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Freshfields Risk & Compliance

| 8 minutes read

Global Enforcement Outlook: US-China tensions - what to expect in the year ahead

As the Biden administration enters its second year, it is anticipated that the US will continue to sharpen its approach on sanctions. This is particularly true in relation to China, where the escalation of US sanctions has led to Chinese countermeasures. The landscape is made more complex as the UK and EU also increasingly rely on sanctions to achieve a wide array of foreign policy objectives, including using sanctions as tools to combat alleged serious human rights violations, cyber-crime and international corruption, and may in the year ahead chart courses on China independent from one another as well as from the US.

It is also possible that their respective approaches to sanctions and trade controls will be further impacted by other international events, such as the situations unfolding in Russia, Ukraine, and Belarus.

 US mid-terms unlikely to soften the hard-line approach  

As President Biden remarked in his first address to Congress, the United States is ‘in a competition with China and other countries to win the 21st century.’

So far, the Biden Administration has maintained Trump-era tariffs on China while sharpening economic sanctions against companies that support and operate in China’s defence and surveillance technology sectors, as well as continuing the US Department of Justice’s China Initiative. Even though 2022 is a pivotal Congressional election year, the political dynamics fuelling the trade dispute are not expected to change. The underlying issues – involving Hong Kong, Xinjiang, Taiwan, the South China Sea, and concerns relating to technology, intellectual property, and long-term military intelligence – remain unresolved, and a hard-line stance on China enjoys bipartisan support in Congress, which is unlikely to shift after the November mid-term elections.

Further, investments into the US, regardless of whether they involve Chinese parties, will continue to be closely scrutinised by the Committee on Foreign Investment in the United States (CFIUS). Among the issues CFIUS considers is the potential for a transaction to result in direct or indirect transfer of sensitive technology to China. There are also proposals to increase the scope of CFIUS’s activities, including: (i) widening the range of transactions that must be filed with CFIUS; (ii) enhancing CFIUS’s ability to look at emerging and foundational technologies; and (iii) giving CFIUS the ability to examine certain greenfield investments. Also on the horizon are legislative proposals for reviewing US outbound investments into China. The proposed review process is expected to focus on investments into Chinese companies that may strengthen China’s role in supplying critical inputs into the US.

The US government is also planning to put in place procedures to enhance regulations that give the Commerce Department the power to prohibit the acquisition, importation, dealing or use in the United States of certain technologies and services. Information and communications technologies and services will be subject to additional scrutiny and potential prohibition if they are designed, manufactured, or supplied by persons owned, controlled, or subject to the jurisdiction of a ‘foreign adversary’, including China.

China strengthening its sanctions framework 

Responding to escalating US sanctions against Chinese companies, as well as Hong Kong and Chinese officials, China has imposed a number of countermeasures. Introduced in 2021, the Chinese Anti-Foreign Sanctions Law (AFSL) ushered in a more assertive era for Chinese countermeasures, with sanctions targeted against US, UK and EU politicians. The AFSL empowers Chinese authorities to take countermeasures against a foreign country whose actions China deems to be ‘discriminatory restrictive measures’ against Chinese nationals or companies. Perhaps more importantly, mere compliance by any person (including a foreign company) of sanctions against China and Chinese persons may amount to a violation of the AFSL, and lead to Chinese authorities’ imposition of sanctions and/or affected Chinese persons’ claims for injunctions and damages before Chinese courts. The AFSL is the latest measure to expand China’s existing sanctions and export controls framework, which now includes the Chinese Blocking Rules, the Chinese ‘Unreliable Entities List’ and China’s new export control law.

Further, 2021 saw the introduction of new laws in relation to data security and privacy, which create a framework for how data is collected and stored in China and imposes restrictions on transfers of data overseas. Companies could find themselves caught in the middle of these measures and the US CLOUD Act, which gives US law enforcement agencies the authority to compel US-based technology companies to produce data regardless of where it is stored.

Taken together, this suite of measures from Beijing aims to create parity with the United States by responding to US sanctions, foreign investment reviews and export controls, and there is no sign of the measures abating.

UK seeks more agile approach, but unlikely to act alone

Although many of the UK’s policy stances on China broadly align with US policy, the sanctions and other trade restrictions implemented by the UK have been less ambitious and more targeted in scope than those in the US. Rather than introduce general measures targeting aspects of the Chinese economy, UK sanctions introduced in 2021 only targeted a certain list of Chinese government officials alleged to have been involved in alleged human rights abuses in Xinjiang.

The approach by the UK reflects an underlying tension in the UK government’s position on China. For example, the UK government’s 2021 integrated defence policy review characterised China as both an important partner and a ‘systemic competitor’. It emphasised the need for the UK to engage with China and remain open to Chinese trade and investment, but also protect itself against ‘practices that have an adverse effect on prosperity and security.’

The UK’s direction of travel is further complicated by the fact that UK is, practically speaking, unlikely to act alone against China, in part because unilateral UK sanctions are unlikely to have a material impact on the Chinese economy. Although, since leaving the EU, the UK considers itself ‘more agile’, with greater autonomy to decide how to use sanctions to pursue its own interests, noting a clear preference for multilateral cooperation. For example, the UK’s first autonomous sanctions regimes (targeting human rights abuses and corruption respectively) all have equivalents across the globe and the UK’s 2021 sanctions against specific Chinese government officials were introduced in tandem with the EU.

