Having grappled with the impacts of a simmering trade war and the global pandemic, U.S. companies face a potential threat to their supply chains from the U.S. response to allegations of the use of forced labor in China’s Xinjiang province.
The Trump administration on Sept. 14 banned the importation of products from five Chinese apparel and technology suppliers over their ties to the alleged oppression of China's majority-Muslim Uighur population. While this action may not directly affect many Western brands, analysts and some lawmakers suggest that it could be an opening volley that could disrupt supply chains for companies like Nike Inc., Apple Inc. and Microsoft Corp.
The action came under the authority of a previously little-used piece of U.S. law called Section 307 of the Tariff Act of 1930, which allows the U.S. to ban companies from doing business with entities or regions found to use enslaved labor.
It may not be the end of the matter as Congress, the Trump White House and Democratic presidential nominee Joe Biden all consider how to respond to allegations of human rights abuses against the Uighurs, who are largely based in the semi-autonomous region of Xinjiang. A wider Section 307 order could conceivably ban whole categories of products from Xinjiang, and Western companies are taking notice.
"We're going to see no hesitation [from the U.S.
The Chinese government is alleged to have forced the ethnic minority into concentration camps and into enslaved labor to produce industrial inputs or finished products. The Australian Strategic Policy Institute, or ASPI, a government-founded think tank, estimated in a March report that since 2017, more than 1 million of the roughly 12 million Uighurs in China have "disappeared into a vast network of 're-education' camps" that it says are rife with political indoctrination, torture, and a forced renouncing of their religion and culture.
Watchdog groups Amnesty International and the Uighur Human Rights Project, as well as the U.S. State Department, agree with this assessment.
Beijing has adamantly denied this. Liu Xiaoming, China's ambassador to the U.K., told the BBC in July that the Uighurs "enjoy peaceful, harmonious coexistence with other ethnic groups of people. ... We treat every ethnic group as equal."
A wider ban
At a Sept. 17 hearing, House members and witnesses hinted at further action.
Rep. Vern Buchanan, R-Fla., ranking member of the House Ways and Means Committee's trade subcommittee, said at the hearing that the biggest tool in Congress' toolkit would be to impose an outright ban on products made with enslaved labor, calling it a bipartisan matter, which subcommittee chairman Rep. Earl Blumenauer, D-Ore., agreed with.
The U.S. in May 2018 imposed a "withhold release order" on all cotton from Turkmenistan following the revelation that the Turkmen government forced public employees to pick cotton under threat of punishment. But it is unknown whether the effort has been successful, said Cathy Feingold, director of the international department at the AFL-CIO, citing a lack of transparency by the Department of Homeland Security’s Customs and Border Protection, or CBP.
CBP had planned for a similar withhold release order on cotton from Xinjiang, The New York Times reported, before releasing its more targeted list of banned sources.
There is more potential for U.S. action against producers in Xinjiang. The U.S. is the fastest-growing export market for the Xinjiang region, rising roughly 250% over the past year, according to Amy Lehr, director of the Human Rights Initiative at the Center for Strategic and International Studies in Washington, D.C. This increase has been driven by chemicals, apparel, plastics, metals and other goods, Lehr said, and the area remains a key source of inputs, for not only textiles but also the solar energy sector.
The White House and the Office of the U.S. Trade Representative did not respond to requests for comment on whether the use of the provision may be expanded to address allegations of human rights abuses in the ever-growing tensions between the two nations. CBP did not comment on questions for this article about whether it has targeted or will target wider categories of goods from Xinjiang, but said in a statement to S&P Global Market Intelligence that it will keep watching the situation. "CBP continues to investigate supply chains in Xinjiang that are linked to the United States," the agency said. "CBP's broad mission set requires that we target any enforcement action as precisely as we can to ensure effective action."
Apparel, tech supply chains at risk
The scrutiny of supply chains alleged by human rights groups and foreign governments to involve forced Uighur labor is not new.
The U.S. Commerce Department on July 20 sanctioned 11 Chinese companies that it said have been linked to the alleged forced labor of Muslim minority groups in China, with nine of those concentrated in the apparel and technology sectors.
Lenovo Group Ltd. received 50 shipments from one of the sanctioned computer parts suppliers in the year ended June 30, while Alstom SA received 43 and General Electric Co. 15, according to Panjiva, an S&P Global Market Intelligence division that tracks trade and supply chains. Amid awareness campaigns from human rights groups and possible further Section 307 actions from the U.S. government, analysts caution that these companies will face public pressure to rethink their supply chains.
Several analysts said they believe the White House may take scrutiny a step further under Section 307. The mandate allows CBP to prohibit imports "made using forced, convict, or indentured labor" from entering the U.S. Section 307 has been invoked nine times against a total of 15 product sources from China since 2016 after not being used against Chinese producers for 20 years. The law has on rare occasions been used on entire products from specific nations, including cotton from Turkmenistan, tobacco from Malawi and artisanal gold from the Democratic Republic of Congo.
"It's certainly possible," Erik Lundh, a New York-based senior economist focused on U.S.-China relations at business think tank The Conference Board, said in an interview when asked whether the U.S. can use Section 307 to ban full categories of Chinese imports. "If the administration wants to leverage 307, whether it's for political or non-political goals, it certainly has the means to do so."
Should wider Section 307 action be taken, that could force companies to shift their supply chains elsewhere in China or Asia, potentially adding costs and disruption at a time of unprecedented financial distress amid COVID-19.
A wider implementation of Section 307 in China could spell bad news for a number of Western apparel brands, including Hennes & Mauritz and Abercrombie & Fitch Co., as well as tech companies including Amazon.com Inc. and Google parent Alphabet Inc., all of which have been linked to suppliers accused of using forced labor, according to the ASPI report, which named dozens of brands that it contended use forced labor indirectly through sub-contractors or sub-sub-contractors.
