Key Points:
- China’s State Council issued sweeping new Counter-Extraterritoriality and Industrial Supply Chain Security regulations that take effect immediately.
- Beijing deployed these rules to block a European Union subsidy probe into airport scanner maker Nuctech and U.S. oil sanctions on five refineries.
- The Ministry of Finance barred government procurement from 46 U.S. defense contractors, while the Commerce Ministry restricted rare earth exports to 10 American firms.
- The expanded legal toolkit creates a severe “dual compliance dilemma” for multinationals, who face conflicting regulatory mandates from Western and Chinese laws.
Global businesses are facing a highly complex legal landscape as Beijing aggressively expands its defensive legal framework. In a series of major State Council decrees, China has introduced robust new counter-extraterritoriality and industrial supply chain security rules designed to block foreign sanctions and restrictive measures. The sweeping measures, which entered into force recently, significantly expand the authority of Chinese regulators to punish international companies that comply with Western export controls or unilateral trade bans. For multinational firms operating in the region, the regulatory shift has created a difficult corporate dilemma, forcing them to choose between complying with home-country sanctions or facing immediate legal penalties in China.
The cornerstone of this updated defensive playbook rests on two major administrative decrees issued by the State Council: the Extraterritorial Jurisdiction Regulations and the Industrial and Supply Chain Security Regulations. Comprising a comprehensive set of 20 articles, these new rules establish a formalized legal framework to identify and neutralize what Beijing characterizes as “improper exercises of extraterritorial jurisdiction” by foreign states. The regulations empower Chinese authorities to investigate trade restrictions, prohibit domestic entities from complying with foreign long-arm jurisdiction, and grant affected Chinese firms the right to seek civil damages and remedies directly in domestic courts.
Beijing’s newly sharpened legal tools have already moved beyond theoretical frameworks into active, real-world enforcement. In a major escalation, Chinese authorities recently deployed the new rules for the first time to block a European Union cross-border subsidy investigation into Nuctech, a state-linked manufacturer of airport baggage scanners. On May 15, Beijing barred any domestic organization or individual from assisting with the EU’s probe, declaring the information requests an improper exercise of foreign jurisdiction. Similarly, on May 2, the government ordered domestic shipping and oil trading companies to completely ignore U.S. sanctions against five Chinese refineries, including Hengli Petrochemicals, involved in the Iranian petroleum trade.
The regulatory offensive has rapidly expanded to target Western defense and critical resource sectors. In late June, the Ministry of Finance announced a sweeping procurement ban, prohibiting all government departments and state-linked entities from purchasing products manufactured by 46 U.S. defense contractors, a blacklist headed by Lockheed Martin Corporation and Raytheon Missiles & Defense. Simultaneously, the Ministry of Commerce added 10 prominent American entities to its export control list, barring Chinese exporters from supplying them with vital dual-use items. This export ban directly targets rare earth mining companies, including MP Materials Corp and USA Rare Earth, alongside several defense electronics and drone manufacturers.
These rapid regulatory moves have placed global conglomerates in an exceptionally difficult operational position, often described by corporate lawyers as the “dual compliance dilemma.” For years, multinational headquarters applied standardized, global compliance policies across all regional subsidiaries to ensure strict adherence to U.S., UK, and European sanctions. Under the updated Chinese laws, however, implementing these globally mandated policies without modification can be legally characterized as executing or assisting in the execution of foreign discriminatory measures. This exposure means that a company trying to comply with Western trade rules risks facing immediate asset freezes, business license revocations, or private civil lawsuits in China.
To protect their local investments and mitigate these growing legal exposures, multinational compliance teams are rushing to conduct comprehensive contract and operational audits. Legal advisers are urging firms to review standard force majeure, termination, and data-sharing clauses, which often contain language requiring strict compliance with Western export controls like the U.S. Export Administration Regulations. Under the new regulatory reality, retaining these standard clauses can trigger immediate Chinese enforcement. Companies are instead having to draft highly customized, localized agreements that can balance competing legal obligations without violating the sovereignty of either jurisdiction.
Another major point of conflict centers on cross-border corporate investigations and litigation discovery. Historically, parent companies routinely conducted detailed internal audits or supplier mapping projects inside China to comply with Western sustainability, human rights, or forced labor laws, such as the EU’s Corporate Sustainability Due Diligence Directive. Under the new Supply Chain Security rules, transmitting this localized operational and supply chain data to foreign regulators or corporate headquarters is strictly regulated. Businesses must now implement rigorous local screening protocols, ensuring that no data crosses the border without prior approval from relevant Chinese ministries.
Top-level political directives back the aggressive enforcement of these anti-sanctions measures. The Central Committee recently issued a comprehensive judicial guidance document, instructing the country’s top court and prosecutors to deepen their research into international and foreign laws. The goal of this judicial ramping is to refine the country’s legal toolkit so that domestic judges can better challenge the technology and trade sanctions imposed by the United States and its allies. By legalizing its economic retaliation, the country is working to establish a highly sophisticated legal shield that matches the complexity of Western regulatory systems.
Ultimately, Beijing’s efforts to sharpen its anti-sanctions tools will likely accelerate the decoupling of global supply chains. By establishing a robust legal framework that penalizes compliance with foreign long-arm jurisdiction, the government is forcing international businesses to choose a side. While some multinational firms may choose to scale back their operations in China to avoid this legal crossfire, others are opting to completely localize their Chinese business units, separating their local operations, data servers, and legal structures from their global parent companies. As geoeconomic tensions continue to rise, the ability to operate seamlessly across borders is rapidly becoming a relic of the past, replaced by highly secure, legally segregated corporate fiefdoms.
