China 2025: Navigating Uncertainty and Capturing Opportunities
Since 2015, the business environment in and with China has grown increasingly risky and complex with each passing year. I am confident that 2025 will be the most challenging and unpredictable year yet—by a significant margin.
For businesses operating in or with China, this landscape is shaped by geopolitical tensions, economic challenges, and evolving regulations. In this post, I explore six key risks that will define China’s business environment in 2025 and provide insights into how businesses can navigate these challenges while seizing potential opportunities.
1. Geopolitical Tensions and Economic Decoupling
The U.S.-China relationship remains one of the most critical and fraught geopolitical dynamics, with the EU-China relationship closely following, usually by only months.
With competition intensifying in areas such as technology, trade, and security, both countries are seeking to reduce reliance on each other—a trend often referred to as “decoupling” or “de-risking.” See US-China Decoupling: Yes, No AND Maybe So.
This decoupling is driven by a combination of factors: ideological differences, national security concerns, and economic competition. Under Xi Jinping’s leadership, decoupling will continue, with the only question being the pace at which it unfolds.
Tariffs and Export Controls: Recent U.S. export controls on semiconductor technology, particularly those targeting advanced chips and chip-making equipment, have significantly impacted China’s tech industry. China has responded with its own restrictions on exports of gallium and germanium, critical minerals used in semiconductor manufacturing. These tit-for-tat actions demonstrate the escalating nature of the tech war and the increasing weaponization of trade. Just today, China imposed trade sanctions against 28 U.S. companies.
Global Realignments: Countries like Japan, South Korea, and the EU are reevaluating their economic ties with China, balancing trade partnerships against national security concerns. This “de-risking” strategy involves diversifying supply chains and reducing dependence on China for critical goods and technologies. This trend is further fueled by concerns about human rights abuses in Xinjiang and the erosion of freedoms in Hong Kong.
A. My Thoughts
The European Union (EU): It used to be said that the EU would follow U.S. sanctions on China about six months later. However, this timeline has drastically shortened to approximately six weeks. The EU now appears increasingly aligned with U.S. trade and economic policies concerning China, driven by shared concerns over geopolitical influence, market practices, and security risks. This growing synchronization reflects a broader Western consensus on addressing challenges posed by China, marking a new era of transatlantic cooperation on economic sanctions and trade restrictions.
Chinese Products from Countries Other Than China: I also anticipate that President Trump will take strong action against products imported into the United States that are manufactured outside China but by Chinese companies. This trend is already creating ripple effects in countries like Vietnam and Mexico. Professionals and legal experts we work with in these regions have expressed mounting concerns about Chinese companies establishing operations within their borders. They understand that failure to address this issue could lead to tariffs or sanctions imposed by the U.S. These measures highlight a broader strategy aimed not only at targeting China directly but also at curbing its global economic footprint.
B. Business Implications
Assess Exposure: Companies must assess their exposure to U.S.-China trade tensions and diversify their supply chains and customer bases accordingly. This includes identifying alternative sourcing options, developing contingency plans, and considering regionalizing operations. must assess their exposure to U.S.-China trade tensions and diversify their supply chains and customer bases accordingly. For practical guidance, check out Moving Your Manufacturing out of China: Choose a “Friend”, Moving Manufacturing to Mexico from China, and Moving Your Supply Chain From China to Southeast Asia/South Asia: The Three Big Issues.
Explore Emerging Markets: As China strengthens its ties with emerging markets through initiatives like the Belt and Road Initiative (BRI), businesses can explore opportunities in these regions. This could involve partnering with Chinese companies to access new markets or investing in infrastructure projects in BRI countries. However, thorough due diligence is crucial to understanding the risks associated with BRI projects. See How Your Company Can Benefit from China’s Belt and Road Initiative.
2. The Taiwan Strait
The Taiwan Strait is a geopolitical flashpoint, with tensions escalating due to increased military activity and assertive rhetoric from both China and Taiwan. While a full-scale conflict in 2025 remains unlikely, the risks of miscalculation or accidental escalation cannot be ignored. The recent focus on “cognitive warfare” tactics, aimed at influencing public opinion and undermining morale, further adds to the complexity of the situation.
A. My Thoughts
I receive at least ten times more questions about Taiwan than about any other China risk, and it’s no surprise why. Most companies view a Taiwan war—or even a blockade—as a catastrophic event that would essentially shut down their China-based supply chains. I share this perspective.
