In response to President Xi Jinping’s call to accelerate its country’s law-based governance beyond its borders, China has in recent years constructed a growing suite of legal instruments with extraterritorial effect.Footnote 1 Although these measures serve multiple purposes—including facilitating China’s global expansion and protecting its overseas interests—one of their central functions is to counter U.S. sanctions and trade restrictions.Footnote 2 China’s weaponization of extraterritorial law, shaped by intensifying U.S.-China rivalry, thus represents a distinct and emerging form of extraterritoriality. It differs from the traditional expansion of extraterritorial jurisdiction, which has often operated as a form of legal imperialism in service of a broader neocolonial project.Footnote 3
Since 2018, Washington has aggressively deployed extraterritorial sanctions and related restrictions against Chinese firms and individuals. Yet for much of this period, Beijing refrained from invoking its most potent retaliatory tools—such as sweeping restrictions on rare-earth exports with extraterritorial consequences—until very recently. This essay argues that China’s initial restraint, often read as a sign of relative weakness vis-à-vis the United States, has instead become a source of strategic leverage. By delaying the deployment of its legal arsenal while consolidating industrial capacity and strengthening institutional support, Beijing preserved escalation options until structural conditions shifted more decisively in its favor.
China’s Extraterritorial Use of Its Law
China’s reckoning with the reach of U.S. regulation came into sharp focus during the 2017–2018 Sino-U.S. trade confrontation. Two episodes were particularly revealing. In 2017, the U.S. Department of Commerce imposed a roughly $1.1 billion civil penalty on ZTE Corporation, a state-owned telecommunications company, for sanctions violations and related compliance failures.Footnote 4 When ZTE later fell short of agreed remedial measures, the reimposition of U.S. export restrictions in 2018 effectively cut off access to critical U.S.-origin components, forcing the company to suspend core operations.Footnote 5 The arrest of Huawei’s chief financial officer Meng Wanzhou in Vancouver in December 2018, pursuant to a U.S. extradition request alleging bank fraud related to Iran sanctions evasion, conveyed a similar lesson.Footnote 6 Together, these incidents made clear to Beijing that U.S. extraterritorial enforcement—through secondary sanctions, export bans, and criminal prosecution—could disrupt global supply chains and, in particular, threaten the survival of leading Chinese tech firms.
In response, China moved to construct a reciprocal legal infrastructure designed to deter and counter foreign legal aggression. The Ministry of Commerce announced the framework for the Unreliable Entity List (UEL) in 2019; the Export Control Law was adopted in 2020; and the Anti–Foreign Sanctions Law followed in 2021.Footnote 7 Parallel enactments, including the Data Security Law and the Personal Information Protection Law, also incorporated explicit extraterritorial provisions.Footnote 8 At the same time, Chinese policymakers signaled a willingness to leverage China’s Anti-Monopoly Law and merger control regulations as instruments of geopolitical bargaining.Footnote 9
Yet the operationalization of this architecture has been notably measured. The UEL authorizes sweeping consequences—restrictions on trade and investment, limits on entry, and denial of work permits.Footnote 10 However, the first formal designations did not occur until February 2023, and the initial targets—Lockheed Martin and Raytheon Technologies—had minimal commercial exposure within China.Footnote 11 More broadly, although the Export Control Law and the Anti–Foreign Sanctions Law furnish statutory authority for overt countermeasures, Beijing has often preferred informal sanctions—delays in merger approvals, antitrust investigations, anti-dumping probes, travel ban warnings, customs slowdowns, reduction in imports, and other administrative frictions—over highly visible sanctions that might provoke immediate and costly escalation.Footnote 12
To many observers, this pattern resembles performative lawmaking—statutes enacted with rhetorical force but enforced only sparingly in practice.Footnote 13 That characterization is intuitively appealing, yet analytically incomplete. It overlooks a fundamental distinction between the territorial and extraterritorial application of law. Territorial regulation ultimately rests on the state’s monopoly on legitimate coercion within its own borders. Extraterritorial regulation, by contrast, depends on structural power—the issuing state’s ability to leverage geopolitical and economic position to shape conduct beyond its territory. In reality, a state’s rules meaningfully affect conduct only if it controls strategic chokepoints such as financial clearing systems, advanced technologies, logistics infrastructure, or indispensable markets.Footnote 14 In China’s case, the foundations of extraterritorial influence rest on three principal pillars: the gravitational pull of its vast consumer and industrial market, its growing technological footholds in selected sectors, and its dominance in critical minerals and their downstream processing.
