Abstract
This article examines the potential repercussions of China's blocking statutes on private actors. In recent years, China's strategy for countering unilateral sanctions has evolved from mere diplomatic protests to utilizing a legal toolkit, most notably through the promulgation of three blocking statutes between 2019 and 2021. This article argues that while a primary goal of China's blocking statutes is to protect the interests of private actors, this objective remains only partially fulfilled. Rather, the enforcement of these statutes may inadvertently precipitate additional challenges for private parties, such as heightened legal uncertainty, risk of exposure to conflicting legal obligations, and increased complexity in private dispute resolution. Given these predicaments, the article advocates that Chinese authorities give due consideration to the interests of private actors in the enforcement of blocking statutes. Specifically, it is recommended that Chinese authorities adopt a prudent enforcement approach and concurrently enhance the procedural support mechanisms for these statutes.
Keywords
Introduction
In recent years, China has systematically expanded its legal toolkit under domestic law in response to foreign unilateral sanctions. Notably, on 19 September 2020, China's Ministry of Commerce (MOFCOM) introduced Order No. 4 of 2020 on Rules on the Unreliable Entity List (UEL Provisions). This was followed by the issuance of Order No. 1 of 2021 on Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (Blocking Rules) on 9 January 2021. The most recent development came on 10 June 2021, when the Standing Committee of the National People's Congress, China's top legislative authority, passed the Anti-Foreign Sanctions Law (AFS Law). These laws and regulations, collectively known as China's ‘blocking statutes', are of significant importance in the current legal landscape of China to counter foreign sanctions.
Blocking statutes are generally regarded as laws or regulations enacted to prevent the unlawful extraterritorial application of foreign laws or measures. 1 In 1947, the Province of Ontario in Canada enacted the world's first blocking statute, the Business Records Protection Act. 2 This act aimed to obstruct the U.S. antitrust investigations targeting Canadian paper companies. 3 In the 1970s, in response to the extraterritorial reach of U.S. antitrust laws, many Western countries, such as the United Kingdom, 4 Canada, 5 and Australia, 6 have enacted blocking statutes.
In the 1990s, the focus of blocking statutes shifted to address the adverse impacts of the extraterritorial application of U.S. sanctions laws. In 1996, the Council of the European Union (EU) adopted Council Regulation (EC) No 2271/96 (EU Blocking Regulation), 7 which aims to shield EU operators from the adverse effects of U.S. sanctions against Cuba, Iran, and Libya. Following the understanding between the EU and the United States reached in 1997, 8 the EU Blocking Regulation soon fell silent without being adequately tested. On 7 August 2018, after the U.S. government withdrew from the Joint Comprehensive Plan of Action and re-imposed sanctions against Iran, the EU Commission reactivated the EU Blocking Regulation to protect EU companies' business interests in Iran. 9
With the proliferation of blocking statutes, international law scholars have devoted considerable attention to examining whether such statutes could effectively counter the extraterritorial application of U.S. laws. 10 While blocking statutes are essentially legal tools designed to address the conflicts between states, their provisions primarily focus on regulating the conduct of private actors rather than states. In other words, the enforcement of blocking statutes would primarily affect the rights and obligations of private actors. 11 Thus, this article aims to contribute to the current academic discussions by examining the potential impacts of China's blocking statutes 12 on private actors.
In addition to the introduction in Part I, this article is structured into four main parts. Part II elucidates the background of China's enactment of blocking statutes, highlighting the shift in China's methodology for countering unilateral sanctions. Part III undertakes a detailed textual analysis of the three Chinese blocking statutes. Part IV explores the potential impacts of China's blocking statutes on private actors, particularly by drawing on the experience of the EU Blocking Regulation. Part V argues that the Chinese authorities should take private actors' interests seriously when enforcing the blocking statutes and offers several recommendations.
