I just wonder how products like game consoles would be viable under a law like this. I assume they would have to cost much more and there would be far less incentive for their development in the first place.

Then again, we are at the end stages of game consoles. Microsoft in particular seems to be considering the idea of not even bothering with hardware. Software is where the money is, Chinese hardware companies can make hardware like you see in the retro handheld scene.