Yet the coercive value of these leverages is endogenous: their potency depends on continued foreign reliance on China. When China weaponizes legal authority against overseas firms or individuals, it risks accelerating diversification, substitution, and allied coordination aimed at reducing exposure to Chinese leverage. This dynamic generates an intractable dilemma: robust deployment of extraterritorial measures enhances credibility and signals resolve, but it may simultaneously undermine long-term leverage; conversely, non-enforcement or merely performative enforcement risks reducing statutory authority to rhetoric, weakening deterrence. Over the past half-decade, China appears to have managed this tension through institutional restraint and selective activation. Its political structure—less constrained by electoral cycles and more oriented toward long-term planning—facilitates a strategy of calibrated patience, as the following analysis illustrates.
China’s Calculated Response
In 2023, China imposed export restrictions on gallium and germanium—two critical minerals essential to semiconductor and defense applications.Footnote 15 Although shipments fell sharply in the immediate aftermath, trade flows partially recovered within months, and the episode was widely interpreted as a calibrated retaliation against Washington’s sweeping semiconductor bans on Chinese firms in 2022.Footnote 16 The escalation came later. In the spring of 2025, amid renewed tariff measures under a second Trump administration, China broadened its export controls to cover a wider range of critical minerals.Footnote 17 The decisive shift occurred on October 9, 2025, when the Ministry of Commerce unveiled measures asserting extraterritorial licensing requirements over certain foreign-made products incorporating Chinese-origin rare-earth content.Footnote 18 Functionally analogous to the U.S. Foreign Direct Product Rule applied to Huawei in 2020 and later extended to other Chinese firms, the new regime marked the first time China required foreign entities to obtain licenses for exports of covered rare-earth inputs from one third country to another.Footnote 19
The timing reflects deliberate strategic calculation. Since 2022, the U.S. Department of Commerce has significantly escalated a series of export control measures to curtail Chinese firms’ access to critical semiconductor technologies.Footnote 20 China’s October 2025 measures followed closely on the heels of further expansions by the Department of Commerce of the Entity List and Military End User restrictions imposed on Chinese firms in the previous month.Footnote 21 From Beijing’s perspective, escalation had become increasingly necessary: failure to respond risked signaling weakness and inviting additional U.S. pressure.Footnote 22
China’s decisive move also rested on institutional and industrial groundwork laid over decades. In recent years, Beijing has successfully consolidated the rare-earth sector into a small number of large, state-backed conglomerates, reducing fragmentation and enhancing regulatory oversight.Footnote 23 At the same time, global technological trends significantly increased Western dependence on high-performance rare-earth magnets and critical minerals used in electric vehicles, wind turbines, advanced electronics, defense systems, and data infrastructure.Footnote 24 While rare-earth ore is mined in multiple jurisdictions, the complex separation and processing stages remain heavily concentrated in China. China’s advantage thus lies not simply in market share, but in embedded industrial know-how—a technological moat built through decades of iterative refinement, regulatory tolerance of environmental costs, and vertically integrated supply chains.Footnote 25
Against this backdrop, Beijing could plausibly conclude by 2025 that its leverage had reached a point of maturity. Even if the United States and its partners accelerated diversification efforts in response to expanded export controls, meaningful substitution would unfold only over an extended timeline.Footnote 26 In effect, the anticipated short-term bargaining gains outweighed the longer-term risks of gradual diversification triggered by enforcement. The 2025 episode thus underscores that China’s prior restraint in deploying extraterritorial legal authorities was not evidence of merely symbolic lawmaking. Rather, it reflected strategic sequencing. When geopolitical pressure intensified and the cost–benefit balance shifted, China activated its most potent legal countermeasures.
