While China’s large trade surplus is fueling global tensions, new regulations were introduced last week that penalize foreign companies that stop using Chinese suppliers. The aim is to prevent so-called “decoupling” from dependence on Chinese manufacturers.
Analysts have warned that the new rules could make it more difficult for foreign companies to divest from joint ventures in China and to shift orders to non-Chinese suppliers. According to The New York Times, the new rules are one of several ways the Chinese government is countering what it sees as rising protectionism in the West. Many of the Western companies that were drawn to China because of the country’s low production costs and relatively high quality are now trying to reduce their dependence and diversify their procurement markets, a move believed to be driving the Chinese regulations.
China’s state media describe the new rules as an effort to “prevent security risks in industrial and supply chains.” The rules grant Chinese authorities expanded powers to investigate companies that choose to relocate their supply chains and move production out of China. Under the new rules, regulatory authorities may, among other things, question employees and review corporate records during investigations. The rules also allow authorities to prohibit companies and individuals from leaving China if they are suspected of moving their production and procurement “under foreign pressure.”
“The threat that individual employees could be punished with travel bans is concerning, given the lack of a clear and transparent legal process,” said Jens Eskelund, chairman of the European Union Chamber of Commerce in China, in a statement.
In a report released last week, the European Union Chamber of Commerce in China criticizes China’s growing use of export controls, including those on rare earth metals. However, the Chinese government justifies these measures as necessary to protect the country’s “economic stability and national security”—a rationale often used to increase pressure on foreign companies.