%20(compressed).jpg)
Introduction
China continues to play a central role in the global supply chain, remaining a top destination for sourcing, manufacturing, and component assembly. Despite rising labor costs and increasing scrutiny over geopolitical tensions, the country’s vast infrastructure, deep supplier networks, and production capabilities still make it indispensable for many international businesses — especially in tech, e-commerce, and high-value manufacturing.
However, navigating the China supply chain in 2025 requires more caution than ever.
The return of Trump-era tariffs in the U.S., growing cross-border compliance requirements, and China’s expanded export controls on critical minerals have added new layers of legal and financial risk. For international SMEs, especially those without in-house legal teams, the risks of supplier non-performance, payment disputes, contract defaults, and IP theft are real — and growing.
For a deeper dive into emerging challenges and practical oversights in import/export scenarios, see our 2025 update on the most overlooked risks when importing from and exporting to China.
This guide offers a comprehensive and practical roadmap to help SMEs mitigate these risks. It covers key legal and operational issues you’re likely to face — from contract structuring and regulatory compliance to warning signs in manufacturing and trade — along with proactive solutions for navigating today’s evolving China supply chain landscape.
Legal Risks Associated with China Supply Chain
Engaging with China's supply chain presents a myriad of legal challenges that businesses must navigate to ensure smooth operations and mitigate potential risks. The landscape has evolved, necessitating a comprehensive understanding of these challenges. Below is an in-depth guide detailing the primary legal risks and the warning signs to be vigilant about in import, export, and outsourcing manufacturing scenarios.
1. Insolvency of Suppliers or Distributors
The Chinese economy has faced fluctuations, leading to financial instability among certain firms. The bankruptcy of a supplier or distributor can disrupt supply chains and result in financial losses. To mitigate this risk:
- Conduct Regular Financial Assessments: Regularly evaluate the financial health of partners through audits and financial reviews.
- Monitor Operational Stability: Be alert to signs such as delayed deliveries, quality issues, or sudden changes in communication, which may indicate financial distress.
2. Intellectual Property (IP) Infringement
IP violations, including unauthorized use of trademarks, patents, and trade secrets, remain a significant concern. To protect your assets:
- Register IP Rights in China: Ensure trademarks, patents, and copyrights are registered within China to gain legal protection.
- Implement Robust Contracts: Use enforceable Non-Disclosure, Non-Use, Non-Circumvention (NNN) agreements tailored to Chinese legal standards.
- Monitor the Market: Regularly check the market for counterfeit products or unauthorized use of your IP and take swift legal action when necessary.
For a detailed explanation of why NNN agreements are more effective than NDAs in China, and how to draft one properly, read our blog: China NNN Agreement: A Must-Have for IP Protection.
3. Contract Defaults and Dispute Resolution
Unforeseen events, such as labor shortages or regulatory changes, can lead to contract breaches. To safeguard against defaults:
- Include Detailed Force Majeure Clauses: Clearly define events considered as force majeure and outline the procedures to be followed.
- Specify Liquidated Damages: Set predetermined damages for specific breaches to provide clarity and deter non-compliance.
- Choose Appropriate Dispute Resolution Mechanisms: Opt for arbitration clauses enforceable in both jurisdictions, specifying the venue and governing laws.
4. Structural and Regulatory Compliance
Missteps in business structuring or non-compliance with regulations can lead to severe penalties. Ensure:
- Correct Business Structure: Choose the appropriate entity type (e.g., Wholly Foreign-Owned Enterprise) that aligns with your business activities.
- Adherence to Business Scope: Operate strictly within the approved business scope to avoid legal complications.
- Obtain Necessary Certifications: Ensure all products meet Chinese standards and possess the required certifications for importation and sale.
5. Foreign Exchange and Taxation Risks
Navigating China's foreign exchange controls and tax obligations is complex. To manage these:
- Ensure Proper Documentation: Importers must provide valid documents to access foreign currency for international transactions.
- Understand Tax Liabilities: Be aware that Value Added Tax (VAT) and customs duties apply to most imports, and certain income types may incur local taxes.
6. Compliance with Environmental Regulations
China's commitment to environmental sustainability has led to stringent regulations affecting manufacturing and exports. Non-compliance can result in fines or operational shutdowns.
- Stay Updated on Environmental Laws: Regularly review and comply with China's environmental regulations to ensure uninterrupted operations.
- Implement Sustainable Practices: Adopt eco-friendly manufacturing processes to align with national policies and avoid penalties.
Warning Signs in Import, Export, and Outsourcing Manufacturing Scenarios
1. Importing from China
- Refusal to Provide Business Credentials: Legitimate suppliers should readily share their business licenses and certifications. Hesitation or refusal is a red flag.
