Overcoming China’s Supply Chain Leverage

In October 1973, Arab oil-producing nations imposed an export embargo on countries that had supported Israel in the Yom Kippur War. The consequences—gas lines, recessions, a fundamental reordering of energy policy—are still being felt today. The world learned, painfully, what it means to be dependent on a single source for a critical input; there was no ignoring that embargo. But most corporate boards have seemingly failed to notice a similarly historic shift in global economic power that is now underway, one that is, if anything, more deliberate, more comprehensive, and more dangerous than the oil shock over half a century ago.

A Weapon Built Over Decades

Since joining the World Trade Organization (WTO) in 2001, China has, almost without foreign notice, executed one of the most consequential economic strategies in modern history. When it entered the WTO, roughly 33 percent of Chinese exports were intermediate goods, or the components, chemicals, and parts that go into making final products. By 2025, that figure had risen to 46 percent.¹ This did not happen by accident. The Chinese Communist Party (CCP) made a deliberate strategic decision to, as it has framed it, make the world dependent on China while making China independent of the world.² Supply chain supremacy was always intended as a geopolitical weapon.

But before China turned to supply chain coercion, it had spent decades perfecting a cruder instrument: control over access to its own vast market. The pattern was consistent and, in retrospect, instructive. When the Nobel Peace Prize Committee awarded its prize to Chinese dissident Liu Xiaobo in 2010, Beijing did not distinguish between Norway’s government and Norway’s people, civil society, or economy. High-level diplomatic exchanges were suspended.³  Trade between the two countries was brought nearly to a halt.⁴ Norway, a country that had done nothing more than host an independent committee that made an independent decision, paid a severe economic price.

When South Korea agreed to host the American thaad missile defense system on its territory in 2016, China did not punish Seoul’s government directly. Instead, it targeted Lotte, the South Korean conglomerate that had provided the land for the deployment. Chinese authorities subjected Lotte’s stores across China to a wave of government-orchestrated inspections, boycotts, and regulatory harassment until the company was effectively forced to exit the Chinese market entirely.⁵ A sovereign military decision by a government became a commercial death sentence for a private company that had no role in making it.

When French President Nicolas Sarkozy met with the Dalai Lama in 2008, Beijing deployed three different instruments at once: it organized boycotts of Carrefour stores across China, stalled negotiations for Areva to build nuclear reactors, and redirected Chinese outbound tourists away from France.⁶ One leader’s personal meeting triggered a coordinated campaign against private companies, state enterprises, and the tourism industry simultaneously.

The message across all three cases was identical: in Beijing’s calculus, there is no distinction between the national and the private. Governments, companies, and individuals are all legitimate targets of commercial coercion. And crucially, the triggers are neither predictable nor proportionate. A webpage that lists Taiwan as a country; a supply chain audit statement citing concerns about Xinjiang cotton; a private meeting between a head of state and a religious leader: any of these could bring Beijing’s commercial leverage to bear on your business.⁷

From Market Access to Supply Chain Weaponization

For decades, companies and countries navigated this environment with a rough working knowledge of the rules. Stay away from Taiwan, Tibet, Xinjiang, and Tiananmen. Do not challenge China’s territorial claims. Do not embarrass the Party. Violate these norms and face the consequences, typically in the form of lost market access. It was an uncomfortable bargain, but a navigable one.

That changed in 2010. Following a territorial dispute over the Diaoyu/Senkaku islands, China did something it had never done before: it imposed an export ban on rare earth minerals, cutting off supplies to Japan.⁸ This was not market access coercion: China was not threatening to close its doors to Japanese goods. Instead, this was supply chain weaponization: China was threatening to cut off something Japan needed to make things, not just sell things. The distinction is fundamental. Market access coercion punishes you for what you export to China. Supply chain weaponization punishes you for what you need from China.

