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Business News – Oct 5, 2024.

1 - For Companies in China, Pulling Out of Xinjiang Poses ‘Messy Dilemma’

New York Times. Oct 4, 2024.

An investigation by China of an American clothing retailer has escalated concerns among foreign companies about their dependence on Chinese supply chains and the future of their operations in the country.

China’s Ministry of Commerce said last week that it was investigating PVH, the corporate parent of the Calvin Klein and Tommy Hilfiger brands, for allegedly taking “discriminatory measures” against products from Xinjiang, a region in China’s far west that produces a fifth of the world’s cotton.

At issue is whether PVH violated Chinese law by pulling back from purchasing cotton or garments from Xinjiang, where researchers have cited evidence of forced labor, mass arrests and confinement to re-education camps among the region’s predominantly Muslim ethnic groups, particularly the Uyghurs.

The investigation has made clear that China will not tolerate companies that shun Xinjiang. That puts some multinationals in a legal vise grip because a growing number of governments, including the United States and the European Union, restrict or ban imports from Xinjiang.

The case is the first time Beijing has wielded a rule it put in place four years ago, known as the Unreliable Entity List, against a company for complying with another country’s prohibition on goods from Xinjiang.

“Since this investigation is the first of its kind, companies in all sectors have been forced to reassess what it means for them,” said Sean Stein, the chairman of the American Chamber of Commerce in China. “Many are seeing higher risk,” he added.

For companies, the PVH investigation adds to the public relations problems that doing business in Xinjiang can bring — inside and outside China.

In 2021, H&M, Nike and other brands faced a damaging backlash from consumers in China after the companies said they would break ties with Xinjiang. This spring, several global automakers became the focus of a congressional investigation for buying parts from a supplier flagged by the U.S. government for participating in forced labor programs tied to the region.

Many international companies are heavily dependent on Chinese suppliers. From cars to solar panels, China is the world’s largest manufacturer by far. More than 90 percent of China’s cotton is produced in Xinjiang.

“European companies find themselves increasingly caught between a rock and a hard place,” the European Union Chamber of Commerce in China said in a statement. “If they cease operations in, or sourcing from, regions like Xinjiang they may face a severe backlash from both government and consumers in China,” the chamber continued. “If they stay, they risk negative consequences from their home and other international markets.”

Western companies have already grown warier of China because of geopolitical issues. Larry Fink, the chief executive of BlackRock, one of the world’s largest asset management companies, said at a conference on Tuesday that global companies needed to re-evaluate investments in China because it is the biggest economic supporter of Russia, which is waging war on Ukraine.

The PVH investigation could provide another reason for companies to shift away from China, according to advisers for global companies.

“It is a serious and growing concern for many multinational corporations and may aggravate the incentive to decouple,” said Lester Ross, the partner in charge of the Beijing office of Wilmer Hale, a law firm.

Companies in joint ventures with Chinese firms in Xinjiang are particularly stuck. Such arrangements are hard to change without official approval. The Chinese government, typically quick to push back against criticism, has made clear it wants foreign companies to stay in Xinjiang, a poor region that it wants to develop

BASF, the German chemical giant, started trying to sell its stakes in both of its Xinjiang manufacturing joint ventures to its state-owned partner