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[UPDATE: Shanghai Securities News picked up our post below and commented on it in the last two paragraphs of the article. In Chinese.]

[Editor’s Note: "China is coming," says Malcolm Bricklin, the entrepreneur who intends to introduce Chinese-manufactured automobiles to the American market. Does the American consumer need a further addition to an already overwhelming choice of middle-market cars that aren’t terribly well made? Gee whiz, we already have our stock of home-bred (home-brewed?) models.

Ah, but, it’s the price, you see. The export engine that forms the backbone of the Chinese economy incessantly pumps out passing product at low cost. And – everyone says this is the case – the consumer benefits. At least, plenty of consumers think they benefit from $75 microwave ovens, $50 DVD players and $7 reading spectacles. But casual conversation with Americans gives one the distinct impression that, while they acknowledge the savings, they are uneasy about its long-term effect.

Give me a dollar for each time this phrase has echoed in my ears over the past year and we would dine well (I’m salivating already): “We’re importing so much from China that soon no one will have the income to pay for it.” The point being the loss of manufacturing jobs. Despite the contrary claims of pols and economists, the general populace are very much out of step with the curious and often querulous statement that American manufacturing jobs have increased.

This writer, despite reading many studies and declarations, frankly doesn’t know which to believe. (When the logical mind fails to discern the truth, one falls back on the eyes and ears.) The fact is that the plethora of small factories that dotted my youthful stomping grounds here in the Northeast of the United States have all disappeared. Well, not entirely. Their corpses --- the hulks of their decrepit structures -- remain.

And those whose minds are flush with these memories – of men and women made to work with their hands and who easily found such work near home – are naturally concerned. Where, indeed, have they gone to find work? They’ve been retrained (whatever that may mean) for the service industry – stocking the shelves of those products they would have made themselves in an earlier time.

But they do so awkwardly, in my opinion. Their natural talents point them to manual factory labor, not the retail trade, and they crowd out those who are naturally inclined to services. Labor statistics showing job growth in the services industries – which exclude those who have “dropped out” of the labor pool because national statistics stop counting them -- fail to account for this serious disjointment.

Someone very bright will come along to cite statistics or studies in an attempt to prove my gut feeling wrong, but even I, who intends to purposeful objectivity in daily life and work, find it hard to dispel. Imagine the mindset of those Americans who haven’t been so trained.

Or those in Europe. Hence our post today. I have translated an editorial appearing today in the 上海证券报 (Shanghai Stocks), an influential newspaper. An entrepreneur in Europe has seized upon an idea evidently growing within the minds of consumers in Europe, and paralleling that in the United States. But Chinese, who view commerce as a natural extension of an ever-fervent nationalism, intend to fight back. Another Danish cartoon scenario?

This can’t be good. Goose liver pate is delicious, but the goose itself is force-fed and, it is said, would perish from an expanded liver if it weren’t sooner sacrificed on the altar of some gourmet. But consumers act of their own volition. They can’t be force fed in this capitalistic system. So, the question is this: if, knowing of the nascent Chinese attempt to prevent the legal registration of a trademark, would Americans ever see past their wallets to boycott products originating in China?

Unlikely, but one never knows. Chinese need to tread very carefully around this issue. It is not as simple as they seem to think. Fanning the proverbial flames may scorch the golden goose.]

Stopping the Registration of the Trademark “Not Made in China”

抵制"非中国制造"商标注册倡议书

“Made in China,” already a popular phrase, has given global consumers cheaper prices. But it has always gone hand in hand with defamation, even carrying with it a flavor of hatred.

This hatred has been transformed into an emotion, spreading globally as economies gradually become one system, and causing Chinese, who have themselves spread to all corners of the globe, to feel powerless.

This hatred has created ever greater misunderstandings, even causing some people to turn it into a commercial product.

Imagine what you’d feel when, like our friend, while in London, you picked up a microwave oven, and was shocked to find it printed thereon “NOT made in China.”

Imagine what it would be like if, like our compatriot in New York working in a job all would envy, receiving accolades, when one of his American colleagues waved a pair of shoes in his or her face that read “NOT made in China.”

This is not being hypochondriacal. The Alvito Company, registered in Gibraltar, has applied for the trademark to “Not made in China,” which was accepted by the “European Union Trademark Management Bureau.” If there are no objections from a third party within three months, the mark will become registered.

[Editor’s Note: The Bureau referred to is most likely the Office for Harmonization in the Internal Market (Trade Marks and Designs). Indeed, the mark exists – search here.]

When a trademark is registered, according to law, it becomes effective in the 25 nations of the EU. The chain reaction is that the U.S. may also approve the registration.

Truly, “Made in China” began with low value added products, and as China was situated in a period of economic development, “Made in China” left a bitter aftertaste. But China continues to develop, to “innovate,” and is precisely in that stage of moving upwards.

We can forgive them their eye to competitive challenge, but we must not look askance at their barbaric discourtesy.

As the saying goes, “all merchants are profiteers.” The initiator of this evil wind is a small company, and as such we may call this a small evil. When the brand is communicated to others, it will be distorted and not rectified. At that time, it will move toward an extreme: the subtle meaning of “not made in China” is that “Made in China” means “no good.” The greater its effect, the greater “Made in China” will be distorted.

Perhaps, when it comes to “Made in China,” we have a set of complicated feelings. But we obviously do not hope that it becomes as distorted as it has done here.

Fortunately, we have another opporuntity to prevent this situation from getting worse. We have the right to raise an objection with the European Community, and change the result.

We have one other directly viable road. Shanghai Securities News, China Stock Net, the United Nations and its personnel, and experts can raise a protest to the European Community. Our opinion is that it will receive close attention.

We hope that we all rise up to prevent the registration of this discriminatory trademark.

Pick up your pen, type at your keyboard, pick up your phone, use your emotional energy and your intelligence and do your part for the China you love.

Click the little triangle to hear today's post.

The New York Times reports that IBM has moved its procurement division from Somers, NY to Shenzhen.

Just 20 years ago, IBM had only a handful of staff resident in China, not buying, but selling PCs made elsewhere in Asia and the U.S. Yes, even in the U.S.

Tempus fugits. One is only surprised how long it took IBM to place its most senior procurement manager and his staff nearest its suppliers.

All the news that fits, we print:

"The People’s Bank of China said in a statement posted on its Web site that it would allow the currency, known as the yuan or renminbi, to rise or fall up to 0.5 percent in each day’s trading. The current daily limit is 0.3 percent."

WOW!

***

UPDATE (May 19, 2007): Here we go again!

"There was hope that broader cooperation was on the way, but a lot has changed in a few months. On the American side, with Democrats in control of Congress and a presidential campaign gearing up, there's a growing impatience with the pace of economic reform in China and a slew of anti-Chinese trade bills pending."

Does Miss Cha mean that under the Republicans progress could have been made?

"In recent months, official rhetoric on U.S.-China trade has grown increasingly hostile."

Rhetoric is an empty tide that ebbs and flows between China and the U.S. For all the hot air, the Americans have been entirely unwilling or incapable of acting. As I have written for years, empty American threats prove worthless in the face of Chinese political administrators who are just as canny and talented (or stupid incompetent, as the case may be). The money continues to roll in. How can the Chinese be expected to step in and stop it?

Now, however, ammunition has passed up to the front lines. The melamine-in-the-pet-food scandal (see my post and podcast) has already galvanized the American consumer to avoid Chinese food products, and the FDA's response appears to be earnest. Will an American negotiator in a position of substantial authority make the link between the food impurities case and the trade war at large?

UPDATE (May 20, 2007): This morning's Washington Post picks up on this thread. The strong language of this front-page piece made me stutter for a second - I thought it was an editorial!

For years, U.S. inspection records show, China has flooded the United States with foods unfit for human consumption. And for years, FDA inspectors have simply returned to Chinese importers the small portion of those products they caught -- many of which turned up at U.S. borders again, making a second or third attempt at entry.

Now the confluence of two events -- the highly publicized contamination of U.S. chicken, pork and fish with tainted Chinese pet food ingredients and this week's resumption of high-level economic and trade talks with China -- has activists and members of Congress demanding that the United States tell China it is fed up.

Chinese food imports are a serious public health concern. Some have begun to see the extraordinary value of the pet food scandal in the context of trade negotiations. Let us hope the American negotiators are hammering away at it with the clobberingest mallet they can find.

UPDATE (May 21, 2007): Bloomberg:

``Paulson, as somebody who understood China, was trying to reach a conciliatory approach,'' says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. ``The question is, has the political pressure taken away his freedom to move?''

With respect to Mr. Stiglitz, that is not the question. Rather, it is the validity of conciliation in negotiation. Conciliation is ineffective with Chinese, unless paired with its subtle black sheep twin brother, Threat.

And neither can be made of straw -- they will both go up in flame. As we've written in the past, one hand must caress while the other is held ready to strike.

WSJ's article on Treasury Secretary Hank Paulson notes his frustration, not in dealing with Chinese officials, but with Americans. With respect to Social Security:

Mr. Paulson says it's "frustrating to be in an environment where well-meaning people on both sides of the aisle see there's a problem" but don't have the political will to act. "I've been asking people to come to the table, saying all options are on the table, and I'm getting a little tired of playing solitaire."

As to China, he appears to think that patience will, over time, result in the gains he is looking to achieve.

Under pressure to take a tougher stance, the administration has unilaterally imposed sanctions on China for alleged improper pricing of exports, and in a World Trade Organization complaint, has accused China of lax enforcement of copyright violations. Mr. Paulson didn't oppose the moves, although he knew it would be an obstacle to discussions, Treasury officials say. The Chinese reacted angrily, and Mr. Paulson spent about four hours on the phone with Ms. Wu to smooth over tensions, people familiar with the conversation say.

A quote verbatim would have been more revealing than this paraphrase. Did Mr. Paulson really say that the WTO IP complaint was an obstacle to his discussions with China? Isn't it, instead, a valuable tool of negotiation with China? The article thus leaves the reader wondering about his priorities and methods.

UPDATE (May 24, 2007): Chinese authorities have proven as incapable of restraining its prolific counterfeiting as American federal departments were of providing humanitarian assistance during hurricane Katrina.

On Tuesday, Ms. Wu said that efforts by some to “politicize” the Chinese-American relationship were “absolutely unacceptable.” This was taken as a reference to the American challenges to Chinese subsidies of exports and piracy of DVDs.

IP is precisely the kind of issue that the U.S. can not let go of. US representatives in China have been banging away on IP -- with words alone -- for at least 4 years, but it is chopping a redwood with an invisible axe.

The hot air -- the new Trade Winds? -- that has blown forth and back between these two Great Nations has accomplished scant little over these many years.

Action -- even if it is only symbolic -- will speak far louder. [Symbolic acts are typical of Chinese political tradition, e.g. to disarm an enemy by executing the leaders of the group and not the entire group itself.]

