Home - Blank Rome LLP

Register to receive insights and analyses on breaking news and trends across varying industries.
<a class="link-primary mt-4" href="/subscribe">Subscribe</a>

Philadelphia, PA

New York, NY

Wilmington, DE

Cincinnati, OH

Princeton, NJ

Los Angeles, CA

Houston, TX

Tampa, FL

Shanghai

South Florida

Pittsburgh, PA

Washington, D.C.

Chicago, IL

Orange County, CA

Dallas, TX

Boston, MA

Dealmakers have a full plate these days with high interest rates, persistent inflation, the nascent artificial intelligence (“AI”) revolution, and the shifting sands of international relations and politics complicating projections and decision making. Tracking, reviewing, and synthesizing information across a range of disciplines is more challenging than ever with significant business implications for the profit-driven enterprise.

core/paragraph

Geopolitical risk may be chief among the myriad challenges dotting the landscape for the cross-border operator. Indeed, a 2023 Oxford Economics <a href="https://www.cnbc.com/2023/08/03/geopolitical-risks-are-a-top-global-threat-to-businesses-survey-finds-.html">survey</a> of businesses ranked geopolitical risk as the top concern for respondents.

As the new year unfolds, there is no shortage of geopolitical challenges. Consider, for example, the U.S.-China tech war, threats to Taiwan, continued fighting in Ukraine, spiraling conflict in the Middle East, and kinetic attacks on commercial shipping in the Red Sea, all of which stand to drive policies that will significantly impact cross-border investment and trade.

Here are six geopolitical risk issues to watch in 2024, which will be explored in-depth in a series of articles following this overview:

Geopolitical Risk Will Stay Top of Mind

core/list-item

core/list

Interest rates may fall and inflation may be arrested, but geopolitical risk will endure as a top business issue this year. Pre-pandemic, such issues arguably were more cabined, but in the post-pandemic landscape of conflict and great power competition, geopolitical factors have come to impact all aspects of cross-border business.

The globalized, post-Cold War model is breaking down, and lawmakers in many countries are rushing to build the policy infrastructure that will take its place. In real time, we are witnessing a transition from the post-1989 “end of history” paradigm to a world with checkpoints on the cross-border movement of goods, technology, and investment. The old buzzwords are giving way to terms like “friendshoring” and “supply chain security.” Even industrial policy, long out of style, is making a comeback in the form of the CHIPS and Science Act, the Inflation Reduction Act, and the Infrastructure Investment and Jobs Act.

Furthermore, outside of the policy sphere, these dynamics can have a direct, physical impact on commerce, as in the case of Houthi attacks on commercial shipping in the Red Sea, forcing carriers to reroute traffic around the Cape of Good Hope or impose surcharges for dangerous Red Sea voyages.

These fast-moving developments, with profound implications for global supply chains, cross-border research and development, and foreign investment flows, will keep geopolitical risk top of mind for the business community.

Export Controls Will Continue as a Major Tool of U.S. Technology Policy

The last couple of years have seen the emergence of export controls as the tip of the spear in stemming the flow of critical and emerging U.S. technologies to adversarial countries and threat actors. In this regard, the watershed moment was the October 2022 rule by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) imposing sweeping controls on the export to China of advanced-node semiconductors and semiconductor manufacturing equipment used in AI development, which BIS supplemented and expanded in October 2023. These rules are notable not only for their clear targeting of China and their granular specification of advanced technologies, but also their significant expansion of the “foreign direct product rule” to cover non-U.S. items derived from U.S. technology or software, and restrictions on the actions of U.S. persons around the world supporting certain exports to China.

Such strategic use of export controls, particularly in relation to emerging technologies, will continue in 2024. The Export Administration Regulations (“EAR”), long a niche set of rules intended to counter weapon of mass destruction proliferation, have gone mainstream, with many members of Congress now interested in the use of the EAR to advance U.S. national security objectives. It is reasonable to expect new controls on technology and further designations of Chinese companies on the BIS “Entity List” of restricted parties in the coming year, and it is possible that BIS will seek to regulate (as it has hinted) Chinese companies’ use of cloud computing resources to engage in AI tech development.

