, economics, law enforcement and cybersecurity, and society and culture. Few details have been released as to how the new dialogue will work in practice, and which of the components of the S&ED and JCCT might be preserved in this new framework.

The 100-day plan for trade negotiations is aimed at addressing trade frictions, particularly with regard to increasing U.S. exports and reducing the U.S. trade deficit with China. Few details about what the 100-day plan will entail have been released, and many details are yet to be negotiated. However, it appears that these negotiations will focus on securing Chinese commitments on a range of U.S. exports including beef (banned in China since 2003) and other agricultural products, steel, oil, and gas. Additionally, the Chinese might provide greater market access for U.S. investments in the financial sector—e.g., in securities and insurance. U.S. Treasury Secretary Steven Mnuchin explained during a press briefing that there was a “very wide range of products that we discussed.” According to some reports, at least some Chinese commitments proposed at this early stage may have originally been intended for offer in the context of the bilateral investment treaty negotiations between the U.S. and China, the prospects for which are now less certain.

The current dynamics present significant opportunities for individual businesses and industry groups. Businesses seeking access to the Chinese market for exports or investment should consider engaging with U.S. policymakers to leverage the situation and make a case for addressing their specific needs during the current round of negotiations. Even if the 100-day plan does not bring about the kind of comprehensive economic benefits potentially possible under a bilateral investment treaty, companies with interests in China should see this as an opportunity to seek relief in a Chinese business environment that, according to over 80% of member companies responding to an AmCham China survey, has become less friendly to foreign business than in the past.

ARTICLE BY John Veroneau, Timothy P. Stratford & Ashwin Kaja of Covington & Burling LLP

© 2017 Covington & Burling LLP

China’s Quantum Cryptography: Tales from (Quantum) Crypt

China Quantum CryptographyThe dream of hack-proof communication just got a little closer to reality. On August 16, 2016, China launched the world’s first “quantum satellite,” a project the Chinese government hopes will enable it to build a communication system incapable of being hacked. Such a system, if perfected, would allow for encrypted communications between any two devices with absolute certainty that the encryption could not be broken, and with a built-in mechanism for alerting the sender/receiver if someone tried.If you are interested in truly understanding the mechanics of quantum cryptography, I would highly recommend the article “How Quantum Cryptography Works.” For the purpose of this post, a very basic explanation is as follows:

In order to encrypt a two way communication, the sending party (who we will call “Alice”) typically encodes a message using a key and sends the message to the receiving party (who we will call “Bob”), who then decrypts the message using the same key. Since modern technology makes it possible to engineer almost unbreakable keys, the best way for an eavesdropper (who we will call “Eve”) to access the message is to find the key itself, which is vulnerable because it also needs to be communicated between Alice and Bob, but can’t itself be encrypted, or else Bob won’t be able to use it.

Quantum cryptography would allow Bob and Alice to use a new key for every message AND guarantee that if Eve tries to intercept the key, they will know. Quantum entanglement is a physical phenomenon that can cause certain particles to become “entangled” such that a change in one will elicit a predictable change in the other, no matter how far apart the entangled particles are, and without any measurable (by current scientific standards) communication between them. If Alice and Bob share entangled particles, Alice can transmit the information for a new key to Bob for every communication by altering the directional spin of her particles, which in turn will alter the spin of Bob’s particles. A complicated process of measuring particle spin and cross-checking information between Alice and Bob (more fully explained in the article linked to above) is then used to generate the key.

Since so far as science is currently aware there is nothing “communicated” between the entangled particles, there is nothing for Eve to intercept unless she can actually access Bob’s particles. Meanwhile, Heisenberg’s uncertainty principle states that anytime the spin of one of these particles is measured, the very act of measuring it changes the spin of that particle. This means that if Eve does manage to physically access Bob’s entangled particles and measures them to try and get Alice’s key before passing the particles back to Bob, Bob will know the particles were intercepted because the key he thinks he got from Alice won’t work to unlock Alice’s message after he and Alice cross-check their information, since Eve’s measuring of Bob’s particles caused the spin of those particles to change. Furthermore, since Eve is not able to cross-check her information with Alice, even if she is able to listen to Bob and Alice cross-checking their information, Eve will not be able to use her information to formulate the correct key to decode Alice’s message.

