On April 23, 2019, Steve Dickinson writes on the Chin Law Blog:
In China’s New Foreign Investment Law and Forced Technology Transfer: Same As it Ever Was and in China Approves New Foreign Investment Law to Level Playing Field for Foreign Companies. MEH. we wrote how we were not at all impressed with China’s new Foreign Investment Law 中华人民共和国外商投资法. Since then, a number of commentators (who near as I can tell cannot read Chinese) have hailed the law as a positive development for foreign companies doing business with China and in China. The impression these commentators are giving is that China’s new Foreign Investment Law (FIL) will raise up foreign companies to become equal to Chinese companies.
This is just not correct. The intent of the new law is actually the opposite and for people like me who have been doing business with China for decades even the idea that it would be otherwise is at least somewhat laughable. The intent and the reality of the FIL is to pull down foreign investors to the status of privately owned Chinese companies. At that level, foreign invested companies will be firmly under CCP control and they will operate at a permanent economic disadvantage to PRC state owned enterprises. In other words, foreign invested companies in China will be crushed by the PRC state in the same way nearly all private Chinese companies are crushed by the state.
Why any commentator views this as a happy fate is difficult for me to understand. One of my China lawyer friends who is even more cynical about China than I (perhaps because he has spent about 40 years of his life in China to my relatively paltry 20 years there) thinks that those who rave about this new law do so knowing full well that it will not lead to positive change, but do so anyway because their livelihoods literally depend on it. I prefer to trace it to their not understanding the law either because they are not lawyers or because they cannot read Chinese.
To understand the impact of the new FIL, some history is required. The core of the new FIL is the concept of “national treatment.” Under this principle, foreign invested companies will be treated the same as other privately owned Chinese companies. This demand for national treatment has not come from foreign investors; it has come from Chinese invested enterprises. So what is going on.
In 1992, the Deng Xiaoping government decided to attract foreign investment to China by offering significant incentives to foreign investors, including the following:
- Exemption from corporate income tax.
- Exemption from VAT and other business taxes.
- Free/cheap land and rent.
- Exemption from social welfare payments for employees.
- Exemption from personal income taxes for foreign employees and executives.
- Freedom from control by the CCP.
- Freedom from worker unions.
These incentives encouraged a flood of foreign investment into China. These incentives did not apply to Chinese locally owned enterprises and at one point China imposed a 35% corporate income tax on Chinese owned businesses, while imposing no income tax on foreign owned businesses. This same sort of distortion applied to all the other foreign business incentives and in the early 2000s, private Chinese companies started complaining about finding it difficult to compete with foreign owned enterprises.
Beginning in 2005, the Chinese government started removing and reducing various foreign company benefits. Foreign owned enterprises were made subject to corporate income tax at the same rate as Chinese owned companies. The full personal income tax and social benefit system was imposed equally on both Chinese employees and foreign employees. Local governments were prohibited from offering land and tax breaks to lure foreign investment. By 2018, there were virtually no incentives left for foreign invested enterprises. The new FIL should be seen as the final nail in the foreign incentive coffin.
Foreign invested companies will now receive no incentives or benefits at all. They will be treated the same as any private Chinese company. They will pay tax at an effective rate of 60%. When they remit after tax profits to their shareholders, they will pay an additional withholding tax of 15%. They will be subject to the 17% VAT rate. They will pay the some of the world’s highest rates for land and office rent. Perhaps most importantly, they will be entirely under the control of the CCP and the Chinese government. No “special status” will shield them. Among other things, this will mean the following:
- When the CCP arrives to set up a party branch in the foreign enterprise, compliance by the foreign enterprise will be required. When the CCP branch insists on reviewing confidential company business records, compliance will be required.
- When the workers in even a five person office state that they will form a union controlled by the local CCP/government, compliance by the foreign company will be required.
- When the local telecom/ISP service states that it will set up the foreign company’s Internet and email server, compliance will be required. When the foreign company is told it can no longer use its international VPN to get access to necessary news and information, compliance will be required.