Background of China's Blocking Statutes: China's Changed Methodology of Countering Unilateral Sanctions
Escalating Unilateral Sanctions Against China
Since its founding in 1949, China has frequently been the target of unilateral sanctions imposed by Western countries. 13 In recent years, there has been a significant increase in the imposition of unilateral sanctions on China, with most of these sanctions being initiated by the United States. The U.S. sanctions on China can be categorized into two types:
Firstly, Chinese entities and individuals have frequently been involved in the U.S. secondary sanctions. U.S. secondary sanctions are known for their extraterritorial effects, as they can be imposed on non-U.S. persons for conducting business transactions with states or individuals targeted by U.S. sanctions. 14 Recently, a growing number of Chinese companies have been sanctioned for their business relationships with Russia, Iran, and North Korea. For example, in 2017, Zhongxing Telecommunications Equipment Corporation, a Chinese high-tech company, was fined a record-breaking $1.19 billion for violating U.S. sanctions against Iran. 15
Secondly, China has increasingly found itself in the crosshairs of U.S. primary sanctions. In recent years, the U.S. Congress has passed a series of sanctions laws specifically targeting China. Some of these laws address human rights issues in Hong Kong, 16 Tibet, 17 and Xinjiang. 18 For example, the Hong Kong Human Rights and Democracy Act of 2019 (HKHRDA) empowers the U.S. President to impose sanctions on foreign individuals 'responsible for undermining fundamental freedoms and autonomy in Hong Kong'. 19 The Hong Kong Autonomy Act of 2020 goes even further, as it not only applies to targeted foreign individuals but also prohibits non-sanctioned foreign financial institutions from engaging in ‘significant transactions' with such individuals. 20 Furthermore, some U.S. laws seek to restrict China's ability to develop high technologies. An example of such a law is the CHIPS and Science Act of 2022, which prohibits the world's leading semiconductor companies from expanding semiconductor manufacturing capacity in China. Otherwise, they are not eligible for financial assistance from the U.S. government. 21
China's Shift in Methodology for Countering Unilateral Sanctions: From Diplomatic to Legal
Historically, China responded to foreign unilateral sanctions primarily through diplomatic protests. For instance, in response to the passage of the HKHRDA, the spokesperson of China's Ministry of Foreign Affairs denounced that [This act] neglects facts and truth, applies double standards and blatantly interferes in Hong Kong affairs and China's other internal affairs. It is in serious violation of international law and basic norms governing international relations. China condemns and firmly opposes it.
22
Meanwhile, China has also sought to oppose unilateral sanctions in concert with other developing countries through diplomatic channels. In a ministerial declaration jointly issued by China and the Group of 77, it was stated that [We] firmly reject the imposition of laws and regulations with extraterritorial impact and all other forms of unilateral coercive measures, economic, financial and trade measures, including unilateral sanctions against developing countries, and urge the international community to take urgent and effective actions to eliminate the use of such measures.
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Significantly, China has transitioned its approach for countering unilateral sanctions from mere diplomatic remonstrations to utilizing a legal toolkit provided under its domestic law in the past few years. A significant indication of this change is the speech delivered by Chinese President XI Jinping in 2019, in which he called for an acceleration of the legislative process related to foreign matters, particularly laws and regulations to counter foreign unilateral sanctions. 24 Similar statements have been frequently mentioned in other influential policy documents and meetings in China. 25
Two factors might be relevant to explain China's shift in methodology: On the one hand, the U.S. government has increasingly imposed China-related sanctions by resorting to its domestic laws, which prompts China's ‘eye for an eye' legislation. Since the Trump presidency, the China–U.S. relationship has reportedly reached its lowest point in decades with deteriorating tensions between these two superpowers. 26 As discussed above, the U.S. government has intensified sanctions against Chinese parties based on U.S. law rather than international law. It was in this context that China has begun expanding its legal toolkit under Chinese law so as to counteract foreign unilateral sanctions.
On the other hand, China has increasingly emphasized the legalization of foreign relations, and the promulgation of blocking statutes serves as a tangible example of how China addresses foreign-related issues according to law. Over the past decade, addressing foreign-related issues according to law has become indispensable to China's development strategy. On 23 October 2014, the Fourth Plenary Session of the Central Committee of the Chinese Communist Party (CPC) approved the Decision Concerning Several Major Issues in Comprehensively Advancing Governance according to Law (the Decision). 27 As one of China's most crucial policy documents, the Decision clearly demonstrates the Chinese government's intention to ‘strengthen foreign-related legal work' and ‘promote the handling of foreign-related economic and social affairs according to law'. 28 On 10 January 2021, the Central Committee of the CPC issued the Plan on Building the Rule of Law in China (2020–2025), reiterating China's determination to ‘improve the system of laws and rules related to foreign interests'. 29 Guided by those policy documents mentioned above, blocking statutes are promulgated to provide a legal basis for China to counteract U.S. sanctions.
China's Blocking Statutes: A Textual Examination
In response to the mounting tensions between China and the United States, China has developed a comprehensive blocking regime through the successive promulgation of the UEL Provisions, the Blocking Rules and the AFS law. This part will analyse the content of each blocking statute.
