After a recent meeting between U.S. Treasury Secretary Janet Yellen and officials in Beijing, China released a statement demanding “practical action” over the issue of sanctions. The implication was that the punitive measures – imposed by the U.S. government on hundreds of Chinese individuals and entities over the past few years – impede any alleviation of the strained relations between the two economic giants.
The statement followed a testy encounter in May 2023 in which Chinese Defense Minister Li Shangfu refused to meet his American counterpart because of sanctions. Clearly, the economic measures are hurting China – prompting not only tough words but also countermeasures to limit their impact.
As a professor of law and an expert on international trade, I study both how the U.S. sanctions China and how China attempts to counter these sanctions. I also analyze whether China’s countermeasures are working.
How sanctions work
Economic sanctions are considered an important foreign policy tool that can be used to influence and change the behavior of countries.
The sanctions on China have been imposed for a myriad of reasons, including as punishment for human rights abuses, espionage activities and supporting Russia’s war efforts in Ukraine. Some sanctions are intended to restrict China’s technological capabilities by limiting access to key tech suppliers.
To be successful, the sanctioning country must have the economic clout to inflict economic damage on the other country and thus force change.
In the case of China, sanctions have harmed producers and consumers in both countries. They have also benefited certain third countries – for example, through trade diversion that replaces Chinese exporters with suppliers from other countries.
Traditionally, sanctions have targeted entire countries. For example, since February 2022 the U.S. has imposed sweeping sanctions against Russia for its invasion of Ukraine. In addition, the U.S. has imposed multiple sanctions against Cuba over the past 65 years in a failed attempt to force regime change.
Economic sanctions can be primary or secondary. With primary sanctions, the U.S., for example, forbids imports of any product from the country being sanctioned. Primary sanctions also bar all U.S. companies from doing any business with the country or entities within it.
In secondary sanctions, the U.S. refuses to engage in business with any company that has a business relationship with the country being sanctioned. In its most extreme form, these sanctions also prohibit conducting business with a company that has a relationship with another company that in turn has a relationship with the sanctioned country.
Targeting individuals and businesses
In recent years, U.S. sanctions against China have become more targeted against specific individuals, products and companies. For example, the Office of Foreign Assets Control of the Treasury Department publishes a list of Specially Designated Nationals against which sanctions apply. Individuals and businesses on the list have their assets blocked, and U.S. citizens are prohibited from dealing with them. There are hundreds of Chinese individuals and businesses on the list, including officials in China’s Hong Kong liaison office and major corporations such as China National Electronic Import-Export Company.
Also, the U.S. Commerce Department, through its Bureau of Industry, implemented export controls in October 2022 on certain exports to China, such as advanced computing equipment and semiconductor parts. These export controls were put in place because of concerns over China’s defense modernization.
In response to the secondary sanctions and the complex enforcement and compliance issues they create for governments and businesses alike, the European Union and countries including Canada and the U.K. have enacted what are called blocking statutes. Blocking statutes typically allow an individual or business to not comply with U.S. laws and require individuals and businesses to notify authorities about any U.S. sanction enforcement measures.
The Chinese government has taken several countermeasures to retaliate against U.S. sanctions in recent years.
In 2020, the Ministry of Commerce in China issued the Unreliable Entity List. A person or company is designated as “unreliable” if Chinese authorities deem them to be harming national security or development interests of China or applying discriminatory measures against a Chinese entity. Punitive measures – such as trade and investment restrictions and fines – may be imposed on them for conduct that is contrary to China’s national interests. So far, two U.S. aerospace and defense companies have been listed as unreliable entities.
In addition, in 2021 the Chinese Ministry of Commerce issued the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures. A Chinese blocking statute, the rules require any Chinese citizen, business or other organization that is restricted or prohibited by U.S. sanctions from engaging in normal economic activities with a third nonsanctioning country to report such matters to the Chinese authorities.
China also enacted the Anti-Foreign Sanctions Law in 2021. This law authorizes China to take action – such as restrictions on visas and who can enter or exit the country – when a foreign country adopts what China sees as discriminatory measures against any Chinese citizen or organization. In addition, censured individuals or businesses can be slapped with a freezing of assets and prevented from doing business in China. Also, a Chinese individual or business can bring a case before Chinese courts and ask for an injunction from or damages for having to comply with foreign sanctions.
Unfortunately, the effectiveness of these countermeasures is unclear. There are no available statistics to determine whether they have mitigated the impact of U.S. sanctions.
Caught in the middle
The U.S. and China are economic superpowers. Imposing sanctions and countersanctions can make it difficult for any foreign country or company that wants to do business in both countries. It is, in effect, asking them to pick sides.
Some individuals and companies within both China and the U.S. may opt to adopt a pragmatic approach to the sanctions and continue to do business either directly or indirectly. But by doing so they risk being fined by U.S. authorities.
Or, they may try to circumvent these sanctions and countersanctions by working with businesses in other countries instead, or find different ways to inoculate themselves from the effects of sanctions. Both the U.S. and China are likely to not push sanctions too hard, so as not to engage in a full-blown trade war.
Workarounds for businesses that trade with both the U.S. and China are critical when the sanctioning country – typically the U.S. – has a monopoly over the particular goods or technology in question. For example, there is no short-term fix for Chinese telecom giant Huawei when the U.S. denies it access to critical semiconductors, since the U.S. has a monopoly on semiconductors. Eventually, semiconductors will be produced in China, but not for several years. In the meantime, Huawei has seen a decline in revenue and shifted money toward more research and development.
The experience of Huawei underscores why Beijing is eager to find a way to counter U.S. sanctions. It seems that at least for now China has settled on a policy of blocking tactics at home while upping rhetoric on the international stage.
by : Bashar Malkawi, Professor of Law, University of Arizona