Blacklisting of Chinese Firms Rattles American Supply Chains

Date: Wednesday, July 22, 2020
Source: The Wall Street Journal

Apple, Ralph Lauren among customers of manufacturers penalized over alleged links to human-rights abuses

HONG KONG—The addition of 11 Chinese companies to a U.S. trade blacklist of entities Washington says are linked to human-rights abuses of the Uighur minority group in Xinjiang is entangling major brands and likely to further a reordering of supply chains that feed American consumers.

U.S. authorities on Monday punished the suppliers—which include textile makers and component suppliers that sell products to major Western firms—by blocking them from buying U.S. technology without a license. Among those to have done business with the targeted manufacturers are Apple Inc. and clothing marquees Ralph Lauren Corp. and Tommy Hilfiger, according to a report this year by the Australian Strategic Policy Institute, a think tank based in Canberra.

The blacklistings illustrate the growing risks to U.S. companies with extensive and often opaque supply chains in China. Beyond additional compliance burdens on American exporters and importers, analysts say reputational risks are likely to dissuade U.S. companies from doing business with firms tied to Xinjiang. That, in turn, may accelerate the decoupling of supply-chain links between the two countries.

In reaction to the move, a Chinese foreign ministry spokesman said Tuesday that the U.S. was using human rights as an excuse to abuse the use of export controls. Such moves went against the basic principles of international relations and interfered with China’s domestic affairs, the spokesman said. China would take the necessary measures to protect the legal rights of its companies, he added.

Western governments and human-rights groups say China has detained more than a million people, mostly Muslim minority Uighurs, in camps across the far western Xinjiang region. Many have been forced to perform work and have been forcibly relocated, they say. The Chinese government has said it is fighting extremism in the region and has described the camps as vocational-training schools.

In recent months, the Trump administration has pushed U.S. companies to more closely evaluate their supply chains for potential exposure to abuses of Uighurs. Earlier this month, the Commerce Department released a business advisory warning of growing evidence of forced-labor practices tied to abuses in Xinjiang, including subsidies to build factories in Xinjiang that use workers from internment camps, involuntary transfer of Uighurs to factories across China and forced labor in prisons.

Many of the corporates added to the list Monday are suppliers and contractors providing garments and basic goods, and they can be replaced by other manufacturers elsewhere in Asia, said Dennis Meseroll, the executive director of business consulting firm Tractus Asia Ltd.

“From a reputational perspective, these firms are now tainted meat,” said Mr. Meseroll, whose firm helps corporates decide on foreign investment and supply-chain strategies. “The major brands will have little if anything to do with them. They will find alternative suppliers to work with.”

The latest entries on the blacklist join more than three dozen entities that have been called out since October over alleged abuses in Xinjiang. The additions stand out in that some are more directly involved in the supply chains of U.S. firms, who in turn sell smartphones, accessories and clothing to American consumers. Those barred previously include surveillance-camera maker Hangzhou Hikvision Digital Technology Co., artificial-intelligence companies SenseTime Group Inc. and a number of Chinese public-security bureaus.

Those blacklisted Monday include Changji Esquel Textile Co., a unit of Hong Kong-based Esquel Group, the world’s largest contract shirtmaker. Its customers include Calvin Klein, Tommy Hilfiger and Nike Inc., according to a Wall Street Journal report last year about Western companies whose supply chains have been caught up in abuses in Xinjiang.

Esquel Group said Tuesday that it is deeply offended by the Commerce Department designation and said it was working to resolve the situation. “We absolutely have not, do not, and will never use forced labor anywhere in our company,” it said.

In April, Esquel also divested its stake in a 22-year-old cotton farming joint venture in the Xinjiang region, the firm said in an online statement.

A spokeswoman for PVH Corp., which owns the Calvin Klein and Tommy Hilfiger brands, said the company has a zero-tolerance policy for forced labor in its supply chain. “PVH will cease all business relationships with any factories and mills that produce garments or fabric, or use cotton grown, in Xinjiang within the next 12 months,” the company said in a statement.

Representatives for Nike and Ralph Lauren didn’t respond to requests for comment.

Another sanctioned company is electronics maker Nanchang O-Film Tech. Apple lists the company on its 2019 supplier list, and the Australian Strategic Policy Institute said the company was a supplier of selfie cameras used in Apple Inc.’s iPhone 8 and iPhone X. The institute said that in December 2017 Apple CEO Tim Cook visited an O-Film factory in Guangzhou.

A since-deleted press release from O-Film dated December 2017 said Mr. Cook praised the company’s humane treatment of its employees during his visit. The release showed Mr. Cook posing with the company’s chairman and visiting a camera workshop.

The Commerce Department has warned U.S. companies that they may face reputational and legal risks if their supply chains contain links to human-rights abuses in China.

“What we have is a supply chain that reaches in and out of China and into the West,” Assistant Secretary of State Robert Destro told reporters in early July. “If we find out that you are knowingly importing goods into the United States using forced labor, there will be prosecutions.”

 

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