Nota Bene Podcast Ep. 167
New Restrictions on Investment in China with Michael Zhang and Reid Whitten of Sheppard Mullin
Thank you for downloading this transcript.
Listen to the original podcast released August 24, 2023 here:
https://www.sheppard.com/notabene-506
In this episode, Michael Zhang, managing partner of Sheppard Mullin's Shanghai office, and Reid Whitten, managing partner of the firm's London office, join host Scott Maberry to discuss a new law that, for the first time, will prevent some U.S. investments in China.
Guests:
About Michael Zhang
Michael Zhang is a lawyer and the managing partner of Sheppard Mullin's Shanghai office. He has a deep understanding of China's legal system and business practices, as well as broad experience in corporate transactions, corporate restructuring, antitrust law, intellectual property, cybersecurity, and personal information protection law in China.
Throughout his career, Michael has represented many U.S. and European clients making investments in China and Asia, including mergers and acquisitions, joint ventures, and debt restructurings. He has helped invest in and create business in the internet technology, life sciences, healthcare, automotive, logistics, material hi-tech, telecommunication and software sectors.
His extensive knowledge of international business transactions has allowed Michael to represent leading Chinese companies in their outbound equity and asset transactions outside Mainland China, specifically in life science and healthcare, e-commerce and green technology. Drawing on his rich knowledge of antitrust laws in China and other East Asian countries, Michael also counsels U.S. and international clients, as well as Chinese local companies, on international and PRC antitrust issues with respect to pre-merger control, price fixing and monopolistic agreement issues.
About Reid Whitten
As Managing Partner of Sheppard Mullin’s London office and leader of the firm’s CFIUS Team, Reid Whitten’s practice centers on international trade regulations and investigations. He works with clients around the world to plan, prepare, and succeed in global transactions. He focuses on his clients’ cross-border investments, particularly in the technology and aerospace sectors, helping clients navigate the international trade regulations that could disrupt their deals.
Reid is a member of Chatham House, the UK's Royal Institute of International Affair. In addition to lecturing at the New College of the Humanities in London, at the Université Catholique de Lille in France, and Wake Forest University in the U.S, he also conducts seminars on regulatory updates for industry groups in the U.S., France, Belgium, Spain and the UK.
A thought leader on cross-border business regulation, Reid is frequently called upon to provide commentary and analysis for television news channels, international newspapers, and trade publications. He is also the lead author and editor of The CFIUS Book.
About Scott Maberry
As an international trade partner in Governmental Practice, J. Scott Maberry counsels clients on global risk, international trade, and regulation. He is also a past co-chair of the Diversity and Inclusion Working Group for the Washington D.C. office, serves on the firm's pro bono committee, and is a founding member of the Sheppard Mullin Organizational Integrity Group.
Scott's practice includes representing clients before the U.S. government agencies and international U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry & Security (BIS), the Department of Commerce Import Administration, the Department of Homeland Security (DHS), the Department of State Directorate of Defense Trade Controls (DDTC), the U.S. Department of Justice (DOJ), the International Trade Commission (ITC), and the Committee on Foreign Investment in the U.S. (CFIUS). He also represents clients in federal court and grand jury proceedings, as well as those pursuing negotiations and dispute resolution under the World Trade Organization (WTO), North American Free Trade Agreement (NAFTA) and other multilateral and bilateral agreements.
A member of the World Economic Forum Expert Network, Scott also advises the WEF community in the areas of global risk, international trade, artificial intelligence and values.
Transcript:
Scott Maberry:
Welcome to Episode 167 of the Nota Bene podcast. I'm your host, Scott Maberry. My guests today are Michael Zhang and Reid Whitten of the law firm of Sheppard Mullin. We're talking about a new law that for the first time will prevent some US investments in China.
Before I introduce our guests, I'd like to thank our listeners in over 100 countries worldwide. We're glad you're tuning in and please keep the feedback coming. It definitely influences our programming. You can email me directly with your comments and suggestions. My email is in the program description.
