China’s Counter-Sanctions Framework Raises More Questions for Multinational Companies

China’s recently issued Regulations on the Security of Industrial and Supply Chains (Decree No. 834) and Regulations on Countering Foreign Improper Extraterritorial Jurisdiction (Decree No. 835) continue to raise significant operational and compliance questions for multinational companies navigating overlapping sanctions, export controls, supply chain, and regulatory obligations.

Following our recent LawFlash, China Issues New Regulations on Countering Foreign Extraterritorial Jurisdiction: What MNCs Need to Know, Morgan Lewis hosted a virtual fireside chat with partners Todd Liao and Carl Valenstein. Attendees from companies across industries raised several key questions regarding implementation risk, enforcement exposure, and the intersection of China’s framework with existing US, EU, and other foreign compliance requirements.

Below are selected questions and our responses addressing several of the most immediate issues companies are facing as they evaluate the implications of China’s evolving countering extraterritorial jurisdiction framework.

Is there risk to employees and executives traveling to China after a wind-down with a supplier?

There can be risk, but the level of exposure depends on specific facts, including how the wind-down was conducted, how it was communicated, and whether the Chinese side perceives it as sanctions driven.

Under Decree 835, there is now a codified legal basis for enforcement against individuals involved in “implementing” foreign extraterritorial measures. The Nanjing Maritime Court case also demonstrated that Chinese courts are willing to treat sanctions-driven commercial decisions as actionable, meaning risk can come from private parties, not just the government.

Key variables include what was documented in the termination communications, whether there is any discoverable indication the wind-down was sanctions motivated, and the strategic importance of the supplier or sector from Beijing’s perspective.

Given the “interlocking effect” across countersanctions, export controls, and other regimes, how should multinational companies operationalize compliance when obligations directly conflict?

The old approach of quietly complying with US requirements while assuming limited enforcement risk in China is becoming increasingly untenable now that the legal infrastructure is fully in place.

Decree 834 restricts certain types of supply chain investigation, while Decree 835 targets implementation or promotion of foreign measures. Together with the Anti-Foreign Sanctions Law and data security rules, multiple overlapping frameworks can capture different aspects of the same activity.

The starting point is a mapping exercise identifying where existing compliance procedures intersect with activities that could be characterized as restricted under the Chinese framework. Some companies are moving toward jurisdiction-specific compliance architectures rather than a single global framework. The appropriate approach depends on the specifics of the company’s operations, China footprint, and risk tolerance.

As a US-headquartered global reinsurer with sanctions clauses like LMA3100, would these decrees realistically require changes to the way we conduct business?

Decree 835 specifically targets the “implementation” of foreign extraterritorial measures. From Beijing’s perspective, a sanctions exclusion clause like LMA3100 is a contractual mechanism that implements foreign sanctions within a commercial relationship. Under the prior regime, China lacked the enforcement infrastructure to challenge that. Under Decree 835, it now has a codified legal basis to do so.

The practical enforcement risk depends on several factors, including whether the company is reinsuring Chinese cedants, whether it has China-related exposures, and whether it might need to invoke a sanctions exclusion against a Chinese counterparty. The Ministry of Commerce of the People's Republic of China prohibition order issued on May 3, 2026 is an example of how quickly the landscape can shift.

The Nanjing Maritime Court case also opened the door to private litigation, meaning Chinese counterparties themselves could challenge sanctions-driven decisions.

What if the reason for termination becomes apparent from disclosure to OFAC? How could that be managed?

The core issue is narrative consistency. If a termination is framed to the Chinese supplier as commercially motivated, but an Office of Foreign Assets Control (OFAC) filing makes the sanctions nexus apparent, that inconsistency creates exposure if it surfaces.

Companies cannot misrepresent anything to OFAC. In many cases, there are genuinely multiple reasons for a business decision, and where those commercial considerations are real and contemporaneously documented, they provide a more complete and defensible basis for the decision across all relevant jurisdictions. Timing, sequencing, and confidentiality considerations are also relevant.

What should companies with global export frameworks implement to avoid impact from these regulations?

First, companies should review existing compliance policies through the lens of the Chinese framework, specifically whether global compliance manuals contain language that could be characterized as “promoting” foreign extraterritorial measures under Decree 835, such as blanket requirements that all subsidiaries comply with US export controls.

Second, companies should assess information collection and due diligence processes. Decree 834 could restrict certain types of supply chain investigation activities if they are characterized as threatening supply chain security.

Third, companies should evaluate how compliance decisions are documented and communicated, particularly decisions involving Chinese counterparties or supply chains. The specific implementation steps depend on the company’s China footprint and where its supply chain intersects with Chinese entities.

Would the Chinese government identify these violations, or would companies report them for enforcement?

The enforcement channels are broader than many companies initially assume. There are three primary pathways.

First, government-initiated enforcement: MOFCOM and other agencies can investigate and impose penalties directly, particularly in higher-profile cases involving strategically important sectors.

The second channel of enforcement is private litigation. The Nanjing Maritime Court case demonstrated that Chinese companies can sue foreign counterparties for sanctions-driven commercial decisions. Chinese business partners therefore have both a legal basis and an economic incentive to bring claims.

Third, regulatory complaints from Chinese companies or industry associations can trigger government investigations.

The practical takeaway is that enforcement risk is not limited to the government and can arise directly from commercial relationships.

Are US-imposed tariffs legitimate considerations for termination of a supply agreement?

Tariffs are generally a stronger basis for termination than sanctions because they are economically distinct. Tariffs increase costs rather than prohibit conduct. A tariff-driven termination can therefore be framed as a commercial decision based on changed economics, which is fundamentally different from a sanctions-driven termination implementing a foreign government prohibition. That distinction matters under Decree 835.

There are, however, important considerations. If tariffs are part of a broader package of US-China trade restrictions, the Chinese side may still view a tariff-driven termination as part of a broader pattern, particularly in strategically important sectors. Decree 834’s supply chain security framework could also become relevant if the termination is perceived as disrupting Chinese industrial supply chains.

As with other scenarios, how the decision is documented and communicated matters. The framing should focus on commercial and economic rationale.

Looking Ahead

Although Decrees 834 and 835 took effect immediately, significant uncertainty remains regarding implementation and enforcement. Many core concepts remain undefined, and companies continue to assess how Chinese authorities may apply the framework in practice, particularly in situations involving overlapping sanctions, export controls, supply chain diligence, and contractual compliance obligations.

What is increasingly clear, however, is that multinational companies operating in or with China are now navigating a more integrated and operationalized regulatory framework. Routine business decisions involving supplier relationships, due diligence activities, contractual provisions, and internal compliance policies may now carry heightened regulatory, litigation, and personal exposure risk.

As a result, companies should continue reassessing how cross-border compliance decisions are documented, communicated, and operationalized across jurisdictions as the regulatory landscape continues to evolve.