The UEL Provisions
The imposition of unilateral sanctions by the U.S. government on Chinese technology companies catalyzed the introduction of the UEL Provisions. On 31 May 2019, shortly after the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce added Huawei and 68 of its non-US affiliates to the U.S. Entity List, 30 the MOFCOM announced that China would establish an Unreliable Entity List (UE List) regime to identify and sanction foreign entities that cause serious damage to the legitimate rights and interests of Chinese companies. 31 On 19 September 2020, following the U.S. Department of Commerce's announcement of a ban on U.S. transactions using WeChat and TiTok, the MOFCOM officially promulgated the UEL Provisions. 32
The UE List is a list-based sanctions regime similar to the U.S. Entity List. 33 The UE List targets foreign entities' activities that (1) endanger China's national sovereignty, security, or development interests; or (2) suspend normal transactions with, or applying discriminatory measures against Chinese parties, which violates normal market transaction principles and causes serious damage to the legitimate rights and interests of the Chinese parties. 34
A ‘working mechanism' comprising relevant Chinese governmental departments has been established for organizing and implementing the UE List. 35 The working mechanism is authorized to decide whether to initiate investigations into the activities of foreign entities. 36 When an investigation is initiated, the working mechanism is entitled to suspend or terminate it ‘based on actual circumstances'. 37 After investigation, the working mechanism is responsible for deciding whether to designate relevant foreign entities on the UE List. 38 The UEL Provisions also provide the working mechanism with a fast-track procedure, which allows the working mechanism to bypass the investigation stage and directly list certain foreign entities on the UE List if ‘the actions taken by the relevant foreign entity are clear'. 39 When a foreign entity has been designated on the UE List, the working mechanism is also empowered to remove the foreign entity from the UE List ex officio or upon the application of the designated foreign entity. 40
Foreign entities designated on the UE List may face a range of restrictive measures, including prohibitions on China-related import, export, and investment. 41 Recognizing the potential disruption to supply chains and the serious damage to the business interests of Chinese parties, the UEL Provisions provide an exemption mechanism for Chinese parties. According to Article 12 of the UEL Provisions, Chinese parties may conduct business transactions with foreign entities designated on the UE List upon the approval of the working mechanism.
The Blocking Rules
On January 9, 2021, the MOFCOM issued the second piece of China's blocking statutes – the Blocking Rules. The purpose of the Blocking Rules is to nullify the extraterritorial effects of foreign legislation and measures that ‘unjustifiably prohibit or restrict the citizens, legal persons or other organizations of China from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organizations'. 42 Some scholars tend to believe that the major purpose of China's Blocking Rules is to protect Chinese companies from the adverse effects of the U.S. secondary sanctions. 43
The Blocking Rules, which seem to be closely modeled on the EU Blocking Regulation, attempt to counteract the unjustified extraterritorial application of foreign laws and measures through the following measures:
1. Reporting obligation. According to Article 5 of the Blocking Rules, Chinese entities and individuals are obligated to truthfully report to the MOFCOM within 30 days if their business activities are affected by the unjustified extraterritorial application of foreign laws or measures. 44 Meanwhile, the MOFCOM and its staff shall keep the reported information confidential if requested. 45 This is said to encourage Chinese parties to fulfill their reporting obligation proactively. 46 Officials who fail to respect the duty of confidentiality may incur punishment or criminal liability. 47
2. Prohibition order. After receiving the Chinese parties' report, if the working mechanism considers the reported foreign laws and measures as unjustified extraterritorial applied, MOFCOM shall issue a prohibition order to the effect that such foreign laws and measures should not be accepted, enforced, or complied with. 48 The working mechanism is also empowered to suspend or withdraw the prohibition order on a case-by-case basis. 49
3. Exemption. Realizing that Chinese parties might suffer significant losses due to the prohibition order which forbids them from complying with foreign laws and measures, the Blocking Rules allow the affected Chinese parties to apply for exemption from compliance with the prohibition order. 50 Up to now, no prohibition order has been issued. The MOFCOM has explained that the competent authority will closely track any foreign laws or measures that are unjustified extraterritorial applied. 51
4. Punishment. The Blocking Rules have established a punishment mechanism. According to Article 13, private actors who fail to fulfill the report obligation or disobey the prohibition order may be subject to various punishments, including warnings, orders to rectify within a specified time period, or even fines. 52
5. Clawback. Similar to the EU Blocking Regulation, the Blocking Rules also contain a clawback clause. The clawback clause establishes a private right of action for Chinese parties who suffer damages as a result of the unjustified extraterritorial application of foreign laws and measures. Based on the clawback clause, the aggrieved Chinese party is allowed to file a lawsuit for recovery of their damages: (1) where a person complies with the foreign laws or measures that are identified as unjustified extraterritorial application by the working mechanism and thus infringes upon the legitimate rights and interests of Chinese parties; 53 or (2) where a judgment or ruling is made per the foreign laws or measures within the scope of the prohibition order and causes losses to the Chinese parties. 54
6. Governmental support. For private parties who suffer losses due to their non-compliance with foreign laws and measures as required by the prohibition order, Article 11 of the Blocking Rules authorizes relevant government departments to provide the affected parties with ‘necessary support'. It is unclear what the ‘necessary support' exactly covers, and some scholars suggest that it might include tax preference or governmental subsidies. 55
The AFS Law
The AFS Law is the third in a series of China's blocking statutes. While the UEL Provisions and the Blocking Rules have enriched China's legal toolbox to counter foreign unilateral sanctions, both are ministry-level regulations and carry less weight in China's legislative hierarchy. By contrast, the AFS Law, promulgated by China's top legislative authority, represents China's strongest response to foreign unilateral sanctions.
