The downward spiral in United States-China relations has taken a new legal twist that threatens to further decouple the world’s two largest economies.
Not only is Beijing determined to frame this confrontation as one in which the US is the aggressor and China is merely defending itself, but in doing so it is developing and deploying the same tools that Washington has deployed.
This mirror imaging threatens to lock in a reflexive tit-for-tat dynamic that ensures the relationship deteriorates further.
China is aggrieved by a lengthening list of US actions intended to punish the country, its companies, or its leaders. (Chinese anger is also being directed elsewhere in the Western world, with Australia and the European Union also targeted for retribution.)
Beijing is especially galled by America’s increasing resort to sanctions against Chinese entities and demands that third parties respect and enforce them worldwide. There is also irritation with US laws that mandate disclosure of information that China feels is best held close, such as audits of companies that aim to list on US stock exchanges.
Two years ago, China started to devise legal countermeasures it could use to target companies that respect those laws and sanctions. Such moves were initially more symbolic than substantive, but Beijing has become more serious as the US-China relationship has deteriorated.
Beijing first said that it would create an “unreliable entities list,” like that of the US Commerce Department, in order to:
safeguard national sovereignty, security and development interests, maintain a fair and free international economic and trade order, and protect the legitimate rights and interests of Chinese enterprises, other organizations or individuals.
After first brandishing that stick in May 2019, however, China has not used it. The Ministry of Commerce never put any names on the list, although the government did hit think tanks, non-governmental organizations and individuals – such as US Senators Marco Rubio and Ted Cruz and former US Secretary of State Mike Pompeo – with visa bans, or forbade Chinese companies from doing business with them.
Failure to use that instrument didn’t stop the Ministry of Commerce from wanting to expand its toolbox. In January this year, it announced “Rules on Blocking Unjustified Extraterritorial Application of Foreign Legislation and Other Measures,” which are designed to “block” foreign extraterritorial sanctions and export controls targeting Chinese actors.
Interestingly, the rules target the sanctions and export control measures that impact third countries, not US measures that block trade between the US and China. In other words, Beijing is going after non-US countries and companies that enforce US sanctions, hoping to divide those so-called “like-minded” allies.
However, after the US announced in June that it would put certain Chinese solar panel manufacturers on its sanctions lists because of allegations of use of forced labor, the Chinese Ministry of Commerce said it would take “necessary measures” to protect those companies’ rights and interests.
Regulatory authority is good – but legislation is better since it provides a firmer legal foundation for action. That reasoning spurred China to pass an anti-foreign sanctions bill that empowers the government to seize assets from and deny visas to individuals who formulate or implement US anti-China sanctions.
It also allows individuals and companies to sue “individuals and organizations” in Chinese courts for compensation of losses resulting from “discriminatory restrictive measures.”
The law effectively codifies the measures that the Ministry of Commerce had taken, providing a legal basis for administrative actions taken by the Chinese government. But its intent is simple: it authorizes both the government and private actors to sue companies that follow foreign laws that ban them from doing business with China.
Moreover, this month the Cyberspace Administration of China ordered ride-sharing company Didi Chuxing’s be removed from local mobile app stores because it had violated the recently passed Data Security Law, which regulates the collection and use of personal data.
The call came hours before Didi went public on the New York Stock Exchange, and other companies were quickly ensnared in the enforcement action. The move was forced by Didi’s initial public offering (IPO), which the authorities claimed would give foreigners access to the company’s databases by virtue of their shareholdings.
That would violate the law’s requirement that the Chinese government approve the release of any China-based data to foreign judicial or law enforcement agencies.
Wang Jiangyu, a law professor at the City University of Hong Kong, points to the EU “blocking statute” designed to counter US sanctions to justify China’s own law.
And while Chinese officials and experts insist it will only be used defensively when other countries apply sanctions first, it’s still “a warning to the US: China will not endure this treatment as easily as it once did,” says Wei Jianguo, a former commerce vice-minister.
The prospect of foreigners getting their hands on users’ data isn’t the only thing that irks Chinese regulators.
Chinese officials were outraged in December last year when the US passed the Holding Foreign Companies Accountable Act, legislation that requires companies listing on US exchanges to provide audits from their Chinese operations – access that is banned by the Chinese government – and to prove that they are not controlled by any foreign government.
While the two governments have negotiated this issue for years, resolution assumed new urgency last year following revelations of massive fraud at Luckin Coffee, which resulted in the company’s delisting from the New York Stock Exchange after its share price imploded.
US punters would have been unwilling to invest in the company had they known that it had intentionally fabricated more than $300 million in retail sales, knowledge that they were denied because of uncooperative Chinese regulators.
These developments threaten to roil the bilateral relationship in new and unprecedented ways. Calls by foreign authorities for access to information that Beijing considers sensitive have prompted a crackdown in China on “illegal securities activities.” The campaign will tighten regulations for companies listing abroad and focus on cross-border transfers of data.
If the government follows through, that project will deflate if not crush the international ambitions of China’s most promising companies, since every cutting-edge enterprise in the digital economy is making its money from data.
Those losses could be significant: 34 Chinese companies raised $12.4 billion in IPOs on the New York Stock Exchange in the first half of 2021. Many in Beijing would prefer to see those offerings move to Hong Kong.
It isn’t just entrepreneurs eager to tap international financial markets who are being hurt. Any business with global ambitions is going to be squeezed.
The tension is acute for auditing companies – they can’t certify accounts for multinational clients without access to books in China and overseas. As Daniel Goezner, a member of the Public Company Accounting Oversight Board, the US accounting regulator, explains, “The audit firms are caught in the middle of two warring jurisdictions.”
Every company doing business in both jurisdictions could face the choice between obeying US or Chinese law. Complying with US sanctions will expose those operations, their executives and even their families to legal jeopardy in China.
Failing to do so, risks equally strong penalties in the US – although families are not going to be targeted unless they actually work for the company.
As a result, says Greg Gilligan, chairman of the American Chamber of Commerce in China, “This new law presents potentially irreconcilable compliance problems for foreign companies with respect to a conflict of law between foreign jurisdictions and China.”
He and his colleagues can only hope that the US and China “do not force our companies to only choose one side or the other.”
Foreign companies worry that they are about to become “sacrificial pawns in a game of political chess,” said Joerg Wuttke, president of the European Union Chamber of Commerce.
If businesses are sweating, hardliners in both the US and China must be gleeful as the wedge between their two countries goes deeper.
Brad Glosserman is deputy director of and visiting professor at the Center for Rule-Making Strategies at Tama University in Tokyo as well as senior advisor (nonresident) at Pacific Forum in Honolulu. He is the author of Peak Japan: The End of Great Ambitions.