The Emergence of Outbound Investment Screening

This very well could be the year in which U.S. government review of outbound investment in other countries, long incubated in policymaking circles, becomes reality. The Biden Administration laid the groundwork for this in <a href="https://www.blankrome.com/publications/10-key-takeaways-biden-administration-sets-stage-regulation-us-investments-china">August 2023</a> by issuing an executive order setting the stage for notification to the U.S. government of certain U.S. investments in China relating to AI, semiconductors, and quantum technology, and outright prohibition of certain other investments. The U.S. Department of the Treasury (“Treasury”) followed up with an Advance Notice of Proposed Rulemaking that began to stand up a regulatory framework, although as of this time, no final rule is in effect.

Why regulate outbound investment? As the August 2023 executive order explains:

[C]ountries of concern are exploiting or have the ability to exploit certain United States outbound investments, including certain intangible benefits that often accompany United States investments and that help companies succeed, such as enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing.

Based on these policy concerns, the August 2023 executive order had been anticipated for years, and Congress has sought to become involved at various points along the way, most recently nearly including legislation on outbound investment in the National Defense Authorization Act (“NDAA”) for Fiscal Year 2024.

Congressional interest in the subject is particularly notable. Legislation on outbound investment passed the House of Representatives as part of an early version of the CHIPS and Sciences Act and later passed the Senate in the runup to passage of the NDAA, and congressional leaders intend to take up the subject again this year. Furthermore, last year Senators Bob Casey and Rick Scott introduced the Disclosing Investments in Foreign Adversaries Act, which would require private equity fund advisors to annually disclose private fund assets in “countries of concern” to the Securities and Exchange Commission.

This year could see significant developments regarding outbound investment screening, potentially in the form of a final Treasury rule and/or enacted legislation.

Continued Emergence of Plurilateral Blocs and “Friendshoring”

As the post-1989 order yields to the 2020s reality of great power competition, new plurilateral arrangements are emerging to grapple with the challenges of a changing world. Through various fora, the United States coordinates its national security policy priorities with the United Kingdom, the European Union, Canada, Australia, New Zealand, and Japan, and to an extent, with India and South Korea as well. This includes actions through the G7, the AUKUS security pact, the “Quad” security dialogue, and the U.S.-EU Trade and Technology Council.

This recalibration of plurilateral institutions has significant implications for coordination of sanctions policy (e.g., Russia sanctions, or China sanctions after a possible invasion of Taiwan), export control policy (e.g., regarding semiconductor export to China), defense cooperation and trade, and “friendshoring”—i.e., relying on international “friends” for production of critical capabilities. All of this will translate into challenges and opportunities for companies seeking to navigate cross-border investment and trade.

Chinese Countermeasures Will Intensify

The emerging system of checkpoints on the movement of goods, technology, and investment goes both ways, and in 2023, China made more use of countermeasures in response to U.S. policy. This included restrictions on the export of gallium, germanium, and graphite, and designation of U.S. companies on the “Unreliable Entity List” for selling defense articles to Taiwan.

It seems reasonable to anticipate that China will make more use of these tools in the coming year, further complicating the landscape for companies.

The “Politics” in Geopolitics

This is shaping up to be a fateful year for world politics, with presidential elections in the United States, Taiwan (held on January 13), and Mexico, and a likely general election in the United Kingdom, a combination rarely seen. The U.S. presidential election will be particularly impactful, with significant (if not particularly well-defined) implications for U.S. policy regarding China, Russia/Ukraine, and the Middle East. It will be of paramount importance to monitor developments and to gauge the geopolitical impact as campaigns progress.

This article was originally published on <a href="https://www.linkedin.com/pulse/6-geopolitical-risk-issues-cross-border-deals-trade-2024-ydaqf/?trackingId=KLlObgb8SB6DXbGQkOZ33g%3D%3D">LinkedIn</a>. Subscribe to the <a href="https://www.linkedin.com/newsletters/br-international-trade-report-7158469048274481152/">BR International Trade Report</a> on LinkedIn and receive new content as it publishes.

6 Geopolitical Risk Issues for Cross-Border Deals and Trade in 2024

Offices

Stay Connected

Slide Menu

Slide Search

6 Geopolitical Risk Issues for Cross-Border Deals and Trade in 2024

Offices

Stay Connected