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Blog Post June 28, 2021

China’s anti-foreign sanctions law: Companies in the crosshairs

By Hung Tran

On June 10, 2021, China’s National People’s Congress passed the Anti-Foreign Sanctions Law on an accelerated basis, arguably sending a signal to the ongoing G7 Summit in Cornwall, United Kingdom. The law, which allows Beijing to take retaliatory measures against those taking sanctions, has built out China’s legal arsenal in its efforts to fight back against sanctions by the United States, the European Union (EU), and others. This could put companies all over the world doing business with the US and EU and China in an untenable position: complying with Western sanctions means violating Chinese law, exposing those companies to counter-sanctions by China and other liabilities. This has raised the complexity and risk of doing business globally, especially as sanctions and counter-sanctions are likely to proliferate in the intensifying US-China strategic competition.

China’s Anti-Foreign Sanctions Law furnishes the legal basis for Beijing to take retaliatory measures including counter-sanctions against persons or entities instigating or implementing sanctions. The range of retaliatory targets has been defined loosely to include spouses, relatives, and co-workers of those deemed responsible for foreign sanctions. Furthermore, Chinese entities that are negatively impacted by sanctions have to report those restrictions to the government and can sue in Chinese courts those implementing sanctions for compensation of damages. Currently at risk of being at the receiving end these measures are companies complying with the US ban against selling high-tech products such as advanced semiconductors to listed Chinese entities like Huawei or military-related companies; companies such as H&M, Nike, and Adidas boycotting cotton allegedly produced by forced labor in Xinjiang; and financial services firms — in particular Western banks in Hong Kong — withholding services to persons and entities sanctioned by the United States. In this context, it is not clear if Beijing intends to apply the law in Hong Kong by inserting it in Annex III of Hong Kong Basic Law.

The Anti-Foreign Sanctions Law basically formalizes a series of administrative measures already launched to counter US and EU sanctions. These include putting offending companies on an Unreliable Entity List — patterned after the US Entity List — which identifies foreign bodies deemed threatening to China’s national security and interests and makes them liable to fines, economic restrictions, asset seizures, and visa restrictions for employees. In addition, early this year, China’s Ministry of Commerce issued a “blocking statute” — patterned after a similar regulation by the EU protecting EU entities against the extraterritorial application of laws of a third country — requiring Chinese persons and entities to report any restrictions they face from foreign governments and allowing them to sue in Chinese courts for compensation. By elevating these measures to law, China wants to make clear its serious intentions to protect its interests against Western sanctions, reflecting confidence in its ability to do so given its growing economic heft.

At present, there is a high level of uncertainty about how China’s law will be applied and the extent of actual threats confronting Western companies which comply with US/EU sanctions. It should be kept in mind that putting onerous counter-sanctions on Western companies, forcing them to choose between China and the United States, will have an economic cost by limiting the pool of companies able and willing to do business with China. Furthermore, experiences with the EU blocking statute show that not much use has been made with it — many companies have found ways to finesse the conflicting laws, including by seeking exemptions from the United States and EU (though, arguably, this could be more difficult to do in the context of a more adversarial US-China relationship).

At the end of the day, how vigorously China implements the anti-sanctions law, and uses other counter-measures, depends on the seriousness of US-China tensions—on issues seen as threatening its core national interests, China would put those ahead of potential economic benefits. As the US-China strategic competition persists and likely intensifies, sanctions and counter-sanctions by Western countries and China will likely proliferate and widen in scope. This would eventually put companies active in the global supply chain — i.e., doing business with both the US/EU and China — in an untenable position, being forced to choose sides to avoid being penalized for violation of one or the other country’s law. In the view of many observers, by pushing Western companies into this predicament, China hopes that many of them will lobby their governments to remove anti-China sanctions, driven by their own interests. However, it is not clear if this would have any impact on US policy making — at least, probably not until US sanctions can be shown to hurt the US economy.

These legal measures have to be seen in the context of China’s effort to establish an international economic playground for its companies and foreign companies doing business with it, shielded from the long arms of US laws including sanctions and judgements by US courts. In the same vein, China has also promoted the use of its laws and courts for dispute settlements in contracts with foreign business partners — beyond the fact that like other bilateral official creditors, the China Export-Import Bank insists on specifying Chinese governing law and a dispute resolution forum in China. In fact, in addition to China International Economic and Trade Arbitration Commission (CIETAC), in June 2018 China launched two international commercial courts (CICC) based in the southern city of Shenzhen and the northern city of Xi’an, mainly to settle disputes between Belt and Road Initiative (BRI) contracting parties. Until recently, most BRI contractual disputes have been resolved in Hong Kong and to a lesser extent Singapore, not in traditional international arbitration centers such as London.

Besides the Anti-Foreign Sanctions Law, China has also tried to promote the use of its currency, the renminbi (RMB), in settling its foreign trade in order to counter the potentially debilitating impact of being denied access to the current international payment system dominated by the USD. This arrangement has allowed the US government to put tremendous pressure on entities or countries whose behaviors are deemed unacceptable to the US by threatening to exclude them from the USD payment system. While being slow to develop, China’s effort has made some progress. The share of China’s foreign trade being settled in RMB has risen from less than 1 percent in 2009 to 20 percent in 2019. In particular, USD trade settlements between Russia and China (two countries under US sanctions) have fallen to 46 percent from 90 percent in 2015, while trade settlements in the yuan and ruble have risen to 24 percent from negligible levels a few years earlier. Generally speaking, China has in place 33 currency swap agreements with foreign central banks — the most among central banks. Theoretically, this allows for the use of RMB (or the counterpart currency) to settle bilateral trade. In this context, China’s plan to soon launch its central bank digital currency, the digital yuan, will make cross-border payments easier, cheaper, and more efficient, giving a fresh impetus to its effort to move away from the use of USD in bilateral trade settlements. Indeed, as part of its testing program, the People’s Bank of China and Hong Kong Monetary Authority have tested the interoperability of the digital yuan in cross-border payments. This naturally will shield such payment flows from US interferences and controls.

In short, recent steps taken by China are part of its efforts to build an economic and business ecosystem, resilient to US interferences including via sanctions. This has begun to bifurcate the global economy—most clearly in the flow of information across the internet—and would eventually lead to an “One World, Two Systems” configuration. While it is premature to say how this configuration will evolve over time, it is safe to say that the costs of doing international business have already risen due to the strategic competition, sapping the potential growth performance of the global economy to the detriment in particular of the low income countries.

Hung Tran is a nonresident senior fellow at the Atlantic Council, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

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