China (PRC)

Beijing Raises the Stakes with New Anti-Sanctions Law,

But Can China’s Counter-measures Succeed Where the EU and Others Have Failed?

 

BJ STOP

Wednesday, 7th July 2021.

This is the second in a series

In 2016, Jack Lew, then serving as US Treasury Secretary, gave a speech in which he discussed the history and evolution of sanctions.  After describing the US leadership position in the global financial system as the source of the power of US sanctions, he then issued this warning: The US “must be conscious of the risk that overuse of sanctions could undermine our leadership position within the global economy, and the effectiveness of our sanctions themselves.”

He went on to identify several potential costs of overuse of sanctions generally and secondary sanctions specifically:  Such measures, Secretary Lew said, can strain diplomatic relations, destabilize elements of the global economy, impose real costs on companies in the US and abroad, and perhaps most importantly, they carry a “risk of retaliation.” [1]

China Enters (and Escalates) the Sanctions Battle

With the adoption of its new Anti-Sanctions Law by the National People’s Congress Standing Committee (NPCSC) on June 10, China has demonstrated that it is fully prepared to retaliate against what it perceives as US sanctions overreach, confirming the prescience of Secretary Lew’s warning.

NPCSC Chairman Li Zhanshu is reported to have told lawmakers that the new law shows that China will never relinquish its legitimate rights and interests.  “The Chinese government and people will resolutely counter various sanctions and interference,” he said.[2]  A Hong Kong-based legal scholar was even more direct, noting, “Cooperation is the best option but the U.S. doesn’t want it. So retaliation, such as with this new law, is the second best option.”[3]

The Anti-Sanctions Law is considered to be “the last piece of the puzzle” to complete China’s arsenal of sanctions counter-measures.   Other key pieces include the Provisions on the Unreliable Entity List issued in September 2020 (UEL Provisions), the Export Control Law adopted in October 2020 (ECL), and the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Laws and Other Measures issued in January 2021 (Blocking Rules).  At the same time, there are persistent calls to push for extraterritorial enforcement of more of China’s laws to even the playing field and give the US and others “a taste of their own medicine.”[4]

The Anti-Sanctions Law provides a broad legal foundation for all of the various weapons in China’s arsenal of sanctions counter-measures.  In addition, the principal new substantive provisions of the law allow China to sanction individuals or entities involved in making or implementing discriminatory measures against Chinese nationals or enterprises.  Such persons so designated will be listed on the Anti-Sanctions List and may have their assets in China seized or frozen, be denied entry into China and be “blacklisted” from doing business with Chinese persons.

The Anti-Sanctions List (or ASL) thus is generally analogous to the US List of Specially Designated Nationals and Blocked Persons (SDN List) administered by the Office of Foreign Asset Control (OFAC) under the US Treasury Department, but while the SDN List sanctions can extend to other entities in the targeted person’s overall group of companies under OFAC’s fifty percent rule, under the Anti-Sanctions Law the counter-measures can also be imposed on family members as well as employers and all companies up and down the chain.

China had previously announced sanctions against numerous prominent US and EU politicians and other organizations for their roles in promoting sanctions against Chinese and Hong Kong officials for alleged human rights violations in Xinjiang and Hong Kong.  These presumably will now be transferred to the ASL.

Consequently, the new provisions included in the Anti-Sanctions Law should not be viewed as “sanctions killers” as such, as the name of the new law may suggest, but more as additional ammunition for retaliation as a means of indirect deterrence.  The counter-measures which are designed to directly neutralize direct and secondary sanctions imposed by foreign countries against China are found in the Blocking Rules, which are modelled after similar counter-measures adopted by the EU and Canada, rather than in the Anti-Sanctions Law itself.

As is the case with other similar “blocking rules,” China’s Blocking Rules are designed to nullify foreign sanctions against Chinese individuals and enterprises by making it unlawful for persons in China (including China subsidiaries of foreign MNCs) to give effect to the extra-territorial enforcement of restrictions on dealings with counterparties in third countries subject to US sanctions.  The Anti-Sanctions Law further reinforces certain remedies under the Blocking Rules.