- When the company is told that all of its company data must be stored on a cloud server located in China accessible to the Chinese government, compliance will be required.
- When the Chinese government/military arrives at the door and tells the foreign company that the PRC Cybersecurity Law mandates that it turn over its source code and other confidential information, compliance will be required.
Demands like those mentioned have been made on WFOEs and Joint Ventures since 2002. However, foreign invested enterprises have for the most part been able to fend them off on the basis that their WFOE/JV status provided them some sort of privilege or exemption. This argument was never a strong one, but it largely worked. Under the new FIL, the special status for WFOES and JVs has been eliminated and with that the last best argument for protection from invasion and control by the PRC government and the CCP has been eliminated as well.
And yet, the new FIL does not really put foreign invested enterprises on an even footing with Chinese invested companies; that too is an illusion. The FIL makes clear that the PRC will continue with its negative list policy. Foreign investors will only be permitted to invest in business sectors not on the negative list and the new negative list will be virtually identical to the current list. This means many of China’s most attractive sectors will remain closed or mostly closed to foreign investment, including Internet and commercial networking (SaaS and e-commerce), banking, securities, insurance, logistics, online payment, media (film, TV, games, magazines, books), automobiles (JV still required), petrochemicals, mining and metals production, real estate and real estate development. The list is long and it will not be getting any shorter.
So it is not even accurate to say that foreign investors will be pulled down to the level of private Chinese companies since so many of the most attractive areas for investment in China will remain “off limits” to foreign investors. So to be accurate, the actual result of China’s new Foreign Investment Law will be to pull foreign investors down to a status even lower than that of private Chinese investors. The new FIL will not level the playing field between foreign and Chinese investors. It will instead consign foreign investors to their own tiny playing field, surfaced with gravel; no grass or even astroturf.
So why any analyst would claim these changes are a good thing for foreign companies doing business in China is hard to understand. We can argue about the motives and the abilities of those who are saying this all we like but I see that as pointless. I have devoted much of my life to helping foreign companies (mostly American and European and a smattering of Australian and Japanese companies) navigate China’s laws and I take no pleasure from saying this, nor does my saying this in any way help me or my law firm economically. But the truth is the truth and the truth is that things have again taken a turn for the worse for foreign companies in China.
I truly welcome anyone to prove otherwise.
https://www.chinalawblog.com/2019/04/new-china-foreign-investment-law-not-good-news.html?fbclid=IwAR2kf8zPGJm5oCk0FgtxNNKX6wwaBp6RQ-rn4S7bIjQrtkqK1sD7D1KlF-Q
Gary Reber Comments:
As the author states, the intent and the reality of Communist China’a Foreign Investment Law (FIL) is to pull down foreign investors to the status of privately owned Chinese companies. At that level, foreign-invested companies will be firmly under the Chinese Communist Party’s (CCP) control and they will operate at a permanent economic disadvantage to the Peoples Republic of China (PRC) State-owned enterprises. In other words, foreign-invested companies in Communist China will be crushed by the PRC State in the same way nearly all private Chinese companies are crushed by the State.
Our nation has made a serious error in incentivizing American corporations to invest in Communist China by co-operating factories there that substitute American supply chain parts and finished product manufacturers for Chinese made supply chain parts and finished products. The impact over the course of decades has been to gut large segments of our manufacturing capabilities, eliminate millions of jobs that Americans held, and make us more dependent on foreign countries, rather than self-dependent.
Self-dependency as related to our manufacturing capabilities should be the aim as far as is possible, not trashing our manufactory prowess by outsourcing supply chains and finished goods and products and off-shoring our productive capabilities by investing in countries with low labor costs and other low costs of production. Instead, we should be investing in the building of a future economy in our homeland that can support general affluence for EVERY citizen.
