International manufacturing lawyers

1. Control Your Molds

Far too many companies that have their products made overseas wrongly assume they will own the molds and the accompanying IP used to make their products. If you do not pay for your molds upfront and have a contract that both works for the country in which your molds are being made and used and that makes clear the molds and their accompanying IP actually belong to you, they probably do not. If you do not have such a contract, there is a good chance you will find yourself unable to switch product suppliers even if your product supplier raises prices through the roof and produces terrible products. Without the right protections in place, you will be stuck. In this post, we explain why this is the case and what you can and should do to prevent this.

Companies that engage in outsource manufacturing need to retain control over their molds at all costs. To accomplish this for our clients, our international manufacturing lawyers focus on two issues when drafting mold provisions that are part of a larger contract (such as a manufacturing agreement or a product development agreement) or that stand alone as part of a mold ownership contract.

First, we want to make clear that our client owns the molds, period. The overseas factory (be it in Taiwan, Thailand, Mexico, Spain, Poland, China or wherever)  can use the molds only for producing our client’s product and not for producing product for any other party. Second, we want it clear that when our client chooses to move its production to a different factory, it will have the right to take its molds and transport them to the new manufacturing location. Negotiation of these terms is usually quite difficult since the manufacturer has a strong incentive to hold molds “hostage” to prevent their foreign buyer from moving its manufacturing to a new factory. The only way to succeed is with a stand alone mold ownership agreement or mold ownership provisions inserted into a written manufacturing or product development agreement.

Second, we want to ensure our client owns all of the IP inherent in the molds. In some products, the form embodied in the mold is in fact the entire value of the product. Take for example a complex part used to manufacture  a turbine or a jet engine. After all the engineering and testing is complete, all that remains is a single part produced by casting into one or more molds. In this situation, the molds embody the entire intellectual property in that part and so the party that owns or controls the intellectual property in the molds essentially controls the product. More importantly, if no party owns any IP in the molds, the molds are effectively open source. And if no one owns any IP in the molds or the product, your manufacturer is free to make your product.

As manufacturing overseas has become more complex, molds for products have become correspondingly more complex, as well. In many cases, the mold embodies most or all of the intellectual property in the product. The following two examples highlight this. First, in some products, the interior mechanism is based entirely on open source hardware. The external enclosure surrounding the mechanism is therefore the primary protectable IP for the product. The IP resides entirely in the molds used to manufacture the product case. The”look and feel” of the enclosure then becomes the identity of the product, and if that “look and feel” is not protected, the foreign company that designed the enclosure owns nothing at all in the IP of the product. Without the IP in the molds protected, your overseas factory can freely copy your product.

 

2. Mold Fabrication Shops

Factories that engage in contract manufacturing have figured all of this out, making protecting molds difficult. In figuring out what to put into our clients’ contractual mold provisions, our international manufacturing attorneys can no longer focus just on ownership of the molds; we also must focus on ownership of the intellectual property in the molds, as well. The new mold IP issues frequently arise in two settings: (a) third party mold fabrication shops and (b) the outsource factories themselves.

The issues that typically arise with mold fabrication shops arise because of a change in procedure that no one has really noticed. It is standard procedure to provide that the contract manufacturing factory making your product is responsible for fabricating the molds for the product as well. In the old days, the same factory almost always made the molds and the product. However, it has now become more common for the factory to outsource mold fabrication to a third party. In many cases, even the design of the molds is outsourced to that third party.

What this means is that a mold agreement with your factory that has been drafted to control the ownership of the molds and to control the IP in the product is compromised or eliminated when the specifications and the responsibility for fabrication gets sent off to a third party mold manufacturer. Given the economics of mold fabrication, it is not common for your mold fabricator to use your mold design for its own purposes but it is common for them to sell copies of your molds to factories interested in cloning your product.

This type of cloning is of course a thriving business in China and in most other countries known for their contract manufacturing. Foreign designers often wonder how a terrific copy of their product got to market before they themselves have even gone into full scale production. This usually happens because many mold manufacturers conduct a thriving trade in selling the “latest” molds. The factory you use to manufacture your product actually has an incentive to keep the mold for its own use since once it gets out into the world the molds will be used by your factory’s competitors. When this happens, the factory making your product will be damaged in much the same way as you will be.

Though losing one’s molds via a third party mold fabrication shop is an enormous risk, few foreign designers are aware of this risk and even fewer know what needs to go into their contracts to prevent this intentional leakage. The foreign designer rarely even knows the identity of its mold fabricator. They mostly just assume it is the factory that will be making their product. All this leaves a gigantic hole in their IP protection that can and should be closed by using a relatively simple set of contracts.

Consider also the issue of patent protection. To acquire a patent anywhere in the world you must show that you invented the item. In a case where the design of the mold has been outsourced to a third party mold fabrication  shop, who actually invented the item can become unclear. Is it the foreign designer who developed the basic idea? Is it the product factory that did some preliminary drawings? Or is it the mold fabricator that did the detailed drawings and produced the final working model? Or is it all three, each entitled to an uncertain percentage of the patent? Our international litigation attorneys have handled too many cases where this issue was not clear.  With this sort of tripartite structure, the usual answer is that no one owns any IP in the molds: no patents, no trade secrets. This often means no one owns any IP in the product itself either. This then leads to disaster in commercializing the product.

 

3. The Factory that Makes Your Products

The fundamental issue with your own factory is the same as with your mold fabrication shop: who will own the IP in the resulting design? For the product, the question is who owns the design for the product. For the molds, the question is who owns the design in the molds. Where the molds are the product, this becomes a core issue that cannot be ignored.

Our international dispute resolution lawyers usually see the following three basic problems after a series of molds has been made for a product that has become commercially successful:

1. The product manufacturer announces a substantial increase in the price of the product. This is often a surprise to the foreign buyer, who had expected the per unit price of the product to go down as production increased.

2. The product manufacturer is not able to keep up with increased production requirements. This is often a surprise to the foreign buyer, who had been assured by the manufacturer that it had ample capacity for any scale of orders.

3. The stress of increased production demand causes the quality level from the manufacturer to decline to unacceptable levels. This is often a surprise to the foreign buyer, who had expected quality to improve over time.

In response to any of the above three issues, the foreign buyer gives notice to its manufacturer that it intends to move production to a different manufacturer. In the past, the issues that arose at this stage mostly focused on ownership of the physical molds, an issue that can usually be resolved with a relatively simple mold ownership agreement. To the extent that a mold ownership agreement resolves the issues, this is old news.

