U.S. Law Firms’ Retreat from China

The once rapid U.S. expansion into China’s legal sphere has now fallen victim to retrenchment. After China acceded to the World Trade Organisation in the early 2000s, a surge in global trade and globalisation fuelled U.S. law firms’ expansion into the Chinese market as the need for international legal services on cross-border transactions and IPOs skyrocketed.

This once-vibrant legal landscape has since declined due to geopolitical tensions, slowed economic growth, and mandates on data privacy and cybersecurity. Major US law firms have closed their offices in China, including Latham & Watkins, Skadden, Paul Weiss, Sidley Austin, and Morrison Foerster. This article explores why firms are leaving and the added implications for international legal practice.

Drivers for change: Regulatory and Compliance Challenges

In 2021, China strengthened its Personal Information Protection Law (PIPL) and Data Security Law (DSLs), regulating how firms collect, store, share, and transfer data. Because law firms handle sensitive client information on an international scale, they must comply with these regulations. This compliance imposes restrictions on cross-border data transfers and access to information, both of which are crucial to the operations of international firms, making the conduct of business increasingly challenging. It also could cause an issue with client relations in other countries, as they try to protect their data, and result in the firms' sources of revenue being poached.

Drivers for Change: Geopolitical Tensions

The ongoing trade disputes and strategic rivalry between the US and China have escalated matters, creating significant uncertainty for cross-border transactions. Sanctions and regulatory complexities have forced businesses to reconsider expansion and investment in China. With China’s Anti-Foreign Sanctions Law and U.S. Sanctions on China, law firms are sitting in the middle where complying with one law may mean violating another. Specifically, China's Anti-Foreign Sanctions Law penalises entities that enforce foreign sanctions against Chinese interests, while U.S. laws may require firms to avoid dealings with sanctioned Chinese entities. Navigating these conflicting obligations represents a growing challenge, prompting firms’ departure from China.

Student re-focus

U.S. law firms' retreat illustrates how commercial firms’ practice is affected by political tensions and compliance risks, an intersection between geopolitical expertise and commercial fluency. These trends underscore the importance of commercial awareness in understanding the broader legal landscape.