As noted in Part 1 of this series, so-called “smart” sanctions, which are increasingly favoured by the US, can be considered to be the economic equivalent of precision-guided ballistic missiles.  By way of extension of that analogy, “blocking rules” can be considered to be the equivalent of anti-ballistic missiles, intended to shoot down and disable US sanctions.

However, to date, all of these “blocking rules” have been almost completely ineffectual and have had little to no deterrent effect on US sanctions extra-territorial enforcement as a practical matter.  The US has consolidated such a strong position in terms of sanctions enforcement as to be almost unassailable, at least in the near term so long as the US dominance of the global financial system remains unchallenged.

Prior Sanctions Counter-measures – A Case Study in Near Complete Capitulation

The dismal track record of EU and Canadian counter-measures vis-à-vis US secondary sanctions amply illustrates how the current asymmetrical interdependent relationship between the US and its major trading partners severely limits what countries can realistically expect to achieve in this regard. [5]

For example, under the 2015 Joint Comprehensive Plan of Action (JCPOA) entered into by Iran and the so-called P5+1 (China, France, Germany, Russia, the UK and the US), European companies had pursued a range of business opportunities in the newly reopened Iran market (US companies, by comparison, were still largely banned from deals with Iran).  But in connection with the subsequent US withdrawal from the JCPOA, in November 2018 the Trump administration reimposed “snap-back” sanctions on Iran, including the addition of new secondary sanctions across a range of industry sectors.  This action by the US put these Iranian deals by EU companies in jeopardy.

EU officials were outraged and took immediate steps to resurrect its so-called “blocking statute,” Council Regulation (EC) No 2271/96 (EU Blocking Statute),[6] which had been first passed in 1996 but then left dormant when the US backed down in response to aggressive pushback by several EU Member States, Canada and others.[7]  Under the EU Blocking Statute, EU companies were prohibited from complying with the US sanctions laws in respect of Iran.  “We are determined to protect European economic operators engaged in legitimate business with Iran,” the foreign ministers of Britain, France, Germany and the European Union said in a joint statement.[8]

Notwithstanding this strongly worded statement by top European officials, thousands of EU companies voted with their feet by promptly exiting Iranian deals worth billions of US dollars, ignoring the requirements of the newly enhanced EU Blocking Statute.  Some of the more notable examples of major European companies which opted to submit to US secondary sanctions in defiance of the EU anti-sanctions edicts included Siemens (which unwound a US$1.5 billion railway contract), Total (which walked away from a US$2 billion investment in the South Pars gas field project), and Airbus (which lost US$19 billion in aircraft sales to Iran Air).[9]

A few months later, in May 2019, the Trump administration announced that it would, for the first time, after more than 20 years of waivers by successive US administrations, fully implement Title III of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996, commonly known as the Helms-Burton Act.  This would allow US nationals to sue to recover damages from any person who “traffics” in property belonging to the US claimant that was expropriated by the Castro government.

While the US had long imposed an embargo on US persons doing business with Cuba, Canadians had continued to trade with Cuba, so the implementation of Title III of the Helms-Burton Act posed a significant threat to many Canadian companies.  Like their EU counterparts, Canadian officials were alarmed at the sudden reversal in US policy, and promptly took steps to renew the implementation of Canada’s anti-sanctions law, known as the Foreign Extraterritorial Measures Act (FEMA).[10]  FEMA was originally adopted to push back against the extraterritorial enforcement of US antitrust laws and had been updated in the late 1990s to address the threats to Canadian interests under Helms-Burton.

Unlike the EU Blocking Statute, which provides only for unspecified “effective, proportional and dissuasive” penalties at the discretion of the relevant Member States, Canada’s FEMA provides for potential criminal penalties for Canadian companies (fines of up to C$ 1.5 million) or individuals (fines of up to C$150,000 and up to five years imprisonment) who disregard the requirements of FEMA by, inter alia, giving effect to corporate compliance policies consistent with, or enforcing or abiding by foreign court judgments entered pursuant to, the provisions of the Helms-Burton Act.  Even in the face of such potential criminal penalties, the Canadian business community has almost without exception continued to comply with the US sanctions rules, effectively disregarding the requirements of the Canadian blocking statute, with apparent total impunity as to date there have been no prosecutions.