However, in the past few years we have seen  factories make arguments (like those below) that render the situation far more complex:

1. The factory says: “It is true you paid the fabrication fee for the molds. But that fee only covered the material costs and the time involved. However, in addition to that, we at the factory spent a lot of time and money doing the CAD drawings and related specifications required to fabricate the molds, and we also spent additional engineering time in integrating the molds into our production process. Before you can take the molds, you have to compensate us for those costs. We won’t charge you a markup but you must pay us for our out of pocket costs.” Then the factory provides an unreasonably high invoice for those costs, and if you do not pay it will hold your molds hostage. This has become almost standard practice in outsource manufacturing. It is therefore essential for foreign designers to make clear in a written contract that all amounts it pays for molds include both design and fabrication costs and no additional payments will be required when the foreign buyer seeks to take possession of the molds.

2. The factory says: “It is true you own the molds and you can take them whenever you want. However, we did all the design work on those molds so we own the design embodied by the molds. We will give you a license to use the molds for production in another factory. However, that license is limited. You have no right to copy the molds. We, on the other hand, have the right to copy the molds and use them for our own production and to sell copies of the molds to third party factories for their own production. The only thing you own is the physical object. You do not own anything else.”

3. In the more extreme case, the factory says: “We did all the design work for the molds, so we own that design and we already registered a design patent in the molds. Since we did all the work, we are the inventor for patent purposes. It does not matter that you paid us for the molds. We still remain the inventor, and our design patent protects us. You can have the physical molds, but if you want to use those molds for production at a different factory, you must pay us a royalty fee.” This royalty is then quoted at a price so high that you cannot economically have your product produced at a third party facility.

 

4. Products Held Hostage 

The more honest factories make the situation clear during the negotiation process. The foreign buyer pays for fabricating the mold, but that payment does not convey any ownership interest in the molds to the foreign buyer. The factory does the design work and the factory owns the molds. The  factory will agree to use the molds only for producing the product for the foreign buyer; however, the foreign buyer has no right to move the molds to any other factory. Some factories will say that you are free to make new molds at your new factory, but some will assert ownership to the mold design and not allow you to have copies made at the new factory. In other words, the factory is clear from the beginning that intends to hold the foreign buyer hostage by guaranteeing it cannot use another manufacturer for its product. With tariffs and duties leading companies to try to  move their production more than ever, our international manufacturing lawyers are getting more calls from companies legally blocked from moving their production, even in the face of crippling price increases. We have many strategies for helping such companies, but none are nearly as good nor nearly as cheap as preventing this problem from occurring in the first place by using good contracts.

 

5. Conclusion

The above is where outsource manufacturing is going, and foreign product designers need to deal with it. NOW. The foreign designer needs to ascertain whether its product and/or mold manufacturers will enter into written contracts that provide the foreign designer with the IP protection it needs. And if the manufacturers will not sign such a contract, the foreign designer then must decide whether manufacturing its new and innovative product in a setting where it will be hostage to its factory or whether it can or should try to find another manufacturer. The best move is usually to move on.

What are you seeing out there?

China bank fraud

U.S. companies’ relationships with their Chinese business partners have been strained in the past year, and that has only accelerated the past few months, as we have noted in prior blog posts (see The US-China Trade War: What’s Next?, When Will the US-China Trade War End? It’s the New Normal, and The US-China Trade War: Next Week’s Shanghai Meeting is a Tiny Glimmer of Hope). We expect trade disputes and general business disputes between Chinese and non-Chinese companies to increase significantly over the next many months (and years), and some of those disputes will center on China’s opaque banking system. Bank and wire fraud is endemic to the worldwide electronic banking systems because our increasingly online interactions and troves of data lend themselves to a culture of fraud. This fraud occurs in the U.S., in China, and in most, if not all, countries throughout the world.

Even more than usual we are being asked by foreign companies (mostly American and European) to review Chinese bank records to determine the likelihood that someone or some entity had committed fraud. Companies do not usually ask us to do this sort of review unless they have good reason to believe a fraud has been committed, and nearly every time we do such a review, we find good evidence of fraud. Based on the reviews we have done, we want to provide you with some pointers that may be helpful when reviewing your own Chinese bank records, wire or other transfer receipts, or when you are expecting money to hit your Chinese or U.S. bank account with a payment from China that “definitely should have been here by now.”

1. It is difficult to get copies of Chinese bank records.

For bank accounts other than those you or your company own, it is almost impossible to get bank records without initiating a lawsuit in China. If you have been able to get your hands on some records, you are doing pretty well vis-à-vis other foreign companies.

 

2. The bank’s location will matter in its ability or willingness to provide records to you.

Hong Kong is, as of this blog post, still a semiautonomous city that benefits from a “one China, two systems” (一国两制) economic policy, and barring extraordinary actions by China, it should remain so through for at least the next year.  Many mainland banks have branches in Hong Kong and other major cities like Singapore, London, and New York, so you may be able to acquire bank records from those non-mainland locations.

 

3. Identify patterns and deviations from those patterns.

If you are tracking regular payments, look at the frequency, the payor, the payee, the account numbers, the amounts, and any other category of information that appears with regularity. Do not rely only on the account number or the name of the account holder. Every piece of data should sync up perfectly. As I discussed in my prior blog post (Cryptocurrency in China: A Primer), Chinese individuals and companies have devised many ways to get currency out of China. Those same skills can be used to move money within China or to create the illusion that money has been moved one way when in fact it was cashed out of the account. Ask the banks involved for a copy of their standard transfer receipts so that you can compare the records you have to those standard documents. Banks involved in international wire transfers use standard forms, as well, and if the documents you received do not resemble those standard forms, you will want to dig deeper.

 

4. Trust but verify (because everyone likes easy money).

In reviewing your transaction records, assume that at least one actor who handled the chain of money from A to Z had something to gain and acted to their benefit. Research and verify the names and addresses of the companies — in Chinese to ensure they match with the official Chinese company record. Look at the names of individuals and ensure they are consistent and the payments were made to or by the individuals who should be receiving or transferring the funds. See should employees really be getting paid that much? The top 10 Chinese surnames are Wang, Li, Zhang, Liu, Chen, Yang, Huang, Zhao, Wu, and Zhou, and that means there are many individuals with the same, similar-looking, and similar-sounding names. Look at the full Chinese name of the individual (in Chinese) and not whatever is on the English language document. If you see anything amiss, do not assume it is an honest mistake. Flag it in your review and come back to it later.

