What Is Happening with Exports to China? Key Concerns and Practical Responses for Japanese Companies

This is Hamamoto from TIMEWELL. Today I want to take a frank look at the realities of doing business with China.

No one needs to be told that China represents an enormous market for Japanese companies. But the situation has changed dramatically over the past several years. The escalating U.S.-China rivalry, the strengthening of economic security frameworks, and a wave of China-specific regulations — before we knew it, the act of selling to China or operating a business there had become more complex and risky than ever before.

I've been receiving increasing inquiries along the lines of "Is it still safe to continue our China transactions?" The answer depends on the specifics, but one thing is certain: continuing to operate as you always have without understanding what's changed is the highest-risk course of action.

How U.S. Export Controls on China Are Hitting Japanese Companies

Any serious discussion of China business risks has to start with the U.S. Export Administration Regulations — the EAR. Short for Export Administration Regulations, EAR is a framework designed to protect U.S. national security by restricting the export and re-export of specific products and technologies.

The crucial point is that EAR's reach extends far beyond U.S. companies. If a product contains U.S.-origin components above a certain threshold, or was manufactured using U.S. technology, a Japanese company exporting that product from Japan to China falls within the scope of EAR. "We're a Japanese company, so this doesn't apply to us" is not a valid position.

At the heart of EAR is the Entity List — effectively a de facto embargo list. Any attempt to export EAR-controlled items to a Chinese company on that list requires a license from the U.S. Department of Commerce's Bureau of Industry and Security (BIS), but such licenses are almost never granted. Combining the Entity List with the Military End User List and the SDN List, the number of regulated companies and organizations exceeds 3,500 in total.

On September 29, 2025, BIS went further with the introduction of the Affiliates Rule. Subsidiaries and affiliates in which an Entity List company holds 50% or more of shares are automatically included in the restrictions.

What does this mean in practice? Even if a direct counterparty is not on any list, you cannot be confident of compliance unless you have investigated the full corporate group structure behind them. It is entirely plausible that a Chinese company you are dealing with turns out to be a joint venture that has received investment from a listed entity. The due diligence burden on Japanese companies has risen sharply.

The penalties for violations are severe. Criminal penalties can reach up to $1 million in fines or 20 years' imprisonment. Administrative penalties can include placement on the Denied Persons List — which would bar you from handling any U.S. products or technology, potentially threatening the very foundation of your business.

Japan's METI Is Also Moving

In parallel with U.S. actions, the Japanese government has been tightening its own export controls toward China.

In July 2023, the Ministry of Economy, Trade and Industry (METI) added 23 items including advanced semiconductor manufacturing equipment to the scope of export controls. While the regulations officially avoid naming specific countries, it is obvious to everyone that this is a de facto China measure. Japanese semiconductor equipment makers such as Tokyo Electron and SCREEN Holdings faced the loss of some of their China-facing sales as a result.

In April 2025, amendments to ministerial ordinances under Japan's Foreign Exchange and Foreign Trade Act (FEFTA) also strengthened catch-all controls. Catch-all regulations allow exports to be restricted even for items not subject to list-based controls, where there is a risk they could be used for the development of weapons of mass destruction or conventional weapons. These amendments expanded METI's discretion in blocking exports.

Japanese companies now have to simultaneously comply with two regulatory regimes — U.S. EAR and Japan's FEFTA. The era when monitoring just one of them was sufficient is long gone.

What makes this particularly difficult is the structural position of being caught between the U.S. and China. The U.S. applies pressure to avoid transactions that strengthen China's military capabilities. China demands: if you want to do business in our market, follow our rules. This is not just a compliance department problem — it goes to the heart of business strategy itself.

One executive at a semiconductor-related company put it memorably: "If we cut back our China business to avoid upsetting the U.S., we lose the China market. If we maintain our China transactions, we risk U.S. sanctions. Either way it hurts." This is not one company's dilemma — it is the predicament facing every Japanese company involved in China business.

China's Retaliatory Regulations Are Accelerating

Here is where things have been moving most rapidly recently.

In the face of tightening U.S. and Japanese regulations, China has not been standing still. Since the start of 2026, a series of regulations specifically targeting Japan have been announced in quick succession.

On January 6, 2026, China's Ministry of Commerce tightened export controls on dual-use (civilian and military) items destined for Japan. Then on February 24, subsidiaries of Mitsubishi Heavy Industries, IHI, and Kawasaki Heavy Industries, along with another 17 entities, were added to the export control list — a total of 20 Japanese defense-related companies. Simultaneously, 20 companies and organizations including SUBARU, TDK, Hino Motors, ENEOS, Mitsubishi Materials, and Nitto Denko were added to a watch list.

The composition of the listed companies is notable. The list includes not only companies directly manufacturing defense equipment, but also auto parts makers, electronic components firms, and materials companies. The scope of what China considers "potentially military-usable" is extremely broad, and there is wide room for discretionary enforcement by Chinese authorities. The assumption that "we only make commercial products, so we're safe" is dangerous.

