China's New Laws Ensnare Western Companies in Legal Bind

China's expanding economic security toolkit is countering Western trade and financial restrictions, putting foreign companies in a bind between complying with Western sanctions and facing legal exposure in China.

China's New Laws Ensnare Western Companies in Legal Bind

China's economic security toolkit has been steadily expanding since 2020 to counter Western trade and financial restrictions. This shift marks a significant change in the country's approach, as Beijing builds mechanisms to resist Western extraterritoriality and replicate it with extraterritorial regulation of its own.

Beijing's countermeasures include the Export Control Law (2020), the Unreliable Entity List (2020), the Anti-Foreign Sanctions Law (2021), the Blocking Rules (2021), the Counter-Extraterritorial Regulation (2026), and the Supply Chain Security Provisions (2026). These instruments are designed to penalize companies and individuals for complying with foreign sanctions and export controls.

The Anti-Foreign Sanctions Law is central to this shift. Article 12 of the law gives Chinese individuals and entities a private right to sue another person or company that implements, or assists in implementing, foreign restrictive measures that harm Chinese interests. This allows Chinese counterparties to sue when foreign firms refuse to perform contractual obligations on the basis of sanctions or export-control risks.

The first reported case involving Article 12 arose before the Nanjing Maritime Court in 2024. A Chinese offshore engineering contractor was listed by a foreign jurisdiction, and its Swiss counterparty withheld almost $12 million in outstanding payments under a shipbuilding-related subcontract, citing sanctions concerns. The Chinese company obtained a preservation order from the court, arresting the vessel involved while allowing construction on that vessel to continue.

A second case before the Shanghai Maritime Court strengthened this trend. In 2025, the court ruled against a Singaporean shipping firm that had refused to deliver electronic goods to a Hong Kong manufacturer after learning that the company was on the U.S. entity list. The court held that the Singaporean company's refusal to unload amounted to the implementation of "foreign discriminatory restrictive measures," enabling the Hong Kong party to invoke Article 12.

Beijing has also begun to activate rules that block Chinese entities from complying with a range of foreign laws. Officially titled Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, this regime was inspired by the European Union's blocking statute. The EU statute only prohibits compliance with the specific U.S. laws listed in its annex, whereas China's Blocking Rules are much broader in scope.

In May, Beijing triggered the Blocking Rules for the first time when it prohibited five Chinese petrochemical companies from complying with U.S. sanctions for their alleged purchases of Iranian oil. The move was carefully calibrated, with the targeted teapot refineries having limited exposure to the U.S. financial system and largely operating domestically.

The Counter-Extraterritorial Regulation marks another escalation. Unlike the Blocking Rules, which are primarily designed to shield Chinese companies and citizens from the extraterritorial application of foreign laws, the Counter-Extraterritorial Regulation allows Beijing to assert its own jurisdiction over foreign conduct with a "reasonable connection" to China. This marks a shift from defensive blocking to proactive assertion of jurisdiction beyond the country's borders.

In May, China's Ministry of Justice issued its first formal determination under the new regulation. It found that the European Commission's anti-subsidy investigation into Chinese security company Nuctech under the EU Foreign Subsidies Regulation amounted to improper extraterritorial jurisdiction.

Chinese companies now have legal avenues to challenge compliance with foreign measures. The Counter-Extraterritorial Regulation, for example, allows the Chinese government to take "necessary measures" against persons complying with foreign measures that are deemed improper, including restrictions on business with Chinese entities. Chinese citizens or organizations that suffer losses from such compliance can sue for damages in Chinese courts.

With its insistence on jurisdiction by its own regime-controlled courts, China appears to be borrowing from Russia's playbook. Since 2020, Moscow has channeled sanctions-related disputes into Russian courts, producing predictable outcomes that often disregard contractual clauses for resolving disputes. Beijing's approach goes in a similar direction: Domestic courts are being mobilized to blunt foreign sanctions and project Chinese law into cross-border commercial disputes.

Two recent cases involving global banks illustrate the risks of running into conflicts between Western and Chinese law for companies operating in China, with Chinese counterparties, or with Chinese-controlled data and supply chains.

The resulting legal environment puts foreign companies in a bind: They can face legal exposure in the West for violating Western sanctions-and in China for complying with them. China's expanding economic security toolkit is countering Western trade and financial restrictions, putting foreign companies in a bind between complying with Western sanctions and facing legal exposure in China.

China's Economic Security Toolkit

The Risks of Running into

Conflicts between Western and Chinese Law

Chinese companies now have legal avenues to challenge compliance with foreign measures. The Counter-Extraterritorial Regulation, for example, allows the Chinese government to take "necessary measures" against persons complying with foreign measures that are deemed improper, including restrictions on business with Chinese entities. Chinese citizens or organizations that suffer losses from such compliance can sue for damages in Chinese courts.

With its insistence on jurisdiction by its own regime-controlled courts, China appears to be borrowing from Russia's playbook. Since 2020, Moscow has channeled sanctions-related disputes into Russian courts, producing predictable outcomes that often disregard contractual clauses for resolving disputes. Beijing's approach goes in a similar direction: Domestic courts are being mobilized to blunt foreign sanctions and project Chinese law into cross-border commercial disputes.

Two recent cases involving global banks illustrate the risks of running into conflicts between Western and Chinese law for companies operating in China, with Chinese counterparties, or with Chinese-controlled data and supply chains.

The Future of Cross-Border Commercial Disputes

The resulting legal environment puts foreign companies in a bind: They can face legal exposure in the West for violating Western sanctions-and in China for complying with them. China's expanding economic security toolkit is countering Western trade and financial restrictions, putting foreign companies in a bind between complying with Western sanctions and facing legal exposure in China.

The future of cross-border commercial disputes will depend on how China's courts and regulatory agencies interpret and apply these new laws and regulations. Will they be used to project Chinese law into cross-border commercial disputes, or will they be limited to domestic cases? Only time will tell.

Source: Foreign Policy