China is finding new ways to hurt U.S. businesses

Tougher regulations, surprise inspections and other bureaucratic moves are hampering U.S. exports amid the trade war.

By MEGAN CASSELLA
Disparate American goods such as oranges, logs, calf skins and even Lincoln vehicles have encountered heightened customs reviews at Chinese ports this year.

As the trade war escalated between the United States and China this spring, American cherry exporters in Washington state unexpectedly found their customs processing slowed at the Chinese border.
Unannounced, increased inspections began in late May and in early June. 

The extra time the inspections took backed up shipments into mainland China, leading to some shipments rotting on the docks and forcing exporters to divert their produce so it could be sold before it spoiled.
Then, almost as suddenly as they were put in place, the increased inspections stopped, said Keith Hu, director of international operations at the Northwest Cherry Growers.
“They were able to find issues with cherries, even though there was nothing abnormal, nothing different from years prior,” Hu said. 

“Shipments were held up. Some for a day, some for three days, some for five days.”
As President Donald Trump has escalated trade tensions throughout 2018, extra scrutiny and inexplicable shipment rejections have come to symbolize the pitfalls, beyond tariffs, that American firms doing business in China have faced.
Data on such disruptions is hard to come by. 

But more than one in four businesses that responded to a recent U.S.-China Business Council survey said they have been subject to increased scrutiny from Chinese regulators as a result of the increasing trade tensions.
Those companies also ranked political risk associated with the U.S.-China relationship as their top challenge for the first time since the survey began 10 years ago.
Disparate American goods such as oranges, logs, calf skins and even Lincoln vehicles have encountered heightened customs reviews at Chinese ports this year. 

Multinational companies already accustomed to the sometimes difficult environment have reported an uptick in the number of hurdles they must jump through in order to do business in the increasingly lucrative market.
The cherry growers group — which represents 2,500 growers in Idaho, Montana, Oregon, Utah and Washington state — relies heavily on getting fresh fruit to consumers in China during the three-month window when nine varieties of cherries are ripe.
The growers ended up rerouting some sea shipments to Hong Kong or Taiwan and away from China, where the country’s large and growing middle class has embraced the fruit in recent years. 

Air shipments to China, which were normally cleared by customs in half a day, also dried up. 

The trade group estimated in November that tariffs and other barriers have cost the industry $89 million in lost sales this year.
Chinese officials rarely tie such actions directly to any international tensions, and they often go unnoticed outside the industries that are affected by them, trade experts said. 

But they are part of a well-worn playbook for the Chinese government, which has used these and other non-tariff barriers for years during political squabbles.
President Trump, a self-proclaimed “Tariff Man,” has used those taxes as the ultimate punishment when it comes to fighting a trade war against Beijing. 

So far, he has imposed tariffs on about half of all Chinese imports. 

He has also threatened to slap tariffs on the remaining U.S. $267 billion in Chinese goods.
The total value of products that China imports from the U.S. represents just one-fourth of what it exports, so Beijing cannot match U.S. tariffs dollar for dollar. 

But China has many other weapons in its arsenal to make doing business painful and costly.
U.S. companies’ complaints include delays in getting licenses approved and increased regulatory requirements that have seemed to grow worse in tandem with the worsening trade relationship between the two countries.
“These are subtle types of steps. It is very hard to be definitively responsive to them,” Mark D. Herlach, a partner with the law firm Eversheds Sutherland in Washington, said. 

“It’s a hard thing to prove.”
Chinese customs authorities announced in May they were strengthening their reviews and quarantines of American apples and logs over concerns about introducing harmful organisms to China.

The initial harvest of oranges at Porterville Citrus located on the Eastern edge of Tulare County moves onto a packing line. 

Joel Nelsen, president of the trade group California Citrus Mutual, said that while the customs slowdowns this year were concerning, more worrying were retaliatory tariffs by the Chinese government that increased citrus import prices by 40 percent.
“We did around 5.5 million cartons of oranges last year and another 1 million of lemons,” Nelsen said. 

“China was a growing market for us. They paid a good price for a quality product.”

Nelsen said it was difficult to find new buyers for the shipments and so orange farmers had to rely on the domestic U.S. market to absorb the extra fruit.
The hot-and-cold war between the world’s two largest economies has hit small businesses particularly hard.
A family-owned company in New England had a routine shipment of calf skins to China rejected this summer because the official count for the container of some 800 hides was off by a handful.
The shipment of calf skins was left idling at a port in southeastern China for more than a month before it was ultimately sent back to the U.S.. 