Susan C. Schwab, the United States trade representative, speaking at the conclusion of the talks Wednesday, made it clear that her own session with Chinese leaders had done little to narrow differences on these issues. “Suffice it to say we had a healthy exchange of views,” she said.

Meaning that the banquet was terrific.

But this quote gives us serious gastric distress:

Mr. Paulson said he was impatient for more concrete results himself and hoped there would be further progress before the third session of the dialogue, in Beijing in December.

“I have no doubt that we’re getting more results than we would have without this dialogue,” he said.

This suffices for an entire weekend's hilarity.

The government is stopping all imports of Chinese toothpaste to test for a deadly chemical reportedly found in tubes sold elsewhere in the world.

"There is absolutely no evidence of this toothpaste in the U.S. but it is what we believe a prudent and cautionary measure to protect the health of the American public," Arbesfeld said.

Just how much Chinese toothpaste is imported into the U.S.? About $3.3 million. Enough fluoride, tartar agent and humectant for Flushing, NY, perhaps. The American toothpaste market has been estimated at $1.5 billion annually.

An FDA ban -- taken the day after the Chinese negotiating team has left Washington, DC -- of a product stated by the FDA to be "absolutely" harmless is not the kind of symbolic action to impress the Chinese. It certainly doesn't impress the American public.

UPDATE (May 25, 2007): This podcast is really worth listening to. Sorry to spoil your dinners. (Click through to the webpage and then click the LISTEN button under the title, "As Imports Increase, a Tense Dependence on China."

UPDATE (May 30, 2007): Yumm... Honey, that monkfish from China is delicious. ARRGH! GAK! Oh, no, it's actually poisonous puffer fish!

Denial ain't a river in Egypt. It's in China.

UPDATE (June 1, 2007): FDA cries out to American public, DON'T BRUSH WITH CHINESE TOOTHPASTE. Of course, we are now aware it is a serious problem. After all, there is $3 million worth of it in the country in any one year. In other words, it's nowhere around, except perhaps Monterey Park, California, and Flushing, NY, both large centers of Chinese immigrant populations.

To the FDA -- What about the teas, the frozen fish, the shrimp, originating in China, that Americans buy in great quantities just about anywhere in the US?

UPDATE (June 2, 2007): The results of a nationwide search: FDA officials have discovered six (6) tubes of Chinese toothpaste.

More of the old back and forth.

Only a piddling amount of money is involved -- as yet -- if any. It appears to be a simple statement without any details of the offending shipments. Did it really occur, i.e., is it an agressive tactic or only a mouthful of threat?

But that's not the most important question. Instead: who'll cave when the stakes are truly high? Will the Americans even last that long?

UPDATE (June 28, 2007)

From the New York Times:

The Food and Drug Administration today issued an alert challenging imports of five major types of farm-raised seafood from China, including shrimp and catfish, because testing found recurrent contamination from carcinogens and antibiotics.

The alert means that the fish will be allowed for sale in the United States only if testing proves that it is free of certain antibiotics and carcinogens

UPDATE (June 29, 2007):

American consumer reaction to Chinese food imports has been overwhelmingly negative. See for example this page.

Because American states must, in most cases, enforce a judgment issued by the court of any other American state, Yanks in business tend to take for granted that fabulous feature of our legal system, known as "full faith and credit." [A dear relative was wont to say "for granite," but the malapropism is nevertheless just as valid, i.e., written in stone.]

But nations do not fall within the American constitutional system: American court judgments aren't not often enforced outside of the U.S. Unless, of course, there is a treaty between the U.S. and a foreign nation, there is little chance a court of that nation will recognize and enforce an American judgment. And, lest we forget, vice-versa.

For this brief post to be of any value to you, I must mention Don Clarke, who teaches at Harvard. He's written a brief article, entitled "The Enforcement of United States Court Judgments in China: A Research Note," and even if you are not an attorney, it is worth your time. Don says, in essence, that Chinese courts do not recognize and haven't enforced an American judgment.

My point in recommending you read Professor Clarke's article is this: here lies an important lesson for American companies who do business with China. Don't expect you can take an American judgment against a Chinese company to China and sue upon it. Your American judgment will not be recognized. Your more likely remedy would exist when the Chinese company has established sufficient presence in the U.S., such that you can sue the company in an American court. But unless that Chinese company has assets in the U.S. upon which you can levy, you are unlikely to recover very much at all.

What implications does this have, exactly? For importers, for example, the Golden Rule is to guard your money carefully -- before you even enter into a transaction with a Chinese exporter. Do not pay up front and then expect to receive product. You may not receive it once the money has left your hands. You will simply have no recourse.

The wise prefer to spend the extra fee to open a letter of credit, payable upon your acceptance of the product, rather than resort to prayer. Now prayer is a good thing, but its efficiency in trade is yet to be proven. Who wouldn't spend the extra? Many inexperienced traders. Perhaps you. Especially if you are new to importing -- and some I've spoken with are sourcing via the internet without even visiting the physical location of your provider -- you should never blindly pay cash up front. [If you haven't visited your supplier, you are neglecting essential due diligence.] But even if you have longstanding relationships with your suppliers, I would not recommend anything but L/C based transactions, except in the rarest circumstances (emergency circumstances where a mold needs to be opened immediately, etc.). Continue to pray, by all means, but, with some recourse in your own country, you won't need to pray so very urgently.

More on the practical aspects of Don's article in upcoming posts.

A shameful kow-tow.

"Our reputation has been damaged lately by these recalls," Thomas Debrowski, Mattel's executive vice president of worldwide operations, told China's quality watchdog chief, Li Changjiang, in the Chinese capital.

Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people and all of our customers who received the toys."

"But it's important for everyone to understand that the vast majority of those products that we recalled were the result of a design flaw in Mattel's design, not through a manufacturing flaw in Chinese manufacturers."

As of 1300 UTC on the date of this posting, the Mattel website does not display any such statement.

Beware, all ye who dare to accuse.

UPDATE (2100 UTC):

Even the Wall Street Journal, that supposed bastion of the free market ideal, and its interviewees miss the point entirely:

it also would also seem logical for Mattel officials to take a respectful stance toward Chinese officials, as 65% of its products are built there. Drew Thompson, the director of China Studies at the Washington-based think thank, the Nixon Center, says maintaining good government relations is crucial for companies that want to build a lasting corporate presence in the country. "It's incredibly important," Mr. Thompson said. "It's everything." Bates Gill, who has worked as a China specialist at the Center for Strategic & International Studies, agrees, noting that while it's important to maintain good governmental relations in most countries, it might be more so in a country like China. "The government has a lot of control over the full range of factors of production in China," Mr. Gill said. "From land usage, regulatory questions, licensing, labor, all of these inputs for profitable production in China are, you know, controlled and can be manipulated by state authorities. So you have to be cautious and make sure that those relationships are positive."

Why is it that, when discussing China, shameful bootlicking subservience under threat, a requisite of behavior before the ancient Imperial court, is tolerated by the most modern of businessmen and academics? Why is it blithely explained away, simply as an act of necessity, even of survival? Lord Macartney refused to bow to Qian Long:

In Peking Macartney refused to kow-tow, or make the nine prostrations, unless a magistrate of equal rank would kneel, and bow nine times before a portrait of George III. Both sides declined to yield. Finally, not in the palace, but in a garden, informally, the British minister obtained audience of the emperor, but in reality he was received and treated as tribute-bearer from a vassal state. Trade was opened at Canton, but the British foreigners agreed to obey the local magistrates. In a word, there was no "extra-territoriality" as yet. The foreigners' place of business was called a "factory."

[Note: If enough readers ask for it, I will find the incident in Macartney's journal of the trip, published ca. 1793.]

Bravo for that Brit! Who has the spine now?

Mattel's apology should be publicly and vociferously deplored, not simply for the craven act itself, then for its assuredly lasting after-effects upon other foreign firms, who will now find themselves pressured to act similarly, at pain of who knows what sanction.

I regret to say I can not commiserate with Mattel executives on their decision to cave. Instead, this is a lesson to all those who would foolishly place most of their eggs in one basket. I've been saying it for years, boys, China is a tough town. They play for keeps. Diversify or suffer. Or they're going to have you by the short and curlies. If they don't already.

Apologies for sparsely posting of late, but my practice has not allowed me much spare time. In the meanwhile, read this article on unregulated Chinese chemical exports finding their way into the pharma drug chain. Podcast available.

Baseball for the Chinese masses? The State Department sending Cal Ripken to Shanghai? Yes, yes, I know something of the hallowed traditions of Japanese baseball and more recently the Taiwanese leagues. Those were begun on sandlots by boys imitating the American soldiers stationed on military bases, and they grew organically.

In the case of China, as with so much else, Chinese "interest" in the sport, of which there is extraordinarily little, is a top down affair, undoubtedly spurred on by the highest levels of sporting administration simply as a result of baseball's inclusion as an Olympic sport. Although eliminated from the 2012 Games, baseball may return in 2016. Surely, there is some long-term planning going on in the General Administration of Sport.

From the American State Department's viewpoint, what is the value in assisting a fledgling Chinese Olympic effort? Not, apparently, the expansion of commerce for sporting goods makers, whose manufacturing base has been China for many years. (Think about it, Mr. Rawlings said to his underlings, a glove for every boy in China! If it had never been said aloud, it was surely thought.)

An effort in fostering Friendship between the Great Chinese People and the Great American People? (That phrase circa 1975.) If so, the substance of our relations has not ventured far from Ping-Pong Diplomacy, but surely it has.

It looks more like a charm offensive. If media is to be believed, and I am not suggesting it should, much of the world has recently come to think very poorly of America. Baseball, strongly identified with the American, is a happy game -- a typically American pastime that might be used to get good press at a time of extraordinary need.

Baseball in China -- bizzare meeting place of the American tendency to proselytize; a State Department whose public relations operates in crisis mode; an aggresively competitive Chinese officialdom; and little boys who just want to play. I hope the kids have at least some fun while the adults make use of them for their own ends.

Gordon Fairclough of the Wall Street Journal visited Chery's main auto plant in Wuhu City in Anhui Province. As you may recall, Chery was -- remains? -- a focus of intellectual property disputes and safety concerns (crash test pix here; video, here). Rather surprisingly, Fairclough was allowed to video the main production line. Then again, perhaps not. Chery's deal with Chrysler to sell cars under the Dodge name in the U.S. is ample reason to garner positive publicity. Here's the WSJ video, courtesy of the WSJ site:

Having observed several fish farms in China -- shockingly unclean conditions -- I have always avoided the purchase of farmed fish and fish products originating anywhere in Asia, except for Japan. David Barboza's article strongly suggests that you do, too:

“Our waters here are filthy,” said Ye Chao, an eel and shrimp farmer who has 20 giant ponds in western Fuqing. “There are simply too many aquaculture farms in this area. They’re all discharging water here, fouling up other farms.”

