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In recent years, unilateral sanctions by the United States, particularly secondary sanctions, have become one of the most significant challenges to Iran’s commercial and legal relations with other countries. Among these, the People’s Republic of China, as one of Iran’s main economic partners, has been subjected to direct and indirect pressures from Washington. These sanctions have not only disrupted bilateral trade flows but have also affected contract structures, payment methods, and dispute resolution mechanisms.
This article defines secondary sanctions, reviews their application methods, analyzes their legal and commercial impacts on Iran-China relations, and examines legal countermeasures.
What Are U.S. Secondary Sanctions?
Sanctions, as a tool of foreign policy, have always been an integral part of the U.S. government’s strategies in international relations. Secondary sanctions, introduced especially after the 1990s targeting Iran, North Korea, Russia, and Venezuela, are legally and practically more complex and controversial than primary sanctions.
These sanctions have become significant obstacles to economic relations with trade partners such as China, India, and European countries because their reach extends beyond U.S. borders to include governments, banks, companies, and third parties worldwide. This section, based on authoritative international legal sources, defines secondary sanctions precisely, distinguishes them from primary sanctions, explains their legal bases, and discusses their global consequences.
Definition and Difference from Primary Sanctions
Primary sanctions apply directly to U.S. entities, persons, and companies for example, U.S. companies cannot trade with Iran or invest there without special licenses from the U.S. Treasury’s Office of Foreign Assets Control (OFAC). These are rooted in U.S. domestic law and predominantly apply within U.S. jurisdiction.
In contrast, U.S. secondary sanctions have an extraterritorial character. Through the threat of penalties, they deter non-U.S. institutions banks, companies, and insurers worldwide from conducting transactions with sanctioned countries. For instance, a Chinese bank or a European company that deals financially with Iran could be cut off from access to the U.S. financial system, dollar-based global banking network, or messaging systems like SWIFT.
Thus, the key difference is that primary sanctions bind U.S. domestic actors, whereas secondary sanctions threaten foreign third parties with significant penalties. This extraterritorial application is highly controversial under international law and raises major legal challenges.
Legal Instruments for Secondary Sanctions
The U.S. implements secondary sanctions through a set of domestic laws and executive orders, including:
CAATSA (Countering America’s Adversaries Through Sanctions Act) 2017, empowering the U.S. government to penalize foreign companies and governments cooperating with sanctioned countries like Iran.
National Defense Authorization Acts (NDAA), with provisions specifically targeting Iran’s oil sector and central bank, especially from 2012 to 2019.
Presidential Executive Orders, such as EO 13846 issued during the Trump administration, which expand sanctions scope and designate entities for sanction listings.
OFAC regulations and SDN (Specially Designated Nationals) List, which enforce sanctions and publicize prohibited entities.
These frameworks create an environment where even in the absence of domestic legal prohibitions, international actors avoid cooperation with Iran due to fear of secondary sanctions.
Global Consequences of Secondary Sanctions
Secondary sanctions impact state sovereignty, free trade, and the structure of public international law. Despite principles in institutions like the World Trade Organization (WTO) and United Nations Charter emphasizing non-intervention and respect for national decisions, these sanctions impose economic and legal pressures extra jurisdictionally, destabilizing global order.
Critics label these sanctions as “extraterritorial enforcement” of domestic law—that is, the U.S. attempts to apply its internal laws to foreign entities outside its borders.
Some major global consequences include:
Disruption of international supply chains,
Limiting sanctioned states’ access to global financial systems (SWIFT, European and Asian banks),
Multinational companies’ reluctance to engage with Iran and other sanctioned countries,
Decline in foreign direct investment (FDI),
Promotion of alternative financial systems such as China’s CIPS and Europe’s INSTEX,
Growing legal inequalities in global trade.
In Iran’s case, these sanctions have forced even willing investors and companies like Total, Peugeot, Siemens, Maersk, LG, and Samsung to exit or refrain from Iranian markets.
Impact of Secondary Sanctions on Iran-China Commercial Relations
Iran-China economic relations, particularly post the 25-year strategic partnership agreement, hold great geopolitical significance. Yet, U.S. secondary sanctions have cast a direct shadow over this partnership’s quality and volume. Although China officially opposes Washington’s unilateral policies, many Chinese institutions, wary of high sanction risks and dollar dependency, have either ceased cooperation with Iran or continued under opaque and complex mechanisms.
Key affected areas include:
Energy Trade: From Transparency to Concealment
China has been Iran’s largest crude oil buyer for years. Despite primary sanctions, Chinese state oil companies like Sinopec and CNPC continued imports. Post-2018 U.S. withdrawal from the JCPOA and intensified secondary sanctions, official Iranian oil exports to China dropped sharply.
Adaptations included:
Chinese firms avoiding direct contracts with Iran’s National Oil Company,
Use of intermediaries, ghost fleet vessels (unlagged or with AIS turned off), and altered origin documents,
Re-labeling Iranian oil as Malaysian or Emirati,
Shipping to smaller ports or special economic zones in China to avoid U.S. customs scrutiny.
