EN -- LARRY ROMANOFF -- An Epidemic of Foreign Fraud in China -- September 19, 2020

 

             An Epidemic of Foreign Fraud in China

 

 By LARRY ROMANOFF – September 19, 2020

 

 

Commercial consumer fraud by foreign multinationals in China has become so widespread that normal trust factors like famous branding, high standards, or a successful reputation are no longer reliable indicators for Chinese consumers. The many hundreds of foreign consumer-goods companies in China have so consistently and repeatedly violated not only a myriad of China's laws, but all norms and standards of morality and ethics, of pride in product, and even of simple common decency, that a healthy functioning of markets could soon become impossible. Most of these violations are not minor; almost all are criminal and most would qualify as felonies in the West. They include fraudulent advertising and consumer price frauds of every nature, constant price-fixing and retail price manipulation, violations of contract law, fraudulent JV conduct, tax evasion, consumer fraud, bribery, espionage, visa violations, illegal transfer pricing, refusals of warranty service, selling used or reconditioned products as new, serious environmental pollution, physical abuse of staff, wages below legal levels, unpaid overtime, knowingly selling diseased meat and contaminated food products, knowingly shipping substandard foods and consumer goods to China, flagrant violations of health regulations. The list is almost endless.

 

 

American multi-nationals like Wal-Mart, Coca-Cola, Pepsi, Nike, Apple, P&G exhibit not only an appalling lack of social responsibility, but demonstrate a mocking open contempt for both the consumers they defraud, and for the governments. They specialise in exploiting cheap labor in developing countries, combined with a wide range of illegal and criminal business strategies, then employ powerful PR tactics, lobbying and bribery, to avoid accountability for their products or actions. And in each instance, when another fraud is exposed or another violation discovered, these firms respond with an arrogance that appears almost surreal, a kind of crazy-making consisting of lies and denials, claims about 'core values' and 'high standards', inevitably followed by the standard Saatchi Brothers PR tactic of a list of charitable donations. When Coca-Cola was discovered selling products containing dangerous levels of pesticides and free chlorine, the company simply denied the irrefutable evidence, airily claiming its products were safe to consume, and refused a recall. When finally forced to destroy all the contaminated product, the company issued an infuriatingly arrogant babble of nonsense about high standards and core values, reminding the Chinese that Coke had made contributions to local charities. I believe most Chinese would happily forego Coca-Cola's charity, preferring that the company instead remove the pesticides from its drinks and its dealers refrain from beating employees unconscious when they ask to be paid.

 

 

American and European MNCs are world-famous for pressuring local governments to avoid setting health, labor, environmental or other standards that would interfere with their profitability, often drawing on the political power of the State Department to bully local governments into relaxing standards or avoiding prosecution of their executives. The management lobby governments everywhere in attempts to prevent or derail labor and wage legislation, as well as lobbying and interfering with environmental laws. These problems exist in every nation, but undeveloped countries are hit the hardest because of inadequate legislation and the lobbying power of these companies from political pressure and bribery. There has been no shortage of reports that executives, as a regular business practice, frequently intimidate and/or bribe local officials and politicians to overlook violations and give them effective sanction to break laws. As well, there have been many similar reports of company executives exercising their power to influence media in many countries to suppress negative stories about the company's products, Coca-Cola's gunpoint resignations in Mexico being one example.

 

 

Coca-Cola, Wal-Mart, Pepsi, Dairy Queen, Danone, Unilever, McDonald's and KFC fill China's stomachs with every manner of toxic food ingredients from insecticides and pesticides to free chlorine and banned growth hormones. They knowingly sell meat from diseased animals. They sell beverages, ice cream and bottled water with astonishing levels of bacterial contamination, then blithely claim their products are all produced to Western standards and are safe to consume. We have seen no end of toxic cosmetics, baby oil and lotion, and other seriously contaminated personal care products by P & G, Johnson & Johnson, and many others. Wal-Mart have such a long criminal record of cheating and defrauding consumers in China, they are in a class by themselves, having been heavily fined almost 30 times in the recent past, with executives finally arrested and stores ordered closed. Wal-Mart were caught and fined eight times in one ten-month period for fraudulently labeling ordinary pork as organic, and selling at twice the price. As the government inspectors were leaving the stores, Wal-Mart managers were busy again re-labeling all the ordinary pork as organic, and the game would begin again. The French supermarket chain Carrefour is almost as bad, regularly establishing new records in China for pricing frauds. Danone has a reputation for being one of the dirtiest foreign companies in China, renowned for their substandard and polluted products, and having been in trouble with China's legal authorities more than 20 times in the recent past.

