International Trade & Sanctions in China

China sits at the intersection of two competing regulatory systems: the United States and EU export control and sanctions regimes on one side, and China's own counter-measures framework on the other. For any international business with Chinese operations, supply chains or counterparties, this creates a dual compliance obligation that cannot be resolved by following only one jurisdiction's rules. Ignoring either side exposes a company to criminal liability, asset freezes, licence revocations and reputational damage simultaneously. This article maps the legal architecture, identifies the most consequential risks and provides a structured approach to managing them.

China does not operate a traditional sanctions regime in the Western sense. Instead, it has built a layered set of instruments that serve analogous functions while reflecting distinct policy objectives.

The Export Control Law (出口管制法, Export Control Law), which entered into force in December 2020, is the foundational statute. It establishes a unified licensing system for controlled items - dual-use goods, military items, nuclear materials and other goods on the control list. Article 2 gives the law extraterritorial reach: it applies to exports from China and, under certain conditions, to re-exports of Chinese-origin controlled items by third parties abroad. Any company that sources controlled components from China and re-exports them must assess whether a Chinese export licence is required, not only a US or EU one.

The Anti-Foreign Sanctions Law (反外国制裁法, Anti-Foreign Sanctions Law, AFSL), enacted in June 2021, is the most operationally disruptive instrument for multinationals. Article 12 of the AFSL creates a private right of action: Chinese entities and individuals harmed by compliance with foreign sanctions can sue the complying party in Chinese courts and recover damages. This places companies in a direct conflict-of-laws trap. A bank that blocks a payment to comply with US OFAC requirements may simultaneously become liable under Chinese law for doing so.

The Unreliable Entity List (不可靠实体清单, Unreliable Entity List, UEL) mechanism, established under the Foreign Trade Law (对外贸易法) and operationalised by the Ministry of Commerce (商务部, MOFCOM) in 2020, allows China to designate foreign companies that are deemed to harm Chinese entities' interests. Designation results in restrictions on China-related trade, investment and personnel entry. The UEL has been used selectively, but the risk of designation is a real compliance variable for companies that implement foreign sanctions against Chinese counterparties.

The Blocking Rules (商务部关于阻断外国法律与措施不当域外适用办法, MOFCOM Blocking Rules), issued by MOFCOM in January 2021, require Chinese entities to report and, in principle, not comply with foreign laws that have extraterritorial application against them. Article 6 of the Blocking Rules creates a reporting obligation within 30 days of becoming aware of the extraterritorial measure. Non-compliance with the reporting obligation itself carries administrative penalties.

China's export control list is administered by MOFCOM jointly with the General Administration of Customs (海关总署, GAC) and the relevant industry regulators. The list covers categories that broadly mirror the EU's dual-use regulation and the US Commerce Control List, but with important divergences in classification and scope.

A controlled item under Chinese law requires an export licence issued by MOFCOM before shipment. The application process involves end-user and end-use certification, which must be provided by the foreign buyer. Processing times vary but typically run from several weeks to several months for sensitive categories. Delays at this stage can disrupt supply chains significantly, and companies that ship without a required licence face penalties under Article 33 of the Export Control Law, including fines, revocation of export rights and, for serious violations, criminal referral.

The end-user certificate requirement creates a practical challenge for distributors and trading companies. Where goods pass through intermediaries, each link in the chain must be able to demonstrate the ultimate destination and use. A common mistake made by international buyers is treating Chinese export formalities as the seller's problem alone. In practice, the buyer's representations in the end-user certificate become part of the Chinese regulatory record, and false or inaccurate representations can expose the buyer to liability under Chinese law and, separately, under the laws of the buyer's home jurisdiction.

China has also imposed targeted export controls on specific technologies as a matter of industrial policy. Restrictions on gallium, germanium, graphite and certain rare earth processing technologies, introduced between 2023 and 2025, require export licences for items that previously moved freely. Companies that built supply chain models on the assumption of unrestricted Chinese exports of these materials have had to restructure sourcing arrangements at significant cost and delay.

