Xiaomi Beats the Tech Blacklist While China Counters Extraterritorial Sanctions

Chinese smartphone manufacturer Xiaomi sued the U.S. government over what it views as unjust extraterritorial sanctions in the same month that the Chinese government sought to protect Chinese companies more broadly from sanctions and export controls.

Xiaomi Store in Hangzhou, China.

By: Krista Landis, Staff member

On January 14, 2021, the outgoing Trump Administration added Xiaomi to a blacklist of Chinese “military-controlled” companies.  This list already included Huawei (another Chinese smartphone giant) and several other tech companies believed to be associated with the Chinese military.  Placement on the blacklist restricts these companies’ ability to do business in the United States by preventing U.S. entities from investing in them. 

This blacklist was part of a larger effort by the Trump Administration to counter alleged intellectual property theft from Chinese tech companies.  The abrupt placement of Xiaomi on the blacklist in Trump’s final days was likely a last-ditch effort to project his ‘tough-on China’ legacy on his way out the door.  But for Xiaomi, this designation is more than just a symbolic ‘tough on China’ gesture ­­– it mandated that all U.S. backers divest from the company by January 2022.

Xiaomi Files Suit in Federal Court

As a result, on January 29th, Chinese smartphone maker Xiaomi sued the U.S. government in federal court challenging its designation as a “military-controlled” company and the U.S. sanctions that followed.  Xiaomi’s main arguments are that this designation is not based on sound evidence and that it violates the company’s 5th Amendment Due Process rights.  A U.S. federal judge recently agreed that the evidence the Department of Defense cited to support the sanction was insufficient and temporarily halted the ban.

China’s New Anti-Blocking Legislation

Coincidentally, Xiaomi filed this suit just a few weeks after the People’s Republic of China (“PRC”) passed new anti-blocking legislation, countering what China views as unjust extraterritorial sanctions and export controls.  The new law gives Chinese companies a claim in Chinese courts to recover damages when they are adversely affected by the actions of foreign governments.

These blocking rules mirror the European Union’s (“EU”) Blocking Regulation which was adopted in 1996 as a way to nullify the effect of extraterritorial application of laws by third countries.  The EU regulation empowers the European Commission to create a list of unjust legislations that have an adverse extraterritorial impact on EU individuals or the interests of the Union.  The EU adopted this regulation to protect EU businesses when the United States took measures against Cuba, Libya, and Iran in the late 1990s. Similarly, the new Chinese blocking rules are a reaction to U.S. sanctions.  Both the new Chinese law and the EU Blocking Regulation aim to express that unjust extraterritorial sanctions are counter to international law.

The Relevance of China’s Anti-Blocking Legislation to the Xiaomi Suit

In fact, Xiaomi’s designation as a “military-controlled” company by the United States is exactly the type of extraterritorial action that China is aiming to punish with its new blocking rules.  In its complaint filed in federal court, Xiaomi asserted that it would suffer irreparable harm if the investment restrictions were to go into place on March 15th.  Three of its top ten shareholders are U.S. institutional investors who will be obligated to divest from the company by January 2022 if the designation remains intact.

China’s new Anti-Blocking Legislation became effective immediately in January 2021, though it is currently only a legal framework that has yet to be enforced.  Under the statute, a PRC person must file a report with the Chinese Ministry of Commerce within thirty days of being subject to any targeted extraterritorial measure that prohibits or restricts its ability to engage in “normal economic, trade or other activities” with an entity or individual based in a third country.  

However, unlike the EU Blocking Regulation, we do not yet know precisely what measures will be classified as the “unjustified extraterritorial application” of foreign law.  If, as seems likely in this case, the working mechanism within the Ministry of Commerce does decide that a foreign law or measure fits the definition, U.S. institutional investors could find themselves subject to legal action in China for complying with U.S. law.  Under these rules, Xiaomi, as a PRC business, is obligated to report extraterritorial legislation that affects its ability to engage in “normal economic, trade or other activities.”

The Biden Administration on Chinese Tech Companies

Though the Biden Administration did not start this fight, Biden’s Secretaries of Defense and Treasury are the named defendants in Xiaomi’s suit.  It remains to be seen how Biden’s Department of Defense will react to Judge Contreras’ recent ruling temporarily halting the ban and whether they will continue to defend Xiaomi’s designation and the tech blacklist more generally. 

Many experts expect that the new administration will increase cooperation on international issues like climate change, and many also expect instituting new tariffs on Chinese exports to become a thing of the past.  However, reversing these tech-based sanctions would have significant domestic political repercussions and could be seen as a step too far for the Biden Administration.  Accusations of Chinese intellectual property theft from American companies and the U.S. government have contributed to increasingly hawkish attitudes in Congress and tough public opinion on China as a whole.  Rolling back these tech sanctions, which many American businesses have seen as a boon, would likely result in domestic backlash. 

While these sanctions remain in place, many American and Chinese companies attempting to do business will be caught between the laws of the two governments. However, the existing sanctions regimes will probably be adjusted as relations between China and the United States change in the coming months.  Relations between China and the United States seem to be shifting a bit since the arrival of the Biden Administration.  Yet while many experts have expected the two nations to appear more amicable on the surface, deep divisions continue to manifest publicly.

Despite efforts to make relations between the two countries more productive, it would be unwise to assume that all sanctions (including the blacklist Xiaomi is currently challenging) will simply be wiped away.  There is still a hawkish attitude in Congress encouraging a hard line on Chinese relations and a consensus among many politicians and American companies that many of these Chinese tech companies should be sanctioned for alleged intellectual property theft.  These Chinese tech giants will continue to face challenges from the U.S. government, and as a result, multinational corporations and investors based in the United States will have to navigate an increasingly complicated compliance regime while doing business in China.

Krista Landis is a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. She graduated from the University of Michigan in 2016.