 

 

Product warranties in China are either violated or simply ignored, by everyone from Apple to LV to Mercedes-Benz; many companies knowingly sell defective products in China and refuse warranty claims. In what is surely one of the dirtiest practices ever conducted, P & G refused to give refunds for their toxic SK-II products unless customers first signed a legal waiver testifying that the product was safe and had caused no health problems, the demand for the waiver itself being an illegal act. Many firms, again like Apple and Sony, make a practice of performing warranty repairs with used parts, or replacing a defective item with a used and reconditioned one instead of a new one. Apple is famous in China for charging Chinese consumers for warranty repairs, sometimes as much as 50% of the original cost of the item. There is no shortage of claims that foreign firms, especially those dealing in so-called "luxury products" like Apple and LV, will put used and reconditioned items back on the shelf in China and sell them as new.

 

 

These firms take apparent advantage of every opportunity to cheat their employees by outsourcing their staff to private employment agencies to avoid having to provide statutory benefits and paying social security taxes. Foreign multinationals are the worst at demanding unpaid overtime from their staff, feeling an apparent immunity to all domestic labor laws. McDonald's and KFC are well-known for paying staff 60% of the legislated minimum wage, claiming "unclear laws". Coca-Cola is famous not only for outsourcing its staff - which is illegal in China - but for the outsourcing company refusing to pay legislated overtime and severely beating employees who dare request to be paid for their hours worked. Some American companies force new employees to sign a contract stipulating they will be paid a certain salary, but then pay them much less. The contracts are for the government to see. Many are forced to work excessive overtime, sometimes 300 hours per month. Some of these are truly criminal organisations that should be fined heavily enough to bankrupt them, or be shut down, and their executives should be in prison.

 

 

Many foreign brand products, including those of luxury marques, are made in China, and manufactured to strict quality controls. But even this has a dark side. Most often, and with most foreign multinationals in China, those goods passing quality inspections are reserved for export to the West, while those failing the tests are sold in the China market - and at prices often three to four times higher than those charged in their home countries for the same item. I have no shortage of documented evidence that many famous brands will remove their best quality products from sale in China, reserving these for the US and Europe. This is so true that luxury goods sales have slowed in China from their breathless pace of double-digit annual growth to double-digit plunges in some cases, primarily because the honeymoon is over, and secondarily because the Chinese have discovered their own domestic products are in most cases of higher quality and at a small fraction of the price. And in any case, those desiring foreign brands have learned they can purchase those products in Europe or elsewhere at higher quality and at only 30% to 50% of the prices in China.

 

 It seems there is almost no limit to the extent of the blind greed that pervades many international firms, especially the Americans, operating in China. Companies renege on JV commitments, fraudulently buying and killing treasured domestic Chinese brands to eliminate their completion for market domination. They engage in every manner of dishonest marketing, cheating their customers in almost every imaginable way, selling their substandard goods in China at price levels far higher than in their own home markets, then reneging on warranties. Some conduct illegal pharmaceutical or other tests on unsuspecting victims in China, they pollute the environment far more heavily and with much less apparent concern than do most domestic firms.

 

 

These problems have existed for years. As far back as 2011, Xinhua News ran an article titled, "A Hundred Thousand Frauds of 'Poorly-Made in China'", which provided details of Chinese government authorities having recovered more than one billion RMB, over $200 million, for Chinese consumers, from foreign companies, most of these being American. This recovery was from the sale of substandard foods and consumer goods products, and unrelated to corporate fraud, misrepresentation and other overtly criminal acts. The literally thousands of other cases involving criminal misconduct were discovered and dealt with separately. The article noted that not only are Chinese consumers becoming increasingly aware of their rights, but the government has "greatly expanded the channels through which consumers can voice grievances and obtain satisfaction."

 

 

Why do these firms dare to engage so widely in open criminality and defraud their Chinese consumers on such a grand scale? The root cause is the amorality and greed of the individual executives of all major corporations, especially MNCs, enhanced by a deeply-rooted white supremacy and racism that the West exhibits to all non-Western nations. These foreign executives believe the Chinese are still uninformed consumers who tend to worship the West, taking further advantage of an unwarranted assumption that the Chinese lack discernment on consumer goods and have less tendency to be critical. One author wrote that "the skilled American marketers read the minds of Chinese consumers and translated their trust and faith into profits. Cheating customers by exploiting their credulity had become a stratagem for most American firms in China, employing behavior and practices they would never consider in the West." A major contributing cause was that for various reasons the Chinese Government had always treated foreign companies with much more lenience than that accorded to domestic firms. Until recently, foreign companies paid tax rates in China that were less than 50% of those charged to domestic companies, and were often given exemptions to rules and policies or received priority in making applications. Few Americans are aware that US firms also benefited from various subsidisations (some major) from China's central government.