One nervously laughs, hearing of outlandish harvesting methods illiterate peasants use on fish they themselves consume. Thai farmers using cheap pesticides to kill whole schools of fish for easy netting; Cambodians using grenades.

We absolutely can not trust the safety of seafood raised on farms in China. Regulatory schema adopted by the U.S. can not possibly be adequate protection. The FDA has been as ineffective over the past 10 years as any branch of the federal government, having been completely aware of the breadth of this problem, with evidently little movement. Only 210 import refusals for illegal drugs for the entire U.S.? (However, the FDA appears to be pleased to announce its advice on the safe sources of puffer fish.)

The Wall Street Journal reports:

A Chinese seafood company exempted from U.S. safety inspections under a pilot project has been cited by Canada after a cancer-causing antibiotic was detected in a shipment of frozen shrimp.

Wonder how that one got by us?

Only about 1% of most imports are subject to FDA inspections. But the FDA blocks all imports of five types of farm-raised seafood from China -- shrimp, catfish, eel, basa and dace -- until they are proved to be free or contaminants. Importers pay for the tests, which run up to $3,000 a shipment.

But tilapia, monkfish and pollock from China appear on our grocery shelves more often than any of these, except for shrimp. And shippers can become expertly creative at misnaming their exports. As Mr. Barboza writes, farmers are not about to give up on their livelihoods simply for the sake of the health of those who buy from them:

Farmers have coped with the toxic waters by mixing illegal veterinary drugs and pesticides into fish feed, which helps keep their stocks alive yet leaves poisonous and carcinogenic residues in seafood, posing health threats to consumers.

Close your wallet to these products. You can have no idea what you might ingest. On the other hand, I know what I am eating when I fry up the bluefish I caught as they ran the waters off Montauk in late summer.

More on the nascent outsourcing of legal work to India. One shudders to see it, if only for reasons of professional ethics.

Gregg Kirchhoefer, an outsourcing lawyer with Kirkland & Ellis who spoke at last week's LPO summit, said there were still no industry standards for how a mishap or mistake would be handled.

"With U.S. lawyers, you always have the rules of ethics," he said. "Going to a service provider offshore, you have to replace that gap-filler with contract."

Good luck monitoring outsourced labor -- it is difficult enough when your people sit in an office down the hall.

But beyond the ethical problem lies greater danger to the welfare of the working American. When manufacturing left the United States, the battle cry was "Retrain for Services!" This left the man who works with his hands in the proverbial lurch.

And now, as service jobs begin their trek to balmier climes -- radiologists in India, customer service reps in the Philippines -- what will we have left here for the man of average drive, intelligence and skill to do?

Cheap goods at the local megafranchise. Adults earning just above the minimum wage for mindless work with ever lessening opportunities to advance. Serfs captive to bureaucratic business units -- are you not frightened by what this portends for the future?

An update on this story from 2007. Claiming thousands of pet deaths on Chinese imported gluten, adulterated with melamine, the U.S. Attorney's Office in Kansas City has indicted three companies on a variety of counts. Two are Chinese; one is a Nevada company located in Las Vegas. Felony counts were brought against the Chinese companies; misdemeanor counts against the American company. [Indictments here and here, courtesy of WSJ.]

The U.S. Attorney's Office claims that the manufacturer's custom's broker purposely mislabeled the gluten in order to deceive the Chinese government. The likely of success appears negligible at best -- there is scant, if any, cooperation between American and Chinese governments by law or by practice:

[U.S. Attorney John F. Wood] added that Chinese authorities took Linzhun into custody at the time his company was shut down, but he said he didn't know if Linzhun was still in custody.

The government's case against the sole American company also appears weak.

[Wood] added that prosecutors aren't alleging that the Millers and ChemNutra knew that the product was toxic, only that they were aware the product had been shipped into the U.S. under false pretenses and failed to notify their customers.

Is it possible for someone to be aware that a product has been shipped under "false pretenses," but not be aware of what those pretenses are?

[Editor's note: The safety of consumer products imported from China now makes national news. But what of national security? Directly after 9/11, news reports on poor security oversight of major American ports flooded the media. Many federal programs, it seemed, were proposed to combat the gaping hole in American armor. Then silence.

The firm practices exclusively in the areas of customs and international trade law. Ms. Schwartz was joined in this article by colleagues Elon Pollack, Jason Li and Brian Murphy.]

China signaled its willingness to enter into an MOU [Memorandum of Understanding] on C-TPAT validations in late 2007, following Customs Commissioner Ralph Basham's meeting with his Chinese counterpart, Mu Xinsheng. [Editor's note: “A C-TPAT validation is a process through which the U.S. Customs and Border Protection (CBP) C-TPAT program meets with company representatives and visits selected domestic and foreign sites to verify supply chain security measures contained in the C-TPAT participant’s security profile are accurate and are being followed.”]

However, it does not appear that a final agreement has yet been reached. Negotiations are, ostensibly, ongoing, so an announcement later in the year may be forthcoming. Since 2003, however, there has been a cooperative agreement between the United States and China in place with respect to the Container Security Initiative (CSI). As implemented, the program affords CBP [US Customs and Border Protection] limited access to participating ports upon information that certain containers are high risk.

When these identifications are made, CBP may request that General Administration of PRC Customs (GACC) liaisons conduct electronic inspections of U.S. bound cargo. (CBP officials, however, are not allowed to perform law enforcement functions, including such inspections, directly.) The CSI program has been operational in the ports of Shanghai and Shenzhen since 2005. See this page.

Initially (for obvious reasons, given China's sensibilities), Chinese officials bristled at requests to permit factory inspections under the auspices of C-TPAT. Partially in response to this reluctance (and partially due to CBP personnel constraints), U.S. Customs developed a pilot program to outsource factory validations in China to private, third party companies that are properly vetted. There is nothing controversial about this program; many companies openly engage in similar in-house practices to secure their supply chains, anyway.

But while this solution may circumvent Chinese concerns about national sovereignty/extraterritoriality, the program remains underutilized; only eleven importers have registered under the pilot program. If China does enter into an agreement on CBP validations with the United States, C-TPAT inspections could potentially become as routine as, say, U.S. Department of Commerce visits made in the course of anti-dumping investigations.

Nonetheless, unless C-TPAT participation becomes mandatory, Chinese suppliers generally have little incentive to comply with C-TPAT requirements -- especially in view of the large number of intermediaries, such as trading companies, involved in China trade. In cases involving large U.S. buyers registered for C-TPAT, such entities have the bargaining power to force its suppliers to allow onsite inspections, but cost allocation (of validation fees, security upgrades, etc.) remains problematic. Anecdotally, the firm has at least one client that has confronted this realization as a result of its experience with C-TPAT.

In short, the prospects for greater C-TPAT acceptance in China are less than rosy. This projection notwithstanding, it is not the case that only those few ocean containers subject to C-TPAT requirements will be under increased scrutiny from U.S. Customs. In January of this year, CBP announced its proposed rule on the Advance Data Elements Project (a.k.a. "10 + 2" Security Filing), in which U.S. importers must supply ten additional data fields through electronic manifest, including, for example, the "container stuffing location." See this page. Under the proposed rule, failure to provide complete and accurate information may result in "no load" instructions.

Given the fluid and -- from the importer's perspective -- nebulous sequence of export processing functions in China, such an onus could pose a considerable challenge to parties on both ends of the transaction.

Just a few years ago, container ships returned to China with much of their capacity unfilled. This situation has apparently changed.

Does a shortage of containers used to export product from the US imply a notable change in the balance of trade, as this article posits? or, is it simply that, as the article states:

Many shipping lines, including Maersk, have shifted container capacity away from the U.S., just when U.S. producers need them most.

You learn something everyday. Throughout the United States, university science departments perform sensitive research with military applications. The first case of spying I'd become aware of involving Chinese graduate students occurred at Cornell University in the early 1980s, evidently involving satellite imaging technology.

The grapevine through which I'd heard the rumor informed me that a former Chinese national Ph.D. candidate -- whom I once may have met at one of those awfully unproductive "you teach me Chinese, I teach you English" get-togethers -- had left the program to start a Chinese restaurant in the nearby town of Danby, where his contacts with the school allowed him a certain amount of access to confidential information performed on behalf of the Defense Department. I forget how much time he did. Of course, spying is not limited to Chinese -- it's just that my eyes are open to happenings in the Chinese community, rather than any other.

Some of the industrial spying stories are simply fascinating. Like the Ohio company, a leader in its field of metals processing, inviting a potential Taiwanese distributor into the factory. He was caught wearing shoes with magnetized soles to pick up metal filings on the floor of the factory, which would have later undergone metallurgical analysis. How such subterfuge was caught is anyone's guess. The Ohio company must have been on its toes. (Get the pun?) Of course, 10 years later, they've made significant investments in R&D sites in various cities in China, thereby heightening exposure to theft of secrets. One wonders the extent to which they 've been able to keep the door of the safe closed and locked.

I, for one, never knew that the assignment of a foreign national to a military research project in a university may require an export license. In today's recommended link, technology espionage meets university researchers meets the Defense Department meets export control laws. A fascinating web of intrigue for the lawyer to unravel.

In law, are gray market imports equivalent to pirated works? [Read this journal article on the implications for American libraries of imported pirated works from China.] Gray market imports are lawfully produced with the permission of the copyright holder, sold to a customer in a foreign country and then imported into another, often the country of origin, at far lower prices than new product on the shelves. Pirates, however, are copies produced without the copyright owner's permission and sold for next to nothing. In both cases -- resale into the gray market and sale of pirate copies -- the copyright holder does not benefit from repeated sales. Only in the gray market sale does the copyright holder benefit at all -- from the first sale. So, which is lawful? Pirated works generally constitute copyright infringement. What about gray market imports?

A young technology entrepreneur (read EBay seller) comes into the office with a software CD, asking if he can legally resell it. The copyright holder gave permission for the publication of the software and the client purchased it lawfully. Quite likely he can. I mean, common sense, he can sell a lawfully published, copyrighted book that he purchased, right?

Vernor v. AutoCAD, has just issued in support of that affirmative answer. Attorney John Mitchell writes:

A seller of lawfully made copies of AutoCAD software, fed up with use of bogus copyright claims to suppress his competition authorized by the Copyright Act, sought a declaratory judgment that his sales are just fine. AutoCAD sought to have his claim dismissed, and lost. In Vernor v. AutoCAD, Judge Richard Jones, of the U.S. District Court for the Western District of Washington, did the sensible thing, ruling that even if Vernor breached some duty imposed by license, such breach would, at best, violate a contractual agreement, and could not be the basis for a claim of infringement where Congress authorized the very activity complained of.

