The China Australia Free Trade Agreement will further open China as an attractive marketplace for business and investment, with greater access to China’s $10 trillion economy which currently has a growth rate of around 7.7% per year.
Despite the opportunities and advantages the FTA brings, there will continue to be a complex range of risks, borne out of the different cultural and political contexts and legal systems of the two countries.
The FTA does not address the usual risks of doing business globally or indeed in China.
So while the FTA will increase access to business and strategic opportunities for importers and exporters, without taking steps to manage the risks unique to China, the realisation of those opportunities will always be precarious.
Below are six key risks that you should take into account when conducting business with China.
Know who you’re dealing with
It might sound simple, but it is critical that you undertake appropriate due diligence on the party you are dealing with, whether that be a customer, supplier, joint venture partner or investor. Site visits along with legal and financial due diligence are all part of this process. Critically, due diligence is not something to be done only at the commencement of a project or buy/sell arrangement, although that is perhaps the most important first step. You should regularly continue this throughout the life of your business venture.
Contractual terms: you need them but they have limitations. You should have a written agreement or terms of trade in place. If you are purchasing goods and wish to claim the benefit of the FTA, then the agreement should include appropriate warranties that the goods are of Chinese origin and indemnities to support those promises. Suppliers should also be required to provide reasonable assistance in providing supporting documentation (such as certificates of origin) and answering queries from Australian Customs. Your current contracts or terms of trade may not address this point and you should review and update these once the FTA is in force.
Chinese legal system
Although it has improved, the Chinese legal system is very different to the Australian legal system. There is less consistency and certainty of process and the judiciary is not independent of Government as in Australia. Even with the best contractual protections, enforcement of your rights can be a practical and real issue. You may wish to consider agreeing to arbitration as the means to resolve disputes. While in the end the arbitral award will need to be recognised by a Chinese court to be enforceable in China, (we have experienced substantial difficulties in that regard) it may be a preferred position when compared to litigation in a Chinese court. There is no perfect solution and this highlights why due diligence is such an important step.
Anti-bribery and corruption risks
Doing business in China raises some significant anti-bribery and corruption risks. In 2013, Transparency International ranked China 80 out of 177 countries, meaning it carries a relatively high corruption risk. Given the political-economic model of China and the significant presence of Government and state-owned enterprises, you will be more likely to come into contact with government officials. Both Australia and China have legislation against bribery and corruption, but importantly you can be caught by expansive US and UK legislation, even when doing business in China. You should have in place clear policies and procedures and monitor compliance with those, to provide you with the best protection. We assist our clients involved in global trade to prepare such documents.
Managing IP risk when expanding to China
Despite stronger statutory protections put in place by the Chinese Government, counterfeiting and piracy continue to be prevalent in China. When combined with low enforcement levels and the broader Chinese legal system, the issue of protecting intellectual property rights is a significant challenge for companies to overcome when entering the Chinese market. Due diligence is an important starting point, along with supply chain security. The more parties involved in the supply chain, the greater the risk of an intellectual property “leak”. We expect the FTA will provide a framework for future co-operation on intellectual property harmonisation, but there is no real detail yet. While you should take steps, where possible, to register your intellectual property rights such as trademarks, for other intellectual property such as know-how, prevention is better than cure when it comes to intellectual property rights in China.
Are the goods really “made in China”?
As China moves increasingly from developing to developed, much manufacturing work is being undertaken in lower-cost countries, such as Bangladesh. Simply because you are buying from China, doesn’t mean you can claim Chinese origin under the FTA. There are significant risks to claiming origin under an FTA incorrectly, and Australian Customs will look to you as the importer for payment of duty where origin has been incorrectly claimed.