China's New Rules Prevent Western Companies from Breaking Free from Dependency

We might have initially thought that nothing could stop Western countries from pursuing decoupling, but in reality, we were mistaken. Chinese authorities blocked Meta’s $2 billion (Rp34 trillion) acquisition of the AI startup Manus last month. This sent a strong signal that even deals structured outside China’s borders are not immune to intervention by the Chinese government. Manus is headquartered in Singapore but has deep roots in China. China views the company as one of its strategic assets in the global AI competition and blocked the deal citing China’s national security concerns. This was followed by China’s swift introduction of new rules on Industrial and Supply Chain Security at the end of April. These new rules strengthen China’s ability to prevent US tech giants from acquiring its top-tier technology. The new rules prevent decoupling. However, the new rules have far broader implications. In practice, Beijing is warning foreign governments and companies against pursuing decoupling. Chinese authorities can now take retaliatory actions against foreign companies that relocate factories to other countries such as Vietnam or India or that bring production back to their home countries. Such companies can also face fines and be added to supply chain blacklists if they comply with export restrictions or sanctions from the US and EU targeting Chinese entities. “This is intended to thwart risk-reduction measures taken by the EU and its member states, including Germany, to reduce dependence on China,” Rebecca Arcesati, an analyst at the Mercator Institute for China Studies (MERICS), told DW. Reflecting on the pandemic, both the EU and the US have intensified efforts to make supply chains more resilient and less dependent on China. Many foreign companies have scaled back their operations in China. Some production has been relocated back to their home countries. Trade tensions between China and the West have heated up for years, but US President Donald Trump’s aggressive trade tariffs on Chinese goods in 2025 have significantly accelerated the shift from globalisation towards a more fragmented global trading system divided into blocs. Europe responds to China’s dumping. Faced with repeated dumping practices of cheap Chinese goods and Trump’s tariffs flooding the European market with even more cheap Chinese products, the EU has taken concrete steps to better protect its trade. Last March, the EU’s executive body, the European Commission, released details of the EU’s Industrial Acceleration Act (IAA). Although it does not explicitly mention China, the IAA aims to reduce Europe’s strategic dependence on Chinese goods and investments and counter unfair competition from Chinese rivals, who often profit from massive state subsidies. These conflicting policies place multinational companies, especially German car manufacturers, in an increasingly difficult position. Companies like Volkswagen, BMW, and Mercedes-Benz are keen to protect their substantial markets in China. Car manufacturers also benefit from producing vehicles largely in China and then exporting them to other regions. In their home countries, these manufacturers face pressure to reduce reliance on Chinese components while trying to compete with rapidly advancing Chinese electric vehicles. Companies face a difficult dilemma. Jens Eskelund, President of the European Chamber of Commerce in China, described Beijing’s new rules as an “extraterritorial device” that will add further “complexity to global trade.” “It could lead to situations where companies are caught between regulations imposed in the US or Europe and in China, making full compliance impossible,” Eskelund told DW. There are several cases where China has pressured foreign companies over their plans to move some production to other countries, said MERICS analyst Arcesati. “Chinese leaders have decided that the best way to ensure leadership in technology is to make China more self-reliant…and to make the world more dependent on China for supply chains and technology,” she explained to DW. Beijing has shown its willingness to weaponise supply chains, tightening export controls last year on rare earth elements and other critical minerals. These materials are essential for producing electric vehicles, defence systems, and advanced electronics. Does China want to weaken the IAA? The EU faces growing pressure from Beijing to weaken the IAA. Some EU member states with close economic ties to Beijing, including Germany, are taking a more cautious approach. The EU’s trade deficit with China is projected to reach an extreme figure of €360 billion (Rp7,400 trillion) in 2025, which may make Brussels struggle to stay firm, even though many analysts warn of the importance for Europe to protect its industrial future. “If I were a European policymaker, I would…double down on efforts,” Alice Garcia Herrero, Chief Economist for Asia Pacific at French investment bank Natixis, told DW. “If we keep accepting threats from China, our room to manoeuvre will shrink further.”