My guests are Michael Zhang and Reid Whitten. Michael is a lawyer and the managing partner of the Shanghai office of the law firm of Sheppard Mullin. He's an expert in corporate transactions, corporate restructuring, antitrust law, intellectual property, cybersecurity and personal information protection law. In his career, he has helped many US and European clients make investments in China and throughout Asia, including mergers and acquisitions, joint ventures and debt restructurings. He has helped invest in and create businesses in the sectors of internet technology, life sciences, healthcare, automotive, logistics, material high-tech, communication, and software.
Reid Whitten is the managing partner of the London Office of Sheppard Mullin. He is an international trade lawyer. He works with clients around the world to plan, prepare, and succeed in global transactions. He focuses on his client's cross-border investments, particularly in the technology and aerospace sectors, helping clients navigate the international trade regulations that could disrupt their deals. Reid has been a treasured guest on the podcast many times, and there are links in the description to some of our past discussions. Reid and Michael, welcome to Nota Bene.
Reid Whitten:
It's our pleasure, Scott.
Michael Zhang:
Thank you.
Reid Whitten:
Thanks for having us on.
Scott Maberry:
In the middle of the week, in the middle of August 2023, the United States government announced that it is going to legally prohibit some US investments into China. The announcement came in the form of an executive order signed by President Biden. And there is an accompanying notice from the Department of Treasury announcing that regulations will be issued soon, we think within six months, to implement the restrictions. Restrictions will target the Chinese sectors of semiconductors, artificial intelligence, and quantum computing.
This is a major escalation of the US trade restrictions against China. On its face, it sounds similar to the US economic sanctions like those the United States maintains on Cuba, Russia, and Iran. But this is different in many ways. Most importantly, it's different because it's China. It's the third largest trading partner of the United States. It's not Cuba, Russia, or Iran where the total trade with the United States is insignificant.
So, why is there a new trade restriction on the United States third largest trading partner? One way to think about, it's to go back to the 2017 National Security Strategy published by the Trump administration. That document declared that the United States and China are engaged in a global struggle for technological dominance in certain key technical sectors, including semiconductors. The document also, for the first time in US policy, characterized China as a strategic adversary, not just a competitor. This continued to be the policy under President Trump and continues to be the policy of the Biden administration to this day, as documented in successive published national security strategy papers. This policy essentially considers US technology in these key areas to be strategic national assets of the United States.
So, in a strategic struggle for technological dominance, there are essentially three parts to the strategy. The first is to develop one's own technology, such as in the US Ships and Science Act and the Inflation Reduction Act, which contain huge investments in developing US homegrown technologies. We've talked about those developments in other episodes of this show. The second is to deny the adversary access to one's own technology, such as in the October 2022 US Export Control Regulation revisions, which contains sweeping expansions of US export controls on certain US technologies to China. Again, we spent some time on a couple episodes of this show discussing that development. A third strategy is to deny the adversary certain resources to develop its own technology. The new restriction that occurred in the August 2023 Biden executive order is designed to deny China access to US capital to develop its technology in these three sectors.
As we've discussed on this show before, US policy considers the Chinese competition in these areas to be a "whole of society" threat. And according to the US Director of National Intelligence, the response of the United States to the China threat is considered to be a "whole of society" response. So, this new rule is a part of that response. Starting with you, Reid, can you start by giving us a high-level outline of this new law and what it's designed to do?
Reid Whitten:
It is, as far as I know, unique in creating a system for review of outbound investment from restricting that investment, prohibiting certain investment, and requiring notification for other investments. Basically, it says that any US person who wants to make an investment in certain industries, in certain countries, will be either required to provide a notification to the US government or will be prohibited from doing so. And the industries are semiconductors, quantum computing, and artificial intelligence, and the countries are China. Now, China also includes, I'm calling Macau under the purpose of US regulatory guidance, but right now there's a category of countries of concerns that this targets and there's only one country on that list.
