Fashion Intel & Analysis

Inside the Washington Beltway, the hype is that companies are “souring” on China – that the challenges of doing business in China have finally reached proportions that companies are willing to either forgo doing business in the market if things do not improve or stop publicly supporting the relationship if negative legislation were to emerge from Congress. A similar refrain is also mentioned, that this is the “worst business climate ever” in China.

It is an intriguing bit of hype, and much of it began with Google’s public announcement in January that it was considering leaving China’s market. But the reality is somewhat less dramatic: companies face significant challenges in China that they want addressed, but the market remains important to their bottom lines, so they want to see those challenges addressed in ways that are constructive and productive.

Overview of issues

There are primary issues that are at the heart of these significant challenges. The first is a mouthful: indigenous innovation. What it means is less tongue tying: China, like all other countries, wants to have an economy that is based on innovation, rather than simply being the manufacturer for the world. The problem comes in how China is pursuing that goal. It has implemented a series of policies since 2006 that encourage domestic Chinese companies to innovate – instead of, and frequently at the expense of, foreign companies. These policies promote innovation in ways that no other government in the world does – including using domestic ownership of intellectual property rights as the basis for benefits – and a return to import substitution – that is, favoring domestic products that will displace imported goods. It remains to be seen how effective these policies will be in promoting innovation.

The other major challenge in the relationship is China’s currency policies. This is an issue that attracts the concern of the U.S. Congress, even though most U.S. companies do not identify it as a major concern for them, either because they source globally and compete against Chinese products in China or because they provide services, so their transactions are conducted in whatever the local currency may be. But China’s currency policies do affect some US companies – primarily those that are competing against Chinese goods in the domestic US market. No matter what your view is of the impact, however, currency is the top risk in the commercial relationship today -- there is a real risk of action by the Obama Administration or by the U.S. Congress if no progress is seen in the coming weeks.

It is in China’s interest to allow greater currency flexibility for its own domestic reasons. A stronger currency would give Chinese consumers more spending power as prices rise due to inflation. In addition, China has repeatedly stated its interest in creating more domestic consumption. Making the currency value better reflect the market will help with that goal as well, and it will address concerns about China’s trade balance.

Importance of the China Market

With these significant challenges, one might wonder why this market is so important to US companies and the US economy. To begin with, China remains our fastest growing export market – or, in the case of 2009’s data, it was the lowest losing market during the recession. We exported $70 billion to China in 2009, which was flat vs. 2008 – but that flat growth outperformed US exports to the rest of the world, which declined by 19 percent last year.

In 2009, China was one of few bright spots for many companies. China is America’s third largest export market, behind only Canada and Mexico – two countries whose products we have virtually no tariffs on. China is particularly important if we are to achieve President Obama’s goal of doubling exports in the next five years. U.S. exporting companies report that they believe there are continued opportunities for growth once the recession has ended. That ties back to jobs in America thanks to the growth of companies’ global operations.

Significant Challenges, But Solutions Possible

Henry James once wrote that, “courtship is poetry, but marriage is hard prose.” We are in the hard prose of our commercial marriage with China. But like any relationship, it can endure and flourish only when both sides make the effort to acknowledge and reinforce its value.

We must continue to encourage China to address other problems in the relationship such as its discriminatory innovation policies. But when we identify a problem, we need to provide them with acceptable ways for it to be addressed, not just taunts of what is wrong. In therapy speak, we need to refrain from name calling and hollow threats and instead focus on finding solutions.

To be clear: we should not avoid talking about problems when we speak to China, but by the same token we should not talk only about problems. Talking only about problems provides ammunition to those who are skeptical of the trading relationship in the first place – and it emboldens them to act on the many creative ideas they have to punish China without seeking any solutions at all. That benefits no one.

There is a way forward in the US-China commercial relationship that does not involve a trade war, or to continue the marriage metaphor, a divorce. It is not easy, since the issues are complex. But moving forward together is the best way to ensure the prosperity of both of our countries for many years to come.

(Prepared by Brenda A. Jacobs and Pete Kasperowicz, Sidley Austin LLP)

In this TDM:

CPSC Hears Expert Testimony on Cadmium and Lead Risks

The Consumer Product Safety Commission held a public meeting yesterday on the toxicity of metals in consumer products, with commissioners focusing their questions on lead and cadmium. The CPSC is looking to establish a standard for cadmium in children's products, limiting the amounts that will be considered safe in the wake of reports that certain children’s jewelry contained high levels of cadmium.

