Isn't that the point of the sandbox?

What if China owns the sandbox?

Levy fines on app stores that allow surveillance apps.

How would an App Store possibly know? Surveillance often happens out of band, and under foreign jurisdiction. The apps themselves may not even know or may be prohibited from disclosing it.

That is something the apps and App stores can solve in collaboration. And if they are required to in order to make money, they very likely will.

If a government decides that it wants some data, they can just take it and silence whoever they want along the way.

Nobody is going to care about some App Store TOS agreement, when faced with the government monopoly on use of force.

this is literally impossible in any case that uses a server to process unencrypted data.

Or encrypted data where keys are shared or stolen.

What if the phone/appstore is Chinese?

If they do not operate in the US, then US laws don't apply.

If the do operate in the US, they must comply with US laws.