Economic growth of the past that has been claimed to have resulted from increased trade and investments has only served a small minority of wealthy corporate capital asset owners and driven a widening wedge between rich and poor of both developing and industrialized countries. It’s interesting, how nobody ever talks about the internal distribution of Gross Domestic Product (GDP) growth—the ownership distribution of corporations’ productive capital assets in which the owners of multi-national corporations are being enriched at the expense of ordinary citizens.
Another article, published on November 27, 2018 in the Los Angeles Times, stated that “very few companies can absorb what would amount to a 25 percent tax on goods, and American businesses have warned that such an increase in tariffs would sharply raise costs for consumers and could lead to significant disruption in their operations.” [and profits]
Yes, that would be an impact on those businesses who have become dependent on “Made In China” supply chains and finished goods manufactured by Chinese companies in Communist China or those who have moved their production to company-owned facilities (off-shoring), and who export those goods and products back to the United Sates tariff-free (as in “free trade”). Of course, this applies equally to outsourcing/off-shoring and dependency on other low-wage, non-regulated countries such as Communist Vietnam, etc., whose exported goods and products exported back to the United Sates are presently not subject to tariffs.
The reality is if we continue to outsource and rely on “Made In China” and “Made In ______ for finished goods and as parts supply chains, the United States will fall as a production economy, which will increase significantly the number of Americans in poverty, as good-paying manufacturing jobs will no longer exist, nor opportunities to broaden ownership of those corporations abandoning the United States. This will be the fate of any “developed” economy who is putting reliance on Communist China, etc. to source their supply chains and finished goods.
If we do nothing and continue to accept the “free trade/non-tariff” status quo, Communist China will become far more stronger economically, as a result of our investment in Communist China and consumer adoption of Chinese-made partial or finished goods and products. As a result, Communist China will come to dominate the world as an economic engine of production and supply chains for what’ is left of so-called “manufacturers” at home and in other “developed” countries who are “assemblers” of parts made in Communist China.
Tariffs are essentially taxes paid on foreign-made supply chain and finished goods exported to the United States to even their “cost to build” factor with our homeland “cost to build” factor (fair trade). The reality is Americans are paid more as workers and our environmental and worker safety and conditions regulations add to the cost of production. Thus, our own “Made In The USA” supply chain and finished goods will carry a higher price tag than those supply chain and finished goods made in low-wage, non-regulated countries such as Communist China and Communist Vietnam, etc. in which there are State-owned or partially-owned enterprises with Chinese Communist Party authoritarian control and subsidized enterprises, and in which there is no Social Security, health care or workers’ compensation requirements.
Think about this. The disparity in income levels is EXACTLY why we in the United States can not compete with slave labor! WE MUST stop dealing with, trading with slave labor countries or institute effective tariffs to de-incentivized American corporations producing in slave labor countries. How can an American corporation producing wholly in the United States pay workers $15 to $30 per hour when the American corporations who outsource their supply chain parts and finished products or completely off-shore production, pay $1.10 a day for workers?
At present there are literally thousands of corporations in the United States, plus North America and Europe, that have opted to outsource their supply chains and off-shore part or all of their manufacturing to foreign countries with lower standards of living by either establishing their own facilities or acquiring existing enterprises to establish operations and contract services there, under Chinese Communist Party control. Our presence in Communist China and increasingly in Communist Vietnam and other low-wage, lower-living-standard countries has enabled those countries people to learn and re-learn how to interact and meet the needs of foreign corporations and clients and manage projects and quality control, upgrade language skills, meet quality product global standards and establish global brands of their own.
