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Last month, China passed a law to counter foreign sanctions and the so-called “power politics” of some Western countries. Foreign businesses with suppliers in China may face more scrutiny from the government for carrying out due diligence in the Asian powerhouse, leaving them tangled in a wider geopolitical row.

China’s top legislature, the National People’s Congress, passed an anti-sanctions law on June 10, sparking concerns from the global business community about how to manage operations and suppliers in China.

The law aims to stop foreign entities or individuals from carrying out “discriminatory measures” against Chinese companies and people. Consequences of being put on the anti-sanctions list include expulsion from China, asset freezes, and restrictions on doing business with entities or individuals in the country.

“The new anti-sanctions law is China’s most wide-ranging legal tool designed to retaliate against countries perceived to be interfering in China’s internal affairs,” reads a report by Verisk Maplecroft, a global risk analytics company.

“Aimed particularly at the US and its allies, the law intends to show that Beijing is willing to sacrifice the interests of foreign business to secure its sovereignty and security.”

The report adds that foreign corporates and financial institutions that comply with the US’ or their governments’ sanctions against China, will likely face increasing scrutiny from Beijing, both locally and abroad.

Virginia Newman, counsel at law firm Miller & Chevalier, tells GTR that if companies are found to be helping to enforce what China views as unjustified application of foreign law in its country, they could get caught in the “crosshairs”.

“Foreign companies need to do all sorts of due diligence to make sure that they are complying with US law while operating in China,” she says, adding: “Not being able to do that puts companies in a situation where they are essentially having to choose between complying with US or Chinese law.”

 

Unnecessary action or fair game?

Beijing’s new law comes in response to the US and Europe ramping up pressure on the Asian trading giant by adding more individuals and entities in the country to sanctions lists.

Earlier in June, US President Joe Biden signed an executive order banning American investors from financial interests in 59 Chinese entities over concerns of ties to China’s military and surveillance activities.

In March, the UK, EU, US and Canada imposed sanctions “against the perpetrators of gross human rights violations taking place against Uyghurs and other minorities in Xinjiang”, according to the UK government. The measures target four state officials and the Public Security Bureau of the Xinjiang Production and Construction Corps, a state organisation responsible for security and policing.

At the start of the year, US Customs and Border Protection issued withhold release orders for shipments of cotton and tomatoes from Xinjiang – a region in northwest China embroiled in allegations of human rights abuses. The orders allow US officials to detain imports based on suspicions of forced labour involvement.

China has repeatedly denied any wrongdoing regarding Xinjiang.

It has been reported that Beijing views the anti-sanctions list as a countermeasure against what it believes are unfair sanctions imposed by the West. As state media outlet Global Times puts it, the law “is a defensive tool to counter foreign bullies”.

Foreign ministry spokesperson Wang Wenbin said during a regular press conference last month: “The law on countering foreign sanctions that has been adopted accommodates input from various sectors, reflects the will of the Chinese people and is consistent with international law and basic norms of international relations.

“I want to stress that China always welcomes and supports foreign companies doing business and pursuing co-operation in China and protects their rights and interests in accordance with law,” he added.

 

‘Not very concrete’

One aspect the law lacks is clarity; it does not explain the meaning of “discriminatory measures” against Chinese entities and individuals. By choosing to err on the side of vague, authorities could potentially apply the law in a wide range of cases and make it difficult for foreign companies to assess and prevent legal risks.

Miller & Chevalier’s Newman says: “This law, as a lot of Chinese laws and regulations are, is not very concrete in terms of the types of measures that might be taken against companies.

“I think that the immediate effect is causing a choke in terms of carrying out normal operations to make sure companies are complying with US law as they prepare to import.”

China has previously taken aim at foreign businesses for what it considers to be meddling in its affairs. “H&M is an enterprise, so it should carry out its own business activities instead of politicising its economic behaviour,” said Xu Guixiang, a foreign policy spokesperson, in a March press conference after the fashion retailer said it would no longer source cotton from Xinjiang.

Newman says that when it comes to shifting supply chains out of China and changing sourcing because of the anti-sanctions list, she “could see that happening”. However, she stresses much will hinge on how China enforces the law.

She adds that some companies have already began shifting supply chains outside of China because of concerns about Xinjiang.

Increasing pressure from regulators over the region as well as the potential for reputational damage has weighed on businesses.

“Other companies may not be able to move from China and could stop selling products in the US. They may look to other markets, depending on how marketable their products are. One industry that comes to mind is solar panels. So much of the world’s component materials, polysilicon for example, are made in China and that is a hot market globally,” says Newman.

Late last month, US Customs and Border Protection issued a withhold release order against Hoshine Silicon Industry Co Ltd, a Xinjiang-based company. Shipments from Hoshine containing silica-based products, used to make parts of solar panels, will now be immediately detained upon entering the US.

The solar industry is particularly vulnerable to forced labour in Xinjiang, a region that dominates the global supply of solar-grade polysilicon, stated a May report, titled In Broad Daylight, by Sheffield Hallam University.

East Asia has been leading the world’s post-Covid trade recovery with strong export performances as economies capitalised on rising global demand for pandemic-related goods such as masks. However, that progress threatens being scuppered as the geopolitical landscape becomes increasingly fractious.