World
China and the West: decoupling
Updated yesterday
2/5
The strategic de-risking of Western economies from China has escalated into a reciprocal regulatory conflict, where China's new legal countermeasures directly target corporate compliance with Western policies, forcing a more complex and adversarial reassessment of economic dependencies.
The revelation of Chinese military researchers using US AI models for defence applications highlights new challenges in export control enforcement, while the UK court's approval of China's embassy project shows diplomatic infrastructure expansion despite economic de-risking.
State of play
The UK government's nationalisation of Chinese-owned British Steel marks a new phase in de-risking, extending beyond trade and technology controls to direct state intervention in heavy industry. London justified the decision by citing national interest, protecting domestic steel production, jobs, and supply for infrastructure and defence. Beijing has condemned this action as discriminatory, warning it will impact confidence in the UK as an investment destination and linking it to broader Western economic containment efforts.
EU De-risking Initiatives
Brussels continues to advance its Economic Security Strategy, including tighter outbound investment screening and coordinated export controls. The European Commission is preparing options to respond to China's use of its new legal toolkit, potentially including faster deployment of the EU Anti-Coercion Instrument and more assertive use of trade-defence tools. France and Germany are coordinating to draft a joint roadmap on China trade imbalances, prepared by their economy, finance and foreign ministers ahead of a presentation in September. This roadmap will focus on addressing trade imbalances, enhancing industrial competitiveness, and strategic de-risking, signalling a coordinated push for EU-level instruments rather than fragmented national responses. New proposals are emerging for a "structural caps" regime to limit single-country supply-chain dependencies, explicitly targeting over-reliance on Chinese exports by requiring EU companies to diversify sourcing of critical components. The EU is also intensifying trade defence against cheap Chinese electric vehicles and batteries, with new tariffs and other trade-defence measures under discussion or implementation, reflecting concerns over industrial overcapacity and its impact on EU manufacturers. New EU eco-design rules for textiles, which entered into force on 2026-07-19, ban large companies from destroying unsold or returned clothing and shoes. These rules will particularly affect fast fashion supply chains reliant on imports from Asia, including China, by forcing changes in inventory and returns management. The European Commission has proposed reforms to the EU Emissions Trading System (ETS) to reduce immediate cost burdens on energy-intensive industries, aiming to balance industrial competitiveness and decarbonisation against competition from jurisdictions with looser climate rules. Germany is quietly mapping China's supply-chain vulnerabilities to identify potential leverage points in a trade conflict.
China's Legal Framework
China continues to prioritize legal and export-control tools to safeguard critical technology amid Western semiconductor and EV curbs. Its commerce ministry stated in early 2026 that key priorities include strengthening legal frameworks, improving export controls, and enhancing risk-prevention to protect supply-chain resilience and national security. Chinese regulators have moved to operational enforcement of their countermeasures against Western semiconductor export controls, opening investigations into foreign chipmakers that reduced sales to Chinese clients. China has also expanded and updated its own export control lists for critical materials and technologies, such as certain rare earths and advanced battery inputs, linking these moves to Western restrictions. Chinese regulators have significantly reinforced oversight of overseas transactions involving Chinese technology and data, with new regulations giving Beijing broad powers to unwind completed deals and scrutinise foreign investments. China is also considering tighter limits on overseas access to its leading domestic AI models, potentially affecting both proprietary and open-weight systems. In a direct response to new EU sanctions on Chinese and Hong Kong companies over Russia, China's Ministry of Commerce added 14 EU-based entities to its export control list, prohibiting the supply of Chinese-origin dual-use items to them. This action targets specific European firms including German defence group Rheinmetall AG, Italian motor maker Lafert S.p.A., and French research lab III-V LAB. Despite broader strategic rivalry, China and the United States signal selective cooperation on law enforcement, including mutual repatriation of criminal suspects and counter-narcotics efforts. Chinese authorities have intensified use of existing export control tools and security reviews targeting sectors where Western governments are actively de-risking, including advanced materials, critical minerals and dual-use components. Regulators are warning foreign companies against complying with foreign measures that restrict business with Chinese entities, forcing corporate legal departments to map potential conflicts of law. The Ministry of Commerce has also begun structured consultations with Chinese AI and semiconductor companies on tightening export controls over advanced technologies, suggesting Beijing is preparing further reciprocal measures that could affect key inputs and design support going to Western firms. A Chinese chipmaker is preparing a 66.5 billion yuan capital raise, Asia's largest to date, driven by AI chip demand, which underscores China's domestic capital mobilization to expand capacity despite Western export controls. The US is weighing sanctions on Chinese AI firm Moonshot over alleged misuse of US foundation models, prompting Beijing to threaten reciprocal restrictions against US tech firms. China's commerce ministry has warned of retaliation following new US import bans on Chinese industrial robots and power inverters, framing the measures as protectionist and undermining global supply chains. China's Ministry of Commerce sharply criticised the US Federal Communications Commission’s decision to add foreign-produced advanced robotic devices and power inverters to its “Covered List,” tightening US curbs on these Chinese-made technologies. China has tightened rare-earth export controls, raising stakes in the regulatory confrontation with Western de-risking efforts. Chinese companies are also preparing a wave of share buybacks to stabilize markets amid external pressures and a market downturn. While export-oriented sectors face pressure, Chinese AI hubs are experiencing rapid growth due to state support and focus on indigenous innovation. Chinese military researchers are extensively using US-developed frontier AI models for defence-related systems, exposing enforcement gaps in Western export controls and AI safety regimes.
Key events
Full chronicle274
This week
- Chinese military researchers are using US AI models for defence applications.
- China's planned "super-embassy" in London received final court approval.