China: Increase In Exports To China

The export market in China has rapidly expanded over the last decade. During the last two years Connecticut has exported nearly $2 billion in services and goods to China, making it the state's fifth largest export market.

In light of the increasing role China is playing in Connecticut's economy, the Business Journal spoke with Paul Edelberg, a partner at Fox Rothschild L.L.P., based in Stamford. Edelberg is president of the Connecticut China Council and co-editor of the China Law Reporter for the American Bar Association.

Why is China a good place to be exporting to right now?

"First, Chinese companies have become larger, global and more sophisticated and are seeking more advanced products and technology internationally. Second, the standard of living and the corporate and personal wealth of a significant segment of Chinese society has increased tremendously. ... Third, the Chinese central government would like to become less dependent on exports and has established the objective of increasing consumer demand within China to create a more self-sufficient domestic economy."

Are there concerns a company should consider when deciding to export to China?

"It is helpful to have exporting experience before exporting to a complex and culturally different market like China. China is culturally different and you must learn how to sell into the Chinese culture. Also, business and legal practices differ from ours. Moreover, you should be aware of a certain level of protectionism by the Chinese government, particularly for the service industry and for government procurement.

"Finally, you must comply with U.S. export control laws, which might prohibit or restrict sales of your product to China or may require that you first obtain a license from the U.S. Department of Commerce or the U.S. Department of Defense."

What are some of the primary risks to be aware of?

"Four risks readily come to mind. You need to protect your intellectual property, both legally and practically. Also, U.S. companies must comply with the U.S. Foreign Corrupt Practices Act, which prohibits bribing foreign government officials. Not only does China have its fare share of corruption, many of its companies are state-owned enterprises, meaning that their officers are government officials.

"The FCPA also has record-keeping requirements for public companies, although we recommend that all companies implement record-keeping systems and a robust compliance process, including a compliance manual and a designated compliance team.

"Another risk is payment and currency risk. If you are selling directly or through distributors and sales agents, you must have a solid sales contract, through which you can minimize these risks, define shipment terms and allocate other risks. You also need to be aware that the Chinese currency, the renminbi, is not freely convertible. This is a less of a problem for transmittal of sales payments, but is more of an issue for foreign companies setting up operations in China.

"Finally, and extremely important, in all of your contracts and dealings, you must address governing law and dispute resolution provisions. You need to specify what law will govern, the forum in which your dispute will be resolved, the process and whether arbitration will be mandated, rather than litigation. If you haven't addressed these contractual terms, you will not have the tools to enforce your rights and can risk your entire investment."

What level of government regulation should a U.S. company anticipate?

"This is one of the major differences from the U.S. system. In China, forming and conducting business is heavily regulated. A foreign company needs approval from one branch of government to form an entity. The approval will specify the entity's capital requirement, which must be infused within a specified period.

"To infuse additional capital requires an entirely new application that can take months. Capital cannot be easily repatriated. You also are required to obtain a business license from another branch of government and cannot engage in business activities beyond those specified in the license.

"The government is more involved in employment matters than in the U.S., with requirements for registration of workers. There are union requirements. The list of government oversight functions is extensive. Foreign companies must adjust to the level of government involvement and the delays the processes cause."

What else should businesses know about exporting to China?

"U.S. businesses should be aware of the value-added tax (VAT) in China. This is the largest source of revenue for the Chinese government. For most products, it is a 17 percent tax. Not only should companies be aware of this cost in their pricing, it can be a cash-flow issue. If a U.S. company needs to warehouse product in China for significant periods of time, it may be stuck with paying customs duties and VAT upfront prior to product leaving the dock.

"One solution that can work for some companies is to use a warehouse in a free trade zone. While more expensive than a normal warehouse, the customs duty and VAT are paid only at the time specific product is shipped from the warehouse. By then you have received a down payment on the purchase price of the sold goods, which should cover most or all of these costs."

Previously published by West Chester County Business Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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