The U.S.-China trade war has escalated. Photo: Shutterstock

The trade conflict between the United States and China has lasted more than a year, and lawyers are worn out. The utter lack of predictability might have increased the demand for legal advice, but the prospect of the world's largest economies locked in a perpetual full-blown economic confrontation is not good news for anyone, including lawyers.

The year-long negotiations, which had many believing a workable resolution would be achieved, took a sudden turn for the worse earlier this month in the form of a series of tweets from President Donald Trump. To the surprise of many, the President threatened to raise tariffs from 10% to 25% on an additional $200 billion worth of Chinese imports. The U.S. Government quickly followed through on the new tariffs; China immediately responded by increasing tariffs on $60 billion worth of U.S. goods, mostly agricultural products.

"Things fell right off a cliff last week," said Stephen Kho, a Washington, D.C.-based international trade partner at Akin Gump Strauss Hauer & Feld. "For the better part of this year, we were cautiously optimistic – the two sides held regular talks and seemed to be able to find common ground," he said.

The new set of tariffs moved beyond the scope of the administration's initial measures against Chinese imports related to technology and intellectual property as a result of the U.S. Trade Representative's (USTR) investigation under Section 301 of the 1974 Trade Act. Products affected now include a wide range of consumer and industrial goods. In addition, the USTR will hold a hearing in June on whether to slap a 25% tariff on a further $300 billion worth of Chinese imports that include nearly all everyday consumer goods such as cellphones, laptops and clothing.

"There is simply no economic precedent for the largest and second largest economies on the planet who are each other's largest single trading partner suddenly slamming on the tariff 'brakes' in this manner," said Nelson Dong, a Seattle partner with Dorsey & Whitney.

But shock and surprise aside, the level of unpredictability created by the trade war certainly brought in work opportunities for trade lawyers. "We do get busier," said Kho, who worked as a lead lawyer on China matters at the USTR under the administrations of Presidents Bill Clinton and George W. Bush. With constant changes arising from the trade talks, Kho said he has had to react quickly to clients' inquiries.

"Uncertainty is great for lawyers," said Denise Jong, Asia managing partner of Reed Smith. Jong, who focuses on China-related matters, said clients are eager to get advice as they reevaluate suppliers options. There is also growing demand for China-U.S.-related disputes work, she said.

But the escalating friction between the two countries is only good for law firm business in the short-term, Kho said. Clients will become numb to the changes when there are too many of them. And more importantly, uncertainty is bad for business.

"Clients are unable to make decisions because there is no predictability. Things can change tomorrow; nobody knows what the future holds," he said. "We are seeing a lot of stagnation in the market."

Deal activity between China and the U.S. is already slow and will likely remain slow. A recent report released by New York-based thinktank the National Committee on U.S.-China Relations said Chinese direct investment into the U.S. in 2018 dropped 83% to $5 billion, a fraction of the $46 billion just two years ago.

Dorsey's Dong said as the U.S.-China trade war continues, suppliers in third countries will look to take advantage of the situation by trying to replace either Chinese or American supply sources, as importers look for ways to avoid the punitive tariffs.

No Winners

Negotiations between the two countries are continuing. Following the U.S. administration's announcement of new tariffs, China's chief negotiator vice-premier Liu He visited Washington, D.C., to hold talks with treasury secretary Steven Mnuchin and USTR Robert Lighthizer. Mnuchin has announced he will visit Beijing for the next round of talks.

But the optimism surrounding a possible trade deal has waned. "There are more and more signs that this is going to be a long-term problem," said Akin Gump's Kho. He noted the Department of Commerce's decision this week to put Huawei Technologies Co. Ltd. on a list of companies that are banned from buying products from U.S. companies without government approval, and Trump's executive order barring U.S. companies from buying telecom products from sources deemed to pose national security threats.

"I'm not sure how a resolution can be reached," said Kho, given the actions. So far, China's responses have been cautious, he said, but that might not last.

Fundamental differences between the two countries seem unbridgeable. Earlier this week, The New York Times reported that as the two countries were about to reach a deal, the Chinese side made a last-minute u-turn and walked back from multiple commitments. That prompted Trump's tweets. The changes to the agreed-upon document came from the top – from President Xi Jinping – indicating Xi did not want to make certain changes to Chinese law, which could be seen as yielding to U.S. demands, the Times said.

In March, China enacted a new foreign investment law, a move largely seen as a response to demands made by the U.S. during the trade negotiations. But the new law, albeit promising foreign investors equal treatment and protection of intellectual property rights, has been criticised for its lack of details and clarity. The new law, which is set to take effect on January 1, 2020, will rely on more detailed implementing rules addressing the real legal and business issues foreign companies face in China.

But before any changes take place, China still has more non-tariff tools at its disposal to retaliate than the U.S. does, Dong noted. The country's state-owned enterprises, which make up a large part of the Chinese economy, are subject to the central government's "policy guidance" and are subject to non-market forces in their purchasing decisions, he said.

"The two sides may well have roughly equivalent power to inflict enormous economic pain and damage on each other's companies and producers if they are not able to find some negotiated settlement," Dong noted.

Meanwhile, there is no telling when any settlement will be reached.

"That's the question clients keep asking that we can't answer," Kho said. "The political players themselves don't have a plan."