Comparing China’s Blocking Rules to the EU and Canadian Counter-measures

China’s Blocking Rules share many of the same features as the EU Blocking Statute and FEMA, and as such they may be subject to many of the same limitations in terms of practical implementation.  (In addition, as we will explore in later articles in this series, there may also be some technical points in the broad array of counter-measures adopted by China which may present additional challenges and obstacles in terms of enforcement in the near-term.)

Certain elements are common to all of these blocking statutes, although the details vary.  For example, as with the other “blocking rules,” under China’s counter-measures there is a mechanism for reporting the threatened or actual extraterritorial application of foreign laws, a prohibition against compliance with or enforcement of specified foreign laws or other measures, a process for applications for exemptions from the prohibitions under the rules, and private rights of action to seek recovery of damages resulting from actions of third parties resulting from compliance with the blocked laws (sometimes referred to as a “claw back” right).[11]

However, unlike the prior EU and Canadian anti-sanctions counter-measures, China’s Blocking Rules do not include an annex specifically listing the foreign laws to be blocked.  Rather, the China Blocking Rules provide a mechanism for issuing orders prohibiting companies in China from submitting to the long-arm jurisdiction of foreign countries.  This mechanism is triggered by a notice from an affected person in China.  Even though all of these blocking rules on their face are designed to have general application to purported extra-territorial enforcement of laws from any foreign country, it is understood that the intended target in each case is US long-arm enforcement of direct and secondary sanctions.

The China Blocking Rules currently provide only a general framework.  To date, no prohibition orders or implementation rules have been issued, and as is characteristic for Chinese regulations generally, there is broad scope for discretion on the part of Chinese authorities in terms of interpretation and application.  Consequently, there are many questions for which there are not yet clear answers, and while the new Anti-Sanction Law supports and supplements the Blocking Rules, it does not clarify these points.

One thing that does seem clear, however, is that the timing of the issuance of the China Blocking Rules was intended as a direct challenge to the incoming US administration.  To underscore the message, China took the unusual step of releasing an official English translation of the Blocking Rules at the same time.

Some reports suggest that while the new Blocking Rules had been in the pipeline for some time, the timing of their issuance was pulled forward after it became apparent that the incoming Biden administration would not take a softer line with China.[12]  As one former senior US trade official noted privately, it is as if China came into the room for talks with the US, took a gun out of its briefcase, placed it on the table and said, “We are now ready to start negotiating.”

Why Anti-Sanction Counter-measures Have Not Worked (So Far)

The question is, in light of the failure of the EU and Canada counter-measures, are there any bullets in the gun?  To answer this question, we first need to assess why the EU and Canadian counter-measures have not worked.

We start with the EU Blocking Statute.  According to sanctions experts, the EU Blocking Statute has proven to be ineffective for the simple reason that the penalties for non-compliance with US sanctions are potentially devastating, and since OFAC has been aggressive in pursuing enforcement actions, such risks cannot be discounted or disregarded.  On the other hand, the related risks under the EU counter-measures are almost negligible as a practical matter.

By way of illustration (as described in more detail in the first article in this series[13]), parties that do not comply with US sanctions run the risk that their access to the US market may be blocked; they may be cut off from global supply chains of goods and services incorporating sensitive US-sourced technology (as in the case of Huawei and ZTE); or their senior managers may be subject to criminal prosecution (as in the case of Huawei CFO, Meng Wanzhou).  Moreover, sanctions violators may effectively be banned from the global financial system, in many cases making it virtually impossible to do business.

By comparison, under the EU Blocking Statute, while the potential penalties are not specified, only administrative fines are likely.  Consequently, given the extreme disparity in potential risks, the decision to comply with US sanctions represented a pragmatic, perhaps the only reasonable, choice for multi-national companies in the EU in the face of the re-imposed US sanctions against Iran and related secondary sanctions.

