Smart China Exit Strategy: Leave but Don’t Burn Your Bridges

China Law Blog (the “CLB”) has just come out with an excellent post regarding how investors should deal with the changing investment circumstances/environment in China. Most fittingly, CLB titled its post as “China Changes. Don't Over-React. Don't Under-React.”

To substantiate its argument, CLB borrows some pearls of wisdom from the China Business Blog, which recently posits the following on how one should respond to changes occurring in China:

1) Don’t over-react
The recent changes in China are not a death knell for global business. What is happening here are just the normal growing pains of a developing economy showing signs of budding maturity and the problems that go along with it.

2) Don’t under-react
China IS going to be a growing consuming market and it WILL suck up a lot of raw material and energy resources. And this WILL have an impact on other nations and economies by making these resources more expensive. It is a reality. It is happening. Sitting and complaining about it is NOT going to help. What emergency plans do you have that address potential future scenarios involving a growing China?

3) Don’t over or under-react, but DO REACT
Many a fortune cookie tells us, in some form, that in the midst of great chaos one may find great opportunity. Well, now seems a time of – if not GREAT chaos – then of some modicum of chaos in global markets. So how can you react and take advantage of it?

4) Look at all of your options
The lesson here is that companies should certainly consider their growth possibilities in China. It is (and will remain for some time) the most compelling market in the world. However, companies should not look at China at the cost of ignoring other markets. If the changes in China are motivating companies to consider all of their options, then I think this is possibly a good thing and is healthier for everyone involved.

In pure simplicity and brevity, CLB translates the above into—“use your head” when dealing with a changing China.

CLB’s advice is most poignant and relevant in light of the way some Korean companies are handling recent changes in China. Reportedly, some Korean companies decided to withdraw from the China, thus causing a pretty noticeable exodus. Nothing wrong with leaving, but it is problematic when they leave illegally (Chinese only). Some “escaped” in the middle of the night, and apparently the problem is so severe that the Korean Foreign Ministry has stepped in to help the exiting companies leave legally.

True, the cost of doing business in China has risen due to a host of economic and legal factors. Inflation keeps rising; labor costs are getting higher accordingly; tax breaks are disappearing; land control is getting tighter; and then there is the “cursed” labor contract law. For some, a quick exit might be the right and appropriate reaction to the changing investing environment; for others, it might not. But, before jumping onto the exodus wagon, it is crucial to analyze the appropriate measures to take, with professional help if necessary. Examine the motives, methods, reasons, and options for exiting.

It is bad enough to leave China illegally, presumably for not settling accounts with supplies, employees, and not paying taxes. It is worse to find out afterwards that China is actually still the place to be, and that you have already burned your bridges in China.

To end, I quote CLB—“Use your head.”

Low-Budget, High-Yield Legal Aid in Xi’an

After I enrolled in law school, I began to notice what amazing services that legal aid offices in American cities offer to the indigents. They operate on a small budget, yet manage to give their all to their clients’ causes. As the good folks at the Dallas Bar Association put it, Pro Bono work is like “billable hours for your soul.”

It turns out that lawyers in my home turf of Shaanxi Province are doing the same, providing much needed legal representations to migrant workers who would otherwise not be able to afford lawyers. As I wrote in one of my previous posts, affordable and easy access to the justice system in a country is essential to the establishment of the rule of law. And what China Digital Times reported does shine a gleam of hope for many, including the disenfranchised Chinese workers and those of us who care about China’s legal system.

In its post titled Why Migrant Workers Praise the Law, CDT states:

The Shanghai Daily News reports that migrant workers have some hope to resolve their woes with free legal assistance in the northwestern city of Xi’an in Shaanxi Province.

Running with a budget of less than 7,000 yuan (US$972) per month, the Xi’an legal-aid station is hailed as a “beacon” for migrant workers by local media which have tracked the station since its formation last year. It is a joint effort by the United Nations Development Program and the All China Lawyers’ Association.

Migrant workers who number up to 200 million in China usually complain that employers pay them late or not at all, and of work-related injuries.

The station recently helped 41 construction workers fight to collect about 90,000 yuan, their half-year earnings for last year. “The work is tougher as they were employed indirectly through sub-contractors or, even worse, via oral promises,” said Zhao.

Now, the Xi’an lawyers have at least two things to be proud of—the historical legacy of Shaanxi and their care for the “soul.”

The Call of the Home

(Foreword--China Business Law Blog strives to focus on matters only related to Chinese Law, but the following post is an exception due to the unique weather circumstances in China right now. This post is dedicated to all the migrant workers, either at home already or still on the road.)

