Doing Business in China? How Colorado Outdoor Recreation, Retail and Manufacturing Industries Can Navigate the U.S.-China Trade Dispute
- Matt McKinney
- March 19, 2019
As part of the ongoing U.S.-China trade dispute, the U.S. has recently imposed $250 billion in tariffs – that may or may not be lifted in the near future – on imports from China. While recent reports suggest a trade deal may occur in the coming weeks, the uncertainty of the trade situation, and these tariffs in particular, have impacted Colorado’s growing outdoor recreation, retail and manufacturing industries by increasing U.S. companies’ costs that are often passed on to consumers as well as by creating pressure on some U.S. companies to reduce some local jobs.
For Colorado, in particular, the trade dispute hits home. Colorado’s outdoor recreation and manufacturing industries are a significant part of the state’s economy: Colorado has 5,900 manufacturers with nearly $22 billion in economic output and more than 150,000 employees. Colorado is also home to 7,800 outdoor recreation firms with more than 511,000 employees. And, the current tariffs increase costs on outdoor goods that many Coloradans use year-round: from winter sports gear like leather ski gloves and backpacks, to warmer weather gear like bikes, camping stoves and chairs and backpacks. Future tariffs could impact a much wider swath of outdoor products, including apparel and footwear.
While the U.S.-China trade dispute has paused temporarily as negotiations continue between U.S. and China trade representatives, Colorado companies that do business in China – now and at any time – can implement some strategic best practices to reduce the risks to themselves and help diminish the impact of the trade uncertainty with China.
- Be smart and proactive about the inherent risks of doing business in China. Many Chinese manufacturing firms don’t have a presence in the U.S. which makes it more challenging to enforce breach of contract, theft of confidential information and infringement of intellectual property (IP). Logistical factors like the cost of enforcement and the need to navigate the time change and local laws contribute to the risk of working with international parties. When doing business in China, in particular, determining how to structure the contract in advance can increase the enforceability and save on the cost of enforcement – especially important for small and midsize companies that don’t have the deep pockets of large corporations to spend on travel and Chinese local counsel. For example, simply using your standard form supply agreement that is tailored for American law with American counterparties can increase the risk of unenforceability. Instead, when dealing with Chinese factories, it can be beneficial to use contracts governed by Chinese law, written in Mandarin or Cantonese (with English translation), and containing dispute resolution that is enforceable in China.
- Complete due diligence and draft a thorough contract to help reduce the risk of IP theft. One of the most significant risks when doing business in China is an unscrupulous partner using your trade secrets or IP to manufacture a competitive product or sharing proprietary information, like trade secrets and production processes, with the state. Proactively taking the time and care to find a reputable firm, using referrals, actually meeting the principals of your Chinese partner, and building a foundational relationship upfront can pay dividends down the road.
- Use NNN agreements instead of NDAs. In much of the world, non-disclosure agreements (NDAs) are used to obligate one or both parties in an agreement to protect confidential information and to only use it for the stated purpose. When doing business in China, it is best practice to use the NNN agreement – non-disclosure, non-circumvention and non-use agreement – instead. The key distinction for NNN agreements is the non-circumvention clause which is an additional obligation for the manufacturer or factory to not circumvent the overall relationship with you. For instance, the obligation prohibits the Chinese factory from attempting to manufacture the same or similar product and sell directly to third parties or retailers in the U.S. (e.g., your customers). In some respects, it’s similar to a non-compete that would prohibit the factory from manufacturing similar or competitive products. However, the non-circumvention term often focuses on attempts to sell to your customers. Additionally, NNN agreements often have a liquidated damages clause, which is an added deterrent. NNN agreements still contain obligations to not share any information publicly and to maintain the confidentiality of the information, but the obligation to avoid circumventing your relationship with your customers is an additional obligation that you can enforce against the Chinese partner.
- Build flexibility into the terms of the contract. There are several ways to build flexibility into the contract to protect the buyer if the manufacturer becomes a risk or the relationship sours. One option is to consider the duration of the agreement – the buyer should know how long and under what terms they may be tied to the manufacturer. Understanding not only how long the agreement is, but how you can terminate, is key. Another option is to ensure you are not required to buy any minimum quantities of product, so that if you are able to shift production to a second source, you are not breaching purchase obligations to the original manufacturer. Minimum purchase quantities are typically tied to preferential, discounted pricing but, in general, it is best practice to ensure that the terms are fair and favorable to the buyer. Also consider the consequences of terminating the agreement, i.e. a termination fee to move manufacturing elsewhere, or whether the property and industrial equipment possessed by the original manufacturer would need to be transferred to another manufacturer in the event that operations need to move. Requiring the factory to transfer the process, property and equipment efficiently ensures that manufacturing and supply chain aren’t disrupted for too long.
“It’s vital to have a clear understanding of the issues that deeply affect Colorado’s outdoor recreation industry and these insights are extremely helpful and timely,” said Luis Benitez, director of Colorado’s Office of Outdoor Recreation. “Without the appropriate guidance to successfully navigate these challenges, there’s a real risk to sustained industry growth.”
Taking a proactive and strategic approach to navigating contracts with China can help Colorado companies in the outdoor recreation, retail and manufacturing industries continue to thrive and provide quality, affordable products for their consumers.
Matt McKinney is a partner at Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC (KO), a Colorado-based firm that specializes in commercial contracts for outdoor recreation, retail and manufacturing companies. KO is one of the only firms in the nation with a dedicated commercial contracts team comprised of attorneys and contracts managers with significant industry experience. Reach Matt at email@example.com.