Blogpost by Brian Chen, Sustainability Consultant, GLOBAL CSR
China’s new regulation on industrial and supply chain security (English translation here), introduced and became effective on March 31st, 2026, represents a significant shift in how cross-border commercial activities are regulated.
The regulation strengthens the Chinese government’s ability to respond to perceived discriminatory practices affecting Chinese companies’ participation in global value chains, with potential implications for foreign companies conducting sustainability due diligence (SDD) in value chains.
While the regulation is framed in terms of supply chain resilience and national security, the regulations may directly affect how companies implement SDD in value chains, particularly where “risk-based” approaches to SDD rely on broad geographic or nationality-based classifications.
Activities under the US Uyghur Forced Labor Prevention Act (UFLPA) may well become the target of this new regulation.
Key Regulatory Features
China’s new regulation reflects a clear policy intent to address perceived discriminatory treatment of Chinese companies in international trade and investment. They establish:
- A broad interpretation of potentially discriminatory conduct, including measures outside “normal market practices” that restrict or disadvantage Chinese companies in commercial transactions (for example, exclusion of Xinjiang-linked suppliers or the imposition of audit requirements).
- The government’s authority to impose countermeasures where such conduct is identified.
- A range of responses may be taken by the authorities, including restrictions on business activities in China, limitations on trade and transactions, and potential travel bans for entities or individuals involved.
Implications for Sustainability Due Diligence
A key implication of the new regulation is the increased legal and compliance sensitivity surrounding the classifications of business relationships (incl. suppliers) in SDD, particularly those that rely heavily on:
- “High-risk country” designations
- Nationality-based assumptions
- Blanket application of increased scrutiny (e.g., audits) or exclusions based solely on geography.
Such approaches have been applied by some companies. However, under the new regulations, they may be subject to legal challenges, where such actions are perceived as lacking objective, evidence-based justification at entity-level.
Companies with operations or business partners in China may therefore need to reassess how SDD is structured and operationalized, particularly where they:
- Rely on country-based risk categorization as a primary sustainability screening indicator for suppliers or the basis of engagement.
- Apply increased scrutiny without entity-specific substantiation.
- Use broad exclusionary thresholds.
Operationalize a Principles-aligned Approach to Sustainability Due Diligence
A more aligned approach to SDD that remains legally compliant across jurisdictions require alignment with the internationally recognized standard, the UN Guiding Principles on Business and Human Rights (UNGPs), endorsed unanimously at the UN Human Rights Council and explicitly supported and encouraged by the Chinese government.
The operationalization of the UNGPs and the implementation of SDD in value chains requires companies to emphasize mutual accountability and transparency, rather than default exclusion based on assumptions.
Such an approach supports both compliance expectations and the main objective of responsible business conduct: identifying and addressing adverse impacts effectively and continuously.
Conclusion
China is the first major economy to formally introduce countermeasures against perceived discriminatory value chain practices in this way. However, similar tensions are emerging across multiple jurisdictions in emerging economies as sustainability becomes increasingly embedded in international trade and investment.
The central challenge for companies ahead is no longer about whether to conduct SDD, but how to implement the sustainability risk management systems that are:
- Effective in identifying and addressing risks of impacts on sustainability.
- Defensible across multiple regulatory jurisdictions.
- In full alignment with the internationally recognized minimum standard for responsible business conduct.