On January 9, 2021, China's Ministry of Commerce ("MOFCOM") issued its first order of the year, the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (the "Rules"), which are immediately effective as of the date of promulgation. These Rules are aimed to counteract the effects of US secondary sanctions, and parallels are inevitably being made with the EU's Blocking Statute1. This article will point out the five aspects to know about the Rules.

I. What will be counteracted under the Rules?

The Rules aim to block the unjustified extra-territorial application, in China and to Chinese persons and entities, of certain foreign legislation and measures. According to Article 2 of the Rules, the foreign legislation or measures would be blocked if the application was determined to unjustifiably prohibit or restrict the citizens, legal persons or other organizations of China (hereinafter referred as "Chinese entities") from engaging in normal economic, trade and related activities with a third state (or region) or its citizens, legal persons or other organizations. Please see Part III below for the detailed factors for the authority to determine whether the application is unjustifiable. (See Part III below)

The measures do not seek to block the effects of international treaties and agreements to which China is a party2, such as the sanctions on Iran and North Korea imposed by the United Nations Security Council to prevent nuclear proliferation. It is also consistent with the commitment of China to fulfill its international obligations, and the foreign policy and the basic principles of international relations held by China.

The key point to note is that the Rules are obviously targeting principally the Secondary Sanctions imposed by the US government. The Secondary Sanctions are found in the specific unilateral US economic sanction laws and regulation. However, the effect of the Secondary Sanctions is that non-US entities will be targeted (or suffer other consequences) if they do not comply with the requirements imposed by the US government. The aim of such sanctions is to prevent non-US entities from transacting with the specific targets in a third country. Those non-US entities who do not comply with the sanctions, may themselves be designated (i.e. added to the Specially Designated Nationals and Blocked Persons list ("SDN List")) or suffer other restrictions. The US laws and regulations containing secondary sanctions are complicated, most of which focus on Iran, Cuba, North Korea and Russia, and also cover certain industries in other states or territories. They are a heavy burden for companies doing business globally. The actual imposition of secondary sanctions measures is not rare, especially on Chinese entities. For example, on January 5, 2021, two Chinese companies were added to SDN List as they have been determined (by US authorities) to support the Iranian metal industry. In addition, since US reimposed comprehensive Iran Sanctions, we can see it has used secondary sanctions to add many Chinese oil transportation companies and vessels to SDN List with the objective of deterring Chinese companies from purchasing oil from Iran. The new MOFCOM Rules are aimed to counteract the application of secondary sanctions.

US export control-related laws may also be a target of the Rules. For example, the US Export Administration Regulations ("EAR") can also impose extra-territorial restrictions on activities of Chinese entities which involve a third state, including but not limited to the re-export, deemed export in R&D activities and communications, and intermediary services, such as transporting, freight forwarding, warehousing, customs declaring, etc.

The Rules will be unlikely to affect other third country counterparties who follow the extra-territorial measure. If an entity in a third state follows the foreign laws such as US laws to suspend or terminate the normal transactions with Chinese entities, it is hard to apply the Rules to counteract such an application in a third state. In response, the Provision on Unreliable Entity List will become a more proper alternative measure for Chinese entities to report the abnormal suspension of transactions by the counterparties in a third state.

II. Who is in charge of the counteracting system?

According to Article 4 of the Rules, China will set up a new working mechanism to counteract the unjustified application of foreign legislation and measures. This working mechanism will involve the MOFCOM and other related central departments, and the MOFCOM will take the leading role in the working mechanism.

It is foreseeable that the MOFCOM will become the most significant authority to implement trade control and economic sanctions regime in China and response to the extra-territorial application of foreign legislations and measures. The MOFCOM is not only responsible for leading the working mechanism under the Rules, but also holds the office for another working mechanism to implement Unreliable Entity List.3 Meanwhile, the MOFCOM is also an important export control administration authority under the Export Control Law4.

