Cracks in America's Sanctions Empire: How China Is Rewriting the Rules of Global Trade

 

The Cracks in America's Sanctions Empire: How China Is Rewriting the Rules of Global Trade

For decades, Washington could tell the world who it could do business with. That era may be ending.

Chuppala Nagesh Bhushan

A Routine Blacklisting That Wasn't

On April 24, 2025, the U.S. Treasury Department added five Chinese oil refineries to its sanctions list — punishment for purchasing Iranian crude oil in violation of American restrictions. On paper, it looked like business as usual.

Since the 1990s, the United States has imposed economic sanctions more than any other country in history. By 2024, the U.S. Treasury's Office of Foreign Assets Control (OFAC) maintained sanctions programs targeting over 20 countries, more than 9,000 individuals and entities, and used this tool more than 10 times as often as it did two decades ago. The dollar's dominance — it accounts for roughly 58% of global foreign exchange reserves and underpins nearly 88% of all international trade transactions — has made these sanctions extraordinarily powerful. Banks everywhere feared being cut off from the U.S. financial system and therefore fell in line.

But this time, something different happened.

Beijing Draws a Red Line

Rather than quietly absorbing the blow or finding discreet workarounds — its typical playbook — China's government announced that Chinese courts would prosecute any company that complied with the U.S. sanctions. The justification: protecting China's "sovereignty, security and development interests."

It was an open, public challenge to the United States' self-appointed role as the world's trade policeman.

The stakes were not small. The five targeted refineries don't just serve China. They supply petrol and jet fuel across multiple Asian countries, sitting at the heart of a continental production network that links:

• Gulf oil (from Saudi Arabia, UAE, and Iran) as the energy source
• Chinese and South Korean components in manufacturing
• Vietnamese and Bangladeshi assembly lines for finished goods

Asia now accounts for roughly 60% of global manufacturing output. Any serious disruption to energy supply chains — already strained by tensions around the Strait of Hormuz, through which approximately 20% of the world's oil passes — risked cascading economic damage across the entire region.

Why China Feels Bolder Now

A decade ago, Beijing would likely have backed down. The U.S. dollar's grip on global finance made defiance simply too costly. Today, China believes it has built enough of an alternative architecture to take the risk.

Here's what has changed:

1. The Cross-Border Interbank Payment System (CIPS) China launched CIPS in 2015 as a yuan-denominated alternative to SWIFT, the Western-dominated messaging system that underpins international bank transfers. By 2024, CIPS connected over 1,400 financial institutions across more than 100 countries, processing the equivalent of trillions of yuan annually.

2. Yuan-Denominated Oil Trade In March 2023, Saudi Arabia and China conducted their first oil trade settled in yuan rather than dollars, a symbolic but significant milestone. China is now the world's largest oil importer, bringing in roughly 10–11 million barrels per day. Even a partial shift away from dollar-denominated settlement reduces exposure to U.S. financial leverage.

3. Central Bank Digital Currency (CBDC) Networks China's digital yuan (e-CNY) is the most advanced central bank digital currency in the world, with trials running in dozens of cities. China is also part of Project mBridge, a cross-border CBDC project involving central banks from the UAE, Hong Kong, and Thailand, designed to allow international payments that bypass the Western financial system entirely.

The calculation Beijing has made is pragmatic: the cost of a prolonged legal fight with Washington is now lower than the cost of allowing American sanctions to disrupt Asia's energy and industrial flows.

Sanctions Fatigue: A Global Pattern

China's defiance is striking, but it is not isolated. The overuse of sanctions has steadily eroded their effectiveness.

• Russia has continued to export oil at near-normal volumes despite sweeping Western sanctions after 2022, redirecting flows to India, China, and Turkey.
• Iran has maintained oil exports of roughly 1.5–1.8 million barrels per day in recent years despite decades of U.S. sanctions — largely by selling to China.
• A 2023 study by the Atlantic Council found that only about one-third of sanctions programs achieve their primary stated goals.
• The number of countries developing alternative payment rails specifically to reduce dollar dependence has grown sharply since 2022.

"The era in which Washington could simply decree who the world could and could not trade with, and expect compliance, is ending," one analyst wrote in the Morning Star in May 2025 — though others caution that the dollar's dominance will not collapse overnight.

The Trade Rules Paradox: China Defends the Old Order

The confrontation exposes a deeper irony in global economics.

In early March 2025, the European Commission unveiled its Industrial Accelerator Act, a plan to combat deindustrialisation by making public subsidies conditional on using locally made components and requiring technology transfers in batteries, electric vehicles (EVs), and solar panels. The EU — which has watched Chinese EVs capture 25% of its car market and Chinese solar panels dominate global supply — framed it as a defensive industrial policy.

Beijing immediately condemned the plan as "protectionism" that violated World Trade Organisation (WTO) rules, warning of "countermeasures" if European companies were harmed.

The irony? China used nearly identical policies to build its own industrial powerhouse. State subsidies, domestic content requirements, and mandated technology transfers from foreign companies were central to China's manufacturing rise over three decades. China's government spent an estimated $248 billion subsidising its industrial sector in 2019 alone, according to research by the Centre for Strategic and International Studies.

The United States has done the same, more recently and more explicitly. The Inflation Reduction Act (2022) and the CHIPS and Science Act (2022) collectively committed over $500 billion in subsidies and incentives tied to domestic production — precisely the kind of industrial policy that free-trade orthodoxy once condemned.

What Kind of World Order?

China's position now contains a fundamental tension. It challenges U.S. hegemony while simultaneously defending the free-trade rules that American hegemony originally built — rules that now benefit Chinese exporters more than anyone else.

In practice, all three major economic powers — the U.S., the EU, and China — are pursuing aggressive industrial strategies while accusing the others of breaking the rules.

What distinguishes the current moment is that the enforcement mechanisms are fracturing. When China refuses to comply with U.S. sanctions and announces it will penalise those who do, the architecture of dollar-based coercion develops a crack that others may widen.

The critical question is not simply whether American power is declining — it is what replaces it. A world of competing currency blocs and rival payment systems may be less dominated by Washington, but it would also be more fragmented, more unpredictable, and potentially more expensive for the smaller countries caught between great powers.

The five Chinese oil refineries sanctioned in April may, in retrospect, mark a minor but telling moment: the day Beijing decided the cost of compliance had finally exceeded the cost of resistance.

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This article draws on publicly available data from the U.S. Treasury, the Atlantic Council, the Centre for Strategic and International Studies, the Bank for International Settlements, and reporting from the Financial Times, Reuters, and Le Monde Diplomatique.