Inc.
China’s new supply-chain rules could make it harder for foreign firms to move production out of the country.
The ‘Supply Chain Trap’: Why Leaving China Just Became a Legal Nightmare for U.S. Firms
Author: Bruce Crumley
This week’s meetings between U.S. President Donald Trump and China’s Xi Jinping were largely positive, despite the diplomatic and trade tensions that have surged between the two countries over the past year. However, those good vibes may not last long. Recent measures introduced by Beijing to block the main objective of Trump’s import tariff policy risk creating considerably difficulties—and legal concerns—for U.S. and European businesses in coming months.
Those threats to international companies dealing with China arise from a pair of measures introduced by Beijing in April. Chief among those were the Regulations on Industrial and Supply Chain Security decree, which essentially bans any moves by foreign companies viewed as undermining internal Chinese economic interests. That includes decisions by both big and small American firms to alter their production, procurement, or logistics strategies in ways that authorities claim will “harm China’s industrial and supply chain security.”
What might qualify as that? For starters, U.S businesses shifting the manufacturing partners or suppliers of components or completed goods they sell out of China, and moving them to countries like Vietnam, Indonesia, or Thailand that are exposed to lower import tariff rates. Countless companies have already done just that since Trump unveiled his duties 13 months ago, and others continue that process.
Similarly, American employers relocating their current China-based production back to the U.S could also find Beijing punishing those moves as harming its economic interests. That’s particularly vexing given the stated objective of Trump’s tariff policy’s was to encourage exactly that re-shoring of domestic manufacturing.
But making supply chain changes to reduce or avoid tariff costs isn’t the only way U.S., European Union, and other international companies may fall afoul of China’s new laws.
“The measures underscore China’s position that foreign sanctions, export controls, and other trade restrictive measures impacting China-related commerce may potentially raise concerns tied to national security, supply chain resilience, and foreign policy,” noted an article this month on legal news site JDSupra. Alleged infractions “would trigger an anti-foreign sanctions investigation and potentially enforcement,” it added.
The other recently adopted measure applies—at least initially—to Chinese companies with affiliates abroad, or which have sought to effectively offshore themselves as de facto foreign companies. That new look-through provision adopted last month permits Beijing to classify any company with “Chinese DNA” as falling under domestic regulations and oversight. That in turn gives the state veto power over any potentially sensitive partnerships or investment plans.
Almost as soon as it was introduced in April, the measure was cited by China in breaking up the plans of U.S. tech giant Meta to acquire Singapore-based AI company Magnus for $2 billion. Beijing argued the startup’s algorithms, data reserves, and staff were all created or otherwise originated from China, before being moved and repacked as a foreign-registered firm. They goes that link-up.
But for most companies from the U.S. and other countries that have done business in, or with China, the bigger risk is coming under legal attack if they seek to shift production or supply procurement out of the country.
And, as the JDSupra article noted, some businesses may even wind up being squeezed by Beijing for respecting the legally required export restrictions and sanctions their own national governments have adopted.
“You could have situations where companies are caught in between regulatory measures being imposed in the U.S. or Europe and in China, where it’s impossible to comply with them all,” European Union Chamber of Commerce in China president Jens Eskelund told Germany’s DW news organization.
The American Chamber of Commerce in China similarly took issue with the new laws—and pointed out the contradiction they were built on.
That rub arises from Beijing pressuring its own tech industry to develop and mass produce powerful computing components the nation currently now has to import from the U.S. Yet at the same time, the government is also seeking to legally prevent foreign businesses from rendering their owns supply chains more flexible, diversified, and inexpensive by moving them abroad to make them less dependent on China.
“There’s a little bit of irony as China continues to build up its own supply chain to make sure it’s not reliant on others,” said AmCham China’s president Michael Hart in responding to the new laws late last month.
Ironic and contradictory perhaps, but as Rebecca Arcesati, an analyst at the Mercator Institute for China Studies in Berlin noted, Beijing apparently believes the measures will allow it to have its supply chain cake, and eat its domestically developed tech independence too.
“China’s leaders have determined that the best way of ensuring national leadership in this technology is for China to become more self-sufficient,” Arcesati told DW. “And for the world to rely more on China for supply chains and technology.”
Credits: TCA, LLC.