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China to be Cautious in Penalizing Businesses Under Anti-Foreign Sanctions Law

  • The new Anti-foreign Sanctions Law adopted by China earlier this month provides a legal basis for the previous administrative countermeasures against foreign sanctions, including those of the US. It also gives Chinese firms opportunities to sue foreign businesses that cause damage to them.
  • However, China will not be rash in going after foreign firms and will thoroughly weigh any such move. Penalizing foreign companies for obeying US sanctions essentially means telling businesses to choose a side. The country is not ready for it yet.
  • The law is part of the toolkit for the future. But for now, the government may want foreign businesses to lobby Washington to lift or at least relax some of the bans on Chinese firms such as Huawei.

After years of grappling with foreign sanctions on Chinese tech firms and officials, the country’s government has finally come up with an Anti-foreign Sanctions Law, passed by the National People’s Congress on June 10. According to the state media, the law provides a framework for blocking unfair foreign sanctions and protecting the sanctioned Chinese companies and individuals from any damage.

However, formulating a law is one story and its implementation another. The latter hinges on more factors than just domestic laws, economy, or national strength. Therefore, Beijing will be cautious in going after businesses with the new legal weapon.

The technological rivalry between the US and China came to the fore with American sanctions against ZTE in 2018 for selling telecommunication equipment with US technology to Iran. ZTE pleaded guilty and settled with the US government by paying a fine of $1.4 billion in 2019. But another Chinese telecom manufacturer, Huawei, is still suffering from US sanctions. Huawei’s global smartphone market share has fallen sharply due to the difficulties faced in sourcing chipsets. Besides, the White House has sanctioned dozens of Chinese government officials for alleged human rights issues.

These sanctions caught the Chinese government off guard. Beijing realized it lacked a systematic toolkit to respond. Since then, China’s commerce ministry has drafted regulations providing weapons to hit back. The most prominent of them is the Unreliable Entity List launched in 2020. The Anti-foreign Sanctions Law provides a legal basis for these administrative regulations. It also gives Chinese firms opportunities to sue foreign businesses that cause any damage to them. However, the passage of the law does not indicate, at least for now, that the Chinese government will take any immediate action to force firms to dismiss US sanctions.

Ever since the debut of the Unreliable Entity List, the state media has been indicating that the government may go after US giants including Qualcomm, Cisco, Boeing and even Apple. The rumor resurfaces whenever the US strengthens its sanctions grip on Chinese firms like Huawei and SMIC, China’s star chip maker. But, on the contrary, Chinese officials, including President Xi Jinping, have been reiterating their support for globalization. Putting any of the aforementioned companies on the sanctions list for executing US sanctions would send too strong a shockwave to foreign businesses in China. Doing so would essentially tell foreign companies to choose a side between the two countries. Despite being the second-largest economy and the biggest consumer market in the world, China is not ready to or even capable of doing that.

China is catching up in terms of technology progression. The government has adopted a slew of industrial policies to bolster domestic research and development. As a result, chip foundries are coming up like bamboo sprouts in the country, but their production capacity is still behind those in South Korea and Taiwan. China still counts on foreign firms to provide essential components such as chipsets.

So, what is the real aim of the Anti-foreign Sanctions Law at present? It should be a bark rather than a bite. Since no one wants to be sued in a Chinese court under the new law, companies may double down on lobbying Washington to lift or at least relax sanctions on Chinese firms. This is also in line with what many top-level Chinese officials have told US businesses — “Play an active role in advancing Sino-US economic ties”.

Will the new law force Washington to soften its stance toward Beijing? The answer is both yes and no. We have observed a pattern where the US always takes a hawkish tone toward China when walking back from the chaotic and vague China bans left by the previous Trump administration. This pattern was visible in the latest US move. Earlier this month, President Biden announced to reverse the executive order banning any “transaction” with Chinese messaging app WeChat and short-video app TikTok. On the same day, the president ordered government agencies to come up with a plan to prevent any “foreign adversary” from obtaining US citizens’ personally identifiable information, health information and genetic information. Though we do not have any detail on the plan, Chinese companies in businesses like social media, cloud computing, medical care and genetic technology may now have second thoughts about their business expansion in the US.

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Archie Zhang

Archie Zhang is a Research Analyst with Counterpoint in Beijing with a primary focus on the mobile phone market in China. Before joining Counterpoint, Archie was an award-winning reporter with world-renowned media including Financial Times where he covered the Chinese economy, vibrant Chinese tech companies and carried out business investigations.

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