China will set up a sweeping new mechanism to ensure the security of its supply chains, targeting espionage and allowing Beijing to retaliate against foreign entities if they impose curbs on trade, according to a directive released by the State Council on April 7. The new rules give government agencies the authority to start security probes against foreign nations and international organizations if they "adopt discriminatory bans" and other similar measures against China, or if they carry out actions that harm the security of the country's supply chains.
The regulations, signed by Premier Li Qiang, also allow the government to target foreign organizations and individuals if they suspend normal trade with China in violation of market rules. "This formalizes China's shift from seeing supply chains as only economic to treating them as a national security asset," said Cameron Johnson, senior partner at consultancy Tidalwave Solutions.
Retaliatory measures include banning the import or export of goods, technologies and services, as well as charging special fees. Foreign entities and individuals could also be barred from entering, investing and transacting in China. The country will also establish an early-warning system for supply chain security, whereby agencies assess the stability of supply for raw materials, technologies, equipment and products in key sectors, and identify risks in a timely manner.
The provisions also contain a pledge to target "information collection activities" on supply chains within China that violate its laws and regulations. From a supply chain perspective, these rules create a new compliance burden for multinationals operating large footprints in China such as Apple, Tesla, BMW and Volkswagen. The leverage Beijing holds over critical minerals, lithium-ion battery components, rare earth elements and electronics supply chains could prove decisive in the next act of the trade war.