Two scientists provided presentations on the risk and toxicity associated with heavy metals. Their statements indicated that children between ages six and 11 seem to retain cadmium more than older children or adults. The commissioners probed both witnesses for advice on where they might draw the line on how much lead, cadmium or other heavy metals can be in a product and still be considered safe. However, neither expert provided definitive guidance, saying that they could not identify a "bright red line."

Most of the discussion centered on lead content standards, which the CPSC could decide to tighten next year from the current level of 300 parts per million for children's products to 100 ppm. One of the experts stated that given the amount of lead in the environment, it might be hard to reduce blood-lead levels further even if consumer products were lead-free. The commissioners also were told that only about 15% of lead taken into the body gets absorbed by the body.

While the CPSC is clearly working on developing a standard for cadmium in children's products, there is still no indication when a proposed standard will be announced.

Rumors, Speculation That China Will Act On Currency

Treasury Secretary Timothy Geithner's quick stop-over in Beijing yesterday has everyone from economists to Members of Congress opining on whether, and if so when and how much the Chinese Government will allow the renminbi to appreciate – and whether there should be satisfaction with any moves by China. It is probably safe to assume that no matter what happens, many Members of Congress and U.S. manufacturing industries will not be satisfied. Nevertheless, the three month hold the Administration has placed on the Treasury semi-annual report on currency should mean that the tension that has marked the U.S.-China relationship most recently should be contained.

CBP Webinar Announces ACE Reorganization

A webinar yesterday afternoon by U.S. Customs & Border Protection announced a reorganization of the office responsible for overseeing and implement the Automated Commercial Environment (ACE), the system designed to modernize and automate border processing. Effective this weekend, CBP is creating an ACE Business Office to reflect the determination of CBP to consider ACE issues from a business perspective. Until now, according to Daniel Baldwin, Assistant CBP Commissioner for the Office of International Trade and the Senior Executive Business Owner for ACE, all ACE program planning has been generated by CBP’s Office of Information Technology. CBP is in the process of hiring a business director to head the new office.

The webinar also reviewed the steps CBP is taking to expand and more fully automate the International Trade Data System, which is the mechanism for coordinating other government agencies' participation in ACE. According to CBP, there are currently 47 government agencies, including CBP, participating in ITDS. CBP wants more of the data for these participating agencies collected and transmitted electronically. Of particular interest to CBP is getting declarations, such as the one required under the amended Lacey Act, for imports containing plant products, which must be sent to the Animal & Plant Health Inspection Service (APHIS), into ITDS.

A recording of the webinar and the accompanying powerpoint presentation are expected to be posted on the CBP website soon.

(Prepared by Brenda A. Jacobs, Sidley Austin LLP)

U.S. Reaches Agreement With Brazil On Path to Resolution, Ending Current Threat of Retaliation Against U.S. Exports

Last November, the Brazilian Government threatened to impose tariff increases on hundreds of products, including 72 different tariff provisions covering U.S.-made textiles, apparel and home furnishing products, and to disregard U.S. intellectual property rights, as retaliation against the United States for failing to abide by a World Trade Organization determination against several U.S. cotton subsidy programs. A final list was issued in March, with the punitive tariffs scheduled to go into force tomorrow. Today, however, a tentative agreement was announced that eliminates that threat, at least for now, even though the U.S. subsidies continue.

In what is described by the Administration as "a path toward a negotiated settlement," the United States has agreed to work with Brazil to establish a fund of more than $147 million per year to provide technical assistance and capacity building to Brazil, and to take steps that should allow Brazil to expand its exports of pork and beef to the United States. The two governments are still working on a Memorandum of Understanding that would provide that the fund will continue until passage of the next Farm Bill or a mutually agreed solution to the dispute is reached, whichever is sooner. The Administration has been limited in its ability to comply with the WTO decision, which found that several U.S. subsidy programs are inconsistent with U.S. obligations under the WTO, because it is up to Congress to change the relevant U.S. laws. This understanding should give the Administration time to work with Congress on the necessary changes.

It is important to emphasize, though, that the announced understanding does not represent a complete resolution. More negotiations are on tap. According to the Office of the U.S. Trade Representative and the U.S. Department of Agriculture, the U.S. and Brazil are aiming to agree by June to "a process . . . that will allow . . . a mutually agreed solution." That process may take a long while.