Central among the AFS Law is the Countermeasure List, which has established a list-based sanctions regime similar to the UE List. The Countermeasure List targets entities or individuals who ‘directly or indirectly engage in drafting, decision making or implementing foreign discriminatory restrictive measures imposed against Chinese citizens and organizations'. 56 According to Article 6, the potential risks to individuals or organizations listed on the Countermeasure List include travel restrictions, seizure or freezing of property and prohibition of business transactions with Chinese entities. 57 In addition, the inclusion of a clause in Article 6 covering ‘other necessary measures' leaves room for other actions to be taken in the future. 58 The power to implement restrictive measures under the AFS Law is vested in relevant departments of the State Council based on their governmental functions. For example, the Ministry of Foreign Affairs (MFA) may be responsible for the denial or cancellation of visas.
The AFS Law also includes a clawback clause. Article 12 of the AFS Law stipulates that if any organizations and individuals infringe the legitimate interests of Chinese citizens or organizations by ‘implementing or assisting in implementing foreign discriminatory restrictive measures', the aggrieved Chinese party is entitled to file a lawsuit before the Chinese court to recover their damages. 59 The clawback clause might serve two purposes: (1) compensating the aggrieved Chinese parties due to the implementation of foreign discriminatory restrictive measures and (2) deterring private companies from engaging in activities that are harmful to the interests of Chinese parties. 60
Compared with the UEL Provisions and the Blocking Rules, some of the measures provided by the AFS Law are more stringent. For example, Article 7 of the AFS Law stipulates that the punishment decisions made by Chinese competent authority shall be final, which indicates that the punished parties under the AFS Law may not be able to seek remedies through an administrative review procedure. In addition, the restrictive measures provided under the AFS Law could apply not only to individuals and entities designated on the Countermeasure List but also to their immediate family members. Despite the stringent nature of its measures, the AFS Law is inherently defensive. As elucidated by Shen Chunyao, the former Chairman of the Legislative Affairs Commission of the NPCSC, the AFS Law is applicable only when foreign countries employ discriminatory restrictive measures against Chinese parties or when the activities of foreign entities and individuals infringe upon China's sovereignty, security, and developing interests. 61 In other words, the AFS Law is intended to position itself as a reactive response to foreign unilateral sanctions, rather than a political instrument to impose sanctions proactively.
In summary, the enactment of blocking statutes represents a significant step in China's systematic project to protect national sovereignty, security, and development interests from the extraterritorial reach of foreign unilateral sanctions. It has not only enriched China's legal toolbox to counter the unjustified extraterritorial application of foreign laws but also demonstrated China's unwavering stance against foreign unilateral sanctions.
The Potential Impacts of China's Blocking Statutes on Private Parties: Lessons from the EU Blocking Regulation
While China's blocking statutes were enacted primarily in response to escalating conflicts with the United States, these statutes mainly regulate the behaviors of private actors rather than states. In other words, private actors have been unwittingly placed at the forefront of the conflicts between China and the United States. Therefore, the enforcement of blocking statutes would directly affect the rights and obligations of private actors. This part will focus on the potential impacts of China's blocking statutes on private parties by drawing on the experience of the EU Blocking Regulation.
Providing Insufficient Protection to the Interests of Private Parties
China is not the first country to counteract U.S. unilateral sanctions through blocking statutes. In 1996, the EU introduced the EU Blocking Regulation to protect EU operators’ business interests from the adverse effects of the U.S. secondary sanctions. Subsequently, modeled on the EU Blocking Regulation, Mexico 62 and Canada 63 also adopted or amended blocking statutes in response to the extraterritorial reach of U.S. sanctions. Despite variations in jurisdictional scope and enforcement procedures, these blocking statutes share a common goal: protecting the interests of domestic private actors.
As one of the most well-known blocking statutes globally, the EU Blocking Regulation includes many provisions to protect the business interests of EU operators, such as the provision for denying recognition and enforcement of foreign judgments, the provision of clawback, and the provision for exemption. The practical effects of these provisions, however, have often been deemed ineffective in achieving their protective objectives. In 2021, the EU conducted a public consultation to gather opinions from different kinds of stakeholders on the effectiveness of the EU Blocking Regulation. A critical finding from the public consultation was that ‘the EU Blocking Regulation has been unsuccessful in achieving its objective of protecting EU operators from abiding by the extraterritorial application of third-country sanctions'. 64 This finding aligns with the views of many scholars, who believe that blocking statute serves more as ‘a political instrument', 65 and private actors ‘are only tools to achieve that purpose'. 66
Similar to the EU Blocking Regulation, China's blocking statutes also include provisions designed to protect the interests of Chinese parties, such as the clawback clause, the exemption clause, and the governmental support clause. As illustrated below, these clauses may only partially succeed in mitigating the adverse effects of U.S. unilateral sanctions on Chinese parties.
