A Chinese Rock and an American Hard Place: A Clash of Sanctions Regimes

Posted on Feb 23, 2022

Elliot Werner

 

I. Introduction

Over the last few years, the U.S. government has imposed an array of sanctions against the People’s Republic of China Chinese government for various reasons, including its ties with North Korea, China’s treatment of the Uighurs in Xinjiang, and its democracy crackdown in Hong Kong.[1] In response, the Chinese government has instituted multiple blocking sanctions regimes.[2] Blocking sanctions are laws adopted by a country to hinder the extraterritorial application of foreign legislation.[3] As a result, companies operating in China currently find themselves caught between the rock that is U.S. sanctions, and the conflicting hard place that is China’s retaliatory blocking regulations.[4]

II. China’s Blocking Regulations Overview

On September 19, 2020, China’s Ministry of Commerce ("MOFCOM") issued regulations on the government’s “Unreliable Entity List” (UEL) plan first proposed in May 2019.[5] The regulations set out a framework for imposing restrictions on foreign enterprises, organizations, and individuals that are seen as (1) “endangering the national sovereignty, security, or development interests of China;” or (2) “suspending [or terminating] normal transactions with Chinese enterprises, organizations, or individuals, in violation of [commonly accepted] market-based principles, [thus] seriously harming the legitimate rights and interests of Chinese enterprises, organizations, or individuals.”[6]

On January 9, 2021, MOFCOM’s issued a blocking statute, the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (The Rules), complimenting the UEL.[7] The Rules were issued to expand China’s arsenal against foreign measures, and came in response to America’s application of extraterritorial sanctions and export control restrictions against China.[8] The Rules are designed to counteract the extraterritorial application of foreign legislation or measures when such action “unjustifiably” prohibits or restricts a Chinese citizen, entity or other organization from engaging in “normal business activities” with “parties of a third country” “in violation of international law and the basic principles of international relations.”[9]

On June 10, 2021, the Chinese legislature enacted the Law on Countering Foreign Sanctions.[10] As this law was introduced by China’s legislature, it is more authoritative than MOFCOM’s UEL and blocking statute.[11] The Chinese legislature’s Legislative Affairs Commission clarified in a Q&A article that the Law will complement and co-exist with existing Chinese regulations, though how, exactly, is unclear.[12]

III. How Companies Have Thus Far Responded

Companies have had highly varied reactions in response to being caught in dueling and contradictory sanctions regimes. Some multinational corporations have already made clear that they plan on abiding by U.S. sanctions. State Street Global Advisors – which has multiple offices in China – put out a statement that they are complying with Executive Order 1403.[13] Invesco, with multiple offices in China as well, also released a statement that their policy is to fully comply with the Executive Order.[14] Still, many companies intend to stay– or have even expanded – their China operations. In a recent study of American companies in China, 70% of respondents said that they had no plans to move their supply chains out of China.[15] Some companies, particularly Wall Street institutions, are expanding in China.[16] In August 2021, BlackRock received approval from regulators to start a mutual-fund business in China.[17]And several prominent banks like J.P. Morgan and Goldman Sachs have received approval in recent years to set up majority owned securities ventures in the country.[18]

IV. Prediction

            Despite China’s market leverage, the United States continues to harbor more dominance on the global economy.[19] For instance, the dollar remains the world’s dominant reserve currency – accounting for 59 percent of central bank reserves, compared to the Chinese renminbi’s 2.5 percent.[20]  Therefore, companies can ill afford to choose to follow China’s regulations at the costs of being severed from the U.S. market as well as the U.S. financial and economic systems.[21] Further, while China’s sanctions doctrine and enforcement is still nascent and so is relatively unknown to MNCs, companies (especially financial institutions) are very wary of U.S. sanctions and their history of strict enforcement.[22] Therefore, China is unlikely to radically enforce its blocking statutes so as not to disrupt its economy. China’s policies thus far reflect this calculus. For instance, in October 2021, China shelved the application of their anti-sanctions law in Hong Kong, only applying it to the mainland.[23] As more than 80% of banks in Hong Kong are foreign, requiring them to comply with China’s sanctions threatened to trigger their departure from the city.[24]

 

____________________

[1] Michael Martina & David Brunnstrom, U.S. sanctions Chinese officials over Hong Kong democracy crackdown, Reuters (Jul. 16, 2021) https://www.reuters.com/world/asia-pacific/us-sanctions-seven-chinese-individuals-over-hong-kong-crackdown-2021-07-16/.