 

5. Official-looking documents and stamps (seals/chops) can be falsified.

Documents that include official-looking (and legally required) stamps and appear to indicate official acceptance of a funds transfer request may show that the request was honored by the bank. Or they may merely show that the “unique” stamp used by the Chinese bank or company was stolen or copied. Chinese companies continue to use these low-tech official stamps, but “official” is not synonymous with “secure.”

 

6. A request for payment is not proof that a wire transfer or other transfer was made.

This point should really be first and last on our list. This is standard fraud: produce a funds transfer request or a deposit or withdrawal slip but do not provide any proof of a successful wire transfer or other deposit or withdrawal. In China as in pretty much every country in the world, it is law and standard banking practice to provide proof of receipt of funds transfer and not merely the proof of request for funds transfer. Each request should be matched exactly by a transfer receipt.

 

7. Look for transactions in cash.

Even though China uses cash more than the U.S., deposits or withdrawals of large sums of cash should raise red flags. If the entities and individuals involved generally use cash, then that is less concerning than large cash transactions suddenly appearing where fully electronic payments previously dominated the ledger.

 

8. Look for payments in foreign currencies (non-yuan/RMB) to or from Chinese companies or Chinese nationals.

If the payment was supposed to go to a Chinese national or come from a Chinese national, it is highly unusual that the payment would be in a foreign currency. If the company is a Chinese company doing business internationally, it will naturally have one or more foreign currency accounts. But it is very unusual that a Chinese company would use foreign currency to pay its domestic obligations to other Chinese companies or to its Chinese employees.

 

9. Chinese companies have bank account numbers.

Let me explain this obvious point. In reviewing Chinese financial records recently, we often see bank transfer slips that do not include the company’s account number at all – only the company’s social credit number, which can be found in a Chinese company public records search. All other types of records included the bank accounts for the supposed recipients. This gets back to point #3 above about identifying patterns, recognizing what “normal” looks like, and then flagging those transactions that deviate from the standard.

10. Look at the whole picture.

Any one of the above factors may only cause you to raise an eyebrow. Many of the above factors indicate a high likelihood of fraud, especially if you are the one waiting for funds that were supposedly sent many days or weeks previously but have mysteriously gone missing. If you can get your hands on some records, you should be able to determine whether the transaction records reveal fraud.

 

Expect that financial fraud will increase in frequency and that reviewing a bundle of transaction records will be integral to cross-border disputes with Chinese companies as the U.S., China, and the global economy continue to bend under the weight of global trade barriers.

1. LaoWhy86 on YouTube

Spent the last few days catching up on my China reading and viewing, mostly those articles and videos friends, clients and readers wrote me insisting I read. One of the sites I checked out — at the recommendation of many people — is LaoWhy86 on YouTube. I’m hooked LaoWhy86 is an American who initially went to China to teach English and then stayed on to start a business and to marry a Chinese woman. He even bought a house, but, like so many expats who have fled China in the last 3-8 years, he eventually came to hate the place. Unlike so many of these expats, he is cashing in on his time in China and knowledge of China with a YouTube channel that often (and understandably) gets more than a million hits per video.

LaoWhy86 is actually Matthew Tye, whom IMDb describes as follows:

Matthew Tye, born in Binghamton New York, on December 27th, 1986 is best known for his work in the documentary, Conquering Southern China, and its sequel, Conquering Northern China.

Matthew, or as he is more commonly known, C-Milk, is an internet personality who documents his life in China on his YouTube channel, laowhy86.

Most describe his videos as upbeat, fun, and candid. Known for traversing rural China by motorcycle, his journeys have been documented throughout his 10 year stay in China.

In 2013, Matthew married Vivienne Wei, and they have a daughter, Olivia.

 

2. Must Watch Video: How China Destroyed Me

How China Destroyed Me is the video everyone should watch. Without going into any detail or specifics, I can say that the things LaoWhy86 discusses in this video essentially destroyed me for China also, and I know of many others similarly destroyed. I strongly urge you to watch the entire video and I welcome comments on it below.

 

3. Must Watch Video: Why I Changed my Opinion on China 

The other LaoWhy86 video I particularly liked was Why I changed my Opinion on China, which is really nothing more than the video version of what countless expats who have soured on China have told me. I am not the only person who is a big fan of this particular video. A loyal blog reader, who spent many years in China before leaving for similar reasons, actually transcribed this video and urged me to watch it, which I finally did today. The below is her transcription, with some portions deleted and those portions I know to be true but which the CCP and its lackeys desperately (and often successfully) hide from the outside world highlighted.

I urge you to watch both videos and to watch any other LaoWhy86 videos that particularly strike your fancy. I assure you that you will not be disappointed.

 

China’s a country that polarizes people’s opinions. Mine included. I’ll be the first to correct someone that is unfairly criticizing the country. And the first to point out when overly optimistic visions of China’s future are just plain wrong.

*    *    *    *

I have to admit, when I would leave China to visit my hometown once every couple years, around 2008 to 2012, it was just embarrassing to see that not only did nothing change in my hometown, but the few businesses and attractions that were just managing to keep afloat were shutting down.

The once-passable city center was now more or less boarded up. The mall destitute and abandoned. People were leaving in droves to go south for better jobs. And it really looked like local politics and economic policies were failing in the town.

Not only small towns like my own were disappointing, though. I would fly into JFK Airport in New York City and just feel like I was stuck somewhere in the ‘70s in terms of the tech and attitude in the workforce. Stepping out of the cabin to New York City, it wasn’t dirty per se, but everything just felt old.

Yeah, old is a good word for it. You know the charm was always there. I love New York. And it’s always had a special place in my heart. But I just couldn’t shake the feeling of it not going places. Trying to get home was a nightmare. There was only a couple buses for a day, for over $50 bucks, just to make a 100-mile journey. I’d have to take a $52 taxi ride from the airport to the bus station as well.

Meanwhile, flying back to China, I would look out the window of my plane and I’d see the magnificent buildings springing up from the ground like bamboo shoots after a good rainstorm. I’d hop off the plane and be able to take a direct bus that only costs $7 to my small city of three million people, in a matter of minutes.

Because straight from the airport, the buses left every 15 minutes. But if I wanted to splurge a bit, I could just take the high-speed rail. Yeah, even my tiny little no-name city had a high-speed rail line.

Keep in mind, this is one of the least important cities in the province. So it’s not like I was going to D.C. from New York City. It was more like going to my hometown from New York City. After getting off the bus, it cost me $2 in taxi fares to go straight to my house.