 

 

From all this, the executives of these foreign companies in China developed a false belief that their passport gave them legal and moral immunity in China. Their sense of superiority and racism led them to continue to treat China as a third-rate market. Of course, this conduct has always been a matter of fact across the border in Hong Kong where these firms were seldom punished according to the non-existent Laws of Hong Kong, neither for financial crimes nor those resulting in physical harm. In the end, the lack of government supervision and punitive enforcement, and an apparently insatiable greed for profit, have combined to produce a thoroughly unpleasant corporate landscape in China, one which will not change until the executives of these foreign firms begin to pay personally - and heavily - for their criminal activity. Corporate executives will behave well only when violations automatically result in imprisonment coupled with serious personal financial loss. Moreover, these greed-driven parasites will still feel little motivation to improve their attitudes until the Chinese public punish them with a total boycott of their company's products.

 

 

Chinese consumers at first were trusting, with a blind faith in the quality of foreign brands, and at first were reluctant to complain strongly and to boycott those companies that took advantage of them. But Chinese consumers have rapidly become more discerning in their judgment of foreign products and more demanding in both quality and service. They became gradually enlightened about unhealthy food and consumer products distributed by foreign companies, and also realised they could purchase the same foreign goods elsewhere at half the price or less. In prior years, foreign consumer goods firms in China had been experiencing double-digit sales growth every year, but by 2016, most American and European consumer products and FMCG companies in China were experiencing their third year of steadily declining sales, viewed as a disturbing and almost certainly irreversible trend. Many attributed the decline to the 2008 financial crisis, or to a slowdown in China's economy. A few of the brighter lights recognised that their dilemma was the result of Chinese consumers reverting to Chinese brands, but apparently nobody seemed willing to face the fact that the honeymoon was over because reality had diverged unacceptably far from expectations. Chinese consumers had tried foreign brands and found them wanting in quality, utility and safety, realising they had been sold the sizzle without the steak. They realised at the same time those famous foreign companies had price-gouged them without mercy, while taking advantage in innumerable other ways. And they walked away, turning to their own trusted and far less expensive domestic brands. And they won't be back.

 

 

•Coddling Foreign Multi-Nationals

 

 

Thom Hartman wrote an article in the Third World Traveler on US Foreign Policy, titled "Coddling Foreign Multi-Nationals", in which he said:

 

 

"Multinational corporations have abundant capital, advanced management systems and good brand reputations. Therefore, they should lead the way in showing how to run businesses honestly and sincerely. However, the recent food safety incidents have made the public aware that mere self-control cannot prevent famous enterprises from violating laws and regulations. The desire for more profits always drives companies to keep approaching the lowest regulatory limit, which means lowest standards, lowest costs and highest profits.”

 

 

Food safety is crucial to people's health, but in the eyes of certain companies, it is just business. The profits they reap from violating laws and regulations are much more than fines and compensation claims. If they reap millions of yuan in profits by violating rules, but are only fined 100,000 yuan, greed will naturally grow and eventually become unstoppable. Due to the extremely low costs of violating laws and regulations in China, multinational corporations simply cannot resist the temptation to reap easy profits. Comforting companies that violate laws and regulations after punishing them will only make them greedier and eventually ruin an industry's reputation, instead of deterring them from violating rules again. Why do these type of problems keep emerging and why in China? Beijing Times commenter, Xun Lifan, expressed his opinion on the matter:

 

"Different strategies have developed due to the business environment in China. Many foreign-owned companies operating in China are used to preferential policies provided by the Chinese government, and lack serious domestic competitors which makes them too arrogant to respect their customers as much as they should. Additionally, the vulnerable position of consumers makes it difficult to protect them, which encouraged the big companies to take their business operations to extreme levels."

 

 

Multinational corporations in China have been feeling the pressure of a crackdown on a variety of practices, including alleged monopoly, corruption, and safety issues, a pressure accelerating in recent years. Chinese probes have been viewed as targeting foreign firms unfairly while providing insufficient legal recourse. If anything can be concluded from all of this, it is clear that multinationals no longer enjoy the preferred status that they did ten or fifteen years ago. Wages are rising, the legal enforcement environment is tougher, licensing procedures have become more difficult, the price of raw materials is rising, and local Chinese businesses are becoming more competitive.