Firstly, many questions have been raised regarding the effectiveness of the clawback clause in providing judicial relief to private actors. The clawback clause was first introduced by the United Kingdom in the 1980 Protection of Business Interests in particular response to the U.S. antitrust litigation, 67 and such a clause was later included in the EU Blocking Regulation. The clawback clause provides private parties the right of action to recover damages that they incurred due to the unlawful extraterritorial application of foreign laws. However, private actors appear to be less motivated in triggering the clawback clause, and there has been no publicly reported clawback litigation yet. Several reasons might account for such a situation: first, for some small or medium-sized companies, the lengthy court proceedings and expensive litigation expenses may be a significant challenge; 68 second, some private companies might worry that initiating clawback litigation would jeopardize business relationships with their partners; 69 third, in cases where the defendants are U.S. governments or their officials, the doctrine of state immunity may become ‘a procedural bar' against the exercise of jurisdiction by courts; 70 fourth, the clawback clause may only be viable when the defendants have assets in China, otherwise recognition and enforcement of the clawback judgment in foreign countries would be highly challenging. Without recognition and enforcement, winning a clawback judgment would simply be ‘an empty victory' for Chinese parties. 71
Secondly, the protective function of the exemption mechanism may also encounter many challenges. Granting exemptions could prevent Chinese parties from suffering substantial losses for violating foreign sanctions laws due to their compliance with China's blocking statutes. The practice of the EU Blocking Regulation indicates that the effectiveness of the exemption clause tends to be easily undermined by the administrative burden. According to the EU public consultation results, some private actors have complained about the lengthy administrative process. 72 In addition, the procedure for applying for exemption remains unclear under China's blocking statutes.
Thirdly, it is also questionable whether the governmental support mechanism under the Blocking Rules could effectively mitigate Chinese parties' losses. On the one hand, it is unclear what types of support will be provided and what specific procedures will be followed. On the other hand, it is highly uncertain whether the governmental support could effectively mitigate the losses incurred by Chinese parties for violation of U.S. sanctions. The possible result that Chinese entities may face for violating U.S. sanctions laws could be losing access to dollar-clearing systems or U.S.-originated technology. Given the dominant role of the U.S. dollar in international finance, losing access to dollar-clearing systems would be catastrophic for most Chinese companies, especially financial institutions. Similarly, the losses suffered by Chinese parties resulting from losing access to U.S. technology also seem to be challenging to mitigate through governmental support. It is reported that Huawei's revenue has hit a significant drop as a result of being designated on the U.S. Entity List. 73
Creating Additional Challenges to Private Actors' Transnational Business
Upon reviewing the practice of the EU Blocking Regulation, it becomes apparent that the enforcement of blocking statutes would place additional risks on private actors. These risks include heighten legal uncertainty, the risk of conflicting legal obligations, and increased complexity in private dispute resolution.
Placing multinational companies in a situation of legal uncertainty
One lesson we can learn from the practice of the EU Blocking Regulation is that the enforcement of blocking statutes may create a high degree of legal uncertainties for economic operators. To counter the adverse effects of U.S. secondary sanctions, the EU Blocking Regulation imposes certain obligations on private actors, such as the obligation to report and the obligation of non-compliance. The provisions of the EU Blocking Regulation, however, tend to be broadly drafted, thus leading to great uncertainty that private actors may face when fulfilling their obligations. After the reactivation of the EU Blocking Regulation in 2018, some private organizations, such as the Financial Markets Law Committee and the European Banking Federation, have publicly expressed their concern over the uncertain nature of the EU blocking regulation. 74 The summary report of the open public consultation also highlights private parties' concerns over the legal uncertainties. 75
Private companies with close ties to the Chinese market will likewise face increasing legal uncertainties since some provisions of China's blocking statutes also employ broad and ambiguous terminologies. For example, Article 12 of the AFS Law prohibits any entities or individuals from ‘implementing or assisting in the implementation of discriminatory restrictive measures taken by foreign countries against Chinese citizens and organizations'. Many questions are left without answers with regard to this phrase, including what kind of action would be regarded as ‘implementing or assisting in implementation' and what type of measure could be considered as ‘discriminatory' and ‘restrictive'. Due to the broad and vague language used, it might be of great difficulty for private companies to evaluate whether their activities will fall within the scope of China's blocking statutes. For multinational companies with substantial connections with the Chinese market, such uncertainties would increase their compliance burden or even lead to over-compliance.