That resulted in a nearly U.S.$50,000 loss for the company, which requested anonymity for fear of further retaliation from the Chinese government.
“Everything has been going on with this trade with no hiccups for years and then all of a sudden we started running into some issues,” said Stephen Sothmann, the president of the U.S. Hide, Skin and Leather Association. 

“This seemed absolutely out of left field.”
China’s erratic regulatory system also makes it difficult to establish what is related to the trade war and what counts as business as usual in the country’s Darwinian business world. 

Moreover, discerning a top-down directive from the actions of an overzealous or corrupt local official can be nearly impossible.
Earlier this year, California-based manufacturer Beach House was suddenly told that supplies of fabrics and plastics it uses to make children’s playhouses in two manufacturing facilities in the Chinese cities Dongguan and Ningbo would now cost between 10 percent and 30 percent more.
The company’s suppliers said that changes to environmental regulations meant the factories making these components needed to be upgraded, Itai Leffler, the company’s group business development manager, said.
The company was given no notice, nor did any government officials ever explain whether environmental regulations had officially changed, he said.
“It always feels questionable,” Leffler said. 

“We just got told that the material costs were up and that there was a crackdown. If we didn’t pay, we were told there would be a penalty.”
China's Ministry of Commerce did not reply to requests for comment about whether China was deploying non-tariff barriers against U.S. companies.
Roy Liu, a trade lawyer in the Washington practice of law firm Hogan Lovells, said there is plenty of anecdotal evidence of increased targeting of U.S. firms, including companies being pressured to admit Chinese Communist Party cells into the workplace, but “we can’t say conclusively there is a concerted effort to broadly punish U.S. companies for doing business in China.”
The uncertainty caused by the trade war also has made some local Chinese officials reluctant to meet with American executives, according to Jason Wright, founder of Hong Kong-based business intelligence firm Argo Associates.
“That’s partly just because local officials might [not] be sure of the overall situation, they may be very reluctant to step out and approve significant projects,” Wright said.
While Beijing has not been shy in the past about issuing strict and obvious economic punishments against countries with which it was locked in disputes, the Chinese government appears to be more hesitant in the current environment to antagonize the U.S..
For example, the customs delays on fruits and other produce this spring disappeared within about three weeks, after high-level meetings between the two countries.
“There’s a significant concern about, once you pull the trigger on that type of policy approach, it has a very, very big chilling effect on U.S. investor confidence and broader foreign investor confidence in China,” said Eric Altbach, a senior vice president at the Albright Stonebridge Group who previously worked on China affairs at the Office of the U.S. Trade Representative. 

“The Chinese government view that as negative for their interest.”
Some see the tougher inspections and other actions as one-offs. 

Beyond a few American “poster children” being hit earlier this year, non-tariff barriers have not been a big deal for many American companies in China, William Zarit, the chairman of the American Chamber of Commerce in China, said.
“We’re not seeing much in terms of the qualitative retaliation,” Zarit said. 

Chinese authorities “understand that foreign investment is in their interest.”
In a recent AmCham survey, some 47 percent of the 430 businesses that responded said they had seen no increase at all in non-tariff barriers.
About 27 percent said they had experienced increased inspections in recent months, while 23 percent said they had experienced slower customs clearance, according to the survey. It was conducted between Aug. 29 and Sept. 5, before the U.S. imposed a 10 percent tariff on $200 billion in Chinese imports.
The Office of the U.S. Trade Representative did not respond to repeated requests for comment on the issue. 

A Commerce official said the agency tracks non-tariff-related issues and works with companies to resolve them, without offering further detail.
But the Trump administration has acknowledged that China has engaged in some punitive actions beyond tariffs. 

Vice President Mike Pence, for one, said in October that senior Chinese officials had targeted U.S. business leaders to lobby the Trump administration to soften its trade actions by “leveraging their desire to maintain their operations in China.”
Pence pointed to an example in which Beijing “threatened to deny a business license for a major U.S. corporation,” which he did not name, unless it spoke out against the administration’s trade policies.

History as prologue
Following a meeting between Chinese dictator Xi Jinping and President Trump at the G-20 leaders’ summit in Buenos Aires this month, the two countries declared a 90-day truce to negotiate, but tensions have remained high.
Since then, Huawei’s chief financial officer, Meng Wanzhou, was arrested in Canada on the request of the U.S., raising questions about whether her detention was politically motivated to pressure Beijing. 