 

 Hartman ended his article with a question as to the long-term existence of these American MNCs in China, thinking they might shift their production and other facilities to other countries in Asia since they might find it "too costly to do business in China". These companies will certainly shift production to lower-cost countries, and have already been doing so, but that avoids the real issues which are related almost exclusively to executive criminality and the rapidly-increasing penalties for that behavior. If companies like Wal-Mart, Pepsi, Nike, Coca-Cola, P&G, and Apple leave China because the costs of obeying the laws are becoming onerous, then the sooner they leave, the better for everyone. Chinese authorities have indeed been increasing both supervision and penalties against foreign MNCs but, if anything, this activity needs to increase, and with prison sentences necessarily added to the financial penalties. And I have to say I laughed out loud when I read in one of AmCham's annual reports that the number of American companies who "were happy" in China dropped from 43% to 28% in one year. I would like to see AmCham's list of Chinese companies who "are happy" in the US. But in the end, by far the best solution for these problems is a total boycott of most American products, one that should remain in effect until these firms are 'purified through bankruptcy'.

 

 

It's worth noting as a comparison that the Bank of China branch in New York was fined US$20 million on what was a trivial matter of accounting for loan collateral, one in which there was no loss nor suggestion of evading regulations. No bank in the US, domestic or foreign, had ever been fined that large an amount for so trivial a matter and, after Beijing objected, the fine was reduced by half. There are many more US banks in China than there are Chinese banks in the US, and China had never fined an American company such an amount even for much more serious (and felonious) crimes involving health and personal injury. Time for this landscape to change.

 

 

There is another matter here that tends to be overlooked by everyone, most especially the media and the Chinese self-appointed "experts" on foreign involvement in China, this being that foreign frauds are not perpetrated in China by corporations but by individuals. A 'company' cannot commit a crime, because a company is simply a piece of paper in a legal office somewhere. It is real people who make these decisions and commit these crimes, and this is where the focus must be placed. Fining a company serves only to punish innocent shareholders by diminishing their profits, but has no effect on the corporate executives who made those criminal decisions. The answer is not fines, but long criminal sentences. China is taking the American route, which is to consider corporate executives immune to criminal prosecution, and we need only look at the US today to see the result of this philosophy.

 

 

There exists in China among many foreigners a widespread contempt for China, for the Chinese people and culture, and for Chinese rules and regulations, the corporate crimes forming only one part of this picture. I recently met an American in Shanghai who was driving one of the old models of the Changjiang motorcycles and, as we chatted, he told me of having been stopped by the local police while driving that bike while very, very drunk. The policeman called his wife to drive the man home while he (the policeman) drove the motorcycle home. They didn't arrest or fine him, but they did cancel his driving license for 6 months. When I asked why he was still driving his bike, he said, "This is China. Who cares? They can't even speak English. They won't do anything to foreigners." In a similar example in Shanghai, three young Americans, perhaps 25 years old, were seen taking their bicycles onto the metro, something not permitted in Shanghai. These men knew that, so they entered the metro through the exit gates, lifting their bicycles over the turnstiles and proceeding to the subway, obviously not paying their fares either. In this case, some passengers detained them until the police arrived, but this kind of thing occurs constantly in all parts of China. The underlying attitude emanates from the insufferable moral superiority that permeates almost everything American. I'm sorry to add that it is also racist. In a more obvious case from late 2016, an American NBA basketball player named Bobby Brown boasted with photos on the Internet how he carved his name and team in huge letters on the Great Wall. His post: "Had a blast at the Great Wall of China today", with photos of him defacing one of China's most treasured cultural and historical relics. When his post triggered a storm of outrage, Brown made another post, saying, "I apologize. I didn't mean any harm by this. I respect the Chinese culture. I made an honest mistake." But then immediately upon leaving China, he deleted his apology. Draw your own conclusions.

 

 

•Wage Theft in China

 

 

Temporary employment agencies can fill a need in a nation's labor market since it often occurs that companies in many industries require additional labor during vacation periods or high seasonal demand. Corporate managers appreciate them because a single phone call can produce the requisite number of workers for a day, a week or a month. But the senior executives of American MNCs appreciate them for other reasons, the main one being that these temporary workers by definition are paid only an hourly rate, often the legal minimum wage but, even more importantly, are not entitled to the range of statutory benefits which include health care, pensions, unemployment insurance, legislated termination notice periods, pregnancy and sick leave, and many other such requirements. In particular, it is illegal in China to fire a pregnant employee and in addition the company must provide generous maternity leave, but these provisions apply only to permanent staff and not to temporary labor. You can already see the temptation.