Thus, official data shows a decline, yet unofficial exports continue with higher hidden costs, less financial transparency, and reduced direct Iranian government revenues.
Banking Restrictions: The Main Bottleneck
Chinese banks, especially those with dollar operations, suspended most Iranian financial activities due to OFAC sanctions and secondary sanctions policies.
Consequences include:
Major banks like ICBC and China Development Bank refusing Iranian accounts or financial transfers,
Iranian companies relying on third-party exchanges, informal payment systems, or trade intermediaries, increasing costs,
Delays in Sino-Iranian joint projects due to lack of safe official financial channels,
Heightened risks of money laundering and financial misconduct linked to opaque transfers.
As a result, even authorized profitable projects are stalled or proceed slowly.
Chinese Companies’ Sanction Aversion: Exit or Silence
Secondary sanctions pressure led even large Chinese technology and energy firms, capable of competing with Western companies, to be wary of Iran.
Examples:
Huawei and ZTE curtailed or stopped official dealings with Iran following U.S. Treasury warnings and legal actions,
Sinopec halted reinvestment in Iran’s Yadavaran oil field under U.S. pressure,
Chinese construction firms withdrew from rail and solar energy projects due to financial complexity and sanction risks.
This caution illustrates China’s practice of prioritizing economic interests and avoiding jeopardizing access to U.S. markets and global banking despite political alignment with Iran.
Legal and Contractual Impact on Iran-China Relations
Secondary sanctions profoundly affect not only financial and trade interaction but also the legal and contractual framework of Iran-China cooperation.
Key legal impacts include:
Contract Structure Modifications: Flexible Mechanisms to Mitigate Sanction Risks
Chinese firms have restructured contracts to reduce direct exposure to U.S. sanctions risks by:
Using third-party intermediaries registered in non-sanctioned jurisdictions (e.g., Southeast Asia or Africa),
Drafting contracts without explicitly declaring the origin or final destination of goods and services,
Replacing the U.S. dollar with other currencies such as RMB (yuan), euro, or UAE dirham,
Including broad force majeure clauses and contract adjustment provisions anticipating sanction effects.
These so-called “low-risk structured contracts” are multifaceted, confidential, and flexible but generate interpretative and enforcement complexities legally.
Execution Challenges: Force Majeure and Complex Legal Disputes
Many Chinese firms face difficulties fulfilling contractual obligations, not due to unwillingness but due to U.S. sanctions threats against violators.
Legally:
Sanctions are often deemed “foreseeable” in international dealings with Iran,
Many contracts lack explicit secondary sanctions clauses,
International courts and arbitral tribunals do not necessarily consider sanctions a justified contract breach.
Thus, many disputes escalate into prolonged litigation requiring detailed contract interpretation, impracticability assessments, and equitable principles.
Growing Use of International Arbitration: Neutral and Effective Dispute Resolution
Due to judicial uncertainty and dispute complexity, arbitration has become prevalent in Iran-China contracts, with forums like:
CIETAC (China International Economic and Trade Arbitration Commission),
SHIAC (Shanghai International Arbitration Center),
HKIAC (Hong Kong International Arbitration Centre),
SIAC (Singapore International Arbitration Centre) in some cases.
Arbitration is favored for speed, confidentiality, expertise, and neutrality. However, challenges persist, such as recognition and enforcement of arbitral awards in third states and conflict with sanction laws. Selecting arbitration institution, governing law, language, and venue is thus critical.
China’s Legal Responses and Alternative Measures
China has sought to preserve its Iran ties by developing independent legal and financial tools, including:
Promoting non-dollar currencies such as yuan (CNY) for transactions with Iran and Iran’s shift to barter and commodity exchanges (especially in energy and infrastructure),
Implementing CIPS (Cross-Border Interbank Payment System) to bypass U.S.-controlled SWIFT infrastructure, although Iran’s full integration faces technical and political hurdles,
Expanding Asian arbitration and joint dispute resolution mechanisms, with CIETAC and SHIAC playing key roles, alongside potential establishment of a joint Iran-China arbitration center.
Conclusions and Strategic Recommendations
U.S. secondary sanctions have deeply challenged not only trade but aalso the legal frameworks of Iran-China interactions. Both sides attempt to maintain cooperation through international arbitration, alternative payment systems, and innovative contract structures.
Recommended measures include:
Drafting contracts that explicitly account for sanction risks with flexible adjustment mechanisms,
Opting for international arbitration, especially with reputable Asian bodies,
Using non-dollar currencies and non-U.S. bank payment systems like CIPS,
Enhancing bilateral legal cooperation including training, consultation, and establishing joint arbitration and mediation institutions.
The Iran-China International Arbitration and Legal Center could play an influential role by offering specialized commercial international law and sanctions advisory services and by drafting contracts compatible with Chinese legal requirements, thus facilitating trade and mitigating sanction-induced legal risks.
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