Background
During the second weekend of 2021, The Ministry of Commerce of the People’s Republic of China (“MOFCOM”) published, the first of its kind, the “Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures” (the “Rules”), effective immediately.
Challenges Being Faced by Chinese Companies Globally
These new rules come at a time when Chinese companies have been facing many challenges globally, especially in the US. We have listed below a few instances of restraints Chinese companies have been facing globally.
In 2012, the U.S. banned companies from using Huawei networking equipment. In May 2019, following an executive order from Outgoing US President Donald Trump, Huawei was added to the U.S. Department of Commerce’s Bureau of Industry and Security Entity List effectively banning Huawei from US communications networks. A year later, Trump extended the order until 2021. Furthermore, apart from the U.S., the U.K. and Sweden have also imposed similar bans on Huawei.
Similarly, in August 2020, Donald Trump issued another executive order attempting to force ByteDance to sell its U.S. division of its popular app TikTok. In early January 2020, the New York Stock Exchange issued its decision to delist three Chinese telecom companies namely, China Mobile, China Telecom and China Unicom Hong Kong. The shares of Alibaba and Tencent fell after a Wall Street Journal report said the Trump administration could be about to add the Chinese tech giants to a U.S. blacklist.
Key Elements of the Rules
As we will examine further and as stated by the Ministry of Commerce, the Rules have been released in order to “defend national interests, avoid or mitigate the adverse impact on Chinese enterprises, and maintain the normal international economic and trade order”.
Under the Rules, a Chinese Person is required to report to MOFCOM any unjustified foreign legislations and sanctions within 30 days. MOFCOM in consultation with the National Development and Reform Commission (NDRC) will determine if such legislations are “unjustified” on the basis of certain conditions stipulated under the Rules.
Upon a determination of such legislations being “unjustified” the MOFCOM can issue a prohibition order (injunction), stating that such foreign legislation and other measures “improperly prohibit or restrict” Chinese individuals, companies, and institutions from conducting normal economic, trade, and related activities with parties from the third countries and for the affected party to not accept, execute or observe the foreign legislation/measure.
In the event of any party violating the injunction issued by MOFCOM, the infringed Chinese citizens/companies may subsequently seek a claim in the Chinese courts for compensation against the violator. Additionally, it is important to note that should any Chinese citizen/company suffer from any judgment or arbitration pursuant to the unjustified foreign laws, they are entitled to claim for compensation within a Chinese court against the party who received profits based on such judgment or arbitration.
For companies/individuals seriously harmed due to compliance with unjustified foreign laws, the Chinese government will provide necessary support on a case by case basis (e.g. Guidance in their particular case, access to any Governmental services from the relevant department) or pursue (as yet undefined) countermeasures.
International Comparison – Areas of Improvement
In 1996, the European Union (“EU”) promulgated the Council Regulation (EC) No. 2271/96 in response to EU sanctions on Cuba, which was updated in 2018 in response to sanctions on Iran. These Rules appear to have been derived from this regulation in the EU.
However, compared with the regulation in EU, we can assess that the Rules still have areas which may be improved upon, most notably in the areas of:
1) Confidentiality
In the E.U., the competent authority (separately established by different EU members) which examine the foreign laws has the obligation to positively retain the confidentiality of obtained information. However, the Rules merely mention that the authority will retain the confidentiality of the information obtained when the reporting party requests.
2) Exemption
In regards to exemption applications, the E.U. has specifically regulated the reasons for an exemption (Violation of foreign laws will materially harm the interests of the applicant or the E.U.). According to the Rules, the basis for the reason for an exemption is not yet clear.
3) Reimbursement
The E.U. has clearly regulated the scope, subject, method and applicable laws in regards to compensation. In China, the Rules only outlines that the affected party can claim to the courts for compensation, which still requires more clarified details.
Conclusion
The promulgation of the Rules is a milestone for China to provide its national authorities the relevant discretion to protect its own justified commercial interests globally.
While many countries in the past such as the US, Canada, Mexico and EU have passed similar sanctions, the impact of these Rules in relation to WTO’s policy on free trade will have to be analaysed. Further, it is important to outline that the Rules may force multinational companies to choose between compliance regimes, with multinational firms wondering whether they should choose sides. The spread of Covid-19 in China, had a serious impact on the supply chain of many multinational companies which is leading to a trend of decoupling of economic ties with China. At these testing times, Rules of this nature, may further impact the dependence of multinational companies on China.
On these point, we will continue monitoring the implementation of the Rules in practice as well as China’s efforts to facilitate and improve the international business environment.
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