How to negotiate a trade agreement in China.

Whether a company is seeking a joint-venture partnership or attempting to go it alone, doing business in China is not for the faint at heart.

"(Trade with China) has been a slow process, but it's heating up at the present time," says a Northern Ontario company representative who has been wooing Chinese partners since 1996.

But there are a few dos and don'ts when developing a contract with the Chinese says Mark Bolger, Export Development Canada's regional manager for Asia Pacific.

In a book titled "When Yes Means NO (or yes or maybe) How to Negotiate a Chinese Deal in China," author Laurence J. Brahm states contracts should be viewed as a tool to ensure both parties understand each other. Through the document everyone knows what they have to do to make the deal work and what will happen to each party if it does not.

Between one another, the Chinese tend not use written agreements, but foreigners cannot rely on domestic ways, says Leo Seewald, lawyer with Goodmans LLP Barristers & Solicitors. He specializes in corporate commercial law, with an emphasis on foreign direct investment with the People's Republic of China.

"Do not abandon your desire to use a Western contract just because the Chinese say you cannot use that on the local people," he urges.

In saying that, however, giving Chinese partners a long-listed document may "complicate the negotiations significantly," depending on the Chinese level of sophistication, he says.

Perhaps contracts may have to come in the form of a series of purchase agreements, with each transaction as discreet as the next, he says.

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But "if a deal calls for a final agreement, then use a final agreement."

The Chinese culture focuses on the sprit of the contract rather than the words, except in areas where misunderstandings could take place, Seewald says. Contracts drafted by Chinese lawyers tend to be shorter than the average North American document. Ultimately a company adviser should have a good feel for the contract best-suited for the agreement. He says, now more than ever, Chinese business leaders want to sign a memorandum of understanding to show that progress is occurring.

China is attempting to open opportunities in certain industries. The government is picking areas of opportunity by classifying industries as restricted, prohibited, permitted or encouraged, he says.

Canada has much to offer China in raw materials, niche technology, safety and environment technology, according to Bolger.

"China has one of the most educated labour forces in the world. What they lack at the moment is specialization."

Bolger advises people not to "treat (Chinese partnerships) as a special case; don't relax credit or business standards."

The Chinese are shrewd negotiators, and in the early 1990s some Canadian companies went in with the expectation of making millions of dollars. In some cases it did not happen, Bolger says.

He suggests contracts need to be completed with senior management's full input.

"You are less likely to have someone renege on goods and services if (you or your top managers) travel to the country."

If a partnership agreement goes sour, companies should opt for arbitration. The court system is arduous and companies cannot choose a judge or guarantee government officers will not be corrupt.

Small- and medium-sized enterprises may be better off walking away and cutting their losses, rather than trying to resolve it.

"Your losses can be substantial. (The Chinese) are shrewd negotiators and will use everything to their advantage," Bolger says.

Having an agent in China is equally essential, but, Bolger warns, China has its share of scam artists, so doing one's due diligence is imperative to business success.

"Never ever, ever sign an exclusivity agreement that locks the company into a single agent," Bolger says.

No one agent can act to cover all of China. Most agents cover a small geographical area. In some cases, a company may need more than one agent for certain regions in China. Agents can evaluate the situation to determine if management's presence is required, or act on the company's behalf when needed.

The Chinese tend not to do business unless there is some basis for a long-term relationship, he says. Personal, business relationships or both are built upon a series of obligations, favours and trust or what is better known as Guanxi.

In the last five years, China has adopted western ways with a passion, with special interest in commerce and the adoption of free enterprise. Now, they are the ones being pursued by Chinese partners eager to sign contracts.

"The Chinese want to manufacture everything they are importing and they want to do this in the next five years," the anonymous company representative says.

www.dec-ced.gc.ca

By KELLY LOUISEIZE

Northern Ontario Business