The New Rules of Doing Business With China

Geopolitical tensions between the West and China are deepening. As a result, Western governments, especially in the U.S. and Europe, are hardening their rules toward Chinese companies. Although many Western executives see these policies as moving in a common direction — toward an economic decoupling — this view is too limiting. Instead, by learning to classify the policies into three distinct buckets — techno-nationalistic, techno-localistic, and protectionist — Western executives can better understand not only the risks but also the opportunities they present and respond more strategically.

Western governments have placed Chinese businesses in their crosshairs for three reasons. The first is that Chinese companies are becoming increasingly competitive globally. Once dismissive, U.S. business leaders and policy makers have come to more fully recognize Chinese companies’ innovation capabilities. Similarly, in Europe, 60% of surveyed executives said that Chinese companies’ innovations are already on par or will soon catch up with those of their own organizations. These concerns are not relegated to consumer products and business model innovations. For example, 65% of German automotive companies believe that their Chinese competitors already lead or will soon surpass them in technological innovation.

Second, many of these innovative Chinese companies are perceived as having links to China’s Communist Party and serving as extensions of the Chinese state by supplying it with dual-use technologies (having both civil and military applications) and/or complying with laws requiring cooperation with state intelligence efforts. These close ties, combined with Western policy makers’ concerns about the Chinese Communist Party’s governance model and its recent geopolitical expansionism, have fueled concerns that Chinese companies pose national security and espionage risks. In parallel, many U.S. and European policy makers seek to penalize Chinese companies because of the sizable financial and regulatory support they’ve received from the Chinese government to the disadvantage of Western businesses.

Third, there is the growing realization of the West’s own declining competitiveness. Decades of globalization have allowed Western multinationals to disperse their value chains around the world, especially to lower-cost China, often hollowing out manufacturing and R&D capabilities in their home markets. Western advantages in innovation, especially in Europe, appear to be waning.

This loss of Western production and innovation advantages has sparked concerns about economic dependence on overseas actors, driving governments to assert greater control over local industries. These concerns are strongest in areas obviously related to national security (such as semiconductors and telecommunications) as well as in nonmilitary artificial intelligence, social media, electric vehicles (EVs), and other technology sectors.

While Western policies may seem to be headed toward decoupling, identifying policies as belonging to one of the three following categories offers business leaders a more strategic perspective on how to respond to them.

Techno-Nationalism: Chinese Not Welcome

Techno-nationalistic policies aim to build domestic technological capacity by removing Chinese companies from supply chains entirely. Multiple U.S. government agencies’ bans on Huawei and ZTE, leading Chinese telecommunications companies, are prime examples of these types of restrictions that have been justified on national security grounds. Both companies are prohibited from supplying technologies for the U.S. telecommunications network, and U.S. companies are restricted from selling semiconductor technologies to them. Several European countries, such as Germany, Sweden, and Denmark, have imposed their own restrictions on Huawei and ZTE to supply their national 5G networks or are even ordering them to remove critical components from already installed equipment.

Despite these restrictions, some Western companies have sought to maintain ties with their Chinese technology partners, both as suppliers and customers. For instance, Qualcomm and Intel heavily lobbied the U.S. Department of Commerce to rethink its restrictions on semiconductor chip sales to Huawei, arguing that supplying the company with lower-end chips would not significantly advance its capabilities. While Qualcomm and Intel initially received exemption licenses to sell to Huawei, pressure from U.S. policy makers prevailed, and the licenses were revoked in May 2024. This loss of Huawei as a key buyer worsened Intel’s financial woes.

Chinese open-source AI company DeepSeek has also recently been subject to techno-nationalistic policies. Various levels of the U.S. government are concerned about the potential widespread adoption of the company’s generative AI application and its ability to collect sensitive user data. As a result, DeepSeek’s app has been banned from use on government devices and networks in some U.S. states. Meanwhile, federal legislation has been introduced to ban DeepSeek software on federal government-issued devices, and other federal proposals could even more widely restrict the app in the U.S.

Western companies facing techno-nationalistic policies might need to phase out their relationships with Chinese businesses in critical sectors sooner rather than later. They may find that even short-term workarounds get blocked by more stringent regulations in the future. Worse, prolonging the inevitable by not expeditiously diversifying toward new buyers or partners could be calamitous. Companies in critical sectors should more proactively identify non-Chinese buyers and suppliers and reconfigure their alliances to mitigate such risks. Even open-source technologies overseen by Chinese companies need to be cautiously adopted.

In terms of nonmarket strategies, organizations should proactively lobby for greater transatlantic harmonization on policy toward Chinese companies. After all, Western companies on either side of the Atlantic may lose out if they are the only ones reshuffling their relationships in sensitive industries’ supply chains.

Techno-Localism: Playing Hardball on Market Access

Unlike techno-nationalistic policies, which aim for the complete exclusion of Chinese companies, techno-localistic policies seek to keep critical technologies — whether foreign or domestic — within one’s domestic borders. These policies often involve a quid pro quo with foreign businesses: Access to Western markets or even government support is allowed in exchange for technology localization.

Ironically, these policies resemble the forced technology transfer practices in China that have prompted Western governments to harden their stances against the country.

