SHANGHAI – Beijing is bidding to weaponize its legal power over foreign-invested companies operating in China with a new bylaw hastily announced by the Commerce Ministry over the weekend. A Huawei challenge to TSMC’s adherence to a US-imposed chip ban could be the regulation’s first high-profile legal test.
Effective from Saturday, the new regulation – touted as Beijing’s latest imperative to counter the “extraterritorial excesses” of United States’ bans targeting Chinese firms – will make third-party, non-American entities in China punishable if they adhere to Washington’s punitive demands such as stopping supplies of goods or services.
The new bylaw, titled Regulations to Stifle Improper Extraterritorial Application of Foreign Laws and Measures, was promulgated by newly-installed Commerce Minister Wang Wentao. Analysts say it may have less bite than a formal piece of legislation tabled and stamped by the Chinese parliament.
Still, it states in the first article that its drafting and implementation are guided by Beijing’s existing legal regime safeguarding national security, in particular Chinese laws that in broad terms criminalize acts by foreign entities to impinge on the rights and interests of Chinese individuals and organizations.
State news agency Xinhua said in an op-ed that the Donald Trump administration’s fixation on national security in ordering bans on Chinese tech and other firms such as Huawei had inspired Beijing to cite the same reason to justify its latest countermeasure.
Turning the tables
The bylaw’s Article 2 states that anyone slapping improper limits or restrictions on Chinese individuals and companies’ business and trade cooperation with partners from a third country may be pursued.
One inference based on the article can be that the US bans that forbid TSMC from shipping its chips made with US technology or know-how to Huawei will be covered by the new Chinese by-law and that TSMC may even fall afoul of it.
“The new regulation recognizes Washington’s jurisdiction over American firms, as it can ban them from doing business with Chinese partners just like Beijing can do the same to Chinese entities,” said an associate professor with Peking University’s School of Governance who requested not to be named due to the sensitivity of the issue.
“But the new message is clear: Washington does not have the extraterritorial power to ban any third-country companies from trading with China and Beijing will not recognize such ‘long-arm jurisdiction.’ And, non-American companies may be punished under the new regulation if their compliance with US bans inflicts losses on their Chinese buyers and partners,” the academic said.
Articles 6 to 9 of the bylaw, regarding related reporting, investigation and the adjudication processes, note that the Commerce Ministry and other authorities should look into the different circumstances of each case and complaints lodged by Chinese firms to determine if Beijing’s national security and interests – as well as the rights and commercial profits of Chinese entities involved – are undermined by any foreign laws or bans.
If a case is established, the Commerce Ministry should issue orders to a third-party foreign entity concerned to stop the execution of any foreign bans and it must compensate for the losses incurred to a Chinese partner.
Chinese firms also have the right to sue a foreign company to claw back losses, according to the articles. There is also an enforcement mechanism for Chinese courts to step in to recover losses.
Still, details are lacking about how the ministry will investigate and verify complaints, including factors and evidence to be considered, and if there will be a channel for a foreign firm to appeal against any rulings.
Taiwanese, Japanese, South Korean and other foreign companies that run large manufacturing facilities in China but also rely on American technologies for their products now have to navigate carefully through the Beijing-Washington tech war with potential penalties from both sides.
There was talk on Chinese social media platforms after the bylaw was gazetted that Huawei would soon mount a legal battle against TSMC to recover lost sales after the latter stopped supplying chips in September 2020.
TSMC is yet to respond to emailed inquiries on the bylaw’s potential impact on its operations in China, as well as its broader ties with Huawei and Beijing. The Taiwanese chipmaker is the world’s solo semiconductor foundry that ships cutting-edge chips to Apple and, before US bans kicked in, to Huawei.
The company runs plants in eastern China’s Shanghai and Nanjing that churn out medium-range chips. TSMC announced bold plans at the end of 2020 to further ratchet up output from its two Chinese bases to tap soaring demand and its net revenue from China accounted for 22% of its total in the third quarter of 2020.
TSMC noted in a previous statement issued after US bans against Huawei took effect that it would strive to comply with laws at home as well as those in jurisdictions that it operated.
It is also believed that the National People’s Congress, whose deputies will meet for the annual session in Beijing in early March, may deliberate on legislative proposals to better protect domestic firms.
Wang, the new Commerce Minister appointed by the NPC on December 26, told reporters that foreign firms would be legally bound to uphold their contracts with Chinese partners.
The bylaw is already causing jitters among foreign-invested companies in China. Several foreign chambers of commerce are said to have expressed disappointment since the Commerce Ministry had not sought their views before drafting and announcing the regulation.
Many foreign firms, especially those in the tech sector, are still browsing through the text of the bylaw to try to work out Beijing’s intent and are seeking advice from their legal consultants.
The European Chamber of Commerce Beijing said in 2020 that other international companies would not choose sides when Beijing and Washington spar on various trade and tech fronts, and that Beijing must continue to level the playing field for all businesses.
There are also concerns that future Chinese laws with catch-all provisions may put onerous legal duties on foreign firms as Beijing seeks to protect Chinese entities and that the extralegal vagaries could be applied arbitrarily.
On Sunday, Chinese Commerce Ministry spokesperson Gao Feng hit back at accusations that the bylaw was tantamount to Beijing’s version of “long-arm jurisdiction”, stressing it would only apply to deals and cooperation between Chinese and foreign firms and that no particular counties would be targeted or singled out.
The ministry stressed that the new bylaw was in line with United Nations solutions aimed at paring pack the extraterritorial duties foisted upon third-party countries and entities.