[2] China's Newest Anti-Foreign Sanctions Blocking Law: What We Know, What We Don't Know, and What U.S. Companies Can Do, Davis Wright Tremaine, https://www.dwt.com/blogs/broadband-advisor/2021/08/anti-foreign-sanctions-law-china.

[3] Sophia Tang, Can China’s New “Blocking Statute” Combat Foreign Sanctions? (Jan. 30, 2021), https://conflictoflaws.net/2021/can-chinas-new-blocking-statute-combat-foreign-sanctions/.

[4] Id.

[5] China Issues Regulations on Its “Unreliable Entity List” Framework, Covington, (Sep. 21, 2020), https://www.cov.com/-/media/files/corporate/publications/2020/09/china_issues_regulations_on_its_unreliable_entity_list_framework.pdf.

[6] MOFCOM, ‘Regulations on the Unreliable Entity List’ Art. 2 (MOFCOM No.4 Order, 19 September 2020).

[7] China Issues Rules to Counteract “Unjustified” Extraterritorial Application of Foreign Measures, Covington Alert, (Jan. 12, 2021), https://www.cov.com/-/media/files/corporate/publications/2021/01/china-issues-rules-to-counteract-unjustified-extraterritorial-application-of-foreign-measures.pdf.

[8] China Issues Legislation to Block Unjustified Extra-territorial Application of Foreign Legislation and Measures, Mayer Brown, (Jan. 13, 2021) https://www.mayerbrown.com/en/perspectives-events/publications/2021/01/china-issues-legislation-to-block-unjustified-extra-territorial-application-of-foreign-legislation-and-measures.

[9] MOFCOM, ‘Regulations on the Unreliable Entity List’ Art. 2 (MOFCOM No.1 Order, 9 Jan. 2021). MOFCOM released Q&As on its website, which explain that “secondary sanctions” are the main target of the Rules; see Cov supra 36. Secondary sanctions usually refer to the enforcement of U.S. economic sanctions with respect to non-U.S. actors that engage in transactions with sanctions parties. See id

[10] China Enacts New Law on Countering Foreign Sanctions, Covington, (Jun. 11, 2021), https://www.cov.com/en/news-and-insights/insights/2021/06/china-enacts-new-law-on-countering-foreign-sanctions.

[11] Id.

[12] Id.

[13] US Executive Order 14032, State Street Global Advisors Insights, https://www.ssga.com/us/en/intermediary/etfs/resources/us-executive-order-14032.

[14]  US Executive Order 14032 – Chinese Military-Industrial Complex Companies, Invesco, https://www.invesco.com/us/en/resources/us-executive-order-14032-chinese-military-industrial-complex-companies.html.

[15] Id. That could possibly indicate – at least with respect to China’s countermeasures discussed here – a wait-and-see approach from companies to see how China might enforce its various countermeasures. It could also be a function of dependence on the Chinese market, or operations within industries that are less impacted by the conflicting sanctions regimes.

[16] Id.

[17] Id.

[18] Id.

[19] Ethan Paul, What Biden’s Top China Theorist Gets Wrong, Lawfare (Oct. 7, 2021) https://www.lawfareblog.com/what-bidens-top-china-theorist-gets-wrong.

[20] Id.

[21] Id.

[22] The “New” Iran E.O. and the “New” EU Blocking Statute – Navigating the Divide for International Business, Gibson Dunn, (Aug. 9, 2018), https://www.gibsondunn.com/new-iran-e-o-and-new-eu-blocking-statute-navigating-the-divide-for-international-business/#_ftn40c.

[23] Ian Marlow, China To Shelve Anti-Sanctions Law in Hong Kong, HK01 Says, Bloomberg, (Oct. 4, 2021) https://www.bloomberg.com/news/articles/2021-10-05/china-to-shelve-anti-sanctions-law-in-hong-kong-hk01-says.

[24] China bans entry to 4 US religious freedom advisors in retort to Xinjiang sanctions, Radio Free China (Dec. 21, 2021) https://www.rfa.org/english/news/china/bans-12212021100724.html.