How Chinese Firms Use U.S. Law to Cope with Rising Tensions

– Interview with Professor Ji Li

On October 3, 2024, Yuxuan Wu,  Editor-in-Chief of China Focus,  interviewed Professor Ji Li to discuss the challenges and risks that Chinese firms face when investing in the U.S. amidst rising geopolitical tensions.  Ji Li is a professor of U.S.-China Business and Law at UC Irvine. He received a Ph.D. in political science from Northwestern University and a J.D. from Yale Law School. His research spans Chinese law and politics, international business transactions, comparative law, and empirical legal studies. Professor Ji Li was interviewed, in Chinese, during his visit to UC San Diego’s School of Global Policy and Strategy. Yuxuan Yu translated the interview into English, and Dr. Harris Doshay and Jade Nettrour, Social Media Manager of China Focus, assisted in editing and proofreading.

Q: Your research involves comparative law between China and the U.S. and the business environment faced by Chinese enterprises in the U.S. What prompted you to focus on this?

A: My interest in this area stems from a genuine curiosity; I find these issues really fascinating. Additionally, this academic area is relatively underexplored, having only gradually emerged in the past decade, and there aren’t many researchers focusing on it yet. Because of this, when others ask me questions relating to this topic, I sometimes struggle to answer. Therefore, I decided to delve into deep exploration and study of this field. A few years ago, I published a book on compliance issues faced by Chinese enterprises in the U.S., which highlighted the stark differences between the legal environments in the U.S. and China. Understanding how Chinese companies adapt to the distinctly different legal framework in the U.S. is a particularly intriguing question, especially considering the significant role lawyers play in U.S. business activities compared to the relatively limited influence of Chinese lawyers in corporate decision-making. This institutional difference piqued my interest.

Q: What are the significant differences between the roles and statuses of lawyers in China and the U.S.?

A: In the U.S., lawyers play an essential role in business activities, and nearly every step of corporate decision-making requires their involvement. In contrast, lawyers in China typically handle issues after they arise, and their role is not as central. This difference in legal systems is also reflected in the daily operations of businesses. Chinese companies tend to rely on lawyers to find solutions after problems emerge, while U.S. companies generally place greater importance on proactively seeking lawyers’ input. These variations highlight the different significant roles that law plays within each country’s business culture.

Q: How have recent changes in U.S.-China relations impacted Chinese enterprises operating in the U.S.?

A: Over the past few decades, Chinese companies generally enjoyed a relatively favorable investment environment, particularly before 2017, when many companies were confident in U.S.-China relations. However, with the deterioration of these relations in recent years, many companies have had to downsize, reduce investment, or even withdraw from the U.S. market. This has been one of the most significant changes in recent years.

Q: What opportunities and challenges do Chinese enterprises face in the U.S.?

A: The challenges far outweigh the opportunities, especially from the worsening U.S.-China relations, which is especially problematic for Chinese firms in the U.S.. This doesn’t  only affect companies involved in national security, such as Huawei, which has been placed on the U.S. government’s restricted list, but it also affects seemingly unrelated small businesses. For example, even a hot pot restaurant might face restrictions for collecting customer information. These kinds of political risks are unpredictable for businesses. When investing and operating in the U.S., Chinese companies must take these unforeseen political factors into account.

Additionally, the differences in legal environments between the two countries can impact business operations. A “client-centric mentality” in China lowers the status of lawyers, and many companies tend to minimize their involvement in negotiations, only seeking legal counsel when issues or disputes emerge. In contrast, lawyers play a critical role throughout U.S. business operations. American companies often proactively consult lawyers to ensure legal risks are adequately addressed. Chinese enterprises must adapt to this way of thinking.

Moreover, compliance requirements in the U.S. are complex, and Chinese companies need to invest substantial resources in legal compliance. 

On the positive side, some Chinese enterprises have found that adapting to the U.S. legal system is advantageous because it is more transparent and mature. As long as businesses follow the rules, they can often avoid uncertainties. After initial adjustment, many companies find that the U.S. system makes operations more predictable and reduces unexpected business risks. For example, deposit management during bidding processes varies significantly between China and the U.S. In the U.S., deposits are quickly refunded if a company fails to win a bid, while in China, companies may need to rely on personal connections or other means to handle similar situations. 

Despite the challenges, the U.S. market remains vast. For certain industries, the relatively stable business environment and high profit margins in the U.S. attract many Chinese enterprises. For instance, companies in the consumer goods sector, such as food and retail, can achieve significant profits once they establish a foothold in the U.S. market.

Q: How can Chinese enterprises in the U.S. respond to the impact of uncertain political factors on the business environment?

A: Chinese enterprises need to demonstrate flexibility in responding to changes in U.S.-China relations. Because these companies have relatively short histories in the U.S., they have limited local connections. Amid heightened tensions, strategies that rely on Chinese government support to address business challenges may no longer be effective and could even backfire. Therefore, businesses often find themselves in a position where they must rely on legal means to protect their rights, making legal investment and professional legal advice crucial strategies for Chinese enterprises to mitigate risks in the U.S.. Many prominent companies facing political pressure have taken legal action, reflecting the relative integrity and fairness of the U.S. legal system, which provides mechanisms for protection and redress. Their actions also reflect a degree of trust in the U.S. judiciary. In this context, law serves not only as a tool for risk management but also as a key safeguard for business survival and growth in a complex international environment.

Q: How will the outcome of the U.S. elections in November affect the business environment faced by Chinese enterprises in the U.S.?

A: Chinese investors are unlikely to favor a reelection of Trump. Although U.S.-China relations may continue deteriorating (regardless of Trump), investors prefer a certain level of stability, which is hard to achieve given Trump’s unpredictability. His potential reelection could negatively impact the U.S. judicial system, as he has previously attacked federal courts, undermining judicial authority. Under the system of checks and balances, the executive branch should not excessively interfere with the judiciary. In contrast, Vice President Harris has a legal background, which makes her more likely to uphold judicial independence.

Furthermore, Trump’s “China Initiative,” which utilized federal power to target Chinese-Americans, was formally rescinded when President Biden took office, but overall conditions have not significantly improved. Thus, the Democratic Party may maintain certain ethical boundaries, in contrast to the Republicans, making the choice akin to the difference between “bad” and “worse.”

On the other hand, Chinese enterprises, particularly private ones, have demonstrated considerable adaptability. While state-owned enterprises face more complex institutional restrictions, private enterprises show greater flexibility when navigating challenges. For instance, if a business encounters obstacles in the U.S., the owner might choose to relocate to Singapore or Canada, thus transforming the company into a local entity.  Thus, “where there is a policy from above, there is a countermeasure from below. For every  challenge, businesses can find a corresponding solution. As long as the U.S. market offers sufficient profit potential, private enterprises are motivated to explore creative solutions for overcoming obstacles.