Beijing’s new regulations aimed at stabilizing industrial supply chains are set to create an unavoidable dilemma for foreign investors and Taiwanese operating businesses in China, as complying with US restrictions would breach Chinese law, while ignoring those restrictions could lead to US sanctions, the Mainland Affairs Council said yesterday.
The Regulations of the State Council on the Security of Industrial and Supply Chains, which were announced earlier last month, would force foreign investors in China to quickly adopt a dual-track supply chain and information technology (IT) mechanism to avoid triggering security investigations or retaliatory measures from the Chinese government, the council said.
Not only would the regulations increase corporate maintenance costs of IT systems, but it would further shorten the supply chain in the global manufacturing system, it said.
Photo: Liu Hsin-de, Taipei Times
The regulations would further authorize the Chinese government to establish a list of critical sectors, offering clear targets for the Chinese government to launch asymmetric retaliation against hostile nations, the council said.
As China has already implemented exploratory export controls on rare earths, gallium, germanium and drone components, it is expected to leverage industries in which it holds a relative global dominance — such as mature-node semiconductors, new energy equipment and advanced battery materials — to impose export restrictions, delay regulatory approvals or impose special fees on foreign governments or companies that align with US policies, the council said.
Once regulations designate a particular supply chain or technological shortage as a national security risk, increased Chinese capital is expected to flow into the strategic sector through government subsidies, bank loans and national industrial funds, the council said.
Under these circumstances, repeated investment and overcapacity are sure to occur, forcing manufacturers to export excess products to other countries and potentially igniting more trade conflicts, the council said.
The regulations would directly affect foreign investors and Taiwanese doing business in China, it added.
They would face the challenge of having to comply with the sanctions imposed by the US and China, which could entangle them in legal disputes when they follow one or the other, the council said.
Meanwhile, supply chain managers, as well as legal and compliance officers, might inadvertently cross the line into “illegal information gathering” when conducting on-site inspections or responding to data requests from overseas headquarters, increasing the risk of detention or exit restrictions, the council said.
The new policy would also make it difficult for Taiwanese businesses in China to provide supply chain transparency reports or certificates demonstrating the absence of forced labor practices, which are required to secure orders from customers of advanced countries, it said.
Taiwanese businesses in China are facing a continual increase in operational costs due to a trade and technology dispute between China and the US, the rise of a “red supply chain” and fierce domestic competition, the council said.
The share of Taiwanese investment in China in total outbound investment has fallen from 83.8 percent in 2010 to 7.5 percent in 2024, and 3.75 percent last year, the council said, citing data from the Ministry of Economic Affairs.
“We urge Taiwanese businesses in China to closely monitor the potential impact from the new policy. Foreign investors in China must now consider political and economic risks they would face as the core elements in their operations,” the council said.
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