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Regulatory Hardball: China’s New Leverage Against Western Sanctions

About the author: Xiangyu Ma (LL.M. ’22) is a contributor to Travaux. Prior to joining Berkeley Law, he obtained his LL.B. degree from Wuhan University in China. Previously, he had interned with public and private stakeholders across different legal sectors such as PE, bankruptcy, dispute resolution, and infrastructure construction. He is particularly interested in the topics of public law, international law, and comparative law.

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On June 10, 2021, China’s National People’s Congress Standing Committee passed the Anti-Foreign Sanction Law (AFSL), strengthening Beijing’s authority to take retaliatory measures against foreign companies and nationals implementing sanctions against China. AFSL’s promulgation comes in the context of worsening diplomatic relations between China and Western countries due to trade disputes, human rights issues, overlapping territorial claims, and the race to set up 5G networks. Despite not explicitly targeting the United States, experts believe that AFSL was enacted primarily to shield Chinese government officials, departments, and companies from the long arms of US law and secondary sanctions, especially considering how Washington has imposed more frequent unilateral punishments on Beijing in recent years. The AFSL helps China diversify its toolbox in competing with the major powers, and, more importantly, maintain its assertive international image.

Introduction to China’s Anti-Foreign Sanctions Law

AFSL Article 4 authorizes relevant Chinese government departments to establish an “Anti-Sanctions List” targeting any individuals or entities “that directly or indirectly participate in the drafting, decision-making, or implementation of . . . discriminatory restrictive measures.” Article 5 broadens the scope of retaliatory targets to spouses, relatives, and co-workers of those deemed responsible for foreign sanctions. Such an approach borrows from the precedent set by the US Department of the Treasury. However, while Washington automatically includes relevant individuals of retaliatory targets on the sanctions list, AFSL grants Beijing certain discretion to selectively include target-related individuals on its list.

AFSL Article 6 stipulates three main types of countermeasures: denial of entry into or deportation from China, freezing of assets located in China, and prohibitions or restrictions on relevant transactions, cooperation, and other activities with organizations and individuals within China's territory. These measures directly copy from the US sanctions playbook. Additionally, Article 6 contains a catch-all clause, allowing Beijing to employ other countermeasures it deems necessary. Nonetheless, how China determines the necessity of “other countermeasures” remains unclear.


Furthermore, AFSL allows Chinese entities and nationals negatively affected by foreign sanctions to report those restrictions to Beijing and sue sanctioners in the Chinese courts for compensation of damages (Article 12). AFSL’s private rights of action resemble prior rules enacted by China’s Ministry of Commerce (MOFCOM) in January 2021. Both of these measures follow from the European Union’s “blocking statute,” a law designed to eliminate the extraterritorial effects of US legislation.

Challenges to AFSL: Legality, Implementation, and Effectiveness

The first challenge to AFSL is its legality. Pursuant to Article 2(4) of the UN Charter, all UN Member States shall refrain from “the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations.” Furthermore, Chapter VII of the UN Charter grants the UN Security Council (UNSC) the exclusive power to adopt economic sanctions in situations that endanger international peace and security. Therefore, whether unilateral sanction complies with the UN Charter is hotly debated. An important justification is that there is a legitimacy gap between UN and unilateral sanctions: UN sanctions can be imposed by nine out of 15 UNSC members on behalf of 193 UN Member States. Thus, unilateral sanctions enable those who do not want to be “represented” by a few powerful states to implement their own economic countermeasures. However, given China’s role as a permanent UNSC member, such an argument carries less weight.

The second obstacle for AFSL comes from its implementation. Before AFSL, there were numerous anti-sanctions laws already in place. Article 7 of the Chinese Foreign Trade Law stipulates that “[f]or any country or region that takes discriminatory banning, restriction, or other acts against . . . China in terms of trade,” Beijing “shall be entitled to adopt . . . corresponding measures against them.” In addition, Article 59 of China’s National Security Law “establishes national security review and oversight management systems and mechanisms” to effectively prevent and mitigate Beijing’s national security risks. Aside from laws, a high degree of similarity can be found between AFSL and some MOFCOM administrative orders such as “Blocking Rules” and “Provisions on the Unreliable Entity List.” Therefore, the relationship between AFSL and other existing legislation still lacks harmony. Furthermore, China’s current anti-foreign sanctions legal scheme has yet to establish a specialized agency for its implementation, which often requires interdepartmental cooperation. In contrast, the US Office of Foreign Asset Control, a component of the US Treasury, administers and enforces economic sanctions against targeted entities and individuals.

Third, the previous track record of anti-foreign sanction legislation in other countries calls into question their effectiveness against the economic and political power of the US. Washington’s sanctions are incredibly effective due to the US Dollar (USD)’s status as the most frequently used currency in international transactions. According to an investigation conducted by the International Monetary Fund, 59% of the official foreign exchange reserves are in USD as of Q4 2021. It is obvious that China’s Renminbi will struggle to match USD’s reach in the short term, therefore reducing the impact of China’s counter-sanctions measures.

Conclusion

AFSL represents China’s ambition to level the playing field with the Western powers, especially the US. After AFSL’s enactment, all sanctions imposed under the law by Beijing were against US government officials, scholars, and activists. In contrast, China has so far refrained from using AFSL against other foreign countries and postponed the promulgation of the AFSL in Hong Kong for the concern of the law’s chiling effect on foreign companies. Therefore, adds a complex twist to the heightened tensions between Washington and Beijing: one that will have profound effects on the global economy for the foreseeable future.





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