(Prepared by Brenda A. Jacobs, Sidley Austin LLP)

In this TDM:

CPSC Debates Proposed Rulemaking on Public Database

The Consumer Product Safety Commission once again revealed a wide divergence of views at a public meeting this morning to discuss a draft proposed notice of rulemaking on the public database. CPSC is required to create and implement, on its web site, a publicly searchable database of consumer product incident reports, to be known as

The proposed website is currently scheduled to be in place by March 2011. During the hearing, four commissioners on hand raised the following concerns and questions for this database:

  • the broad range of persons who could submit product incident reports (including bystanders and others without direct knowledge),
  • the absence of a limitation on the age of incidents (which could have happened many years before the database is in place),
  • whether there should be a limitation on the length/size of a response by a manufacturer,
  • whether a report should remain on the database indefinitely,
  • whether there should be a distinction between incidents caused by misuse of a product and those occurring in the course of normal use and abuse, and
  • the availability of adequate CPSC resources to review the reports once submitted (to determine whether the requirements for publication are satisfied).

The CPSC is expected to vote next week on whether to approve the draft notice for publication in the Federal Register. Once published, there will be a 60 day public comment period.

Separately, the Commission has postponed the hearing to discuss 15 month rule to April 15 instead of April 8. Voting will take place on April 21st.

Treasury Secretary in Beijing This Week; Deputy US Trade Representative Headed to Beijing Next Week

China is definitely front and center on the agendas of Obama Administration officials. First came reports this morning that Treasury Secretary Timothy Geithner is headed to Beijing to meet with Chinese Vice Premier Wang Qishan on Thursday, with currency presumably the primary topic. Subsequently, Deputy U.S. Trade Representative Demetrios Marantis, whose portfolio includes Asia, announced that he will travel to Beijing next week. Marantis stated that he expects to discuss a number of trade issues, including concerns about China's "indigenous innovation" policy (under which companies must have produced their intellectual property in China in order for their products to be considered for government procurement projects), other intellectual property rights issues, sanitary and phytosanitary rules that impact U.S. agriculture trade, investment restrictions, and border measures.

In this TDM:

(Prepared by Brenda A. Jacobs and Pete Kasperowicz, Sidley Austin LLP)

Treasury Delays April Currency Report

In typical Washington good cop-bad cop fashion, while Congress threatens China over its currency policies, the Administration has called a time-out, delaying by at least three months the report on currency manipulation that was due to be issued April 15.

Treasury has been under pressure from Congress to cite China as a currency manipulator in its April report on foreign currency practices, pressure that includes warnings from the Senate that legislation might be pursued if Treasury failed to cite China. Treasury was under similar pressure during the Bush Administration, and managed to avoid both citing China and legislation. This time, however, Treasury got around the problem at least in the short term by saying meetings over the next few months might lead to some progress in getting China to let the value of the renminbi appreciate.

In a Saturday statement, Treasury cited three reasons for delaying the report: 1) this month's G-20 meeting of finance ministers and central bank governors in Washington, 2) the next Strategic and Economic Dialogue (expected in May), and 3) the G-20 finance and leaders meeting in June. Treasury Secretary Tim Geithner said he thinks these meetings are "the best avenue for advancing U.S. interests at this time." Click here to read the statement.

But there is also speculation that Chinese President Hu Jintao's visit to Washington next week was a factor, as well as China's decision last week to agree to start substantive talks on a United Nations resolution that would tighten sanctions against Iran. While the White House has denied any link between currency and Iran, China’s participation in the UN process is critical and has long been sought by the Obama Administration, and it seems unlikely China would agree to cooperate with this U.S. priority in the wake of a Treasury citation. Another possible factor that went unspoken over the weekend is the expectation that China is about to allow the renminbi to appreciate very soon, and was waiting for its exports to recover before beginning the process.

Treasury's announcement prompted several members of Congress to reiterate their "bad cop" roles, notably Sen. Charles Schumer (D-NY), who said Congress would press ahead with currency legislation. House Ways and Means Committee Chairman Sandy Levin (D-MI), who has resisted legislation, said that if multilateral efforts failed legislation might be needed.

