BEIJING — China's new Industrial and Supply Chain Security law took effect immediately in early April, introducing a layer of regulatory oversight targeting cross-border industrial activity and global supply chains. The law extends scrutiny beyond national security reviews and antitrust enforcement to include commercial conduct interpreted as undermining China's supply chain stability.

The law's scope covers decisions on sourcing, production allocation, technology transfers, and contractual relationships with Chinese partners. Standard business adjustments such as diversifying suppliers, relocating production to alternative jurisdictions, or scaling down China-based operations can now trigger regulatory attention if perceived to contribute to supply chain disruption. The law penalizes or discourages business adjustments viewed as externally driven or politically motivated.

The measure raises the cost and risk of adjusting supply networks, even when driven by commercial considerations such as risk diversification or sustainability goals. It may constrain foreign firms' ability to shift parts of their supply chain to other regions, even when such moves are driven by European Union industrial policy initiatives aimed at reducing dependency on China. Efforts to localize battery production within Europe or to source critical minerals from alternative partners could be interpreted as destabilizing Chinese supply networks.

EU-based multinational corporations have cumulative investment in China exceeding 140 billion euros (US$164 billion), with a heavy concentration in the German automotive and chemical sectors. These multinationals operating in China must also adhere to EU sanctions regimes, export controls, and due diligence requirements.

German automotive manufacturers and chemical producers have deep integration into Chinese supply chains and rely on local production ecosystems. European carmakers have invested heavily in China as a market and as a production and innovation hub, particularly in electric vehicles and battery technologies. German chemical firms have established large-scale integrated production sites in China embedded in local industrial clusters and reliant on long-term relationships with Chinese suppliers and customers.