On November 12, 2024, as part of our 2024 Global Year-End Review of Import/Export & Trade Compliance Developments Conference, Baker McKenzie hosted an in-person fireside chat with Kyle Sullivan, Vice President of Business Advisory Services at the US-China Business Council (“USCBC“).
In the discussion with Baker McKenzie’s Senior Counsel, John McKenzie, Mr. Sullivan discussed the changing commercial and business environment for US and multinational companies doing business in China. The key takeaways are summarized below:
- US-China intergovernmental dialogue under the current Administration: Following the United States’ hosting of the 2023 Asia Pacific Economic Cooperation meeting, the governments of the United States and China had entered a managed tactical pause, endeavoring to cooperate in areas of shared interest (e.g., climate change) while attempting to manage their strategic differences. The US government has taken efforts over the past year to communicate its intentions to Beijing ahead of actions that could perceived as escalatory, such as the May 2024 tariff actions taken under the authority of Section 301 of the Trade Act of 1974 and the outbound investment review rulemaking process. How that may look under the new Administration remains to be seen and likely depends on confirmation hearings.
- USCBC annual Member Survey takeaways: Mr. Sullivan highlighted key takeaways from USCBC’s annual Member Survey. In particular, he noted that companies had seen modest improvements in the Chinese business environment, although respondents indicated increased scrutiny from US regulators regarding their activities in China. Mr. Sullivan added that US/multinational companies tend to act cautiously regarding their Chinese operations vis-à-vis Chinese and US regulatory risk, and may be self-policing more than what is legally required.
- Emerging US tools:
- Expect outbound investment review scope to expand: Mr. Sullivan noted that the technologies targeted by US Department of the Treasury’s new outbound investment review regulations, effective January 2, 2025, were largely scoped according to the policy framework of the Biden Administration’s National Security Advisor, Jake Sullivan—i.e., technologies in the semiconductor and microelectronics, quantum computing, and artificial intelligence fields. Expansion of the US outbound investment review regime into additional technologies is a matter of bipartisan congressional interest and the interest of China hawks within the upcoming Trump administration.
- Military End-User restrictions: Mr. Sullivan also noted the continued ambiguity and challenges regarding the military end-user (“MEU“) proposed rules under the Export Administration Regulations (“EAR“) published in July 2024, which we covered here. Under the proposed rules, companies would be required to self-identify MEUs, which Mr. Sullivan noted imposed heavy burdens on the private sector, could pose employee safety issues, and force companies to choose between complying with MEU due diligence expectations under the EAR and limitations in conducting in-country due diligence in China due to, for example, China’s Anti-Espionage Law. Mr. Sullivan also added that it is unclear whether the MEU proposed rules would be finalized in the remainder of the Biden Administration due to other rulemaking priorities, such as semiconductor and semiconductor equipment manufacturing rules.
- Expect outbound investment review scope to expand: Mr. Sullivan noted that the technologies targeted by US Department of the Treasury’s new outbound investment review regulations, effective January 2, 2025, were largely scoped according to the policy framework of the Biden Administration’s National Security Advisor, Jake Sullivan—i.e., technologies in the semiconductor and microelectronics, quantum computing, and artificial intelligence fields. Expansion of the US outbound investment review regime into additional technologies is a matter of bipartisan congressional interest and the interest of China hawks within the upcoming Trump administration.
- Emerging Chinese tools:
- Regulatory tools: China has been modernizing its economic retaliatory toolbox, and has already demonstrated a willingness to weaponize export controls, specifically in the case of rare earths. Mr. Sullivan views China’s economic retaliatory toolbox as more flexible than its US counterpart, in part due to vague regulatory language.
- Industrial policy: Mr. Sullivan noted that the economic environment in China is driven by Beijing’s interest in import substitution and fostering domestic industry. Beijing has resorted to standards setting as an internal barrier to trade to encourage domestic production. Large state-owned entities have also imposed domestic content requirements on procurement having a signaling effect on the international business community.
- Regulatory tools: China has been modernizing its economic retaliatory toolbox, and has already demonstrated a willingness to weaponize export controls, specifically in the case of rare earths. Mr. Sullivan views China’s economic retaliatory toolbox as more flexible than its US counterpart, in part due to vague regulatory language.
- Trade Relations under Trump II: In the face of likely additional US-China trade restrictions under the second Trump Administration, Mr. Sullivan identified Beijing’s primary economic retaliatory options: reciprocal tariffs, canceling exclusions, and devaluing the yuan. Devaluation may be particularly appealing in the event of an unregulated escalatory trade war between Beijing and Washington, which would incentivize China to devalue the yuan and make its exports more competitive in third-country markets.
