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September 16, 2020

Asia

US/CHINA: Ban on selected Xinjiang exports may be just the beginning

BY Gabriel Wildau

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  • The Trump administration announced narrowly-targeted restrictions on US imports from Xinjiang, with broader measures likely in the coming weeks.
  • The controversy surrounding the Disney film Mulan has drawn public attention to alleged human rights abuses in the territory.
  • Multinational companies should scrutinize their supply chains for exposure to Xinjiang, including indirect exposure through subcontractors.

The Trump administration on 14 September announced a ban on US imports of cotton, apparel, hair products, and technology goods from several companies that operate in western China’s Xinjiang region, based on allegations of forced labor by Uighur Muslims.

US Customs and Border Patrol had already issued other so-called “Withhold Release Orders” in recent months, enabling the agency to impound inbound shipments from specific Chinese companies allegedly complicit in Xinjiang human rights abuses. The latest action expands the list of banned exporters but falls short of the blanket ban on US imports of Xinjiang cotton and tomatoes that had been previously reported. However, further US action is likely in the coming weeks and months, regardless of who wins the US election in November. Customs has already formulated broader restrictions, which US officials said are currently undergoing legal review.

Apart from import bans, the US Commerce Department has previously banned exports to dozens of companies and government institutions in Xinjiang using its entity list. The State and Treasury departments have applied the Global Magnitsky Act to ban senior Chinese officials linked to Xinjiang from travel to the US and to impose financial sanctions on those officials.

The latest trade sanctions mark a shift from late 2018 when US President Donald Trump’s reportedly rejected sanctions against Xinjiang to avoid disrupting trade negotiations with Beijing. The conclusion of the phase-one trade deal, the general deterioration of US-China relations due to Covid-19, and US election politics appear to have overcome Trump’s previous disinclination to press human rights issues with China.

Still, the Trump administration reportedly refrained from broader sanctions on cotton due to concerns about Chinese retaliation against US cotton exports. Though Xinjiang produces a fifth of the world’s cotton, China is still a large net importer of cotton thread and yarn, due to the country’s central role in global textile manufacturing. China agreed to increase purchases of US cotton as part of the agricultural purchase commitments contained in the phase-one trade deal. The US Trade Representative, which led negotiations on the trade deal, was reportedly among the agencies that opposed broader import restrictions, along with Treasury and the Agriculture Department.

But Washington’s forbearance on broader Xinjiang sanctions may prove short-lived. The situation in Xinjiang has gained increased public attention from the controversy surrounding the Disney film Mulan, which was produced with cooperation from Xinjiang authorities. Further US actions could include:

  • Informal “name and shame” operations targeting multinational companies that operate in or source from Xinjiang
  • Additions other Chinese companies allegedly linked to internment and surveillance in Xinjiang to the entity list
  • Partial or complete import bans on exports from Xinjiang, including cotton, energy and petrochemicals, tomatoes, apples, oranges, and walnuts
  • Accelerated processing of asylum applications from Uighurs
  • Boycott of the 2022 Beijing Winter Olympics
  • So-called “secondary sanctions” on financial institutions that conduct significant transactions with sanctioned individuals, companies, and government institutions connected to Xinjiang

As previously discussed – and as the Mulan controversy further illustrates – multinational companies whose supply chains touch Xinjiang, even indirectly, face rising ethical and reputational risks. The same is true of financial institutions whose clients or counterparties are connected to the region. Careful due diligence is required, especially in the apparel sector, where supply chains often involve multiple layers of sub-contractors, while travel restrictions in Xinjiang make factory visits difficult or impossible.

Scrutiny of Xinjiang may also accelerate the migration of Asia’s apparel industry – already underway for at least a decade – from China to lower-cost locations like Vietnam, Indonesia, and Bangladesh. But moving production out of China would not necessarily protect apparel producers from a broad import ban that applies to cotton originating in Xinjiang.