Scott Maberry:
Well, that's a really interesting way of framing it in and of itself, and I hadn't thought about this very much when it first came out. But what do you guys make of the fact that the executive order that the president released on August 9th calls this whole thing a prohibition on certain investments in countries of concern, and then doesn't list China until you get down to the annex, and it lists the countries of concern, as you say, as one country, China. Why did they frame it this way?
Reid Whitten:
Probably two answers to that. The first is to say that this is not just about China, although it is hard to say that with a straight face when there's only one country on the list. You'll recall that from the Cuba sanctions regulations where they have all the countries covered by these sanctions and the list is Cuba. It is possible that they will expand this. It is possible that the US will see some other country as being a threat and prohibit or restrict foreign direct investment in that country. And I think that that would happen, if there's some reason to believe that an investment in a third country would risk the advancement of technology in China, then that country would get added to the list.
Scott Maberry:
So one thing you're saying I think is really interesting. It's that it gives the US government the flexibility to promulgate these prohibitions really fast by just adding a country to a list without ever having to go through a whole new regulatory process. I think that is probably accurate, and it is a way that the new restrictions are borrowing from the sanctions regime, even though it's not a sanction, meaning that it's not an economic prohibition like the United States imposes on Cuba, for example. But it's just a way of preserving the ability to ratchet the prohibitions up over time. Michael, what do you think about the fact that it doesn't name China until you get to an annex? Did that give you any pause?
Michael Zhang:
Yeah, well, Scott, I think, like Reid just mentioned, we see, as Chinese, we see the trend of this policy to be expanded not just towards China, but also other countries in the future. So, from the Chinese perspective, it's now towards or targeting China, and it could be against any other countries that US may want to put a trigger against. So, that's interesting to be and witness at this point about how this policy is addressed. It also clearly illustrates the Chinese people's concern. That is, it may not be the end of or the ultimate goal of this whole policy, but it's actually against other possible countries in the future.
Scott Maberry:
I think you're putting your finger on something that hasn't been said a lot about this regulation yet, and we should explore that further. And so, maybe that's a great segue into, since you're really plugged into the Chinese business community, what are you hearing in your discussions with business leaders in China? What are their concerns about this new investment restriction?
Michael Zhang:
People have been talking about these, especially through our blogs. I think you and Reid, the whole international trade team, has been written about all these expecting this policy to come out the so-called reverse CFIUS. The Chinese business industry has been shocked. It's really coming out. The boots is finally on the ground.
There are two things I would say, two angles, that you may feel interesting to hear. First is about the present. Second is about the future. For the present, there are so many US invested portfolio companies in China, not just a little, not just a few, but many. There are private equity investors, venture capital investors, multinational companies from the US that invested into Chinese business partners, portfolio companies, public traded companies. This new act, this new regulation, is going to impact all these existing investments.
Second is about the future, like I said. The expectation is it's not an end, it's just a start. It's clearly saying this policy may be expanded not just towards China, but also to other countries. But also it may not just be these three key industries, but also other industries that could be traditional industries, automobile, internet, all those we do not consider very advanced technologies. So, that's the other concern area.
Scott Maberry:
Yeah, so as Reid said, right now, the regulation targets investments in three sectors, basically, semiconductors, quantum computing, and AI. And I think that's very consistent with what the United States considers to be the most important technologies in which the United States is in this struggle with China for global technological dominance. But what you're saying, and we should explore this, that there's some sense that the sector list will expand over time. So Reid, Michael mentioned a thing called reverse CFIUS, and I think that's a term that you coined when the United States was first thinking about creating this regulation. So, just give us the brief refresher on what CFIUS is and why this is a reverse CFIUS.
Reid Whitten:
That's a good point. Yes, so we have been, as Michael mentioned, blogging about this. And I went back to check, and it was July of last year when we first started talking about reverse CFIUS, so it's been cooking for quite some time. And we'll talk a little bit later about why it's so difficult for this regulation to coalesce and become something tangible.
The reason that I've used the term reverse CFIUS is that CFIUS is the Committee on Foreign Investment in the United States. So that committee, which is headed by a little office in the treasury, well now a larger growing office, is responsible for reviewing investments by foreign parties that have taken interest in US businesses where that transaction could affect US national security. And really US national security is defined broadly to mean a critical technology, the critical infrastructure, the critical sensitive personal data of the US, really anything that affects the day-to-day operation of the US government or the US population.
