China’s new supply chain rules raise conflict-of-law risks for UK, EU firms

Firms may be caught between local restrictions and Western compliance demands.

China’s new regulations are creating potential conflict-of-law risks for UK and EU manufacturers operating in or sourcing from China linked supply chains, according to international law firm Pinsent Masons.

The firm said State Council Order No. 834 on the Security of Industrial and Supply Chains and State Council Order No. 835 on Countering Improper Extraterritorial Jurisdiction by Foreign Countries expand China’s control over supply chain activity whilst also setting limits on the application of certain foreign laws inside China

Pinsent Masons said the rules sit alongside existing measures including the Anti Foreign Sanctions Law and related blocking rules.

It said the combined framework may put companies in positions where Chinese legal requirements do not align with obligations under UK, EU and US regulatory regimes, particularly around supply chain due diligence reporting and information disclosure.

Order No. 834 establishes a formal supply chain security system covering foreign companies operating in China in sectors identified as critical by authorities.

Pinsent Masons said these sectors may include semiconductors, renewable energy, rare earth processing batteries, and advanced manufacturing.

The regulation gives Chinese authorities the ability to impose countermeasures where companies are found to breach market transaction principles or engage in activity considered harmful to supply chain security.

These measures may include restrictions on imports and exports, limits on investment, and entry bans for key personnel.

It also places restrictions on certain supply chain related information activities where they conflict with Chinese law and gives authorities enforcement powers in cases involving disruption or discriminatory trade actions.

Order No. 835 introduces a blocking framework for foreign laws that Chinese authorities consider to have improper extraterritorial reach.

The Ministry of Justice of China can designate such laws and restrict their enforcement in their territory. 

Companies and individuals may be prevented from complying with these foreign requirements unless approval is granted.

The rules also allow authorities to list entities linked to enforcement of such laws and apply restrictions to them.

Pinsent Masons said the interaction between the two regulations increases the likelihood of conflict of law situations for multinational companies.

This is particularly relevant where firms must comply with Chinese restrictions on supply chain information whilst also meeting Western requirements on transparency reporting and due diligence across suppliers, noted the law firm.

The firm said companies may also face risk if supply chain decisions taken in response to foreign sanctions or regulatory obligations are later viewed by Chinese authorities as falling within the scope of prohibited extraterritorial influence.