China will soon start targeting foreign and Chinese businesses under its new law to counter Western sanctions , effectively forcing them to “pick sides”, according to legal observers. They say the broad scope of the legislation could present foreign businesses in China with a major dilemma, as they may be caught between compliance with foreign sanctions and the new law that prohibits them from enforcing those measures. Under Article 12 of the law, passed by the National People’s Congress Standing Committee on Thursday, organisations and individuals who enforce or assist foreign sanctions could be taken to court, and forced to “stop the infringement and to pay compensatory losses”. Lester Ross, a partner at WilmerHale in Beijing, said he feared the new law would compel regulators to “reduce [companies’] discretion to determine with whom they wish to do business”. “If so, this could have a major impact particularly on financial institutions,” he said. Businesses that could be at risk include multinational fashion brands that have announced they will not use cotton from Xinjiang – banned by the United States because of concerns about forced labour – or suppliers to the telecoms giant Huawei, which has been hit by US export restrictions. Observers say the new legislation establishes a clear legal foundation for regulations issued by the Ministry of Commerce last year. These include a so-called unreliable entity list that identifies foreign bodies deemed to threaten China’s national security or interests and makes them liable to measures such as fines, economic restrictions and visa restrictions for employees. In January, the ministry also released a “blocking statute” that would compel Chinese organisations and individuals to report whether they faced any restrictions from foreign governments with the risk of penalties if they did not, and entitle them to claims for compensation. Tian Feilong, an associate professor at Beihang University’s law school who was involved in the consultations over the new legislation, said the blocking statute borrowed from a similar one in the European Union that affected compliance with certain US sanctions. “In China for example, Huawei could sue [Taiwanese semiconductor giant] TSMC for economic losses, and demand consequences,” Tian said. “Our court could rule that TSMC loses, and Huawei would have a domestic legal channel to protect its rights ... In this example, TSMC would have to decide whether to respect the US sanctions or respect the anti-sanctions law in China, given that it has huge interests in both places.” China to set up special group to enforce anti-sanctions law Tian said a leading group would be set up to coordinate and enforce anti-sanctions measures, which would include representatives from the commerce and foreign ministries and the National Development and Reform Commission. “To put it simply, foreign companies involved in sanctions against China will lose the Chinese market,” Tian said. “Many companies need to weigh their pros and cons, whether to pick a side between the Chinese market or the US and European market, and between Chinese law and foreign laws.” Jianwei Fang, a Shanghai-based partner at the Zhong Lun Law Firm, said blocking statutes had not been used so far and had served more as “political announcements”, but the new law increased the likelihood of China using them. “The risk of multinational corporations being caught in dilemmas or difficult situations will greatly increase,” he said. But he added: “Unless it’s a defence company that sells weapons to Taiwan or something like that, I think most multinational companies in China don’t need to worry too much about the law.” Nick Turner, a Hong Kong-based lawyer at the Steptoe & Johnson firm who works with multinationals on economic sanctions issues, said he expected the Ministry of Commerce to act now that the new law had resolved questions around the legal basis for its previous orders. “That’s what I would be looking for next – MofCom [the commerce ministry] to take action under its previous orders and for the Ministry of Foreign Affairs to continue to identify foreign persons which are helping to develop and implement [foreign] sanctions,” he said. This would mean that a company that publicly declared that it would not use a certain product – such as cotton from Xinjiang – could be placed on the unreliable entity list and given a chance to change course or face the consequences. China hurried work on anti-sanctions law ‘after Joe Biden disappointed Beijing by continuing to take a tough stance’ It could also see a supplier in China that had a contract cancelled due to foreign sanctions or restrictions seek compensation in a Chinese court, he said. “There is certainly a risk to companies, but that risk had already been put on the table earlier in these MofCom orders, so I think a lot of companies have already digested that,” he said. “My impression from speaking to clients and others is that most are taking this new development in their stride because a lot of what they’re seeing is familiar to them, and they’ve already thought through these issues and made their calculations accordingly.” Tian said the new law could also affect Chinese companies that had complied with foreign sanctions, citing the removal of the Chinese smartphone maker Xiaomi from a US investment blacklist after reaching an agreement with the authorities . “[When the law passed], there were many businesses’ legal departments that could not sleep well,” he said. “This law places a bet on where the future of globalisation will be. If you think it is the US, then your values do not align with China.” Companies involved in imposing foreign sanctions against China would also be banned from taking part in overseas Chinese investment, such as infrastructure projects in Africa, Tian said.