The economies of China and the United States are closely connected, with strong trade relationships and mutual dependencies. As both countries compete for leadership in important areas like artificial intelligence, supercomputing, and high technology, Chinese companies operating in the U.S. are encountering a more complicated regulatory landscape, particularly concerning export controls and sanctions. These strict U.S. regulations require foreign companies to meet various compliance requirements and standards.
U.S. export controls and sanctions have an extensive reach, which creates significant obligations for Chinese companies. In this article, we will analyze and explore how Chinese companies are limited to comply with U.S. export controls and sanctions under PRC law, specifically, whether a Chinese company would be exposed to non-compliance with or violation of PRC laws and regulations when complying with the U.S. export controls and sanctions, and how a Chinese company balance its compliance with both Chinese laws and the U.S. export controls and sanctions. By examining these dynamics, we aim to provide a clearer understanding of how Chinese firms address the challenges of operating within this competitive and regulatory environment.
1. Overall Understanding of the U.S. Sanctions and Export Controls
U.S. export controls are a framework of federal laws and regulations designed to manage the transfer of certain goods, software, and technology from the U.S. to foreign countries, to protect U.S. national security and promote foreign policy objectives.[1] Pursuant to the Export Control Reform Act, the Bureau of Industry and Security (BIS) of the U.S. Commerce Department reviews and controls the export of certain goods, software, and technologies from the United States to foreign countries through the EAR (Export Administration Regulations, EAR). The EAR impose licensing and other requirements for items subject to the EAR lawfully to be exported from the U.S.[2] The expanded reach of items subject to the EAR, especially the expansion of Foreign Direct Product Rules (FDPR), makes products produced outside the U.S., such as produced in China, likely be captured to be subject to the EAR, and accordingly, such item would be restricted to be exported to certain countries or entities such as entities listed in the Entity List administered and maintained by the BIS.
From the perspective of the U.S. sanctions, economic sanctions programs are primarily administered and enforced by the Office of Foreign Assets Control of the U.S. Department of Treasury against countries and groups of individuals.[3] All U.S. persons must comply with OFAC sanctions, and non-U.S. persons are also subject to certain sanctions prohibitions.[4] Take the Russian-related sanctions programs by the OFAC as an example, Section 1 of the Executive Order (E.O.) 14024, as amended, provides that “all property and interests in property that fall within the U.S. jurisdiction of the following person are blocked, if any person (including U.S. person and non-U.S. persons), determined by the Secretary of the Treasury in consultation with the Secretary of State, to have materially …… provided financial, material or technological support …… for any person whose property and interests in property are blocked pursuant to this order”. Accordingly, a Chinese company would be prohibited or restricted from transacting with other entities sanctioned by the U.S., such as an entity listed in Specially Designated Nationals and Blocked Persons List (SDN List) pursuant to E.O. 14024. Furthermore, a Chinese Company itself may be exposed to secondary sanction risk if transacting with such SDN entities.
2. Legal Analysis on Limitations Set by PRC Law on Chinese Companies Complying with the U.S. Sanctions and Export Controls
Generally, the major statutes in China to counteract the extra-territorial application of foreign laws include the Measures for Blocking Improper Extraterritorial Application of Foreign Laws and Measures (the Blocking Statute) and the Anti-Foreign Sanctions Law (the AFSL).
- Legal Analysis under the Blocking Statute
Under the Blocking Statute effective on January 9, 2021, when foreign laws improperly prohibit or restrict Chinese entities from transacting with other entities in third countries, the Chinese government may issue an injunction against the compliance with such foreign laws by Chinese entities. Chinese entities shall apply for an exemption from complying with the injunction and to comply with that said foreign laws.
Assuming a scenario where the compliance with the U.S. export controls and sanctions by a Chinese Company would prohibit or restrict a Chinese company from transacting with entities designated into the SDN List, if Chinese government deems the application of U.S. export controls and sanctions on Chinese entities as improper, it may issue an injunction to prohibit or restrict Chinese companies from complying with U.S. sanctions and export controls.
As of now, no injunctions have been issued under the Blocking Statute concerning compliance with U.S. export controls and sanctions by Chinese entities. Accordingly, the Blocking Statute currently would not limit a Chinese company’s ability to comply with the U.S. sanctions and export controls.
That being said, the Blocking Statute leaves the discretionary power for Chinese government to possibly issue such injunction against the application or compliance with the U.S. sanctions and export controls, which would accordingly affect the ability of a Chinese company to comply with U.S. sanctions and export controls, which warrants ongoing monitoring.
Of particular note, even if such an injunction against the application or compliance with the U.S. export controls and sanctions is issued, a Chinese company can apply for an exemption from complying with the injunction and to comply with the U.S. sanctions and export controls.
- Legal Analysis under the AFSL
Under the AFSL, China would take countermeasures against any foreign country adopting “discriminatory and restrictive measures” against Chinese entities. The countermeasures include the addition of individuals and organizations participated in the formulation, decision on or implementation of discriminatory restrictive measures into the Countermeasures List. Furthermore, the assets of the individuals and organizations listed in the Countermeasures List falling within PRC jurisdiction would be blocked and the PRC individuals and organizations are generally prohibited from transacting with such entities listed in the Countermeasures List. Article 12 of the AFSL prohibits any person from implementing or providing assistance in implementing any discriminatory and restrictive measures initiated by foreign governments against the PRC individuals and entities.
