China Pushes Back Against U.S. Sanctions With New Rules

• Rules mean government can prohibit application of foreign laws
• Companies, citizens can sue for compensation in Chinese courts

China continued its pushback against U.S. sanctions, issuing new rules to protect its firms from “unjustified” foreign laws and allowing Chinese courts to punish global companies for complying with foreign restrictions.

The rules on “counteracting unjustified extra-territorial application” of foreign laws allow Chinese authorities to issue orders saying that companies or people in China don’t need to comply with foreign restrictions, the Ministry of Commerce said in a statement Saturday.

The measures went into effect immediately, and although they don’t mention the U.S. directly, China has long complained about the extra-territorial application of U.S. law through sanctions and restrictions on trade. The rules also allow Chinese citizens or companies to sue for compensation in Chinese courts if their interests are damaged by the application of foreign laws, and could put global companies in legal jeopardy in China for complying with U.S. sanctions.

“The new order will be enforceable in China primarily through court actions brought by parties who believe they’ve been damaged by someone else’s compliance with a foreign sanction,” Nicholas Turner, a lawyer at Steptoe & Johnson LLP in Hong Kong who specializes in economic sanctions, said Saturday.

“Companies with significant business interests in China may need to tread carefully to avoid being subject to claims by counterparties in China under prohibition orders issued pursuant to this new framework,” he said. Still, it remains to be seen whether it “will be effective at discouraging companies from complying with U.S. sanctions in the region or elsewhere.”

Forcing a Decoupling

The Chinese move comes as the outgoing U.S. President Donald Trump extends his campaign against Chinese companies in his final days in office, further straining ties between the world’s two largest economies.

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“The release of new regulations ahead of the inauguration of the Biden administration served the purpose of drawing China’s red line in protecting Chinese companies’ interests and rights,” Tommy Xie, an economist at Oversea Chinese Banking Corp. in Singapore, wrote in a note Monday.

Throughout the Trump administration, the U.S. has imposed a series of legal restrictions on Chinese business. These include restricting the sale of U.S. technology to Huawei Technologies Co. and other firms, requiring investors to pull out of companies linked to China’s military and blacklisting firms for connection to alleged human rights violations.

Earlier this month, the U.S. banned transactions with Chinese apps like Ant Group Co.’s Alipay and Tencent Holdings Ltd.’s digital wallets, in addition to an ongoing effort to force the sale of TikTok by ByteDance Ltd. The New York Stock Exchange has also become involved, heeding calls from the Trump administration to delist certain Chinese companies.