‘Tribal’ world creates complications and opportunities for law firms

Chris CroweTuesday 25 April 2023

In today’s increasingly polarised world, trade and geopolitical friction are growing by the day – with major implications for law firms.

For example, just as the US placed additional tariffs on Chinese goods during the Trump administration, it’s reportedly considering a ban on TikTok, the social media platform owned by Chinese company ByteDance. In mid-April, Montana became the first US state to pass legislation banning TikTok on personal devices over safety and surveillance concerns, a move that ByteDance has suggested it’ll ‘fight’ and that it called ‘egregious government overreach’.

These developments come at a time when the US–China relationship is becoming ever-tenser and international divisions over China’s domestic and international policies are escalating.

Geopolitical divisions naturally provide opportunities for the legal sector, not least in the trade, customs and sanctions fields, but they also pose intricate challenges when firms assess their global networks and international client relationships. For example, 2022 saw a mass exodus of international law firms from Russia following the country’s invasion of Ukraine. Meanwhile, Beijing’s increased influence over Hong Kong has caused some commentators to question the Special Administrative Region’s long-term viability as a legal centre.

Firms must also be wary of the effect of geopolitics on client relationships. A Western firm might have welcomed a wealthy Russian or Chinese client five years ago, but the reaction would likely be different today.

Every question to do with sanctions and export control, and increasingly with mandatory supply chain due diligence […] are very close to the general counsel and the C-suite

Yves Melin
Vice-Chair, IBA International Trade and Customs Law Committee

‘The world at large, geopolitically, politically and business-wise has become more tribal, and this trickles down to the legal profession. This affects who you do business with and who you are representing’, says Michael Diaz, Global Managing Partner at Miami-headquartered Diaz, Reus & Targ. ‘There seems to be more of a focus on how you make a decision on whether to represent a certain entity and what the potential consequences are for a global law firm. If you represent the Chinese government or a Chinese sovereign entity, it may impact the relationship with different countries around the world.’

In this ‘tribal’ world, countries are often forced to choose sides, at least in relation to specific geopolitical flashpoints. Honduras for instance cut diplomatic ties with US partner Taiwan in March, stating: ‘The government of the Republic of Honduras recognises the existence of only one China in the world and that the government of the People’s Republic of China is the only legitimate government that represents all of China.’ Only 13 nations now recognise Taiwan as a sovereign state.

Similarly, while Russia may be portrayed as an international pariah over the war in Ukraine, it does have allies, not least China itself; Chinese President Xi Jinping and his Russian counterpart Vladimir Putin held cordial talks as recently as March 2023. Russia still enjoys close economic ties to India, while it retains historical links to African nations such as South Africa where the Soviet Union previously opposed the apartheid regime.

This expanding chasm between states that openly support the defence of Ukraine against those that are refusing to condemn Russia creates further difficulties for the legal profession. They may be bound by codes of practice and legislation in their own jurisdiction, depending upon the stance their government has taken in regards to Russia’s invasion. By way of example, the UK government announced in September 2022 that UK-based law firms would be prohibited from delivering ‘transactional legal advisory services’ to Russian clients as part of heightened sanctions against Russia in response to the country’s illegal annexation of Ukrainian regions.

Leaving aside sanctions, law firms must also consider how a client relationship might be perceived by other clients and the wider public. A wrong move could be reputationally and commercially catastrophic – and would come at a time when social responsibility has become a top priority for businesses worldwide. Diaz says that his firm faces increasing difficulties when analysing potential client relationships. ‘Legal representation used to be more of a commercial and financial decision and was less politically charged’, he says. ‘Confronting these issues on the representation of individuals, government officials and government entities, you now have to make that calculus. It weighs on me all of the time and before the pandemic, I didn’t have to think that way. You have to take that into consideration. It is the first thing I think about.’

Despite the difficulties that law firms face in steering a path through a volatile geopolitical landscape, there are further possibilities to develop new business streams, says Yves Melin, Vice-Chair of the IBA International Trade and Customs Law Committee and a partner at Reed Smith in Brussels. ‘We are turning the page of the GATT (the General Agreement on Tariffs and Trade) and the post-World War II order, away from ever more globalisation, towards reshoring (the process of returning the production and manufacturing of goods back to the company’s original country) and high-stake border investigations.’ Melin believes the world has become ‘messier’ over the past several years, given Brexit, the Covid-19 pandemic and the war in Ukraine, among other things.

He says this has thrust trade and customs law into the limelight. ‘These frictions [and] these new burdens on companies have been keeping us very busy, because of the changing landscape, the complexities, and the high stakes’, says Melin. ‘Now, every question that has to do with sanctions and export control, and increasingly with mandatory supply chain due diligence and sometimes large customs enforcement actions, are very close to the general counsel and the C-suite. It’s in their top ten, if not top three, list of issues.’

The legal profession has an opportunity to develop services and provide additional value as businesses reassess their global operations and address supply chain risk and security. ‘The last several years of trade tensions, particularly in the US–China relationship, have forced our clients to carefully re-examine their business practices and supply chain arrangements, particularly as globalisation has given way to 'onshoring' [relocating suppliers closer to home] and 'nearshoring' [outsourcing to a nearby jurisdiction]’, says Eric Emerson, a partner and trade specialist at Steptoe & Johnson in Washington, DC. North America has experienced an upsurge in the nearshoring and onshoring of supply chains after the disruption and vulnerability highlighted by the Covid-19 pandemic and the incentives presented by the implementation of the United States–Mexico–Canada Agreement (USMCA) and other legislative changes.

‘With the rise of protectionist measures and trade barriers, legal professionals will need to navigate complex trade regulations and customs laws. This requires a deep knowledge of the legal frameworks of multiple countries and the ability to provide cross-border legal advice to clients’, says Carolina Carvalho, Co-Chair of the IBA International Trade and Customs Law Committee and a partner at Brazil’s Mundie Advogados.

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