So, that committee looks at inbound investment, decides whether or not it's a threat to US national security or creates a vulnerability in US infrastructure. And it says, "Okay, this investment's okay," or, "This acquisition is not," and it puts in mitigation measures. And there's a whole practice around CFIUS work now. And now we have the beginnings of a system for reviewing outbound investment. So, it'll be the CFIUS, will be the Committee on US Investment in Foreign States, I suppose. It's a little hard to get a better name than reverse CFIUS, but I'm happy to workshop it with you guys if you want to talk.
Scott Maberry:
Exactly. Well, we'll work it up. But I think the point is really important for people to understand in our audience, which is that the United States for a long, long time has had a national security review of foreign direct investment inbound into the United States where the Treasury Department can literally prohibit your investment. In fact, if they think that your investment was prohibited and you went ahead anyway without consulting the committee on foreign investment in the United States, that committee can make you unwind your investment in the United States. And that's been happening for years. There's been a very pronounced creep in how broadly that law has been applied in the United States, including prohibiting a lot of Chinese investment in the United States' critical infrastructure. So, it's all a part of the same pattern that Michael identified, which is that the United States' policy has gotten more and more and more aggressive on doing business with China.
The other thing to say about the new regulation is that on August 9th the announcement of the outbound investment restrictions came as an executive order by President Biden, but it was accompanied by an advance notice of proposed rulemaking by the Department of Treasury. So that treasury document is a really important piece of the puzzle. And we'll link both of those documents in the program description here, because when you read what treasury put out, that's starting to give us a sense of what these regulations are going to look like. And I think we should make it clear the regulations have not taken effect yet. There's no ban on investment in Chinese technology right now, because the Treasury Department hasn't written its regulations yet. They're in the process of doing so, and I expect they're fairly well along on it. Reid, when do you expect them to finish writing those regulations and for us to start seeing the actual prohibition coming into effect?
Reid Whitten:
The general consensus seems to be sometime early next year. I don't think that we'll see specific regulations in place and in effect before the end of 2023. Again, I've been blogging on this since July of last year and been getting it wrong on timing, so I'm definitely not taking the under. But let's go with Q1 2024 as my predicted time for this.
Scott Maberry:
I guess that gives us maybe six months, you're saying, to prepare?
Reid Whitten:
I would say.
Scott Maberry:
I'll take the under. I think it'll be less than six months. But let's see. And welcome to Nota Bene where you can have as many opportunities to get it wrong again as you want, because that's our motto here. Just throw it out there and see what happens. Just to dive in a little bit, first of all, I would say that the advanced notice of proposed rulemaking by Treasury, it goes into very deep detail on some of these questions. So, if you want further reading on this, check the link in the program description. But Reid, who does it apply to, and so who is prohibited from making the investments?
Reid Whitten:
The regulation applies to US persons, and it targets a few sectors of industry. So, US persons has its traditional definition throughout trade regulations of US citizens and legal permanent residents, as well as businesses organized within the United States. So, that's going to be US persons, individuals, wherever they may be, and then US companies that are organized in the United States, and that would include US subsidiaries of foreign companies.
But really what I think is most interesting is what this focuses on. So, we said semiconductors, quantum computing, and AI. And as you remember from last October, there was a huge wave of regulation that came out all at once, 140 pages of new regulations just focusing on the semiconductor industry to China. And so, this is a continuation of that restriction. And the reason that I think that there's such detailed regulation on semiconductors is because that's an area where you can draw bright lines. And we'll talk a little bit about how you do that in this regulation. So, the restrictions on exports of semiconductors were very detailed, because the regulators know how to draw lines in that area. I think we talked earlier about how long this thing has been brewing, this reverse CFIUS regulation has been brewing.
Scott Maberry:
Yes.