And guess what? Even back in 2013, I was paying for everything with my phone. On the bus from New York City to my hometown, I’d watch the swathes of forest go by on my journey. I couldn’t help but shake the fact that, when I got home, I’d be stuck there. The nearest shop was a 15-minute drive. And there was certainly no one that was going to deliver anything that I needed to my door.

Flashback to my backwater apartment in no-name Chinese city, and I was having Oreos and beer delivered to me at any time of night. Not that I recommend that anyone order Oreos and beer at 1:00 a.m. But I could, and that’s what mattered.

*    *    *    *

Things, however, changed pretty drastically. The train and bus tickets that I mentioned now needed a Chinese ID to buy them—something I would never have. You can’t become a citizen of China. You can’t even get a green card.
This meant being enslaved to my wife’s help for really buying anything transport-related. It was now illegal to put an American flag up next to the Chinese one at the entrance to my English training center, even though it symbolized cooperation. Police visits became a regular fixture in my life. Friends and family and the government were now telling me that I was constantly being monitored and followed, and I should be careful about posting anything online. Or, who I was associated with.

Keep in mind, all of my content was fairly positive. Social media and non-Chinese websites were now blocked. My little window to the outside world was now shut.

My motorcycle business with my best friend shut down when the government decided that it wanted to reclaim the land for more ramshackle ghost towns for hungry real estate investors. No one was asked if this was okay. A big uptick of kidnappings in the neighborhood parks started to become more prevalent. With a child at home, the idea that I could lose my daughter to human traffickers really kept me up at night.

Unrest at the nearby hospital down the road led to the murder of countless nurses and drunken street violence at the barbecues was hard to avoid now.

Police would arbitrarily threaten me with arrest, even coming to my door, because I had flown a drone over the building where I lived. They said there was a military base that was visible in the footage. Meanwhile, the exact same footage was posted on Chinese video sites, by Chinese people, with no pushback.

Arbitrary enforcement of law, when random government leaders would come to town, meant that street-side vendors were closed and shooed away, with all their goods confiscated.

All of the choices I had for restaurants on my local road would close and reopen with worse and worse quality food. I got sick a lot more than in the past. With the ever-growing presence of gutter oil being used in the cooking and the fake alcohol even being sold in large supermarket chains, it wasn’t a good time to be eating or drinking anything.

The buildings I once fawned over started showing signs of abandonment. Those bamboo shoots springing up around me at an alarming rate turned out to be hollow shells and empty apartments. Some of them nearly collapsing only after three years.

Due to the advice of my Chinese family and friends, I bought my own apartment for my family. But the elevator collapsed twice in this shiny new building that had literally just been built. Massive cracks formed across the floors and walls.

*    *    *    *

Our next documentary, Conquering Northern China, focused on showing the positive adventures that China had to offer. It led us to being searched and detained by the SWAT team, as well as the People’s Liberation Army. Apparently, they don’t like footage of camels.

We were harassed and bullied out of towns, not allowed to stay at most hotels and followed. We quickly realized that the vibe towards foreigners had changed. For the first time, I would be heckled almost weekly by locals who had been reading too much news about how China’s problems are now the fault of foreigners. “You’re stealing our Chinese women!” “Go home, foreigner!” “I don’t like Americans!”

*    *    *    *

The social credit system was being rolled out, which monitors your activity, what you do or say about the government and pretty much all of your actions. Banners praising the current leader, as well as tons of Communist insignia started to be unveiled in every corner of the country. Cameras could now be found on every stoplight and street corner.

All this new regulation, the clamp-downs, the renewed xenophobia, even the growth seemed to be shifting from a tolerable inconvenience to a full-fledged messy bureaucratic nightmare.

You see, China’s always thrived on being a gray area in almost all walks of life. Capitalism had taken its toll in many ways, but life was improving and even felt freer than the West in many, many ways—albeit no political expression or freedom of speech.

Now churches are being dismantled. Millions of ethnic minorities are being put into concentration camps and being told that they’re Chinese, but need to be reeducated. Families torn apart. Foreign entertainment and opinions blocked and squashed, overstepping boundaries when it comes to free societies like you see in Hong Kong. Military showmanship. Threats. Imprisonment.

*    *    *    *

The open tap for dialogue with other people from other countries has effectively been shut off. They’ve created an army of soft power internet trolls and government initiative to try and prove to the world that it’s not only us versus them, but that our system is best.

*    *    *    *

Now when I go back home to my tiny little town in the forest, it all makes sense. It feels fantastic.

Your thoughts?

How to get your product through U.S. Customs

If you are importing products into the United States you need to do your homework to make sure your incoming shipments comply with U.S. Customs laws and regulations. Compliance with U.S. Customs laws and regulations is critical to avoid your shipments being detained or seized, and/or penalties assessed. Common issues importers of products  typically face include the following:

 

1. Not determining proper classification and duty rate for products.

If you plan to import and sell on a Delivered Duty Paid basis, you should consider customs duties in your costs and that means you should know all of your applicable duty rates before you import.  Also certain products are subject to high antidumping or countervailing duties in addition to regular customs duties, which may be as high as 300%.

 

2. Failing to mark the product with the country of origin of manufacture.

Generally goods of foreign origin for import into the U.S. or immediate containers of the goods must be marked legibly and in a conspicuous location with the country of origin in English. Failure to do so accurately can result in civil and even possibly criminal penalties.

 

3. Not properly marking wood packing material.

All wood packing material for products imported into the U.S. must be properly treated and marked prior to shipping. Failure to meet the treatment and marking requirements may cause shipments to be delayed and penalties issued.

 

4. Failing to provide complete commercial invoices.

Customs regulations provide that specific data must be included on the commercial invoice for U.S. Customs purposes, including a detailed description of the merchandise, and correct value information. Omission of this information may result in improper declaration to U.S. Customs at the time of import and expose you to penalties.

 

5. Failing to meet other U.S. Government agency requirements.

Goods imported for sale in the U.S. must satisfy the same legal requirements as those goods manufactured in the United States. U.S. Customs enforces the laws of other agencies in the U.S., including, the Food and Drug Administration, the Consumer Product Safety Commission (CPSC), and the Environmental Protection Agency, in addition to others. Therefore, if toys, for example, are exported to the U.S., detailed CPSC requirements, including for testing, must be met prior to export.

