China's New Legal Tool to Counter Foreign Sanctions
On January 9, China’s Ministry of Commerce issued the Rules on Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (《阻断外国法律与措施不当域外适用办法》) (official translation here), taking effect immediately.
There have been arguments that these Rules are designed solely to limit the application of secondary sanctions on Chinese firms, and therefore will have a limited impact. If the Rules are interpreted broadly, however, they could be used to retaliate against additional U.S. actions, such as recent export control decisions that target Chinese firms. If this happens, the impact on international trade will be much broader. The actual scope and implementation of the Rules remains to be seen.
Due to escalating tensions between the United States and China, U.S. companies operating in China could be potential targets of the Rules, as well as other foreign companies that trade with both nations (although whether the Rules apply to foreign companies with no physical or legal presence in China is debatable). This document, along with the establishment of China’s unreliable entity list and export control entity list, could be used to punish companies for complying with U.S. laws.
The Rules, modeled after a similar EU blocking statute, have sixteen provisions. Article 1 identifies the legal bases and clarifies that the purpose is to “block the impact of improper extraterritorial application of foreign laws and measures.” Article 2 indicates that the Rules apply to extra-territorial application of foreign laws and measures that unlawfully restrict or ban trade activities of Chinese entities or third country entities.
Article 5 of the Rules requires Chinese citizens and entities to report to the working body if they face prohibition or restriction from conducting normal trade actives pursuant to foreign laws or measures. A working body is made up of relevant agencies and led by a State Council department in charge of commerce (Article 4).
Article 6 lists four elements to determine whether foreign laws or measures have unjustified ex-territorial application, including:
- Whether they are contrary to international law and basic norms of international relations;
- The potential influence on China’s national sovereignty, security, and development interests;
- The potential influence on the lawful rights and interests of Chinese citizens, legal persons, or other entities;
- Other factors.
Once a foreign law or measure is found to have unjustified extra-territorial application, relevant agencies under the State Council may issue an order to prohibit the recognition, enforcement and compliance of the law or measure (Article 7.1). It is possible that the injunction will only apply to Chinese companies, including foreign invested companies registered in China. The order may be suspended or revoked by the working body (Article 7.2). Exemptions may be granted (Article 8).
If the lawful rights and interests of Chinese citizens or entities are hurt by another party’s compliance with a foreign law or measure, which would be in violation of the order, the relevant individuals or entities may initiate litigation and request compensation from the other party, unless an exemption was granted to the other party (Article 9.1). This provision may only apply to Chinese entities.
In addition, if a Chinese individual or entity suffers losses as a result of a judgment or ruling made under a foreign law within the scope of the injunction, the Chinese individual or entity may file a lawsuit and request compensation from the parties who benefit from the judgment or ruling (Article 9.2). This provision could cover both Chinese and foreign entities.
The government may provide support to any Chinese citizens or entities that suffer major losses as a result of not complying with foreign laws or measures due to orders from the Chinese government (Article 11). The law does not clarify what type of support could be provided.
In addition, for parties that violate the prohibition order, government agencies may impose penalties, including warnings and fines (Article 13).
Similar to China’s recent Export Control Law, the Rules authorize the Chinese government to take countermeasures against the extraterritorial application of foreign laws or measures (Article 12).