In addition, it appears that the EU Blocking Statute may effectively be unenforceable in its own terms.  Over the last few years, EU companies have been able to maneuver around the prohibitions merely by being able to point to any legitimate commercial reason for unwinding the banned transaction other than the impact of the US sanctions.[14]  In such a case, there has been no basis to establish that a violation of the EU Blocking Statute has in fact occurred.  In fact, it appears that so far EU Member States have in effect conceded the unenforceability of the EU Blocking Statute and are turning a blind eye to obvious intentional violations, not wanting to add the insult of fines to the injury of lost business under the US secondary sanctions.

However, some commentators have suggested that courts in the EU may now adopt a much more aggressive enforcement posture in respect of the EU Blocking Statute, citing the non-binding opinion[15] recently issued by the Advocate General (AG) of the EU Court of Justice.  The AG opinion was solicited in connection with a “claw back” civil action for damages brought by Bank Melli Iran (BMI) against Telekom Deutschland GmbH, a subsidiary of Deutsch Telecom (DT), alleging that in violation of the requirements of the EU Blocking Statute, DT terminated its telecommunications services contract with BMI’s Hamburg branch after the Trump administration re-imposed secondary sanctions vis-à-vis Iran.

The AG opined that where an EU company purports to terminate a contract with an Iranian counterparty, the EU Blocking Statute will apply, and the contract termination should be declared void, unless the EU company can demonstrate that it was compelled to take such action pursuant to an official US court or administrative order or that such action was motivated by purely economic reasons with no concrete link to the US sanctions.  In other words, the AG’s view was that it may be appropriate for the German court to require DT to explain the reasons for the termination and possibly go so far as to demonstrate that “the decision to terminate the contract was not taken for fear of possible negative repercussions on [DT’s position in] the US market.”

As noted above, this AG opinion is non-binding, although it may have persuasive value.  Ultimately it will be for the referring German court to make the final decision.  However, it is important to note that this case does not involve penalties imposed by the German government but arises in the context of a “claw back” case.  As such, this AG opinion is unlikely to have any significant deterrent effect because the potential damages in a “claw back” case typically are very modest in amount.  In this case, the value of the contract with BMI was only 2,000 Euros per month, while DT has 50,000 employees in the US, and the US market accounts for 50 per cent of DT global turnover.

This is typical of such “claw back” actions generally: They have been limited in number, and the claimed damages have tended to be very modest.  Moreover, in such cases it may be possible to receive a limited exemption from OFAC, which resolves the issue.  All of these are manageable risks, while if a company is hit with US sanctions, it may be the equivalent of a corporate death penalty.  Consequently, while EU operators will need to document the basis for their decisions to unwind such transactions more carefully in light of the AG opinion, the overall analysis remains essentially unchanged – US sanctions are expected to continue to trump the EU Blocking Statute.

For companies in Canada, the risk analysis should be the cause of substantially more concern given the existence of potential criminal penalties under FEMA.  Moreover, the provisions of FEMA expressly state that the intention to comply with US sanctions cannot form any part of the decision to unwind a transaction, even if there are other unrelated commercial bases for the decision.  However, again the result has been the same as in Europe – virtually 100% compliance with US sanctions notwithstanding the prohibition under FEMA.  In this case, it appears that Canadian authorities surrendered in advance without a fight, failing to take any enforcement actions to date.

This again appears to be a concession to the realities of the marketplace – nearly three-fourths of all Canadian exports go the US, so Canadian companies cannot risk being barred from the US market.  Moreover, some experts suggest that imposing criminal penalties on Canadian companies under such circumstances would be unduly harsh, so officials have not been willing to enforce those provisions of FEMA, rendering it toothless as a practical matter.

As such, the EU and Canada experiences illustrate the conundrum faced by US trading partners – if penalties under sanctions counter-measures are too low (as in the EU), companies will ignore the prohibitions against compliance with US secondary sanctions and take the risk of modest administrative fines, but if penalties are too high (as in Canada), officials may be unwilling to enforce the anti-sanctions rules against their own companies.  Two opposing approaches leading to the same impotent result.