 

This is one American labor practice that has been attracting increasing government attention in China, the alarming tendency to outsource permanent, full-time staff to temp agencies, primarily to avoid the cost of paying statutory benefits but also to escape responsibility for a host of other actions which would otherwise be illegal. Coca-Cola is famous for this American practice. As in all Western nations, it is illegal in China to hire full-time permanent staff through temporary agencies or to employ outsourced labor for other than temporary positions. But, if you have a clever lawyer play with the rules, you can find ways to pretend these are really only "temporary" employees, and you can pay them much less while avoiding all responsibility for their welfare and statutory benefits - and their mistreatment. In one recent case, immediately prior to China's new Labor Laws taking effect, Coca-Cola fired all its employees in some China locations and turned them over to an outsourcing agency at half pay. One Coca-Cola employee reported that "they called us into a meeting . . . with no notice, and told us that they were outsourcing our jobs and turning us over to a third party. We would no longer be Coca-Cola employees". But not to lose the main point which was that Coca-Cola executives took this drastic step just before the laws changed, in what was surely a blatant attempt to circumvent the new laws. Other American firms, Schering-Plough among them, did the same.

 

 

Coca-Cola managers claim they employ temporary labor because drink bottling is a seasonal business, but investigations have proven that perhaps 50% of the staff in the company's plants during an entire year consist of temporary outsourced labor. It has been well-documented that Coca-Cola in China has employees who have been working continuously for as long as 10 years in the same job as "temporary labor" while being paid less than the minimum wage, a situation containing clear and multiple violations of the law. There were many media reports that nearly half the employees at Coca-Cola's Hangzhou plant were "illegally dispatched", employed by the labour supply company but working full-time for Coca Cola. The company's China management insist their use of contract labor is lawful and that "independent auditors" have confirmed they were "fully compliant with local labor law." The translation is that they found clever ways to circumvent the law while becoming too cozy with a few officials in the government labor office in Hangzhou. A few years ago, students conducted investigations in five Coca-Cola bottling plants, discovering there were severe legal violations in each - long term and high volume use of dispatch labor, frequent workplace injuries, insufficient safety measures, wage deductions, wage arrears, excessive overtime, etc. After publicly releasing the report, there was much media coverage that resulted in a strong public reaction, giving Coca-Cola executives no choice but to respond, but they persistently denied the fundamental problem of illegal use of dispatch labor. Reports are that over the years, nothing has changed in the slightest, with no reduction in the large volume of illegally employed dispatch workers, wages still remain much below the legal minimum, worker safety is apparently ignored, and workers have no have insurance or other statutory benefits.

 

 

Among the documented labor violations in Coca-Cola's bottling plants is the frequent claim that workers are asked to sign a blank contract in which only the expiry date has been entered or which contains a fictitious salary meant only for government inspectors to see. According to one group of student workers, "A manager at the agency asked us to sign a contract stating that we will be paid the minimum wage of Hangzhou, which is 5.7 yuan, but at the same time, he told us that we will only be paid 4.5 yuan and we have to work 12 hours a day with no overtime pay. We wonder how much Coca-Cola pays the agency." Zhen Zhiqiang, the agency's manager, claimed the students were paid the minimum wage and were lying. One investigator reported that, under pressure from Coca-Cola's managers, staff "often worked 12 hours per day for an entire month without a single day off.", and SACOM said that this dispatched (outsourced) labour always had overtime work up to 150 hours per month in Swire Guangdong Coca-Cola - in other words, working 16-hour days, while others were forced to work excessive overtime, sometimes as much as 300 hours per month. The Chinese press reported from the investigations that Coca-Cola employees were "involved in the most dangerous, intense and tiresome labor, work the longest hours, but receive the lowest wages and face arrears and even cutbacks in their pay." It's clear that Coca-Cola is bringing its destructive labor, human rights, environmental policies and products into China. My view of the situation is that a few labor officials in Hangzhou and Guangdong, and more than a few Coca-Cola China executives, need to sit in prison cell until Coca-Cola converts all its subcontracted workers into full time employees as required by the law.

 

 

A few years ago, Coca-Cola China was involved in a massive public scandal involving intimidation and physical violence against university students who had been hired for summer jobs through the company's outsourcing agency. At the end of the summer, when the students appeared in the company office, as per instruction to receive their final pay, they were refused overtime and other earned pay, and threatened by the company staff. One student named Xiao Liang, who was apparently not intimidated and insisted on being paid what he was legally owed, was beaten by two managers in the labour supply company’s office, and was hospitalised with serious wounds in one eye and hand, and was diagnosed with a ruptured eardrum and permanently damaged hearing. The incident occurred in the office of the vice-general manager of Zhiqiang Company, Coca-Cola's labor dispatch company. The response of Coca-Cola's executive staff was, as always in many similar situations, to deny any responsibility for the actions of its agency, and to dismiss the violence as an isolated incident, but contrary to Coca-Cola’s assertion, the CLB’s preliminary research showed that this workplace violence was a serious and widespread problem. Officials at Coca-Cola in China said the dispute did not involve Coca-Cola. Zhai Mei, the associate external affairs director of Coca-Cola China, told the media "We are very sorry about what happened to Liang, but the conflict is strictly between Liang and the employment agency. The bottling factory and Coca-Cola are not aware of the situation." He further claimed that Coca-Cola and its bottlers not only "strictly comply with the laws and regulations regarding labor practices", but also "have strict supplier guiding principles" for its employment agencies.