The world watched, took note, and moved on, concluding it was just Japan’s problem. That was a catastrophic misreading, and Japan knew it. In the aftermath of the 2010 ban, Japanese companies did not wait for their government to fix the situation. They understood, correctly, that this was a problem each company had to solve for itself. Governments may try to ease diplomatic tensions, but they change, and those that are friendly to China today may be adversarial tomorrow. Japanese industry moved aggressively to diversify: investing in Australia’s Lynas Rare Earths, developing recycling technologies, funding research into rare earth substitutes, and building stockpiles.⁹ Japanese dependence on Chinese rare earths fell from roughly 90 percent at the time of the embargo to below 60 percent today.¹⁰

The response was not only about sourcing. Japanese companies understood that reducing consumption of the targeted materials was as important as diversifying supply. Sumitomo Electric recently announced a $100 million investment to build a new tungsten production plant, boosting capacity by 50 percent specifically to reduce dependence on Chinese imports.¹¹ Nissan, working with its parts suppliers, developed technology that reduced the rare earth content in the motor of its new Leaf EV by more than 90 percent compared with the first-generation Leaf released in 2010. This allowed the company to cut its reliance on dysprosium and terbium, the heavy rare earths China has placed under export restriction.¹² The lesson Japanese companies drew from 2010 was simple: assume you will be targeted, prepare on both the supply and the demand sides, and do not wait for your government to solve it for you.

The rest of the world did not draw the same lesson. And so, when the Trump administration moved to expand its Entity List—a government blacklist that bars U.S. companies and their foreign partners from selling or transferring technology to designated foreign companies deemed a national security threat—to include subsidiaries of previously blacklisted companies, the world was caught off guard. China responded by banning rare earth exports to the entire world, threatening global automotive, defense, aerospace, and electronics industries all at once.¹³ The weapon used on Japan fifteen years earlier was now pointed at everyone.

The casualties were immediate and concrete, rippling across the global automotive and electronics industries simultaneously. Suzuki Motor halted domestic production of its Swift subcompact after Beijing’s rare earth restrictions cut off essential materials.¹⁴ Nissan was forced to scale back production of its new Leaf EV before it had even launched. Lucid Motors, Ford, and a range of Asian manufacturers from Bajaj Auto to Ather Energy all had to delay or reduce output.

What is striking is not just that it happened, but that China had telegraphed exactly this playbook, and the world still wasn’t ready. Even more striking is what China did next. Rather than targeting a country, it carefully targeted individual companies. After Japan’s prime minister warned that Chinese military action against Taiwan could threaten Japan’s own survival, Beijing placed twenty Japanese companies on its own entity list.¹⁵ This was a shot across the bow that told every corporate executive on the planet something important: like it or not, this conflict involves you.

The Nexperia Lesson

The Nexperia episode, which unfolded last October alongside the rare earth ban, should be required reading in every boardroom.¹⁶ Nexperia is a semiconductor company headquartered in the Netherlands, owned by China’s Wingtech Technology. It produces legacy chips: the unglamorous, low-cost semiconductors used in power steering, automatic windows, and hundreds of other automotive functions. In other words, one of many ubiquitous components that quietly hold modern manufacturing together.

When the Dutch government, acting on concerns about illegal technology transfers—and reportedly under pressure from Washington, given that Wingtech had been placed on the U.S. Entity List—seized control of Nexperia in late September 2025, Beijing responded within days. China’s Ministry of Commerce imposed an export ban on chips produced at Nexperia’s Chinese plants, effectively severing the global automotive supply chain from a critical, if overlooked, node.

Nexperia is not a dominant player in the global semiconductor market but it did not matter. Honda was forced to cut production at plants across North America, Japan, China, and Mexico.¹⁷ The company slashed its annual sales forecast by 110,000 units and absorbed nearly a billion dollars in lost operating profit. Stellantis set up a cross-functional war room dedicated solely to the crisis. The European Automobile Manufacturers’ Association warned that carmakers across the continent were close to shutting down production lines.¹⁸

The lesson for supply chain managers is sobering: you do not need to rely on a monopoly supplier for your operations to be crippled. A modest share of a narrow market segment, concentrated in China, with no immediately available alternative, can do the job.