The coldest winter of half a century has so far claimed at least 60 people.

It has caused billions of dollars in economic damages.

It has paralyzed much of the transportation system in southern, central, and southwestern China.

It has engendered mass blackouts in many areas, including my parents’ home.

And it has exposed the Chinese government’s weaknesses in emergency response management. At least, it is a huge blow to a government whose leadership believes that “man is sure to triumph over nature.”

Besides bringing about these unpleasant losses, damages, and revelations, the worst weather in half a century also showed something golden and precious—Chinese people’s unwavering resolve to go home for the most important holiday of the year, no matter what.

Hundreds of thousands of migrant workers are willing to brave the cold, the pushing and shoving, the rude railway employees, the cops, the hunger and thirst, and the seemingly endless waiting while exposed to the elements. Even though they knew they would be delayed for an extended period of time, most of them still chose to wait some more so that they could catch a train or bus for home. So, many of them are still waiting in the cold as I am writing and by the time you are reading this.

Why? Why don’t they just turn around and return to their factories, warehouses, construction sites, dormitories, or wherever they were before their arrival at the Guangzhou train station? Or some other stations scattered across southern and central China? It would be such an easy, logical, and obvious thing to do, given the grave circumstances.

But they did not. Millions of them chose the counter intuitive approach. They chose to brave the difficulties on their way home. They chose to suck it all up for a New Year’s Eve meal with their family whom they have not seen for at least a year; they chose to “eat the bitterness” in order to spend a few days at home, drinking home water, eating home meals and breathing home air; they chose to go home for all that it stands for and all that it means consciously and subconsciously to them. They chose to go home at all costs. They simply choose home over a hotel room, a dormitory bunk bed, or a rented apartment where they do not belong. Because to them, the simple truth is that as far as the Chinese New Year is concerned, “North, South, East or West, Home is the best.”

They won’t do this for the Labor Day; neither will for the National Day; nor will for any other cultural or political holidays. Somehow, the return to home for the Chinese New Year is so deeply ingrained in their psyche that nothing can overcome their drive and resolve to accomplish it.

Is it worth their while to risk so much, even their lives, just to be home?

For observers outside China, the answer is not so obvious, but for them, it seems to be a simple yes.

After observing migrant workers at the Guangzhou train station, the China Blog has the following to say:

My overriding impression was that I was impressed. I was impressed by what people were willing to put up with just for the possibility of getting a seat or even a spot on the floor of a train for a 20+ hour trip home. It was a grand display of enduring hardship, or what in Chinese is vividly known as "eating bitterness" (吃苦).

Of course, that is what many of these people's lives are about, a willingness to endure hardship to get ahead. The thousands waiting outside the Guangzhou station were largely migrant workers, people who traveled to Guangdong province from China's interior seeking a better life for themselves and their families. So when I spoke with the Chinese reporter, my final thought was that I couldn't imagine many Americans going through this. I left feeling a little guilty for complaining about transpacific flights in economy class.

It definitely gives me a new perspective about the Chinese New Year and going home. The closest thing about going home during a holiday in America can be found, I think, in the comedy movie Planes, Trains & Automobiles, although the mood is totally different from the reality in China now.

Hope the migrating masses in China find their transportation and get safely back to their sweet home soon; and above all, wish all a happy Chinese New Year (starting on February 7, 2008).

Mag Train, or Mega Pain?

While most of China is paralyzed by one of the coldest winters of nearly half a century, including the South, and Southwest, the citizens of one district in Shanghai is engaged in a potentially flammable protest against the Shanghai government. As reported by western media (NYTimes, and Washington Post) and in China (Chinese only), some citizens are waging their "battle" against the city government, which has proposed an extended stretch of the Shanghai mag-lev train. Under the proposed plan, the train line, connecting the Pudong Int'l Airport with the Hongqiao Airport, will cut across a densely populated residential area, potentially wrecking the peaceful life of thousands of residents (the number could be over one million based on one undisclosed source). As soon as those residents caught wind of the plan, they began vehemently opposing it, but in peace and through various forms of pleas and petitions. Their efforts so far culminated in a public hearing held on January 19, 2008; this event was attended on the one hand by officials from the city bureau of environment protection, bureau of city planning, the Mag-lev Project management team, and various district officials, and on the other hand by affected citizens of the proposed project.