 

One practice shared by Yum, KFC, Pizza Hut, and McDonald's is wage theft. These firms are renowned as much as Coca-Cola for finding every possible way to pay their employees less. This is especially true, and especially irritating, in China where KFC earns half of its worldwide profits on a sales volume half that of the US. Part-time staff are particularly unfairly exploited, with both KFC and McDonald's paying only 60% of China's minimum wage, persistently blaming "unclear regulations" while continuing to violate the laws. American critics complain that US companies are singled out for this kind of media attention, but the fact is that American companies came to China boasting of their high standards and high quality, of employing "international best practices", and being generally superior in all respects, then proved to be the least honest and most predatory of all companies. It is the American firms who will make extensive use of every possible legal loophole to avoid paying wages and providing statutory benefits for their staff. The Chinese authorities have been much too lenient on these American companies for much too long, leading to the point where they now believe they are above all domestic law.

 

 

In spite of its pretty face and attractive products, Apple has some of most deplorable labor practices of any American multi-national. Steven Jobs is revered as an innovator because of Apple's iphone, but the iphone was nothing. Jobs' real innovation was in finding a firm - Foxconn - that would build a one-million employee concentration camp where it could manufacture and assemble iphones while the one million young workers were living on the brink of starvation. and at the time of writing, Apple was sitting on a cash pile of $150 billion (then increased to $200 billion), but that entire cash pile was stolen from the workers who made Apple's products. Had Jobs accepted responsibility for what were in fact Apple employees and paid them anything resembling a living wage, that $200 billion would be zero. The iphone's 'cool factor' is irrelevant in this equation. Apple's profits did not come from cool; they came from the theft of wages from society's most vulnerable young people who needed a job and a start in life. Steve Jobs wanted Apple to be profitable, with a margin of about 40%, but to succeed in his quest, Jobs first had to ensure they failed in theirs. And he did. Even in an internal company report, Apple admitted the "sweatshop" conditions inside the factories that make and assemble its products, admitting that at least 55 of its 102 factories were making staff work more than 60 hours per week, that only 65% were paying legal minimum wages or statutory benefits and that 24 factories paid nothing near China's minimum wage. The pressure placed on these young people for higher productivity was truly unconscionable, with dozens of young people committing suicide, a fact which did not escape the attention of either Steve Jobs or Tim Cook but which resulted in no action. A human rights organisation accused Foxconn of having an "inhumane and militant" management, the executives of neither Foxconn nor Apple caring to comment.

 

 

A few years ago, Carrefour came under fire in China for having refused to raise wages for more than ten years, with company executives refusing to accept the collective wage negotiation system that has existed in China for decades. Since China does not have a compulsory system of heavy fines for violations of these regulations, it is cheaper for Carrefour executives to ignore them. According to media reports, the salaries of more than 6,000 employees at about 20 Carrefour stores in Shanghai barely changed between 1998 and 2010 while the average salary of Shanghai workers more than tripled. Many American MNCs do the same. It seems that no behavior is too low for a Carrefour store manager. You have no doubt seen displays in supermarkets where a company hires (usually) young university students to distribute free samples or free tastes of a new product. Carrefour not only charge high fees to permit this on-site marketing, but view it as a source of free slave labor. The girls usually work an 8 or 10-hour day, after which the Carrefour manager demands they don a Carrefour smock and work another 4 hours - unpaid - for the store. The incentive is that if they refuse, they will be given a negative reference to their employer and will lose their jobs.

 

 

•And Not Only the Corporations . . .