When asked about Taiwan, my typical response is that China could invade Taiwan at any time—tomorrow, next week, next month, next year, or even a decade from now. I’ve read extensively on this subject, yet I remain uncertain about when or if it will happen. The truth is, the only person who knows is Xi Jinping, and even his views on the matter are likely subject to change based on shifting political, economic, and strategic considerations.
I also encourage companies to think beyond just Taiwan. A war or blockade would have far-reaching consequences not only for their China supply chains but also for their ability to move their products from countries like Vietnam, Thailand, and Malaysia to the United States or Europe. These countries are heavily reliant on shipping routes through the South China Sea and the broader Indo-Pacific region—areas that would almost certainly become contested in the event of a Taiwan conflict.
Mexico, in contrast, benefits from its geographic proximity to the U.S. and lacks the same level of exposure to geopolitical tensions in Asia. While Mexico isn’t without its risks, such as political instability or trade policy changes, its supply chain vulnerabilities are fundamentally different and, in this scenario, arguably less severe than those of its Asian counterparts. My law firm’s Mexico manufacturing work approximately tripled in 2024, and I expect it to grow at about that same pace in 2025.
B. Business Implications
Contingency Planning: Companies with operations in Taiwan or China—or those that rely heavily on suppliers from these regions—must prioritize robust contingency planning. This involves identifying alternative suppliers in less geopolitically volatile regions, securing backup production facilities to maintain operational continuity, and developing detailed strategies to manage potential disruptions, including worst-case scenarios.
Risk Assessment: Above all else, know your China risks and have a plan in place to deal with the worst-case scenarios. See China Exit Bans: You Can Check Out Any Time You Want, But You Can’t Ever Leave, How to Calculate Your China Risks, and A Resounding Maybe on Fleeing China
Having a robust strategy to address the most severe potential outcomes—whether stemming from geopolitical conflict, trade sanctions, or internal regulatory challenges—can mean the difference between resilience and crisis. Evaluate your dependencies on China and Taiwan and explore alternative suppliers or manufacturing locations. This could involve shifting production to countries in Southeast Asia or Latin America or even reshoring operations to the U.S. or Europe.
For over a decade, my law firm has been providing comprehensive international risk assessment packages to help businesses navigate the complexities of global markets. Since the end of COVID, the demand for these services has surged, with the number of assessments we perform doubling annually. This sharp increase highlights the growing awareness among companies of the critical need to identify and mitigate geopolitical, regulatory, and supply chain risks. For instance, a Fortune 100 client has us perform this analysis annually, even though they operate in a relatively low-risk sector.
Looking ahead to 2025, I am confident this trend will accelerate further as businesses face mounting challenges in regions like China, Taiwan, and beyond. Robust risk management is no longer optional—it is essential for survival in today’s volatile global landscape. As the stakes rise, I anticipate an even greater demand for my law firm’s expertise in helping businesses assess and address their international exposure.
3. China’s “Unlimited Friendships” with Russia and Iran
China’s deepening relationships with Russia and Iran have become a significant geopolitical wildcard, reshaping alliances and challenging the existing global order. Amid heightened sanctions and diplomatic isolation of these two nations, China has emerged as a key partner, offering economic, technological, and political support. These “no-limits” partnerships carry profound implications for global stability, particularly in sectors like energy, technology, and finance.
Russia
— Energy and Economic Lifeline: China has ramped up its energy imports from Russia at discounted rates, providing a crucial financial lifeline to Moscow and undermining Western sanctions. This trade has also boosted the use of the Chinese yuan in bilateral transactions, challenging the dominance of the U.S. dollar and signaling Beijing’s ambition to reshape global financial norms.
— Military and Technological Collaboration: Beijing and Moscow have strengthened cooperation in military and technological arenas, particularly in advanced sectors such as semiconductors, drones, and cyber capabilities. This partnership extends to space exploration and joint military exercises, raising concerns about technology transfer and the potential for heightened military escalation.
Iran
— Strategic Investments: Through the 25-year Comprehensive Strategic Partnership agreement, China has significantly expanded its investments in Iranian infrastructure and energy. This not only secures access to vital resources but also enhances Beijing’s influence in the strategically critical Middle East.
— Regional Integration: Beijing has supported Iran’s integration into key regional alliances like the Shanghai Cooperation Organization (SCO), further cementing its role as a dominant player in Middle Eastern geopolitics and challenging Western influence in the region.