 

6. Distribution of many trademarked and copyrighted items.

Items which are trademarked and copyrighted are restricted by contractual agreements that give exclusive rights to specific companies to distribute the product in the U.S. Imports of improperly trademarked or copyrighted items can be seized at the U.S. border and can subject you as the importer to penalties.

 

Taking the time to identify the required U.S. Customs laws and regulations for the products to be shipped to the U.S. will help you maintain seamless delivery of your merchandise to U.S. customers and avoid civil and criminal penalty exposure.

Listen HERE or stream on SpotifyApple PodcastsGoogle PlayAmazon MusicStitcher, or Soundcloud!

The large-scale shift to telework brought on by the COVID-19 pandemic is prompting businesses around the world to explore new avenues to engage with clients and friends. Harris Bricken is no exception, and we are happy to provide this podcast series: Global Law and Business, hosted by international attorneys Fred Rocafort and Jonathan Bench.

In Episode #37, Jonathan and Fred look back at the podcast’s first year and look ahead at 2021.

Some of the highlights:

We look forward to your continued listenership in 2021!

If you have comments on this episode or if you’d like to suggest topics for future episodes, please email globallawbiz [at] harrisbricken [dot] com.

And please follow Fred and Jonathan on social media to stay informed on upcoming guests and topics:

Four things importers from China should know about US anti-dumping cases.
Four things importers from China should know about US anti-dumping cases.

Companies importing products into the United States from China may be unfamiliar with terms such as “non-market economy (NME),” “respondent,” and “surrogate values.” However, this quickly changes when such companies’ imported goods are subject to a U.S. antidumping proceeding.

U.S. antidumping or “AD” cases are complex. This is especially true for “non-market economy” or “NME” cases, including those that involve China. The United States deems China to be a non-market economy in which the Chinese Government is presumed to control all Chinese companies and their pricing decisions. Consequently, the United States does not generally use the Chinese companies’ prices in China to determine whether and to what the extent dumping has occurred.

Instead, the United States constructs the sales price of a good in China by valuing the good’s factors of production – such as raw materials, labor, energy, and capital costs – with surrogate values from another country at a comparable level of economic development. Historically, India was consistently the default surrogate country for China, but in more recent cases, the U.S. Department of Commerce has selected Brazil, Malaysia, Mexico, Romania, Thailand, Turkey to be the primary surrogate country.  The selection of surrogate values can have a huge impact on the dumping margins calculated in China NME cases because they can be significantly higher than the actual cost incurred by the Chinese producers.

Because U.S. antidumping cases move fast, U.S. importers are advised to have a good understanding of their roles during and after the various stages of AD proceedings.

First, assuming no affiliations between the Chinese exporter and U.S. importer, U.S. importers are not the responding or examined parties in U.S. AD cases against China. The U.S. Department of Commerce will select one or more companies for examination – the “respondents” – from the companies in China that exported the products to the United States during the investigation or review period.

Nonetheless, U.S. importers should strongly encourage their Chinese suppliers to take the important first step in an NME AD investigation of applying for a separate rate to demonstrate that the Chinese company is not controlled by the Chinese Government. Such applications must be submitted 30 days from the date on which the NME AD case initiation notice was published in the Federal Register. Submitting the NME “Separate Rate Application” is necessary to ensure the Chinese company does not receive the adverse antidumping margin assigned to the “PRC-Wide Entity.”

Second, although U.S. importers are not the respondents in U.S. AD cases, they are the parties liable for paying AD duties on imported products subject to the AD cases. However, such duties will not be conclusively finalized until a subsequent administrative review period concludes. Following an investigation, an AD case’s first administrative review will likely conclude over two years from the date on which an investigation’s final order is published.

Following the AD investigation’s preliminary determination and until an order is issued for an investigation, U.S. importers may post bonds for estimated AD duties on the imported goods. After the order is published, importers must pay cash deposits for estimated AD duties.

Third, U.S. law generally prohibits a U.S. importer’s Chinese vendor from paying or reimbursing the importer for antidumping duties the importer must pay. The Department will deduct any such reimbursed duties from a respondent’s export price in the AD margin calculation such that the AD margin effectively doubles.

Fourth and (for this blog post) finally, U.S. AD cases on Chinese products wreak havoc on global markets for the goods subject to the AD cases. Chinese companies and their U.S. importers will not know the final AD rates on the products for several years. Because U.S. importers do not definitively know their AD risk exposure in sourcing from particular Chinese companies, they cannot accurately budget for purchasing such companies’ goods. This uncertainty often encourages U.S. companies to source goods from other countries or U.S. producers that are not subject to the AD case.

Uncertainty about an instituted AD case and possible liability should not mean indecision. Exactly the opposite is true. In order to ensure that all steps are taken to fully protect U.S. importers’ interests concerning purchases from their Chinese suppliers, U.S. importers need to get out ahead of the AD action and encourage their Chinese suppliers to do the same. AD actions move quickly; U.S. importers and their Chinese vendors need to be quicker.

China Design ownership

1. Who Owns the Product Design?

When foreign buyers purchase products from Chinese factories the big issue is usually who owns the design of the product. This issue is often discussed in a theoretical way, based on intellectual property law principles, without getting to the real point. You are having a product made at Chinese Factory A. You decide the price Factory A is charging you for the product has become too high. The fundamental issue is this: can you take that exact product and have it made at factory B?

Suppose you find a product made and designed by a Chinese factory. Normally, you will not purchase off-the-shelf products in their “as-is” condition. You will customize the product by maybe changing its colors, and/or its surface design and/or small surface features such the number of buttons so that particular iteration of the product will be seen as your product.

In this situation, the Chinese factory ordinarily will take the position that it owns the underlying product design and it can sell that product anywhere in the world. It will though agree to “customize” its product for you by making surface changes such as color, logo, or changes to one or more surface design features. If requested, the Chinese factory will usually agree not to manufacture and sell a product using those same features for sale anywhere else in the world, or maybe just to your particular sales market.

 

2. What Happens if You Change Your Manufacturer?

Given this basic position, what happens if you want to go to a different manufacturer for the same product?

The Chinese Factory usually will permit. you to go ahead and customize the product made by a different factory, but it will not usually permit you to have that new factory manufacture your product based on the Chinese Factory’s underlying product design.

Some Chinese factories will permit you to have its product made by a different factory, but require you pay it a royalty. Other Chinese factories will agree to give you a license to go to another factory solely to manufacture the product but not to make any adaptation or other “new work” relying on the underlying design.