There are also warnings that rare earths and gallium — raw materials with limited substitutes for Japan's manufacturing sector — could be included in export bans. Gallium is an essential material for semiconductor manufacturing, and China accounts for approximately 98% of global production. A cutoff here would deliver a devastating blow to Japan's semiconductor industry.

China frames this as "a response to Japan's military expansion," but I read it primarily as economic coercion — economic pressure applied in response to Japan's China policies.

Don't Overlook China's Entity List

Just as the U.S. has an Entity List, China has developed its own sanctions lists. These are still relatively low-profile, but their practical impact cannot be ignored.

One is the "Unreliable Entity List." Foreign companies placed on this list face severe restrictions on trade with China and investment activities within China. In 2025, U.S. companies were added multiple times, with 14 foreign companies and organizations newly listed in October.

The other is the "Export Control Entity List," which is more specifically focused on export controls. Companies on this list are prohibited from receiving certain categories of exports from China.

In October 2025, a "50% rule" was also introduced — mirroring the U.S. Affiliates Rule. Subsidiaries and branches more than 50% controlled by a listed company are also subject to regulation, a framework that replicates the U.S. model almost exactly. The spectacle of the U.S. and China learning each other's regulatory techniques and escalating them is nothing short of a nightmare for businesses.

As an aside, tools and databases have recently begun to appear that allow cross-referenced searching of Chinese regulatory lists — a kind of China-side CSLSEARCH equivalent. What used to require checking only U.S. lists now requires screening Chinese lists simultaneously. Compliance costs are unquestionably rising.

For now, Japanese companies have not been added to these lists in large numbers. But as the February 2026 addition of 20 companies demonstrates, the situation can change overnight depending on how Japan-China relations evolve. This uncertainty is the greatest risk of all.

The Less Visible Wall: Cybersecurity and Data Regulations

Export controls tend to dominate the headlines, but there is another major obstacle in China business that often goes unnoticed: data-related regulations.

China has established extremely stringent rules on data handling through three laws — the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law. The Cybersecurity Law was enacted in 2017, with an amended version taking effect in January 2026. The Data Security Law and the Personal Information Protection Law were both enacted in 2021.

At the core of this framework is the concept of data sovereignty. Data collected or generated within China — particularly "important data" and personal information — must, in principle, be stored on servers located within China. Transferring data to a parent company in Japan requires a review and approval process with Chinese authorities.

Consider some standard business scenarios: wanting to analyze production data collected at a China facility at the Japanese parent's headquarters; wanting to integrate a Chinese customer database into the parent company's CRM. Things that any global company would naturally want to do are not straightforward in China. The procedures are cumbersome, and approvals are often not granted.

The January 2026 amendments to the Cybersecurity Law significantly increased penalties. Violations can result in fines of up to 50 million yuan (roughly 1 billion yen) or 5% of the previous year's revenue, and business licenses can be revoked.

For companies whose business models are built on unified global data infrastructure, this is a fundamental problem. Do you build a separate IT infrastructure exclusively for China operations? Or do you limit the scope of data utilization? This is not a technical question — it requires a management-level decision.

In a December 2025 Reuters report, about 30% of European companies said they were reconsidering their sourcing in response to China's tightened export regulations, and 40% reported that China's Ministry of Commerce was taking longer than promised to process export licenses. The practical opacity in operations has grown beyond data regulations alone.

You Cannot Set Up a Local Entity Entirely on Your Own

For companies looking to operate through a legal entity in China, there is another structural constraint worth understanding.

The Foreign Investment Law, which came into force in 2020, made the process of establishing foreign-invested entities more transparent than before. A negative list approach was adopted, and it is now possible to establish a wholly foreign-owned enterprise (WFOE) in sectors not listed on the negative list.

However, sectors such as telecommunications, media, education, and healthcare remain on the negative list, with foreign-only market entry prohibited or restricted. Operating in these sectors requires a joint venture with a Chinese company.

Joint ventures have the advantage of leveraging the local partner's knowledge and network, but they invariably carry risks including conflicts over management control and the unintended leakage of technology and know-how. Choosing the wrong joint venture partner can result in the worst-case scenario of having your technology extracted and then the joint venture dissolved. Due diligence on potential partners must be conducted with even greater care than for ordinary transactions.

Even in sectors where a WFOE can be established, practical operations will typically require close coordination with local accounting firms, law firms, and administrative service providers. Company registration, tax registration, bank account opening, social insurance procedures — each of these operates under rules that differ from Japan, and you cannot make progress without professionals deeply familiar with local conditions.

The Problem of Not Being Able to Bring Profits Home

Another structural challenge in China business that is often underappreciated — yet critically important to profitability — is the restriction on repatriating capital.

Even if you generate profits from operations in China, you cannot freely remit that money to Japan. China continues to maintain strict foreign exchange controls, particularly strong restrictions on capital account transactions.

