A new paper by Jingwan Dai and Kathrin Rau

In response to the U.S.’ Iran-related sanctions against five Chinese petroleum and petrochemical companies, China issued its first Prohibition Order under the 2021 Rules on Counteracting Improper Extraterritorial Application of Foreign Legislation and Other Measures (“Blocking Rules”) on 2 May 2026. The U.S. measures were based on the companies’ alleged participation in Iranian oil transactions and included their entry into the Specially Designated Nationals and Blocked Persons List. The Prohibition Order marks the first concrete use of China’s blocking mechanism against U.S. sanctions and provides an early test case for the practical operation of China’s emerging anti-foreign sanctions framework.

The Prohibition Order and its Chinese legal basis

The Prohibition Order provides that the relevant U.S. sanctions shall not be recognised, implemented, or complied with. Its immediate function is therefore clear: it seeks to prevent U.S. sanctions from producing legal effects within the Chinese legal order and to protect affected Chinese companies from the consequences of complying with foreign sanctions. At the same time, the wording of the Order leaves important questions open, most notably regarding the precise scope of the prohibition and the actors to whom it is addressed.

Under Chinese law, the specific legal basis for the Order is the Blocking Rules, especially Articles 2, 6 , and 7. Once an improper extraterritorial application is identified, Article 7 authorises the Working Mechanism, an inter-agency coordination mechanism led by the Ministry of Commerce and involving other relevant authorities, to issue a prohibition order.

Article 2 sets out three conditions for the application of the Blocking Rules: there must be an extraterritorial application of foreign legislation or measures; such application must violate international law and the basic principles of international relations; and it must improperly prohibit or restrict normal economic and trade activities between Chinese persons or entities and third countries or their persons or entities. In the present case, the Chinese authorities could plausibly regard these conditions as fulfilled. First, by imposing sanctions on Chinese companies for transactions involving Iranian petroleum that took place outside U.S. territory, involved non-U.S. entities, and concerned non-U.S. oil, the U.S. measures may constitute an extraterritorial application of foreign legislation and measures. Second, the U.S. sanctions attach legal consequences to Chinese-Iranian petroleum transactions without a sufficient U.S. nexus, thereby raising concerns under the customary international law of jurisdiction and the principle of non-intervention, as discussed below. Third, petroleum trade between China and Iran constitutes normal economic and trade activity between Chinese and third-country entities that the U.S. sanctions seek to restrict.

Article 6 further specifies the factors for the Working Mechanism to determine whether an extraterritorial application is improper, including its impact on China’s sovereignty, security and development interests and on the legitimate rights and interests of Chinese persons and entities. In this case, the sanctions may affect China’s ability to conduct its external economic relations independently, as well as the commercial interests of the five companies and China’s economic security and development interests, given their role in the development and upgrading of China’s petroleum and petrochemical industry. The breadth of these concepts leaves the competent authorities considerable discretion in making this assessment. Moreover, Article 6 refers to “potential” impact, suggesting that actual damage need not already have occurred.

The Order should also be understood within the broader anti-foreign sanctions framework under China’s foreign-related rule of law. It relied not only on the Blocking Rules, but also on other laws that provide different layers of legal authority: the National Security Law establishes the overarching mandate to safeguard national security, including economic security; the Foreign Relations Law authorizes countermeasures and restrictive measures; and the Anti-Foreign Sanctions Law and its Implementing Provisions provide the specific anti-sanctions framework and institutional arrangements.

China has recently adopted the 2026 Regulations on Countering Improper Extraterritorial Jurisdiction of Foreign Countries. The relationship between these Regulations and the Blocking Rules is not entirely self-evident. Article 19(2) of the Regulations provides that, where other Chinese rules govern foreign restrictions on normal economic and trade activities between Chinese entities and third countries, those rules shall prevail. This suggests that the Blocking Rules function as a more specific instrument for such situations, while the 2026 Regulations provide a broader framework for countering improper extraterritorial jurisdiction.

The Prohibition Order under International Law

The assessment of the Prohibition Order under international law is more complex and requires, first, a legal assessment of the U.S. sanctions themselves.

The Legality of the U.S. Sanctions

U.S. sanctions are easier to justify insofar as they operate within traditional bases of jurisdiction. Measures that block assets located in the United States, prohibit U.S. persons from dealing with designated entities, or condition access to U.S. markets and financial infrastructure are generally defensible on the basis of territoriality or nationality.

The more difficult question concerns their secondary or extraterritorial dimension. The designation of the Chinese companies also pressures non-U.S. business partners to avoid transacting with them because of potential sanctions exposure, giving the measures the character of secondary sanctions. This may lead to overcompliance, meaning that companies avoid even legally permissible transactions to reduce uncertainty and enforcement risk. Such a secondary application is generally unlawful unless a sufficient jurisdictional basis or other legal justification is proven.