That has led to concerns that China may retaliate by targeting American executives. 

Three Canadian citizens have been detained in China in what has widely been regarded as direct retaliation for Meng’s arrest.
Further muddying the waters, President Trump said he would be willing to intervene in the Huawei case if it meant securing a trade deal.
Compared to China’s actions during other recent trade disputes, the measures taken against U.S. firms to date appear minor.
During a diplomatic showdown with Japan in 2010, the Chinese government placed a temporary ban on exports of rare earth minerals to its neighbor.
Two years later, sales of Toyotas and Hondas plummeted in China, after state-run media instigated a boycott of Japanese goods in another territorial dispute. 

Japanese businesses, including sushi restaurants, were attacked as thousands of Chinese people took to the streets to protest.
In addition to actions by government officials, foreign companies can face sabotage from private sector competitors, said Josh Gardner, the chief executive of Kung Fu Data, a Beijing-based company that runs e-commerce operations for international firms in China.
In one recent example, Gardner said a retail client was hit by local competitors lobbying tax officials to “fine and hamper” the company.
“That was just ‘Friday’,” he said. 

“Everything that happens in China stays in China; people don’t talk about it because they don’t want to deal with the repercussions.”

Rogue Nation

China's Worst Trade Abuses Are Hidden
By Christopher Balding

China is nothing if not creative in protecting its local industries. 

Although it has liberalized its economy in recent years, it has also erected a sophisticated set of barriers to safeguard companies it views as national champions. 

Increasingly, this is a counterproductive approach.
The usual method of assessing protectionism is to look at metrics such as tariff rates. 

And by that measure, China remains one of the least open major economies: According to the World Trade Organization, it maintains an average most-favored nation tariff of 9.6 percent on imports, compared with 5.3 percent in the European Union and 3.5 percent in the U.S.
But tariffs only tell part of the story. 

China has also become adept in using non-tariff barriers to prop up favored companies. 

The European Union Chamber of Commerce in Beijing recently identified a raft of such measures China was using to protect manufacturers, including subsidizing local businesses and forcing foreign firms to turn over technology to Chinese partners.
When China recently announced that it was granting a subsidiary of U.S.-based asset manager BlackRock Inc. an additional investment quota, it touted the deal as a major liberalization in a sector almost entirely closed to foreign firms. 

In fact, it only accentuated the barriers that still exist: Even now, China limits the number of branches financial companies can open and imposes ownership restrictions to protect state-owned banks.
Such measures can border on the absurd. 

A recent administrative order barring foreign children's books -- including beloved titles such as "Guess How Much I Love You" and the Peppa Pig series -- constitutes a non-tariff barrier to trade in intellectual property. 

Foreign firms have even been prohibited from selling products made in China to Chinese consumers, for fear they'll take market share from domestic competitors.
Getting China to address these barriers is a challenge, as a recent report from the U.S. Trade Representative's office shows. 

WTO rules require countries to report industrial subsidies. 

But the report testily notes that "the United States has now counter notified over 400 Chinese subsidy measures," while China "has included in its subsidy notifications only a small number of programs." 

Making matters worse, "China has refused to engage in bilateral technical discussions to address this issue."
In other words, not only is China failing to disclose measures that may violate WTO requirements, it is refusing to even discuss them.
Perhaps the worst part is that these barriers don't really work. 

Protectionism hurts Chinese consumers and retards the very enterprise the government wants to promote. 

Chinese consumers stock up on Japanese toilets and European luxury goods partly because they're cheaper than buying at home in a protected market. 

The price of milk powder in Hong Kong is roughly half that in my neighborhood megamart in Shenzhen, where corner convenience stores do a bustling business in gray-market goods from across the border. 

This differential stems mainly from trade restrictions that drive up the cost of imported products and allow local firms to charge noncompetitive prices.
Dismantling this complex and multilayered system of protections will be a huge undertaking. Although lowering tariffs would be a good start, more fundamentally, the government needs to stop using hidden administrative means to protect local companies, reduce its vast subsidies and allow foreign firms to operate on a level playing field.
That may sound unrealistic. 

But doing so would stimulate competition, innovation and entrepreneurial activity, while giving consumers more choices and cheaper products. 

It would also help Chinese companies take advantage of cutting-edge technology and new investment from overseas. 

Delaying such reforms will only hurt consumers, anger trade partners and sustain noncompetitive businesses.
In short, China needs to ask a simple question: Who really benefits from all these barriers?