There is a second lesson from Nexperia that has not received nearly enough attention either: moving your supply chain out of China is necessary but not sufficient. Nexperia is a Dutch company. Its headquarters are in the Netherlands. Beijing imposed the export ban anyway, because part of the manufacturing was in China and the parent company was Chinese. If your supply chain runs through a Chinese-owned entity, regardless of where it is incorporated or of what flag flies over its headquarters, you remain exposed.

China Makes It Official

For those who still harbored doubts about Beijing’s intentions, the Chinese government recently removed all ambiguity. On March 31, 2026, Premier Li Qiang signed State Council Order No. 834, the Provisions of the State Council on the Security of Industrial Chains and Supply Chains, which took effect immediately, with no transition period.¹⁹ It is China’s first dedicated administrative regulation on supply chain security, and it is best understood as an offensive measure.

The regulation, described by Chinese state media as seeking to “prevent security risks in industrial and supply chains,” establishes a centralized coordination mechanism among more than fifteen government agencies to monitor supply chain activities. It grants authorities sweeping power to investigate and impose countermeasures against foreign governments, organizations, or individuals deemed to threaten China’s supply chain security. Critically, the regulation explicitly extends scrutiny to commercial conduct, including decisions by multinational companies to exit Chinese supply chains, to conduct supply chain due diligence that Chinese authorities deem excessive, or to comply with foreign sanctions in ways that disrupt relationships with Chinese counterparties.

In plain language, the regulation threatens companies that try to decouple from China. The countermeasures available to Beijing under the law include export bans, restrictions on the entry and exit of executives, and seizure of property in China. The law is intentionally broad and vague: broad enough to catch almost any company in its net if Beijing chooses to pull the trigger.

Consider what this means in practice. Brazil holds the world’s second-largest reserves of rare earths. The Brazilian government has recently stated that it will require foreign partners to process rare earth minerals domestically as a condition of access, a perfectly reasonable industrial policy aimed at capturing more of the value of the country’s own resources.²⁰ Under Brazil’s current president, a known friend of Beijing, this is unlikely to trigger Chinese retaliation. But what happens when Brazil’s next president takes a harder line in defense of Brazilian workers and industry? Under State Council Order No. 834, Beijing could plausibly argue that Brazil’s domestic processing requirement disrupts Chinese supply chain interests and act accordingly. Any company building a supply chain around Brazilian rare earth processing would find itself caught in the crossfire.

This is not a hypothetical edge case. It is the central design feature of the regulation. In other words, vagueness is the weapon. If companies and countries cannot predict what will trigger Chinese countermeasures, the rational response is to avoid anything that might, which is precisely what Beijing wants. The law is designed to make decoupling feel too risky to attempt.

China has now demonstrated three distinct triggers for weaponizing supply chains: commercial disputes, such as tariffs or trade cases; security concerns about dual-use goods; and competitive threats in industries where China fears losing the innovation race. State Council Order No. 834 formalizes all three into a single legal framework. Taken together, these criteria will eventually encompass virtually every industry that relies on China for its inputs.

The Industries of Tomorrow Are at Stake

The urgency of this moment goes beyond today’s supply chains. It extends to the industries that will define the next several decades of economic and military competition.

Consider the drone industry. China’s sanctions on U.S. drone maker Skydio, imposed after the company sold drones to Taiwan’s National Fire Agency, cut off Skydio’s battery supply virtually overnight.²¹ Batteries were one of the few components Skydio had not yet moved out of China. One phone call from Beijing to a Chinese battery supplier, and the United States’ largest drone company was rationing parts. The drone market has historically been dominated by Chinese companies, and Beijing’s message was explicit: it was attempting to eliminate the leading U.S. competitor and deepen global dependence on Chinese drone suppliers.