The UK remains influential in global policy arenas, however, and is therefore unlikely to remain silent on China sanctions in 2022. Recently, for example, measures such as the National Security and Investment Act 2021 (which permits the UK Government to intervene in potentially hostile foreign direct investment) and the Telecommunications (Security) Act 2021 (which requires telecom services to increase the security of their networks) demonstrate the UK’s willingness to put in place measures to secure its critical infrastructure and economic supply chains against security concerns from abroad. In addition, in December 2021, the UK introduced more restrictive controls around the export of certain specified goods and technology, where there is a clear risk that they could be used to commit a violation of human rights. It is possible the UK may use these or similar measures to create additional hurdles around the export of materials to China, given the UK Government’s articulated position on the situation in Xinjiang.

EU seeking common ground for more assertive stance

Any suggestion that the departure of the UK from the EU would result in a reduction of sanctions activities in Brussels was dispelled in 2021. Indeed, the EU acted before the UK in targeting the Belarus government for actions taken by the Lukashenko regime. It has also launched a new human rights sanctions regime and utilised it to target Chinese officials. Additionally, the EU has launched a dual use export control regime with new requirements around the export of cyber surveillance items and around items which have a military end-use, giving export controls regulators in the EU member states more tools, potentially to restrict exports of certain goods to China.

In addition, there are discussions to include corruption as a reason to designate persons or entities under EU sanctions. The EU is reviewing the efficacy of its sanctions programs and is developing strategies to counter extraterritorial restrictions more efficiently. As part of this review, the EU has made clear that it will take into account the increased risk of extraterritorial measures from China.

Although it is clear the EU has robust tools at its disposal, identifying the EU’s likeliest long-term policy on China remains complex, not least because the views expressed by the EU and each of its member states do not always align. For example, the EU has been moving toward ratifying the EU-China Comprehensive Agreement on Investment (CAI). This is a proposed investment deal between the EU and China that seeks to open China to investment by EU companies, however,  the EU Parliament announced that it would refuse to ratify the CAI while Chinese sanctions against EU officials remain in place. By contrast, sentiments from the new German Chancellor, Olaf Scholz, remain more optimistic about potentially 'deeper bilateral economic ties with China.

Overall, the increasingly assertive stance on sanctions on China and related countermeasures is not expected to diminish in the year ahead, and it remains to be seen whether the potential for major escalation of sanctions in other contexts – such as potential sanctions targeting Russia – will lead to increasing divergence of US, UK and EU sanctions.

Key takeaways 

  • Sustained tension in the US-China trade dispute may result in both sides expanding the scope of economic, political and legal sanctions imposed by each on the other, with a potential for innovative approaches and significant disruption across a wide range of industries and markets. The complex web of sanctions, countersanctions and blocking rules can also lead to companies getting caught in the crossfire if they don’t stay on top of the latest developments.
  • The UK and EU may complicate the picture by updating their own sanctions regimes on China, which may not necessarily echo the US approach and may also differ between the EU and the UK. This is particularly the case in matters where national security and human rights issues are raised.

Key practical steps to take

  • Due diligence: sanctions and export controls due diligence is increasingly an area of focus by counterparties, banks, regulators and prosecutors and should be considered in any proposed business transaction. US, UK and EU companies should consider identifying any China-nexus in a proposed transaction or business activity as early as possible and assessing how it may be impacted by these new and proposed regulatory initiatives.
  • Contractual protection: where possible, companies should seek contractual protection to allow flexibility in circumstances where proposed business activities may become targeted by sanctions or export control laws. These could include warranties and certifications regarding a counterparty’s conduct, as well as termination or suspension rights when a sanctions event arises.
  • Monitoring: companies should take steps to stay abreast of these proposed measures and countermeasures. While details of the specific measures will emerge as the year progresses, the key themes to watch out for are US and non-US extraterritorial enforcement, increased investment restrictions imposed by the UK and China, conflicting positions within the EU, the rise in ‘blocking rules’ and more use of sanctions against alleged perpetrators of human rights violations.
  • Conflicts of Laws: The combination of the extraterritorial effect of US sanctions (notably, global transactions made in US dollars) and the retaliatory effect of the Chinese AFSL (as well as Hong Kong’s National Security Law) has created a clear risk of conflicts of laws. Conflicts of laws challenges are not new in the area of sanctions, for example the EU Blocking Statute regarding US sanctions on Iran/Cuba has been in existence for many years. But the risk has increased in circumstances where potential conflicts affect financial institutions and multinational companies doing business the world’s two largest markets, the US and China. This has necessitated, and is likely to continue to require, increasingly sophisticated and nuanced approach to managing sanctions compliance across global operations.

This is the sixth in our 2022 Global Enforcement Outlook blog series, which looks at key enforcement and investigations trends. All other blogs in the series will be made available here.

Our Global Sanctions & Trade team will continue to monitor developments. All our sanctions related briefings are available here.


investigations, corporate crime, global enforcement outlook