Assessing Scenarios Under China’s Anti-Sanctions Framework

Given this rather unpromising history of ineffectual counter-measures enforcement elsewhere, can China realistically expect to achieve a better result with its new anti-sanctions legal toolkit?

To test this proposition, we can consider some potential scenarios based generally on the Zhuhai Zhenrong case.  In July 2019, the US placed Zhuhai Zhenrong Company Limited (ZZCL) and its CEO Youmin Li on the SDN List for engaging in a significant transaction involving Iranian crude oil after the expiration of China’s exemption for such purchases in early May 2019.[16]  This is precisely the situation the Blocking Rules were designed to address – US secondary sanctions purporting to restrict the transaction between ZZCL and the Iranian crude oil supplier through extra-territorial enforcement of US laws.

If the Blocking Rules had been in place and ready to be deployed at the time of the proposed ZZCL purchase of the Iranian crude oil, ZZCL could have notified the relevant Chinese authorities (the “working mechanism” under the terms of the Blocking Rules) on a pre-emptive basis that the US secondary sanctions purported to prohibit or restrict ZZCL from engaging in normal commercial transactions with its Iranian counterparty.  This notice would then trigger a review.  Under the terms of the Blocking Rules, if the working mechanism found that the US sanctions violated international law, encroached on China’s sovereignty, or infringed on the legitimate rights and interests of ZZCL and other similarly situated Chinese companies, then a prohibition order could be issued.

These elements listed in the Blocking Rules as noted above form the most common grounds for objections to US sanctions cited by US trading partners around the world: The exercise of direct and indirect long-arm jurisdiction by the US is regarded by many non-US legal scholars to violate customary international law; foreign governments have consistently maintained that US secondary sanctions, which purport to require non-US companies to comply with US sanctions against Iran (for example), manifestly infringe on their sovereign right to set their own foreign policy; and banning transactions with companies which refuse to comply with US sanction rules by definition interferes with their otherwise legitimate commercial rights and interests.

As a result, Chinese authorities could easily find a basis under the Blocking Rules to justify issuance of a prohibition order.  Such a prohibition order would make it unlawful for ZZCL or any other company in China to submit to the restrictions under the US secondary sanctions vis-à-vis Iran.  In other words, this notice mechanism under the Blocking Rules would trigger the review that would then result in a prohibition order that would be the functional equivalent of the listing of the US secondary sanctions in respect of Iran in the annex to the EU Blocking Statute.

So far so good, but that would not be the end of the story.  Such a prohibition order under the Blocking Rules would not be able to block US action to enforce the secondary sanctions by adding ZZCL to the SDN List, and once a company is added to the SDN List, it is cut off from the US market and the US dollar-denominated global financial system.  In short, a prohibition order under the Blocking Rules would make it unlawful for ZZCL or any other Chinese company to comply with the US secondary sanctions with respect to Iran transaction, but such a blocking order would not protect any of them from the resulting penalties imposed by the US.

It is at this point in the analysis that all European and Canadian companies capitulated, opting to comply with the rules of the game set out by the US notwithstanding the fact that so doing was illegal under the applicable blocking rules.

But China has additional weapons in its arsenal, which neither the EU nor Canada have at their disposal – China has the UEL Provisions, which China copied from the US, and then adapted.  To see how the UEL Provisions may change the state of play, we now turn to our scenarios to assess whether China can blunt the impact of the SDN List penalties in certain cases.  If China can do so, this will weaken the effectiveness of US secondary sanctions.

For our first scenario, we address the situation involving a US counterparty: If a US company had a pre-existing contractual relationship with an entity placed on the SDN List, then they would need to unwind it, and if they were negotiating a new deal with the sanctioned entity, they would need to terminate the negotiations.

A second scenario involves non-US counterparties.  Even though they are not directly required to do so by US sanctions laws, global banks and many non-US MNCs have also tended to back away from dealings with companies on the SDN List.  For banks, the risk of being cut off from the US financial system has in many cases resulted in a zero-tolerance compliance posture, where they avoid getting anywhere close to the line vis-à-vis sanctioned entities.