Washington’s Miscalculation
Washington enters strategic competition with Beijing from a position of considerable structural advantage. The centrality of the dollar, dominance in advanced technologies, and influence over its massive network of allies gave the United States tremendous leverage to deploy extraterritorial sanctions and restrictions unmatched by any other state.Footnote 27
Yet structural advantage can breed overconfidence. In the post–Cold War era, the most sweeping exercises of U.S. extraterritorial authority were directed largely at economically peripheral countries such as Iran, North Korea, Syria, and Cuba, often with little concern about reciprocal countermeasures.Footnote 28 It was not until the first Trump administration that these tools were applied with sustained intensity against China, the world’s second-largest economy, with formidable manufacturing depth, a growing high-tech ecosystem, and substantial state capacity.Footnote 29 When directed at a rival of this scale, U.S. sanctions and restrictions trigger adaptation, substitution, and countermeasures that can generate far-reaching and often unintended consequences.
The semiconductor sector illustrates this dynamic. U.S. policy has sought to slow China’s technological ascent by restricting access to advanced chips and manufacturing equipment. Although these measures initially shocked Chinese firms, they also intensified Beijing’s commitment to technological self-sufficiency.Footnote 30 Since 2019, China has directed large-scale state investment toward domestic fabrication capacity, design software, and equipment manufacturing in an effort to reduce dependence on U.S. suppliers.Footnote 31 As Chinese substitution takes hold, America’s coercive leverage correspondingly attenuates. Even as the Trump administration has begun to relax certain export controls on advanced chips since 2025, China’s response has been notably muted, with some authorities reportedly restricting domestic firms from buying American chips.Footnote 32
A second miscalculation lies in Washington’s underappreciation of its own vulnerability. Rare-earth elements provide a telling example. Contrary to the prevailing narrative that the decline in rare-earth production in the United States stemmed principally from Chinese market manipulation, substantial evidence suggests that domestic political economy played a decisive role.Footnote 33 In the 1970s and 1980s, the United States was the world’s leading producer of rare earths.Footnote 34 By the 1990s, however, U.S. firms confronted rising environmental compliance costs and competitive pressures. In response, many shifted processing and manufacturing operations abroad, transferring technical expertise and intellectual property to China in order to capitalize on lower production expenses and more permissive regulatory conditions.Footnote 35 What initially appeared to be an efficient cost-saving strategy—effectively the outsourcing of environmental harms—proved misaligned with long-term strategic interests.Footnote 36 Over time, this combination of market-driven offshoring and insufficient state coordination hollowed out domestic capabilities in separation and downstream refinement.Footnote 37 The resulting vulnerability did not fully register in Washington until China escalated export controls in 2025.Footnote 38 By then, reliance on Chinese processing had become deeply entrenched, leaving the United States in a weakened bargaining position.
Conclusion
Until recently, China’s extraterritorial deployment of domestic law remained comparatively restrained—a posture shaped by its asymmetric position vis-à-vis Washington. Unlike the United States, which has long exercised global leverage through financial dominance and technological chokepoints, China remained deeply reliant on foreign capital, imported technologies, and export markets. In 2025, however, Beijing activated a highly consequential countermeasure: rare-earth export controls with extraterritorial implications, functionally analogous to the U.S. Foreign Direct Product Rule. The timing reflected a calculated judgment that the short-term risks of diversification were manageable, while the value of deterring additional U.S. sanctions and restrictions was substantial. By contrast, despite its structural advantages, Washington appeared insufficiently prepared for rare-earth supply disruptions, weakening its bargaining power in the ongoing trade war with China. The result is a highly fluid power dynamic in which China has transformed what once appeared to be weakness into strategic strength, while the United States risks converting structural advantage into long-term vulnerability.
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