There are probably two reasons for the legal uncertainties surrounding China's blocking statutes. The first reason may be related to China's rapid legislative process. A review of the legislative process of China's blocking statutes reveals that the introduction of these laws and regulations is an emergency response to the escalating U.S. unilateral sanctions. A noteworthy fact is that the AFS Law was drafted and passed under an expedited process that only took around three months without the public consultation process. As commented by Chinese scholars, 'such an expedited process is not common in China's legislative practice'. 76 As a result of the urgent passage, China's blocking statutes have only established a general framework for counteracting foreign sanctions; how they will be interpreted, applied and enforced remains in need of further clarification.
The second factor contributing to the legal uncertainties may be related to legislators' strategy. As noted by some scholars, the legislators of China's blocking statutes seem appear to have adopted an approach of strategic ambiguity, whereby some of the provisions of China's blocking statutes are deliberately left vague. 77 Such a strategy has two sides: on the one hand, it would provide the law enforcement agency of China with broad discretion in interpreting and enforcing the blocking statutes, and thus, China could fully utilize the blocking statutes as leverage to negotiate with foreign governments. On the other hand, it may expose private companies to great uncertainty, which in turn could adversely affect China's business environment.
Putting private companies between a rock and a hard place
Almost all the existing blocking statutes in the world involve a non-compliance provision, which prohibits private actors from complying with U.S. sanctions laws that are extraterritorial applied. The enforcement of the non-compliance provision has been widely criticized for exposing private actors to a compliance dilemma where compliance with the blocking statutes would lead to violation of U.S. sanctions laws, and vice versa. 78
The private actors' compliance dilemma is well illustrated in Bank Melli Iran v Telekom Deutschland GmBH (Melli). 79 Bank Melli Iran (BMI), an Iranian bank with a branch in Germany, has concluded a framework contract with the defendant, Telekom Deutschland GmbH (Telekom). According to the contract, Telekom promises to provide BMI with several telecommunications services. In 2018, shortly after BMI was designated on the U.S. Specially Designated Nationals and Blocked Persons (SDN) List, Telekom notified BMI of its decision to terminate their contract relationship with immediate effect. BMI thus filed a lawsuit against Telekom, alleging that Telekom's termination constituted a violation of the non-compliance obligation under Article 5 of the EU Blocking Regulation.
A central issue in the Melli case is whether the non-compliance obligation of Article 5 would apply to Telekom even though no order has been issued by the U.S. government to compel compliance. In the Melli case, the European Court of Justice (CJEU) adopted a strict enforcement approach and held that Telekom's termination of the contract constituted a violation of the EU Blocking Regulation. The CJEU's decision in the Melli case inevitably placed Telekom - an EU operator - in a dilemma: if it continues the contract relations with BMI, it may be subject to U.S. secondary sanctions, while if it unilaterally terminates the contract, such termination would constitute a violation of the non-compliance obligation under Article 5 of the EU Blocking Regulation. As commented by EU Advocate General Hogan, The operation of the EU blocking statute gives rise to a series of hitherto unresolved legal issues and a variety of intensely practical problems, not least of which is that European companies find themselves facing impossible - and quite unfair - dilemmas brought about by the application of two different and directly opposing legal regimes.
80
In a similar way to the EU Blocking Regulation, China's blocking statutes also seek to lessen the effects of U.S. unilateral sanctions by restricting private actors' compliance with certain U.S. laws or measures. As noted above, Article 12 of the AFS Law prohibits any organization or individual from implementing or assisting in implementing foreign discriminatory restrictive measures employed against Chinese entities and individuals. 81 The Blocking Rules contain similar provisions, prohibiting entities and individuals from complying with laws and measures specified in the prohibition order. When China's blocking statutes meet the U.S. sanctions laws, private actors, especially international financial institutions, are most likely to encounter the same dilemma as Telekom does. 82 Such a dilemma would also create a challenging business environment for foreign companies doing business in China. As stated by the U.S.-China Business Council, ‘companies increasingly feel squeezed between the US and Chinese governments, where complying with the rules of one government may cause them to run afoul of rules of the other government'. 83
Increasing complexity in private dispute resolution
With the rise of blocking statutes, the settlement of transnational commercial disputes, either through arbitration or litigation, could become complex if blocking statutes are taken into consideration. This argument can be illustrated by disputes over the validity of sanctions clauses. In recent years, it has been increasingly common for business participants to incorporate a sanctions clause into their commercial contracts. 84 The purpose of the sanctions clause is to exempt the private party from liabilities for failure to perform the contract when certain sanctions programs prohibit the performance. In practice, many disputes have arisen with regard to the validity of the sanctions clause, especially when one party refuses to fulfill the contractual obligation based on the sanctions clause while the other party demands the performance based on relevant provisions of the blocking statutes.
