On January 9, 2021, China’s Ministry of Commerce (the “MOC”) announced the immediate implementation of the “Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures” (the “Blocking Regulations”).

In the area of advanced technology, the US has been pressuring China on various fronts by leveraging its export control policy and economic sanctions.  Specifically, the US (i) listed Huawei and its affiliates on the “Entity List” of the Bureau of Industry and Security under the US Department of Commerce and amended the so-called “Direct Product Rule” to control even products of non-US suppliers (including semiconductors) supplied to Huawei, and (ii) enacted Executive Order 13959 to exclude certain companies listed as “Communist Chinese Military Companies” from accessing the US capital market.  Additionally, the US government took measures to sanction entities involved in the Hong Kong and Xinjiang affairs.  The MOC’s Blocking Regulations are viewed as a direct response to the above measures by the US targeting China.

The details of the Blocking Regulations are as follows: 

• The Blocking Regulations apply where an extraterritorial application of a foreign legislation unjustifiably prohibits or restricts Chinese companies or Chinese citizens from engaging in normal economic and trade activities with a third state’s company or its citizens.

• If normal economic and trade activities have been prohibited or restricted as a result of such extraterritorial application of a foreign legislation, Chinese companies or citizens must report the relevant facts to the MOC within 30 days (non-compliance with the reporting obligation is subject to administrative penalties). 

• A council composed of the MOC, the National Development and Reform Commission and other relevant departments may determine that an extraterritorial application of a foreign legislation is unjustifiable.  In such case, the MOC can issue an order prohibiting Chinese companies and citizens from complying with the relevant foreign law. 

• If a Chinese company or a Chinese national receives such a prohibition order, it must not comply with the relevant foreign law, and any failure to comply with the prohibition order may result in a warning or a fine (Chinese companies or citizens can apply to the MOC for exemption from compliance with a prohibition order).

• If an unjustifiable extraterritorial application of a foreign law infringes on the interests of a Chinese company or citizen, the affected Chinese entity can institute legal proceedings in a Chinese court and claim damages against the transacting counterparty that complied with the relevant foreign law.

• The Chinese government may provide necessary support for any losses incurred from non-compliance with an unjustifiable extraterritorial application of foreign law.

• The Chinese government may take necessary retaliatory actions against an unjustifiable extraterritorial application of foreign law.

Implications

• The Blocking Regulations serve as a clear warning that the Chinese government intends to respond to any application of foreign laws to Chinese companies located in China. 

• Since the Chinese government has not provided any specific guidance as to how the Blocking Regulations will be applied, and the Chinese government has broad discretion on how to enforce the Blocking Regulations if there is a report on extraterritorial application, it is difficult to predict how the policy will be enforced.  The actual application is expected to be heavily influenced by the changing relations between the US and China.

• Korean companies with local entities in China will now be obligated to report to the Chinese government in case of any impact on its economic and trade activities by extraterritorial application of foreign laws, and a failure to report may result in sanctions. 

• If the Chinese government chooses to actively enforce the Blocking Regulations, Korean companies must monitor and prepare for any potential lawsuits by Chinese companies with respect to the transactions covered by the US government’s sanctions against Chinese companies.