For non-US companies, this caution on the part of the banks presents an additional practical concern – if the banks will not process payments to/from a party on the SDN List, then foreign counterparties cannot make/receive payments to/from the sanctioned entity, and accordingly they may also need to unwind existing deals and decline to proceed with new deals with the sanctioned entity.

For our third scenario we add one further variation: Assume that according to media reports, a Chinese entity purchased crude oil from Iran in violation of US secondary sanctions, but OFAC has not yet added the company to the SDN List.  What happens if banks flag the report and out of an abundance of caution decline to process payments to/from the entity, and as a result, a US company terminates its contract with the not-yet-sanctioned Chinese entity?

As noted above, in each of these scenarios, we are already outside of the scope of application of the Blocking Rules, and this is where the UEL Provisions may come into play.  The UEL Provisions set out measures which may be taken against foreign companies which, either inside or outside of China, take actions to suspend “normal transactions” with or otherwise discriminate against a Chinese entity “in violation of normal market transaction principles” resulting in serious damage to the legitimate rights and interests of affected entity.

The key question as a legal matter may be which of the scenarios above reflect “normal market transaction principles” and which do not.

The first scenario presents a clear-cut case of minimum mandatory compliance since US sanctions laws are directly binding on US companies.  While under the plain language of the UEL Provisions, China could take action in such circumstances, most experts currently take the view that China is unlikely to do so, as that would put US companies in the impossible situation of facing potentially devastating penalties in China for simply complying with applicable US law, which could have a chilling effect on foreign investment in China generally.

In contrast, however, the third scenario above presents an example of possible over compliance (at least on the part of the banks) rather than minimum mandatory compliance as in scenario 1.   Chinese authorities could take the view that minimum mandatory compliance is consistent with “normal market transaction principles” while over compliance is not.

The second scenario may be a bit of a hybrid situation.  Non-US banks will not be able to provide US dollar services for sanctioned parties to the extent that (as would typically be the case) such payments would need to clear through the US banking system, so this could be classified as mandatory minimum compliance.  It is not clear, however, that this means that non-US banks cannot provide any other banking services to the sanctioned person.  Under the current policy of over-compliance adopted by virtually all banks which have any exposure to the US financial system, entities and individuals on the SDN List in most cases cannot even open a bank account, even for other currencies which will not involve any nexus to the US.

On the other hand, it is hard to fault the foreign company in either scenario 2 and 3 for terminating its dealings with the sanctioned Chinese entity on the grounds that it would not be able to make or receive payments under the contract due to the banks’ refusal to provide banking services to such party, whether the bank was required to do so or did so out of an overabundance of caution.

If Chinese authorities elect to use the UEL Provisions to push back against perceived over-compliance, this would provide a powerful tool to reduce a significant portion of the negative impact of secondary sanctions enforcement, because if a foreign company (or bank) is placed on the UEL, then it can essentially be barred from all trade and investment activities with China, similar to the blanket ban under the SDN List in respect of access to the US market.  In other words, like the US, China can use access to its massive market as both a carrot and a stick.

However, if China tries to use market access as a bargaining chip in too aggressive a manner to counter US sanctions, it creates the potential for a conflicts of law stalemate, where foreign MNCs are forced to choose between the US market and the China market.  And if China adopts the most aggressive enforcement posture under the UEL Provisions, and penalizes not just over compliance but also minimum mandatory compliance, then it all falls apart, and everyone loses, including China.

What Can the New China Counter-measures Realistically Achieve?

Consequently, the threat of the international trade equivalent of mutually assured economic destruction provides a natural constraint on what actions each side will be willing to take.  But on the other hand, as we have seen from the EU and Canadian examples, counter-measures that are no more than half-measures have to date only persuaded US officials that their sanctions enforcement position is virtually immune to attack.