In Qingdao Jinhailian International Trade Co. v. Guangzhou Development Bibi Oil Products Co. (Jinhailian), 85 the Guangzhou Intermediate People's Court had the chance to address the issue of the validity of sanctions clauses in contractual disputes. In that case, Qingdao Jinhailian International Trade Co. (QJIT) concluded a purchase contract with the defendant, Guangzhou Development Bibi Oil Products Co. (GDBOP). Under the purchase contract, QJIT shall purchase oil from third countries and then resale to GDBOP. There is an annex to the purchase contract titled ‘Statements and Assurances regarding Trade Sanctions' (Sanctions Statement), which states that QJIT shall not purchase oil from countries that are subject to U.S. sanctions. Later, GDBOP found that the oil supplied by QJIT originated from Iran. Thus, GDBOP decided to terminate the contract unilaterally. QJIT initiated a lawsuit against GDBOP and claimed that the Sanctions Statement is invalid since it has violated China's Blocking Rules and the AFS Law.
The Chinese court finally supported GDBOP's argument and held that the Sanctions Statement was valid. In the words of the court of Guangzhou, [T]he main content of the Sanctions Statement is the commitment made by QJIT that the oil supplied to GDBOP shall not be products originating from countries such as Iran, and thus, the Sanctions Statement falls outside of the scope of the Blocking Rules and the AFS Law.
Although QJIT has failed to assert the invalidity of the sanction clause concluded with GDBOP, the Chinese court's wording in Jinhailian seems to indicate that the sanctions clause would be null and void if the agreement reached between both parties in the sanctions clause falls within the scope of China's blocking statutes. Identifying the scope of China's blocking statutes, however, is a task fraught with challenges and uncertainties. As discussed above, the Chinese legislators used certain ambiguous terms and terminologies when specifying the jurisdictional scope of the AFS Law. Some terms, such as ‘discriminatory restrictive measures', are rarely used not only in international legal instruments but also in China's domestic law. Therefore, private actors who conclude sanctions clauses with Chinese partners might have particular difficulty in assessing the validity of the sanctions clause.
The contractual disputes concerning the validity of a sanctions clause would become even more complex if the disputes were heard before a court in a third country. On the one hand, China's blocking statutes, which counteract foreign unilateral sanctions for the purpose of national sovereignty, security and development interests, would usually be regarded as China's overriding mandatory rules. 86 On the other hand, the U.S. sanctions laws and regulations may similarly belong to the overriding mandatory rules of the United States. 87 When a court in a third country is faced with a conflict between these overriding mandatory rules, it must decide which rule to apply, an issue that remains unresolved and largely depends on the jurisdiction where the dispute is heard. 88
Anticipating the Development of Blocking Statutes in China: Taking Private Actors' Interests Seriously
As a legal tool designed to counteract the unlawful extraterritorial application of foreign laws, the blocking statutes have often been criticized for not taking private actors' interests seriously. 89 Some commentators believe private actors ‘are only tools to achieve [political] purpose'. 90 Since China's reform and opening up in the 1970s, private actors, especially foreign investors, have played an essential role in China's economic development. At the current stage, promoting a high level of openness remains China's top development strategy. Therefore, the Chinese authorities are supposed to take private actors' interests seriously when enforcing the blocking statutes. Specifically, the Chinese authorities are suggested to adopt a prudent enforcement approach and improve the procedural supporting mechanism for these statutes.
A Continued Prudent Enforcement Approach
After the introduction of China's blocking statutes, the enforcement strategy that the Chinese competent authority will adopt has become an intriguing issue. As illustrated in Part III, private parties who violate China's blocking statutes could face various commercial restrictive measures, including prohibitions on China-related import, export, and investment. The legislators appear to use the Chinese market access as leverage to counteract U.S. unilateral sanctions. In this context, the enforcement strategy adopted by Chinese competent authority would significantly affect private actors' business operations: on the one hand, if the restrictive measures are rarely employed, the deterrent effect of the blocking statutes would be substantially reduced; on the other hand, if the blocking measures are applied strictly, private actors' freedom of business decision-making would be easily disturbed. As demonstrated in the Melli case, Telekom was obliged to continue its contract with the Iranian bank, even though doing so could possibly expose Telekom to significant losses due to the violation of U.S. sanctions against the Iranian bank, especially given the fact that Telekom derives nearly half of its revenue from the U.S. market.
In addition to the above two enforcement strategies, it seems that China has pursued a middle way by adopting a prudent enforcement strategy. The recent practice of China's blocking statutes indicates that Chinese law enforcement agencies have been quite cautious in initiating restrictive measures against private parties. As shown in the chart in Appendix, while China has designated certain individuals or private companies on the UE List and the Countermeasure List, almost all of these designations were triggered for their involvement in interfering with China's internal affairs, especially issues regarding Hong Kong, Xinjiang, Tibet, and Taiwan. From China's perspective, these issues are ‘entirely China's internal affairs that brook no interference by any country'. 91 Up to now, no private companies have been blacklisted for terminating or suspending business transactions with Chinese companies for the purpose of complying with U.S. sanctions. The current enforcement strategy seems to signal that Chinese competent authorities would not arbitrarily impose restrictive measures on private companies unless they engage in activities that endanger China's national sovereignty and territorial integrity.
