Blog News Events Publications Directory Community Industry Voices Media

US companies sourcing across China face “bumpy” couple of years, experts warn

The number of manufacturers kickstarting operations in China’s Xinjiang region has continued to grow despite intense scrutiny of forced labour, new research shows, as experts warn of due diligence risks across the breadth of the country.

A little under 4,500 new manufacturing companies were established across Xinjiang last year, according to an analysis of corporate records by the Center for Advanced Defense Studies (C4ADS), a US-based non-profit and provider of data-driven analysis and evidence-based reporting on global conflict and transnational security issues.

This was the highest annual total over the 12-year period assessed by the organisation, which found that roughly 40,000 manufacturing entities have been founded since 2009 – of which around 29,000 remain in business.

AdvertisingMolecule
AdvertisingBrady Technologoes

The report, titled ‘Shifting Gears: The Rise of Industrial Transfer into the Xinjiang Uygur Autonomous Region’, says the total number of firms registering in Xinjiang dipped in 2017 and 2018, “coinciding with the beginning of a mass detention campaign” – which has since been condemned by NGOs, western governments and corporates.

“The [Chinese] government may have been placing a greater emphasis on securitisation during those years, temporarily slowing industrial transfer,” says C4ADS.

But in the time since, researchers claim there has been a resurgence in manufacturing companies setting up shop in Xinjiang, despite the wider effects of the Covid-19 pandemic on global economic growth and trade volumes in 2020.

In terms of sectors, the report says textiles and food processing are the two main industries driving the recent manufacturing boom across Xinjiang.

China’s ruling communist party is accused of detaining more than a million Uyghurs and other Muslim minorities in “political re-education camps “ in Xinjiang, where human rights group say detainees are subject to various human rights abuses, including forced labour, either within the internment centres or in nearby industrial parks.

As reported by the Guardian in 2020, Uyghurs are also often moved to factories around China as a source of free labour, after “graduating” from detention camps.

 

East coast ties

In its report, C4ADS states that the Chinese government is working to transform the landlocked Xinjiang region into a manufacturing hub, and points to the role of state-owned and private companies located thousands of kilometres away in driving these efforts.

The report claims that under a state-backed “pairing assistance programme” launched in the late 1990s – and later expanded in 2010 –19 eastern Chinese counties and cities have been partnered with similar authorities in Xinjiang.

As part of this initiative, entities in wealthier provinces have been increasingly offered incentives to funnel resources and personnel into Xinjiang Uygur Autonomous Region (XUAR), the report says.

“The central government wants economically dynamic east coast cities to reproduce their successful export-led growth model in the region by attracting manufacturers through low labour costs and subsidised land, electricity, and freight fees,” it adds.

Oftentimes industrial parks – which C4ADS alleges may have ties to forced labour risks in Xinjiang – serve as the “vectors” for the transfer of companies from the east coast region to XUAR.

Since 2014, the Chinese government has dramatically expanded the number of industrial parks in XUAR: today there are 23 national and 65 regional-level industrial parks, up from a combined total of 62 at the end of 2011, the analysis says.        

In one example, C4ADS points to the Yining textile industry zone in Xinjiang’s Ghulja province. The zone contains two industrial parks and was built as a result of a pairing programme with Nantong, a major textile production hub in eastern China.

“The park is framed as a vehicle for poverty alleviation and job provision,” C4ADS says, while noting that, as of March this year, about 20 Nantong-based textile companies had established operations in the Yining industrial zone.

According to C4ADS, several ethnic Kazakh victims have testified they were forced to work in a factory in the Yining textile park after being released from a detention camp. There are signs at least 1,000 people work there, “including those sent via organised labour transfers from the surrounding county”, says the report.

Researchers warn of possible implications for global supply chains, given links between a manufacturer of unfinished fabrics in the Yining Country Weaving Industry Park, part of the wider zone, and a company in Nantong.

C4ADS alleges there are senior executives tied to both the Xinjiang Dasheng Weaving Company and Nantong Youmian Haochen Textile Company Co Ltd, which claims to be a leading maker and supplier of hotel linens to major brands in 58 countries.

Nantong Youmian Haochen Textile Company does not publish information about where it sources textiles, but according to the C4ADS report, the close relationship with the Xinjiang Dasheng Weaving Company, as well as the Yining weaving park, creates a “heightened risk” the firm may be sourcing materials from XUAR.

C4ADS says importing companies must improve due diligence and enforcement efforts to ensure tainted goods are not being bought from other regions in China.

Nicole Morgret, a human rights analyst at C4ADS, tells GTR US companies should be watching out for Chinese  companies that have any subsidiaries or investment in the Xinjiang region, and consider that a “red flag”.

 

UFLPA risks

The warnings come as importers wait to discover how strictly the US Customs and Border Protection (CBP) will enforce new due diligence legislation designed to crack down on Xinjiang-made goods making it into the American market.

The Uyghur Forced Labor Prevention Act (UFLPA), which came into effect on June 21, has created a “rebuttable presumption” that goods produced either wholly in Xinjiang, or in part, were made through the use of forced labour.

In effect, the onus is now on US companies to prove that a product with any Xinjiang-related component or input was not produced using forced labour.

Ted Murphy, a partner at law firm Sidley Austin, says in a note published in late June that the industry is waiting to see how the UFLPA will be applied, but warns US companies should brace for stringent enforcement action.

“If the government’s actions match its rhetoric on this issue, many companies will be faced with a bumpy couple of years as supply chains adjust to the new incentives,” he says.

Jeffrey Weiss, a partner at law firm Steptoe, echoes such claims and says diligence expectations will be heightened for all US companies sourcing from China, whether they are importing goods directly tied to Xinjiang or not.

“If you are an importer sourcing in China, but outside of Xinjiang, you still have to show you did not get any inputs from that particular region; or there were not any workers from Xinjiang relocated to a factory elsewhere that produced an input for your product,” says Weiss.

He points to a notice put out by the USTR earlier this month which suggests the government is looking to expand its use of trade tools to root out forced labour in supply chains.

“I don’t think they’re intending to stop. I think the UFLPA is just the beginning,” he tells GTR. “We expect the US government could expand its target over time beyond Xinjiang. Companies are going to assess their options and ask, ‘am I going to be able to continue sourcing there?’

The post US companies sourcing across China face “bumpy” couple of years, experts warn appeared first on Global Trade Review (GTR).

Go to the Source – US companies sourcing across China face “bumpy” couple of years, experts warn