What Can We Know from China’s First Legal Order of 2021?

China’s role on the international arena has been rising prominently. Even with a pandemic engulfing the entire globe since early 2020, the country is still attempting to accelerate its global impact. On January 9, 2021, China’s Ministry of Commerce announced that the new Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures, or the Rules, shall come into effect. Article 9 shows: “Where a judgment or ruling made in accordance with the foreign legislation within the scope of the prohibition order causes losses to a citizen, legal person or other organization of China, the latter may, in accordance with law, institute legal proceedings in a people’s court, and claim for compensation by the person who benefits from the said judgment or ruling.” This new regulation grants Chinese courts the opportunity to impose judgment on foreign companies. Moreover, one of the four criteria for determining if an “unjustified” extraterritorial conduct exists is “other factors that shall be taken into account”. Such ambiguity leaves much leeway for China to arbitrarily impose restrictions on foreign companies.

Western media interprets this document as retaliation against US restrictions on Chinese enterprises. Critiques from Bloomberg describe the newly published Chinese rules as a “pushback against US sanctions” and comments from Reuters point out that “the new rules come amid an ongoing backlash against various Chinese companies from foreign governments, especially the United States.” Given this context, what are other implications of China’s new rules on counteracting “unjustified” extraterritorial application of foreign legislation?

Even though many critics consider the Rules aggressive, publishing this document appears reasonable from China’s point of view. China is not the first country to develop measures regarding the extraterritorial application of foreign laws. In the 1980s, the European Union (EU) used extraterritorial tactics of competition law on foreign companies, such as Nintendo and Asahi Glass Limited, since they distributed their products in the EU. The EU also imposed a fine on GIS, a Japanese company whose business was only in Asia, by arguing that we are living in “a complex world where the movement of peoples and the activities of private-sector companies cross borders as a matter of routine”. China is facing a similar situation: as the country’s economy grows extensively it becomes more challenging to isolate the effects of conduct committed by international companies. For example, many economic activities affecting China’s internal market may originate outside the country. Therefore, publishing the Rules could be justified as protecting the interests of the country and its citizens.

China has reasons for passing this law other than fighting current US sanctions against Chinese companies. When China published its regulation, extraterritorial application of US statutes had declined. In Corporate and commercial disputes review, US courts are committing “a reversal from the historic trend of expanding the scope of US law” meaning that US courts are retreating from applying federal statutes extraterritorially. Examples include racketeering, bankruptcy, and foreign trade antitrust areas. In 2018, the Sherman Antitrust Act, a law known for its extraterritorial use, was barred by the Foreign Trade Antitrust Improvements Act (FTAIA) for transactions in FX instruments (foreign exchange derivative instruments) in a foreign exchange or operating abroad with a foreign defendant. It is not hard to see the substantial extent to which US courts are abandoning statutes’ extraterritoriality. This trend will likely continue into the future given that President Trump “[solidified] a conservative block in the Supreme Court’s majority”.

Given the US abandoning extraterritoriality statutes, China is likely to take advantage of extraterritoriality statutes to influence the overall comity and norms generated by current international law. At the second meeting of the Rule of Law Commission of the Communist-Party of China Central Committee on February 25, 2019, President Xi called for facilitating the construction of a legal system for extraterritorial application of China’s law. Then in November 2019, the same call was reiterated at the Fourth Plenary Session of the 19th CPC Central Committee. China’s plan is not limited to measures countering illegitimate extraterritorial applications of foreign law. Instead, the Chinese government is carrying out a large-scale project, which would bring about changes to the entire international legal system. The Rules published at the beginning of 2021 serve as a cornerstone for further influential actions.

The Rules do include China’s intent to comply with international law and reserve reasonableness for publication, but it cannot disguise China’s aggression on international affairs. More predominant approaches from China, potentially affecting the entire international legal system, will likely occur in the future. Those approaches could provide a passageway for Chinese companies’ unfriendly expansion in the future as more international transactions involve them. Moreover, the Rules itself is more like a role of orientation for further Chinese law and regulations on banning foreign extraterritorial application, since there are still technicalities left undone. For example, the Rules stipulates that the relevant subjects who have suffered damage to their legitimate rights and interests in China have the right to sue, but specific contents such as the scope of compensation are still to be clarified. As more regulations entailing the aforementioned specific details come into effect in China, foreign companies are less likely to be protected by laws originating from where they are headquartered. Therefore, the Rules should be a heads-up for foreign companies that China is trying to expand more control over their operation in the Chinese market.