Table of Contents

  • The US government issued a “supply chain advisory” warning about reputational and legal risks in Xinjiang and is reportedly preparing a similar advisory about operational risks in Hong Kong.
  • Both warnings look like efforts at moral suasion, where the administration has decided to encourage, rather than force, companies to move their business elsewhere.
  • Persuading foreign companies to withdraw from Xinjiang is likely to be easier than doing the same for Hong Kong.

Six US government agencies jointly issued a warning about “significant reputational, economic, and legal risks” to US companies that operate in Xinjiang or source labor or materials from the region. The warning lacks the force of law or administrative regulation but reiterates the State Department’s position that the Chinese government is engaged in “genocide and crimes against humanity;” it also signals a likely increase in enforcement actions against companies with ties to the region.

The so-called “supply chain advisory” warning is broadly worded, addressing itself not only companies with employees and factories in the region but also to those “with potential exposure to or connection with operations, supply chains, or laborers.” In a footnote, the agencies broaden the warning even further to encompass alleged human rights abuses elsewhere in China, citing reports of Xinjiang-style internment camps in Tibet and Inner Mongolia.

The notice follows a series of recent government sanctions related to Xinjiang. On 9 July the Commerce Department added 14 additional Chinese companies and other entities to the department’s entity list, barring these entities from buying US technology without specific permission. On 24 June, Customs and Border Protection (CBP) issueda withhold release order barring US imports of solar equipment made with materials from Xinjiang-based Hoshine Silicon, the world’s largest producer of metallurgical-grade silicon. The agency has previously banned US imports of Xinjiang cotton and tomatoes.

Separately, the State Department is preparing to issue a similar warning over operational risks to US companies in Hong Kong. We flagged these risks a year ago when Beijing imposed the National Security Law in Hong Kong, but we also doubted that the law would trigger a significant exodus of foreign business from the city. In May, we weighed the latest evidence on a potential foreign exodus, which reinforced this earlier call.

Moral suasion

Both the Xinjiang and Hong Kong warnings look like efforts at moral suasion in a context where the administration has decided, at least for now, to encourage, rather than force, companies to relocate. In the case of Xinjiang, the evidence that ethnic Uyghurs face persecution and that their participation in labor transfer programs – both within Xinjiang and elsewhere in China – sometimes occurs under government pressure. However, establishing whether any particular supplier relies on forced labor is difficult. CBP now regularly halts cargo imports from apparel makers, who then struggle to prove the negative case. While further sanctions on individual Chinese companies are likely, the administration apparently hopes that US companies will also act voluntarily to withdraw from Xinjiang in the face of increasing risks, rather than relying on lawyers to defend the legality of every transaction for which evidence is incomplete or ambiguous.

In the case of Hong Kong, the ability of the US government to compel decoupling is even more limited – at least short of extreme measures that would significantly disrupt global trade and investment while crippling the competitiveness of US companies. The State Department will reportedly highlight the risk that mainland authorities can obtain proprietary data that foreign companies store in Hong Kong. As previously discussed, however, it is unlikely that most multinationals use Hong Kong as a significant data hub or that corporate measures to ensure data security would require exiting the city altogether.

The warning on Hong Kong will reportedly also cite the risks from a new mainland law authorizing Beijing to impose retaliatory sanctions against foreign entities that implement sanctions against Chinese entities. But our analysis of this law highlighted that while the legal text potentially enables sweeping action, Beijing has shown significant caution in scapegoating foreign companies for sanctions by their home governments.

Xinjiang more replaceable than Hong Kong

Persuading foreign companies to withdraw from Xinjiang is likely to be easier than doing the same for Hong Kong. The commercial logic of operating in Hong Kong is generally more compelling than for Xinjiang, while the alleged abuses in Xinjiang are more severe. In the short term, the Hoshine ban will cause significant disruption to solar energy supply chains. Still, ample silica reserves are available in the US, Canada, France, and India, among other countries. Xinjiang’s main advantage has been cost, but sanctions are likely to encourage new capital investment in dormant mines and processing facilities, just as has been occurring with rare earths.

By contrast, there is no viable substitute for the role of Hong Kong’s capital markets in serving Chinese companies’ demand for cross-border financial services. For non-financial companies that sell to mainland China or manufacture there, the main alternatives to Hong Kong are mainland cities like Shanghai or Shenzhen – not the kind of decoupling that US policymakers favor. As discussed, however, companies that mainly use Hong Kong to support their Asia ex-China regional operations are more likely to reduce their footprint. Meanwhile, companies that maintain their presence will rely less on expatriate staff.

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US/CHINA: Warnings on Xinjiang and Hong Kong are more persuasion than threat

The US government issued a “supply chain advisory” warning about reputational and legal risks in Xinjiang and is reportedly preparing a similar advisory about