How Trade Sanctions Affect China Business

Economic sanctions are a popular way for powerful governments to exert their disapproval over one another.

The unpredictable moves of the current US regime make many companies and their management concerned as to the threat of US based sanctions. Involvement of the U.S. Department of the Treasury in economic sanctions against foreign states dates back to the War of 1812, when the US enforced sanctions against Great Britain in retaliation for the harassment of American sailors. The Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United​ States.

Even though the US do not so far apply country specific sanctions against China, various companies operating in Chinese markets have to be prudent with the US based regulations despite the fact that US laws cannot be enforced on Chinese soil. Especially so called U.S. persons have to be particularly mindful of their operational limits. All U.S. persons are required to comply with OFAC regulations. U.S. persons are defined as any individual present in the United States and every U.S. citizen and U.S. permanent resident located anywhere in the world. The definition of U.S. persons also includes entities formed in the United States or incorporated in the United States and the branches of any foreign entities that are located in the United States. The Chinese subsidiaries of a U.S. parent company are also subject to OFAC regulations and must comply with them.

In order to better understand the challenge one must understand the difference between primary and secondary sanctions. Primary sanctions, such as asset freezes and trade embargoes, prohibit citizens and companies of the sanctioning country from engaging in certain activities with their counterparts from the sanctioned country. This is currently not a major concern in China trade as China is not a sanctioned country. In turn secondary sanctions pose more headaches and can hit any person irrespectively of nationality or residence. Secondary sanctions put pressure on third parties to stop their activities with the sanctioned country or person by threatening to cut off the third party’s access to the sanctioning country, in this case the U.S. The recent ZTE case illustrates the challenge well. A practice called a denial order prevented ZTE from buying parts from US companies as ZTE had allegedly sold end-products with U.S. components to North Korea and Iran. A deal has however been concluded and according to Business Insider, ZTE had to pay a bigger fine than would have normally been convicted, it has to hire American compliance officers, and it has lay off the old management team. Even though the US fine cannot be enforced in China, in order to ensure business continuity, ZTE likely pays it without objections.

Specially Designated Nationals, a.k.a. SDNs include individuals or entities that the United States has determined are terrorists, involved in illegal activities such as narcotics trafficking, or acting on behalf of sanctioned countries. Several Chinese companies fall under this designation by having closer ties with the inner circle of the North Korean government. US persons are prohibited to trade with SDNs.

Even though the US-North Korean relations seem to warm up, the situation is most unpredictable and the regulations may change overnight. ARC Consulting provides further guidance on the applicability of sanctions in your China business.

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