A non-obvious risk is the interaction between Chinese export controls and US re-export rules. An item that clears Chinese export licensing may still require a US Bureau of Industry and Security (BIS) licence for re-export if it contains US-origin technology above the de minimis threshold. Managing both simultaneously requires coordination between legal counsel in both jurisdictions, which many mid-sized companies underinvest in.

To receive a checklist on export control compliance for China-sourced goods, send a request to info@vlolawfirm.com.

US sanctions administered by the Office of Foreign Assets Control (OFAC) and export controls administered by BIS apply to US persons and, through the Foreign Direct Product Rule (FDPR), to non-US companies using US technology or software in their manufacturing processes. For any company with Chinese operations, this creates exposure that does not depend on the company being American.

The Entity List maintained by BIS designates Chinese companies and research institutions to which exports, re-exports and transfers of items subject to the Export Administration Regulations (EAR) are restricted or prohibited without a licence. The list has expanded substantially, covering semiconductor manufacturers, telecommunications equipment producers, AI research entities and others. A supplier relationship with a listed entity - even as a downstream customer - can trigger EAR compliance obligations for the non-US party.

The FDPR, expanded in 2022 and again in 2023, extends US jurisdiction to foreign-produced items when those items are the direct product of US-origin technology or software, and when the foreign producer knows or has reason to know the item is destined for a listed entity. For a European or Asian manufacturer using US-licensed chip design tools, this means that chips produced entirely outside the US may nonetheless be subject to US export controls if destined for certain Chinese end-users.

In practice, it is important to consider that the FDPR analysis requires a product-by-product and transaction-by-transaction assessment. A blanket policy of 'we don't export to China' does not resolve FDPR exposure if the company sells to distributors who then supply Chinese customers. The distributor's knowledge and the company's constructive knowledge both matter.

OFAC's Specially Designated Nationals (SDN) list includes Chinese individuals and entities designated under various programmes, including the Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC). Transacting with NS-CMIC listed entities in publicly traded securities is prohibited for US persons, but the practical effect extends to non-US financial institutions that process dollar-denominated transactions through US correspondent banks.

The cost of a BIS or OFAC enforcement action is substantial. Civil penalties can reach the greater of USD 356,579 per violation or twice the transaction value. Criminal penalties under the Export Administration Act can reach USD 1 million per violation and 20 years imprisonment for individuals. For a company processing hundreds of transactions with Chinese counterparties monthly, the aggregate exposure from a systemic compliance failure can be existential.

The Foreign Corrupt Practices Act (FCPA) applies to US issuers, US domestic concerns and, through the 'while in the territory' provision, to foreign nationals and companies that take any act in furtherance of a corrupt payment while physically present in the United States. For international companies operating in China, FCPA exposure arises most commonly through interactions with state-owned enterprises (SOEs) and government officials.

China's economy retains a large state-owned sector. Employees of SOEs are treated as 'foreign officials' under the FCPA, even when the SOE operates commercially. This is a point that many international managers underappreciate. A payment to a procurement manager at a state-owned manufacturer to secure a contract is an FCPA violation, regardless of whether the payment is characterised as a commission, consulting fee or gift.

China's own anti-corruption framework operates in parallel. The Anti-Unfair Competition Law (反不正当竞争法), the Criminal Law (刑法) provisions on commercial bribery (Articles 163-164), and the regulations of the National Supervisory Commission (国家监察委员会) create domestic liability for bribery of both public officials and private sector employees. Foreign companies are subject to these provisions when operating in China.

A common mistake is structuring payments through local agents or distributors on the assumption that intermediary distance provides insulation. Under both the FCPA and Chinese law, payments made 'knowing' they will be passed on to an official are treated as direct violations. The knowledge standard under the FCPA includes conscious disregard and deliberate ignorance, which courts have interpreted broadly.

Practical scenario one: a mid-sized European manufacturer appoints a Chinese distributor to manage government tender submissions. The distributor requests a 15% 'facilitation budget' above the standard margin. Without adequate due diligence and contractual controls, the manufacturer faces FCPA exposure if any portion of that budget reaches a government procurement official, even if the manufacturer never knew the specific recipient.