A particularly contested issue is whether use of the U.S. financial system provides a sufficient territorial nexus. Transactions routed through U.S. correspondent banks formally involve U.S. entities. Yet treating every technical or incidental use of dollar clearing as sufficient for far-reaching sanctions consequences would effectively allow the U.S. to restrict trade between third States and sanctioned targets globally. Such a nexus should therefore not be treated as unlimited, particularly where the transaction has no substantial U.S. connection beyond payment infrastructure.

Other possible bases of jurisdiction, such as the protective principle or the effects doctrine, do not easily justify the measures either. The protective principle applies where foreign conduct threatens essential security interests, territorial integrity or political independence. The effects doctrine may allow regulation of foreign conduct producing sufficiently direct, substantial and foreseeable effects. Yet ordinary third-country trade with a sanctions target does not automatically meet these thresholds. Transactions between Chinese petroleum companies and Iranian suppliers, conducted outside U.S. territory and without U.S. persons or property, create at most indirect and policy-mediated effects on the United States.

This assessment is reinforced by the principle of non-intervention. Economic pressure does not automatically amount to unlawful coercion. However, where secondary sanctions seek to force third States and their economic operators to abandon otherwise lawful trade and align with the sanctioning State’s foreign policy, the argument for unlawful intervention becomes stronger. In this case, if the measures’ practical effect is to compel Chinese and third-country actors to discontinue lawful trade outside U.S. jurisdiction, they interfere with China’s freedom to conduct its external economic relations.

The Legality of China’s Prohibition Order

China’s Prohibition Order must be assessed separately. China is generally entitled to refuse recognition and enforcement of foreign public-law measures and to regulate persons and entities subject to its jurisdiction. In this respect, the Order is likely lawful under international law. However, if applied to foreign persons abroad solely for complying with U.S. sanctions without an accepted basis of Chinese jurisdiction, China would risk reproducing the jurisdictional defect it criticizes in U.S. secondary sanctions. Such extraterritorial application could only be justified, if at all, as a lawful countermeasure under the law of State responsibility.

The Order does not clearly specify whether the obligation is limited to persons subject to Chinese jurisdiction or also binds foreign actors abroad. This ambiguity may have deterrent effects beyond the Order’s clearly lawful domestic scope, as foreign companies may adjust their conduct because they cannot exclude legal or commercial consequences in China.

A comparative perspective: The EU Blocking Regulation

The Chinese response is not unprecedented. The EU Blocking Regulation (Council Regulation (EC) No 2271/96), adopted in 1996 in response to U.S. extraterritorial sanctions and updated in 2018 after the U.S. withdrawal from the JCPOA, serves a similar function.

Both regimes seek to neutralise the domestic effects of foreign extraterritorial sanctions through similar legal techniques: reporting duties, non-recognition and non-enforcement, prohibition of compliance, authorisation or exemption mechanisms, remedies, and penalties. A key difference, however, concerns their scope. The EU Blocking Regulation applies to specified foreign laws listed in its annex, whereas under the Chinese Blocking Rules, the Working Mechanism determines case by case whether a foreign law or measure constitutes an improper extraterritorial application. This makes the Chinese model more flexible but less predictable.

The regimes also differ institutionally. The EU model is more legalistic and follows a clear procedure, operating through a directly applicable regulation, Commission guidance, an authorisation mechanism and Member-State penalties. The Chinese model is more administrative and executive-led and is embedded in a wider anti-sanctions framework.

Finally, recent EU sanctions practice adds nuance to the comparison. Since 2022, EU sanctions on Russia have increasingly included anti-circumvention tools affecting third-country entities. While not necessarily equivalent to U.S. secondary sanctions, these measures complicate any simple contrast between the EU’s rejection of extraterritorial sanctions and U.S.’ reliance on them.

Conclusion

For European and German companies, the practical significance of the Prohibition Order lies primarily in the uncertainty created by overlapping sanctions and blocking regimes. While European companies may not be direct addressees of the Chinese Prohibition Order, those with exposure in China must assess not only U.S. sanctions risks, but also whether refusing to deal with listed Chinese companies could be viewed in China as compliance with a prohibited foreign measure.

The Order also signals China’s shift from constructing its anti-foreign sanctions framework to implementing it in practice. Whether and to what extent these instruments will be applied to foreign entities abroad, thereby potentially creating the same kind of legally problematic extraterritorial scope that they seek to counter, remains to be seen.

The full paper titled China’s First Prohibition Order under the Blocking Rules: A Chinese, International and Comparative Law Assessment of China’s Response to U.S. Secondary Sanctions is available on SSRN and forthcoming in Zeitschrift für chinesisches Recht, Issue 3/2026.

Jingwan Dai is a Research Associate at the Institute of East Asian Studies, University of Cologne. Kathrin Rau is a Research Assistant at the Institute of East Asian Studies and the Academy for European Human Rights Protection, University of Cologne. Find out more about her work and get in touch with her under kathrin.rau[at]uni-koeln.de or via LinkedIn. This research was funded by the Federal Ministry of Research, Technology and Space of the Federal Republic of Germany under grant reference number 01DO25011. The authors would like to thank Björn Ahl and Daniel Sprick for their helpful comments and suggestions on earlier drafts.