US-China trade war could ‘severely undermine’ global merger activity in 2019, says Baker McKenzie report

  • In a new report, the legal giant says an escalation of trade tensions could knock as much as 0.8 percentage points off global GDP by 2020
PUBLISHED : Monday, 17 December, 2018, 8:03am
UPDATED : Monday, 17 December, 2018, 10:19am

The trade war between the United States and China could weigh heavily on sentiment for corporate deals as soon as next year if the world’s two largest economies are unable to reach an accord on trade in the coming months, legal experts said.

In a new report, the law firm Baker McKenzie said an escalation of trade tensions could knock as much as 0.8 percentage points off global gross domestic product by 2020 and “severely undermine” the ability of companies to operate across borders. Worldwide GDP growth is expected to be 3.1 per cent in 2018, according to Baker McKenzie, one of the world’s biggest law firms.

“The risk is that much worse is to come. Global investors and deal makers have largely overlooked the acceleration of trade tensions between the US and China, and to a lesser degree, between the US and a range of other economies,” Baker McKenzie said. “But the global consensus that trade disputes should be handled via the multilateral framework has clearly broken down, and there is a risk of a damaging spiral into protectionism.”

Foreign investment in China falls 27.6 per cent on trade war worries

Global mergers and acquisitions activity has remained robust, with the law firm expecting US$3.1 trillion in deals this year. But the report said transaction values are expected to decline to US$2.9 trillion next year as activity slows in the second half of the year, and fall to US$2.3 trillion in 2020.

In the Asia-Pacific region, the law firm expects the value of deals to increase 7.5 per cent year-on-year to US$750.7 billion in 2019, but to fall back to US$652.7 billion in 2020.

The US has placed tariffs on nearly half of all goods imported from China this year as US President Donald Trump seeks to overcome a US$376 billion trade deficit between the countries and end what he says are unfair trade policies undertaken by Beijing.

After a meeting between Trump and Chinese President Xi Jinping at the Group of 20 leaders’ summit in Buenos Aires, the US and China agreed to a 90-day negotiating period to try to reach a resolution.

Since the summit, Trump has threatened to increase the level of tariffs to 25 per cent on some US$200 billion of Chinese products if they cannot reach an agreement. But he also has taken a more positive tone, saying on Twitter as recently as last week that the US has had “very productive conversations” with China.

The president said he would be willing to take the unprecedented step of intervening in a criminal case involving Huawei Technologies chief financial officer Sabrina Meng Wanzhou to reach a trade deal. American officials are seeking to extradite Meng from Canada after accusing her of being involved in a scheme to skirt US sanctions against Iran, which has created a potential flash point with China.

In recent months, Huawei has seen its telecommunications network products banned by Australia, Japan, New Zealand and the US over security concerns.

Chinese companies have been among the most prolific buyers of digital and technology assets since 2009 and Beijing has placed an emphasis on increasing the market share of domestic players in key technology sectors with its “Made in China 2025” programme.

There have been signs recently that Beijing may be toning down its “Made in China 2025” efforts as the programme has sparked concern in Washington and among other governments and led to a growing resistance against deals involving Chinese buyers on national security grounds.

Local authorities no longer required to work on ‘Made in China 2025’

According to a new report by the law firm Freshfields Bruckhaus Deringer, Chinese companies were among the top buyers of digital and technology firms in the S&P Global 1200 between 2009 and 2017, averaging 4.6 transactions each. Dutch firms averaged 4.7 transactions each, placing them just ahead of Chinese acquirers, the law firm said.

Chinese firms outspent their global counterparts, averaging US$1.47 billion per deal, according to Freshfields. The study looked at more than 26,000 deals in that time frame.

“This might be read as a sign of both the desire in China to develop a more technologically advanced economy and the fact that Chinese buyers are often expected to pay a premium in cross-border deals due to the uncertainty of securing regulatory approvals from Beijing,” Freshfields said.

US-based digital and technology assets accounted for almost half of all deals in the S&P Global 1200 between 2009 and 2017, according to Freshfields.

But increased scrutiny of foreign-led deals involving critical technologies in the US, particularly by Chinese buyers, could have a “chilling effect” on the volume of merger activity, said Richard Blair, a partner in Freshfields corporate and M&A practice.

“That will have an impact, both in terms of China going into the US and looking to do things with that technology once acquired. And conversely, the other way around, with the US going into China and looking to collaborate and leverage some of the innovation that has happened in China,” Blair said. “Clearly, as of right now we have some fairly strained macro-political issues also at play which will also have an impact.”

Chinese deal-making in the US reached a record high in 2016, but has since fallen as American officials have taken a harder line on some deals involving Chinese buyers.

For example, Trump blocked the Chinese investment firm Canyon Bridge Capital Partners’ US$1.3 billion deal for Lattice Semiconductor in 2017 and Broadcom’s proposed US$117 billion deal for Qualcomm this year.

This year, the US vastly expanded the powers of the Committee on Foreign Investment in the United States, or CFIUS, to examine mergers and investments by foreign entities on national security concerns.

A new pilot programme, which began last month, has identified a series of 27 sectors involving so-called critical technologies that will now require a mandatory review by the government. That includes certain minority investments or deals where companies receive board seats or observer roles in those critical industries.

“It makes M&A more complicated. It doesn’t mean it’s not happening,” Yash Rana, a M&A partner at the law firm Goodwin Procter’s Hong Kong office said. “It makes transactions more difficult to execute and more complicated to execute.”