There Are The Laws When Times Are Good And There Are The Laws When Times Are Bad. Are China's Bureucrats Shock Troops Against Foreign Business?
By Dan Harris and Steve Dickinson
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One of the things I love about being an international lawyer is using outside events to interpret the law. Now I know this is going to anger a lot of people, but non-lawyers generally do a terrible job interpreting the law. This is true worldwide. Examples of this abound:
Non-lawyers tend to look for "the law" that applies to their situation. Once they have found that law, they think they are done. What they so often fail to do is put the law into context. Many years ago, we had a fairly client [I am going to get intentionally vague here] who was doing a big project in a foreign country. The client had read that companies in this country for less than six months did not need to pay a particular tax and they did not pay this particular tax. They had failed to read that this law (and a whole slew of other laws) did not applly to companies employing more than 50 people and this failure ended up costing them hundreds of thousands of dollars in penalties and attorneys' fees.
Non-lawyers often fail to realize there can be many different laws applicable to the same factual situation. The easiest example is that there can be national laws, provincial laws, and even city laws (this is particularly true with respect to China's employment laws) and merely following one set of laws can leave you very much exposed.
Non-lawyers tend to believe all laws mean what they say, even though this is oftentimes not true. Laws sometimes neither mean what they say nor are they always enforced. Sometimes there are laws that say one thing, but some other law or case or bureaucrat says another, and that other essentially becomes the law.
Lack of enforcement can be a huge issue in China. There are all sorts of laws in China that are on the books, yet only sometimes enforced, only enforced in some provinces and cities, or only enforced against some companies. As I have often written, a Chinese company getting away with not following a law should mean very little for a foreign company.
I am certainly not saying anything new here and everything above is known by most lawyers and has been said on this blog many times before. But I am writing about it now because I am getting the strong sense that there has recently been yet another tightening up of enforcement in China against foreigners and I attribute it directly to the economic downturn. China, like so many other countries experiencing an economic downturn, is fighting even harder for its own people at the expense of outsiders. If the Chinese themselves are going to have trouble making money, the Chinese authorities are going to need to step it making sure foreign companies are not taking away economic opportunities from its own citizens. We can argue all we like about whether this is good economics, but I do not think it can be disputed that it is good politics.
This all came into stark relief for me in the last few months when something happened twice that has never happened even once before. Two companies called us about "cleaning up" their legal acts in China. These two companies were doing well in China, off the grid, and they retained us to get on the grid. By on the grid, I mean, registered as foreign companies with written contracts with their employees, and an employee manual. Both of these companies were located in tier two cities and both had been doing business in those cities for a couple of years. They retained my firm, paid the retainer, and we started doing the work. But, in both cases, well before we had even gathered up all necessary information, these two companies had been shut down and told not to even bother.
Over the last few years, we have registered countless companies in China that had been operating quite openly without registration for years. We registered one company that purchased more than $300 million in Chinese goods a year and employed more than 3000 people. We registered another company that had been operating for more than 15 years. But only after the economic crisis has begun have we ever been in the process of bringing a company within the law only to have that company thrown out. I cannot say more at this point because these two companies are both looking into their various options, but I can say that from our perspective, it seems China is going after foreign companies as fervently as I have ever seen and I have no doubt economics is the reason.
For more on this stepped up enforcement against foreign companies, check out the following:
-- "a href="http://chinabystander.wordpress.com/2008/12/19/china-deters-foreigners-from-selling-bank-stakes/"China Deters Foreigners From Selling Bank Stakes,/a" at China Bystander.
-- "a href="http://www.chinasolved.com/blog/2008/12/15/the-new-chinese-economy-you/"The New Chinese Economy You,/a" at ChinaSolved. This post starts out with the following:
blockquoteThe Chinese economy is already starting to look a little more protectionist and inward-looking. If you need proof, take a look at a href="http://www.ft.com/index.html"Sunday?s FT article/a that quotes a directive from China?s Civil Aviation Administration,
?It also exhorted domestic airlines to unite and develop together ?to form a ?fist? in the face of international competition? while avoiding competition with each other domestically.?
/blockquote
It concludes by very wisely warning of what it calls "legal gray areas":
blockquoteLegal gray areas ? Are you in a legal business, or a ?not illegal business?? ?Not illegal businesses? are great for bull markets when they help facilitate the flow of funds sloshing around. Unfortunately, they quickly turn into ?not approved businesses? when things get leaner. Think hard about your basic business model and make sure it?s bureaucratically bulletproof. In China, bureaucrats are the shock troops of a trade war. They live for this moment. /blockquote
Will Chinese bureaucrats really be the "shock troops of a trade war" or are we just being alarmist?
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