Remitting profits from a China subsidiary to a Japanese parent company as dividends involves clearing multiple hurdles. First, all prior-year accumulated losses must be fully offset. Second, 10% of profit must be set aside as a statutory reserve, and this requirement continues until the accumulated reserve reaches 50% of registered capital. Dividends are subject to a 10% withholding tax on corporate income. There may be relief available under the Japan-China Tax Treaty, but the process is complicated.

As a general rule, interim dividends are also not permitted — meaning dividends can only be distributed once a year after the annual financial close. This means the company cannot respond to sudden funding needs. Financial planning flexibility is severely constrained.

Making money in China but not being able to get it out — that is not an exaggeration, it reflects the honest experience of companies doing China business. Any consideration of investment in China needs to factor in the difficulty of capital recovery when building the business plan.

What Specifically Should You Do?

I have laid out a long list of concerns. So what should you actually do? Here are the practical countermeasures I recommend.

Map and Diversify Your Supply Chain

The first step is to visualize your entire supply chain and precisely understand your degree of dependency on China. Are there components or raw materials with no substitute that you are sourcing from specific Chinese companies? Is there a risk that those companies could become subject to U.S. or Chinese regulations? This mapping exercise is the starting point.

From there, advance supply chain diversification. Shifting procurement to ASEAN countries or India — the so-called China Plus One strategy — is no longer an advanced initiative; it is a baseline expectation for all companies.

That said, restructuring a supply chain takes time and money. It cannot happen overnight. That is precisely why starting now matters.

Build a Dual-Track Screening Framework for Export Controls

Constructing a compliance framework that covers both U.S. EAR and China's Export Control Law is urgent.

Is the counterparty listed on U.S. or Chinese regulatory lists? What about their affiliates? Don't forget the 50% rule. Are the products or technologies involved controlled items? What is the intended end use? You must establish a rigorous process for checking each of these questions before every transaction.

Developing in-house export control expertise is equally important. EAR is amended frequently, and China's regulations change daily. Leverage external seminars and JETRO information resources to maintain a system capable of continuously updating your knowledge.

Redesign Data Governance to China Specifications

Responding to China's data-related laws is not just an IT department issue. You need to redesign — at the management level — how you define the data handled within China, how you manage its lifecycle, and how you determine whether cross-border transfers are necessary.

In some cases, building a standalone IT infrastructure dedicated to China operations may be a realistic option. It costs money, but given the scale of penalties for non-compliance, it can be a rational upfront investment.

Update Contracts to Address Geopolitical Risk

Contracts with Chinese companies are a first line of defense when geopolitical risks materialize. Three areas to review:

First, force majeure clauses — confirm that government-imposed import/export restrictions and economic sanctions are included as grounds that relieve contractual obligations. Second, regulatory compliance clauses — build in indemnification provisions for situations where compliance with third-country laws such as U.S. EAR or China's Export Control Law makes it impossible to perform the contract. Third, governing law and dispute resolution clauses — specify which country's law governs and where disputes will be resolved, and secure favorable terms during the negotiation phase.

Design Capital Repatriation Schemes in Advance

Given the difficulty of moving money out of China, it is essential to design capital repatriation schemes at the business planning stage. Beyond dividends, there are other channels for repatriating funds — royalties and service fees, for example. However, each of these also involves transfer pricing rules and withholding tax issues, so they need to be worked out in advance with tax specialists.

Streamline U.S. and China Screening with TRAFEED

Checking whether a counterparty is on both U.S. and Chinese regulatory lists — simultaneously — is not a realistic task to perform manually at scale. TRAFEED (formerly ZEROCK ExCHECK), developed by TIMEWELL, uses an AI agent to assess counterparty risk in five seconds, achieving over 95% accuracy through multi-LLM cross-validation.

TRAFEED supports cross-referencing across the Entity List, SDN List, and China's Export Control Entity List, enabling you to efficiently build a dual-track screening framework covering both U.S. and Chinese regulations. Try a free demo to see it in action.

How to Engage with the China Market Going Forward

After reading all this, some may be tempted to conclude: "Better to stop doing business with China altogether." But I'm not taking that extreme position.

The China market remains enormous and still has room for growth. The problem is that the old way of operating no longer works.

One direction attracting attention is deepening the "In China, for China" strategy — transitioning to a model where products for the Chinese market are developed, manufactured, sold, and data-managed entirely within China. This minimizes both the risk of cross-border data transfers and the reach of U.S. re-export regulations.

Geopolitical risk has shifted from a variable to a constant in business strategy. Continuously monitoring policy developments in both the U.S. and China, maintaining contingency plans across multiple scenarios — including worst-case scenarios like a Taiwan contingency — and incorporating these into business continuity plans. That is, in my view, the minimum preparation for doing business in China today.

The regulatory environment will continue to change. Some of what I have written here may be outdated in six months. That is precisely why staying current on information and drawing on external expertise as needed, while continually searching for the optimal approach for your own company, is the only way forward.