Why? Because of the "first sale doctrine." Generally speaking, once one has purchased a lawful copy of a copyrighted work, one may resell it, barring, as noted by Judge Jones above, some breach unrelated to copyright infringement.

"Once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution,”In other words, gray market " Quality King Distributors v. L’anza Research International

Those merchants whose sales are undercut by gray market imports would attempt to argue piracy without success. (See this post.) Ten years ago, Delco had a significant problem with Korean distributors rerouting auto batteries into the Chinese market at profit margins higher than could be gotten in Korea and yet at prices lower than Delco's China distributors charged for the same product. Hmm, fire Jackson in the Global Pricing Department...

The undercurrent of the gray trade moves wherever expensive or difficult to source product is in high demand: pirated DVDs from China into the US, iPhones gray marketed into China from the US. Gray market imports from China back into the U.S. are cause for concern, certainly by American equipment manufacturers, who claim, for example, non-compliance with U.S. environmental and safety regulations. Of course, American medical equipment manufacturers had no qualms selling used devices to China, untill their import was banned in the 90s. Need for equipment, insufficient capital, etc. Yes, the money was bubbling up at that time.

On the subject of bubbly, one is led to understand that a delightful gray market exists in Champagne. ...as long as the bubbly itself isn't grey...

Many small and mid-sized manufacturers in the United States are unaware that their exports may be subject to Export Administration Regulations (EAR). The implementation of those regulations is overseen by the Commerce Department’s Bureau of Industry and Security (BIS), and enforced through that bureau's Office of Export Enforcement (OEE). BIS is joined by several other federal departments with various responsibilities in the area of export control.

Not only are dual-use products -- items with military and commercial uses -- subject to the EAR, but many solely commercial products as well. Does your export require a license? The answer to that question is not necessarily straightforward, given the complexity of the regulations, which have been strengthened since 9/11. However, the importance of reviewing your export in light of the EAR cannot be understated.

To that end, I've devoted today's post to several China-related enforcement actions from the BIS website, which make for pretty interesting reading. More on export control law -- especially the topic of “deemed export” about which I've written here -- in future posts. I have dealt with China export issues and welcome inquiries from companies dealing with that and related issues.

WMD and Missile Proliferation

Industrial Furnace to China – On October 4, 2006, William Kovacs, president of Elatec Technology Corporation, was sentenced to 12 months and one day imprisonment, three years’ supervised release, and 300 hours community service in connection with the export of an industrial furnace to a proliferation entity of concern in China. On May 28, 2004, Kovacs and Elatec pled guilty to charges that they conspired to violate U.S. export licensing requirements in connection with this export. Elatec’s export license application for this transaction had previously been denied by BIS due to missile technology concerns. An associate, Stephen Midgley, separately pled guilty on January 10, 2005, to falsely stating in export documents that the furnace did not require an export license when the goods were shipped to China. Midgley was sentenced to one year probation, 120 hours community service and a $1,500 criminal fine. BIS assessed Midgley a $5,000 ($4,000 suspended) administrative penalty as part of an agreement with Midgley to settle charges related to this unlicensed export. OEE and ICE jointly conducted this investigation.

Nickel Powder to Taiwan – On October 11, 2007, Theresa Chang was sentenced to three years’ probation and to pay a $5,000 criminal fine. On June 21, 2007, Chang pled guilty to one count of making false statements related to the export of nickel powder controlled for nuclear proliferation reasons to Taiwan without an export license.

Thermal Insulation Blankets to China – On May 17, 2005, Vladimir Alexanyan, owner of Valtex International, was ordered to pay a $12,000 criminal fine, was sentenced to three years’ probation, and was ordered to refrain from any international activities or trade for the term of his probation. Valtex International was ordered to pay a $250,000 criminal fine. In February 2005, Vladimir Alexanyan and Valtex pled guilty to export violations and false statements in connection with the attempted export of satellite/missile insulation blankets to the Chinese Academy of Space Technology in Beijing. BIS had previously rejected Valtex’s application for an export license for these items. The goods were seized in San Francisco before their shipment from the U.S. BIS assessed Alexanyan an $88,000 administrative penalty and Valtex a $77,000 administrative penalty to settle charges related to this attempted unlicensed export. Both Valtex and Alexanyan are also subject to five year denials of export privileges to China. Further, Valtex agreed to implement an export management system. OEE and ICE jointly conducted this investigation.

Computer Chips with Guidance System Applications to China – On October 6, 2004, Ting-Ih Hsu, a naturalized U.S. citizen and president of Azure Systems, Inc., and Hai Lin Nee, a Chinese citizen and an employee of Azure, were sentenced to three years’ probation for false statements in connection with the illegal export of low-noise amplifier chips to China. The defendants falsely described the goods as “transistors” in export documents. These goods have application in the U.S. Hellfire missile. OEE and ICE jointly conducted this investigation.

Unauthorized Military Use

National Security Controlled Items to China – On May 1, 2006, criminal sentences were handed down against four former employees of Manten Electronics in connection with their illegal exports of millions of dollars worth of sensitive national security controlled items, with applications in radar, electronic warfare and communications systems, to state-sponsored institutes in China. Weibu Xu, aka Xu Weibu, aka Kevin Xu, was sentenced to 44 months’ imprisonment and two years’ probation. Hao Li Chen, aka Ali Chan, was sentenced to 30 months’ imprisonment and two years’ probation. Xiu Ling Chen, aka Linda Chen, was sentenced to 18 months’ imprisonment and two years’ probation. Kwan Chun Chan, aka Jenny Chan, was sentenced to six months’ home confinement and two years’ probation. OEE, the FBI, and ICE jointly conducted this investigation.

Attempted Export of Encryption Modules to Taiwan – On March 7, 2006, Ching Kan Wang, President/owner China May, Inc. of Hollywood, Florida was sentenced to prison for one year and one day. Wang pled guilty to conspiracy to violate the IEEPA for his role in attempting to acquire sensitive communication encryption modules for export to Taiwan without the required BIS export licenses. OEE and ICE jointly conducted this investigation.

National Security Controlled Electronic Equipment to China – On January 18, 2006, Ning Wen, operating Wen Enterprises, was sentenced following his conviction at trial on September 21, 2005 to 60 months’ imprisonment, two years’ supervised release and a $50,000 criminal fine for conspiracy to illegally export more than $500,000 worth of controlled electronic components to Beijing Rich Linscience Electronics in China. On December 21, 2005, Hailin Lin was sentenced to 42 months’ imprisonment and a $50,000 criminal fine; and on July 25, 2005, Jian Guo Qu was sentenced to 46 months’ imprisonment (later reduced to 22 months), and two years’ supervised release for their roles in these exports. OEE, the FBI, the Internal Revenue Service, and ICE jointly conducted this investigation.

Satellite and Radar Technology to China – On September 28, 2005, Zhaoxin Zhu of Shenzhen, China was sentenced to 24 months’ imprisonment and three years’ supervised release for conspiring to purchase controlled satellite and radar technology for illegal export to China. Zhu negotiated with undercover federal agents to purchase a variety of sensitive goods, including traveling wave tubes with satellite and radar applications, for export to China. OEE and ICE jointly conducted this investigation.

Low Noise Amplifiers to China – On August 17, 2005, Univision, operated by Zheng Zheng, was sentenced to a $1,000 criminal fine for false statements in connection with the export of low noise amplifiers, controlled for national security reasons, to China without obtaining the required license from the Department of Commerce. On June 28, 2005, Zheng was also sentenced to a $1,000 criminal fine for this violation. OEE and ICE jointly conducted this investigation.

False Statements on Export Documents; Microwave Amplifiers to China – On August 22, 2007, Norsal Export and its President Norman Spector agreed to pay administrative fines to settled charges that between November 9, 2000 and January 9, 2003, Norsal and Spector each committed forty-four violations of the Export Administration Regulations by exporting microwave amplifiers to the China with knowledge that violations of the EAR would occur in connection with the items. BIS also charged that the parties filed false Shipper’s Export Declarations in support of the unlicensed exports. To settle the charges, Norsal agreed to a $462,000 administrative fine, all of which will be suspended for a period of one year, and then waived, provided that no future violations of the EAR occur. Spector also agreed to an administrative fine of $462,000, of which $442,000 will be suspended on the same terms, and $22,000 is due in payment. In addition, both Norsal and Spector have been subjected to a twenty-five year denial of export privileges. In February 2005, Spector International, dba Norsal Export, was sentenced to a $57,000 criminal fine in connection with providing false information on Shipper’s Export Declarations regarding unlicensed exports of microwave amplifiers with potential radar applications and controlled for national security reasons, to China.

Deemed Exports

Video Amplifiers to China/National Security Controlled Technology to Chinese Nationals – On July 25, 2005, Charlie Kuan, former president of Suntek Microwave, Newark, California, was sentenced to 12 months and one day imprisonment and two years’ supervised release for failure to obtain required export licenses for shipments of detector log video amplifiers (DLVA), items controlled for national security reasons, to Chengdu Jeway Microwave Telecommunications, a company controlled by the Chinese government. Suntek, which was also charged with failing to obtain export licenses under the deemed export provisions of the EAR, was sentenced to a $339,000 criminal fine. BIS additionally assessed administrative penalties of $275,000 against Suntek, $187,000 against Kuan, and 20 year denials of export privileges against both parties in connection with these violations.

National Security Controlled Technology to Chinese and Ukrainian Nationals – In November 2004, BIS assessed Fujitsu Network Communications, Inc. an administrative penalty of $125,000 as part of an agreement with Fujitsu to settle charges related to unlicensed deemed exports to foreign nationals. In particular, BIS alleged that Fujitsu failed to obtain the export licenses required for transferring commercial digital fiber-optic transmission and broadband switching technology to Chinese and Ukrainian nationals. The applicable technology is subject to national security controls.

National Security Controlled Items and Technology to China – In September 2004, BIS assessed a $560,000 administrative penalty against Lattice Semiconductor Corporation as part of an agreement to settle charges of unlicensed exports of extended range programmable logic devices and technical data to China and the deemed export of controlled technology to Chinese nationals. The items and technology are controlled for national security reasons.

National Security Controlled Technology to Chinese and Iranian Nationals – In April 2004, BIS assessed New Focus, Inc., an administrative penalty of $200,000 as part of an agreement with New Focus to settle charges related to unlicensed deemed exports to foreign nationals and other exports. In particular, BIS alleged that New Focus failed to obtain the export licenses required for transferring technology to two Iranian nationals and one Chinese national who, in the course of their employment in the U.S., were exposed to national security controlled manufacturing technology. BIS also alleged that New Focus failed to obtain the required export licenses for shipments of national security controlled amplifiers to the Czech Republic, Singapore, and Chile.

Der Spiegel reports that one out of five German companies has ceased or is planning to cease production in China due to rising costs.