Where does your Chinese program fit into this system? Most buyers face a situation where their Chinese factory cannot sell the buyer’s customized product but they are stuck with that Chinese factory and if they want to go to a different factory, they must start over from scratch or pay what is usually a very high royalty. This can be a disaster if there is no readily available alternative source for your product.

Another issue that arises from this situation is the question of exclusivity. If you have worked hard to create a market for a specific product in a certain territory, you will not want essentially the same product to be sold in that territory in direct competition with your product. It is common to provide that your factory is not permitted to sell the customized product to any other buyer. On the other hand, the factory is free to work with a different buyer who customizes the product in a different way. It is that alternative customized product that will then appear as a competitor in your territory.

Obtaining the agreement of your Chinese factory not to sell your customized product to anyone else is relatively easy because no one else really wants that product. It is much more difficult to get your Chinese factory to agree not to sell an alternative product. If you are looking for that kind of protection, you must be clear about the rules and you must expect the Chinese factory will only agree to those rules if it receives a substantial benefit for doing so. That benefit is normally your agreement to a specific volume of product purchase for each year of exclusivity. Big companies often get this sort of deal; SMEs, far less often.

China contract damages
  Joost Bakker

1. China Contract Damages

This must be China contract damages week. I say that because in cleaning up months of emails I came across three interesting emails on contract damages (similar to  liquidated damages under common law). Before I discuss those three emails, I will explain what contract damages are and why they are so important in just about all China contracts.

Contract damages refers to a contract provision setting out the damages for breach. The typical contract might have a provision saying if Party X breaches this contract, Party Y is entitled to $100,000 in contract damages. Some contracts we write will have more than one contract damages provision. For instance, we might write a distribution agreement that provides for $300,000 in contract damages for a distributor breaching the contract by stealing our client’s IP and another contract damages provision providing for 1% a month in contract damages for late payments.

Contract damages are an amazing and oftentimes essential element of a good China-specific contract.

2. Calculating the Right Contract Damages Amount

In the standard commercial contracts, our China lawyers usually include a specific damage amount for certain (but not all) violations of the contract terms. We often say that coming up with the right amount and the right combination of contract damages is an almost magical combination of experience, art and science. We vary the amount of contract damages each time, based on a combination of the amount at stake in the contract, the likely amount of damages if there is a breach, the location of the court in which disputes will be resolved, the moral culpability of the breach, the industry, the financial wherewithal of the Chinese party, the power/prestige of the Chinese company, and sometimes even the country in which our own client is based. The only constant is that we try to make the amount as high as we can, while at the same time erring on the side of keeping it low enough so that it will likely be enforced by a Chinese court and therefore work to scare the Chinese company into not breaching the contract

Our China lawyers need to ensure that the Chinese judge will not view this provision as a penalty, but rather an honest assessment of what real damages might result from the breach. Perhaps most importantly, this amount needs to be high enough to deter the Chinese counter-party from breaching the contract, yet also low enough so that it will actually sign the contract and so that a Chinese court will enforce it. Chinese courts will often simply invalidate or just ignore a contract damages provision if they deem it to be too high. Far too often foreign companies and their lawyers will put use such a high amount in their contract damages provision that the Chinese company will readily sign the contract, knowing it will never be enforced. They are trying to cover themselves for any potential lost profits they might lose from a breach, but in doing so they shoot themselves in the foot because no Chinese court will enforce it and knowing this, their Chinese company has no fear in breaching.

 

3. Why China Contract Damages are Such a Great Thing

But done right, contract damages can be a near miraculous thing and our China attorneys love them for the simple reason that they work. Putting the right contract damages provision in your China contract does the following important things:

1. Increases the likelihood your Chinese counter-party will not breach your contract.

2. Increases the likelihood you will be able to avoid litigation if your Chinese counter-party breaches your contract.

3. Increases the likelihood you will prevail quickly in litigation if you do end up needing to sue your Chinese counter-party.

Chinese contract law clearly provides for “contract damages” and Chinese judges tend to like them. Though contract damages are both permitted and encouraged, they cannot be used as a penalty and Chinese courts therefore usually will allow a defendant to argue that the contract damages are too high and the court should therefore ignore them and award a lower amount. The court is then free to accept this argument and award the lower amount.

Amazingly enough, the plaintiff also has the right to argue for an amount higher than the contract damage amount. That means that well-crafted contract damages can be used as a damages floor, but not a ceiling. Though this idea of allowing defendants to argue for less than the amount of contract damages set forth in a contract while also allowing a plaintiff to argue for more does obscure the concept of contract damage amounts, our China lawyers still nearly always include contract damages in the China contracts we draft. We do that for the following three reasons:

1. We want a specific number for when we contact the breaching party to try to settle and having contract damages gives us a specific damage amount to discuss.

2. We want a specific number for when we go to the court when suing for a breach of contract. This is particularly important for those situations where the amount of damages is not clear.

3. Most importantly, we want a specific number to use for a prejudgment attachment of assets. One of the best ways to stop a Chinese company from infringing on your intellectual property rights (IPR) is with prejudgment attachment. But to to get that you need a reasonable standard for the amount of damage that will quickly set the amount to be attached. Contract damages provides that reasonable standard. Chinese companies know how easy it is to attach/seize their assets based on a contract damages provision and they fear this. This in turn makes them far less likely to breach a contract with a well-crafted contract damages provision.

Securing injunctive relief is difficult in China and it pays to have an agreed contract damage amount in cases where the actual amount of damages is difficult/impossible to calculate. In these cases where there is no clear monetary damage (the classic common law injunctive relief situation), PRC courts generally have NOT allowed defendants to argue that no relief should be awarded when there is a contract damages provision.

 

4. China Contract Damage Examples

Now about those three emails. The first was from one of our China manufacturing lawyers to a client regarding the amount of contract damages we had chosen to put into an NNN Agreement. I see this sort of email all the time and it was in response to a client complaining that the amount we had chosen as contract damages were too low:

I do not advise we increase the amount of contract damages we have written into your NNN Agreement. Note that this $350,000 per each event and note that it is intended to represent a fair estimate of your losses from each breaching event. When the amount of contract damages is too high, the Chinese side is unlikely to sign the agreement because it will think you are being unreasonable and or demonstrating your inexperience with how to conduct business in China. Equally importantly, a Chinese Court is unlikely to enforce a much higher amount because it will view it as not having a sufficient relation to the actual damages.

That said, there is nothing “magical” about the $350,000 we chose here for the contract damages amount. We came to this figure using various different factors we ordinarily use for calculating the best amount of contract damages for any specific contract. If you still believe our number is too low, let’s talk more about what your losses are likely to be and see whether we can come to a number we both like.

