International Trade, WTO and China Human Rights

A few days after Secretary of State Hillary Clinton's hopeful and celebrated official visit to China, the U.S. State Department issued its annual report on China's human rights record.  In it, the U.S. criticises China for silencing dissent and oppressing ethnic minorities.  

Not to be outdone by the U.S., China hit back with its own Human Rights Record of the United States in 2008, enumerating a laundry list of rights violations committed by the United States government.

As a law student who wants to carve out a living by building a China-related law practice, I refuse to be drawn into this "p___ing contest."  However, that is not to say that human rights and law practice related to China are not related.  Quite on the contrary, I learned over the weekend that there is a correlation between the two.

During the UT International Law Journal China Law Symposium, Professor Patricia Hansen at the University of Texas Law School spoke about the connection between international trade, the WTO, and human rights, and the possible ramifications that this connection may have for China.  From a historical perspective, before China joined the WTO, the U.S. Congress had an annual review of China's human rights record in the 1990s, and thus a chance to publicly shame China before the Congress would grant China the coveted Most Favored Nation Status for the purpose of international trade.  In that sense, there was a direct correlation between China's behavior on human rights and carrots that the U.S. held on trade.  However, after China joined the WTO, the U.S., essentially, lost its only effective leverage to "whip" China into shape with respect to human rights because China did not agree nor did it commit to any provisions regarding human rights in its negotiations for the WTO membership.

Professor Hansen posits that the disconnect between international trade and human rights abuses/concerns extends beyond China.  Therefore, there should be an international solution that binds all players in international trade.  To reach that goal, Professor Hansen explained that trade policymakers have attempted the following two approaches: (1) weave human rights protection into the Doha Round; and (2) empower and implore the Appellate Body of the WTO to use human rights protection as a factor in deciding trade disputes.

However, problems exist for both approaches.  First, developing countries are unlikely to and have refused to agree to any kind of human rights protection provisions as envisioned by the developed countries because human rights is just another excuse for the latter to discriminate against the former and impose unreasonable demands.  Second, the Appellate Body of the WTO is fiercely textual in its application of the relevant law; and hence, absent textual authorization, it is unlikely to step beyond its commitment to the WTO agreements.  Given these hurdles, it seems that human rights protection and international trade do not really mesh well in the context of creating a binding obligation on trading nations in the WTO.

Professor Hansen does see hope on the horizon though in light of some incremental developments on this very subject.  First, international negotiations have resulted in a narrow exception to the strict prohibition of compulsory licensing of pharmaceutical technology (patents) by member countries.  Where there is a human health pandemic or disaster, member countries like Brazil and India are permitted to appropriate patents held by foreigners in order to protect the right to protect public health and access to medical treatment.  Second, in a  case regarding sea turtles decided by the WTo Appellate Body, the Court decided that laws implemented by the U.S. in protecting sea turtles to the detriment of other member countries are fully in compliance with the WTO rules and consistent with relevant WTO decisions.  Based on the above, access to medical treatment & the protection of public health as well the the protection seas turtle, both of which are beyond the traditional notions of human rights, might herald a new direction in linking trade with human rights protection.  [One might think that protecting human rights (however one interprets it) is arguably more important than the protection of endangered sea turtles even though it is also arguable that some sea turtles are more lovable than some humans.]

These developments led Professor Hansen to see the possibility that the Appellate Body might gradually read more human rights protection into trade disputes between nations where necessary and appropriate despite its strictly textual approach to interpreting the WTO rules.

I do think that human rights have a part to play in international trade and vice versa. Undoubtedly, China's entry to the WTO has resulted in dramatic changes in the Chinese society.  Millions of Chinese enjoy more material wealth, and the society has grown more open and integrated to the rest of the world.  More Chinese have the basic necessities to sustain their lives, and the government is growing more responsive to people's fundamental survival needs (public health, transportation in the countryside) (some might argue that this is not a result of the WTO, but I'd humbly submit that there is a connection.)

Because of the transformitive power of international trade to trading nations, human rights could certainly play a role in improving the lives of citizens of those nations.  However, in order to help developing nations stomach the idea of international standards on human rights, the following limitations might facilitate and/or accelerate the linking of the two:

1.  Integrate international customary law on human rights, rather than human rights standards set forth by the developed nations.  International customary law is already recognized and practiced by many nations, and it does not  impose additional, new obligations on developing nations. 

2. The WTO Appellate Body should require evidence of specific violations relevant to a trade dispute, rather than simply relying on allegations of general violations by a certain nation.  This requirement imposes a heavier burden of proof on the complaining nation, and it helps the Appellate Body to fashion appropriate and proportionate penalties for actual and specific violations of international human rights obligations. 