Reid Whitten:
And I think it's because a lot of the work that's being done is defining what it is you are going to control. So on semiconductors, they say, "Okay, you can't invest in semiconductors that are going to be developed above a certain set of specs." And those specs are similar to the ones that are in the other regulations, and they're very specific line.
Interestingly, there's a restriction on investment in software for the design of semiconductors, and I think that's really critical. This is electronic design automation software, EDA software. And that really drives microchip design. And one of the most used softwares in that field is cadence software. It's a US product. And in fact, that software is the hook for a lot of those controls that were imposed last October. You'll forgive me taking you in the weeds here, it's important. The US government targeted Huawei and others with this foreign direct product rule. So basically, a Chinese company that designed ships in China, manufactured them in China, and sold them in China to Huawei or another targeted entity entity, that company still required a US license if they designed their chips on US software. Because the chip or its design was the foreign direct product of that US software, of that cadence software, in many cases.
So in October, that restriction gave impetus to, gave a reason for investors in China to invest in development of a non-US electronic design automation software. So, the design shops outside the United States can design on non-US EDA software and not be subject to the jurisdiction of that very expansive foreign direct product rule. So China wants to be developing this software, and there's a demand then for investment in that software. So, there you go. The regulators see the gap, and they're working to stop that gap. It's putting fingers in a dam, but they've definitely put their finger on one here that I think is very interesting and probably critical at this time for investors.
Scott Maberry:
The fact that most semiconductors in the world up to now are designed using US design software gave the United States a very novel way of prohibiting the export of chips by prohibiting the export of chips essentially to China, essentially chips made with US design software. That, in turn, as you would expect in a normally functioning world economy, would create a demand for new, non-US, chip design software. And that, in a normally functioning economy, would create investment opportunity. It's a way of addressing the natural economic response to the previous prohibitions and preserving what the United States perceives to be its advantage in this global struggle for technological dominance, in this case on technology for manufacturing semiconductors, or designing high-tech semiconductor.
Reid Whitten:
Exactly. It's a targeting mechanism. And it's the kind that's available to the United States regulators in the semiconductor area. Now, when you get to quantum and AI, you can tell that the restrictions are a little more careful, because these are areas where it's harder to get clear lines. So for quantum, the investment restrictions fall on production materials, like the cooling materials to operate a quantum computer. That's a tangible item that can be singled out. The US government says, "Okay, we don't want investments in China developing those cooling items, because we know how to regulate those." And similarly, there are a few current applications of quantum computing, like quantum key distribution, which is actually the only current application of quantum computing that I'm aware of, but that's just my limitation of scientific knowledge, and so there's a regulation restriction on that application, investment in that application. But otherwise, the regulations can only really feel around the edges.
And so, for AI and for the rest of quantum computing, the restrictions on investments are only prohibitions on AI systems or quantum computing sensing platforms that are for military, government intelligence, or surveillance uses. They can't draw a clear line and say, "Okay, investment in AI above this level is prohibited," because there's just not a way of defining the things that you want to regulate. So, they've had to tread lightly or take a grasp at what they want to control. But the regulations are a little softer there. And it's going to be a little difficult to find those lines, and it's going to be an interesting ride figuring out where they will fall.
Scott Maberry:
Oh, it's fascinating substantively to see how regulators try to address technologies as or before they emerge. But when I take half a step back from all of that, I continue to be struck by how dramatic this law is. What you just described, are things that any normal investor, anywhere in the world, would be really interested in. If you knew of a company that was developing a technology for cooling quantum devices, you know that quantum computing is part of the future, and you know that cooling a quantum computer is vastly important in that future, and that's a really interesting target for investment. And up to now, an investor has never had to think, "Wait a minute, will my investment in that new startup that's making that technology, is that going to be prohibited by the United States because of what that company is doing? For the very reasons that I'm interested in it as an investment, the United States might be telling me I can't invest in that."
And Michael, this goes back to something you were saying. I'm interested in any more comments you have on, how's the business community thinking about this? What's it like to be a strategic investor, or a private equity fund, or a venture capitalist, or a multinational corporation looking around for good places to put your dollars, seeing a Chinese company that may be developing software for the design of semiconductors, or technology for cooling quantum devices, or some AI system? What's it like to see these restrictions on things that would be otherwise really attractive investments?