- Unusual Payment Terms: Requests for full payment upfront or offers of significant discounts for early payments may indicate potential fraud.
- Lack of Physical Presence: Suppliers without a verifiable physical address or those unwilling to allow factory inspections may not be trustworthy.
2. Exporting to China
- Complex Regulatory Requirements: China's export procedures involve detailed documentation and compliance with specific regulations. Ensure thorough understanding and adherence to avoid delays or penalties.
- Sudden Changes in Trade Policies: Be aware of geopolitical tensions that may lead to abrupt tariff impositions or trade restrictions affecting exports.
3. Outsourcing Manufacturing to China
- Inconsistent Communication: Difficulty in establishing clear and consistent communication channels can lead to misunderstandings and errors.
- Quality Control Issues: Inability to provide product samples, reluctance to adhere to quality standards, or frequent production errors signal potential problems.
- Intellectual Property Concerns: Manufacturers hesitant to sign IP protection agreements or those with a history of IP violations should be approached with caution.
- Environmental Compliance: Manufacturers not adhering to environmental regulations may face operational disruptions, affecting your supply chain.
For more practical strategies on managing IP risk during production, see our guide on how to protect your IP when outsourcing manufacturing to China.
By proactively identifying and addressing these legal risks and warning signs, businesses can establish more secure and efficient supply chain operations in China.
China's Regulatory Framework for Imports and Exports: What You Need to Know in 2025
China's regulatory landscape for imports and exports has undergone significant changes, reflecting the nation's strategic priorities and responses to global trade dynamics. Understanding these regulations is crucial for businesses engaged in international trade with China.
Classification of Imports
China classifies imports into three main categories:
1. Prohibited Goods:
Items that are entirely banned from importation due to safety, environmental, or security concerns. This category includes:
- Arms, ammunition, and explosives of all kinds
- Counterfeit currencies and negotiable securities
- Printed materials, magnetic media, films, or photographs deemed detrimental to China's political, economic, cultural, and moral interests
- Lethal poisons
- Illicit drugs
- Disease-carrying animals and plants
- Foods, medicines, and other articles coming from disease-stricken areas
- Used garments
- Local currency (RMB)
2. Restricted Goods:
Products that require special licenses or are subject to quotas. These often include:
- Certain chemicals and hazardous materials
- Specific pharmaceuticals
- Dual-use technologies
- Advanced technological equipment
- Certain categories of waste and scrap materials
3. Permitted Goods:
Most other products fall into this category and can be imported with standard customs procedures. However, they may still be subject to tariffs, value-added tax (VAT), and other regulatory requirements.
Recent Regulatory Developments (2024-2025)
Several key regulatory changes have been implemented recently:
- Adjustments to Tariffs: In early 2025, China announced modifications to import and export tariffs on selected goods to expand domestic demand and support high-quality development. These adjustments aim to enhance synergy between domestic and international markets.
- Export Controls on Critical Minerals: In February 2025, China imposed restrictions on the export of five metals used in defense, clean energy, and other industries. This move was a response to new U.S. tariffs and reflects China's strategy to leverage its dominance in critical minerals.
- Enhanced Countermeasures to Foreign Sanctions: China has implemented new rules to bolster its countermeasures against foreign sanctions. These regulations allow for actions such as entry denial, asset seizure, and business restrictions against entities on China's anti-sanctions list.
Impact of Global Trade Tensions
The ongoing trade tensions, particularly with the United States, have led to reciprocal tariff increases and trade restrictions:
- U.S. Tariffs on Chinese Goods: In February 2025, the U.S. imposed a 10% additional tariff on all Chinese imports. China retaliated with tariffs on U.S. products, including a 15% tariff on coal and liquefied natural gas and a 10% tariff on oil and agricultural machinery.
- China's Retaliatory Measures: In response to U.S. tariffs, China imposed additional tariffs of up to 15% on imports of major U.S. farm products such as chicken, pork, soy, and beef starting from March 10, 2025.
Recommendations for Businesses
To navigate China's regulatory framework effectively:
- Stay Informed: Regularly monitor updates from official Chinese regulatory bodies, such as the Ministry of Commerce and the General Administration of Customs.
- Conduct Due Diligence: Before engaging in trade, verify whether your products are subject to any prohibitions or restrictions. Ensure compliance with licensing requirements and obtain necessary permits.
- Consult Legal Experts: Engage with legal professionals specializing in Chinese trade law to ensure adherence to all regulatory obligations and to receive guidance on mitigating potential risks.