The second email was from one of our China IP lawyers to a client involving an IP licensing agreement. In this matter, the Chinese side had stricken our contract damages provision entirely and our client was asking how to respond to that:

As for paragraph 8.2, the sentences they [the Chinese company on the other side of the deal] are seeking to remove are one of the core provisions of this licensing agreement because they provide for contract damages in a specific monetary amount for every act of breach. This sum certain amount (called contract damages) provides the Chinese court with the basis for a prejudgment seizure of the Chinese company’s assets (but it does not limit the court’s power to decide the amount of damages). In short, these sentences give your agreement real teeth and I would not accept the proposed change and would push back hard on this. The Chinese company knows this provision is powerful and will make its breaching your contract more risky to it and for that reason it does not like it. This is somewhat of a red flag regarding the Chinese company’s intentions and so we probably will want to draw a clear line on this issue.

The third email was from me to a company that wanted our China litigation/arbitration team to take its case and the contract damages part of this email went like this:

I also do not like the contract damages provision in your contract. It’s for $25 million dollars on a 2.5 million dollar deal and near as I can tell from what I have read and from what you told me when you spoke, your damages here are well under a 2 million dollars on a really good day and I do not see how anyone could ever have viewed them as being higher than this when the contract was signed. To be blunt with you, I do not even see how you get to $2 million dollars in damages under your analysis and under a U.S. damages analysis I have a hard time getting past $1 million in damages and I am skeptical a Chinese court would see even $750,000 in damages here. Your too-high contract damages provision is going to hobble us from the get-go. It is too high for us to use to try to freeze the Chinese company’s assets so we probably should just forget about that. Even worse, and based on what the Chinese company has told you and on how it is acting, it has zero fear of this happening and in fact, it plans to use this provision to paint you as the horrible exploitive Westerner (the potential client was from the Europe) trying to take advantage of a Chinese company. Not sure how far that will actually get this Chinese company, but it probably will to eat up more time.

So again, I really wish you had used a lawyer who knew what it was doing with Chinese contracts because if you had, you would be in a much better position right now and we might have been interested in taking on this case. But this, coupled with all the other flaws we see in your contract have convinced us that we are not the right law firm for this case. But just to be clear, I am NOT telling you that you have no case and I am NOT telling you not to pursue this case. What I am telling you is that we simply would not feel comfortable taking your money to handle this case nor are we interested in taking it on a contingency fee basis. I therefore urge you to find another attorney/law firm for this litigation and I truly wish both you and your company nothing but the best going forward. This Chinese company did not treat you fairly and I would hate to see it get away with that.

5. The Bottom Line on China Contract Damages

Contract damages can be a great thing in a China contract, but only if done right.

international M&A due diligence

My law firm’s international lawyers do a significant amount of transactional work, which we call “happy law.” It’s generally happy because the buyer and seller largely know what they want from the other side and they have already agreed in principle on what the deal will look like. Both sides bring in transactional lawyers like me to help prepare the various contracts that will be involved. If everything goes smoothly, everyone is pleased at the closing.

In purely domestic deals, especially where parties are familiar with each other, the buyer will sometimes forgo due diligence except for the most cursory review of financial statements to ensure the target company is viable. In international cross-border deals this never happens because the parties are thousands of miles apart and rarely familiar with each other. There are many unknowns, and the buyer needs to know all of them. (See Foreign Company Due Diligence and China Company Due Diligence: Not Optional.)

It is in the seller’s interest to be entirely upfront during this process, at the expense of blowing up their own deal. Due diligence almost always reveals small things like unsigned contracts, contract terms that are not quite what the seller represented to the buyer, or important supply or lease contracts that have expired or will soon expire. Sometimes there are simmering ownership disputes that need to be worked out first.

Due diligence can also reveal major issues that many buyers find troublesome: income tax avoidance, business entities that are unlicensed or exceed the scope of what they are permitted to do, and employees being paid (in whole or in part) under the table to avoid employer and employee side tax requirements.

In the past 12 months our international merger and acquisition lawyers have worked on several deals that fell apart because of what we discovered in the due diligence phase while working for buyers. These deals together make a great case study for what to look for when digging through China company documents.

They are also great case studies for potential sellers with China operations that think Chinese laws and regulations do not matter. I have modified some details to provide you a compilation of the most egregious things we uncovered in our due diligence work this year.

In these cases, the deals were proposed as asset purchases by a U.S. company of another U.S. company, and the primary seller assets to be purchased were its China operations and employees. The sellers used a representative office, not a WOFE/WFOE (wholly owned foreign enterprise, pronounced “woff-ee” and “wiff-oh”).

 

Red Flag #1: We Don’t Have Any China Office Documents.

When we sent our lengthy due diligence request list to the seller’s attorney, the seller responded that they didn’t have “any China office documents.” I half choked and half chuckled when I read that because I knew the seller must have documentation related to their China office if they had any operations in China.

When we asked whether the seller had a WFOE/WOFE or a representative office, we got nothing but radio silence, probably because the seller had no idea what kind of operation they were running in China. After several prods, it turned out that the seller had a representative office and did have China documents relating to the representative office.

They eventually found a lease, an agreement with FESCO (a third-party hiring agency that contracts with the seller’s China office for their employment needs), and employment and dispatch agreements with each of the seller’s China employees. If we had taken the seller at face value on their first answer, we would not have discovered the problems that ultimately caused our clients to pull the plugs on their deals.

 

Red Flag #2: We Have a Representative Office, and They Take Care of Our China Operations.

When we asked what role the China employees played within the organization, the seller replied that they performed “all kinds of roles” for the seller and that they were “top notch employees.” That all would have been welcome news for the buyer except that the seller had a representative office, not a WFOE/WOFE.

A representative office has no separate legal identity in China, and you can only perform limited marketing and market entry activities through a representative office. The representative office cannot enter into contracts, receive payment, or do anything resembling actual business. All Chinese citizens working for a representative office must be hired through employee dispatch agencies (we call these PEOs (professional employer organizations) in the U.S.). See The Slow Death of the China Rep Office

After we learned about the expansive roles the top notch Chinese employees filled within the seller’s organization, it became clear that the seller’s representative office was not compliant with Chinese laws and regulations. We advised our client that they should not want any part of this arrangement and that they should not close until they formed a WFOE/WOFE to properly run its China operations.

 

Red Flag #3: We Pay Our Employees Partly in Cash.

