MCC: Will the U.S. election, and the significant differences in trade policies between the Obama and Trump administrations, mean additional legal or regulatory hurdles for trans-Pacific deals?
Yao: We believe that there will be additional trade and investment hurdles. There is a nationwide debate heating up in China’s business and legal sectors about the burdens that taxes pose for them. The consensus is that the overall tax burden of doing business in China is likely higher than in the United States. This is an indication that businesses will be more willing to leave China.
While anticipating the potential for greater protectionism and possible anti-globalization efforts under the Trump administration, China likely will put the brakes on Chinese business initiatives that call for making investments in the U.S. On January 7, a new rule was rolled out by the Chinese stated-owned assets watch dog stipulating that all China outbound investment initiatives made by major state-owned companies would be subject to “close scrutiny.” At the same time, China has − and will − put in place more preferential policies aimed at attracting and retaining foreign investment. The State Council of China issued an executive order to promote and attract China inbound foreign investment on January 17, which is interpreted as China’s significant move to win back foreign investments.
China’s strategy includes a tightening of the foreign exchange control mechanism, which makes China outbound investment much more difficult. President Trump’s withdrawal from the Trans-Pacific Partnership (TPP) during his first week in office may boost U.S.-China trade significantly, as TPP countries will not be able to take advantage of TPP. China would likely win back significant trading deals.
MCC: Chinese regulations prohibit foreign firms from practicing Chinese law. What are the most important questions for international firms to ask themselves when engaging a Chinese firm?
Yao: We understand that the primary questions would be about reliability: ensuring that the firms maintain only the highest professional standards, that their work is consistently of top quality and that they have demonstrated their ability to work with clients in the appropriate language, particularly English.
MCC: Some clients have concerns about the confidentiality of the data they share with counsel in China. How can they keep their information, which may be necessary for a legal proceeding, private?
Yao: Again, the firm’s track record for reliability is the key. In some cases, the goal is to make sure that the team is reliable, along with all the professionals who are associated with it. It’s important to make sure their reputation for ethical conduct is beyond question. In some cases, technical tools can be deployed, such as read-only databases or files.
MCC: What should a U.S. or international company know about drafting contracts under the laws of China, and what are the most important questions such a client should ask before engaging a Chinese firm?
Yao: First, the laws of the United States and China are very different. There is no federal and state law distinction in China. Everything is centralized, and local laws only exist when they serve the purpose of implementing the national laws. When drafting contracts in China, one should know that there is often no choice of law available. Most contracts are governed by Chinese law. In addition, court proceedings are not necessarily public and could be more effective than arbitrations in many cases. Most contracts require a version written in Chinese. In some cases, a contract could require the approval of the Chinese government.
Second, when engaging a Chinese firm, the most important question, in our view, is whether the firm has the requisite ability to communicate effectively with the client.
Finally, there are routine questions such as clearing conflicts and fee arrangements. Particularly in cross-border deals or matters in which a client is dealing with firms in different countries, it is critical to have an arrangement in place for identifying and vetting potential conflicts. Don’t just assume that this takes care of itself. Many Chinese firms have no conflict check and clearance process.
Published February 12, 2017.