Overlooked Strategies for Surviving the US-China Trade War (and possibly others)

By Dan Prud’homme and Mark Cohen

The trade war between the US and China has escalated to a point far beyond the expectations of many. In what started as volleys of tariffs and a WTO complaint against China’s “forced” technology transfer policies, now involves expanded export controls, inbound investment restrictions, restrictions on labor mobility, an FBI task force on economic espionage from China, visa limitations, and an embargo (albeit a temporarily relaxed one at the time of writing this article) against Huawei, a leading Chinese telecom firm. The supply chain disruptions from the trade war are immense.1 And Western firms are increasingly fearful of regulatory reprisals in China.2 While reconfiguration of manufacturing supply chains involving China has been on the forefront of many managers’ responses to the trade dispute,3 currently available advice is sometimes ill-informed about how to best do so. Further, intellectual property (IP), innovation, and non-market strategies – some of which also involve reconfiguring supply chains, others which are distinct – are less discussed but critical for many firms to survive the tensions.

 

Attempts to redraw manufacturing supply chains so that companies’ goods will be classified as originating from a country other than China, and therefore avoid the latest round of Trump tariffs, are fraught with risks.

Reconfiguring manufacturing supply chains the right way

Attempts to redraw manufacturing supply chains so that companies’ goods will be classified as originating from a country other than China, and therefore avoid the latest round of Trump tariffs, are fraught with risks. In some cases, it may be possible to reduce US tariffs to zero if a firms’ goods undergo a sufficiently high level of manufacturing or other transformation in a country that enjoys duty-free treatment under a free trade agreement or other preferential arrangement with the US. However, in order for products to be eligible for US non-punitive “most favored nation” tariffs, firms will usually need to perform a “substantial transformation” of their product components in a country outside of China and prove the country of origin of such transformation. Separate rules regarding the country of origin may also apply if the product is subject to antidumping or countervailing duties. Additionally, US export control laws have separate rules regarding incorporation of US technology into foreign-manufactured products.

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About the Authors

Dan Prud’homme (EMLV & DKU) is an associate professor at EMLV Business School (École de Management Léonard de Vinci) (Paris, France). He is also a non-resident senior researcher at the GLORAD Center for Global R&D and Innovation at Tongji University (Shanghai, China).

Mark Cohen (University of California, Berkeley)  is a Chinese-speaking Intellectual property and commercial attorney with over 25 years experience in emerging markets. Former US government and US Embassy (Beijing) official, former Fulbright Professor (Republic of Slovenia). Extensive experience in management of patent porfolios, IP enforcement campaigns, government and media relations, international trade matters (including WTO issues), and public policy efforts, including antitrust advice. Educated thousands of leading Chinese public and private sector officials on IP matters, and have lectured before business and academic audiences throughout the world. I have also served as an expert witness on intellectual property matters involving Chinese companies.