The ability to send completely secure messages between any two points has myriad applications for data security. From a commercial standpoint, it could mean the ability for enterprises to remote access data without fear of interception. It could also mean an increase in the security of customer information (especially information that is legally required to be protected, such as personally identifiable information) and a corresponding decrease in the risk of a security breach that might result in damage to a company’s brand, increased compliance costs, or potential litigation awards and expenses. For consumers, it could mean the ability to communicate private information securely in an age where so many online transactions require the sending of sensitive information over the internet.

More troubling (or liberating, depending on your point of view) are the challenges quantum cryptography poses for law enforcement and national security. Agencies such as the CIA, FBI, and NSA currently depend on access to third party data networks, such as e-mail clients and telecommunication companies, for a large part of their data collection and monitoring activities. Under the “third-party doctrine” when Alice sends a message to Bob, if a copy of that message is kept by the medium they use to communicate (e.g. by Alice’s e-mail client), a government agency can request a copy of that information directly from Alice’s e-mail client without needing to get a warrant, and without telling Alice or Bob about the request. Quantum cryptography could allow Alice to send an encrypted message to Bob such that, even if a government agency gets a copy of the message itself from Alice’s e-mail client, they will not be able to decrypt it without help from either Alice or Bob.

Quantum cryptography still has a long way to go before it lives up to its promise, and there will almost certainly be bumps along the way. Yet, if the Chinese satellite launch does kick start the quantum cryptography revolution, commercial enterprises, consumers, governments, hackers, and lawyers alike will need to find ways to respond to the new challenges it creates.

ARTICLE BY Adam Waks of Proskauer Rose LLP
© 2016 Proskauer Rose LLP.

Increased Sanctions on North Korea Focus on China and Russia

Last week, President Obama significantly increased sanctions on North Korea through Executive Order 13722, which implements the North Korea Sanctions and Policy Enhancement Act of 2016 (H.R. 757). The Executive Order’s prohibitions and blocking provisions, and designation criteria are substantially more expansive than that Act. Concurrently with the issuance of the Executive Order, OFAC announced the designations of 17 North Korean government officials and organizations, 15 entities, two individuals, and identified 40 blocked vessels under various sanctions authorities.

While neither Congress nor the President imposed secondary sanctions per se, China and Russia should  interpret the Executive Order as a clear warning about their economic ties with North Korea. In the Iran sanctions program, secondary sanctions require that a foreign financial institution “knowingly facilitate or conduct a significant financial transaction” for a particular individual or entity. This evidentiary standard greatly limited the use of those sanctions authorities. The new sanctions against North Korea are clearly aimed at foreign business interests, but unlike secondary sanctions, this new authority does not have an evidentiary impediment to its implementation.

Transportation, Mining, Energy, and Financial Services

Subsection 2(a)(i) of the Executive Order authorizes the Secretary of the Treasury to identify industries in the North Korean economy, the participants of which may be designated solely based on their operating within that industry. The Secretary of the Treasury determined that entities within the transportation, mining, energy, and financial services industries are subject to designation. The Treasury Department’s Office of Foreign Assets Control (OFAC) then designated Ilsim International Bank and Korea United Development Bank for operating in the financial services industry.

OFAC’s authority to derivatively designate any bank that provides services to any identified North Korean bank creates de facto secondary sanctions. Executive Order 13722 authorizes OFAC to designate any individual or entity that provides services to any identified Korean bank. Therefore, any financial institution that provides an identified North Korean bank with an account, serves as an intermediary, confirms or advises a letter of credit, or provides any other service can be designated. The most likely targets of these derivative actions are Russian and Chinese financial institutions.

