CHINA: Rules to counteract foreign sanctions are mostly symbolic

New Commerce Ministry rules allow regulators to prohibit the application of foreign sanctions inside China. But Beijing will remain reluctant to scapegoat foreign business in retaliation for government action, given the desire to resist supply-chain decoupling. The rules enlarge Beijing’s toolkit for economic coercion but do not signal a change in the basic calculus that has guided its response to foreign sanctions until now. China’s Ministry of Commerce (Mofcom) issued rules on 9 January to block the extraterritorial application of foreign economic sanctions against Chinese companies. The rules are a response to US actions targeting companies including Huawei, SMIC, TikTok, and WeChat. They derive legal authority from China's National Security Law (separate from the Hong Kong law enacted last year), and Mofcom cited the EU's blocking statute from 1996 as a reference point. The Mofcom rules create an inter-agency task force empowered to issue “prohibition orders” declaring that foreign sanctions are "not accepted, executed, or observed" inside China. A cautious approach to retaliation The rules could theoretically lead to scenarios in which multinationals are forced to choose between compliance with Chinese and foreign law, creating new risks for foreign companies in China. In practice, however, the impact will likely be modest. As previously noted, Beijing has largely refrained targeting foreign companies as retaliation against US tariffs, export controls, and financial sanctions, even though various mechanisms of retaliation already existed. The main reason for such forbearance is Beijing's concern about alienating foreign investors, as China's leadership seeks to resist pressure for supply-chain decoupling and maintain access to foreign technology. The recent EU-China investment agreement is further evidence of Beijing’s continued focus on attracting foreign investment, despite the nationalist turn under President Xi Jinping. Rather than scapegoating foreign companies in retaliation for coercive policies by foreign governments, Beijing wants to cultivate the goodwill of the business community as a bulwark against decoupling. Last year Mofcom announced the creation of an “unreliable entities” list to punish foreign groups that harm China’s national interests by applying foreign sanctions, but the mechanism has so far never been used. State media has floated the names of US multinationals as possible targets, but the government has not followed through. A rumored anti-monopoly investigation against Google in China has also failed to materialize. In Hong Kong, where the new National Security Law also theoretically imposes penalties on companies who apply foreign sanctions, the financial regulator informally advised financial institutions that abiding by US financial sanctions against Chinese officials would not be considered a violation. China's economic coercion calculus To be sure, China's leadership has proven itself willing to inflict pain on foreign companies to gain leverage in geopolitical disputes in some cases, as recent trade sanctions against Australia indicate. But Beijing has evidently decided that alienating Australian commodity producers poses less risk to their overall political and economic objectives than targeting major global technology companies. Chinese leaders may calculate that given China's preeminent role as a global commodity purchaser, Australian suppliers will happily resume sales to China once Sino-Australian relations improve. By contrast, while foreign technology companies similarly value their access to China's large market, the path-dependent nature of technology ecosystems is such that once decoupling or bifurcation occurs, the trend may be difficult to reverse. If Chinese regulators do decide to scapegoat a foreign technology company, they will likely choose one whose products are readily replaceable from alternative suppliers. As previously noted, Beijing might be willing to make an example of a technology company like Google, whose China operations are already minimal and whose products are not crucial to China's development goals. Just another tool in the toolbox The new rules grant the task force, led by Mofcom, broad discretion to decide whether to issue prohibition orders. In exercising this discretion, the distributed nature of multinational corporate structures will offer Beijing ample leeway to avoid self-inflicted wounds. For example, in cases where a multinational company abides by US export controls banning the sale of certain items to Chinese counterparties, the corporate unit that produces the banned items will typically not be located in China. While Chinese regulators could theoretically punish a company’s China-based unit for the actions of its global headquarters, doing so would further jeopardize China’s access to that company’s products. The Mofcom-led task force also has the authority to provide compensation to Chinese companies or individuals harmed by the extraterritorial application of foreign law. This authority could serve as a new mechanism for China to subsidize its own national champions and promote “self-reliance.” Overall, the new rules add another tool to Beijing’s toolkit for economic coercion and industrial policy but do not signal a change in the basic calculus that has guided Beijing’s response to foreign sanctions until now.

January 12, 2021

Asia

CHINA: Rules to counteract foreign sanctions are mostly symbolic

BY Gabriel Wildau

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