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US–China Tensions Will Continue to Heighten Regulatory and Enforcement Risk

Aimen Mir


Partner, Washington

Nabeel Yousef


Partner, Washington

Stephanie Brown Cripps

Brown Cripps

Counsel, New York

Aryeh Kaufman


Special Counsel, New York

In 2021 the US–China trade war escalated as each side deployed a variety of newly developed regulatory and enforcement tools alongside more traditional economic measures to gain a geopolitical advantage.

As expected, the Biden administration maintained Trump-era tariffs while sharpening economic sanctions against companies that support and operate in China’s defense and surveillance technology sectors (e.g., through Executive Order 14032). In the face of expanding US sanctions against Chinese companies as well as Hong Kong and Chinese officials, China has imposed a number of countermeasures, including the new anti-foreign sanctions law, sanctions against US, UK and EU politicians, and, among other legislative initiatives, a new data security law with potentially expansive extraterritorial application to data-related activities that are perceived to harm China’s national security interests.

US and Chinese tit for tat impacts global markets

Collectively, these measures have impacted global markets and international supply chains while forcing companies in a variety of industries to assess the changing landscape of legal and regulatory risk. These issues have been exacerbated – and progress on resolving them may be significantly impacted – by the COVID-19 pandemic.

As President Biden remarked in his first address to a joint session of Congress, the United States is “in a competition with China and other countries to win the 21st century.” The key issues animating the trade dispute – US claims of human rights violations in Hong Kong and Xinjiang, as well as concerns relating to technology, intellectual property, and long-term military and intelligence dominance – remain largely unchanged, with a hardline stance against China continuing to enjoy bipartisan support in Congress. In addition, a growing Chinese presence in the South China Sea and relations with Taiwan persist as potential flashpoints.

Regulatory enforcement set to increase in 2022

What seems clear for 2022 is an increase in regulatory enforcement activity, particularly in connection with US sanctions and export controls, and attendant cross-border investigations. Notably, principal associate deputy attorney general John Carlin of the US Department of Justice (DOJ) previewed a forthcoming “surge” of DOJ resources for corporate enforcement. Carlin highlighted DOJ’s heightened focus on sanctions and export control-related actions and noted that over the course of 2021, DOJ has significantly increased the number of sanctions and export investigations with approximately 150 open matters.

Additionally, existing tools will continue to be used in new ways. For example, targeted sanctions developed to disrupt Russian and Chinese activities are being repurposed, as shown by the first sanctions designations against virtual currency exchanges and a focus on combating ransomware.

CFIUS will continue to closely scrutinize sensitive technology investments

Investments in the United States – regardless of whether they involve Chinese transaction parties – will continue in 2022 to be closely scrutinized by the Committee on Foreign Investment in the United States (CFIUS) for any risk of direct or indirect transfer of sensitive technology to China. Proposals to mandate a broader range of transactions to be filed with CFIUS, enhance the committee’s ability to look at emerging and foundational technologies, or hand CFIUS the ability to examine certain greenfield investments, cannot be discounted. Discussions will also continue within the government over a potential CFIUS-like process to review US outbound investments in China, particularly in companies that may further strengthen China’s role in supplying critical inputs into the United States.

The US government will also be adopting procedures to implement already-effective regulations that allow the Commerce Department to prohibit use of information and communications technologies or services in a broad swath of the economy where such technologies or services are designed, manufactured, or supplied by persons owned, controlled, or subject to the jurisdiction of a “foreign adversary,” including China.

Companies and financial institutions must remain diligent and proactive in assessing their legal, regulatory, operational, and reputational risks. Practical steps could include, for example, updating China-related policies and advice, strengthening compliance programs, examining business practices and transactions that may become targeted by existing and emerging rules, evaluating the China-related exposure of significant current and potential business partners, conducting supply chain reviews to identify and mitigate potential links that could be affected by those regulatory initiations, and engaging with government policymakers to inform the development of regulation and enforcement.

Key takeaways for boards

  • Sustained tension in the US–China trade dispute, as both sides strategically deploy the expanding array of economic, political, and legal tools at their disposal, with potentially significant impact across a wide range of industries and financial markets.
  • Increased US and non-US extraterritorial enforcement activity, with particular focus on economic sanctions, export controls, investment restrictions, supply chain restrictions, and anti-corruption initiatives.

  • Companies should consider their range of activities that have a nexus with China that could be affected by these regulatory priorities – including, for example, manufacturing, supply chain, sales, and investment interests – and assess whether any steps should be taken to mitigate legal, regulatory, operational, and reputational risk.