"The big story here is that globalization is for real -- and China is no longer what it was," says Ronald Haddock, a vice-president at consultant Booz Allen Hamilton...

Corporate fright at seemingly unstoppable upwardly moving human resources cost, the rapid turnover of highly trained workers, the insufficiency of energy supplies coupled with fast rising demand, the slight appreciation of the RMB and a revulsion by many consumers in the West at the prospect of seeing their local shops stocked entirely by Chinese -- all contribute to the "China no longer is what it was" phenomenon. Elsewhere on this blog, I have suggested as much, viz., a decrease in the increase of the rate of at which Chinese goods find their shores in the US. Even so, read this:

Chinese companies, too, are increasingly outsourcing production abroad, Eddy Henning, the head of corporate banking at Deutsche Bank in Beijing, told the newspaper. "Someone who just wants to produce T-shirts is more likely to go to Vietnam or Africa," he said.

As energy prices make container transport unprofitably expensive for heavy products, some furniture manufacturers in North and South Carolina in the United States have brought back production from China. But has the tide turned back to the countries that have lost their manufacturing? Not likely:

In only four years, from 2002 to 2006, the value of furniture production in China has nearly tripled in value, from just under $20 billion to just under $60 billion. As production has increased, China's furniture exports have experienced a similar boom. From 1997 to 2006, the value of furniture imported to the US from China has increased more than nine-fold, to hit $14.4 billion in 2006. The percentage of US furniture imports from China rose from 32% in 2001 to 50% in 2005. Due to a weaker currency and state regulations, Chinese manufacturers can produce finished products at much lower costs. In fact, the average wage of a Chinese furniture production worker is only four percent of the average wage of a worker in the U.S. This fact combined with China's modern, high-tech plants make them a huge threat to the stability of the industry in North Carolina.

One wonders whether the German companies profiled by Der Spiegel are smaller companies which should never have been in China in the first place. The Chinese export engine continues to hum. Visit the ruins of the American manufacturing industries throughout the US and one will see what it really means to pull production.

Hmmm... Now everyone is jumping on the China downturn bandwagon.

Textile exports fell 4.2 percent in June from the same month last year, a serious blow to an industry that employs millions of people. Overall export growth in June was 18.2 percent, down from May's 28 percent rate.

Note the change in overall export growth means that there has been a decrease in the rate of increase, but that exports continue to grow.

China's international reach for precious commodities extends as far as Cuba, lately earning the Minxia Non-Ferrous Metals Company a substantial Office of Foreign Assets Control (”OFAC”) fine. (Not this far more delightful Minxia.)

How is it that a Chinese metals dealer has been ordered to pay $1.5 million to the US Treasury?

Our story begins with a fairy tale island, white beaches nestled in lapping warm waves of a clear blue sea. [Ok, so my descriptive muse has overdone it a little...] Playboys and celebrities once danced to a Cuban Rhythm. They still drive 1959 Bel-Airs there, because that's the last year American autos could be imported. The American embargo of Cuba began in the depths of ancient time and, unbelievably, continues to this day, viz. the Cuban Assets Control Regulation (31 CFR 515), etc.

The excellent ExportLawBlog takes up the story:

Minxia Non-Ferrous Metals is a subsidiary of China Antimony Chemicals Co., Ltd., which, in turn, is a subsidiary of China Minmetals Non-Ferrous Metals Co., Ltd., which is, in turn, a subsidiary of the giant Chinese metal conglomerate China Minmetals Corporation. This climb up the corporate ladder may reveal what had OFAC in a snit about Minxia’s trades — namely, the $600 million joint venture between China Minmetals Corporation and Cuba to exploit Cuba’s large nickel supplies. China is one of the largest consumers of nickel which is a key component of stainless steel, and nickel is Cuba’s largest export — plenty there to get OFAC in a tizzy. In fact, the Bush administration announced a crackdown on nickel exports in July 2006, claiming that they constitute more than half of Cuba’s foreign income.

Sadly for the Chinese, if this was the cause of the fine, the Chinese interest in the nickel joint venture was recently bought out by Venezuela in what may not have been an arms-length, consensual transaction.

Make sure you click over to the ExportLawBlog page for this item to get the links, generously provided by its editor.

[Editor's note: Doug Jacobson has graciously provided the text of today's post. I recommend readers visit his International Trade Law News blog, well-written, informative and worth your time. Doug Jacobson is a partner in the Washington, DC office of the law firm of Strasburger & Price (www.strasburger.com) and serves as chairperson of the firm’s international trade compliance practice. Doug has extensive experience representing companies in a wide range of international trade regulatory and enforcement matters, including dual-use and defense-related export controls, trade sanctions, customs, Foreign Corrupt Practices Act and and antiboycott issues. Doug is also the founder and editor of the International Trade Law News blog (www.tradelawnews.com).

The Air Force did not like the idea of a Chinese national working on top-secret unmanned drone technology. The Department of Justice prosecuted the research student's professor, who had assigned him his work. The professor was convicted this month. What next? Our guest author today takes up the story from there.]

Attorneys for Convicted Professor File Motions for Judgment of Acquittal and New Trial

The attorneys for former University of Tennessee Professor J. Reece Roth, who was recently convicted of violating the Arms Export Control Act (AECA) and wire fraud, have filed motions for a judgment of acquittal and a new trial under Rules 29 and 33 of the Federal Rules of Criminal Procedure. Such motions are routinely filed by defendants who have been convicted in order to set up the legal issues for appeal, but are rarely granted.

Summary of Arguments for Judgment of Acquittal

Roth's Motion for Judgment of Acquittal is based on two grounds. First, defense counsel claims that the data generated by the contracts that Roth and his graduate students were working on was neither a “defense article” or “technical data” relating to a “defense article” as those terms are defined in Category VIII of the United States Munitions List (USML). Second, defense counsel contends that the evidence presented in this case was not sufficient to convict Roth for willfully violating the AECA.

The crux of the defense argument is that the certifications made by the Directorate of Defense Trade Controls (DDTC) regarding the classification of the data and other items that Roth was working on and exported to China were incorrect. For example, the Memorandum of Law in Support of the Motion for Judgment of Acquittal notes that the DDTC staff member that made the certifications initially determined that "none of the items which were subject to the Indictment were included on the USML and thus were not defense articles or technical data relating thereto." Specifically, counsel stated that the defense articles and technical data at issue in this case were not "directly related to an aircraft specifically designed, modified, or equipped for military purposes," the test for determining whether an item is subject to the jurisdiction of the ITAR or not.

Defense counsel noted that it "is fair to say there was less than unanimity in the proof regarding the particular defense article that the data and [defense article] fell within, although the jury was charged and returned a verdict premised solely on Category VIII."

In addition, Roth's counsel contends that the provision in the AECA that precludes judicial review of the "designation of items as defense articles or services" (22 USC 2278) does not exempt certifications from the State Department that particular articles or technical data are within USML Category VIII. In addition to discussing a few cases where the courts appeared to exercise judicial review of State Department certifications, counsel also noted that a "construction of section 2778(h) that would preclude judicial review of the adequacy of the evidence that an item constitutes a defense article would violate the Constitutional due process requirement that criminal statutes provide 'fair warning.'"

Finally, Roth's attorneys stated that the evidence presented in this case was insufficient to establish that Professor Roth acted willfully and with specific intent, the requirement for a conviction under the AECA and wire fraud statutes. For example, it was noted that in addition to there being considerable uncertainty as to whether the defense articles and technical data were defense articles or not, Roth's "efforts to comply with his inaccurate understanding of this complex regulatory scheme demonstrate a lack of understanding of the law that persisted throughout the time period in question."

Summary of Arguments for New Trial

In arguing for a new trial, Roth's counsel claimed that a new trial should be granted because the trial judge did not include in the jury instructions a proposed instruction on ignorance of the law and the file to include such an instruction "resulted in prejudice to the Defendant." The proposed jury instruction read as follows:

In order for the government to show that Defendant violated the Arms Export Control Act, it must prove beyond a reasonable doubt that Defendant knowingly and willfully violated the Arms Export Control Act. Defendant acted knowingly and willfully if he knew he was unlawfully exporting technical data on the United States Munitions List. An innocent or negligent mistake by the Defendant is insufficient to support a finding of a knowing and willful export. So if Defendant was ignorant of the requirements of the Arms Export Control Act or was aware of the requirements of the Act but believed that he was complying with those requirements, he did not act knowingly or willfully, and you must find him not guilty.

Citing several cases as precedent, defense counsel argued that because ignorance of the law is a defense to the AECA, the issue should have been put before the jury and failure to do so is grounds for a new trial.

Needless to say, the U.S. Government will present a different version of the law in their responses to Roth's motions. Assuming that these motions are not granted and the convictions are appealed by Professor Roth, the appellate decisions could lead to important legal precedent and clarification on these issues for companies and academic institutions subject to export controls.

Author's Note: Thanks to a loyal reader for providing copies of the motions filed by Roth's counsel.

In the past six months, production in China has, for some foreign manufacturers, become too expensive. At present, I don't hear this as any more than a minor rumbling, but it could be, possibly, a precursor to a trend.

A drop in the dollar, rising transportation and labor costs, and the added difficulties inherent in overseas production have convinced some to pull production out of China and bring it back home. Remember our post on companies shifting production capacity back home to Germany from China?

Read this story on an Alabama sleeping bag manufacturer which has reduced production at its joint venture in Shanghai and now produces more of its products in the US than anywhere else.

To be fair, production has been shifted to the US only on this one product, but note the skeptical attitude towards the value of production in China:

While sleeping bags are three-fourths of its business, Exxel also makes tents and ski vests that are still cheaper to produce in China. Even so, ``every product we make is up for study now,'' {founder and CEO Kazazian} said.

In other words, something has changed.

Bloomberg reports that the credit freeze is expected to reduce the number of international shipments banks commonly guarantee:

``Letters of credit and the credit lines for trade currently are frozen,'' Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. ``Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay.''

Companies completely dependent upon product purchased overseas by means of letters of credit could be badly affected if L/Cs will not issue. Very few will purchase product from China T/T and who will ship D/P? Primarily self financed manufactured goods (not many of those, one expects) and domestic manufacturers may be somewhat better off.

One would expect effects to be seen at American and EU factories dependent upon foreign parts and retail stores within a matter of weeks. What possible effects? fewer imported products? increased difficulty of obtaining product? Higher prices, if demand remained steady? Production ramped up in the US and scaled down in China?

Statistics compiled by the Chinese state are unverifiable and unreliable, but Western company representatives seem to agree that the bloom is still there, but wilting somewhat. Indeed, the Chinese economy has slowed drastically, even before the American melt-down. Expect more to come as American and EU retail spending plummets over the course of the next year.

You read intimations that trade was slowing here (and elsewhere on this blog) long before you could read it there.

As we've noted in the past, sporadic reports of factory closings in China seem to be tied to a downturn in orders from Western nations, as summed up in this USA Today article.