One of the citizens' key concerns is just compensation for the loss to their property due to the project. Reportedly, the plan proposes to "condemn" property within 22.5 meters of the train line on both sides. In other words, the government will appropriate private property by way of eminent domain; however, it will only do so to property that it deems necessary for the consummation of the project—those apartments located on the plots of land lying within 22.5 meters of both sides of the train line. And the government will compensate the owners of property that it deems "affected" by the project, whereas those owners with property beyond the 22.5 meter boundary take nothing.

Many homeowners cannot stomach this Mag-lev project and the compensation methodology to be employed by the government. First, they disagree with the 22.5 meter rule as proposed, citing that it is arbitrarily set without adequate scientific evidence that the property beyond the boundary will be unaffected by the train. Of course, two sub-issues are embedded in this concern. 1). whether the government needs to "condemn" more land beyond the 22.5 meter line for safety concerns; and 2). whether the entire project will affect the health, safety, home value, and qualify of life of those residents alone the train line, irrespective of the 22.5-meter eminent domain proposal. Second, they disagree that this project is for public good. Public good is the prerequisite to eminent domain proceedings initiated by government entities (more on this later), but the construction project, linking two airports, does not either directly or indirectly benefit the people concerned. Rather, the benefit and convenience go to transit travelers. Third, they oppose the proposed plan all together because they believe that this project is a direct consequence of poor city planning, and that they should not bear the burden and consequence of substandard governance.

So far, the city government appears to be just listening. Officials have appeared at the public hearing, received complaints, and have "softly" pressured vocal dissenters. But, the severity of the issue, with homes and lives of thousands of residents on the line (pardon the pun), begs the question of "what next?" if the government turns a deaf ear. What other recourse do the citizens have? What are their rights under the Chinese legal system? How can they protect their rights in a country where the central government has been "pursuing" the Rule of Law? How should they navigate the complex and at times unfriendly legal system to enforce their rights?

To be Continued...

Woe to Assumptions!

"Assumption and Expectation ~ Two cousin brothers responsible for most of the chaos in the world."

An anonymous blogger behind the FOARP kindly pointed out a technical error in one of my previous posts: Microsoft Falls One Step Behind in Protecting “Windows” . Here is the comment that this reader left:

Mate, there is no such thing as CTPO, there is CTMO (the trademark office) and SIPO (the state intellectual property office - which deals with patents) but no CTPO.

It was an assumption on my part. Here in the United States, one is so familiar with the USPTO that one might assume that trademark and patent offices in other countries are organized and institutionalized in a similar way as in the United States. Small it is, but the error is indicative of my tendency to assume certain things. A bit of attention would have led me to the acronym "CTMO" as used by the China Trademark Office Website (English Version). In the study of law, assumption is costly because it affects one's credibility; in the practice of law, assumption is a lawyer's enemy, costing clients' business, case, and trust. For those who practice international law, the need for precision, sensitivity to cultural differences, and thoroughness is paramount. It's a wake-up call for me as well as a reminder that attention to details really matters in the legal profession.

Thank you, FOARP! Corrections have been made at your suggestion. And for readers out there, please note the changes.

And FYI:

China Trademark Office (CTMO)
State Intellectual Property Office (SIPO) ( handling patent-related matters)
National Copyright Administration (NCAC) (in Chinese only)

WTO Guru

On Tuesday (January 15, 2008), a special visitor spoke in my International Business Transactions class at SMU Law School. His background and speech are so interesting that they warrant a special post here.

Hon. James Bacchus was the guest speaker. If you haven’t heard of him, he served two terms on the appellate body of the WTO. The following is an excerpt of his bio:

He was a founding Member, and remains the longest-serving Member, of the highest global trade tribunal. He was twice appointed by consensus of the Members of the WTO, and was twice elected Chairman by his six colleagues. During his eight years of service to the WTO, he was the only American, and the only North American, on the Appellate Body.
…
His final decision for the WTO was as the presiding judge in the appeal in the complaint by the European Union, Japan, China, Brazil, and other WTO Members against a safeguard measure by the United States restricting imports of steel. Following the decision by the United States to comply with the ruling by Bacchus and his colleagues on the Appellate Body, The New York Times concluded that "this case was the rough equivalent of Marbury v. Madison, the 1803 decision that established the Supreme Court as the final arbiter of the constitution, able to force Congress and the executive branch to comply with its rulings." (Page 25, December 5, 2003). According to the American Lawyer, "James Bacchus, as much as anyone, can lay claim to being the John Marshall of the World Trade Organization." (March, 2004).