III. How is the counteracting mechanism functioning?

MOFCOM will issue an official prohibition order to counteract the extra-territorial application of specified foreign legislation and other measures. Before the issuance of a prohibition order, the working mechanism shall assess to confirm whether unjustified extra-territorial application has arisen and if so, the working mechanism may then decide that MOFCOM shall issue a prohibition order. Article 6 of the Rules provides the factors to consider in the assessment by the working mechanism:

  • whether international law or the basic principles of international relations are violated;
  • potential impact on China's national sovereignty, security and development interests;
  • potential impact on the legitimate rights and interests of the citizens, legal persons or other organizations of China;
  • other factors that shall be taken into account.

Furthermore, it is on the discretion of the working mechanism to suspend or withdraw the prohibition order. Similar to the European Union Blocking Statute, the Rules stipulate exemption application with the obligation to follow the prohibition orders, and provide the right of judicial relief for Chinese entities in addition to the administration liability where there is a violation of the prohibition order.

IV. What are the rights and obligations for the companies doing business in China?

  • Obligation to report promptly Where a citizen, legal person or other organization of China is prohibited or restricted by foreign legislation and other measures from engaging in normal economic, trade and related activities, he/it must report such matters to MOFCOM within 30 days. Chinese entities which fail to report promptly will be given a warning, an order to rectify or even a fine concurrently. The working mechanism is responsible for the decision on whether the foreign legislation or other measures are unjustified. Therefore, it is advised to report promptly when companies come across any restriction on normal economic and trade activities due to the foreign legislation and other measures.
  • Request for confidential privileges The Chinese entities shall request the MOFCOM to keep confidential of the matters reported. Otherwise, the MOFCOM does not have the duty of confidentiality. However, if the entities make such a request, the MOFCOM and its staffs shall keep confidentiality. The failure to keep confidentiality will result in an administrative punishment on the MOFCOM staffs and criminal liabilities where a crime is constituted.
  • Obligation to comply with the prohibition order All the Chinese entities shall strictly comply with the prohibition order issued by the MOFCOM. The relevant foreign legislation and other measures within the scope of the prohibition order shall not be accepted, executed, or observed. Further clarification is needed on the compliance obligation in the scenario where Chinese entities choose not to deal with entities in a third state due to their own legitimate interests rather than foreign legislation and other measures. If there are specific difficulties or situations for Chinese entities to follow the prohibition order, they can submit a written application to the MOFCOM for an exemption. In the lack of an exemption, any entities who fail to comply with the prohibition order will be warned, ordered to rectify or fined concurrently according to Article 13 of the Rules.
  • Rights of official guidance and services According to Article 10 of the Rules, Chinese entities could seek official guidance and services from the working mechanism in response to unjustified extra-territorial application of foreign legislation and other measures.
  • Possibilities to necessary support If Chinese entities comply with the prohibition order issued by MOFCOM, they may unavoidably violate the foreign legislations and measures and may be punished severely by the foreign authority. Article 11 provides a backup to the Chinese entities which suffers significant losses due to the compliance with the prohibition order. The Chinese government may provide necessary support for those Chinese entities based on specific circumstances. Though it is not clear what are the conditions to grant and what kind of necessary support will be granted, the Rules indicates that the dilemma of private entities is fully evaluated and introduces the necessary support aimed to address the concerns of Chinese entities to comply with the prohibition orders.
  • Judicial Relief where the legitimate rights and interests are infringed If the extra-territorial application of foreign legislation and measures within the scope of a prohibition order has infringed upon the legitimate rights and interests of Chinese entities, they can seek the judicial relief in China for damages and can apply for enforcement of the judicial relief granted by Chinese courts. The aforesaid infringement circumstances are as follows: (1) in absence of exemption, any entity complies with the foreign legislation and other measures within the scope of a prohibition order and thus infringes the legitimate rights and interests of Chinese entities; (2) any judgment or ruling made in accordance with the foreign legislation within the scope of a prohibition order causes losses to Chinese entities.