A. My Thoughts
These developments demand serious attention. Many Chinese companies have sought my law firm’s assistance to navigate the risks associated with their connections to Russia and Iran. They increasingly recognize these ties as liabilities that could harm their global business operations, particularly as sanctions and regulatory scrutiny tighten.
If you are an American company doing business with Chinese firms that maintain ties to Russia or Iran, you face substantial risk as well. These indirect connections can expose your company to secondary sanctions, reputational harm, and regulatory challenges. It’s imperative to assess and mitigate these risks proactively.
B. Implications for Businesses
— Sanctions Risks: Companies involved in sectors linked to China, Russia, or Iran must be vigilant about secondary sanctions and reputational damage. Conduct thorough due diligence on all business partners and transactions to ensure compliance with international sanctions regimes. For detailed guidance on how to reduce your U.S. import risks, check out U.S. Import Practice Tips to Mitigate Compliance Risk.
— Strategic Diversification: Businesses should closely monitor these alliances, particularly in energy, technology, and finance, where tightening U.S. and EU policies could disrupt operations. Proactively diversifying investments, exploring alternative markets, and preparing contingency plans are essential steps to mitigate potential risks.
— Opportunities in Energy Markets: The evolving China-Russia energy partnership is reshaping global energy flows. For companies outside the scope of sanctions, this shift could present opportunities, such as exploring alternative energy sources, investing in renewable technologies, or developing new transportation routes to adapt to the changing dynamics.
4. Technology Competition and National Security Concerns
The competition for technological dominance between the U.S. and China continues to shape global industries. Sectors such as semiconductors, artificial intelligence (AI), and telecommunications are particularly affected by export controls, sanctions, and regulatory scrutiny.
— CHIPS Act in the U.S.: This legislation aims to boost domestic semiconductor manufacturing and research while restricting technology exports to China. It includes funding for new fabs, research initiatives, and workforce development programs. The U.S. is also actively encouraging allies to adopt similar restrictions, creating a more challenging environment for China’s tech sector.
— China’s AI and 5G Push: Despite restrictions, China remains a global leader in 5G infrastructure and AI applications. It continues to invest heavily in these technologies, aiming to achieve self-sufficiency and global leadership. China’s advancements in AI are particularly noteworthy, with applications in areas such as surveillance, facial recognition, and autonomous vehicles raising ethical and security concerns.
Actionable Insights
— Compliance: Stay updated on export control regulations and sanctions to avoid penalties. This includes implementing robust compliance programs, conducting regular audits, and seeking legal advice when necessary.
— Strategic Alliances: Explore partnerships in regions not directly impacted by U.S.-China tensions to maintain access to technology and markets. This could involve collaborating with companies in Europe, Southeast Asia, or other regions to develop joint ventures, research projects, or technology licensing agreements.
— Innovation and R&D: Invest in research and development to maintain a competitive edge in the face of technology restrictions. This could involve focusing on niche areas, developing alternative technologies, or collaborating with universities and research institutions.
5. Supply Chain Resilience and Diversification
As geopolitical tensions escalate and economic decoupling intensifies, businesses must rethink their supply chain strategies to reduce exposure and ensure resilience.
The COVID-19 pandemic and geopolitical tensions exposed vulnerabilities in global supply chains. While China remains the “world’s factory,” businesses are increasingly exploring alternative manufacturing hubs. This trend is driven by a desire to reduce risk, improve resilience, and respond to changing geopolitical and economic realities.
A. My Thoughts
I realize that moving production from China to other countries is both difficult and expensive. However, the reality is that China’s business environment is only going to become more challenging. This will, in turn, make the process of moving production out of China even tougher and more costly in the future.
When it comes to diversifying supply chains, I am a big fan of Vietnam, South Korea, India, Sri Lanka, Thailand, Mexico, Poland, Colombia, and Peru. The best choice for your business will depend heavily on the specific characteristics of your product, such as its complexity, labor intensity, and logistical requirements. Each of these countries offers distinct advantages that could help mitigate risks while maintaining production efficiency and cost-effectiveness. They also, of course, each have their own disadvantages.
Companies that act sooner rather than later will be better positioned to navigate these challenges, minimize risks, and capitalize on new opportunities in alternative markets. The longer you wait, the more complex and expensive the process is likely to become. Planning and execution now are essential to ensuring resilience and flexibility in your supply chain.