Then we started comparing the numbers on the employment agreements with the seller’s financial statements, and we noticed some strange gaps between the money flowing into the China operations and the money that was supposed to be paid to the employees. When we pushed for more information, the seller said that they paid part of their employee salaries through FESCO and part of the salaries in cash.

I don’t know what the best way is for a seller to disclose to a prospective buyer that they have been engaging in tax evasion, but the seller did not do it very eloquently or convincingly. The seller shrugged (via email) and said that they intended to start complying with Chinese tax laws soon. They didn’t mention whether they intended to clean up the last 15 years of tax evasion with the Chinese authorities or whether they were sure their Chinese employees would never blow the whistle on that tax evasion (something disgruntled Chinese employees and employees around the world love to do). Or maybe they just expected our buyer to pay the back taxes, interest and penalties. See China’s Tax Authorities Want You.

We reminded our client that whether a company is evading taxes in the U.S. or in China, the taxing authorities are going to bring down the hammer. We advised our clients that this was the largest red flag of all, and they decided to walk away.

In the end, our clients thanked us for our work that allowed them to understand the risks so they could then make the decision how to proceed. Not all of these red flags are fatal, but you need to know how to deal with them when they arise because you do not want to discover these after the closing when they are largely your problem. You may be able to recoup some of your expenses from the seller, but that will depend on how well your purchase agreements were drafted by your lawyer.

The End of Hong Kong

This blog’s Christmas message reflected on what has happened to Hong Kong over the last couple of years. That subject dovetails well with my most recent blog post, The China Thrill Is Gone. In that post, I described how Xi Jinping’s rise to power coincided with growing pessimism on my part regarding China’s future, eventually leading me to leave the Mainland for Hong Kong. And then, as I said in the post, they came for Hong Kong.

For most of my time living in Hong Kong (over three different time periods), I led what can be properly described as a crossborder life. Visits to Shenzhen and Guangzhou were about as normal as treks out to the Hong Kong Customs warehouse in Chai Wan or to a client’s office in Quarry Bay. After all, from my Kowloon apartment, it took about the same amount of time to reach the border as it did to reach those places. RMB and HKD notes coexisted in my wallet and dual SIM cards were an important feature on cell phones. But as disillusionment with China grew, that crossborder life gave way to a more Hong Kong-centered one, with Mainland China being just one of the parts of my beat (which dramatically shifted toward Southeast Asia starting in 2016).

With every calamity that has befallen the city, there have been those who have assured me I was lucky. And, yes, I am glad that I was not a first-hand witness to the strife of 2019 and the imposition of the National Security Law (NSL). But the reality is that my concerns over such developments occurring at some point in the future played an important role in my Hong Kong departure at the end of 2018. Admittedly, things happened more quickly than I imagined they would, and I could not have guessed the specifics, such as the extradition bill and the NSL. But the writing was on the wall that things would, somehow, sometime, change, and not for the better.

The 2014 Umbrella protests were a heady time in Hong Kong. Though generally sympathetic to demonstrators, I thought their disruptions of traffic in places like Mong Kok (a few blocks away from my apartment) were unjustified impositions on Hongkongers, many of whom did not agree with their agenda. In fact, in most areas of the city, the protests seemed a world away, and there was not much visible support. One of my then-colleagues, an expat, started frequenting protests and amassing a collection of memorabilia. I scoffed at his romanticized view of Hong Kong, which seemed to ignore majoritarian sentiments regarding democratic reform and the city’s relationship with China.

More importantly, I thought the protests would ultimately be counterproductive. During the innumerable conversations I had with Hongkongers and foreigners alike, I encountered a lot of naïveté about the CCP. One expat who hailed from the former Eastern Bloc used his country’s experience as a rallying cry for Hongkongers, failing to see the crucial differences between the USSR in 1989 and China in 2014 (and between nations such as Poland and Romania, and a city of 7 million).

In my view, Hongkongers’ focus should have been on preserving and strengthening the “one country, two systems” arrangement. Rather than lamenting that Hong Kong’s political system did not look more like Canada’s or Australia’s, they should have appreciated the fact that it was not like Wuhan’s or Xinjiang’s.

In the aftermath of the 2014 protests, it was clear to me that Beijing had learned its lessons. The signs of a tougher line were there to see. For instance, the Hong Kong authorities quickly sought the disqualification of Baggio Leung and Yau Wai-ching after they turned their Legco oath-taking into political theater. Overall, the Hong Kong government began to  increasingly resemble its Mainland counterparts. It rammed through a proposal to build a branch of Beijing’s National Palace Museum, despite vocal opposition (and no vocal support whatsoever) from citizens. Again in the face of local opposition, the government footed a significant part of the bill for a white elephant bridge to the other side of the Pearl River Delta, hailed as a great achievement by the central government but of little practical value to Hongkongers. The government also endorsed the stationing of Mainland law enforcement officers at the new high-speed rail station.

The government’s proposal in 2019 of a law that would permit extradition to Mainland China, sparking a season of unrest that in turn prompted the imposition by the Beijing authorities of the repressive NSL, was a logical progression of the pattern of genuflecting to Beijing’s wishes. And this pattern was on evidence for all to see in the preceding years. Looking ahead, only two scenarios seemed plausible. The first was for Hong Kong to slowly morph into the CCP’s likeness bit by bit. Alternatively, there would be a final straw that got people out in the streets again, in turn setting the stage for a repressive response.

In the end it was the latter scenario, randomly sparked by a Hong Kong dirtbag who allegedly murdered his pregnant girlfriend in Taiwan. The Hong Kong government sought to change its extradition law to be able to legally send the alleged murderer to Taiwan to stand trial. Maybe Beijing thought this would be a good way to slip in legalized extradition to the Mainland (and hence avoid the inconvenience of having to kidnap suspects on Hong Kong soil). Or perhaps someone in Beijing or Hong Kong said, “whoa, you cannot allow extradition to Taiwan but not to the Mainland.” It does not matter. Hong Kongers were fed up and took to the streets.

Had it not been the extradition bill, it could have been any number of things. Perhaps an arrest by Mainland immigration officers at the high-speed rail station gone wrong, or an initiative to prioritize the use of Mandarin, or an increase in one-way permits granted to Mainland immigrants. But by 2018, it was evident that Xi Jinping’s vision for Hong Kong was one of increasing convergence with the Mainland. Hongkongers had to acquiesce or else.

I chose to leave and it seems a million Hongkongers are looking to do the same.