North Korean Slave Labor and Coal

The Executive Order authorizes OFAC to designate businesses that “have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea.” According to open source reporting, North Korea has between 50,000 and 100,000 “state-sponsored slaves” predominantly located in China and Russia. The North Korean regime earns between $1.2 and $2.3 billion annually in foreign currency through these slave laborers. Apart from the appalling human rights violations, this practice finances the North Korean nuclear and missile development programs.

In addition to companies that utilize North Korean slave labor, entities that deal in metal, graphite, coal, or software to or from North Korea are now subject to designation, “where any revenue or goods received may benefit the Government of North Korea.” United Nations Security Council Resolution 2270 of March 2, 2016 address the sale of coal and iron from North Korea, but in a very limited manner. Unlike the United States sanctions program, the prohibitions do not apply to transactions  “exclusively for livelihood purposes and unrelated to generating revenue for the DPRK’s nuclear or ballistic missile programs.” As a result of these substantial limitations, any application of the sanctions on coal and iron are likely to be enforced unilaterally by the United States.

Chinese companies are clearly the most susceptible to this designation criteria. According to the press release announcing the Executive Order and designations, “coal generates over $1 billion in revenue per year for North Korea.” Open source reporting also indicates that in 2015, North Korea supplied China with 19.63 metric tons of coal.

Return to a Comprehensive Sanctions Program

In addition to the designation criteria highlighted above, Executive Order 13722 also transitions U.S. sanctions against North Korea back into a comprehensive sanctions program. All property and interests in property of the North Korean government are now blocked, and the Department of Commerce licensing requirements are now supplemented with a prohibition on the exportation of goods and services.

OFAC released a series of 9 General Licenses to address issues that commonly arise from comprehensive programs. These include authorization of certain legal services, certain services in support of nongovernmental organizations,  transactions related to intellectual property, and noncommercial personal remittances.

Article By Jeremy P. Paner of Holland & Hart LLP.
Copyright Holland & Hart LLP 1995-2016.

Top Manufacturing Trends to Watch for in 2016

Cybersecurity

Manufacturers continued to face challenges and find opportunities related to cybersecurity in 2015, and those trends can only be expected to intensify in 2016. New laws and new threats (discussed in more detail here and here) have either incentivized or required manufacturers to evaluate their cybersecurity strengths and weaknesses, then capitalize on the former and work to eliminate the latter. In light of the rapid evolution of cybersecurity technology and threats, manufacturers can expect to devote, or continue to devote, significant resources to cybersecurity issues in 2016.

Disruptive Technology/Internet of Things

Smart products, big data, and analytics are not just for tech companies anymore. Many manufacturers are now constantly looking for ways to leverage these tools to improve their process, their products, and their customers’ satisfaction, and those who aren’t may be falling behind. In an increasingly connected world, manufacturers need to keep pace and ensure that their products not only stay relevant, but push the envelope whenever possible. Potential regulation of the open Internet (discussed here) only complicates matters, and gives manufacturers more reason to carefully watch this trend in 2016.

Regulatory Developments in China

In 2015, manufacturers saw dramatic changes in China’s regulatory landscape (discussed in more detail here, here, and here), including new restrictions on hazardous substances for electronics manufacturers, data-flow and content restrictions, and currency devaluations that significantly complicated the international trade landscape. Additional changes are surely coming in 2016, with new implementing measures for defective auto product recalls and a more aggressive climate policy being only some of the changes to watch. Manufacturers currently operating or selling products in China or looking to expand there in 2016 should pay close attention to these and other developments.

Article By Louis J. Thorson of Foley & Lardner LLP

© 2016 Foley & Lardner LLP

China Devalues the Yuan in Biggest Single-Day Markdown in 20 Years

The People’s Bank of China—the country’s central bank—devalued its notoriously tightly controlled currency (Chinese Renminbi) by 1.9 percent against the U.S. dollar between Monday night and Tuesday morning, Aug. 11, 2015. Such devaluation represents the greatest single-day markdown since 1994, following years of international political rhetoric concerning China’s exchange rate control.