By understanding and adapting to China's evolving import and export regulations, businesses can better position themselves to succeed in this dynamic market environment.
Best Practices to Prevent Supply Chain Disputes and Defaults in China
Fortunately, many of these risks can be significantly reduced through proactive legal and operational strategies. Below are some of the best practices SMEs can follow to avoid disputes and defaults in their China supply chain.
Before Signing a Contract
1. Conduct Thorough Due Diligence
- Verify Legal Identity and Compliance: Utilize official Chinese government databases to confirm the company's registered name, legal representative, business scope, and operational status. This ensures the entity is legally recognized and compliant with local regulations.
- Assess Financial Health and Reputation: Engage reputable third-party firms to evaluate the company's financial stability and reputation. Be mindful of recent challenges faced by foreign due diligence firms in China, emphasizing the importance of selecting partners with a strong compliance record.
2. Draft Clear and Enforceable Contracts
- Bilingual Agreements: Prepare contracts in both Chinese and English, specifying the governing language. This practice ensures clarity and enforceability within the Chinese legal system.
- Precise Terms and Conditions: Clearly define all terms, including payment schedules, delivery timelines, product specifications, and quality standards.
3. Include Robust Dispute Resolution Mechanisms
- Arbitration Clauses: Incorporate arbitration clauses specifying recognized arbitration institutions and applicable rules. Ensure these clauses are valid under Chinese law to facilitate enforceability.
- Governing Law: Clearly state the governing law of the contract, considering the implications of choosing Chinese or foreign law on enforceability and interpretation.
For a broader look at building and maintaining effective supplier relationships, visit our ultimate legal guide to managing your supply chain in China.
During the Partnership
1. Monitor Performance and Compliance
- Set Key Performance Indicators (KPIs): Establish measurable KPIs to track supplier performance, including quality control, adherence to delivery schedules, and compliance with contractual obligations.
- Regular Audits and Inspections: Conduct periodic audits and on-site inspections to verify compliance with agreed-upon standards and identify potential issues early.
2. Maintain Comprehensive Documentation
- Detailed Records: Keep thorough records of all communications, agreements, amendments, and transactions. This documentation is crucial in the event of a dispute.
- Written Confirmations: Ensure that any changes to the contract, especially regarding delivery or payment terms, are documented in writing and acknowledged by both parties.
If Problems Arise
1. Initiate Prompt and Formal Communication
- Demand Letters: Engage legal counsel to draft formal demand letters addressing breaches or non-compliance. Such letters should reference contractual terms, specify remedial actions, and outline potential legal consequences.
2. Explore Negotiation and Mediation
- Amicable Resolution: Attempt to resolve disputes through negotiation or mediation, which can be more time and cost-effective than litigation.
- Mediation Committees: In China, parties can seek assistance from people's mediation committees to facilitate settlements, which, upon court confirmation, become legally enforceable.
3. Pursue Legal Action if Necessary
- Litigation and Arbitration: If disputes cannot be resolved amicably, proceed with litigation or arbitration as specified in the contract. Ensure compliance with procedural requirements to enhance the likelihood of enforcement.
- Enforcement of Judgments: Be aware of the challenges associated with enforcing foreign judgments in China and consider this when drafting dispute resolution clauses.
Additional Considerations
- Stay Informed on Regulatory Changes: Regularly update your knowledge on Chinese laws and regulations pertinent to your industry to ensure ongoing compliance.
- Cultural Sensitivity: Understand and respect cultural differences in business practices and negotiations to build trust and effective communication.
- Legal Expertise: Engage legal professionals with expertise in Chinese law and international business to navigate complex legal landscapes effectively.
By implementing these best practices, businesses can significantly mitigate risks associated with disputes and defaults when operating in China.
Final Thoughts
The landscape for doing business in China has shifted — and continues to shift — amid global policy changes, supply chain restructuring, and rising pressure on compliance and transparency.
For SMEs relying on China-based suppliers or distributors, legal risks are no longer just hypotheticals. The risk of contract breaches, payment defaults, regulatory violations, or business partner insolvency can have real consequences on cash flow, delivery timelines, and brand reputation.
Yet despite these risks, opportunities remain for businesses that prepare well and act smartly.
Legal preparation, relationship management, and local insight are more important than ever. With properly structured contracts, enforceable dispute resolution mechanisms, and clear oversight on partners and suppliers, SMEs can protect themselves and maintain leverage when things go wrong.
The key is not to avoid China altogether — but to work smarter within it.
With the right mix of diligence, documentation, and cross-border legal strategy, international businesses can still thrive in China’s dynamic, high-potential market while minimizing exposure to unnecessary legal and operational pitfalls.