The Extraterritoriality of Chinese Law

Chinese Extraterritoriality: The New Legal Arsenal in Global Trade

Introduction

Over the past decade, China has strategically expanded its legal framework to extend its jurisdiction beyond its borders, directly affecting foreign businesses, supply chains, and international trade regulations. This phenomenon, known as Chinese extraterritoriality, reflects Beijing’s ambition to influence global economic governance while protecting its national interests. Through newly enacted laws and aggressive legal actions, China is imposing its regulatory reach worldwide, challenging the dominance of Western legal systems.

This new legal arsenal impacts multinational corporations, forcing them to navigate contradictory legal obligations between Chinese and Western jurisdictions. Notably, China's Anti-Foreign Sanctions Law (AFSL), Data Security Law (DSL), Export Control Law (ECL), and Unreliable Entity List (UEL) have been deployed to pressure foreign businesses into compliance with Chinese policies, sometimes at the expense of U.S. or EU legal frameworks.

To understand the full scope of China’s extraterritorial legal strategy, this presentation will explore:

1. The legal foundations of China’s extraterritorial reach
2. The impact on global businesses and compliance challenges
3. Key case studies of Chinese extraterritorial legal actions
4. Strategic responses for companies operating in global trade

1. The Legal Foundations of Chinese Extraterritoriality

China has enacted several laws that extend its legal authority beyond its borders, forcing companies worldwide to comply with Chinese regulations or face severe consequences. The most significant of these laws include:

1.1 The Anti-Foreign Sanctions Law (AFSL, 2021)

• This law allows China to retaliate against foreign sanctions imposed on Chinese entities.
• Companies that comply with U.S. or EU sanctions against China risk facing countermeasures from Beijing, including asset seizures and business restrictions.
• Example: Lithuania-China Trade Dispute (2021-2022)
• After Lithuania allowed Taiwan to open a de facto embassy, China blocked Lithuanian exports, pressured multinational firms to cut ties with Lithuania, and imposed de facto sanctions on the country.

1.2 The Data Security Law (DSL, 2021) and Personal Information Protection Law (PIPL, 2021)

• These laws impose strict controls on data leaving China, requiring government approval for data transfers that might affect national security.
• Foreign companies operating in China or handling Chinese citizens' data must store data domestically and comply with national security reviews.
• Example: Didi Global Case (2021-2023)
• The Chinese ride-hailing giant was fined $1.2 billion for violating data security rules after listing in the U.S. without Chinese regulatory approval.
• Beijing accused Didi of transferring sensitive data overseas, reinforcing China’s control over tech firms with global operations.

1.3 The Export Control Law (ECL, 2020)

• This law grants China the power to restrict the export of sensitive materials and technology, preventing foreign companies from accessing Chinese-origin products deemed critical to national security.
• Example: Rare Earth Export Restrictions (2023)
• China restricted exports of gallium and germanium, key materials in semiconductor production, as a retaliatory measure against U.S. sanctions targeting China’s chip industry.

1.4 The Unreliable Entity List (UEL, 2019)

• Foreign companies that engage in activities deemed harmful to China’s national interests may be blacklisted, preventing them from conducting business with Chinese firms.
• Example: Lockheed Martin and Raytheon (2023)
• China imposed sanctions on these U.S. defense companies due to their arms sales to Taiwan, restricting their operations in China.

2. Impact on Global Businesses and Compliance Challenges

China’s extraterritorial legal framework creates significant risks for multinational corporations, forcing them to navigate conflicting laws from different jurisdictions. Key challenges include:

2.1 Contradictory Legal Obligations

• Businesses are caught between Western sanctions and Chinese countermeasures.
• Example: HSBC’s Compliance Dilemma (2020)
• The British bank faced legal conflicts between U.S. sanctions on Huawei and China’s anti-sanctions law, making it difficult to operate in both markets.

2.2 Supply Chain Disruptions

• China’s export restrictions on critical materials disrupt global industries reliant on Chinese components.
• Example: Dutch Semiconductor Equipment Ban (2023)
• ASML, a Dutch chip equipment maker, was pressured by both the U.S. (to stop exports to China) and China (to continue trade under threat of retaliation).

2.3 Increased Regulatory Uncertainty

• Companies must conduct extensive due diligence when dealing with Chinese partners to avoid unexpected legal liabilities.
• Example: TikTok U.S. Ban Threat (2023)
• The U.S. and EU cited China’s data security laws as a justification for banning TikTok, fearing Beijing’s access to user data.

3. Case Studies of Chinese Extraterritorial Legal Actions

3.1 The Micron Case (2023)

• The U.S. semiconductor firm Micron faced a ban from supplying key products to Chinese firms, as retaliation for U.S. chip export restrictions on China.
• China cited national security concerns to justify the ban, showcasing its willingness to use legal tools for economic retaliation.

3.2 The Canada-China Huawei Extradition Case (2018-2021)

• Huawei CFO Meng Wanzhou was arrested in Canada at the request of the U.S. for violating sanctions against Iran.
• China retaliated by detaining two Canadian citizens, showcasing its use of legal and political pressure.

3.3 The Bloomberg and Bain & Company Raids (2023)

• Chinese authorities raided U.S. consulting firms operating in China, citing national security risks.
• This demonstrated China’s willingness to weaponize legal investigations to control foreign businesses.

4. Strategic Responses for Companies Operating in Global Trade

Given China’s aggressive use of extraterritorial legal measures, companies must adopt proactive strategies to mitigate risks:

4.1 Legal and Compliance Adjustments

• Businesses must strengthen their legal teams to handle conflicting laws.
• Establishing regional compliance teams helps navigate China’s evolving legal landscape.

4.2 Diversification of Supply Chains

• Companies should reduce dependency on Chinese suppliers to minimize exposure to regulatory risks.
• Example: Apple’s Manufacturing Shift (2023)
• Apple moved part of its supply chain to India and Vietnam to reduce reliance on Chinese factories.

4.3 Geopolitical Risk Assessments

• Firms should conduct scenario planning for potential legal conflicts.
• Example: European Companies Adjusting Investment Strategies
• Some EU firms are reducing exposure to China due to rising regulatory and geopolitical risks.

Conclusion

China’s expanding extraterritorial legal framework represents a new phase of global economic competition, where legal tools are used as strategic instruments in geopolitical conflicts. Foreign businesses must navigate complex legal landscapes, balancing compliance with both Western and Chinese regulations while minimizing economic risks.

As China continues to assert its influence, multinational corporations must remain vigilant, adaptable, and strategically prepared for the challenges of an increasingly fragmented legal and trade environment.