Is China’s Anti-Sanctions Regime a “Paper Tiger” to Multinationals?
In this article, Yihan Zang of Shihui Partners looks at China’s anti-sanctions regime and explores whether it can be considered a “paper tiger” to multinationals.
Yihan Zang
Between September 2020 and June 2021, China consecutively rolled out the Provisions on the Unreliable Entity List (the “UEL Regulations”), the Measures for Counteracting the Unjustified Extraterritorial Application of Foreign Laws and Measures (the “Blocking Rules”), and the Anti-foreign Sanctions Law (the “AFSL”). These rules aim to counteract, among others, the development and implementation of sanctions, export controls, and other discriminative restrictive measures (DRMs) targeting or affecting China, and are collectively referred to as China’s “anti-sanctions rules”.
Over the past two years, China has subjected dozens of individuals and entities to its retaliatory sanctions, including asset freezes and travel and transaction bans, mostly for their roles in the development of DRMs against China. As a result, multinationals have started to add these parties to their screening processes and make provision for the realities of Chinese sanctions in their transaction documents. However, it is equally true that new foreign DRMs keep emerging, and many multinationals, including a number of Chinese state-owned enterprises, simply opt to comply with foreign DRMs to avoid the severe consequences of non-compliance. This reality has led some observers to conclude that China’s anti-sanctions regime, as implemented, is responsive and retaliatory, but lacks a sufficient deterrent effect.
Although the constrained deterrence may be the result of a deliberate strategy to avoid pushing multinationals out of the country, the implementation of the anti-sanctions rules may have led market players to underestimate the potential risks associated with following foreign DRMs. This article aims to remind multinationals of a few critical facts that they should not overlook.
Don’t Disregard What has Been in the Rules
The existing anti-sanctions rules have left a few avenues open for punishing entities that comply with foreign DRMs at the expense of Chinese parties. These rules are not new, and can be activated in the future with little prior notice.
- Articles 4 and 5 of the AFSL permit the imposition of retaliatory sanctions on individuals and organisations involved in the “execution of DRMs”. The term “execution” is not yet defined. While we understand that those who “execute” should include the executive branches of foreign governments, companies that choose to “implement” foreign DRMs have not been explicitly excluded from the definition.
- Articles 2 and 10 of the UEL Regulations allow for the imposition of trade sanctions, travel and investment bans and administrative fines on foreign parties that seriously harm the lawful rights and interests of Chinese parties through discriminatory measures. The regulations do not differentiate between “voluntary” and “involuntary” discrimination.
- Article 12 of the AFSL and Article 9 of the Blocking Rules allow civil proceedings against individuals and entities complying with foreign DRMs at the expense of Chinese parties.
- The PRC subsidiaries of multinationals may also receive administrative fines for complying with foreign DRMs in violation of prohibition orders issued pursuant to the Blocking Rules.
Don’t Misunderstand the Nature of the Anti-sanctions Rules
It may be tempting to view the three anti-sanctions rules as defining the boundaries of China’s anti-sanctions regime; however, they do not. In fact, they are not even essential for China’s adoption of anti-sanctions measures. To the extent that anti-sanctions measures are state actions similar to war and diplomacy, the Chinese government’s power to implement them stems from the Constitution rather than any specific legislation. Consistent with this observation, the Chinese government began announcing retaliatory sanctions on foreign parties as early as December 2019, seven months before the enactment of the AFSL, and the enactment did not affect the legal efficacy of the pre-AFSL sanctions.
Arguably, the three anti-sanctions rules are primarily declaratory and serve as manifestos to demonstrate to the world that China has the ability to introduce equivalents of foreign sanctions programmes. They were never intended to limit the scope and extent of anti-sanctions measures, nor were they meant to be exclusive. Therefore, it should not come as a surprise that actual anti-sanctions measures may be implemented with flexibility through unique interpretations of the rules.
Don’t Forget to Consider the Full Picture
Similarly, nothing prohibits the Chinese government from utilising a more comprehensive approach towards the country’s perceived “rivalries”, meaning that the three anti-sanctions rules may only serve as a component of a broader defence framework. For example, a multinational that crosses a certain line may attract wider regulatory scrutiny, potentially spilling over into other areas such as antitrust, anti-unfair competition, and data protection. Further, the aftershocks may even extend beyond the regulatory framework, as certain reputational harm could be so severe that the company may face collective boycotts from Chinese customers, supply chains or Chinese society in general.
“Dos” and “Don’ts”
- Stay vigilant regarding geopolitical dynamics. Although much of China’s anti-sanctions regime is currently dormant, political realities, both domestic and international, may motivate the Chinese government to activate and expand anti-sanctions measures with little prior notice.
- Avoid incorporating a political agenda into business practices or creating the appearance of doing so. Taking a political stance is unlikely to satisfy everyone, and therefore conducting business with a focus solely on commercial interests is safer and more advisable.
- Steer clear of “over-compliance”. “Over-compliance” refers to restrictions that a company imposes on itself and its business partners that exceed the actual requirements of DRMs. Over-compliance can cause additional harm to Chinese parties without solid, defensible regulatory necessity. Such actions are more likely to be viewed as evident and wilful disregard of Chinese interests, which may potentially invite more straightforward responses.
Shihui Partners