    

“No Harm, No Foul”: China Wins Trade Dispute on Paper Exports

As reported by the New York Times, the United States International Trade Commission (USITC) handed a victory to the Chinese government and a few glossy paper exporters in their trade dispute with the U.S. government over “illegal subsidies.”

Notably, the USITC refused to endorse tariffs on Chinese glossy paper as requested by American producers, and it “threw out” duties on Chinese imports “authorized” by the Bush government. The reason for this ruling against the American parties is that the USITC found no “material injury” or “threat of material injury” to American manufacturers, despite allegations of illegal subsidies by the Chinese government.

Currently, industries such as steel and tire are also seeking relief, and of course the key to their success seems be to evidence of “material injury” or threat thereof.

China Hearsay looks beyond these trade cases and rulings, and sees glimpse of protectionism in the U.S. and the EU.

Maybe, the Chinese government and those Chinese glossy paper exporters will have something to be thankful for at this time of the year.

BIS Implements New “China Rule”on Dual-use Export Control

The Federal Register published the Department of Commerce’s updated China regulations, which have come to collectively be known as the “China rule.” As commented by Mario Mancuso, the Under Secretary of Industry and Security, it is a “right of balance” and a “model of future cooperation.” BIS intends the China Rule to encourage trade with legitimate civil end-users in the PRC, while further tightening controls on exports that could assist the PRC with its military modernization efforts.

Three main issues have been included in the Rule. First, it imposes additional licensing requirements for exports destined for a military end-use in the PRC; second, it creates the Validated End-User program (VEU); and the third, it revises the existing End-User Statement requirements by improving the threshold from the value of $5, 000.00 to $50,000.00.
This article addresses the VEU and the Threshold increase for End-User Statement issues, which are closely related to our clients’ business operation.

Validated End-User Program

Based on the China Rule, BIS removed individual license requirements for certain authorized customers in China. Under the “Validated End-User” (VEU) program, certain “trusted customers” in China with a track record of responsible civilian use of U.S.-controlled technology will be able to receive certain items without individual export licenses. This arrangement shall actually and significantly lower the administrative and regulatory burden of exporting to these “trusted” customers. “VEU will reduce lag time, expense, and uncertainty in the licensing process, helping U.S. exporters to be even more competitive in China. VEU will also act as a powerful market-based incentive for good behavior by rewarding the many firms in China who handle sensitive U.S. technology with care,” as remarked by Mario Mancuso. Currently the VEU program applies only to Chinese companies, with the expectation that it will be extended to India companies and companies in other countries in the future.

The complete procedure to request VEU authorization, as well as the procedures, timelines, and criteria the End-User Review Committee (ERC) will use in considering such requests can be found in Section 748.15 and Supplement Nos. 8 and 9 to Part 748 of the Export Administration Regulations (EAR). The Commerce Department expects to publish an initial list of approved Validated End-Users as early as July. Sectors likely to benefit from VEU include electronics, semiconductor equipment, and chemicals. BIS anticipates that a number of Chinese companies that must currently apply for individual licenses to import many items will seek VEU status to eliminate the burdens associated with repeatedly applying for multiple individual licenses.

Based on the Rule, either Chinese companies, or exporters on behalf of intended import Chinese Companies may apply for VEU status. According to the template designed to assist the application in preparing and submitting their requests for Validated End-User (VEU) authorization, some initial information and documentation should be included in the filing for an Advisory Opinion Request for Authorization Validated End-User (VEU). This includes general information such as candidate company name, operating name, destinations, company physical address and contact information, information about submitting company; structure, ownership and business activities of the candidate company; recording keep and compliance information; certification which can be an original statement with candidate company letter head containing required statements and other additional information. The deadline for the End-User Review Committee (ERC) to make a decision on the request is 30 calendar days after the application is circulated to all ERC agencies.

End-Use Certificate Threshold Improvement

The China Rule expanded the range of items for which U.S. exporters must acquire End-User Statements (“EUSs”) from the Chinese Ministry of Commerce (“MOFCOM”). However, the China Rule also addresses industry concern about additional administrative burdens relating to end-use certificates by raising the dollar threshold for obtaining an end-use certificate to $50,000 (from $5,000). However, the value limitation does not apply to the transfers of particularly sensitive items or technology to the PRC, in which case, the exporters or re-exporters shall still need to get a EUS.