Panjiva's data has identified 59 consignee parent companies and 17 shipper parents that have been linked to imports from the region over the 12 months to Aug. 31, with furniture importer COA Inc. shipping 86 twenty-foot equivalent units, plastic manufacturer Pioneer Plastics Corp. with 38 TEUs and commodity trader Olam International Ltd. with 16 TEUs.
The largest entity, though, was Cathay Biotech Inc., with 618 TEUs of organic chemicals shipped led by dodecanedioic acid used in plastic production. Cathay's shipments fell 45.1% year over year in the past three months after a surge in May.
Cotton, specifically, is at high risk should a wider 307 order come down. Roughly 84% of Chinese production comes from Xinjiang, and western Chinese cotton is known as being among the world's best. Transferring supply chains would be no easy task, given that other major cotton producing regions such as Uzbekistan have a checkered past with human rights issues.
"If the issue is the Uighurs and Xinjiang, then look at textiles and apparel," Bill Reinsch, senior adviser for the Center for Strategic and International Studies, said in an interview.
Difficult to trace
Western companies trying to avoid using forced labor face a lack of transparency on the ground in their Chinese supply chains, which often involve a tangled web of contractors and subcontractors. Some may use sanctioned sources and not even know it.
"It's really hard to police this," said Gardner, who emphasized the difficulty of conducting independent investigations.
Take Hubei Yihong Precision Manufacturing Co. Ltd. The supplier produces parts for electronics such as backlights and battery covers. More than 100 Uighurs were forcibly transferred to Hubei’s factory in Xianning from Keriya County in Xinjiang in May 2018, according to the ASPI.
Hubei Yihong is a subsidiary of Dongguan Yidong Electronic Co. Ltd, which supplies directly to Toshiba, TDK, Kyocera and others. According to the ASPI, the company claims Apple, General Electric, Google, Microsoft, Mitsubishi, Nintendo and Samsung among its end users. By just highlighting the end users, it becomes difficult to trace who is supplying these major brands. Hubei even took down its company webpage following the think tank’s report.
The ASPI named 82 Western companies across industries in its report. It said it contacted them all and used responses from companies that replied to inform its findings. S&P Global Market Intelligence contacted seven large apparel and technology companies seeking comment on their supply chain practices in light of the allegations.
Apple, which the ASPI said was supplied by several producers using forced labor, told S&P Global Market Intelligence that it "immediately" began investigating its suppliers after the report was issued. It said it found no evidence of forced labor on Apple production lines and that it conducted "surprise" audits through third-party investigators in June and July on O-Film, one of its suppliers in China.
Amazon said it does not expect to exit the region and it will regularly assess suppliers and use independent auditors as appropriate. It did not specify what corrective action it would take if violations are found.
Hennes & Mauritz, the clothing store chain better known as H&M that was cited by the ASPI for using an allegedly a supplier that allegedly enlisted forced labor in Xinjiang, said it does not work with any garment manufacturing factories in the province and does not source products from the region, though it does have an indirect business relationship with a unit of yarn producer Huafu in Shangyu.
Abercrombie & Fitch denied being linked to the factories it is tied to in the ASPI report.
Patagonia, the outerwear seller, took things further, telling its suppliers July 23 that it is exiting the Xinjiang region. It said it did the "painstaking" work of mapping the source of its products at the farm level.
"We have also communicated to our global suppliers that both fiber and manufacturing in Xinjiang is prohibited," Cara Chacon, vice president of social and environmental responsibility for the clothing company, said in a statement. "Our supplier vetting process is enforcing this mandate."
Nike and Google did not respond to requests for comment. The ASPI reported denials by Nike that it used several disputed suppliers. It did not include any response from Google.
A bargaining chip
Calls for greater scrutiny of companies that rely on Chinese supply chains come as the Trump administration has ratcheted up pressure on Beijing in an evolving conflict between the nations.
The U.S. departments of State, Treasury, Commerce and Homeland Security on July 1 issued an advisory to U.S. businesses, cautioning three types of supply chain exposure: assisting in developing surveillance tools for the Chinese government in Xinjiang, relying on labor or goods sourced in Xinjiang or elsewhere in China implicated in alleged Uighur forced labor, and aiding in the construction of detainment camps for the Uighurs and other Muslim minority groups or the construction of manufacturing facilities close to these camps.
The departments in their order identified goods that have been produced in Xinjiang allegedly involving forced labor, including agricultural goods, cell phones, cleaning supplies, construction materials, cotton, electronics, footwear, textiles, toys and sugar, among others.
A month later, Treasury sanctioned Xinjiang Production and Construction Corps, an economic and paramilitary organization controlled by the Chinese government, due to its connection to the alleged Uighur abuses. It is a major player in the production of cotton in the region, and the sanctions could spell further complications for companies sourcing through their overseen operations.
Companies view policymakers' concerns as serious ones, said Anna Ashton, the senior director of government affairs for the US-China Business Council, which advocates for great trade between the nations. But she cautioned that if the U.S. orders companies to cut ties entirely with Xinjiang, it would go against accepted international best practices for addressing forced-labor concerns that encourage companies to remediate a problem. Cutting ties would leave a vacuum to be filled by "less transparent or responsible" businesses, thus simply shifting the problem elsewhere.
"Some of the proposed remedies ... like having companies cut all direct and indirect ties with Xinjiang, will be very difficult to implement overnight," Ashton said. "Few of our members have operations or direct supplier relationships in Xinjiang, but guaranteeing there are no indirect ties of any kind will require some work."
Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.