Consumers Groups Seek FTC Investigation into 'Organic' Product Claims

On March 12, the Consumers Union and the Organic Consumer Association filed a petition asking the Federal Trade Commission to investigate misleading claims that personal care products are "organic." The petition argues that the lack of a uniform standard is allowing some manufacturers to inappropriately claim their products as organic, without revealing which standard was used.

The petition has the potential to build momentum for some uniformity of standards. It follows a July 2009 decision from the U.S. Department of Agriculture that said USDA only regulates organic personal care products made with agricultural ingredients, and has "no plans" to develop standards in this area. Last November, the National Organic Standards Board, which advises USDA, voted to require USDA to certify organic personal care products, but USDA has yet to act on that recommendation. For more information, click here to see the Sidley Austin Client Alert on the USA-ITA website.

CPSC Posts More Proposed Rules, Including "15 Month Rule"

The staff of the Consumer Product Safety Commission has posted more proposed rules, including the so-called "15 month rule," which is intended to identify the testing and labeling requirements applicable to products subject to General Conformity Certificates and Third Party Certification. (It is called the 15 month rule because it was supposed to be issued no later than 15 months after enactment of the Consumer Product Safety Improvement Act (CPSIA), which was November 2009, but the CPSC determined that it needed more time to prepare the rule.) The draft proposed rules also include conditions and requirements for testing component parts. These very detailed draft rules are expected to be discussed at a public meeting of the CPSC this Thursday, although what gets published in the Federal Register for public comment may not be decided until later in the month.

Under the CPSIA's "15 month rule," the Commission shall by regulation

(A) initiate a program by which a manufacturer or private labeler may label a consumer product as complying with the certification requirements of subsection [and]
(B) establish protocols and standards— (i) for ensuring that a children’s product tested for compliance with an applicable children’s product safety rule is subject to testing periodically and when there has been a material change in the product’s design or manufacturing process, including the sourcing of component parts; (ii) for the testing of random samples to ensure continued compliance . . . .

The draft Federal Register notice lays out the proposed rule that would establish requirements for a reasonable testing program and for compliance and continuing testing for children's products. The proposal would also address labeling of consumer products to show that the product complies with certification requirements under a reasonable testing program for non-children's products or under compliance and continuing testing for children's products. A lengthy 75 day comment period is proposed – and given the complexity and detail of the proposal, that much time may be necessary for affected manufacturers, importers and sellers to fully consider their implications.

Very briefly, under the draft testing program proposal, a reasonable testing program for non-children’s products consists of five elements:

  1. A product specification that contains a description of the consumer product and lists the applicable rules, bans, standards or regulations to which the product is subject;
  2. Certification tests that provide evidence that a product identified in a product specification complies with the applicable rules, bans, standards, or regulations, based on testing of a sufficient number of samples that are identical in all material respects to the product to be distributed in commerce;
  3. a production testing plan that describes what tests must be performed and the frequency at which those tests must be performed to provide a high degree of assurance that the products manufactured after certification continue to meet all the applicable safety rules, bans, standards, or regulations;
  4. a remedial action plan that identifies the steps to be taken whenever samples of a product or a component part of a product fails a test or fails to comply with an applicable rule, ban, standard, or regulation; and
  5. a recordkeeping system to document the reasonable testing program.

More detailed rules are proposed for children’s products (which are subject to a third party testing requirement), including sufficient and random sampling for testing by an approved assessment body. (Interestingly, the CPSC staff recommends that a low volume for purposes of random testing be defined as less than 10,000 units.) Under the draft, each manufacturer also must establish procedures to safeguard against the exercise of undue influence by a manufacturer on a third party conformity assessment body.

The draft proposed rule also would allow manufacturers and private labelers of a consumer product to indicate, by a uniform label on or provided with the product, that the product complies with any consumer product safety rule, or with any similar rule, ban, standard or regulation under any other act enforced by the CPSC. Specifically, the draft rule would require “the label to be printed in bold typeface, using an Arial font of not less than 12 points, be visible and legible, and state ‘Meets CPSC Safety Requirements.’” The agency decided any other wording would not be adequate.

The proposed Federal Register notice also includes an extensive discussion of the costs of a reasonable testing program, acknowledging that the requirement for third party certification testing could be a barrier to new firms entering the children's product market, unless they expect to have relatively high volume products. The Commission invites comments on alternatives that could provide some relief to small businesses that would be adversely impacted by the proposed rule.

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