More than half of all China's toy exporters — 3,631 firms — shut their doors the first half of the year, the official Xinhua news agency reported. "Many toy factories have gone bankrupt this year," says Luo Yunzhang, founder of toy exporter Guangzhou Sixiren Toy, which makes playground equipment for Ohio-based Little Tikes, among other products.

"We saw exports start to dip in May, when the government began restricting businessmen's visits ahead of the (August) Olympic Games. … Now the global crisis is causing problems. When people are in difficulties, they spend less on things like toys," Luo says. Luo predicts that Sixiren's export revenue will drop by half this year, to $500,000.

China's textile industry is also enduring a deep slump. Textile exports have been tumbling since March. More than 10,000 small textile manufacturers went out of business the first half of this year alone, the government says. "The global crisis is seriously affecting the local textile industry," says Yu Xin of the China Chemical Fibers and Textile Consultancy in Hangzhou.

Other reports of factory closings may be found here and here [Many thanks to Sean Hocking in Hong Kong for these links.] I haven't even begun to search Chinese language websites for reports of factory closings.

The popular opinion noted at Asiabizblog several months ago -- that the growth slowdown began well before the global financial meltdown -- has been borne out by Chinese government statistics.

Those statistics, invariably unreliable for reasons we have discussed often before, posit a decrease in the rate of GDP growth in the most recent quarter, compared with the same quarter in 2007. Nevertheless, 9% growth, as claimed by China, remains extraordinary. But is it accurate? Is it even close? (Economists posit that 8% growth is required simply to maintain a satisfactory level of employment growth.) Is the Chinese economy still growing by leaps and bounds, or is it qualitatively as bad as the Washington Post reports, also relying upon government statistics?

The official Xinhua News Agency reported this week that 3,631 toy exporters _ 52.7 percent of the industry's enterprises _ went out of business in 2008.

Perhaps we will know when we see more news reports of massive Chinese companies suddenly filing for bankruptcy, like this.

One of my fav blogs suggests that the Chinese Academy of Sciences (中国科学院) was the prime mover in the introduction of melamine into the Chinese food production industries. The Academy has issued a denial.

Chinese banks, despite State prodding to the contrary, refuse to lend to struggling factories. At least, that is what Bloomberg writes.

``It's wishful thinking for the government to try to talk banks into lending to stimulate the economy,'' says Li Qing, a Shanghai-based analyst at CSC Securities HK Ltd. ``Banks are holding onto their purse not because they are bound by the quota, but because they are expecting mounting defaults and failures.''

Hold on to your 帽子 （hats）!

An update to our earlier post on the contraction of credit used for international trade:

According to Mr. Zoellick, the onset of the [credit] crisis caused a "stunning" decline in global trade. "And we believe that you could find in 2009 that you could have an actual decline in world trade, which would be the first time since 1982," Mr. Zoellick said.

Speaking at a briefing during the Group of 20 meeting of finance ministers and central bankers in Sao Paulo, Mr. Zoellick said that one of the primary drivers in the drop-off was a big gap in trade finance. The World Bank recently moved to expand a trade finance facility to $1.5 billion, up from $1 billion, that could be expanded further to help offset the gap.

Read the rest here.

According to Mr. Zoellick, China is a country that could move forward with a financial stimulus package.

Which, in fact, they have just announced.

Both the Chinese and American governments have asserted through massive market invasions their great goodwill as final protector of the People. We can posit that Chinese decision-makers are intent upon bolstering their own private business interests, which will suffer without a stimulus, and with tamping down root causes of social disorder. It is only natural that the single biggest investor in capital infrastructure in China -- it's government -- would also move massively to expand its involvement.

But who would ever have thought that Americans would act to nationalize banks and invest vast sums of taxpayer money into private non-banking enterprises? Isn't something very wrong here? We in America trod a dangerous path of ever-expanding federal government, a behemoth bureaucracy that blots out the sun while claiming the light as its own. Those who grow it larger, accompanying their aggrandizement with language at once fearful and promising, contribute to the starvation of everyone who does not need a handout from the King to live and thrive.

Below you will find the relevant text of the FDA's import detention order of Chinese-made product, as reported by the AP today. Note the breadth of products potentially affected. Physical inspection is not required under this order for detention. (For some background on melamine, read this FDA paper on melamine contamination in China)

Products affected by this order include:

PRODUCT
Bakery Products/Doughs/Mixes/Icings
Cereal Preparations
Breakfast Food Ready to Eat
Breakfast Food Quick Cook
Snack Foods
Milk/Butter/Dried Milk Products
Cheese/Cheese Products
Ice Cream Products
Filled Milk/imitation Milk Products
Soft Drink, Milk Based (Chocolate Flavored), Noncarbonated
Noncarbonated Soft Drink, N.E.C.
Soft Drink/Waters N.E.C.
Soft Drink, Milk Based (Chocolate Flavored, Etc.) Carbonated
Carbonated Soft Drink, N.E.C.
Beverage Base N/Fruit (Cola Rootbeer Etc)
Beverage Base Non-Fruit Liquid
Soft Candy w/ Nut, seeds, w/out Coconut
Soft Candy w/ Coconut
Soft Candy w/ Fruit
Soft Candy w/ Nuts & Fruits
Soft Candy, w/out Nut/Fruit
Candy Specialties
Candy w/out Chocolate, N.E.C.
Chocolate/Cocoa Products
Custard Pudding mix
Pudding Mix (Not Custard)
Baby Food Products
Iodinated Casein (Cat. I, Type A med. Article)
Iodinated Casein (Combo Cat. I& II, type A, med)
Iodinated Casein (Cat. I med. feed)
Iodinated Casein (Combo Cat. I & II, med. feed)
Dairy Byproducts for Animals
Animal Waste Feed Products
Byproducts for Animals, N.E.C.
Pet Cat Foods
Pet Dog Foods
Pet Fish Foods
Other Pet Foods, N.E.C.
Laboratory Animal Feeds
Pet and Laboratory Animal Foods, N.E.C.

The order (redacted):

IA #99-30, 11/12/2008, IMPORT ALERT #99-30, "DETENTION WITHOUT PHYSICAL
EXAMINATION OF ALL MILK PRODUCTS, MILK DERIVED INGREDIENTS AND FINISHED FOOD PRODUCTS CONTAINING MILK FROM CHINA DUE TO THE PRESENCE OF MELAMINE AND/OR MELAMINE ANALOGS"

PRODUCTS: All milk products
All milk derived ingredients
Finished food products containing milk

PROBLEM: Unsafe Food Additive
Poisonous or Deleterious Substance
Unfit For Food

COUNTRY: China (CN)

MANUFACTURER/
SHIPPER: All

CHARGES: "The article is subject to refusal of admission pursuant to
Section 801(a)(3) in that it appears to bear or contain a
food additive, namely melamine and/or a melamine analog,
that is unsafe within the meaning of section 409
[Adulteration, section 402(a)(2)(C)(i)]"
OASIS charge code: MELAMINE

and/or

"The article is subject to refusal of admission pursuant to
section 801(a)(3) in that it appears to bear or contain a
poisonous or deleterious substance which may render it
injurious to health [Adulteration, section 402(a)(1)]"
OASIS charge code: POISONOUS

and/or

"The article is subject to refusal of admission pursuant to
section 801(a)(3) in that it appears to be unfit for food
[Adulteration, 402(a)(3)]"

REASON FOR
ALERT: In September, 2008, FDA became aware of thousands of infant
illnesses in China due to the consumption of infant formula
reported to contain melamine. Reports indicated over 53,000
illnesses, including almost 13,000 hospitalizations, and at
least four deaths of infants. The illnesses involved the
formation of kidney stones and crystals and related
complications.

The milk used in the infant formula has been implicated as
the source of the melamine contamination. According to
sources, at a bulk fluid milk collection point, water is
added to the bulk fluid milk to increase the apparent volume
of product. Melamine is added to the water/milk mixture to
increase the nitrogen content in order to inflate the
apparent protein content found in the product. Milk is
transported from the collection centers to milk processing
facilities.

The problem of melamine contamination is not limited to
infant formula products. Chinese government sources
indicate contamination of milk components, especially dried
milk powder, which are used in the manufacture of a variety
of finished foods. These contaminated milk components
appear to have been dispersed throughout the Chinese food
supply chain.

FDA analyses have detected melamine and cyanuric acid in a
number of products that contain milk or milk-derived
ingredients, including candy and beverages. In addition,
information received from government sources in a number of
countries indicates a wide range and variety of products
from a variety of manufacturers have been manufactured using
melamine-contaminated milk or milk-derived ingredients,
including: fluid and powdered milk, yogurt, frozen desserts,
biscuits, cakes and cookies, taffy-like soft candy products,
chocolates, and beverages. These products appear to contain
at least one milk-derived ingredient and they are of Chinese
origin. Reports of contamination have come from more than
thirteen countries in Asia, Europe, and Australia, in
addition to the United States. Additional products from
various manufacturers continue to be found to be
contaminated with melamine.

The problem of melamine contamination in Chinese food
products is a recurring one. In 2007, bulk vegetable protein
products imported from China were contaminated with melamine
and melamine analogs, apparently from deliberate
contamination.

We’re opening up a new era, not just new offices...a permanent F.D.A. presence in China.

So claims Mike Leavitt, Secretary of Health and Human Services for the Bush administration. Well, at least there will be a physical presence -- but whether or not this office will be able to inspect any of the factories it wishes remains to be seen. It is unlikely the Chinese government will give the American government the access it wishes. Let us not forget similar programs which have come up against extraordinary stonewalling, e.g. Validated End-User (VEU) inspections under the BIS, requiring on-site inspections in China for certain technology items requiring a license prior to shipment.

The American public barely knows of that program and its frustrations, failures and very limited successes. Imagine the potential publicity of American inspections in Chinese factories where access is unfettered! No, indeed, there will be epic battles between Chinese and American regulators over destination factories. American regulators are sure to be on the short end of the stick. One hopes that the stories of these bureaucratic tangles will find their way to the press -- I will be pleased to post a report of anyone so involved, especially any of the eight inspectors who are supposed to be manning the office. You may remain confidential...

In yesterday's post, we noted the opening of the FDA office in Beijing and the frustration that they are bound to expect.

The struggle has begun.

"China hopes the U.S. side accepts certificates offered by the Chinese quality inspection department on goods to be exported to the United States," Foreign Ministry spokesman Qin Gang was quoted as saying by the state-run Xinhua news agency.

In other words, China will not cooperate with American Food and Drug Administration inspectors resident in China and will only issue certificates attesting to a Chinese government inspection.

This is the opening salvo In what should prove to be a major battle, much of which will be fought in public, a spectator's delight, a regulator's nightmare.