B. Emerging Alternatives
— Southeast Asia: Countries like Vietnam, Thailand, and Malaysia offer competitive manufacturing options with lower labor costs and favorable trade agreements. These countries have also benefited from government initiatives to attract foreign investment and improve infrastructure.
— India: India’s “Make in India” initiative has attracted companies seeking to diversify supply chains, offering a large and growing market with skilled labor. India’s democratic system and English-language proficiency are also attractive to many businesses.
— Mexico: Nearshoring to Mexico is becoming popular among U.S. companies due to geographic proximity, established supply chains, and the USMCA trade agreement. Mexico also offers a relatively skilled workforce and lower labor costs compared to the U.S.
C. Best Practices
— Risk Assessments: Conduct a comprehensive review of your supply chains, mapping out dependencies and identifying vulnerabilities. This includes assessing geopolitical risks and evaluating alternative sourcing options.
— Multi-Location Manufacturing: Develop a diversified manufacturing strategy to minimize disruptions. Establishing production facilities in multiple countries or regions can reduce reliance on a single location, help businesses respond to regional demand, and lower transportation costs.
— Protect Against Your China Risks: When a company decides to leave or shift production out of China, former Chinese business partners and the Chinese government almost invariably will turn against you and seek to exploit your situation for their own benefit. This may include actions like withholding payments, enforcing questionable contracts, or leveraging regulatory obstacles to disrupt your operations. Leaving China is almost always a high-stakes endeavor, requiring careful planning and discretion. Before making any announcements or even hinting at your plans to decouple from China (or even just reduce what you are doing in or with China), I urge you to read How to Leave China Safely for the basics on minimizing your risks and protecting your business.
6. China’s Flailing Economy
China’s economy has been trending downward for years, and the outlook shows no signs of improvement. December’s economic numbers were dismal, and the year began with a significant stock market plunge. GDP growth is slowing, debt levels are climbing, the population is aging, and the birth rate continues to plummet—all factors that compound the nation’s economic challenges.
A. My Thoughts
With over 25 years of experience working with China, I’ve witnessed the country endure countless economic ups and downs. One thing remains consistent: when China’s economy faces difficulties, its government tends to crack down harder on foreign businesses. This often involves stricter regulatory scrutiny, sudden enforcement of obscure rules, increased pressure on joint ventures, and other measures designed to prioritize domestic interests, frequently at the expense of international companies.
I first wrote about this issue in The Wall Street Journal, back in 2012, where I explained how economic downturns in China increase risks for foreign businesses and shared strategies for minimizing those risks. More recently, I revisited the topic in China’s Declining Economy and the Implications for YOUR Business, providing updated, practical advice for navigating these challenges.
The bottom line hasn’t changed: understanding how China’s economic shifts impact government policies is crucial for protecting your business. Now more than ever, companies working with China must stay vigilant, adapt quickly, and implement robust plans to navigate the turbulence of a declining economy.
B. Implications for Businesses
— Consumer Demand: As the economy slows, consumer spending is likely to decline. Businesses should analyze market trends closely and adapt their strategies accordingly. This might mean focusing on premium segments, introducing innovative products and services, or exploring opportunities in new markets to offset potential losses.
— Debt Concerns: Rising corporate debt, particularly in the real estate sector, poses significant risks to financial stability and credit availability. This environment could lead to difficulties in securing financing, increased bankruptcies, and a higher rate of defaults. Companies should monitor these developments closely to mitigate potential impacts on their operations.
— Risks to Your China Business: My law firm has dealt with China’s economic fluctuations for decades. When economic pressures rise, the Chinese government becomes tougher on foreign businesses, using tactics that can disrupt operations and profitability. Companies must be prepared for these risks with well-thought-out strategies to protect their interests.
— Opportunities: Despite these challenges, there are growth opportunities in areas where China is doubling down on innovation and green industries. Sectors like renewable energy, electric vehicles, and healthcare are receiving strong government support. Businesses should explore these emerging sectors and develop strategies to capitalize on favorable policies and consumer demand.
Conclusion
The business environment in and with China has grown increasingly complex and risky every year since 2015, and 2025 is shaping up to be the most challenging yet. Understanding the key risks—geopolitical tensions, economic shifts, regulatory challenges, and supply chain vulnerabilities—will be crucial for navigating this volatile landscape.
Success in this environment will depend on your adaptability, vigilance, and a deep understanding of both the challenges and opportunities ahead.
