What was once a calculated risk has become a strategic trap. U.S. companies that built supply chains, factories, and R&D partnerships in China now find themselves ensnared — not by market forces, but by a deliberate web of legal, regulatory, and political entanglements. The dream of a clean exit is collapsing under the weight of retaliatory laws, seized assets, and government-imposed chokeholds. China is no longer just an industrial powerhouse — it’s a gatekeeper, locking the doors on foreign firms trying to leave.

On March 4, 2025, China’s Supreme People’s Court announced a new regulation allowing its courts to retaliate against “discriminatory” foreign intellectual property (IP) actions. Effective May 1, this rule gives Chinese courts sweeping authority to interfere in international IP disputes. Imagine a U.S. defense contractor that enforces a U.S. court ruling to block a Chinese firm from using patented night vision technology. Under the new rule, that contractor will face a countersuit in China — one that freezes its local assets, blocks export of optical components it depends on, and ties up the firm in litigation for months or even years. This isn’t a hypothetical risk — it’s a preview of the next front in economic warfare. 

Legal Gridlock: 2021 Challenges, 2025 Consequences

The structural obstacles to exiting China’s manufacturing base have been well known since at least 2021, as highlighted in the article Challenges of Moving Manufacturing Out of China. But in today’s heightened geopolitical environment, these barriers have become sharper, more politicized, and more difficult to navigate:

• Tooling and Molds - Manufacturers in China frequently claim ownership of production assets — even when U.S. firms paid for them or manufactured them in U.S. facilities before exporting them for mass production. Without local government cooperation, reclaiming these tools is nearly impossible, especially if the supplier has strategic importance.

• Labor Law Weaponization - Chinese labor laws require formalized procedures for layoffs or facility closures. Attempting to exit quickly or reduce workforce size may trigger lawsuits or labor inspections, backed by local Communist Party authorities which may force the firm to pay out the entirety of the contract even if production stops.

• Administrative Delays - Exit-related obstacles — like surprise audits, environmental reviews, or withholding of export permits — are increasingly used as leverage to slow or stall corporate relocation. These litigations cost companies millions, and delay exit for months or years.

• IP Hostage Situations - As companies shift R&D or unwind joint ventures, any co-developed IP may be blocked from leaving the country. With the new IP retaliation rule in place, courts now have legal cover to detain, repurpose, or revoke IP rights under the banner of protecting national interests.

Strategic Implications for U.S. Defense and High-Tech Firms

For the U.S. defense sector, the growing regulatory and legal entanglements in China aren’t just operational nuisances — they strike at the core of what makes a military-industrial base effective: cost-efficiency, quality assurance, and technological superiority.

• Cost - Relocating production or duplicating capabilities outside China often comes with steep upfront costs — new infrastructure, workforce training, and materials sourcing — and many of these costs are compounded by delays caused by Chinese administrative interference or IP disputes. Meanwhile, Chinese suppliers continue to offer lower prices, trapping companies in a short-term cost dilemma that undermines long-term security.

• Quality - Precision manufacturing — particularly for components like sensors, optics, and advanced electronics — can take years to replicate outside of China’s mature supplier networks. Attempts to shift production often result in quality degradation or reduced production throughput, jeopardizing program timelines and warfighter readiness.

• Strategic Technological Edge - Perhaps the greatest risk lies in the erosion of U.S. technological advantage. If advanced designs, proprietary processes, or co-developed IP are trapped or co-opted in China, they can be reverse-engineered or absorbed into adversary systems. In a worst-case scenario, U.S.-funded innovation ends up enhancing a competitor’s military capability — all because a company couldn’t extract its IP or assets in time.

Together, these risks amount to more than supply chain inconvenience — they represent a structural threat to U.S. defense innovation, acquisition timelines, and national security posture.

Case in Point: The Defense Optics Supply Chain

Nowhere is this complexity more visible than in the defense optics sector. From infrared lenses and night vision components to high-precision coatings and optical filters, many U.S. defense platforms depend on components that are designed, sourced, or manufactured in China.

These parts are often part of classified or ITAR-regulated systems, yet their production includes materials or processes that are globally unique — and frequently monopolized by Chinese suppliers. In some cases, U.S. companies co-develop optics with Chinese partners, only to find themselves unable to retrieve designs or tooling when strategic tensions rise.

In an IP dispute, optics firms could see:

• Patent rights nullified or contested under China's new retaliation law.

• Tooling for lens shaping or coating retained by suppliers.

• Raw material restrictions on key inputs like specialty glass or rare earth elements.

This poses a direct threat to programs relying on electro-optical/infrared (EO/IR) systems, from UAVs and guided missiles to submarine periscopes and satellite imaging.

The Bottom Line

China’s new IP retaliation rule is not just legal maneuvering — it’s a component of a broader state strategy to retain manufacturing, control innovation, and push back against decoupling. Paired with labor enforcement and administrative control, it creates a high-friction trap for U.S. businesses, especially those tied to defense.

For U.S. firms: the challenge isn’t just leaving. It’s getting out with your assets, IP, and supply chain integrity intact.