When it comes to international trade, bad headlines mean good business for some global law firms.
Since President Donald Trump took office and declared his intentions to get better trade terms from China and other U.S. trading partners, including Canada and Mexico, nothing has settled down for global companies or the firms that advise them.
Any lawyers who once thought the initial upheaval would subside have since learned to expect the unexpected. Yet global firms say they have profited in the last couple of years from clients’ increased need for expert counsel to help them deal with it all.
Regulatory practices are especially strong of late, and as long as the economic downturn many firms anticipate doesn’t become a deep global recession, they expect that growth to continue. In practices as wide-ranging as international trade policy, national security, antitrust and government contracts and investigations, firms are seeing a silver lining in the global turmoil.
In less than three years in office, the Trump administration has overseen a steadily expanding thicket of thorny trade issues. Talks aimed at cutting the U.S. trade deficit with China had gone nowhere as summer wound down. Each time negotiations have broken off, Trump has imposed or threatened higher tariffs on more imports. China has retaliated by restricting imports of U.S. farm products and raising tariffs on U.S. goods, as well as devaluing the yuan, prompting the U.S. Treasury to designate it a “currency manipulator.”
Foreign direct investment into the United States from China has plunged as a result of China’s recent restrictions on capital outflows and heightened scrutiny by U.S. regulators that has disrupted or aborted deals. The EU also is tightening national security reviews of foreign investments, and tighter export controls and trade sanctions have placed new obstacles on trade and dealmaking.
In Europe, Brexit continues to cast a long shadow over business in the United Kingdom, which fell from first to sixth in foreign direct investment in the United States from Europe, according to U.S. government data. The U.S. has increased sanctions on Russia and Iran, and in Latin America sweeping U.S. sanctions continue against Venezuela, a major oil exporter.
Even on the North American continent, trade tensions between the United States and its neighbors have escalated at times as the countries renegotiated the North American Free Trade Agreement (now called the U.S.-Mexico-Canada Agreement), which had been in place for 25 years. And an inverted yield curve on U.S. Treasury notes, long considered a sign of an impending recession, exacerbated financial market volatility in August.
Through it all, law firms capable of addressing clients’ long list of concerns are benefiting, they say.
“It is not the ideal motivation, but we have seen a noticeable uptick in demand for services in the areas most affected by the current situation, and it also drives certain defensive and strategic dealmaking,” says Jaime Trujillo, acting global chair of Baker McKenzie.
Tax, restructuring and compliance and investigations lawyers are in high demand at the moment, he says. In the firm’s annual report released in late August, M&A, private equity and capital markets showed growth, with technology, media and telecommunications, health care, and energy, mining and infrastructure marked as the highest-growth industry sectors.
“Clients are more focused on understanding the implications and complexity. Even the less-sophisticated ones are demanding true expertise in sanctions, trade and CFIUS,” Reiss says, referring to the Committee on Foreign Investment in the United States, the interagency panel at the Treasury Department that reviews foreign investment in U.S. companies for national security risks.
Even deals with no U.S. component may still encounter U.S. regulatory issues in the current landscape, says Jeffrey Kochian, partner and head of Akin Gump Strauss Hauer & Feld’s corporate practice in New York.
“Even if you are doing a deal entirely outside of the U.S. you may have U.S. regulatory issues, and we are fortunate to get those calls,” Kochian says. “The same is true for internal U.S. transactions—we may need antitrust clearance in the EU for things of that nature.”
Cross-Border M&A Goes M.I.A.
Signs of a global slowdown in mergers and acquisitions were apparent in the first half of 2019. Global M&A activity decreased 10% year over year in the first six months of the year, according to Bloomberg data. Megadeals were responsible for about half of the total value.
But cross-border M&A deals dropped 45% in that span, according to figures released in July by Refinitiv. And two-way completed foreign direct investment between the U.S. and China dropped a whopping 70% from its record level of $60 billion in 2016, according to data from Rhodium Group. That shift has been a major contributor to the overall decline.
“Deals that don’t cross jurisdictions tend to be the deals that are getting done, whereas those that cross multiple jurisdictions are more challenging,” Kochian says.
European M&A also fell because of a weaker economy, according to Refinitiv. Once-hot tax-inversion deals, in which U.S. companies domicile abroad, ceased after Trump’s tax reform, and a strong U.S. dollar made U.S. companies more expensive for foreign companies to buy. Interest rate risks and volatility in the price of oil also played a role in tamping down M&A activity, Kochian says. The United States has actually been a bright spot for M&A activity globally.
“Deals are still happening,” Trujillo says, “but not for the reasons that would have been present two or three years ago.” Rather, clients are making moves in preparation for changes they anticipate in the near future, he says.
Some Chinese investment that had been going to the United States is simply shifting to other places, including Latin America, Africa and within Asia itself. And a lot of Chinese investment is being plowed back into the country itself to build up its domestic consumer economy and regional infrastructure. Additionally, China’s Belt and Road Initiative stretching from Asia to Europe and Africa is extending the country’s global reach, says Julia Hayhoe, Baker McKenzie’s chief strategy officer.
China’s GDP growth is north of 6%, a “respectable” number, Hayhoe says. But while China now has more Fortune Global 500 companies than the United States (129 to 121), the vast majority of their revenue is domestic, meaning global firms need to have strong capabilities and relationships to succeed within China’s borders, she says.
“Smaller international players are struggling,” Hayhoe says. “You have to have a very strong practice on the ground and it has to be connected into the international capability. You can’t just fly in and fly out.”
U.S. trade conflicts with China also could have implications for future law firm expansion and recruitment abroad, says Nathan Peart, managing director of Major, Lindsey & Africa’s associate practice group. He recently returned to New York after a long stint in Hong Kong.