Practical scenario two: a US-listed company acquires a Chinese joint venture partner. Post-acquisition due diligence reveals that the target maintained a slush fund used for gifts to SOE customers. Under FCPA successor liability principles, the acquirer inherits the liability unless it self-discloses, cooperates and remediates. The cost of remediation - including internal investigation, external counsel, monitor fees and penalties - typically runs into the low millions of USD even for moderate-scale violations.

Practical scenario three: a Hong Kong-based trading company with no US nexus processes payments for a US parent's Chinese subsidiary. If the trading company takes any act in furtherance of a corrupt scheme while a US person is involved, the US parent faces FCPA exposure. The geographic separation does not sever the legal connection.

To receive a checklist on FCPA compliance programme requirements for China operations, send a request to info@vlolawfirm.com.

China's customs regime is administered by the GAC under the Customs Law (海关法) and the Regulations on Import and Export Customs Clearance (进出口货物申报管理规定). Customs compliance in China involves classification, valuation, origin determination and licensing verification - each of which carries independent liability exposure.

Tariff classification disputes are common. China uses the Harmonised System (HS) nomenclature but applies its own interpretive rulings. A misclassification - whether intentional or inadvertent - can result in underpayment of duties, triggering back-payment obligations, penalties and, in serious cases, criminal investigation for customs fraud under Article 153 of the Criminal Law. The GAC has authority to conduct post-clearance audits going back three years, and in cases of suspected fraud, the limitation period extends to five years.

Customs valuation is a persistent source of dispute for related-party transactions. Where a Chinese importer purchases goods from an affiliated foreign entity, the GAC may challenge the declared transaction value and substitute a customs value based on comparable uncontrolled transactions. Transfer pricing documentation prepared for tax purposes does not automatically satisfy customs valuation requirements, and companies that treat these as interchangeable create a gap that auditors exploit.

Rules of origin have become strategically significant in the context of US-China tariff measures. Goods that are substantially transformed in a third country may qualify for preferential tariff treatment, but the transformation must meet the relevant origin criteria. A non-obvious risk is that origin claims that satisfy one jurisdiction's rules may not satisfy another's. A product declared as Vietnamese-origin for US tariff purposes may still be treated as Chinese-origin by the GAC for Chinese export licensing purposes if the value-added in Vietnam is insufficient.

Anti-dumping and countervailing duty investigations initiated by MOFCOM against imported goods follow a structured procedure under the Regulations on Anti-Dumping (反倾销条例) and the Regulations on Countervailing Measures (反补贴条例). Foreign exporters subject to investigation have the right to participate, submit questionnaire responses and request hearings. The failure to participate results in the application of the highest available duty rate, which is consistently the worst commercial outcome. Legal fees for participation in a full anti-dumping investigation typically start from the low tens of thousands of USD and can reach the low hundreds of thousands for complex cases.

The World Trade Organization (WTO) dispute settlement mechanism remains available for government-to-government trade disputes involving China, though its practical utility for private parties is indirect. Companies that believe their government should initiate a WTO challenge can engage through domestic trade remedy procedures and industry associations, but the timeline for WTO proceedings - typically three to five years from panel establishment to final appeal - makes it unsuitable for urgent commercial relief.

The most operationally difficult challenge for multinationals in China is the direct conflict between obligations imposed by foreign sanctions regimes and obligations imposed by Chinese law. The AFSL and Blocking Rules do not provide a safe harbour for companies that comply with foreign sanctions. They create liability. At the same time, OFAC and BIS do not recognise Chinese law as a defence to US sanctions violations.

Several structural approaches reduce exposure without eliminating it entirely.

Operational separation involves maintaining distinct legal entities for China-facing and sanctions-sensitive business lines, with separate management, systems and personnel. This reduces the risk that a compliance action in one entity triggers liability in the other, but it requires genuine operational separation - not merely separate letterheads. Regulators on both sides have shown willingness to pierce corporate structures where the separation is cosmetic.

