Behind the Exodus of U.S. Law Firms from China

No doubt economic factors are part of the reason behind the departures: Both decoupling and the slowing of the Chinese economy mean less business. Moreover, the tightening political atmosphere probably makes firms less optimistic that investments in loss-making operations now will ultimately pay off in the form of future business.

But China operations pose risks for foreign law firms beyond just the economic.

A big one is that of data security. Global law firms like to have their offices interconnected so that staff in one office can access digital records in another. What happens if the gentlemen from the Ministry of State Security come to your Beijing (or Hong Kong) office and demands access to your computers so he can access your files in New York? “No, thank you. We’d rather not” and “See you in court!” are not going to cut it. This concern led Latham & Watkins last February to cut its Hong Kong office off from unfettered data access—a measure it had already taken with its Beijing office. And concerns about data security were also a reason behind the Dentons-Dacheng breakup in 2023.

In addition, communications may not be secure. While firms may use VPNs, they must be from government-approved VPN providers, raising the very security concerns that VPNs are supposed to mitigate.

A second risk is that of attorney-client confidentiality. Chinese law does not recognize any attorney-client privilege. If an attorney possesses information about a client the state wishes to know about, they are under the same obligation as anyone else on Chinese territory—citizen or foreigner—to reveal it. The fact that doing so might violate a foreign attorney’s legal or ethical obligations in their home jurisdiction is irrelevant.

A third risk is the same one faced by all foreign residents of China, particularly those who are likely to be involved in disputes with powerful local people: the risk of arbitrary detention or an exit ban.

These problems and risks are not new. But they have been rapidly increasing in salience in recent years, just as the corresponding actual and likely economic payoffs have been declining. For many law firms, it would seem, a critical threshold has been crossed.

Groceries, make-up, and stuffed animals were among the industries that I worked with when I was a paralegal at Coudert Brothers’ Beijing office in the late 1990s. It was a crash course in the challenges that foreign businesses routinely encountered when navigating the complex Party-state. It also was fun, exciting, and hope-filled. So much seemed possible as China was ramping up to join the WTO.

Yet, even after full WTO accession, the permitted scope of foreign law firms’ work in China remained constrained. As Chinese law firms grew in size and sophistication, there were nonetheless gnawing questions about what role foreign firms would play. The current batch of foreign law firm closures is not a rush to the door: It is a sad but not unexpected next step in an outbound flow.

The lack of foreign law firms in China is not just of immediate concern to clients. It is also another break in the connective tissue between the U.S. and China. As a U.S.-based law professor, I have watched from this side of the Pacific as the desirability of American law degrees has diminished for Chinese students.

Twenty years ago, my Chinese classmates in law school had confidence in a pathway from a one-year Master of Laws (LL.M.) degree to a year of practical training at a U.S.-based law firm and then to a promising career back in China or perhaps at an international office. This route still exists, but in practice, opportunities have shrunk dramatically because of market forces.

There are still Chinese students at American law schools to be sure, earning both LL.M. and three-year Juris Doctor (J.D.) degrees. But the exit of American law firms from China enhances doubts about the value of these expensive degrees for people who expect to spend their careers in China with Chinese law firms and companies. This concern is exacerbated by broader questions about how rewarding and enjoyable studying in the United States will be in an age of heightened U.S.-China tensions. In the reverse direction, the number of American students and academics in China—including in law—has failed to rebound after the pandemic.

Looking back four decades to when Paul Weiss and other American firms were first opening offices in Beijing, there were at best a handful of Chinese visitors at U.S. law schools. To energize connections, American legal academics and their Chinese counterparts created the Committee on Legal Education Exchange with China (CLEEC)—a groundbreaking program with the centerpiece being a substantial investment in bringing Chinese legal scholars to study in the United States. CLEEC also created pathways for foreign academics to spend time in China. 

Today, I hope that new creative efforts can protect existing ties between legal fields in the U.S. and China as well as forge new ones. But I worry that the recent wave of foreign law firm exits forebodes connections will continue to wither.

When notifying China’s Ministry of Justice about its planned departure, Paul Weiss’s message will likely have taken a page from The Godfather: It’s not personal. It’s strictly business. Paul Weiss and numerous other foreign law firms that hung on throughout China’s long zero-COVID winter are finally calling it quits because they don’t see any prospect of income from their China offices covering expenses any time soon.

Top international firms like Paul Weiss are not cheap to run. They pay internationally competitive salaries in order to attract and retain lawyers capable of participating in cross-border transactions almost anywhere in the world, and their offices are typically in prestigious buildings. This requires them to charge high fees, which Chinese clients are typically willing to pay only when a transaction requires special experience, knowledge, or contacts in another jurisdiction. For anything else, there are many competent Chinese law firms with highly competitive price structures. 

When Paul Weiss entered the China market in 1981, there was no local competition. Private (non-government) Chinese firms emerged only in the 1990s, and for a long time were unable to compete with elite foreign firms on complex transactions. But over the past two decades, the top domestic Chinese firms have upped their game by filling their top ranks with seasoned lawyers from the China offices of international firms, and their entry-level positions with Chinese graduates from the best U.S. and European law schools. The Chinese government also restricts the kind of work that foreign law firms can do, meaning they cannot offer full service as local competitors can. 

