China is imposing extraordinary measures to keep its factories at the heart of global supply chains.
Part 1 of 3: Capstone Examines China’s Strategy in the Age of Decoupling
During the past decade, governments on both sides of the Atlantic have been refining their tools to address Chinese trade practices that they claim distort competition and damage local industries. Recently, leaders from the economic blocks led by the US and the EU have started pursuing a two-track strategy to address what they see as Chinese overcapacity and strategic control in critical industry segments that have made the west dependent on China. One track involves mandating that companies reduce dependence on Chinese supply chains, proposing new laws targeting critical raw materials, semiconductors, clean technology, and medicines. The second track is to use existing tools to investigate and counter the problematic practices of Chinese state capitalism.
Earlier this year, China unveiled its most comprehensive response to the West’s two-track policy to date, meeting them head-on via a pair of orders addressing “Supply Chain Security Regulations” and “Counter-Extraterritoriality Regulations.” The supply chain order (Order No. 834) is meant to counter mandates from the US and EU to decouple and diversify supply chains away from China. The second (Order No. 835). targets the extraterritorial reach of Western enforcement, from sanctions to investigations into foreign subsidies.
For now, the two Orders serve as deterrence. China has yet to articulate what kinds of actions constitute “substantial harm” under the orders, nor has it revealed which sectors where it intends to enforce them. This suggests that Beijing wants to keep strategic industries guessing whether they fall within their scope and what kinds of actions will trigger the orders, using that uncertainty to maximize its leverage over Western companies.
What the Orders actually do: Order No. 834 gives Chinese authorities the power to investigate any foreign company whose ordinary commercial decisions they judge harm the security of China’s supply chain. Any finding of such harm will lead to severe and personal consequences. China can use it to bar companies from importing, exporting, or investing in China and from dealing with Chinese partners. Its executives can be banned from entering the country, their assets frozen, their right to live and work in the country canceled. The order’s reach extends throughout a corporation, affecting subsidiaries and affiliates that were uninvolved with any alleged infraction.
Order No. 835 goes further. It lets Beijing declare a foreign law illegitimate and forbid anyone in China, including a Western company’s own local staff, from obeying it. Both took effect March 31st, with no transition period and no published list of which sectors will be targeted first. Together, the orders turn compliance with EU and US rules into legal liability in China, leaving firms in limbo, unable to satisfy one jurisdiction without breaching rules in another.
I. Multinationals will be unable to satisfy the EU, US, and China simultaneously
Here is an example of the bind Orders 834 and 835 put companies in. Before the orders, a company conducting a supplier audit at a Chinese facility in accordance with the European Corporate Sustainability Due-Diligence Directive (CS3D) was engaged in a routine task. Under the orders, China may interpret the audit as the gathering of industrial and supply chain information in violation of Chinese law. And when the EU Critical Medicines Act (CMA) enters into force, a company implementing a dual-sourcing strategy for active pharmaceutical ingredients (API) procurement, under the orders , is potentially interrupting normal transactions with existing Chinese suppliers. A company implementing US Biosecure Act procurement restrictions is potentially adopting discriminatory measures against Chinese counterparties. A company whose leadership publicly commits to reducing exposure to China in an investor call to comply with decoupling mandates risks triggering regulatory scrutiny. None of these activities are legally optional from the perspective of the EU and US, yet they all create exposure under the new orders.
In a situation where China and the US or EU are each intent on enforcing their laws, companies would have to choose not only which rules to follow, but whether it is possible to operate legally at all. As companies will be unable to satisfy multiple legal systems, they will default to the law of their home jurisdiction: a US company will comply with US law, an EU company with EU law. The cumulative effect of these individual choices will be a fragmentation of global supply chains along jurisdictional lines, disrupting business models that rely on integrated Chinese operations.
II. The framework will catch ordinary commercial decisions, not just compliance-related ones.
Before the announcement of Orders 834 and 835, pre-existing Chinese legal instruments, such as the Unreliable Entity List and the Anti-Foreign Sanctions Law, were triggered by actions taken by foreign governments, such as a sanctions designation, an export restriction, or a policy explicitly targeting Chinese entities. The change imposed by Order No. 834 is to target commercial decisions. For example, under the order, a supply chain security investigation can be opened if a business terminates a supplier relationship, reduces procurement volumes, or approves an alternative vendor, if those decisions can be characterized as interrupting normal transactions or adopting discriminatory measures against a Chinese counterparty.
The threshold for triggering an investigation is intentionally broad and operationally undefined to maximize the deterrence effect by not limiting it. The standard under which conduct becomes actionable (that it “causes or may cause substantial harm” to China’s supply chain security, in the words of the order) is prospective, intent-neutral, and undefined, with no implementing guidance issued to date. The fact that companies cannot identify a safe harbor or calibrate their exposure creates a chilling effect on any attempt to diversify, de-risk, or articulate an exit strategy well before an investigation is even opened.
The measures, once imposed, can reach every organization and individual operating in China. These include the designated entity’s own subsidiaries, locally-employed staff, distributors, and business partners, all of which are legally required to implement the orders. Non-compliance generates independent liability. Local managers, compliance officers, and country heads face potential exit bans, visa restrictions, and asset seizures if they obey their employer’s lawful global policy in conflict with the new Chinese policy.