 

 

The US government itself has a long history of defrauding the Chinese public whenever a suitable opportunity presented itself. One such example has been the issuance of US travel visas to Chinese citizens. The US State Department didn't publicise this but AmCham, the American Chamber of Commerce, boasted in one of its annual reports that Chinese visa applications constituted "a significant source of revenue for the State Department". The reason was twofold: the first that the State Department charged 1,000 RMB per application, with one visa officer able to process at least 16,000 applications in a year, thereby earning about 16 million RMB per officer - of which the State Department has about 50 in China, generating total revenue of about 800 million RMB per year. The second, and even better, part was that the 1,000 RMB application fee was "non-refundable" and that the American consulates deliberately made the application process so complicated and lengthy that many, or even most, applicants simply abandoned their applications, leaving the State Department with most of their 800 million RMB as clear profit. This constitutes unconscionable price-gouging that surpasses even the astonishing greed of most American health care companies and universities in China and, looking at the details, there is no way to avoid the conclusion this had all the signs of a deliberate and fraudulent scam. An added attraction was that since these fees were delivered to the US consulates in cash, they would create neither paper nor banking trail accessible to Chinese authorities, permitting the money to be quietly re-distributed (also in cash). The State Department then had a perfectly invisible method of employing those visa profits to finance the activities of USAID, the NED, and various other politically-incestuous American NGOs in China, a clever way to use the money of Chinese citizens to finance the CIA's destabilisation efforts in Tibet and Xinjiang. Among other things.

 

 

Another more open fraud was promoted in legislation initiated by the Jewish-American Senator Charles Schumer, one of the world's most renowned China-haters who discovered infamy with claims China's RMB was 40% undervalued. In this case, Schumer conceived a plan to refloat the US economy by sucking huge amounts of cash from the bank accounts of the (in Schumer's deluded mind) hundreds of millions of Chinese citizens desperate to live in the US but unable to obtain a travel visa (see above). The plan was brilliant. Any Chinese citizen could receive a three-year automatically-renewable US visa, by doing two simple things: (1) purchase a home in the US for more than $500,000 and, (2) agree to pay taxes to the US government in perpetuity on all world-wide income. Additional stipulations were that the home purchase must be in cash, and that the visa was tourist-only, with no possibility of either a green card, work permit, or other amendments. As I said, Schumer's plan was brilliant in conception. The US housing market was in the gutter after 2008, with no hope of resurrection, but now we would suddenly have hundreds of millions of eager Chinese rushing to purchase a home and re-inflating the housing balloon to even greater heights, solving America's housing crisis without costing the US government a penny. These hopes were becoming increasingly common among Americans, with the wealth from China's emerging middle class considered a panacea for all American troubles in recent years. As one writer noted, "When American workers needed jobs, a conditional green card was offered in exchange for half a million dollars and 10 local job opportunities. When American farmlands needed cultivating, a conditional green card was offered to those willing to buy large parcels and hire farmhands. And now, why not salvage the distressed housing market by tapping into those deep Chinese pockets yet again?". With luck, China would once again become a cash ATM dispensing hundreds of billions of dollars to refloat the US economy. However, while Schumer's plan may have been brilliant in conception, it proved to be idiotic in execution, with precisely zero Chinese citizens availing themselves of the opportunity to pay income taxes forever to the US government when they were neither American citizens nor earning money in the US.

 

 

•Owe Money to a Chinese Company?

 

 

This topic was originally prompted by a story published in Canada's Globe & Mail about a Canadian businessman with a peculiar view of doing business in China. A Mr. Jim Tyrer and his company, Trans-Pacific, sent a shipment of substandard lumber to a Chinese firm in Tianjin. The customer of course complained and, while Tyrer admitted his product was substandard, he refused to accept a return or refund the customer's money. The Tianjin company finally made application to the courts and obtained a judgment for the shipment's value. However, Tyrer ignored the court judgment and refused to pay because his lawyer advised him that since Trans-Pacific had no assets in China, "the Chinese court ruling was unenforceable". Unfortunately for Tyrer, the Chinese courts disagreed, and after he skipped out the first time they were waiting for him on his return. He was arrested prior to departure, and released only after payment was made to the court. The Globe & Mail unashamedly turned the article into what they called "a cautionary tale about doing business in China", but it should have been a tale about doing business with Canadians. And not only Canadians. It seems we are developing a kind of new Olympic sport - reneging on debts to Chinese businesses on the grounds that the Chinese dislike confrontation and conflict, and probably won't sue.

 

 

Following this, we discovered an enlightening series of articles published by an American lawyer named Dan Harris, who openly recommends not paying debts to Chinese companies, on the same basis as outlined above. This was posted in [China Law Blog, by American Lawyer Dan Harris on July 9th, 2009. Harris & Moure; 600 Stewart Street, Suite 1200, Seattle, Washington, 98101 Phone: (206) 224-5657: http://www.chinalawblog.com/]

 

 

Harris wrote a charming article titled "How to get free product from China: Just Don't Pay". Being the clever US lawyer he is, Harris tells us he is not recommending reneging on debts to Chinese firms, while he gleefully recommends reneging on these debts. As follows:

"If you owe money to a Chinese company for product and you cannot pay all of your creditors, skip out on the Chinese company. Near as I can tell, there is nearly a 100% chance they will never sue you to recover. About a year ago, a client had come to me for a consultation regarding a dispute it was having with its Chinese OEM supplier. The Chinese company was threatening to sue my client for about $350,000, per its invoices. I advised my client not to pay anything. I met with this US client (later) and asked him "whatever happened with that Chinese supplier that had been threatening to sue you?" His response was that nothing had changed. Every few weeks, the Chinese company emails seeking its $350,000 and threatening to sue. My client responds by offering $200,000 in full settlement and the Chinese company refuses. We laughed and moved on."