Cliff Burns at ExportLaw Blog recounts the tale of Chinese operatives, who'd set up a front company to buy export-controlled items, ensnared by American operatives who'd set up a front company to catch front companies doing precisely that.

Front companies of foreign intelligence services are most likely a dime a dozen, but it is rare when they are discovered, no less made public and prosecuted publicly. During the mid-1980s, I was working in Osaka for a Japanese electronics company. A friend of a friend (both Chinese resident in Japan) approached me looking to appoint me U.S. representative of his company, the Japanese subsidiary of Sea Gull Co. (Hai Ou 海鷗).

Specifically, I was asked to find and conclude deals with American manufacturers of gluing machinery, which applies glue between the fibers and the base cloth of oversized carpeting. This seemed like a delightful opportunity. I'd visited carpet factories in Tianjin -- while selling electronic components to Chinese factories for another Japanese company in Tokyo, sort of a solo jaunt, shall we say, during which I searched and did not find product worth exporting to the U.S. -- so I knew the machinery was needed.

Through friends, I discovered Sea Gull's connection to Chinese naval intelligence. While I thought it possible that a unit of naval intelligence was indeed looking to go into the carpet business, the mere possibility of my being used as a front swore me off the deal really fast. With friends like these...

On the subject of spies, I recommend two books -- lots of fun reading.

我杀死了张作霖 -- the record of a Japanese spy who in September of 1931 helped plan the murder of warlord, Chang Tso-lin (available in digital form in Chinese; originally published in Japanese)

Vespa, Amleto, Secret Agent for Japan. Wikipedia entry here.

I do believe last summer that Asiabizblog predicted a steep drop in trade coming shortly. Well, here it is.

Beijing announced yesterday that its November exports dropped 2.2 percent after a 19.2 percent surge in October. Imports took an even steeper drop, falling 17.9 percent. Analysts now say growth there is slowing to its lowest level since 1990, curbing Chinese demand.

Surprising that few Americans are calling for protectionist policies to curb imports -- especially given the incoming Democratic administration, which wishes to be perceived as the party of the American worker (whatever that may now mean).

"Global trade is reversing course because it is a function of industrial production, and we're seeing the biggest coordinated slump in industrial production since the early 1930s," said Philip Suttle, director of Global Macro Analysis at the Institute of International Finance. "In the old days, you'd get weakness in one part of the world, and it would take three to six months to impact another part. But now, everybody is so interconnected through trade that the impact is happening instantaneously."

The executive bailout has been implemented; the worker's bailout to follow? Will we see an increased call for protection, from foreign imports as American unemployment surges? Looks like this may get bloody, soon..

As of today, direct ocean cargo shipments between Taiwan and China are permitted,. 經濟日報 (Taiwan's daily business newspaper):

海運直航協議正式生效，兩岸昨（12）日同時公布「海運直航許可管理辦法」、「台灣海峽兩岸海上直航實施事項」。交通部航政司表示，辦法明（14）日生效並發出許可，15日展開直航。台灣公司、船舶證照為兩年期，但大陸為總量管制，船舶證為一年效期。

17 carriers have applied for permits -- 12 of them mainland Chinese, five of them Taiwanese. 18 routes applied for originate in China; eight in Taiwan.

Direct flights, the impact of which I briefly discussed in June and which now occur daily, have come under criticism for ticket pricing.

The Validated End User (VEU) program, about which we wrote in June, will soon become but a bad memory, according the Washington Times.

The program allowed the companies to obtain dual-use technologies without the formal security checks required for an export license. Congressional investigators recently raised concerns that the program lacked safeguards, and that the Beijing government is refusing to allow U.S. officials to conduct full inspections at Chinese facilities to see whether companies are diverting U.S. high technology to the military.

And good riddance! Who, except those with high hopes and little experience with China, would believe that the Chinese government would agree to "full inspections at Chinese facilities?" [I think I'll produce a TV program entitled, "Whose Sovereignty is it Anyway?"]

The other shoe may drop soon. Let us not forget that the FDA recently opened an office in Shanghai, about which we wrote last month, specifically with the expectation that inspections will be conducted on Chinese facilities.

[Thanks to Carol Kalinoski, Esq. for the tip-off.)

The animus towards China -- specifically imported products -- has never, in my lifetime, been as acute nor as widespread than it is today.

This article and the popular comments below it show the depth of contrary feeling. Chinese products are blamed for being injurious to human health, cheaply made, made with slave labor, anti-American, etc., requiring strict import regulation or even the outright ban of Chinese imports.

Few American internetizens appear to have much to say that's postive about China. One can't foresee anything but greater kickback from Americans. Importers will need to diversity their sources, if they haven't already.

One in five of an estimated 700,000 South Koreans living in China at the start of 2007 have left [China], according to the [South Korean] consulate in Beijing.

A brief article on its causes, worth reading.

Not only are Korean expats leaving China, as we posted earlier this month, but migrant Indian workers are no longer willing to call Dubai home:

It's the great escape by Indians who've hit the dead-end in Dubai. Local police have found at least 3,000 automobiles -- sedans, SUVs, regulars -- abandoned outside Dubai International Airport in the last four months. Police say most of the vehicles had keys in the ignition, a clear sign they were left behind by owners in a hurry to take flight.

[Many thanks to Miss Johnson From London for the onpass.]

India's Directorate of Foreign Trade announced last week a temporary ban of six months on Chinese toy imports.

The Toys Manufacturers Association of India said it was pleasantly surprised by the decision of the Commerce Ministry to prohibit shipments of cheap toys from China.

Love that: "pleasantly surprised." Of course, it's all because of safety and quality concerns (heavily spiced with patriotic protectionist sentiment of the industry).

"You see Chinese toys everywhere. The good, upper-end toys are made in India, but the cheap toys in the street and small shops were being dominated by them. They are bringing in toys without safety norms," he said.

This may amount only to another inning in the game of international trade hardball these two nations have played over the past 15 years. Or it may be a harbinger of protectionist policies -- WTO be damned -- that may spread throughout the Third World. We now hear popular echoes -- ones heard and ignored for years -- redoubled in the U.S.

More than half of all Chinese toy exporters are reported to have closed their doors in 2008. Chinese toy exporters who've recently shipped product to China now find their inventory aboard ship unable to offload in Indian ports and probably unsaleable.

“虽然印度不是我们出口的主要国家,但影响肯定存在,特别是对企业士气的消极影响。”中国玩具协会副会长郭卓才表示...“

[Editor's Translation: "Although India is not one of our primary export nations, the effect will definitely be felt, especially a negative effect upon the morale of our enterprises," said Guo Zhuo-cai, the Vice-Chair of the China Toy Association...]

The smaller Chinese factories with overflow and lower quality goods are more likely to suffer from the Indian ban. But protectionist sentiment may have taken root in the Third World. Watch it grow throughout those nations -- indeed, we may see a Chinese response in kind, not simply the bureaucratic nonsense of a WTO dispute China has threatened to lodge.

Reuters:

Exports in February slid 25.7 percent from a year earlier, dwarfing forecasts of a 5.0 percent fall, while imports dropped 24.1 percent, close to projections of a 25.0 percent decline.

Bloomberg's story fleshes it out a bit more. Read also Andrew Batson's article for context.

As we've written many times in the past -- echoing the research of scholars of the Chinese economy -- official Chinese statistics must be taken with a grain (make that "pillar?") of salt. Distortions due to collection methodology, the inaccuracy of reporting, the pressure of political demands, all contribute to inaccuracy.

But we all know that the manufacturing sector in China has been badly hit -- we saw the signs and posted our early presentiments back in the summer of 2008. As unreliable as the number is. I find this officially announced statistic so shocking that I'm compelled to compare it to the extraordinary upset occasioned by an event in modern Taiwanese economic history: when the New Taiwan Dollar peg to the US dollar was removed in the late 1980s.

In the space of a few months, that ratio moved from 40:1 to 25:1, shutting the doors of many businesses on the island and forcing factory owners to look for manufacturing sources elsewhere in Asia. It was -- and those who were there at the time will remember it -- a disaster of great proportions. Prices and unemployment soared, and Taiwanese, already following the trail of general diaspora throughout the world, hastened their steps away.

While a handful of Westerners have told me they do not see much change in China -- they see people continuing to purchase and go about their lives as naturally as they did before the global meltdown -- these gentlemen reside in the major urban centers and are only vaguely aware of the boiling undercurrent in rural areas, especially in the middle and southern parts of the country.

One does not see China creating within a generation -- not to mention a brief economic cycle -- a domestic market capable of absorbing sufficient volume of manufactured product to make up for the decline in exports. Exports are the engine which drives China's growth, upon which great masses of uneducated and poorly skilled people rely for a basic living. The Chinese stimulus package may provide limited employment for some building roads and fixing the rails, but never the kind of capacity that manufacturing has provided. An empty stomach and idle hands are ruinous to individual, family and country. Now that they have had a taste of a better life, Chinese will not willingly return to the life of strict social constraint and enforced poverty of the pre-1978 years.

The export statistic is, thus, a crude indicator of the social turbulence to follow.

A former divisional merchandising manager in charge of Home Depot's hard flooring products was sentenced to 63 months in prison for tax evasion and wire fraud, and ordered to pay $1.1 million in restitution to Home Depot. You can read the brief blurb about it here.

He is one of three former executives who have pleaded guilty to receiving millions of dollars in kickbacks from foreign suppliers in return for placing their products in Home Depot stores across the nation.

The article does not detail the scheme, but instead focuses on a lavish lifestyle the extra cash in pocket enabled the manager to lead. For the uninitiated, let me tell you how it happens.

A buyer in a national or even regional chain store controls millions of dollars worth of purchasing power. He is responsible for choosing suppliers, wherever they may be, and ensuring goods in his department are competitively priced, of sufficient quality and delivered on time. The buyer is paid a static wage which appears puny in comparison to the amount of purchasing power he wields through his organization.

Buyers on the take generally expect 1% of the total value of order to come back to them. A buyer who controls $25 million of annual spending can rack up $250,000 a year, and many become quite wealthy over time. If he doesn't get caught...

The convicted individual lived life a little too obviously large:

...more than $1 million in cash, luxury cars and real estate...including $269,000 to a California real estate development firm that sold Robinson two Tennessee properties, $135,000 in deposits to Robinson's investment accounts, and funds that paid off Robinson's loans on a 2004 Cadillac Escalade and a new Infiniti sports utility vehicle.

Who pays the 1%? Not the seller, because he adds that 1% to the value of the order. The buyer's company ends up paying. Business acquaintances have told me several buyers demanded currency, so that there be no trace. (One factory owner I knew gave his buyer a birthday card loaded with cash while singing, "Happy Birthday!") The payoff is expected before the order is placed. Simply because the payoff is made does not allow the seller to provide shoddy goods. One is given no quarter. There is such competition to get product into an established distribution channel that a deadbeat supplier will be dumped and a paying, hungry, effective supplier found quickly enough.