One extreme example of a techno-localistic policy is the U.S. government’s demand that TikTok be sold to a U.S. company or face a ban. This scenario presents a potential opportunity for U.S. businesses, several of which have expressed interest in acquiring the social media platform and its proprietary algorithm. A salient difference between the TikTok and DeepSeek cases is that DeepSeek currently does not have the proprietary, intellectual property-protected technology or a sufficient U.S. market share to warrant it being subject to techno-localistic American policies.

A less confrontational example of a techno-localistic policy, also drawn from China’s own technology transfer playbook, is the European Union’s demand that Chinese EV battery companies establish local factories and share expertise in exchange for access to 1 billion euros ($1.09 billion) in development grants.

On the one hand, Western companies may be able to use techno-localistic policies to their advantage. Such rules may indeed facilitate access to new technologies and/or otherwise enable businesses to negotiate favorable terms for technology transfer.

On the other hand, caution is warranted. As our prior research shows, state tech transfer policies that deny foreign technology owners the ability to profit from their most cutting-edge innovations tend not to work — and may even backfire by discouraging foreign tech transfers to host-market companies across the board as the host country develops a bad reputation.

Further, in other research, we found that Western businesses that faced forced technology transfer policies in China often transferred only noncritical technology; this, alongside other intellectual property, R&D, and nonmarket strategies, allowed them to maintain their tech leadership for decades. Chinese companies expanding to Europe and the U.S. may use similar strategies to protect their technological advantages from techno-localistic policies. They may also apply their lightning fast time-to-market competencies developed at home to outpace Western counterparts in innovation abroad. In short, Western companies may stand to benefit from techno-localistic policies at home but should not rely on them as a long-term solution to more deep-rooted competitive disadvantages.

Protectionism: Imports (but Not Foreigners), Go Home

Protectionist policies do not explicitly target technology transfers or the removal of Chinese companies; rather, they focus on limiting imports to protect domestic industries. These policies apply to imports from foreign and domestic companies’ operations abroad.

Recent examples of protectionist policies include the United States’ imposition of a 100% import tariff on Chinese-built electric vehicles in 2024, among other sizable tariffs on imports of solar cells, semiconductors, steel, and aluminum, among other products that same year. In early 2025, the new Trump administration instituted substantial tariffs on imports from China, as well as tariffs on imports from Mexico, Canada, Europe, and elsewhere. Likewise, the EU imposed tariffs of up to 35% on companies importing EVs from China. As previously mentioned, not just Chinese businesses are subject to these rules. For example, Tesla cars produced in China face significant import tariffs in the EU.

Protectionist trade policy can also take the form of subsidies to domestic industry. The 2022 Inflation Reduction Act, for example, offered sizable subsidies exclusively for U.S.-made solar panels, batteries, and EVs. That benefited U.S. companies and made it harder for Chinese producers to maintain cost advantages. Europe has instituted a similar set of policies as part of the European Green Deal Industrial Plan, aka the Buy European Act: It aims for 40% of clean technologies consumed in the EU to be produced there by 2030.

At the same time, these policies do not prevent Chinese companies from maintaining certain existing operations in the U.S. or Europe, establishing new ones, or partnering with Western companies. For instance, BYD, a leading Chinese EV producer, still has lucrative contracts in the U.S. under which it sells buses to transit agencies in some states. The company has a manufacturing facility in California and has stated its commitment to investing in the U.S., buying from U.S. vendors, and hiring U.S. labor. Chery, another leading Chinese EV manufacturer, has a joint venture with Spanish automaker Ebro-EV Motors to build cars in Barcelona, Spain. Even President Donald Trump has explicitly suggested that Chinese automakers can avoid future tariffs by building factories in the U.S. rather than moving production to Mexico as a backdoor into the U.S. market.

Further, in some cases, Chinese companies can even exploit the government incentives offered by protectionist policies. Chinese solar panel companies — such as Trina Solar, Jinko Solar, JA Solar, Runergy, Boviet Solar, and Hounen Solar — have invested in sizable production facilities across the U.S., and some of those could net billions of dollars in American tax subsidies. Chinese supplier Longi has formed a joint venture with Chicago-based Invenergy to produce solar panels and has already benefited from millions of dollars in tax credits.

The lesson here is that Western businesses cannot bank their success on protectionist policies; rather, they must ramp up investments locally and carefully consider partnerships with Chinese companies. While protectionist measures can offer short-term advantages to Western businesses by shielding them from competition, complacency is risky. Some Chinese companies have shown resilience to protectionist policies by significantly increasing their investments abroad and adapting through local partnerships, impression management, and innovation. Western businesses should respond by increasing their own investments in R&D, production, and marketing. It may also behoove them to consider strategic alliances on their home turf with politically savvy Chinese companies that have the right technology, know-how, or production capabilities.

Investors and consumers alike have benefited from multinational firms’ optimization of global value chains, in the form of increasing profits and decreasing prices, respectively. Yet, as a consequence, the very foundations on which these companies’ success were built have started to erode. As Western governments now start to enact policies that reset the rules of global competition, multinational companies must rethink how they manage their global value chains.

Western business leaders can better assess the risks and opportunities presented by policies targeting Chinese companies by better understanding whether they are techno-nationalistic, techno-localistic, or protectionist in character. To respond most strategically, executives should realign supply chains, capitalize on policy incentives, ramp up investments, and/or consider entering strategic partnerships with Chinese companies.