Precisely because the Chinese government kept the yuan tied to a strong dollar, the exports of other countries have become more competitive as their currencies have fallen against the yuan over the past year. This has resulted in a weakening export sector, upon which the Chinese economy is very much dependent. Other contributing factors to the currency devaluation are the country’s slowing, albeit still net-positive, second-quarter GDP in comparison to prior years and, perhaps, a desire to reign in capital outflows from China, which totaled $162 billion for the first half of this year alone. Add to this backdrop the fact that the central bank has repeatedly cut interest rates to boost lending and spur a slowing economy over the past year, thereby also decreasing returns on domestic investments and forcing investors to look outwardly for higher yields.

While Beijing is focused on the country’s growth and macroeconomic prosperity, the move raises questions as to how a weaker yuan will affect the very active market of Chinese foreign investors.

However, the question now is how the devaluation of the yuan will impact foreign direct investment by Chinese in the real estate sector and as well in EB-5 investments.

ARTICLE BY Shaun K. Staller of Greenberg Traurig, LLP

©2015 Greenberg Traurig, LLP. All rights reserved.

China Proposes “RoHS 2” Framework for Comment

On May 15, 2015, China’s Ministry of Industry and Information Technology  (“MIIT”) released a latest Draft for Comments (“May 2015 Draft”) of the “Management Methods for the Restriction of the Use of Hazardous Substances in Electrical and  Electronic Products” (“Methods”) (Draft for Comments in Chinese). The new Methods is designed to replace the existing regime, promulgated in 2006 and commonly referred to as “China RoHS.” The May 2015 Draft is now open for public comments until June 17, 2015. It makes several important proposed changes to the existing China RoHS regulation.

Since 2010, the Chinese government has attempted to push forward an updated RoHS regulation, and MIIT has released several draft revisions, but none have been enacted. The May 2015 Draft generally retains the requirements on both materials restrictions and information disclosure, but makes several important changes:

  • It aligns its scope with the EU RoHS 2. The new open scope of covered “Electrical and Electronic Products” (“EEP”) is not limited to “electronic information products” but would now extend to all electrical and electronic equipment (“EEE”) that meets voltage specifications. The definition is almost identical to that of EEE in the EU RoHS 2 Directive, except that it excludes “devices involved in electrical power production, transmission and distribution.”;

  • The May 2015 Draft will remove the current “manufactured for export” scope exclusion;

  • The renamed “Compliance Management Catalogue” will likely, once issued in the future, include the hazardous-substance content limits (to date not yet imposed under China RoHS 1).

  • With respect to certification, the May 2015 Draft proposes a new, multi-agency, two-step system to replace the current program. Products on the “Compliance Management Catalogue” will first go through a “conformity assessment” process. After the conformity assessment, that assessment will be subject to a subsequent verification mechanism, which will be developed later by MIIT along with Finance and other ministries.

It remains unclear how the new conformity assessment and the following verification mechanism will operate in practice. The language implies that the MIIT may need to take further actions to specify the details of these programs;

  • The May 2015 Draft will remove the disclosure requirement for product packaging materials from the existing regulation.

It remains to be seen whether this May 2015 Draft will be finalized as the new China RoHS 2 regulation and whether the above changes will remain in the enacted rules.  Parties that are interested in submitting comments on this Draft may do so via either of the two approaches listed here (in Chinese).

Mr. LaMotte graciously acknowledges the assistance of Shengzhi Wang, a summer associate with the Firm, in the preparation of this Alert.