 

 

Harris advises those reading his firm's website, to first "Get everyone out of town". In other words, when you plan to default on your debts to a Chinese firm, first send all your American staff (and your assets) back to the US, then tell your Chinese supplier "from far far away" that you aren't going to pay. Disturbingly, Harris appears to be suggesting that American companies do this as a matter of course, whenever they have no Chinese assets to be attached. Certainly, he is putting the thought firmly in their minds. According to Harris, you should make a huge purchase from a company in China, then just ignore their demands and eventually they will go away and you won't have to pay. And if you do plan on perhaps paying them someday, be sure to put the Chinese firms at the very bottom of your payables list. What else is there to say? Harris is educating us to the American principles knows as 'rule of law' and 'playing by the rules'. Can you imagine the outcry in the Western media if a Chinese lawyer were to publicly recommend that Chinese firms renege on their US debts on the basis that they have no US assets and that judgments are unenforceable?

 

 

Certainly Harris has prompted such behavior. Several American firms confirmed this approach. In one case, an American executive posted on Harris' blog: "This is so true. This is exactly what my company did and we got away with it. We owed money to a Chinese company and all they had to do was sue us and we would have paid, but they just kept calling and writing and calling and writing and we just never paid. At first I felt bad about this, but then I started seeing it as payback for how American companies get treated over there." Another executive posted this: "This is what happened with my company. We chose not to pay one of our Chinese creditors because we could not afford to pay everyone. They said they would sue and a lawyer (from China) wrote us, but then they just gave up."

 

 

According to Harris, the problem is not that American companies are dishonest and renege on their debts. Rather, the problem is entirely China's, for "the terrible job Chinese companies do in collecting on their international debt". He tells us there are countless stories of Chinese companies shipping product overseas and then never getting paid, but it's their fault for trusting Americans. And I suppose he's right. Americans cannot be trusted. Certainly, Chinese companies must become more prudent in issuing export credit. The best solution is cash in advance or an irrevocable letter of credit. Too many Chinese exporters, especially the smaller ones, worry about losing customers and are often lured into granting credit in unjustifiable situations. Given the slim export margins, one large unpaid debt can easily represent an entire year's profits. Chinese culture is much less belligerent than that of nations like the US who readily resort to litigation for the smallest dispute. To the Chinese, this kind of open warfare is a failure, with negotiation being the preferred process. But negotiation is possible only with sincere participants, and Americans display no such sentiment.

 

 

There are a great many such corporate executives following (or attempting to follow) Harris' advice, and from the accumulated evidence, few of these are unanticipated defaults where a purchaser simply ran out of cash. Rather, there is substantial evidence that these defaults are planned, the American firms counting on the probability they won't be sued in US courts. Often, an unscrupulous buyer begins with small orders and prompt payment, sufficient to gain trust from Chinese suppliers, then places a large order and simply reneges on payment. Following precisely this practice, the American electronics distributor APEX, defaulted on debts to Changhong, China's major electric appliance maker, of about 2.5 billion yuan, nearly equivalent to all the firm's net profit from 1998 to 2003. But there are other, more sinister schemes. American firms often take advantage of Chinese lack of familiarity with US corporate law, and set up a shell company without assets specifically for the purpose of fraudulently placing orders then disappearing without a trace, many American firms doing this repeatedly as a standard procedure. China's Export and Credit Insurance Company found that many exporters in various Chinese cities were cheated by the same American buyers in the same way. An executive of an asset management firm which helps Chinese companies collect debts in the US, said the cheating tactics used by American companies in dealing with Chinese firms consist of virtual templates falling neatly into precise categories, with more than sufficient examples to enable compiling a catalogue record of their cheating practices. It appears it will still require some time for Chinese firms to fully acquaint themselves with the truly predatory nature of American capitalism.

 

*

 

Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai's Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He can be contacted at: 2186604556@qq.com

 

 *

 

Larry Romanoff is one of the contributing authors to Cynthia McKinney's new COVID-19 anthology ''When China Sneezes''.

 

Copyright © Larry Romanoff, Moon of Shanghai, 2020