Jurisdictional routing involves processing transactions through entities and financial institutions in jurisdictions that are not subject to either the US or Chinese conflicting obligations. This approach has become more difficult as secondary sanctions pressure has increased on third-country financial institutions, but it remains viable for certain transaction types and counterparty profiles.

Contractual allocation of compliance risk involves including representations, warranties and indemnities in commercial contracts that allocate the cost of regulatory intervention to the party best positioned to manage it. This does not eliminate regulatory liability but determines who bears the economic cost between the contracting parties.

A loss caused by incorrect strategy is most acute when a company applies a US-centric compliance programme to its China operations without adapting it to Chinese law requirements. The result is a programme that creates AFSL and Blocking Rules exposure while providing only partial protection against US enforcement, because the programme was not designed with Chinese regulatory interaction in mind.

The business economics of the compliance decision depend heavily on the company's China revenue exposure. For a company deriving a significant portion of revenue from China, the cost of a robust dual-compliance programme - typically starting from the low hundreds of thousands of USD annually for a mid-sized multinational - is justified by the avoidance of enforcement actions that can reach multiples of that figure per incident. For a company with marginal China exposure, a lighter-touch risk assessment and monitoring programme may be proportionate.

When to replace one procedure with another: companies that initially manage China trade compliance through internal legal teams often reach a point where the complexity of the dual-compliance environment requires external specialist counsel. The trigger is typically either a regulatory inquiry, a significant transaction involving controlled items or a corporate event such as an acquisition that brings new China exposure. Waiting for an enforcement action to engage specialist counsel is consistently more expensive than proactive engagement.

To receive a checklist on structuring a dual-compliance programme for China trade and sanctions, send a request to info@vlolawfirm.com.

What is the most significant practical risk for a European company sourcing components from China?

The most significant risk is the interaction between China's Export Control Law and the US Foreign Direct Product Rule. A European company may receive components that require a Chinese export licence, and those same components may be subject to US re-export controls if they contain US-origin technology. A failure to identify this dual obligation before shipment can result in simultaneous enforcement exposure in both jurisdictions. The practical mitigation is a product-level classification analysis conducted before entering into supply agreements, not after the first shipment has cleared customs.

How long does a Chinese customs post-clearance audit take, and what are the financial consequences?

A standard GAC post-clearance audit typically runs from three to twelve months depending on the complexity of the transactions under review and the volume of documentation requested. The financial consequences of an adverse finding include back-payment of underpaid duties, interest calculated from the original clearance date, and administrative penalties that can reach several times the underpaid amount. In cases where the GAC refers the matter for criminal investigation, the timeline extends significantly and the exposure includes personal liability for responsible individuals within the company. Engaging customs counsel at the outset of an audit, rather than after the GAC has issued preliminary findings, materially improves the outcome.

When should a company consider operational separation rather than a unified compliance programme?

Operational separation becomes the preferred approach when a company's China-facing business involves counterparties or transaction types that are directly targeted by foreign sanctions, making full compliance with both US/EU and Chinese law simultaneously impossible. A unified compliance programme works when the conflict is theoretical or manageable through transaction-level screening. When the conflict is structural - for example, a financial institution that must both process and block certain payments - separation into distinct legal entities with distinct governance is the more defensible structure. The decision requires a jurisdiction-specific legal analysis, because the adequacy of separation is assessed differently by US, EU and Chinese regulators.

China's trade and sanctions environment requires international businesses to manage obligations that are not merely complex but structurally in conflict. The Export Control Law, the Anti-Foreign Sanctions Law, the Blocking Rules and the Unreliable Entity List create a domestic framework that pushes back against foreign regulatory reach. The FCPA, OFAC and BIS regimes impose obligations that extend into Chinese operations regardless of where the company is incorporated. Managing this environment requires a compliance architecture designed for both systems simultaneously, not a US or EU programme applied to a Chinese context.

Our law firm VLO Law Firm has experience supporting clients in China on trade compliance, export controls, customs disputes and anti-corruption matters. We can assist with compliance programme design, regulatory inquiry response, customs audit defence and FCPA risk assessment in the China context. To receive a consultation, contact: info@vlolawfirm.com.