References
1. AmCham China Member Survey, May 22nd 2019, available at  https://www.amchamchina.org/about/press-center/amcham-statement/
2. US firms in China fear ‘retaliation’ against Huawei curbs: Am Cham, available at https://www.bbc.com/news/business-48361689, citing an interview with AmCham Chairman Tim Stratford
3. Maidment, P., 2018. How Western multinationals are responding to the escalating U.S.-China trade war. Harvard Business Review, available at https://hbr.org/2018/12/how-western-multinationals-are-responding-to-the-escalating-u-s-china-trade-war
4. It should be noted that, generally, trademarks are not added to the transaction value for assists.
5. For a list of the various tariff tranches see Section 301 Trade Remedies to be Assessed on Certain Products from China available at https://www.cbp.gov/trade/remedies/301-certain-products-china.
6. See https://twitter.com/realdonaldtrump/status/1156979446877962243
7. Cohen, M. 2019. Unpacking the Role of IP Legislation in the Trade War, available at https://chinaipr.com/2019/05/19/unpacking-the-role-of-ip-legislation-in-the -trade-war /; Prud’homme, D., von Zedtwitz, M., 2019. Managing “forced” technology transfer in emerging markets: The case of China. Journal of International Management; Prud’homme, D., Zhang, T., 2019. China’s Intellectual Property Regime for Innovation: Risks to Business and National Development. Springer; Prud’homme, D., 2019. Reform of China’s ‘forced’ technology transfer policies. University of Oxford Business Law Blog, available at https://www.law.ox.ac.uk/business-law-blog/blog/2019/07/reform-chinas-forced-technology-transfer-policies
8. Cohen, M, 2019, A Federal Circuit with Chinese Characteristics: The launch of China’s New National Appellate IP Court,   see https://chinaipr.com/2019/01/04/a-federal-circuit-with-chinese-characteristics-the-launch-of-chinas-new-national-appellate-ip-court-%E4%B8%AD%E5%9B%BD%E7%89%B9%E8%89%B2%E7%9A%84%E8%81%94%E9%82%A6%E5%B7%A1/
9. Prud’homme, D., Zhang, T., 2019. China’s Intellectual Property Regime for Innovation: Risks to Business and National Development. Springer.
10. Ibid
11. Bureau of Industry and Security, Review of Controls for Certain Emerging Technologies, 83 Fed. Reg. at 58202 (Nov. 19, 2018).
12. See Export Administration Regulations (EAR), Sec. 734.3(b)(3) , which provides that the following types of information are not “subject to the EAR,” regardless of their content: (i) “published” information; (ii) information that arises during, or results from, “fundamental research;” (iii) information released by instruction in academic institutions; (iv) information in patents and published patent applications; (v) information that is a non-proprietary system description; and (vi) certain types of telemetry.  See also Sec. 734.10 on patents specifically.
13. Prud’homme, D., von Zedtwitz, M., 2018. The changing face of innovation in China. MIT Sloan Management Review, https://sloanreview.mit.edu/article/the-changing-face-of-innovation-in-china/; Greeven, M., Yip, G., Wei, W., 2019. Understanding China’s next wave of innovation. MIT Sloan Management Review, https://sloanreview.mit.edu/article/understanding-chinas-next-wave-of-innovation/
14 McKinsey Global Institute, 2018. Outperformers: High-growth emerging economies and the companies that propel them, available at https://www.mckinsey.com/~/media/mckinsey/featured%20insights/innovation/outperformers%20high%20growth%20emerging%20economies%20and%20the%20companies%20that%20propel%20them/mgi-outperformers-full-report-sep-2018.ashx
15. Scheve, K., Zhang, R., 2016. One belt one road: Chinese strategic investment in the 21st Century. Harvard Business Review Case Studies, available at https://hbr.org/product/one – belt – one – road – chinese – strategic – investment – in – the – 21st– century/P87 – PDF – ENG
16. China’s Xi Jinping revives Maoist call for ‘self-reliance’, 2018, https://www.ft.com/content/63430718-e3cb-11e8-a6e5-792428919cee
17. For example, see: Chinese media calls for ‘people’s war’ as US trade war heats up, 2019, https://edition.cnn.com/2019/05/14/asia/china-us-beijing-propaganda-intl/index.html; China’s propaganda machine takes aim at U.S. over trade war, 2019, https://www.nytimes.com/2019/05/14/world/asia/china-propaganda-trade.html; China’s latest weapon in the trade war: Karaoke, 2019, https://www.bbc.com/news/world-asia-china-48359002
18. Trade war is putting Chinese tourists off US, with many opting for ‘more welcoming’ nations, 2019, available at https://www.scmp.com/tech/big-tech/article/3010145/ctrip – ceo – says – trade – war – putting – chinese – tourists – us – many – opting – more
19. FDRA Open Letter to President Trump, May 20th 2019, available at https://fdra.org/wp-content/uploads/2019/05/2019-Footwear-Tariff-Letter-1.pdf
20. Prud’homme, D., von Zedtwitz, M., Arreloa, F., 2019. Strategic responses to neo-populism. The European Business Review, available at https://www.europeanbusinessreview.com/strategic-responses-to-neo-populism/

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