“This leaves foreign investors wanting to set up Sino-foreign equity or cooperative joint ventures in something of a dilemma due to the change in governance structures,” McGinty observes. “Do they set up a JV now under the old rules and renegotiate with their partner down the line, or do they agree two sets of documents now and have a ‘flip-over’ to the new documents on Jan. 1, or do they wait till the effective date of the FIL thus giving them better visibility as to the outcome of the trade war and what the implementing regulations will look like?”
“The FIL also sets forth new rules for the protection of intellectual property and technology transfer compliance, both in response to an escalation of disputes in these two areas and as China takes new steps towards market reform. While the new law aims to promote trade and break down barriers for foreign investment, the ongoing trade tensions have caused multinationals to adopt a more cautious approach towards market entry or exit in the U.S. and China,” says Dora Wang, Partner in Reed Smith’s Global Regulatory Enforcement group.
“Many Chinese and U.S. companies have also become more vigilant in managing the compliance issues and commercial and employment disputes that often surface during wind-downs or corporate restructuring, which could be corruption or bribery, HR-related disputes or even environmental noncompliance, or any issues that might trigger a government investigation. These MNCs recognize that they need to step up their efforts to curtail and remediate noncompliance in order to avoid becoming targets of regulatory enforcement in China or the U.S.,” Wang comments.
“We are seeing a significant uptick in legal risk assessments, investigations and regulatory advisory work in the areas with the most enforcement activity—trade sanctions, antitrust and competition law, cybersecurity, and anti-corruption and anti-bribery compliance, for example—as there is a growing concern among multinational companies that they face heightened regulatory scrutiny in the current environment. Chinese companies and foreign companies that transact business with Chinese entities are seeking our legal advice in recalibrating their risk profiles and risk mitigation strategies in light of the changes they see in the external environment,” Wang notes.
“For example, a client may contact us for advice on how to restructure its supply chain or reroute its logistics in order to minimize the impact of tariffs and comply with international sanctions. In doing so, the client may discover previous noncompliance, or disputes may arise as a result of stopping payment or the delivery of goods in connection with the sanctions. Over the course of our representation, we could end up assisting the client with advice on international trade sanctions, multijurisdictional import and tariff rules, contract disputes, banking regulations, and international shipping, as well as conducted an internal investigation and a compliance system upgrade.”
With the recent news about Huawei and other major Chinese firms, “many Chinese companies are reaching out to us on advice regarding how to comply with U.S. export controls and sanctions,” says McGinty. “We help them set up export control compliance programs and guide them when they discover a potential violation of U.S. or other jurisdictions’ export control laws.”
On the trade remedies side, the number of U.S. investigations has doubled in the past two years. “So, we have represented a wide array of Chinese companies and their U.S. importers in front of the Department of Commerce and the International Trade Commission assisting in either reducing the tariff levels or making arguments that the U.S. industry was not ‘injured’ as a result of the tariffs,” he notes.
As far as tariffs are concerned, companies are seeking exemptions from the bilateral tariffs but both countries have product exclusion processes where companies can argue that a specific product should not face tariffs. “We represent clients before the U.S. Trade Representative. While it is a difficult policy environment, we find that a targeted message regarding the potential economic harm can help avoid the tariffs,” says McGinty.
“Many companies, therefore, have already started proactively considering modifying or diversifying their supply chains, looking at alternative investments, or increasing their investments in other countries in the region that are less affected by the trade tensions,” Wang points out. And the most burning questions for them, according to McGinty, are about actual investments currently going through the CFIUS process in Washington.