*This is the first article in a two-part series. For more than two decades, multinational companies approached China with a straight-forward strategic formula. China offered low-cost manufacturing, an expanding consumer market, and an increasingly in-tegrated position within the global economic system. Companies in-vested heavily, supply chains deepened, and China became an essential pillar of globalization. That era has ended. Today, China sits at the center of a far more complex geopolitical and regulatory environment. Strategic competition between major powers, evolving national security frameworks, technology controls, and competing regulatory regimes have transformed the global operating landscape. Yet many foreign companies continue to approach China using outdated assumptions. The result is what might best be described as the Great China Miscalculation—a misunderstanding of how China fits into today’s global economy.
The key risk now for companies is not operat-ing in China. Rather, it is failing to understand how the rules of engagement have changed. Successful companies are not those that are the most optimistic or pessimistic, but the most re-alistic and structured. They recognize that China is both an opportunity and a threat, and they design their China strategies accordingly.
China’s Structural Role in the Global Economy: The Mid-Tech Bottleneck
Despite headlines suggesting decoupling or economic disengagement, China remains deeply embedded in global supply chains. China today is still: • One of the world’s largest consumer markets, with hundreds of millions of middle-class customers; • The dominant manufacturing hub, espe-cially for electronics, machinery, chem-icals, and autos; • A key supplier of intermediate inputs, specialized components, and materials for products assembled elsewhere; • An innovation and technology center leading in areas like 5G, electric vehi-cles, and industrial AI.
But the critical insight is that China’s strength now lies in mid-tech manufacturing: special-ized processes and inputs that are hard to relo-cate. These inputs include advanced batteries materials, rare earths and specialty chemicals, and pharmaceutical intermediates, among oth-ers.
For example, China produced about 59.2% of the world’s rare earth elements in 2024, and it processes over 90% of global graphite for bat-teries. Chinese firms also control roughly two-thirds of the world’s cobalt and lithium pro-cessing capability. In the battery supply chain, China imported 44% of raw battery minerals trade and exported 58% of finished battery ma-terials and components in 2023. Many companies that shift final assembly to Southeast Asia, Mexico, or Europe find that specialized inputs still come from China. A U.S. medical device maker, for instance, might move assembly to Mexico, but its precision sensors or proprietary plastics tooling remain in Wuxi or Shenzhen. In effect, China’s up-stream ecosystem, from chemical precursors to semiconductor fabrication equipment, has no easy substitute. An industry analysis finds that “internal value chains of many advanced manufacturing multinationals are deeply an-chored in China and not easy to relocate. In practice, geographic diversification rarely means a clean break. Key components, mate-rials, and patents often stay China-centric even if final production moves. Implication: A simple “China exit” is unreal-istic. Even “China-plus-one” strategies must reckon with the mid-tech bottleneck: China’s control of critical inputs and know-how. Sup-ply chains are deep, and the “+one” often just adds another link rather than replacing China entirely.
The Rise of a New Risk Environment
While China remains economically indispen-sable, the risk landscape has multiplied. Three broad trends define today’s environment: 1. Geopolitical Competition Major powers increasingly view trade through a national-security lens. Export controls, in-vestment screening, and tariffs target technol-ogy transfer and critical infrastructure. In 2024, the U.S. added hundreds of Chinese firms to its export control lists, particularly in semicon-ductors and AI. Allies like Japan and the Neth-erlands followed with similar tech restrictions. The EU has also tightened controls on dual-use technologies. 2. Regulatory Expansion in China China has built an extensive legal regime for security and data. The Data Security Law and Personal Information Protection Law (PIPL) imposes strict rules on cross-border infor-mation flows and local data storage. In 2025, the Cyberspace Administration of China issued guidance making clear that transfers of “im-portant data” and personal information require government review or certification. Many Chi-nese regulators now demand security assess-ments or binding contracts before sensitive data can leave China. China is also refining export controls. In October 2024 it introduced a new Dual-Use Export Control Regulation that ex-pands military end-use prohibitions and re-ex-port rules.
