When China’s groundbreaking Industrial and Supply Chain Security Law entered into force in early April, it established a sweeping new layer of regulatory oversight over cross-border industrial activity and global supply networks, with wide-ranging consequences for multinational corporations operating within the country’s borders. Framed as a policy tool to strengthen supply chain resilience and national economic security, the legislation represents a deliberate strategic response to rising global economic fragmentation, escalating geopolitical tensions, and the expanding network of foreign regulatory restrictions that increasingly shape global corporate decision-making. For European Union-based multinationals, which hold more than €140 billion ($164 billion) in cumulative direct investment in China, with heavy concentration in Germany’s automotive and chemical sectors, the law carries both immediate operational consequences and long-term structural impacts that are forcing a complete rethink of compliance frameworks and long-term investment roadmaps.
At its core, the law expands regulatory scrutiny far beyond traditional oversight areas such as national security reviews and antitrust enforcement to cover a broad spectrum of commercial activities that could be interpreted as threats to China’s supply chain stability. This sweeping scope extends to core corporate decisions including raw material sourcing, global production allocation, technology transfer arrangements, and contractual partnerships with domestic Chinese entities. A defining feature of the new framework is the inherent ambiguity surrounding the definition of “supply chain stability”, which grants Chinese regulators wide discretionary authority to interpret corporate actions – a reality that has significantly elevated legal uncertainty for foreign firms operating in the market. What were once considered routine commercial adjustments, such as diversifying supplier bases, shifting production capacity to alternative regional markets, or scaling down local operations, can now trigger official regulatory scrutiny if they are deemed to contribute to supply chain disruption in China.
This new regulatory landscape has created a particularly acute compliance dilemma for EU multinationals. On one side, European firms are legally obligated to adhere to EU-wide regulations including binding sanctions regimes, strict export controls, and mandatory supply chain due diligence requirements, all of which may require firms to reduce their market exposure to China or limit business engagement with specific Chinese entities. On the other side, China’s new law explicitly discourages and penalizes such strategic adjustments when they are deemed to be externally driven or politically motivated. The result is a direct regulatory conflict: compliance with the legal requirements of one jurisdiction automatically exposes firms to enforcement risk in the other.
German automotive manufacturers and chemical producers, which have built deep, integrated ties to Chinese supply chains and rely heavily on local production ecosystems, are among the most vulnerable to this growing tension. The automotive sector offers a clear illustration of the challenges at hand: European carmakers have spent decades building large-scale investments in China, treating the country not just as a major end market but as a global hub for production and electric vehicle innovation, particularly for battery technologies. The new law directly constrains firms’ ability to shift segments of their supply chain to other regions, even when these moves are mandated by EU industrial policy designed to reduce strategic dependency on Chinese inputs. For example, ongoing efforts to localize battery production within the European Union or source critical raw minerals from non-Chinese suppliers could be interpreted as actions that destabilize Chinese supply networks, leaving firms open to heightened regulatory scrutiny, administrative barriers, and informal political pressure that derail planned strategic realignment.
A similar dynamic plays out in Germany’s chemical sector, where leading firms have built large, fully integrated production facilities embedded within local Chinese industrial clusters, dependent on long-standing collaborative relationships with domestic Chinese suppliers and customers. The new regulatory environment raises both the financial cost and risk profile of adjusting these deeply entrenched networks, even when changes are driven by legitimate commercial goals such as risk diversification or meeting corporate sustainability targets. Beyond operational costs, the reclassification of routine business decisions as politically sensitive actions introduces significant new reputational and legal risks that did not exist prior to the law’s passage.
Beyond direct compliance challenges, the legislation has already created a measurable chilling effect on global corporate governance and strategic decision-making. Multinational firms are growing far more cautious about rolling out global corporate policies that impact their Chinese operations, particularly policies designed to ensure compliance with foreign regulatory requirements. Many firms are already restructuring internal governance processes to add mandatory China-specific risk assessments, and decision-making authority is increasingly shifting to localized Chinese management teams that have greater experience navigating the country’s complex regulatory landscape. Over time, this shift could lead to a fragmentation of global corporate governance models, eroding the high degree of centralized global integration that has defined multinational corporate operations for decades.
The law also introduces new uncertainty for contractual relationships and cross-border commercial dispute resolution. Chinese counterparties can now leverage the new regulatory framework to renegotiate existing contract terms or block changes initiated by foreign partners. The prospect of Chinese regulators intervening in private commercial disputes on the grounds of protecting supply chain stability adds an unprecedented layer of uncertainty to contract enforcement in China. As a result, many EU firms are already re-evaluating the structure of their joint ventures, supplier contracts, and investment vehicles in China, with a growing preference for arrangements that offer greater operational flexibility and stronger legal protections against regulatory intervention.
Viewed from a broader strategic perspective, the law forms part of a deliberate Chinese effort to shape the behavior of foreign firms to align with Beijing’s core economic and political priorities. By embedding geopolitical considerations into the commercial regulatory framework, Beijing is sending a clear signal that corporate business decisions cannot be separated from the wider geopolitical context of international relations. For EU multinationals, this reality underscores the urgent need to integrate systematic geopolitical risk analysis into core business strategy, rather than treating it as a peripheral afterthought.
At the same time, the law carries potentially unintended consequences for China’s long-term attractiveness as a foreign investment destination. While the legislation is explicitly designed to deter supply chain decoupling and reinforce China’s central role in global manufacturing, it has also increased the perceived risk of operating in the country for foreign firms. In response, many companies are expected to adopt a more deliberate, cautious approach to the popular “China-plus-one” strategy, which involves maintaining existing market presence in China while gradually building alternative production and supply capacity in other regional markets. Over the long term, this shift could lead to a more segmented global supply chain landscape, where firms prioritize redundancy and resilience over the cost efficiency that defined global supply networks for decades.
For the European Union, the implications of the new law extend far beyond individual corporate actors to shape the broader EU-China economic relationship. The legislation highlights the growing divergence between the two blocs in regulatory philosophy and core strategic objectives, complicating ongoing efforts to maintain a stable, mutually beneficial economic partnership. EU policymakers are expected to face growing pressure from European industry to provide clearer regulatory guidance, targeted support mechanisms, and high-level diplomatic engagement to address the challenges posed by China’s new regulatory framework.
Ultimately, China’s new Industrial and Supply Chain Security Law represents a significant shift in the governance of cross-border industrial activity, taking effect against a shifting global order where economic interdependence is increasingly structured by geopolitical competition. For global firms, the new framework requires navigating an increasingly intricate and uncertain global operating environment, where compliance with competing regulatory demands has become one of the core challenges of multinational operations. This analysis is contributed by Bob Savic, a geopolitical risk advisor focused on sanctions and supply chain issues and co-author of *Multipolarity and the Changing Global Order*, published by Springer.