Michael Zhang:
I like the description of dramatic, like Scott mentioned. Because, when we were in the law school, that's decades ago, but I think the first thing we talk about was the globalization. Because, till then, we were still talking about globalization, the global family of economic world. The first thing you talk about is the freedom to follow the cashflow. So anywhere the money goes, basically it's a freedom. So you see there's a chance there's a potential investors got to go, anywhere in the world, any jurisdiction, as long as you don't have any ongoing physical wall, it's free. I think especially US investors, private equity bankers, I-bankers, I think US investors were all over the world in most jurisdictions that you will never think about. They explored into China back in 1970s, 1980s, when I think the rest of the world were still talking about the Cold War and how to deal with China. But US money entered into the China market, McDonald's, Kentucky Fried Chickens, interestingly. Then the high-tech world, the beauty of cars, all these high-tech investors.
But now looking back, then people, if you want to think about investing into China, either in a traditional industry or in a very so-called high-tech industry, the first thing is not to think about whether it makes sense financially, but it has to be making sense from a compliance point of view. This is, I think, a game changer after these 10 years, in the past 10 years, I would say. This actually shocked many business runners, operators, in China. Because, I think from this minute or starting next year, like Reid anticipated, they have to think about it twice. Whether they're investors, it's the US money, US investor, they have to reconsider this investment. It's not about the valuation. It's about whether they can or cannot be a portfolio of these US investors. It's like you would not imagine this happening probably a couple of years ago.
And second add to it start, interestingly, Chinese people looking at it are those US passport holders or green card holders that are working in Chinese companies, possibly in these high-tech areas where they should go under this new revelation and how they should be governed in the future implementation. This is also a question for you and Reid to talk about it.
Scott Maberry:
Just to underline what Michael was saying, this is dramatic because there are considerations about your investment in what has traditionally been a very active and very lucrative market for investment, the Chinese semiconductor sector, and to a lesser extent the computing and AI sectors. This is a thing that the market has got to now take into account when they're thinking about new investments. There's got to be a compliance assessment very early on. Now, I guess I will say, I'm hearing from my contacts in private equity and in some of the multinationals that they've already priced this into the market, metaphorically. What I mean is we weren't the only ones who knew that this was coming, so were the VP of strategy for the big multinationals, and so were the investment directors for the big private equity funds. So, I think there's been-
Reid Whitten:
Well, that's because they're readers of our blog.
Scott Maberry:
Oh, of course. Well, maybe we're the blog readers. They've already started cooling off in some of these sectors. I think. Now, I hope that our podcast right now isn't brand new news to somebody who's staked their entire life on a future three or four or five years of investments in Chinese semiconductor manufacturing, or software for semiconductor design, or AI. Because those investments are going to start to be prohibited, and there's not going to be any turning back. I think where all of the opinion that this is the start, not the end, of investment restrictions on China. Reid, the point Michael made about US green card holders and US passport holders anywhere in the world are covered by this prohibition, tell us about the impact on those people.
Reid Whitten:
It's an interesting question, Michael. I think it's really one that we get to, especially when we've seen restrictions on US person activity with respect to China, because we have this population of Chinese nationals who have maybe come to the United States, were educated in the United States, who have connections to the United States, maybe have family there who are green cardholders or passport holders, and who have founded companies in China or worked for companies in China, and they were concerned about the October semiconductor regulations that control US person activity. And there's, from my understand from your discussion, that there's concern again about this regulation. Now, they will be covered. They will be covered persons, US persons, who are prohibited from investing in the restricted countries, in the restricted industries, so China and quantum computing, AI, and semiconductors.