3. Sanctions and Countersanctions Western sanctions (e.g., on Huawei or Xin-jiang) create conflict with Chinese rules. China’s Anti-Foreign Sanctions Law explicitly authorizes retaliation against entities comply-ing with foreign sanctions. Beijing has used it sparingly, such as sanctioning a U.S. data in-telligence firm in 2023, but its existence cre-ates legal minefields. A company may find it-self caught between U.S. technology export bans and Chinese prohibitions on disclosing data to foreign authorities. In short, foreign businesses now operate in multiple overlap-ping legal systems, each with their own com-pliance requirements. Collectively, these factors mean companies cannot assume the “old China rules.” Rapid le-gal changes and security reviews are routine. As one analysis notes, “export controls [are] tightening, targeting sensitive technologies” on both sides. The practical takeaway: legal and compliance strategy must be a front-and-center part of any China plan.
The Binary Thinking Trap
A common mistake is framing the China deci-sion as a binary choice: stay or leave. In reality, most companies end up somewhere in between. Savvy firms develop multi-layers strategies that balance risk and opportunity, rather than swinging between extremes. Examples of strategic response include: • Geographic diversification of manufac-turing: building plants in other countries like Vietnam, India, Mexico to hedge risk while recognizing that some supply chain links may still involve China. • Selective China participation: keeping key supplier relationships in China for critical parts, while move non-strategic production elsewhere. • Restructuring IP arrangements: using li-censing or joint-development models to share technology in China while protect-ing core IP. • Data research and segmentation: separat-ing high-risk R&D or sensitive data plat-forms from Chinese operations. • Enhanced compliance frameworks: building global policies that specifically address cross-border conflicts. In practice, firms choose a mix based on indus-try and risk appetite. One company might move final assembly out of China but continue sourcing specialized inputs there. Another might reorganize as a “China for China” model, ring-fencing its Chine business so that fi-nances, data, and technology are kept distinct from global operations. Strategic Postures in Practice Rather than a binary choice, companies typi-cally align along a spectrum of strategic pos-tures: 1. Full Exit: Complete divestment of China operations. This method is suitable for sec-tors where geopolitical risk is highest, such as defense-adjacent tech, and no China in-volvement is worth the exposure. 2. Containment: Maintain a presence but strictly ring-fence it. Companies may con-sider protecting global IP and data by iso-lating Chinese operations legally and tech-nologically. This type is especially used by companies with large China sales but sen-sitive worldwide technology such as global tech firms with China-only product lines. 3. Dual-Track: Run parallel supply chains and org structures. One track serves global markets outside China, and another serves within China, with separate teams and tech stacks. This is feasible for large multination-als in industries like automotive or electron-ics, where they can split product lines.
4. Integration: Deep joint ventures or partner-ships in China. Integration is appropriate where market access requires local partners such as finance, telecoms, and certain man-ufacturing sectors. Note, this requires ex-ceptionally careful JV structures to avoid loss of control. 5. Virtual Exit: No Chinese legal entity, but maintain direct market access via licensing, distribution, or toll manufacturing. Compa-nies with niche products might choose this to preserve revenue without a fixed China base, thereby minimizing a compliance footprint. The right posture depends on the sector and risk. For instance, a defense contractor might choose Full Exit, whereas a food & beverage company might only need Containment. The key is intentional choice, not reaction to head-lines.
Looking Ahead to Article 2
In this first article, we’ve diagnosed the mis-calculation: why outdated assumptions fail, how China’s mid-tech bottleneck makes exit unrealistic, and the new risk environment for-eign companies must navigate. But diagnosis alone is not enough. In Article 2 – The Legal and Compliance Playbook, we will move from the strategy to execution. We will cover: • How to choose the right legal structure (WOS, JV , licensing) to protect IP and preserve flexibility • Why Chinese Courts and arbitration are no longer a black box (and how to use them) • A practical compliance framework for export controls, sanctions, and cross-bor-der data • Real examples of companies that are adapting successfully Article 2 – The Legal and Compliance Play-book – will be published separately through China Law Insider. Selected Sources China Briefing (2025). China's Rare Earth Elements: What Busi-nesses Need to Know. U.S. Energy Information Administration (2025). China Dominates Global Trade of Battery Minerals. Clemens, E. (2026). Internal Value Chains Remain Dependent on China Even as Multinationals Shift Production to America. Lam, E., Xu, J. & Zhou, S. (2025). 2024: A Review of Foreign Sanctions and Export Control Developments Involving China. Arnold & Porter (2025). China Clarifies Cross-Border Data Transfer Rules: Practical Guidance for Compliance.