Turning the Tables

From The Practice September/October 2016
Trade battles in China

Americans have grown accustomed to hearing about a certain type of trade battle between the United States and China. This scenario involves American firms taking Chinese companies to U.S. courts for anything from price fixing to infringement of intellectual property. As demonstrated by the U.S. steel industry’s recent victory against its Chinese competitors, these cases have high stakes for both the particular companies and economies involved, and thus they have become a major part of the story of U.S.-Chinese relations in the twenty-first century. However, there is another, less well-known side to this story, one which takes place outside of the U.S. legal system. For just as American companies have taken their foreign competitors to task, so too have Chinese companies turned to their courts for legal remedies against perceived violations of trade law. While these cases may not be on the radar of the typical American GC, they provide insights into both the Chinese legal profession and the dynamics of doing business in the world’s second largest economy.  To better understand this aspect of the Chinese legal profession—and its implications for U.S. firms working overseas—The Practice recently sat down with Mark Wu, an assistant professor of law at Harvard Law School, the former director for intellectual property at the Office of the U.S. Trade Representative (USTR), and a leading scholar on China and international trade law.

What is a typical example of a trade remedy case in China?

Trade remedies cases are similar all around the world. They typically involve a domestic firm or industry seeking recourse against foreign competitors whose imports are causing them harm. The dynamics in China are not that different than those in the U.S.

In China, just as in the U.S., the complainants are typically firms and/or industry associations. The only difference is that some of these companies or industry associations have closer ties to the government than would be true of American complainants. The respondents are foreign companies importing products into China.

So far, the industry sector in China where these cases are most common is chemicals. But they can spring up in pretty much any industry. Other examples include autos, chicken by-products, polysilicon for solar panels, and paper.

By far, the most common form of trade remedy litigation is an antidumping case. These involve a Chinese firm or industry association alleging that a foreign company is “dumping” its product into the Chinese market at a price that is below the “normal value” of the product and causing harm to the Chinese industry. More than 90 percent of Chinese trade remedy cases fell into this category. Another type of case is where a Chinese firm alleges that a foreign firm is the beneficiary of specific subsidies that are causing harm to the Chinese industry. But these are much less common.

Who are the lawyers in these cases? What are their backgrounds?

China requires that representation on domestic legal matters involving Chinese law be handled by Chinese lawyers. Therefore, all of the trade remedy lawyers are Chinese nationals. In conducting my research, I discovered that the trade remedy bar is a small tight-knit community, where most everyone seems to know everyone else. Many have worked on cases together in the past.

Because China’s trade remedy legal system was set up in the late 1990s, several of the senior lawyers in the trade remedy bar played an important role in establishing the system. Several of the lawyers, especially the younger partners, will have spent some time studying and/or working overseas. Many also have worked on trade remedy proceedings overseas defending Chinese firms.

The trade remedy bar is a small tight-knit community, where most everyone seems to know everyone else. Many of the lawyers have experience and close ties with the government.

Finally, many of the lawyers have experience and close ties with the government. Some worked in government directly before leaving for private practice. Others play more of an advisory role. Either way, they acquire insider knowledge about how the government works.

Are there firms which have come to specialize in complainant or respondent work for these cases?

As far as representing Chinese complainants is concerned, there are a handful of specialized boutique firms based in Beijing that are widely considered to be the “go-to” firms. They may work in conjunction with local counsel, but they are typically the lead counsel.

The set of law firms that work for foreign respondents is much larger. It includes both boutique firms as well as some of China’s better-known law firms seeking to offer a full range of services to foreign clients. Trade remedy work may be part of a larger international trade law practice. Several of the Chinese firms on the respondent side have formed relationships with foreign law firms with strong international trade practices. They will refer clients to one another when a client is targeted in the foreign jurisdiction.

What is the trial process for these cases?

These are administrative cases, meaning that the matter is heard before a government agency. As is the case in the United States, Europe, or Japan, there is no jury involved. In China, the relevant government agency overseeing trade remedy cases is the Ministry of Commerce. It will examine the complainant’s petition and decide whether to open an investigation. If so, then during the course of the investigation, both sides have an opportunity to present evidence and make their case. The agency will typically issue a preliminary determination and then a final determination. This ruling can be appealed through the court system.

How do most cases end?

Provided that the government agency decides to open an investigation, most cases will result in some finding of harm, with the end result being higher tariffs imposed against the foreign firm. In select instances, the government may dismiss the petition, or the two sides might reach a negotiated settlement.

Note that although the domestic Chinese firm typically wins, it may not always get the government to impose as high of a tariff as was sought in its complaint. Different foreign firms may be subject to different tariffs, with some receiving higher rates than others.

If the government agency opens an investigation, most cases will result in some finding of harm, with the end result being higher tariffs imposed against the foreign firm.

Among the companies that are investigated, what portion are American? What other countries are strongly represented?