Management suspects buyers of being crooked. (Years ago, one buyer I knew told me "They suspect me even if I am pure, so why don't I just go ahead and do it?" I thought it pointless to suggest the benefits of uprightness to him) Some companies, especially those with experience, shift buyers from department to department every few years and engage investigative services in an attempt to ferret out dishonesty.

Executives with any intellect know what's going on. I am reminded of the CEO who said to me over drinks, "Bob X in Purchasing just bought a new house in that subdivision. Son of a b--- must be on the take. Didn't he just buy a Caddy, too?"

Purchase from overseas manufacturers enables greater camouflage, such as overseas bank accounts in false names, the establishment of trading companies which masquerade as the producer (sometimes established with buyer capital) and gifts bestowed in overseas venues (gold coins, women, gambling forays, etc.).

The "savvy" buyer who is on the take does not disclose his relationship to any but the one decision-maker in the organization from whom he is taking his payoff, refuses to discuss payoffs in close quarters even with that executive (preferring a space where he cannot easily be recorded) and makes sure his department is extremely profitable.

It is surprising how few are caught and publicly made an example of. Partly, management may prefer a simple termination rather than arrest, the publicity and the negative implications for their control over staff. But even if management discovers the buyer's fraud, it may choose to keep him on, considering the 1% simply as another expense. Yes, I have known this situation to have actually occurred, and can only assume I gained a glimpse of a more general practice.

Quotes like those below make for great reading. The proclamations of friendship between China and African nations, common in the 1960s and 70s, based upon on a common penury and "revolutionary ideals," have long since vanished, replaced by mountains of cash.

China's cynical new version of imperialism in Africa is a wicked enterprise.

There are persistent rumours, which cropped up in almost every conversation I had in Zambia, that many of the imported Chinese workforce are convicted criminals whom China wants to offload in Africa. I was unable to confirm this but, given China's enormous gulag and the harshness of life for many migrant workers, it is certainly not impossible.

The limitation of the article -- not a weakness -- is the insistence that the writer's personal experience is repeated throughout Chinese business communities in Zambia and Africa. Nonetheless, I found many of the writer's assertions to be plausible. Confirmation of this story is essential. First-hand accounts would be extremely welcome, especially from Chinese who've lived and worked in these colonies. Readers aware of other such articles are more than welcome to pass those stories on to me.

If any of this is true, the writer is himself quite an interesting individual.

It appears that cross-border trade between Hong Kong and mainland China may be settled in yuan as early as next month. [Thanks to Frank Caruso at the Chinatex blog.]

Note the limitations:

The State Council said early in April that it would allow traders in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan to settle their cross-border business in yuan.

In December, the council said Hong Kong and Macau would be permitted to use yuan for the settlement of trade with designated partners in Guangdong and the Yangtze River Delta under a pilot scheme. Mr Zhou said how many mainland enterprises participated in the scheme would depend on the governments of the two delta regions but “there will be at least a few hundred”.

Mr Yam said all Hong Kong exporters and importers could settle trade with their designated mainland counterparts, but the scheme could only be implemented after the PBOC issued administrative guidelines.

One has been reading pronouncements about convertibility since the early 1980s. This writer is still unsure that full convertibility will ever take place, if only because -- without consideration of economic or financial reasons -- convertibility takes substantial control out of the hands of those who have enjoyed it for so many years. This project, at least described by the article, appears to be a beta test.

Given our prior posting on dangerous imports and reader reaction, this may be of interest to readers.

The Hanoi Market Control Sub-agency has affirmed that China-made clothes contain formaldehyde, a substance which is harmful to human skin, with the content ratio of less than 2 percent. No official conclusion has been released because no regulation covers this issue.

[Thanks to Trade Lawyer twitter for the onpass.]

Sony seems to have shipped PCs with new filtering software, with interesting instructions to consumers.

Further to this September, 2008 post, a Tennessee University researcher has been sentenced to four years in prison for violation of the Export Control Act. Doug Jacobson writes about it on his excellent trade law blog, here. The court did not assess any monetary penalties.

The first person to send me a bottle (can't be empty) of this brew wins this blog's Annual Champion Reader Award!

Following our 88 Queensway article comes this:

At several Chinese-run projects in Windhoek, workers were not wearing safety helmets. The Namibian workers said they must pay for their own safety equipment — for example, $3.65 for a helmet, $1.20 for gloves and $9.75 for overalls. “It’s not a nice place,” said another worker.

Recurring problems among Chinese employers in Africa included low wages, unpaid overtime and a lack of safety equipment such as helmets and gloves. At a construction company in Malawi, workers had to mix cement with their bare hands, the report states. In Ghana, construction workers worked nine to 12 hours a day, seven days a week, according to the report...

Many thanks to Miss Johnson from London for the link.

Counterfeit sellers were asking for up to $400 for the fake units on the street, to take a margin of nearly $345 on the $55 wholesale price quoted by illegal importers.

One seller said he sourced his supply from an employee within Customs. The seller, who refused to supply a name, claimed that the employee used his position to circumvent Customs' usual vetting procedures to import the contraband in shipments of 5000 and 10,000 each.

He said his supplier acquired the phones in China at a cost of $18.50 per unit.

Here.

NY Times:

A World Trade Organization panel ruled on Wednesday that China had violated its international free trade rules by limiting imports of books and movies,

WTO Findings and Conclusions here. (Beware: although written in what appears to be English, it is generally impervious to understanding by those with graduate school education. You may need to hire a specialist.)

UPDATE: China to appeal.

As his employer plans to roll out 15 stores in China,

George Hrdina, president of Ralph Lauren’s Asian business, said in an interview in Hong Kong. “We do more Ralph Lauren business on the island of Manhattan, New York than we do in Hong Kong and China.”

What an extraordinary public statement! Generally, execs are loathe to give any indication of sales volume in specific locations. One wonders if the company breaks out numbers by geography in its financial statements? As luxury sales slow in the West, the paradise of China passes through the minds of sales execs who must raise their numbers or, at least, stanch the bleeding.

Luxury brand Gucci plans to open two to four more stores this year in China, after opening its 28th outlet yesterday. Gucci chief executive Patrizio Di Marco is undeterred by uncertainty in the global economy as China is set to lead future luxury consumption.

Counterfeit Lauren has been a favorite of consumers (both Chinese and foreign) in Greater China for 25 years. How, other than by purchase in a Lauren store, can a luxury buyer ensure that what he's purchased is the real thing? And what, frankly, is the difference between what passes, often, as superb fake and the genuine?

In 1988, a garment maker in Taiwan showed me both and I could not tell the difference. Granted, I was not in the business and did not have the eye or the touch that experience brings. The maker told me that the genuine shirt was priced at $14 ex factory; the fake at $7. Some of the counterfeits brought into the U.S. today are of high quality and priced to sell fast. The problem is bigger than ever before. The potential counterfeit market is now China, not merely Taiwan, Hong Kong, Korea and the foreign tourists who visited those tiny states.

Perhaps there is, other than price, little difference in the well-made counterfeit product. Some name brand contract factories in China -- I will not specify what brand or product -- produce extra for their own account for sale to the domestic market, even in the department stores. China does not present, if I may suggest, a marketing challenge for Lauren -- everyone knows Polo by now -- but a management challenge, specifically of its intellectual property. Daunting, in the face of weak IP enforcement and the ubiquity of excellent forgeries. The company must be well aware of this. Their strategy is worth watching as it plays out over the next few years.

On September 29, 2009, the U.S.-China High Technology Working Group, sponsored by NAM, MOFCOM and the Dept of Commerce, will hold a "Public-Private Sector Dialogue," described as follows:

The U.S.-China High Technology Working Group (HTWG) was established to facilitate high-technology exports to civilian end-users in China, in accordance with U.S. export control requirements. In furtherance of this effort, the Department of Commerceʼs Bureau of Industry and Security (BIS) and the Peopleʼs Republic of Chinaʼs Ministry of Commerce (MOFCOM) are pleased to announce that the 2009 HTWG meetings will include a public-private dialogue on Tuesday, September 29, 2009.

In this public-private HTWG event, participants will focus on identifying barriers to U.S.-China high technology trade, particularly in two of the largest categories of bilateral advanced technology trade: civil aviation-aerospace and information technology. This all-day event will provide ample opportunity for two-way dialogue. The principal goals of this dialogue are to offer an opportunity for U.S. and Chinese companies to interact with each other and with government officials directly on these issues, and to learn from individual U.S. and Chinese companies about the ways in which the two governments can further support high technology trade for civilian end-uses in China.

A number of interesting speakers. In light of the tire tariff decision, this meeting might prove worthwhile if only to witness the sparks that might be generated.

I attended something similar to this in the mid-1980s when China was first eagerly developing its approach to technology transfer. And the US was eagerly divesting itself of its design and manufacturing capabilities in a vast swath of technology products. How the world has changed...

Note the last sentence of the indented paragraphs: "...for civilian end-uses in China." Ah, yes, creating the consumer economy of China. When will they wake up? Better asked, will they? What of American technology manufacturing?

Register here.

More pie-in-the-sky dreams about a consumer economy in China. Note this paragraph, buried in the article:

It remains unclear whether the Chinese have abandoned their traditional caution [to spend]. "Over the past decade or so, the growth of China's household consumption has been outpaced by fixed investment growth and exports, and consumption as a percentage of GDP is low and has been on the decline," said Morgan Stanley analysts Qing Wang and Steven Zhang in a report last month.

The topic is a long-standing Western fantasy about which I have written often over the past 10 years on this blog and will not spend any more time on.

Getting China to spend rather than save turns out to be harder than it sounds.

I have been tooting this horn for a decade, with few other Western watchers in agreement, until this rather tepid, but ultimately concurring, WSJ piece. China will not become the spendthrift the US wishes it to become. Of course, Chinese have known what Westerners, especially Americans, haven't dared to assume.

China State Construction Engineering Corp, the largest contractor in China, has bagged a subway ventilation project worth about $100 million in New York's Manhattan area, marking the construction giant's third order in the United States' infrastructure space this year.

SUBWAY VENTILATION... Given extraordinary precautions regarding biological agents, etc., and the exposure of 5 million riders daily, isn't this an extraordinary decision?

Click this link for the QueensCrap blog plus comments.

WSJ confirms, quoting DOW Jones in Shanghai:

SHANGHAI (Dow Jones)--China State Construction Engineering Corp. (601668.SH) recently signed contracts totaling $94.35 million to build subway ventilation facilities in Manhattan, a person familiar with the deal told Dow Jones Newswires on Monday. The contract was given to China Construction American Co., a unit of the firm, said the person, who declined to be named.

Anyone with specific information on the project is more than welcome to write a post on it for Asiabizblog.

[H/T to Miss Johnson from London.]