ARTICLE BY K. Russell LaMotte of Beveridge & Diamond PC
© 2015 Beveridge & Diamond PC

China and Australia Conclude Landmark Free Trade Agreement Negotiations

Sheppard Mullin Law Firm

Summary

On November 17, 2014, China and Australia completed their negotiations for a China-Australia Free Trade Agreement (“ChAFTA”)by signing a Declaration of Intent which contained the essential elements of the free trade deal and commits both countries to draft the legal text of the agreement for signature at a later date.  This agreement ends almost a decade of free trade negotiations between China and Australia.  The ChAFTA is significant because it will initially lower and ultimately eliminate tariffs on a wide range of exports between the two countries boosting bilateral trade between the world’s second largest economy and a significant U.S. free trade partner in Asia.

“Best Ever” Trade Deal with China

Australian Prime Minister, Tony Abbott, described ChAFTA as the best ever between China and a Western country.  ChAFTA builds on Australia’s trade deals with Korea and Japan which account for Australia’s three largest export markets.  In the short term, ChAFTA will consolidate Australia’s competitive position in the resources and energy market by phasing-in zero tariffs on products including iron ore, coal, gold, and crude petroleum oils which comprise 4 of the top 5 leading exports (by value) from Australia to China.

ChAFTA will also reduce and eliminate tariffs on a wide range of Australia-produced agricultural products, foodstuffs and wine as Australia attempts to transition in the longer term to what commentators have described as a “mining to dining” export economy.

China has also offered Australia its best ever services commitments in an FTA (other than China’s agreements with Hong Kong and Macau) which includes new or significantly increased market access for Australian banks, insurers, securities and futures companies, law firms and professional service suppliers, education service exporters, as well as health, aged care, construction, manufacturing and telecommunication services businesses in China.

Importantly, ChAFTA will contain an Investor Dispute Settlement Mechanism (IDSM) which generally contain administrative, judicial and/or arbitral protections that enable companies to invest in China with greater confidence because an IDSM permits compensation claims against alleged government regulation that negatively impacts investments.

Promoting Chinese Exports and Investment in Australia

ChAFTA will promote further Chinese investment in Australia by, for example, raising the Foreign Investment Review Board (FIRB) screening threshold for private companies from China in non-sensitive areas from AS$248 million to AS$1,078 million.  However, FIRB will continue to screen proposed investments by Chinese State Owned Enterprises regardless of value.

ChAFTA will also increase China’s exports to Australia, in particular, of telecom equipment and parts, computers, clothing, domestic furniture and children’s goods which comprise China’s top 5 exported products to Australia.

Potential Effect on U.S. Trade

The potential impact of ChAFTA on U.S. trade cannot be determined at this stage.  In general, recent economic studies suggest that the effect  of “hub-and-spoke” free trade agreements where one country, in this case, Australia, acts as a “hub” by establishing two different bilateral FTAs with countries that retain their trade barriers on each other’s goods, i.e. U.S. and China, is of positive and significant effect on bilateral trade among all three countries.  However, these economic studies do not incorporate the rules of origin (“ROO”) which are an essential part of FTAs because they define the conditions under which the importing country will view a product as originating in an FTA partner.

Without the full text of the ROO for ChAFTA, it is not possible to indicate the potential for more Australian manufacturing using U.S.-origin components that would otherwise attract high duty if exported directly to China but may not if incorporated into goods in Australia.  However, based on the proposed tariff-reduction on imported Chinese telecom equipment and parts, and computers, ChAFTA does suggest the potential for increased manufacturing in Australia for the U.S. market using Chinese components that could not otherwise be imported directly into the U.S. without paying significant duty.

Under the ROO of the U.S.-Australia FTA, Chinese-origin components would need to satisfy any applicable tariff-shift and/or meet any applicable regional value content.  Alternatively, those Chinese-origin components that did not satisfy an applicable tariff-shift could not comprise more than the de minimislevel of 10% of the adjusted value of the good.

Finally, ChAFTA offers the potential for U.S. investors to structure their investments in China using an Australian entity by taking into account the final text of ChAFTA’s IDSM because there is currently no investor protection offered by a bilateral investment treaty between the U.S. and China.

ARTICLE BY

Neil Ray
Jiamu Sun
OF
Sheppard, Mullin, Richter & Hampton LLP