China’s adoption of its new anti-sanctions toolkit will not immediately change the balance of power, as a realistic assessment of the relative strengths of the US and Chinese arsenals in terms of trade sanctions measures and counter-measures confirms that the US maintains extraordinary advantages which China cannot match.  Stated simply, while China and the US can both leverage access to their massive markets to induce compliance, only the US can cut companies and individuals off from the global financial networks and key global technology supply chains; and only the US can exploit the dominance of the US dollar in international trade to enforce its assertion of extra-territorial jurisdiction.

However, China may be in a much stronger position than the EU or Canada in terms of pushing back against US secondary sanctions because it has much greater economic heft than Canada, and much higher levels of internal cohesion than the EU.

By way of illustration of the importance of internal cohesion in pushing back against the US position, in 1996 leading European governments (working in concert with Canada and other Western nations) were able to get the US to back down on the implementation of secondary sanctions under the Cuba and Iran sanctions acts, but in 2018 when the Trump administration reimposed the Cuba and Iran sanctions, EU and Canada complained loudly then meekly surrendered.

In 2019 the European Council on Foreign Relations (ECFR) undertook a major study to assess what had changed in the intervening twenty-plus years from the late 1990s to the late 2010s.  Among the factors cited in the report: the US had over that period tightened its grip on the global banks, effectively turning them into private enforcers; the US took advantage of the political fragmentation of the EU Member States; and finally, and perhaps most importantly, in 1996 European company executives indicated that if their governments told them to ignore US sanctions, they would do so, while in 2018 the consensus had shifted 180 degrees – no one was willing to take the risk of excommunication from the global trade and finance system.[17]  In sum, over that period the EU had effectively ceded the sanctions battle completely to the US side.

Because it lacks the built-in advantages that the US enjoys, China cannot go on the offensive in these trade sanctions skirmishes.  China may, however, be able to utilize its new toolkit in a defensive posture to its advantage.  Case in point – in March China and Iran announced a massive 25-year deal, pursuant to which China pledged to invest US$400 billion in various sectors, ranging from banking, telecommunications, ports and railways to health care and information technology, in exchange Iranian oil at steeply discounted prices. [18]

The secondary sanctions imposed by the Trump administration as part of its withdrawal from the JCPOA may currently be under review by the Biden administration in connection with its stated intention to restart the Iran nuclear deal.  But if the secondary sanctions remain in place over an extended interim period, blocking EU companies from going back in while China steals the march on the rest of the developed world in Iran, this (or some other analogous situation) could be a potential flash point in the sanctions battle.

To forecast how such a situation may play out, all we have to do in the sanctions counter-measure scenarios posited above is to remove the name of ZZCL or another generic lower-profile Chinese entity and replace it with the names of China’s national champions in each relevant industry sector, and then project what measures and counter-measures each side might take.

It would be a game of who blinks first, with China in effect daring the US to slap an SDN designation on potentially dozens of China’s major state-owned enterprises, all of which would resolutely ignore any US sanctions at Beijing’s direction, just as all of the top EU companies would have done in 1996 if their governments had so requested.

If the US thinks it can call China’s bluff, and imposes sanctions anyway, China can deploy different counter-measures, starting either with penalties for minimum mandatory compliance or for over-compliance as the circumstances may dictate, to ratchet up the pain for the US side without triggering all out economic war, until a partial sanctions détente is achieved.

End Game – De-Dollarization of International Trade

This would be high stakes geopolitical poker, with high risks for all involved, and no guarantee that the right outcomes can be achieved by either side.  Given the stakes, and given China’s preference for the long game, China may be more likely to wade in carefully, probing for possible cracks in the US armor, pushing for incremental advantage on a case-by-case basis, and at the same time seeking (where possible) to consolidate support from other US trading partners which share the universal objections to US overuse of sanctions, in order to exert sufficient pressure to effect changes in the status quo.

Ultimately, the only truly effective anti-sanctions play is to erode the source of US sanctions power by reducing the dominance of the US dollar in international trade, thereby undermining the US stranglehold on the global financial system.  But absent another black swan event which results in a massive devaluation of the dollar without bringing down the entire global economy, de-dollarization may prove to be the most challenging play of all.

 

Read the first article in the series here.