Foreign firms began exiting more than a decade ago due to these factors. More recently, China’s heightened data protection laws have forced all entities with offices inside China to wall off certain kinds of data so that it cannot be shared with their overseas offices, creating regulatory risk. Some firms are reportedly concerned about possible data leaks in the other direction—that is, the risk that Chinese authorities might demand access to information from firms’ international databases if they are accessible in-country. These developments probably contributed to the decline in foreign law firms with registered offices in China to 205 in 2022, from 244 in 2017. More than a dozen American-headquartered firms shut some or all of their China offices in 2024, apparently felled by the coup de grace of the slumped Chinese economy. More are likely to follow.

Paul Weiss can continue to serve its mainland-based clients from its Hong Kong office. Indeed, in some firms, the Hong Kong office is accustomed to working closely with the usually smaller Beijing or Shanghai office on major transactions or to support big clients. The only downsides are that lawyers will waste time on travel and, more importantly, will likely become less informed due to spending less time mixing with government regulators and local colleagues in Beijing.

As for the Chinese government, while it has no cause to celebrate the departure of foreign law firms, it will be much more focused on the potential loss of American high-tech firms due to escalating U.S. government restrictions on investment in China. And that’s not strictly business.

Foreign law firms’ closing may be part of an exodus of in-house counsel. Many expatriate in-house lawyers may have left their company’s China branch. The closures might also indicate a rise in confidence in Chinese law firms. Or they could be attributable to a slowing economy or to other factors, including a declining confidence in China as a hospitable environment for practicing law. To the extent that foreign law firms may have been outposts rather than revenue generators, these closures could also be cost-cutting measures.

For American and other common law lawyers, China always presented certain risks to their clients, particularly with respect to rules regarding confidential attorney-client communications and fiduciary obligations to clients, which are different from obligations to the party-state that China’s law requires. Clients may have felt more comfortable discussing sensitive issues outside of China. Foreign law firms also may have found that market access restrictions—not being able to represent a party in court and not being able to prepare legal opinions—may have been too restrictive.

Both China and the U.S. lose with departures of major Western law firms. China loses an important way for its lawyers to integrate into international law firms, as well as a source of talent and training for local universities, government institutions, and companies. Also lost may be a trusted way to back-channel communications to the United States. The United States loses an important vehicle for better understanding of the Chinese business and legal environment, and for communication with China. I am not sure how much it has registered with China’s government what these losses may mean for China-U.S. relations.

As one example of the nature of the problem, currently China has very few registered U.S. patent lawyers or agents. The China National Intellectual Property Administration has taken steps to open up the market, but as China’s efforts to file patents and trademarks overseas and to engage in IP-intensive commerce has increased, China will increasingly need to rely on counsel based in the United States rather than China. The gap may sometimes be filled by unscrupulous domestic agents, many of which have been sanctioned by the United States Patent and Trademark Office for unethical activities.

When international law firms began opening China offices in the 1980s and 1990s, they were following a familiar pattern: Lawyers follow their clients. The initial impetus was to better serve the multinational corporations increasingly engaged in trade with China. Later, Chinese companies also became important clients, especially those looking to expand overseas or raise money in capital markets.

Given this pattern, the retreat of international law firms from China is no surprise. Recent downsizing by law firms reflect economic headwinds, namely economic uncertainty and weak consumer spending in China itself combined with years of economic decoupling between the U.S. and China. China-based lawyers openly admit that M&A and capital markets work has dried up, with data from mid-2024 showing the pace of M&A activity at a twelve-year low.

What is new is international law firms’ willingness to exit China entirely. When Su Li and I were doing research on international law firms in China a decade ago, we found that most firms were reluctant to quit the country even when their revenues were modest. Between 1992 and 2012, just twenty-five foreign law firms changed their strategy and left China outright. Among the firms we interviewed, the dominant strategy was to maintain an “outpost office” with a median size of eleven lawyers, kept open for its symbolic value or as a bet on future profits. Today, strains in U.S.-China relations and a steady drumbeat of news about tariffs and economic decoupling make optimism about future economic possibilities harder to sustain. And having an office in Beijing or Shanghai is no longer a “must have” to be taken seriously as a global law firm.

It is unlikely that anyone in the Chinese leadership is overly concerned about the departure of international law firms, especially since this will create space for local firms to expand their business. Law is an important strategic sector for the Chinese government, both because law firms are major white-collar employers and because cabining legal activism has emerged as a major twenty-first century political priority. The government has a rooting interest in the success of China’s elite “red circle” law firms, run by lawyers with elite domestic credentials rather than international experience. Red circle law firms are increasingly expanding overseas, with the goal of competing for top international clients. The long-term vision is for these domestic champions to step ably into the space vacated by international law firms like Paul Weiss, though it remains to be seen when (if at all) clients prove ready to make the switch.