Additional Links for Reference

The links below contain some helpful information and the full text of the Rule:

http://www.bis.doc.gov/News/2007/Mancuso06182007.htm

http://www.bis.doc.gov/validated_End_User.pdf

http://a257.g.akamaitech.net/7/257/2422/%2001jan20071800/edocket.access.gpo.gov/2007/pdf/E7-11588.pdf

Wahaha's China arbitration request granted despite pendency of Swedish and U.S. lawsuits

Brad Luo's articles have illustrated the escalation of the trademark dispute between China's beverage giant, Wahaha, and the French company, Danone. The dispute centers around the ownership of trademarks used by 39 joint ventures which have evolved contractually between the companies since 1996. Danone claims that Wahaha has been using the trademark to unfairly compete with Danone and the joint ventures; Wahaha claims that the trademark transfer contracts, under which the joint ventures operate, was never approved by China's trademark authority and are void.

Choice of venue issues are complex in multi-national lawsuits and there is no great statutory relief in certain venues which will protect parties from multi-venue fights. This has proven to be a problem for foreign companies contracting with Chinese entities, in particular. An example is the case of China National Metal Products Import/Export Company vs. Apex Digital, 379 F.3d 796 (9th Circuit 2004). Apex Digital (Apex) is a California corporation that imports consumer electronic goods from China which it sells under its own brand name to retailers in the United States. In 2000, Apex entered into a series of contracts to purchase DVD Players from China National Metal Products Import/Export Company (Metal). Each of the contracts contained the following identical arbitration clause:

All disputes from or in connection with this Contract shall be submitted to the China International Economic and Trade Arbitration Commission ("CIETAC") for arbitration which shall be conducted by the Commission in Beijing or by its Shenzhen Sub-Commission in Shenzhen or by its Shanghai Sub-commission in Shanghai at the Claimant's option in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.

In March 2001, Apex filed a Statement of Claims concerning nine (9) of the purchase orders at the Shanghai sub-commission and the case was accepted. A week later, Metal decided that Beijing would be a better venue and filed a Statement of Claims concerning eight (8) of the purchase orders with CIETAC in Beijing.

Not surprisingly, Apex objected and requested consolidation of all claims into the already commenced Shanghai arbitration. CIETAC rejected Apex's objection and held that CIETAC could entertain both arbitrations at the same time, in different forums because the arbitrations were not "entirely the same." The difference? The Shanghai arbitration involved one additional contract.

The Beijing arbitration panel, unsurprisingly, ruled in favor of Metal as it had predicted. Metal sought enforcement in the United States. The United States District Court held, and the Ninth District affirmed, that the United States had to defer to CIETAC's internal rules to determine the validity of arbitral awards and had to enforce the Beijing decision.

Given the fact that the Wahaha/Danone dispute has been filed in three global forums, it raises serious questions: What do the joint venture contracts say about dispute resolution, venue selection, consolidation of disputes (if anything)? What happens if the Chinese tribunal rules in favor of Wahaha (that the IP transfer wasn't approved by the China Trademark Office) - will it void the contract in full or just negate the trademark transfer issues?

The Apex case exemplifies the impact of the dispute resolution clauses on the relationship and mechanisms to resolve disagreements. The agreement should always specify one institution for dispute resolution and, moreover, the issue of case consolidation should be taken into consideration when drafting contracts between multi-national parties. In Apex, CIETAC was asked to consolidate cases but refused to do so. Such refusal to consolidate cases is not improper in China. Thus, the only protection in these type of disputes is either to include a clause in the initial contract which expressly agrees to the consolidation of any cases concerning the transaction or the parties; or the warring entities can find a way to agree to consolidate the cases after a dispute arises.


In the Wahaha/Danone case, it is unlikely that Wahaha is going to agree to consolidate the cases in any venue other than Hangzhou. Hangzhou is the capital of China's eastern Zhejiang province and is home turf for Wahaha and Zong Qinghou. As the former chairman and founder of Wahaha (in the late 1980's), Zong has been the target of the allegations made by Danone and the primary catalyst for the escalated battle between the companies in the past 2 months.

Importing Food from China: Due Diligence Necessary

In one of my previous posts, I discussed the food and drug safety laws and the weak enforcement of them. Here I want to address what a foreign importer could do in light of the less than perfect track record of the Chinese food & drug producers/exporters.

More often than not, most people in the U.S. do not realize the extent of America’s dependence on Chinese food imports. According to a news report from National Public Radio last week,

China has become the leading supplier of many food ingredients, such as apple
juice, a primary sweetener in many foods; garlic and garlic powder, a major
flavor agent; sausage casings and cocoa butter.

China now supplies 80 percent of the world's ascorbic acid — vitamin C. It's used as a preservative and nutritional enriching agent in thousands of foods. One-third of the world's vitamin A now comes from China, along with much of the supply of vitamin B-12 and many health-food supplements, such as the amino acid lysine.