The same dynamic applies, at far greater scale, to humanoid robots, the technology that many analysts believe will be the defining industrial platform of the coming decades. Analysts estimate that roughly 60 percent of the supply chain for humanoid robots overlaps with that of electric vehicles.²² Reports suggest Tesla’s Optimus robot currently sources a majority of its parts from China.²³Much more than an ordinary business risk, the situation amounts to a strategic vulnerability of the first order. China is investing aggressively in humanoid robotics. If it concludes it is losing that race, it has already shown it will not hesitate to act.

This brings us to a point that has been almost entirely absent from the U.S. policy debate: the strategic importance of the electric vehicle supply chain is not primarily about climate or consumer preferences. Rather, it is about industrial capacity. The batteries, sensors, actuators, and motors developed for EVs are the same components needed for drones, humanoid robots, and the next generation of autonomous systems. By retreating from the EV transition on political or environmental grounds, without accounting for this technology spillover, the United States is not just ceding the car market. It is forfeiting the industrial learning curve, the manufacturing scale, and the supplier ecosystem that will determine who leads the next industrial revolution. China, which is investing simultaneously in EVs, drones, and humanoid robots, understands this perfectly. Washington, so far, does not.

The irony is sharp. Nissan’s engineers spent fifteen years developing technology to reduce rare earth consumption in EV motors by 90 percent, precisely the kind of innovation that reduces strategic vulnerability. That work was driven by the 2010 embargo and the recognition that dependency was a liability. U.S. automakers, having largely stepped back from the EV race on political grounds, are not building that knowledge base. When the next generation of autonomous systems requires it, they will find themselves starting from behind, and dependent on China for the inputs they need to catch up.

The strategic stakes crystallized when reports emerged that senior Pentagon officials approached the CEOs of General Motors and Ford about retooling their factories for weapons production, the first such request since World War II.²⁴ Defense officials framed the conversations as a matter of national security, citing dwindling weapons stockpiles and production capacity strained by the conflicts in Ukraine and the Middle East.

The historical parallel to the “Arsenal of Democracy” paradigm from World War II, in which the private sector worked in coordination with government to produce the weapons that won that conflict, is stirring indeed. But it carries an uncomfortable question that no one in Washington appears to be asking: if GM and Ford retool for weapons production, what happens when Beijing decides to pull the supply chain out from under them? Both companies source components, materials, and intermediate goods from Chinese suppliers. GM has committed to eliminating Chinese-sourced parts from its North U.S. vehicles by 2027, a commitment that reflects exactly the right strategic instinct.²⁵ But the process is not complete. And the moment these companies begin producing weapons systems, they move squarely into the second and third of China’s three trigger categories: dual-use goods and competitive threats to Chinese industrial interests.

The Pentagon cannot ask U.S. manufacturers to become an Arsenal of Democracy while those manufacturers remain exposed to Chinese supply chain chokepoints. The two objectives are in direct conflict. Resolving that conflict is the precondition for everything else.

How to Build the Alternative

Unwinding exposure to Chinese supply chains will not be cheap, fast, or simple. Companies setting out to do so should go in with clear eyes about what they are taking on.

The obvious first instinct, reshore everything to the United States, is understandable but insufficient. For high-value, strategically critical industries including advanced semiconductors and biopharmaceuticals, U.S. production is the right long-term goal, and investment should flow there. But the supply chain is too vast, and China’s chokepoints too numerous and too urgent, to be addressed by U.S. production alone.

The United States currently faces a projected shortfall of nearly two million manufacturing workers by 2033, and that estimate predates the current push to reshore.²⁶ The shortage is not just a matter of numbers: a dearth of experienced tooling engineers—experts with deep knowledge of injection molds, dies, drills, jigs, and gauges needed to manufacture goods at scale—is arguably the single greatest obstacle to rapid reshoring.²⁷ Layer onto this an electricity grid in which over 70 percent of transmission infrastructure is more than twenty-five years old, has never been upgraded, is already strained to record levels by data centers and AI workloads, and is now being asked to absorb a manufacturing renaissance as well.²⁸ Add to all this the contradictions of a trade policy that imposes tariffs on steel, aluminum, and lumber: the raw materials needed to build the very factories that would house reshored production.

