The US has been making use of its “long-arm jurisdiction” statutes that allow local courts to exercise personal jurisdiction over out-of-state defendants in recent years, subjecting Chinese enterprises and individuals to US laws. In response, China’s Ministry of Commerce (MOFCOM) released the “Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures” on 9 January, which took effect on the date of its promulgation.
Long-arm jurisdiction is a legal term in American law, and was initially used in interstate litigations in the US. Later, its use expanded into the international realm, and was also exercised on non-US citizens and enterprises in accordance with American domestic laws.
A few years ago, the US’s long-arm jurisdiction mainly targeted “old rivals” such as Iran and North Korea. Recently, following the worsening of ties between China and the US, an increasing number of Chinese enterprises and individuals have been affected by the US’s long-arm jurisdiction. Among those affected, the most well-known examples are Huawei, which got its chip supplies cut, and Huawei CFO Meng Wanzhou, who is still detained in Canada until today.
While MOFCOM's latest rules are not a set of laws but administrative regulations based on law, this is the first time that China has adopted domestic regulations to fight against long-arm jurisdiction.
China has always opposed the US’s behaviour of using its long-arm jurisdiction statutes against foreign countries. While MOFCOM's latest rules are not a set of laws but administrative regulations based on law, this is the first time that China has adopted domestic regulations to fight against long-arm jurisdiction.
Fighting back against the US’s long-arm jurisdiction statutes
The rules consists of 16 articles. Article 1 clearly states that the formulation of these rules is “in accordance with the National Security Law of the People’s Republic of China and other relevant laws”.
National security is a relatively broad term. Since US President Donald Trump took office, the main reason for the US’s suppression of Chinese enterprises such as ZTE and Huawei has been because these enterprises could potentially harm US national security. Now, China has also retaliated in a tit-for-tat fashion, and used national security to deal with national security.
Article 2 outlines the applicability of the rules: “These Rules apply to situations where the extra-territorial application of foreign legislation and other measures, in violation of international law and the basic principles of international relations, unjustifiably prohibits or restricts the citizens, legal persons or other organisations of China from engaging in normal economic, trade and related activities with a third State (or region) or its citizens, legal persons or other organisations”.
In other words, if long-arm jurisdiction affects normal economic and trade activities between Chinese enterprises and individuals and a third state — such as if the US prohibits Chinese enterprises and individuals from doing business with other countries without authorisation or resolution from the UN — it would have violated the rules. In 2018, the US had heavily penalised ZTE and asked Canada to arrest Meng Wanzhou on allegations of their business dealings with Iran.
More importantly, the US prohibiting enterprises in Europe, Japan, South Korea, Taiwan and elsewhere from supplying to Chinese enterprises would now come under the scope of these new rules.
If third-party enterprises continue executing the US’s ban on supplying to Chinese enterprises, such behaviour can now be sanctioned under the new rules.
Over the past two years, the US has added numerous Chinese enterprises to its Entity List of persons “subject to specific license requirements for the export, re-export and/or transfer (in-country) of specified items” and has forbidden US enterprises from supplying to these companies whilst preventing third-party companies from supplying to Chinese enterprises or risk facing sanctions from the US. Under pressure from the US, chips from Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung, lithography machines from the Netherlands, as well as other advanced products, have been prevented from being supplied to relevant Chinese enterprises.
However, as the new MOFCOM rules only apply to economic and trade restrictions with a third state or region, this implies that the US can restrict US companies from doing business with China, but has no right to prohibit a third country or region from supplying to China. If third-party enterprises continue executing the US’s ban on supplying to Chinese enterprises, such behaviour can now be sanctioned under the new rules.
Article 6 of the MOFCOM rules says that when assessing and determining whether there exists unjustified extra-territorial application of foreign legislation and other measures, the following factors will be taken into account: “(1) Whether international law or the basic principles of international relations are violated; (2) the potential impact on China’s national sovereignty, security and development interests; (3) the potential impact on the legitimate rights and interests of the citizens, legal persons or other organisations of China; (4) other factors that shall be taken into account.”
This means that if a foreign law restricts Chinese citizens, companies, or other organisations from engaging in normal economic activities with a third country or region, these individuals and companies can make a report with the Chinese authorities.
Articles 7 and 8 of the rules state that if the authorities assess that such foreign legislation is unjustified, it can issue “a prohibition order to the effect that the relevant foreign legislation and other measures are not accepted, executed, or observed”. This means that third-party companies engaging in commercial activities within China also cannot implement unjustified foreign legislation.
Article 9 of the rules state: “Where a person complies with the foreign legislation and other measures within the scope of a prohibition order, and thus infringes upon the legitimate rights and interests of a citizen, legal person or other organisation of China, the latter may, in accordance with law, institute legal proceedings in a people’s court, and claim for compensation by the person... (If this person) refuses to execute an effective judgment or ruling made by the people’s court, the citizen, legal person or other organisation of China may apply to the people’s court for enforcement in accordance with law.”
If they do not abide by the US’s long-arm jurisdiction, they would also face US sanctions in their turn; but if they do continue to participate in US sanctions against China companies, they may face lawsuits in China, and may even be ordered to pay compensation.
Third-party companies target of the new rules
This means that if the Chinese authorities issue a prohibition order of non-compliance with foreign legislation, and a third-party company still wants to abide by long-arm jurisdiction and hurts the interests of any Chinese company, the “injured” Chinese company can take the third-party company to court and seek compensation for losses.
For example, if TSMC or some other company abided by the US ban on Huawei and scrapped its contracts with Huawei, thereby damaging Huawei’s interests, then Huawei would have the right to seek compensation from TSMC.
Looking at its contents, the rules are not meant to hit US companies, but are targeted more at the impact of long-arm jurisdiction on the relationships between China companies and third-party companies. This would inevitably lead to a dilemma for companies from Europe, Japan, Korea, Taiwan and so on that are operating in China: If they do not abide by the US’s long-arm jurisdiction, they would also face US sanctions in their turn; but if they do continue to participate in US sanctions against China companies, they may face lawsuits in China, and may even be ordered to pay compensation.
And so, while the rules are meant to stop or reduce the impact of US long-arm jurisdiction on Chinese companies and individuals, the possible negative consequences cannot be ignored. For example, would these rules be a major hindrance for third-party companies operating in China, and affect foreign investors’ confidence in China’s business environment?
This is also a question that the Chinese authorities have to consider and handle.
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