The AFSL does not define clearly what constitutes “discriminatory and restrictive measures”, leaving its scope broad and subjective, granting the Chinese government discretionary power in this regard. In practice, generally, the Chinese government typically designates foreign individuals or entities to the Countermeasures List when their actions contradict the principles or positions of the Chinese government on sensitive issues, such as the sale of military weapons to Taiwan. In practice, in the first case ruled under Article 12 of the AFSL, the Chinese Court determined that it qualifies as “discriminatory and restrictive measures” if a foreign country designates Chinese entities or individuals on sanctions lists (such as the SDN List). Furthermore, if other entities implement such “discriminatory and restrictive measures” by, for instance, refusing to make payments to the designated Chinese entities, this would be in violation of Article 12 of the AFSL.
As of now, the Chinese government does not consider U.S. export controls and sanctions to be “discriminatory and restrictive measures,” nor has it designated specific U.S. individuals or entities involved in the formulation, decision-making, or implementation of these sanctions to the Countermeasures List. Based on our understanding of the AFSL, the U.S. export controls and sanctions apply to both U.S. persons and non-U.S. persons, rather than exclusively targeting Chinese entities. Therefore, we do not believe that the Chinese government is likely to classify the U.S. export controls and sanctions as “discriminatory and restrictive measures” at present, despite the Chinese Court’s view that the designation of Chinese entities on U.S. sanctions lists is considered “discriminatory and restrictive measures.” Consequently, to a significant extent, a Chinese company is currently not prohibited or limited by the AFSL in its ability to comply with U.S. sanctions and export controls.
That said, as discussed above, the AFSL grants the Chinese government discretionary power to define the scope of “discriminatory and restrictive measures.” If, at any point, the Chinese government determines that U.S. export controls and sanctions fall under the category of “discriminatory and restrictive measures” as per the AFSL, a Chinese company under Article 12 of the AFSL, would be prohibited from implementing any such measures. This raise concerns regarding whether compliance with U.S. export controls and sanctions could be interpreted as implementing discriminatory and restrictive measures. We currently do not have definitive answers on this matter. However, if this interpretation is upheld, even with minimal likelihood, the ability of a Chinese Company to comply with U.S. export controls and sanctions could be significantly affected and limited.
To wrap up, a Chinese company, is currently not prohibited or limited by the AFSL from complying with U.S. sanctions and export controls. However, if the Chinese government, in accordance with the AFSL, categorizes U.S. export controls and sanctions as “discriminatory and restrictive measures,” and if compliance with these sanctions is interpreted as implementing such measures, then even under the least likely scenario, the ability of a Chinese company to comply with U.S. export controls and sanctions could be affected and limited to some extents.
3. Case Study and Practical Considerations
In navigating the complex landscape of U.S. sanctions and the Blocking Statute of a foreign country (such as the EU’s Anti-U.S. Sanctions Blocking Regulation), the ACE Limited case[5] has demonstrated the challenges of compliance. ACE Europe provided insurance coverage for European customers traveling to Cuba, believing that their operations were governed by the EU’s Anti-U.S. Sanctions Blocking Regulation, which prohibits compliance with U.S. sanctions. Despite seeking guidance from their regional compliance team, ACE Europe ended up omitting sanctions exclusionary clauses from their policies, operating under the assumption that the risk of violating U.S. sanctions was minimal. This misunderstanding led to significant repercussions when OFAC imposed fines for violations of U.S. sanctions related to Cuba. The case illustrates that while companies may attempt to align with local regulations, failure to accurately evaluate the implications of U.S. sanctions can result in substantial financial penalties and complicate their operational strategies in the global marketplace.
Additionally, from a practical perspective, if the revenue a Chinese company primarily comes from overseas markets, particularly the U.S. market, and it would be reasonably to believe that it will commit to complying with U.S. sanctions and export controls. Assuming the Chinese government issues an injunction against the application and compliance with these U.S. export controls and sanctions under the Blocking Statute, a Chinese company can still seek an exemption from the injunction to maintain its compliance with U.S. sanctions and fulfill its commitment.
4. Concluding Remarks
In summary, under Chinese law, the Blocking Statute and the AFSL do not currently restrict a Chinese company’s ability to comply with U.S. sanctions and export controls. The Blocking Statute grants the Chinese government discretionary power to potentially issue an injunction against compliance with U.S. sanctions and export controls, which could impact a Chinese company’s ability to adhere to these regulations. However, even if such an injunction is issued, a Chinese company may seek an exemption to comply with U.S. sanctions and export controls. Under the AFSL, Chinese companies are not prohibited from complying with U.S. sanctions and export controls. Nevertheless, if the Chinese government designates these U.S. sanctions as “discriminatory and restrictive measures,” and if compliance is interpreted as endorsing such measures, this could limit a Chinese company’s ability to comply with U.S. regulations to some extent. From a practical standpoint, Chinese companies deriving significant revenue from overseas markets, particularly the U.S., are likely to prioritize compliance with U.S. export controls and sanctions to maintain their market access and business relationships.
[1] Please see The U.S. Export Control System and the Export Control Reform Act of 2018, available at https://www.congress.gov/crs-product/R46814.
[2] Please see The U.S. Export Control System and the Export Control Reform Act of 2018, available at https://www.congress.gov/crs-product/R46814.
[3] Please see the homepage at OFAC, available at https://ofac.treasury.gov/about-ofac.
[4] Please see FAQ 11 of OFAC, available at https://ofac.treasury.gov/faqs/11.
[5] Please see the ACE Limited case in 2019 Civil Penalties and Enforcement Information of OFAC, available at https://ofac.treasury.gov/media/25921/download?inline.