China’s new law on Industrial and Supply Chain Security, which took effect immediately in early April, introduces a significant new layer of regulatory oversight targeting cross-border industrial activity and global supply chains. It will inevitably have far-reaching implications for multinational corporations operating in China.

While formally presented as a framework to safeguard supply chain security and resilience, the law reflects China’s broader strategic posture in response to intensifying global economic fragmentation, rising geopolitical tensions, and an expanding web of foreign regulatory constraints that increasingly shape corporate decision-making.

For EU-based multinationals – whose cumulative investment in China exceeds 140 billion euros (US$164 billion), with a heavy concentration in the German automotive and chemical sectors – the consequences are both immediate and structural, affecting compliance strategies and long-term investment planning.

At its core, the law extends regulatory scrutiny beyond traditional areas such as national security reviews and antitrust enforcement to encompass a wide range of commercial conduct that may be interpreted as undermining China’s supply chain stability.

This includes decisions on sourcing, production allocation, technology transfers and contractual relationships with Chinese partners. The ambiguity embedded in the concept of “supply chain stability” creates a broad discretionary space for regulators, increasing legal uncertainty for foreign firms.

Actions that might previously have been considered standard business adjustments – such as diversifying suppliers, relocating production to alternative jurisdictions, or scaling down China-based operations – can now trigger regulatory attention if they are perceived to contribute to supply chain disruption.

For EU multinational companies, this shift introduces a complex compliance dilemma. On the one hand, firms must adhere to EU regulations, including sanctions regimes, export controls and due diligence requirements, which may necessitate reducing exposure to China or limiting engagement with certain Chinese entities.

On the other hand, the new Chinese law effectively penalizes or discourages such adjustments when they are viewed as externally driven or politically motivated. This creates regulatory conflict, where compliance with one jurisdiction’s legal obligations may expose companies to enforcement risks in another.

German automotive manufacturers and chemical producers, given their deep integration into Chinese supply chains and reliance on local production ecosystems, are particularly vulnerable to this tension.

The automotive sector vividly illustrates the challenges. European carmakers have invested heavily in China not only as a market but as a production and innovation hub, especially in electric vehicles and battery technologies.

The new law may constrain their ability to shift parts of their supply chain to other regions, even when such moves are driven by EU industrial policy initiatives aimed at reducing dependency on China.

For example, efforts to localize battery production within Europe or to source critical minerals from alternative partners could be interpreted as destabilizing Chinese supply networks. As a result, companies may face increased scrutiny, administrative hurdles, or informal pressures that complicate strategic realignment.

Similarly, in the chemical industry, where German firms have established large-scale integrated production sites in China, the regulatory implications could be profound. These operations are often embedded in local industrial clusters and rely on long-term relationships with Chinese suppliers and customers.

The new regulatory environment raises the cost and risk of adjusting these networks, even when driven by legitimate commercial considerations such as risk diversification or sustainability goals. Moreover, the possibility that routine business decisions could be reframed as politically sensitive actions introduces a layer of reputational and legal risk.

Another important consequence is the potential chilling effect on corporate governance and decision-making. Multinational companies may become more cautious in implementing global policies that affect their China operations, particularly those related to compliance with foreign regulations.

Internal processes may need to be restructured to incorporate China-specific risk assessments, and decision-making authority could shift toward localized management teams who are better positioned to navigate the regulatory landscape.

This, in turn, may lead to a fragmentation of corporate governance models, reducing the degree of global integration that has historically characterized multinational operations.

The law also has implications for contractual relationships and dispute resolution. Chinese counterparties may leverage the new regulatory framework to renegotiate terms or to resist changes initiated by foreign partners.

The possibility that regulators could intervene in commercial disputes on the grounds of supply chain stability adds uncertainty to contract enforcement.

This may prompt EU companies to reconsider the structure of their joint ventures, supplier agreements, and investment vehicles in China, potentially favoring arrangements that provide greater flexibility or legal protection.

From a broader strategic perspective, the law can be seen as part of China’s effort to shape the behavior of foreign firms in a way that aligns with its economic and political priorities.

By embedding geopolitical considerations into the regulatory framework governing commercial activity, China is effectively signaling that business decisions cannot be insulated from the wider context of international relations.

For EU multinationals, this underscores the need to integrate geopolitical risk analysis into their core business strategies, rather than treating it as a peripheral concern.

At the same time, the law may have unintended consequences for China’s attractiveness as an investment destination. While it aims to deter supply chain decoupling and reinforce the country’s central role in global manufacturing, it also increases the perceived risk of operating in China.

Companies may respond by adopting a “China-plus-one” strategy more cautiously but more deliberately, seeking to maintain their presence in China while gradually building alternative capacities elsewhere. Over time, this could lead to a more segmented global supply chain landscape, where redundancy and resilience are prioritized over efficiency.

For the European Union, the implications extend beyond individual companies to the broader economic relationship with China. The law highlights the growing divergence in regulatory philosophies and strategic objectives, complicating efforts to maintain a stable and mutually beneficial partnership.

Policymakers may face increased pressure from industry to provide clearer guidance, support mechanisms, or even diplomatic engagement to address the challenges posed by the new Chinese framework.

The new Chinese law represents a significant evolution in the governance of cross-border industrial activity within a shifting global landscape in which economic interdependence is increasingly mediated by geopolitical considerations, requiring companies to navigate a more intricate and uncertain environment.

Bob Savic advises on sanctions, supply chains and geopolitical risk and is co-author of the new book “Multipolarity and the Changing Global Order” published by Springer.