He commenced his lecture with a short pithy discussion on the relationship between trade and freedom. In his opinion, economic freedom generally precedes political freedom, and he stated that is why he supported granting China the “Most Favored Nation” trade status while he was representing Florida in the United State Congress. In his own words, “sooner or later, people are going to ask for political freedom.” Not to put words in his mouth, but a corollary of free trade is ultimate political freedom. (A highly disputed topic, which I won’t get into.)

Then, he posited that the WTO does not try to influence any sovereign nation’s politics, and that it has power over a certain nation only when the member country (countries) chooses to give such authority. In the WTO dispute resolution mechanism, there is no private right of action. In plain English, only member countries, not individual corporations in the countries, can sue. Thus, if a country does not agree to sue the company in another country, the grieved company is out of luck. Simply put, the WTO’s compulsory jurisdiction is only good when a sovereign nation complains about another country.

Further, he shed light on how a judge makes a decision on a WTO case. Generally, a judge undertakes a three-step process. First, she examines the defendant country’s WTO obligations in a certain area at bar, which are laid out in WTO accession agreements. For example, intellectual property obligations would be governed by the TRIPs agreements. Then, she explores the measures that the defendant country has taken to fulfill the WTO obligations. Third, she scrutinizes the facts and circumstances in their totality, and analyzes whether the defendant country’s measures indeed fulfill its compulsory WTO obligations. If a shortfall exists, the defendant country is “guilty,” and it will be required to adjust its measures accordingly. If it does not comply, penalties will follow in the form of withdrawn WTO benefits, i.e. higher tariffs. (Writing a WTO legal opinion is a totally different matter. Those opinions go for hundreds of pages, if you think the U.S. Supreme Court opinions are long. For example, Panel report out on Mexico-US anti-dumping dispute.)

Unlike the International Monetary Fund (IMF) or the World Bank, the WTO is not an independent legal entity. It cannot own real estate, nor can it enter into other business transactions.

During the Q & A session, questions about the U.S. WTO action against China regarding intellectual property was raised, but he did not go into details. I think it is because that he is a counsel (or maybe an advisor) of one of the involved parties.

Another point of interest is that he would like to see a WTO specific legal code of ethics for those attorneys practicing at the WTO, but he sees the difficulty of it ever coming into fruition, since that would be giving the WTO too much power.

He was thoroughly enjoyable and extremely knowledgeable about WTO-related matters. What a treat!

Microsoft Falls One Step Behind in Protecting “Windows”

China Trademark Office (CTMO) dealt another blow to American software giant Microsoft in January 2008. Reportedly (here and here), it rejected Microsoft’s opposition of the registration of a trademark “Windows”by a Ningbo eye glass company. The company successfully registered “视窗” (“Shi Chuang”, which means windows of vision) in 2001, and it later tried to register “Windows” in 2003 for glasses (Class Nine). After a search at the CTMO’s database for opposition/cancellation decisions, I was not able to find the written decision regarding "Windows," and I will have to base my post on news reports. (note, I will continue to search in the next few weeks for the decision.)

Based on the report, as soon as the owner of the Ningbo Eye Glass company filed its application for the “Windows” trademark, it received a demand letter from Microsoft. As those letters typically go, it expressed its opposition of the registration of “Windows” in China, because Microsoft used it first. Sounds great, right?

Well, not necessarily for the CTMO, apparently. Prior use in the United States may establish common law trademark rights (which is not something that a major IP owner should hang its hat on), but in China prior use does not establish any trademark rights unless the mark has been registered, or unless the mark has been deemed legally famous for particular classes of goods and services.

Without further facts or the CTMO written decision, I can only assume what went wrong on the part of Microsoft. Two possible scenarios exist here that might have led to Microsoft’s misstep in protecting “Windows” in China. First, Microsoft simply forgot to register “Windows” in China, which is unlikely given its level of legal sophistication. Second, it registered “Windows” in China but did not cover Class Nine, limiting its rights to the classes of goods or services registered for.

All is not lost though. Assuming that Microsoft registered “Windows” for certain classes of goods (say, software), it could ask either the CTMO or a People’s court to give “Windows” the famous mark status, thereby availing itself of broader protection. It is unlikely that Microsoft’s counsel has not tried that at the CTMO, but it can still try at an intermediate court in Zhejiang province where Ningbo is located. The court might find “Windows” legally famous for software (and whatever Microsoft registered it for in China), and might rule that the registration or use of “Windows” by another applicant for eye glasses is likely to dilute “Windows”, the famous mark for software.

(Too many facts are not available at this moment; so much of this post is based my assumptions and speculations. Once I get my hands on more details, I will write an update.)