Authors:

robert lewis

Robert Lewis

Robert Lewis is a lawyer based in Beijing.  He was admitted to practice in California in 1985.  He has worked in prominent U.S., U.K. and Chinese law firms in China for nearly 30 years.  He is currently Senior International Consultant with Chance Bridge Partners, a leading boutique full-service business law firm in Beijing, as well as co-founder and Senior Expert of docQbot, an award-winning legal tech company providing bilingual automated contract solutions for China-related transactions.  He is also the author of the book, The Rules of the Game of Global M&A: Why So Many Chinese Outbound Deals Fail.  He is fluent in spoken Mandarin and written Chinese.

With contributions by:

Li Li Chance Bridge

Li Li

Li Li has more than ten years of experience as an international lawyer. She focuses on cross-border dispute resolution and cross-border compliance, and has represented Chinese and foreign companies in the complex commercial litigation and international arbitration cases before Chinese courts, Chinese arbitration institutions, foreign courts and international arbitration institutions. Ms. Li also has extensive experience in cross-border compliance, particularly in relation to U.S. export controls and U.S. sanctions compliance.  Li Li is currently the head of the Compliance Department of Chance Bridge Partners.


The opinions expressed in this article are those of the authors and do not reflect the opinions of InHouse Community Ltd, or it’s employees.


Next article in series:

Can De-coupling from the US Dollar De-fang US Secondary Sanctions?

US Extra-territorial Jurisdiction Hinges on the Dominance of the US Dollar, So US Global Leverage Will Persist Until the US Dollar Is De-throned


 

[1] https://www.treasury.gov/press-center/press-releases/Pages/jl0398.aspx

[2] China passes law to counter foreign sanctions, East Asia News & Top Stories – The Straits Times

[3] https://www.reuters.com/world/china/china-passes-law-counter-foreign-sanctions-2021-06-10/

[4] https://ph.news.yahoo.com/hong-kong-leader-carrie-lam-072013138.html

[5] While other countries (such as Mexico and Russia) have passed similar anti-sanction rules, in this article we will focus on the EU and Canadian statues as these appear to provide a representative basis for comparison and analysis.

[6] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:01996R2271-20140220

[7] See Part 1 in this series at https://www.inhousecommunity.com/article/us-secondary-sanctions-provoke-strong-backlash-among-friends-foes-around-world/ for further background.

[8] U.S. to Restore Sanctions on Iran, Deepening Divide With Europe – The New York Times (nytimes.com)

[9] https://ecfr.eu/publication/meeting_the_challenge_of_secondary_sanctions/.  For a more extensive list, see Iran Sanctions (congress.gov).

[10] https://laws-lois.justice.gc.ca/eng/acts/F-29/FullText.html

[11] “Blocking rules” serve as counter-measures to US secondary sanctions as traditionally defined, specifically the application of OFAC sanction restrictions to non-US persons in respect of their dealings with sanctioned parties in the targeted third country.  In this series of articles, we have in some cases adopted a more expansive definition of secondary sanctions to include restrictions on re-export of US-sourced technology, which many commentators would classify as direct sanctions, having a clear nexus to the US.  This more expansive interpretation has been suggested by some legal scholars to reflect the fact that such restrictions essentially regulate conduct by foreign persons outside of the US with only a tenuous territorial nexus to the US, and so have similar practical effect and raise similar practical concerns on the part of non-US parties.

[12] https://www.scmp.com/news/china/diplomacy/article/3136676/china-speeded-work-anti-sanctions-law-after-joe-biden

[13] https://www.inhousecommunity.com/article/us-secondary-sanctions-provoke-strong-backlash-among-friends-foes-around-world/

[14] https://academic.oup.com/bybil/advance-article/doi/10.1093/bybil/braa007/5909823

[15] https://curia.europa.eu/juris/document/document.jsf?text=&docid=241168&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=2477201

[16] SecondarySanctions_Final.pdf (atlanticcouncil.org)

[17] https://ecfr.eu/publication/meeting_the_challenge_of_secondary_sanctions/

[18] https://www.nytimes.com/2021/03/27/world/middleeast/china-iran-deal.html

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