The restructuring of global supply chains is no longer centered only on trade flows. It is increasingly shaped by the movement of capital. Under this evolving framework, relations among the United States, Europe, and China are being reshaped less by short-term policy shifts than by structural economic constraints. For China, the implication is clear: outward investment is no longer optional. It is becoming a strategic necessity.
Domestic pressures are already pushing in this direction. As China's manufacturing sector moves up the value chain and approaches the limits of domestic absorption at scale, the outward expansion of capital is becoming a structural feature of its growth model. It reflects the reallocation of industrial capability in a maturing economy. Recent policy signals reinforce this trajectory. The establishment of a dedicated bureau under the State-owned Assets Supervision and Administration Commission (SASAC) to oversee overseas state-owned assets points to a more coordinated and institutionalized approach to outward investment. Compared with the previous phase, which was largely driven by private firms, China's outward investment is likely to become more diversified, more policy-supported, and more systematically embedded in national development objectives.
A BYD Co. electric vehicle showroom in the Mayfair district of London, UK, on Feb. 9, 2026. (Photo: CFP)
At the same time, external conditions are reshaping the landscape in which this outward expansion takes place. Europe, in particular, is emerging as a key destination, not simply as a market, but as an industrial platform. Through policy instruments such as the Industrial Accelerator Act (IAA), the European Union is seeking to attract and structure foreign capital to support its manufacturing base. The logic is not exclusion, but controlled integration: embedding external capital within domestic industrial systems while maintaining regulatory oversight.
A defining feature of this approach is its differentiated treatment of investment structures. Wholly owned foreign direct investment (FDI) remains permissible, but is subject to increasing scrutiny, performance requirements, and implicit political constraints, especially in sectors deemed strategic. Joint ventures and partnership-based models, by contrast, are structurally encouraged. Through these arrangements, foreign firms, particularly Chinese firms in sectors such as electric vehicles, batteries, and clean technologies, are expected to localize production, contribute to employment, and share selected technological capabilities. In effect, the EU is constructing a framework in which market access is increasingly conditioned on economic contribution.
This framework creates both opportunities and constraints for Chinese firms. On the one hand, it offers a relatively clear and structured pathway for integration into European industrial ecosystems. On the other hand, it implies a degree of technological and operational concession, particularly in joint venture formats, that echoes earlier phases of China's own industrialization. Whether or not this model is fully acceptable to Chinese firms, the direction is clear: access to key markets will increasingly require embedded investment rather than standalone exports.
Hangzhou Yushu Technology, also known as Unitree Robotics, demonstrates two humanoid robots at the Consumer Electronics Show (CES) at the Las Vegas Convention Center in Las Vegas, Nevada, USA, on Jan. 6, 2026. (Photo: CFP)
The United States presents a more complex and less predictable environment. While Washington continues to restrict Chinese capital through investment screening and export controls, its ability to fully insulate itself from Chinese economic influence is inherently limited. This limitation is particularly evident in the use of rules of origin and supply chain restructuring strategies.
Policies embedded in agreements such as the USMCA are designed to reduce the Chinese content in goods entering the U.S. market. In practice, however, these mechanisms primarily affect trade flows rather than capital flows. Chinese firms have already adapted by expanding production in third markets such as Mexico and Vietnam, where goods can qualify under rules of origin while still relying on upstream Chinese inputs, technology, and management structures. As a result, what appears to be diversification is often reconfiguration rather than decoupling.
This creates a structural tension. The more the United States tightens rules of origin and related trade-based restrictions, the more it incentivizes Chinese firms to move further upstream in the value chain of globalization, shifting from exporters to investors. Over time, this dynamic reduces the effectiveness of China-Plus-One strategies. If market access is increasingly conditioned not only on geography, but also on ownership structures and supply chain transparency, then intermediate relocation may become less viable.
In this context, more direct engagement with the U.S. market becomes strategically relevant. Political constraints remain significant, particularly in sensitive sectors. However, the alternative, remaining embedded in third-country supply chains subject to evolving rules of origin, may prove even less stable. In other words, if capital mobility is becoming the dominant feature of the current system, bypassing the U.S. market entirely may be neither feasible nor optimal.
Taken together, these dynamics suggest that Chinese firms must adopt a more differentiated outward investment strategy, one that goes beyond the traditional China-Plus-One framework. In Europe, the priority is deep industrial embedding, often through joint ventures and localized production under frameworks such as the IAA. In nearshoring economies, the focus remains on supply chain positioning, though uncertainty is rising as regulatory scrutiny evolves. In the United States, a more selective and structured approach may become necessary, focusing on sectors where political risks are manageable and where local production can align with domestic policy priorities.
This amounts to a form of "dual anchoring" across major economic blocs. Rather than choosing between markets, Chinese firms are increasingly required to operate within multiple systems simultaneously, embedding capital in Europe's managed industrial framework while maintaining direct or indirect pathways into the U.S. market. This is not simply diversification. It is a response to a fragmented global system in which trade is constrained, but capital remains mobile.
The implications extend beyond firm-level strategy. If investment is becoming the primary channel of interdependence, then its governance will define the next phase of global economic competition. For China, this means continuing to support outward investment while improving coordination, risk management, and regulatory alignment. For the United States, it raises a parallel question: whether continued reliance on trade-based restrictions can achieve strategic objectives in a system increasingly shaped by capital flows.
In this emerging landscape, the central issue is no longer whether interdependence can be reduced, but how it is being reshaped. For Chinese firms facing intensifying domestic competition, the strategic direction is increasingly clear: move outward, integrate deeply, and engage across multiple fronts, including, where feasible, the U.S. market itself. The alternative is not insulation, but gradual marginalization within a system being reorganized around investment rather than trade.
*The author of this article is Yilun Zhang, Research Associate and Manager of the Trade and Technology Program at the Institute for China-America Studies.
