China Issues New Rules In Response to U.S. Sanctions. What Could Come Next.

By Reshma Kapadia

Jan. 9, 2021 4:31 pm ET

China unveiled new rules on Saturday, pushing back against a spate of U.S. executive orders that have blacklisted Chinese companies and restricted their access to U.S. technologies. It’s the latest reminder for investors that U.S.-China tensions are here to stay.

China’s Ministry of Commerce unveiled an order Saturday for “counteracting unjustified extraterritorial application of foreign laws.” The rules establish a vague and open-ended regime aimed at dissuading the U.S. and other foreign governments from adopting unilateral sanctions or applying them against Chinese entities and individuals, Lester Ross, partner-in-charge of law firm WilmerHale’s Beijing office, told Barron’s via email.

The order from the Ministry of Commerce would let Chinese companies sue in court for damages and to overturn foreign judgments, said Henry Gao, an associate professor of law at Singapore Management University who focuses on China and trade issues.

But large Chinese companies or those with global aspirations may be reluctant to bring complaints against foreign counterparts under the rules, Ross notes. Gao concurs, adding that, for now, it may just be aimed at creating a “balance of terror” to deter other U.S. moves.

The order comes amid a myriad of China-related measures and the increased scope of sanctions under the Trump administration, which has increasingly viewed China not just as a strategic rival, but also as a security threat.

The U.S. has imposed technology restrictions that have curtailed the growth of 5G gear maker Huawei Technologies, and issued a November executive order that bans U.S. investment in securities of companies the Pentagon says are affiliated with the Chinese military. That order led to the delisting of three companies, including China Mobile (CHL), by the New York Stock Exchange. And The Wall Street Journal recently reported discussions within the Trump administration to try to add two of China’s most valuable and most-widely held companies— Alibaba Group (BABA) and Tencent Holdings (700. HongKong)—to the Pentagon’s list.

China’s countermove has the potential to become a major escalation in its response to U.S. measures, but it depends on how the order is rolled out and enforced, said Paul Triolo, head of Eurasia Group’s geo-technology practice, via email. “It is clearly a shot across the bow for the Biden administration, and is part of a broader policy framework Beijing is rolling out to protect its domestic champions such as Huawei, that have been the target of U.S. government actions, some unprecedently extraterritorial.”

So far, policy watchers have described China’s counter-response to U.S. moves as relatively restrained. For example, China has talked about its own blacklist—an unreliable entities list—but it hasn’t yet named U.S. companies to it. China also recently outlined a clearer legal foundation and procedures for the national security review of foreign investments in China—much like the beefed up Committee on Foreign Investments in the U.S. (Cfius) that has contributed to a sharp decline in Chinese investment in the U.S. in recent years.

The Biden administration is expected to continue a tough stance on China but one that uses a more multilateral approach. While the fallout for investors will come down to the details and enforcement, it adds to the growing view that the U.S. and China will try to reduce their reliance on each other—and portfolios should begin to recalibrate for a less global world.