But if they're working for company and that company wants to make an investment in its own subsidiary in China, so let's say there's a US Topco and it wants to make an investment in a Chinese subsidiary that does research, or does manufacturing, or whatever it is, there are certain accepted investments that are anticipated by the executive order that put out the regulation. And one of those exceptions is an intracompany transfer of funds from a US parent company to a subsidiary located in a country of concern. So, if you have a US Topco that wants to provide US money to a subsidiary in China, wants to continue to build strategically in China, the investment restrictions will not stop that. Now, certain other restrictions on export controls and US person activity that are elsewhere may, but for that purpose, that exemption may be critical for the work, for the investment, for the strategies of those persons in those companies.
Scott Maberry:
Well, we're coming to the end of our time, but before we end, I'd really like to get both of your thoughts on the future, starting, Reid, with you.
Reid Whitten:
I think that Michael was right to intuit the idea that the US government might expand the technologies, the industries to which these things are applied. But I think that the first step that the government will take, like with Korea and Japan going on this weekend, and I would imagine that there's going to be a discussion of saying, "Hey, we'd love it if you guys would put together similar export control and similar restrictions on investment." The US has some leverage in that area because they're most favored nation status under CFIUS. They could say, "Hey, look, if you put investment restrictions both inbound and outbound, like we have in your countries, then we'll make it easier for you to invest in the United States," which could be a big advantage for a number of the private equity and the strategic investors in those areas.
And you've seen it with the US government already when they put out the regulations on exports in the semiconductor industry, they went to the Netherlands, they went to Japan and said, "Hey, can you line up your export controls with ours?" We called it at the time a technological containment working with your allies to keep China from technology, not just from the United States, but also from its allies.
I would be very surprised if they weren't already discussing similar outbound investment restrictions with Japan, with Korea, with the Netherlands, maybe with other EU powers, Germany and France. I think that that will be a very hard diplomatic push that they'll be making soon. I think that's the next expansion you'll see because it doesn't require new substantive areas of regulation. It just requires saying, "Hey, allies, can you get up to the line with us on this one?"
Scott Maberry:
That's going to be a tough sell too, I think. There was a very strong US diplomatic push around the export controls in the October timeframe, 2022, and there was some success getting some US allies to impose some restrictions on exports to create a united front in restricting the export of certain technologies to China, but not as much as I think the US government would've wished. Because I think European countries and Europe generally have a much narrower view of their jurisdiction in order to prevent the flow of trade, I think there's some philosophical differences among the allies about whether trade should be restricted. And then when you get to allies like Japan and Korea, Korea especially, these regulations are putting Korea into a really tight spot, because China's a huge trading partner of Korea and it's very difficult for a Korean company when the US government starts asking Korean companies to choose between doing business with the United States and doing business with China.
Michael, I'm interested in any thoughts you might have about, would we expect to see some Chinese regulatory response to this? Because, I got to believe that this has caught the attention of the Chinese government. And if I'm the Chinese government, I'm hopping mad about this regulation.
Michael Zhang:
Following the recent legislations by Chinese government, clearly it has been learning or somehow studying how US government does or did in actual control. And the retaliation is they do a copy. They do a similar type of legislation that creates the same screening or firewall of actual control or sanctioned, anti-sanction, that kind of mechanism. So, following that kind of learning and repeating or retaliating act, I would not be surprised if in the next six to 12 months the Chinese legislation comes up with something similar. Or I would say, probably based on the current, because we have a so-called foreign investment law, they probably will have a stronger enhanced, or updated, or amended foreign investment law based on this concept, or similar concept, following the US government's act. That's something I will say it's coming. But we haven't seen any clear message.
Scott Maberry:
Well, we'll let that be the last word for today. This has been a really fascinating discussion. It bears a lot of really close attention, so I'm sure we'll have you back on future episodes. But Reid and Michael, thank you very much for being with us today.
Reid Whitten:
It's our pleasure, Scott.
Michael Zhang:
Thank you.
Reid Whitten:
Thanks for having us on.
Contact Information:
Resources:
Treasury Department Advanced Notice of Proposed Rulemaking
Previous episodes featuring Reid Whitten:
https://www.sheppard.com/notabene-447
https://www.sheppard.com/notabene-356
https://www.sheppard.com/notabene-278
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