The fact of the matter of is globalization has linked people together in amazing ways, and food imports from China will continue to grow despite the bad press and weak Chinese law enforcement.

However, foreign import companies can take effective measures to reduce risks of exposure to liability and loss of credibility to customers. Preventive measures seem especially sensible and prudent to do following the massive pet food recall in the United State. I have not heard or read about lawsuits filed by pet owners, but one can expect the sellers and importers of the pet foods to have suffered a decrease in consumer confidence in the pet food.

Precautionary Measures to Take:

A. Conduct Due Diligence

· Refer to the United States Food & Drug Administration Website for updated information on food refusals by country of origin. It also makes sense to speak to FDA officials to find out who the repeat Chinese offenders are and stay away from them when importing from China.

· Check with U.S. Customs and Border Protection (Commercial Enforcement Division) to ascertain whether a certain Chinese exporter has a history or record of exporting substandard food or food ingredients to the U.S.

· Before executing a contract, travel to the producer’s manufacturing facility in China to examine the method, process, and overall food quality. This might be the most expensive way to conduct due diligence, but it is probably the most effective simply because you will be able to find out the salient problems.

B. Contractual Protection

· Provide in the contract that the delivery of food or food products with dissatisfactory quality pursuant to United States standards constitutes a material breach of the contract

· Indemnify yourself in the contract in case of latent food quality issues

America Didn't Get What She Wanted; Now What?

I am no economist, nor politician, neither a VIP of some giant international corporation, but I am a little worry now. What is America going to do to China now that the second round of high level trade talks between the U.S. and China came to a close without accomplishing much of what the Americans wanted?

An Associated Press report pretty much sums up the "disappointing" results of this round of trade talks. With Secretary Henry Paulson hosting a delegation of high level Chinese officials, the two sides touched up a wide array of trade issues between the parties. They, as I think, agreed to continue to disagree on some of the thorniest issues:

1. the undervaluation of the Chinese currency--"Renminbi" (or "Yuan");
2. the failure of Chinese government in its protection of intellectual properties;
3. American companies' access to the Chinese market, especially in the financial services sector.

Aside from the disagreements that remain, the parties did agree on the following, which might make some happy in the U.S.:

1. the number of daily passenger flights between the U.S. and China will be doubled in 2012 from the current 10 to 23 in five years;
2. an increase of the number of cargo flights will also increase;
3. a slight expansion of financial services to enter into China.

Given the strong sentiments involved and forceful arguments advanced by both sides on these tough unresolved issues, I am uneasy about what might happen in the next 18 months. Once again, I am no politician or economist, but I do want to voice what I sense might happen.

First, the United States will continue to push for a quickened pace for the appreciation of the Chinese Renminbi for a couple of obvious reasons. The trade deficit with China is simply too large to overlook; it was a whopping $232.5 billion in 2006 according to the above cited AP report, which is reportedly larger than U.S. trade deficit with any country in history. In addition, an attack on China makes good political fodder in an election year.

Second, China, on the other hand, is unlikely to back down on its position to let the Renminbi rise on the scale and in the pace that the United States wants. That is an enormous 40% (this is the figure most frequently quoted and used in the context of the Chinese currency undervaluation.) in a short period of time. Even though what constitutes a "short period of time" is not specifically defined or made public by U.S. lawmakers, it seems that patience is running very thin for many who have subscribed to Paulson's saged notion of patience in dealing with the Chinese. Probably many complicated political, economical, and social factors in China contribute to the Chinese government's unwillingness to appease the United States in the currency issue. Very simply, the idea or the perception by others that China is appeasing the United States or is giving in to intense U.S. pressure does not go very well in an increasingly nationalistic society. It might also be worthy noting that export is still and probably will remain a key factor in creating jobs and generating revenue for China, and a sudden rise in the value of the Chinese currency as desired by the United States will have unimaginable impact on the economic health of the country as a whole. Without sounding any more stupid in my layman's analysis of the Chinese government's hesitance to agree with the U.S. on the currency issue, I think it is not too difficult to have a general idea that China will not at any time soon budge on this one.

OK, here is the simple way to put what I labored so hard to get across in the last two LONG paragraphs--the U.S. really wants China to do something because it thinks that the desired action by China would solve a host of other related issues, but China does not want to do it because it either does not want to bend its knees or it simply cannot do it right now in the way the U.S. wants it, or both.

Absent some middle ground between the current positions held by China and some lawmakers in the U.S., I'm afraid that some serious trade war may arise in the foreseeable future in light of the political landscape and environment. Surely, I hope that I' wrong. But if my fear bears some legitimate and logical reasons, I hope politicians in both countries will look at the bigger picture of building a truly symbiotic relationship benefiting both sides without resorting to another "war."