Another aspect is Communist China requires foreign corporations who want to enter certain industries—such as energy, telecommunications and autos—to form joint ventures with local partners, which means Chinese controlling ownership. Often, this results in the transfer of technology to the Chinese companies. An interesting fact is 90 percent of all privately owned firms in China employ fewer than eight people, with major enterprises State owned or co-owned and controlled by Chinese. According to reports, handing over technology has effectively become a cost of doing business in China—a market too big for many American and other North American and European businesses to ignore. Additionally the Chinese government strongly encourages or requires global businesses to carry out R&D activities inside the country. And many corporations are on-shoring to produce for the growing Chinese market. These corporations are frequently owned with Chinese partners. According to reports, GM is the leading car-maker in China with about 20 percent of sales and selling more vehicle units than in the U.S. GM has 11 assembly plants and four power-train plants in eight Chinese cities. Similarly, foreign companies have been on-shoring in the United States for years.
When Americans act in the role of consumers instead of producers of goods, products and services, they demand lower and lower prices. (And in the role of producers, they demand higher and higher wages.) By doing so as consumers, we encourage American corporations to outsource/off-shore. This results in the requirement for every corporation within the same sector to also outsource/off-shore to stay competitive. This is also true in other developed countries. The result is the jobs associated with producing at home are eliminated and shifted to jobs the corporations create in Communist China, etc. Displacing people, often thousands at a time, from their jobs is disastrous to their financial well being and creates hard times for those displaced and their families, and their communities. And the workers who lose their jobs are often the people who have helped grow the business into what it is, though they are not the owners of the business (which is a serious problem that needs to be addressed).
As the job attrition expands, Americans will have less opportunity to produce and therefore consume. (To consume one must produce and we are doing less and less.) Thus, outsourcing/off-shoring increases unemployment and underemployment, while enriching the owners of the corporations outsourcing/off-shoring as it makes American corporations more competitive in the global marketplace in which other foreign corporations are doing the same thing—outsourcing/off-shoring production to competitively sell their goods and products globally. As a result, Communist China, etc, becomes a stronger economic and political force.
Technology is a huge factor in producing at less cost and technology can be adopted by manufacturers in any country at any stage of their development. Communist China has benefited immensely from learning the technologies of American corporations who have outsourced, and building upon them to advance further, as well as from their youth who are being educated in American universities, or immigrant specialized workers who are living here on H-1B visas. At our stage of development, only through employing the non-human factor—technology and all the non-human things that are means of production—can our corporations produce high-quality, low-priced goods, products and services to be competitive in the global marketplace.
Some argue that past intellectual property (IP) theft and past technology transfer has enabled Communist China to focus and sustained government investment in science and research and develop their own capabilities to innovate and invent with technology advancement.
But in order to have technology there must be “engineers” and other educated knowledgeable people. Communist China is focused on education, particularly engineers trained in computer science and software at universities. In 2006, there were an estimated 290,000 graduates and according to China’s Ministry of Education and National Statistics Bureau that number is expected to increase to 350,000 to 400,000 new engineering graduates available to support its expanding manufactory capabilities. Here in our homeland and Europe, the enterprises outsourcing are struggling to secure educated staff, a deficiency in our educational systems. Many Chinese, from weathly families, pay high tuitions to be educated in America’s top universities, only to return to Communist China to contribute to their economy. Also, along with all this outsourcing and off-shoring investment is the mounting concern of how to protect intellectual property
According to reports, the Communist Chinese government has designated 10 cities as computer software centers, offering incentives to global firms and local enterprises to establish themselves there. The cities provide strategic accessibility to the international business traveler with leading-edge telecom infrastructure, and an educated talent pool, fueled by the presence of Communist China’s top universities, with studies in English, Japanese and Korean. This is part of the long-term master plan to dominate the world with its manufactory capabilities, while at the same time America and Europe are ceding dominance by their enterprises outsourcing and off-shore and investing in Communist China, and our failure to produce sufficient numbers of new engineering graduates for sustainability.
In America, while the national focus is always on job creation (yet we displace jobs through outsourcing/off-shoring) instead of ownership creation, our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success—always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent is not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the goods, products, and services produced as a result of substituting “machines” for people, as well as outsourcing/off-shoring to reduce the cost of production. And yet you can’t have mass production without mass human consumption made possible by “customers with money.”