Economic considerations may be the primary factor leading to China's current prudent enforcement approach. Since the implementation of China's reform and opening-up policy in the 1970s, foreign investments have been pivotal in China's economic development. As discussed above, the enforcement of the blocking statute could pose additional challenges to the operations of private businesses. Concerns have arisen that the enforcement of blocking statutes could negatively affect China's business environment. A report indicated that the passage of the AFS Law has ‘unsettled' many financial institutions in Hong Kong. 92 At the current stage, optimizing the business environment and promoting a high level of openness are integral part of China's long-term development agenda. For instance, the report of the 20th National Congress of the Communist Party of China emphasized China's commitment to protecting the legitimate rights and interests of foreign investors and creating a first-class business environment. 93 On 28 February 2024, the State Council issued an action plan to promote high-level opening-up and attract foreign investment. 94 Against this backdrop, the Chinese authorities need to consider how to minimize the adverse impacts of the blocking statutes on China's business environment while maintaining their deterrent effect. A prudent enforcement approach appears to best serve China's development interests, since such an approach could not only demonstrate China's zero-tolerance stance on foreign countries’ interference in China's internal affairs, but also reduce excessive governmental disruption in normal commercial transaction orders.
An Enhanced Procedural Support Mechanism
As an emergency response to escalating foreign unilateral sanctions, China's blocking statutes appear to serve more as a political statement and exhibit significant weaknesses in practical operation. Therefore, the Chinese authorities are advocated to enhance the procedural support mechanism for these statutes, and the following are some specific examples:
First, it is essential to note that while Article 13 of the UEL Provisions allows private actors designated on the UE List to apply for removal, the process and criteria for removal are in need of further clarification.
Second, Article 5 of the Blocking Rules mandates Chinese parties to report to MOFCOM within 30 days if they are affected by foreign legislation or measures that are unjustified extraterritorial applied. Further guidance is necessary to clarify when the 30-day reporting obligation begins, what information should be included in the report, and the procedure to be followed for submitting the report to the competent authority.
Third, MOFCOM needs to provide guidance to Chinese parties on how to submit their applications for exemption, including the application format, the limitation period for submission, and the department responsible for receiving applications.
Fourth, MOFCOM is expected to establish clear criteria for assessing whether Chinese parties’ application for exemption should be granted. The Blocking Rules enable Chinese parties to apply for exemption from compliance with the prohibition order, and the UEL Provisions authorize Chinese parties to do business with foreign entities designated on the UEL ‘under special circumstances'. 95 Both the UEL Provisions and the Blocking Rules, however, are silent on the criteria for assessing whether such an application should be granted. Providing specific criteria for exemption under the blocking statutes may not only facilitate the work of the competent authority but also help private actors to prepare their applications in a focused manner. Therefore, it is advocated that relevant criteria for obtaining exemption should be provided under China's blocking statutes.
Conclusion
In response to escalating unilateral sanctions and worsening China-U.S. relations, China has shifted its methodology for countering foreign sanctions from diplomatic protests to expanding its legal toolkit under domestic law, most notably through the promulgation of three blocking statutes between 2019 and 2021. The enactment of blocking statutes has not only enriched China's legal toolkit for addressing the risk of unjustified extraterritorial application of foreign laws but also demonstrated China's resolute stance towards foreign unilateral sanctions.
China's blocking statutes share many similarities with the EU Blocking Regulation. An examination of the EU Blocking Regulation's enforcement history reveals that, while a primary goal of the blocking statutes is to protect the interests of private actors, this objective remains only partially fulfilled. Instead, the enforcement of blocking statutes may potentially result in additional challenges for private parties, such as heightened legal uncertainty, risk of exposure to conflicting legal obligations, and increased complexity in private dispute resolution. Since China's reform and opening up in the 1970s, private actors, especially foreign investors, have played a crucial role in China's economic development. At the current stage, promoting a high level of openness remains China's top development strategy. Against this backdrop, the Chinese competent authority should take private actors' interests seriously when implementing the blocking statutes. Specifically, the Chinese competent authority is suggested to adopt a prudent enforcement approach and enhance the procedural support mechanism for these statutes.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
This article is supported by the Ministry of Education's Youth Fund for Humanities and Social Sciences (Grant No. 22YJC820019). This paper was completed on 26 May 2024, and all websites are current as of this date.
Notes
Appendix
The List of Entities and Individuals Designated on the Countermeasure List and the UE List