Trying to reindustrialize the United States and relocate supply chains out of China simultaneously, using the same policy tools, risks achieving neither. These are related but distinct objectives. Supply chain security, getting critical inputs out of Chinese control as fast as possible, should be treated as the higher priority, because China’s existing chokepoints threaten the reindustrialization effort itself. You cannot rebuild U.S. industry on a foundation that Beijing can pull out from under you at any moment.

The fastest viable path runs through allied nations, and nowhere more so than in Latin America. The region is undergoing a political realignment that creates a rare window of opportunity. U.S.-friendly governments have recently been elected or taken power in Argentina, Chile, Paraguay, Ecuador, the Dominican Republic, Colombia, Costa Rica, Perú, and Honduras. Even countries with leftist governments, such as Mexico, have made clear that they want productive working relationships with Washington. Across the hemisphere, the political conditions for a safe-shoring bloc, that is, a network of allied countries whose supply chains can be certified as China-free, have rarely been more favorable.

Latin America also brings tangible assets to the table. Chile and the broader Andean region control much of the world’s lithium and copper. Mexico already hosts a sophisticated automotive and electronics manufacturing ecosystem built over three decades of NAFTA and USMCA integration. Colombia and Central America offer young, growing labor forces and improving logistics infrastructure. The U.S. government needs to signal clearly—through trade frameworks, investment guarantees, and diplomatic commitment—that these countries are part of a safe-shoring bloc whose access to the U.S. market is secure. There is no time to waste on this. Every day of delay is a day China uses to tighten the regulatory and commercial screws that make decoupling harder.

But companies that go into this process expecting a plug-and-play replacement for China will be disappointed. Several realities must be factored in from the outset. First, it will be expensive. China’s price advantage is the product of decades of deliberate industrial policy, scale, and subsidy; no alternative supplier will match it immediately, and companies should budget accordingly. Second, alternative suppliers will need training, just as multinationals once trained Chinese factories to meet their specifications. Third, there will be a learning curve, with higher initial rejection rates and quality control challenges. Fourth, financing will be needed. Many alternative suppliers will need to build or scale up production capacity before they can absorb significant orders. Fifth, and critically, the new supply chains cannot be Chinese-owned. The Nexperia case established this definitively: Chinese ownership, regardless of the flag on the headquarters, means Chinese leverage.

Finally, no single country or region can absorb everything. Triage will be required. Mexico and Central America are natural candidates for automotive components and electronics assembly, Brazil for rare earths and agricultural inputs, and India for pharmaceuticals. The task is to map each chokehold and find the fastest viable alternative, country by country, component by component.

The Clock Is Running

The Xi-Trump truce reached in Busan in October 2025 has bought some time. Both sides agreed not to implement new trade measures that could harm the other. This has to be utilized. Even though the May 2026 Xi-Trump Beijing Summit managed to maintain this truce, do not assume this will be permanent or long-lasting. The PRC is laser-focused on establishing supply chain independence for a reason: to more effectively weaponize it. State Council Order No. 834 tells you everything you need to know about Beijing’s long-term intentions.

China’s commercial coercion has followed a consistent pattern for decades: probe with market access pressure, escalate to supply chain weaponization, formalize the tools, and tighten the screws. Each step has been telegraphed and each warning has been ignored until the crisis arrives. Japan learned this lesson in 2010 and the world learned it fifteen years later.

Every day a company does not begin shifting to a China-free supply chain is a day lost, and a win for Beijing. The Busan truce will not last forever. The next export ban will come and will not announce itself in advance. The remaining question is whether any company in its crosshairs will have an alternative when it does.

This article is an American Affairs online exclusive, published August 20, 2026.

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Notes