We have two choices for our future. Either we cede our manufactory and intellectual property development to Communist China and other low-cost countries and cease to produce goods and products, and eventually services in our homeland with the result of a significant deterioration of middle-class living standards and an increase in poverty—and dependence on Communist China. OR we halt the influx of “cheap” and cheeper supply chain goods and finished products, “Made In China” and elsewhere, by imposing tariffs to incentivize our corporations to discontinue outsourcing/off-shoring and return to investing and building a technologically advanced, environmentally enhanced future economy here that can support general affluence for EVERY citizen.
But for the latter to be successful, there must be a significant reform to our monetary, financial and capital credit systems and our planning for long-term results, with a focus on engineering educations to innovate and invent new technologies. We need tuition-free public colleges and universities, and trade schools to provide higher education opportunities for our children. We can no longer ignore the ever more concentration of ownership of the non-human productive capital means of production—all manner of technology, robotics, AI, automation, etc.—among a tiny wealthy capital (asset) ownership class, who seek to OWN the world and hoard all capital asset wealth.
Primarily, we must provide equal opportunity for EVERY child, woman and man to become an owner of future productive capital asset formations and eliminate barriers to using insured, interest-free capital credit, repayable solely from the earnings of the investments, without the requirement of past savings by citizens (which only the already wealthy have). It is this collateralization barrier that excludes the non-haves from access to wealth-creating, income-producing productive capital.
We need to lift ownership-concentrating Federal Reserve System credit barriers and other institutional barriers that have historically separated owners from non-owners and link tax and monetary reforms to the goal of expanded capital ownership. Removing barriers that inhibit or prevent ordinary people from purchasing capital that pays for itself out of its own future earnings is paramount as an actionable policy. This can be done under the existing legal powers of each of the 12 Federal Reserve regional banks, and will not add to the already unsustainable debt of the federal government or raise taxes on ordinary taxpayers. We need to free the system of dependency on Wall Street and the accumulated savings and money power of the rich and super-rich who control Wall Street. The Federal Reserve System has stifled the growth of America’s productive capacity through its monetary policy by monetizing public-sector growth and mounting federal deficits and “Wall Street” bailouts; by favoring speculation over investment; by shortchanging the capital credit needs of entrepreneurs, inventors, farmers, and workers; by increasing the dependency with usurious consumer credit; and by perpetuating unjust capital credit and ownership barriers between rich Americans and those without savings. The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today—management and banks—that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The first layer of risk could be taken by the commercial credit insurers, backed by a new government corporation—the Capital Diffusion Reinsurance Corporation (CDRC)—through which the loans could be guaranteed. The CDRC could reinsure any portion of any financing risk assessed as reasonable and insurable but not already insured by the commercial capital credit insurance underwriters. In establishing the CDRC, the federal government would not be undertaking a new responsibility but merely simplifying and rationalizing an existing one. This entity would fulfill the government’s responsibility for the health and prosperity of the American economy.
These reform policies are what is addressed in the proposed Capital Homestead Act (aka Economic Democracy Act and Economic Empowerment Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/. And The Capital Homestead Act brochure, pdf print version at http://www.cesj.org/wp-content/uploads/2014/11/C-CHAflyer_1018101.pdf and Capital Homestead Accounts (CHAs) at http://www.cesj.org/learn/capital-homesteading/ch-vehicles/capital-homestead-accounts-chas/
Also support Monetary Justice at http://capitalhomestead.org/page/monetary-justice and the all-encompassing agenda of the JUST Third WAY (not “Third Way”) Movement (also known as “Economic Personalism”) at http://foreconomicjustice.org/?p=5797, http://www.cesj.org/resources/articles-index/the-just-third-way-basic-principles-of-economic-and-social-justice-by-norman-g-kurland/ and http://www.cesj.org/resources/articles-index/the-just-third-way-a-new-vision-for-providing-hope-justice-and-economic-empowerment/.
