China’s new supply chain rules force multinationals into regulatory crossfire

China has implemented the Regulations on Industrial and Supply Chain Security, granting authorities new powers to penalise foreign companies that relocate manufacturing out of the country or reduce purchases of Chinese components. Introduced in April, the measures allow Beijing to impose fines and supply chain blacklists on firms that comply with US and EU export controls or sanctions. The rules aim to deter de-risking efforts by Western governments and companies, with Beijing already blocking Meta’s acquisition of AI startup Manus on national security grounds. The regulations place multinational corporations, particularly German automakers, in a difficult position as they navigate conflicting regulatory demands from China, the US, and the EU.

The enforcement of these rules was underscored by Chinese authorities blocking Meta’s $2 billion (€1.7 billion) takeover of the artificial intelligence startup Manus last month. Although Manus is headquartered in Singapore, it possesses strong Chinese roots, and Beijing viewed the firm as a strategic asset in the global AI race. The move followed the swift introduction of the new regulations, which strengthen Beijing’s ability to prevent US tech giants from acquiring high-end Chinese technologies. Rebecca Arcesati, an analyst at the Mercator Institute for China Studies (MERICS), told Deutsche Welle that the rules are effectively designed to derail de-risking measures such as those the EU and member states, including Germany, have been taking to reduce dependency on China.

Trade tensions between China and the West have simmered for years, but US President Donald Trump’s aggressive new tariffs on Chinese goods in 2025 significantly accelerated the shift away from globalization. This has hastened the move toward a more fractured, bloc-based global trading system. Faced with repeated dumping of cheap Chinese goods, most recently electric vehicles (EVs), flooding the European market as a result of Trump's tariffs, the EU is increasingly taking concrete steps to better guard its trade with China. In March, the European Commission published details of the bloc's Industrial Accelerator Act (IAA). While it does not explicitly single out China, the IAA aims to cut Europe’s strategic dependencies on Chinese goods and investments and counter unfair competition from Chinese rivals, who often benefit from huge state subsidies.

This regulatory tug-of-war is putting multinationals, especially Germany's carmakers, in an increasingly difficult position. Companies such as Volkswagen, BMW and Mercedes-Benz are keen to protect their substantial market share in China and profit from producing a considerable proportion of their vehicles there, which are then exported to other territories. At home, they face pressure to reduce reliance on Chinese components while also competing with fast-rising Chinese EV competitors. Jens Eskelund, president of the European Union Chamber of Commerce in China, described Beijing's new powers as an "extraterritorial toolbox" that will further add to "complexity in global trade." He warned that companies could be caught between regulatory measures imposed in the US or Europe and those in China, making it impossible to comply with all of them.

Beijing has already shown its willingness to weaponize supply chains, tightening export controls last year on rare earth elements and other critical minerals vital for EVs, defence systems and advanced electronics. The EU is under growing pressure from Beijing to water down the IAA, with several EU states with strong economic ties to Beijing, including Germany, urging a more cautious approach. Despite the EU’s trade deficit with China reaching €360 billion ($424 billion) in 2025, Brussels may struggle to hold firm. Alice Garcia Herrero, Chief Economist for Asia Pacific at French Investment Bank Natixis, told Deutsche Welle that European policymakers should double down on protection, warning that accepting China’s threats will leave Europe with less room to operate.