As of the end of last year, China was imposing 91 antidumping measures, down from 113 in December 2013. Of these, 19 were against U.S. companies, representing slightly more than one-fifth of the total. The other countries whose firms are commonly targeted are Japan, the European Union, and South Korea.

What is the publicity around these cases? Are they more transparent than other cases due to WTO requirements? How does the public understand these cases?

The WTO requires that countries follow a number of procedural and substantive rules during the course of their investigations and legal proceedings. Consequently, relative to other areas of Chinese law, the cases are more transparent. The decisions are more extensively reasoned and made available on the internet. But transparency problems nevertheless persist. Foreign companies complain about procedural inadequacies and worries over whether the confidential information shared is truly being protected. The United States has brought several successful challenges at the WTO, arguing that certain Chinese practices fall short of what is required under WTO law and with WTO jurists ruling that China needs to do more.

As far as publicity is concerned, it will depend on the product and the state of bilateral trade tensions. Some, such as the solar industry cases, receive extensive media coverage. This is understandable because the case itself touches on a growing industry for China, environmental protection, and relations with the United States and Europe. All of this makes for an interesting story. However, the Chinese public may not be as interested in run-of-the-mill cases concerning imports of foreign chemicals. These are not widely covered.

What are the politics of these cases within Chinese society?

Politics come into play with trade remedy cases everywhere in the world. What’s unique about China, as I’ve argued, is the relationship between the government, the Party, the financial sector, and enterprises – both in the private sector and the state-owned sector. It’s hard to generalize, but at stake in any given case may be tensions between different government agencies, between central and local authorities, or between different regions. Also, as is true elsewhere, trade remedy cases often create tensions between upstream and downstream firms in a supply chain. It’s much more complicated than simply the industry or the nationality of the respondent.

What do you think foreign law firms currently consider when hiring Chinese counsel? In your opinion, what should they consider?

Trust is a big issue as far as foreign law firms are concerned. They are placing their clients’ interests in the hands of local counsel. The local Chinese counsel will be giving the client advice about what type of evidence to turn over to government authorities during the course of the investigation and what type of strategic posture to adopt in discussions with the government and Chinese industry. Foreign law firms want to make sure that the Chinese counsel they recommend to their clients is someone who is not only knowledgeable but someone who will put their client first.

Generally speaking, preparing for the possibility of trade remedy action is a much lower priority for foreign companies entering China, as compared to intellectual property, financing arrangements, or license approval. But although these cases are not numerous yet, they can strike in a wide range of sectors, and once they do, they can be devastating.

Foreigners would be wise to think about two issues when seeking local counsel. First, you should explore in-depth the nature of the relationship between the potential counsel and the government. You should hire someone who knows how the Chinese trade remedy system operates inside-out and can effectively “lobby” for you Chinese-style. At the same time, you want to make sure that your counsel is not beholden to the Party-state because of client interests in other legal fields and will put you first. Second, as would be true anywhere, you should explore the potential counsel’s track record to date. With trade remedy cases, it’s not simply a matter of winning or losing, but what type of margin rates one is able to obtain for the client relative to the client’s competitors.

The Chinese are quickly catching on to the fact that a legal instrument that has been used so effectively against their firms can also be deployed to the benefit of Chinese firms in their home market. Trade remedies are becoming a double-edged sword.

In terms of actual numbers, can you give us a sense of how many trade remedy cases take place in Chinese courts versus U.S. courts?

Because the Chinese legal system for trade remedies was set up much more recently than the United States, they are still catching up. In 2015, based on the WTO reporting methodology, the United States initiated 42 new antidumping investigations whereas China initiated only 11. Overall, we also have many more trade remedies in place against Chinese imports than they do against us. But the Chinese are quickly catching on to the fact that a legal instrument that has been used so effectively against their firms can also be deployed to the benefit of Chinese firms in their home market. As my research has shown, trade remedies are becoming a double-edged sword.

If the Trans-Pacific Partnership is passed, what sort of implication, if any, do you see it having for trade remedy cases in Chinese courts? What about U.S.-Chinese trade relations more broadly?

Since China is not party to the TPP, and the treaty doesn’t do much in the way of new rules concerning trade remedies, this is one area where the TPP will not have much of an effect. As for U.S.-Chinese trade relations generally, the TPP, if ratified, will likely accelerate China’s own efforts to conclude comprehensive trade agreements with its Asian trading partners. China is one of the leaders in the Regional Comprehensive Economic Partnership negotiations involving sixteen countries in the Asia-Pacific, including Japan, Australia, South Korea, and India, but not the United States. Many Chinese view the TPP as the economic component of the U.S. “pivot” to Asia which they believe is designed to force China to play by rules set by the United States in the region. China is not interested in playing second fiddle and will take the steps necessary to ensure that it retains the flexibility it seeks. This will lead to some increased tensions. But on the economic front, I think the two sides can find ways to manage these effectively in the short-run without a major flare up.