Decoupling from China? Managing reputational and compliance risks in global supply chains

Decoupling From China


The disruption to the economy and international trade caused by COVID-19, coupled with the imposition of trade restrictions and tariffs as a result of US-China geopolitical tensions, are forcing many companies to reassess the merits of their finely-tuned global supply chains. In this context, businesses need to forearm themselves against unforeseen events, whilst also demonstrating resilience to respond to rapidly changing international circumstances, adapt to new regulation and protect their reputation among consumers.

Serious challenges in sourcing medical equipment during the pandemic and a recent shortage of semiconductors within the automobile sector prompted President Biden, in February 2021, to introduce an executive order to review vulnerabilities in the US’ sourcing of pharmaceuticals, rare earth minerals, semiconductor chips and large-capacity batteries. On 8 June 2021, the Biden administration outlined a range of actions and recommendations aimed at bringing the manufacturing of critical goods back to the US and diversifying access to foreign-made strategic materials like rare earth minerals.

As the world’s largest manufacturer, China has most to lose from any sweeping diversification of global supply chains, while other countries in Asia stand to benefit. However, for businesses whose supply chains are highly interconnected with China, a rapid ‘decoupling’ from Chinese factories and Chinese-controlled supply routes may not be a realistic prospect. Any supply-chain restructuring is likely to be extremely complex, time-consuming and costly. Many companies also want and need to keep manufacturing in China to enjoy direct access to its hugely significant and increasingly affluent consumer market. On the other hand, given rising labour costs in China, moving labour-intensive manufacturing away from China to low- and middle-income countries could also have its benefits.

Drivers of reputational and compliance risks

National security concerns

Over the past few years, the telecommunications firm Huawei has become a symbol of technological threats to global communications and data security. In December 2020, dozens of other Chinese companies, including chipmaker Semiconductor Manufacturing International Corporation and drone manufacturer SZ DJI Technology, joined Huawei on a list of companies that US firms cannot trade with without a licence. The Biden administration has retained the Trump administration’s ban on these Chinese technology companies.

National security concerns mean that many companies, particularly those in the technology sector, are operating in a politically charged environment, balancing the demands of the US and China. Both chipmaker Taiwan Semiconductor Manufacturing Company and contract electronics manufacturer Foxconn have committed investments in the US, while Cisco has cut back its manufacturing in China in anticipation of higher import tariffs being imposed by Washington.

Meanwhile, Washington has been rallying its allies to limit Huawei’s global influence. Australia and Japan banned Huawei back in 2018, with others, including the UK and France, following suit two years later.  Other European governments have opted for a middle path that allows Huawei equipment in some parts of their networks. Recently, Washington has gone a step further by attempting to sway its other high-tech producing allies in East Asia to shift their respective supply chains away from China. For example, at the recent May 2021 US- South Korea Summit Seoul committed to investing in electric vehicles battery plants and the manufacturing of new chips in the US.

Human rights/forced labour concerns

As Beijing continues to face international criticism for its crackdown in Hong Kong and alleged human rights abuses against Uyghur Muslims in China’s Xinjiang region, there is growing political, legal and societal pressure on companies to look for alternative supply chains.

In 2020, the US issued withhold release orders blocking imports of cotton and tomatoes from Xinjiang due to concerns over forced labour. Companies noted a lack of adequate guidance from the US government about complying with the restriction. In response, China launched a “blocking statute” in January 2021 that allows Chinese companies to take legal steps against foreign companies with businesses in China that comply with US sanctions, and on 7 June 2021, Beijing proposed draft legislation aimed at countering sanctions imposed by foreign governments.

The new trade restrictions and legal requirements have also prompted institutional investors to put greater emphasis on environmental, social and governance issues, with many pressing their portfolio companies to better understand their own supply chains and to make public the steps they are taking to mitigate risks.

But fashion retailers have found themselves caught in the political crossfire between western and Chinese governments, forced to choose between taking a stand on human rights issues and profits from Chinese consumers. In late March 2021, days after the US, EU, UK and Canada imposed sanctions on Chinese officials for their roles in Xinjiang policy, Chinese state-backed news outlets called for an immediate boycott of H&M. While many retailers cut ties with Xinjiang’s cotton industry following the 2020 ban imposed by former President Trump, some major high street names have subsequently removed statements from their websites that referenced Xinjiang and forced labour. Despite US bans on key products and sanctions on major companies, Xinjiang’s direct exports to the US more than doubled in the first quarter of 2021 compared to the same period last year.


Prevailing geopolitical risks and benefits associated with lower costs mean that both multinationals and China-domiciled companies are now looking to increase trade outside China. But as long as growth in China’s domestic market remains strong, businesses with an established presence are unlikely to relocate.

As far as the tech industry is concerned, driven by the US’ push to “decouple” its economy from China and wider concerns over data security, the sector could end up having two separate supply chains — one for the Chinese market and one for much of the rest of the world. Some industry leaders appear to believe that such a shake-up is likely. Speaking in June 2020, Foxconn chairman Young Liu noted that “the past model, where manufacturing is concentrated in just a few countries like a world factory will no longer exist… What we think is more likely in the future are regional productions networks”. Meanwhile other observers have maintained that, when it comes to critical goods like those used in pharmaceuticals as well as rare earth minerals and semiconductors, it is important to develop sovereign capability to remove vulnerabilities associated with dependency on global supply chains.

With regard to forced labour concerns, China’s vast consumer market, significant geopolitical influence and dominance of global supply chains all work against western companies and investors imposing a blanket ban on Xinjiang suppliers. This increases the pressure on companies, particularly in the apparel, technology, food and energy sectors, to trace their supply chains to origin and, to the extent possible, identify any associations between their sub-suppliers and human rights issues in Xinjiang or China more broadly. This is no easy task given government-imposed limits on access and a lack of freedom of speech for workers.

As corporate boardrooms debate the merits of ‘reshoring’ and ‘nearshoring’ their operations, and how to reduce their exposure to a host of reputational and compliance risks, our upcoming webinar will discuss measures that companies and investors can take to mitigate exposure in their global supply chains.

Please register here for our webinar on Wednesday 16 June: Decoupling from China? Managing reputational and compliance risks in global supply chains.

Vivien Li, Head of Asia Pacific Practice at Aperio Intelligence.