The Combination of Global South Industrialization and Chinese Capital

Executive Summary

This issue concerns the fundamental limits of the EU’s regulatory framework toward China when Chinese capital becomes integrated into the substantive structure of industrialization in third countries, namely the Global South.

As Chinese capital combines with local resources and labor in third countries, a structure can emerge in which products are recognized as having third-country origin. This creates a gap between the standard of trade, product origin, and the object of control, capital nationality.

If Chinese capital is targeted, the industrialization and economic sovereignty of the Global South may be infringed upon. If existing rules of origin alone are maintained, China’s global supply-chain expansion cannot be controlled.

1. Substantive Localization Beyond Export Circumvention

The recent movement of Chinese capital into major global production hubs (third countries), such as Morocco, Egypt, Vietnam, and Mexico, takes a fundamentally different track from the simple transshipment methods of the past, and represents an advanced circumvention and localization strategy that can operate outside the category of regulation on Chinese-origin products within the global supply chain.

In economic substance, this form represents the “expansion of Chinese capital,” but in legal and commercial terms, it can be recognized as a “third-country product.” The supply-chain case combining Morocco’s phosphate resources and LFP battery production is a representative model.

Role-Sharing Structure of the Third-Country Localization Model

In this model, China, as the investor, provides capital, technology, process know-how, equipment and machinery, equity stakes, and data. This extends Chinese-linked supply chains and secures overseas production returns.

The third country, as the host country, provides core raw materials, factory sites, labor, employment, and tax revenue. This enables national industrialization and supports the acquisition of lawful “local origin” status.

2. The Multidimensional Dilemma of EU Trade Regulation Toward China

Under the current structure in which the origin of goods and the nationality of capital are separated, the EU’s multi-layered trade regulatory tools face different limits. Unlike the United States, which carries out unilateral market-access control based on strong hegemonic power, the EU, which emphasizes the rules-based order, falls into the following policy dilemmas.

  • Limits of origin criteria: If the full set of production elements of a product is located in a third country, it becomes difficult to directly apply existing regulations on Chinese-origin products.
  • Risks of applying capital criteria: If third-country products are sanctioned on the grounds that Chinese capital has been invested, diplomatic costs arise because the industrialization policies of non-Western countries (the Global South) as a whole must be called into question.
  • Difficulty of proving technology and subsidies: Regulating the use of Chinese equipment and software, or proving the path through which Chinese state subsidies are transferred into the prices of third-country local products, is administratively and technically very difficult.
  • Conflict with third-country partnerships: The EU cannot abandon the grounds of FTA consistency, WTO consistency, Southern partnerships, and development cooperation with developing countries, so it is difficult to imitate U.S.-style top-down sanctions.

3. The Formalization of China’s State Management of Outbound Investment

What makes the issue more complex is China’s recently strengthened outbound investment regulation.

The Chinese government does not leave the outbound investment of its domestic companies as a simple “movement of private capital,” but incorporates it into a national security and management system that includes prevention of technology leakage, personnel dispatch, data control, and counter-sanction responses.

  • Change in the EU’s view: This regulation makes it difficult to separate Chinese companies’ outbound investment as only the movement of private capital. From the EU’s perspective, apart from the origin of third-country products, how the Chinese capital behind them is connected to a state-management system remains an additional variable.
  • Conflicting structure: However, because the final product is formed within the third country’s raw materials, labor, production facilities, tax revenue, employment, and origin system, it is difficult to treat it in the same way as a Chinese-origin product.

4. Conclusion and Implications: Direct Collision with Global South Industrialization

Direct exports from mainland China are becoming targets of various tariffs, sanctions, and geopolitical targeting. Accordingly, Chinese capital is pursuing in earnest a form of localization that uses third-country resources, labor, and production bases to reduce the tariff, sanctions, and political targetability of direct exports from mainland China.

If the EU treats this structure in the same way as direct exports from China and sanctions “Moroccan-made (third-country-made)” products in the same way as “Chinese-made” products, this will go beyond countering China and produce the result of infringing upon the economic sovereignty and industrialization paths of emerging countries, including Morocco.

“If we attract Chinese capital, will our products also be treated as Chinese-made?”

In the face of this question that non-Western countries will raise, the EU will find it difficult to provide a clear answer.

In conclusion, if China adopts a method of leading the “substantive industrialization” of third countries, the EU’s industrial countering of China will face a structural dilemma in which it becomes difficult to distinguish between “striking China” and “striking the sovereign industrialization of third countries.”

Endnotes

  1. CNGR Advanced Material Co., Ltd., “A Contract Signed for Jointly Building a New Energy Battery Material Base in the Pan-Atlantic Region by CNGR and Al Mada Group,” September 18, 2023; Argus Media, “China’s CNGR to Build Battery CAM, LFP Plant in Morocco,” September 20, 2023.

  2. European Commission, “EU Acts to Stop Chinese Glass Fibre Fabrics Circumventing EU Tariffs via Morocco,” Directorate-General for Trade and Economic Security, February 25, 2022.

  3. European Commission, “EU Commission Imposes Countervailing Duties on Imports of Battery Electric Vehicles (BEVs) from China,” Access2Markets, December 12, 2024.

  4. European Commission, “EU-Morocco Association Agreement,” Access2Markets, accessed June 1, 2026.

  5. European Commission, “Sufficiently Worked or Processed Products,” Access2Markets, accessed June 1, 2026.

  6. State Council of the People’s Republic of China, “国务院关于对外投资的规定,” Xinhua, June 1, 2026.