V. Who is affected?

Chinese entities are the main duty bearer under the Rules. It is worth mentioning that the branches of Multi-National Corporations ("MNCs") located in China are also covered by the definition of Chinese entities and thus are obligated to report such matters and comply with the prohibition orders issued by the MOFCOM.  These Rules may pose a challenge for the MNCs doing business in China: in some cases they may have to make the choice between compliance with the US law and the Chinese law. In this regard, it is significant for the MNCs to pay attention to the exemption application. When the Chinese branch of MNCs are confronted such prohibition orders, it could submit the exemption application to MOFCOM with the reasons and scopes of exemption as soon as possible to catch s breathing space. The MOFCOM shall make the decisions on whether to approve the exemption application or not within 30 days from the date of acceptance of the application, and in case of emergency shall make in a timely manner, according to Article 8 of the Rules.

Businesses, and especially MNCs, which have commitments to comply with US sanctions as a standard term in contracts may need to reconsider those terms when doing business with Chinese counterparties.

Looking forward

The counter-measures at the state-level raise much attention of the public. Article 12 provides Chinese government with "necessary counter-measures". It is similar with the Article 48 of the Export Control Law which stipulates that China could take reciprocal measures against the states or territories which abuse its export control measures to endanger the Chinese national security and interests. The declaration function of these articles to take counter-measures at the state-level may be more prominent, considering the obvious political sensitivities and complicated diplomatic relations.

In the past two or more years, the US government has continuously utilized the extraterritorial application of its domestic laws and measures, targeting Chinese companies. Chinese companies were put in an awkward position in facing the law enforcement storm by the US. Also, in the near future, the resignation of Donald Trump may not mean the end of superpower games. In this regard, in the past six months, China passed laws and regulations such as the Export Control Law, the Provisions on the Unreliable Entity List and the Rules this time. How to implement these laws and regulations will become the focus in the following stage.

The Export Control Law, the regulations enacted by MOFCOM including the Rules and the Provisions on the Unreliable Entity List have established a set of operational mechanisms. It is expected that these mechanisms will function quickly under MOFCOM and other authorities to help the state and companies better cope with the complex and fluctuating international situation.

International Response to US Secondary Sanctions

Since they were first deployed, US secondary sanctions have been controversial.  The EU's Blocking Statute was first adopted in 1996, although at the time a political solution was found such that the Blocking Statute was little used.  However since then, the US has come to discover the effectiveness of secondary sanctions in achieving its policy aims, and has deployed them more widely, especially in recent years.  The EU's reassertion of its Blocking Regulation in 2018 demonstrated both its opposition to the extra-territorial nature of the US measures (which were largely undermining the EU and Chinese support for the JCPOA with Iran), and the difficulty in effectively counteracting them in a globalised world where many businesses regard US economic access as essential and a US designation as a major stigma.  The UK has chosen to retain the Blocking Statute, without substantive changes, as part of its sanctions framework since leaving the EU.

These MOFCOM Rules have, on their face, similarities with the EU and UK Blocking Statutes – a reporting obligation and a prohibition on complying with the US extra-territorial restrictions, potentially leaving business to make a choice between respecting the US measure or the Chinese prohibition.  However the difference may come in the operational approach to them:  in the EU and UK, the practical enforcement of the Blocking Statute remains very limited, such that businesses have generally seen the US secondary sanctions threat as the greater risk;  if MOFCOM takes a more assertive approach the risk evaluation for affected businesses may be different.


1. Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom

2. See Articles 3 and 15 of the Rules

3. According to Article 4 of the Provisions on the Unreliable Entity List, the State establishes a working mechanism composed of relevant central departments to take charge of organization and implementation of the Unreliable Entity List System. The office of the working mechanism is located at the MOFCOM.

4. According to the Export Control Law, it is likely that the Central Military Commission will be responsible for the export control tasks of military items. Regarding the dual-use items and items under the catch-all provision, we understand, the MOFCOM is the main administration authority. It is also reflected in the various export control lists enacted in late 2020 which is led by the MOFCOM in conjunction with the Customs and other departments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.