What to Expect From China’s New Anti-Sanctions Law

Following Western sanctions directed against it regarding alleged human rights issues, China unveiled its new anti-sanctions legislation on July 10 to much pomp and circumstance. The international community was quick to notice the promulgation, with widespread speculation ensuing that this could greatly damage the business environment for multinational corporations and other entities that have a large market presence within China. Domestically, the news was met with the support of several media outlets, portraying the bill’s passage as an indication that China would no longer allow this type of Western economic bullying to continue unabated.

Although this particular Chinese law has garnered lots of media attention, such measures blocking foreign sanctions are far from unprecedented. In fact, the European Union has in the past enacted policies specifically designed to circumvent certain sanctions regimes that it deems to be extraterritorial in scope. The EU Blocking Statute, first enacted in 1996, prohibits EU operators from complying with or enforcing any sanctions listed in its annex as falling into that category of extraterritoriality. The legislation originally targeted U.S. measures directed against Iran, Cuba, and Libya. Those specific disputes were eventually settled via other channels, making it unnecessary to enforce the statute at that point. Nevertheless, this became an issue following the U.S. withdrawal from the Joint Comprehensive Plan of Action, better known as the Iran nuclear deal, and resultant reimposition of sanctions targeting the Islamic Republic under the Trump administration in 2018. At that time, the EU made it clear that its companies were not to comply with U.S. sanctions. One aide to the foreign policy head even explicitly stated that if EU entities elected to implement U.S. sanctions, they would in turn be sanctioned by the EU. The Chinese law is in effect doing the same thing for entities that maintain operations on Chinese soil, subjecting them to any responsibilities associated with implementing sanctions targeting Chinese entities.

Some of the potential responses spelled out in the new legislation are asset freezes, visa bans, business prohibitions, or deportations. One provision that has attracted particular attention is the ability for such measures to target not merely the entity complying with foreign sanctions or the policymakers that designed them, but family members of those parties or corporate leaders in their individual capacities as well. Further, those enforcing Western sanctions in China can be subject to lawsuits by Chinese companies that are harmed. In those instances, the pressure will be on top brass at multinational corporations with large scales of business in China to decide whether or not to comply with Western sanctions targeted at Chinese entities. In terms of the direct effects this may have on businesses, only time will tell. It is possible that the countermeasures may primarily target foreign politicians that hammer sanctions through legislative houses rather than corporate executives, but that is far from a certainty.

Given the flexibility of the policy and its discretionary implementation, it is quite possible that the overall level of enforcement may reflect the ebbs and flows of a given bilateral relationship. Additionally, it will be much tougher for enterprises that rely heavily on the Chinese market in driving revenue growth to avoid considering the potential impact of complying with sanctions against Chinese entities. The carrot of the Chinese marketplace may end up proving large and sweet enough to induce some businesses to either pressure their home states to relent on sanctions or elect not to enforce them in practice on Chinese soil. It is further possible we could see some large multinationals attempt to separate their China division from their other subgroups through complex corporate structures that might be able to weave around the sanctions. Of course, all of those seemingly crafty moves would run the risk of blowback back home and potential repercussions for noncompliance. All of this represents a delicate balancing act that must take into consideration the specific circumstances faced by an individual enterprise.

In fact, there had been some speculation that Beijing was taking a wait-and-see approach with regards to passing the legislation, postponing enactment following the election of President Joe Biden to see if his administration would soften some of the policies set in place by his predecessor. Once it became evident that would not be the case, the law was etched in stone and codified.

One question that has been on the minds of global observers is whether this measure will play out as an offensive barb or defensive response on the ground. While it is impossible to say definitively due to the novelty of the ordinance, initial indications point toward the latter. First, China passed this bill in the wake of a flurry of Western sanctions directed at its companies and individuals in response to alleged human rights abuses occurring in the far-western Xinjiang region. Moreover, the Chinese Ministry of Commerce announced that it would introduce an Unreliable Entity List near the end of 2020, in a similar vein to the U.S. Department of Commerce’s Entity List. Notably, Chinese domestic telecommunications champion Huawei was added to the Entity List in 2019. All of that followed the highly publicized detention in December 2018 and subsequent extradition request pertaining to Huawei’s CFO Meng Wanzhou, which is still playing out in the Canadian legal system. However, the Ministry of Commerce has yet to add any entities to its Unreliable Entity List. China has in the past sanctioned some prominent U.S. figures and business, with former Secretary of State Mike Pompeo included, for violating its sovereignty with respect to their policy positions or public proclamations.

Though no companies have been added to the Unreliable Entity List to this point, there has been some increased scrutiny directed at companies that have strong ties or disclosure requirements in the United States. Even though that does not stem directly from the anti-sanctions law, it could still be reflective of the same general trend of pushback against Western tactics, as the United States had delisted multiple Chinese corporations from its equity exchanges on account of their having been deemed security threats. A Trump administration bill also raised the potential for delisting of firms that do not provide financial audits in the future.

For its part, China has directed increasing scrutiny at firms that choose to go public on New York equity exchanges. Didi Chuxing had its mobile app removed from app stores in the Chinese mainland due to potential data security issues related with disclosure and audit requirements. China followed up by launching probes against Full Truck Alliance Company, a Tencent-backed trucking company using an Uber-like business model connecting truckers with products for delivery, and Kanzhun Limited, a leading online recruitment platform also funded by Tencent, both of which listed on the New York Stock Exchange in June.

In the face of this increasingly hostility, China determined it was not in its own best interest to sit idly by and watch as future and more far-reaching sanctions are already being debated. Rather, it seems the anti-sanctions law provides a new option in China’s toolkit for responding to foreign sanctions, as it appears Western nations are looking more inclined to target China via such sanctions moving forward. If that remains the case, we may soon see whether or not the anti-sanctions legislation will be given more bite in its implementation.