China’s goal is to preserve its place at the heart of global supply chains by making the cost of exit prohibitive, not to sever itself from Western supply chains. Triggering Orders 834 and 835 at scale would undercut that centrality, confirming the very unreliability the West cites to justify its own decoupling agenda. This points to a framework that is durable and discretionary, with Beijing likely to periodically showcase its reach. For companies, this makes the risk difficult to mitigate, given the threat is ever-present and subject to geopolitical volatility.
“China’s goal is to preserve its place at the heart of global supply chains by making the cost of exit prohibitive, not to sever itself from Western supply chains. Triggering Orders 834 and 835 at scale would undercut that centrality, confirming the very unreliability the West cites to justify its own decoupling agenda.”
III. Today’s target sectors will prove a floor, not a ceiling
The technique of deliberate vagueness created by not defining the trigger thresholds that makes the deterrence instrument credible is also applied to the scope.The absence of a key sectors list means any company in a strategically sensitive sector is already operating under compliance uncertainty. Beijing is preserving maximum leverage to expand the regulation’s reach as Western decoupling agendas evolve.
Chips, semiconductors, and rare earths are the obvious starting points: China holds near-monopoly positions across the rare earth value chain, not only in extraction but in processing and refining. Environmental constraints in the West make replicating that capacity economically and politically impractical. For semiconductors, the same structural lock-in applies to equipment and materials. Designating these sectors costs Beijing very little, as decoupling is structurally constrained regardless of what Western policy mandates.
For Beijing, the biggest concern is Western de-risking in sectors where it is potentially realistic. Production of pharmaceuticals and APIs is not geographically locked: alternative manufacturing capacity exists in India, and rebuilding local production capacity is a political priority across the EU and the US. The energy and clean technology sector – including solar and wind – follows the same logic, where Chinese dominance is real but is not based on a permanent structural advantage. Across both industries, reshoring by the West would impose substantial costs on industry and require fundamental changes to business models, but it could be done. This is at the root of Chinese anxieties and where China has the strongest interest in deterring decoupling by Europe and America.
IV. What to watch
Looking ahead, the publication by China of its key sectors would mark a halfway step between deterrence and potential retaliation. Naming sectors would begin to give Orders 834 and 835 a concrete operational bite without suggesting Beijing might act against every single company. However, publishing a fixed list would take away the discretion Beijing currently enjoys and the power to keep every potentially sensitive sector guessing. As the list is unlikely to arrive with a grace period, companies would be wise to begin scenario planning now, rather than treating its absence as breathing room.
Next, the first enforcement actions will define the triggering thresholds, giving practical meaning to “substantial harm”. This will draw the red lines and indicate how aggressively Beijing intends to use the framework. The EU’s investigation into Chinese company Nuctech is still pending (please see case study below), and China has said the examination violates its new rules. Both its outcome and any eventual Chinese enforcement are likely to follow political logic, reflecting the priorities of the Chinese Communist Party.
Case Study: Nuctech
Nuctech is a Chinese state-owned manufacturer of security scanning equipment with subsidiaries across Europe. In December 2025, the European Commission opened an in-depth investigation under the EU Foreign Subsidies Regulation, conducting inspections at Nuctech’s European premises and seeking access to employee email accounts. On 15 May 2026, China’s Ministry of Justice issued a formal determination under Order No. 835 declaring the Commission’s investigation constituted improper extraterritorial jurisdiction and prohibited any organization or individual from assisting with it.
Nuctech’s EU entities now face the choice of complying with the Commission and violating Chinese law or following Beijing’s prohibition and risking EU fines and adverse inferences about their subsidy status. The Commission’s investigation remains open, and neither side has backed down. By intervening mid-investigation, China established an operational deterrent, as it directly blocked companies from cooperating with the EU’s requests by creating a binding conflict of obligations.
The determination adds an immediate dimension for any company subject to EU regulatory investigations that involve China-based data or operations. Any company asked to produce documents or information as part of an EU regulatory process now faces the same dilemma as Nuctech: producing the material risks violating Chinese law, withholding it risks EU enforcement consequences.
Third, the trajectory of EU and US decoupling legislation will be the most useful indicator of where the scope of the orders is likely to expand next, since the framework is built to counter Western industrial policy. Companies whose sectors are currently outside the political debate would do well to remember this and to assess which pieces of Western legislation are gaining support as an early warning of where China is likely to turn its attention next.
Lastly, a united Western response is unlikely. The US can act with far more agility and leverage than the EU, deploying unilateral tools like Section 301 tariffs to real effect. The EU has tools such as the Anti-Coercion Instrument (ACI), and member states have just broadened the Commission’s mandate to explore the development of new tools. The Commission’s effectiveness is hampered by the unwillingness of member states to support its use: the economic cost of a harder line falls unevenly across member states, and this fact has consistently eroded collective resolve at the moment of implementation. Brussels’ ability to respond will remain constrained by internal divisions and transatlantic instability, including the constant fear of a US-China deal that would sideline Europe. Beijing knows it faces many Western positions rather than one, and the framework it has built is intended to exploit that.
This is Part 1 in a three-part series: China, the EU, and the US: What’s Changing for Global Companies at a Time of Geopolitical Fragmentation. Part 1 examines China’s strategic approach to Western decoupling mandates. Part 2 examines the EU’s tools and options for responding to China’s overcapacity and unfair trade practices. Part 3 examines how global companies can future-proof their business models.
