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

Beijing’s investigation of the parent of Calvin Klein and Tommy Hilfiger, which stopped buying goods from Xinjiang, has put global firms in a difficult position.

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 in late 2023. Last week, BASF said the sales had not been completed and were “subject to negotiations and required approvals of the relevant authorities.”

Volkswagen, the German automaker, said in February that it was examining “the future direction” of its small joint venture in Xinjiang, where the staff and scale of operations had already shrunk considerably. China’s Ministry of Foreign Affairs responded by saying companies should “cherish the opportunity to invest and develop in Xinjiang.”

VW has yet to announce any changes.

PVH was given 30 days to respond to the government’s claims. If PVH is found to have violated China’s laws, penalties could include fines and travel limits on PVH employees, or even a halt to the company’s exports from China, the ministry said.

In recent years, human rights groups and corporate responsibility organizations have pushed retailers, in particular, to avoid purchases from Xinjiang.

In July 2020, PVH said that within 12 months, it would stop buying garments, fabric and cotton from Xinjiang. The company responded last week to the Ministry of Commerce announcement by saying, “As a matter of company policy, PVH maintains strict compliance with all relevant laws and regulations in all countries and regions in which we operate.”

PVH said this week that it had no further comment.

The Ministry of Commerce has not explained the timing of its decision to begin investigating PVH, which came against a backdrop of persistent trade frictions between the United States and China.

In the United States, the Uyghur Forced Labor Prevention Act bans all imports from Xinjiang unless the importer can prove that the goods are not tainted by forced labor. The United States also has a separate ban on any imports that contain even traces of Xinjiang cotton or tomatoes, two crops grown mainly on state-owned farms that researchers have linked to human rights abuses.

Companies in the European Union and Canada must comply with a patchwork of national regulations that ban the import of goods made by forced labor.

China has banned independent investigations of labor conditions in Xinjiang and has cracked down broadly on due diligence firms, making it almost impossible for companies to prove how their goods were produced.

Nury Turkel, a lawyer and former chair of the Uyghur Human Rights Project, said repression and forced labor involving minorities were continuing, both within Xinjiang and around China.

China has stopped publishing the number of people sent to re-education camps. Those detainees have not been released but instead transferred to prisons, fields or factories, he said.

Mr. Turkel said the United States needed to work with more countries to ban Xinjiang products, and toughen penalties for companies that violate bans.

The U.S. Commerce Department declined to comment. The White House did not respond to a request for comment.

Senator Ron Wyden of Oregon, the Democratic chairman of the Senate Finance Committee, said the Chinese government was “trying to harass and intimidate” American companies that were complying with U.S. law.

“The United States must not let this bogus investigation stop our country from cracking down on China’s ongoing human rights abuses,” he said.

The Chinese government denies that human rights abuses have taken place. The government also portrays programs to send rural Xinjiang residents to jobs in distant factories as an effort to alleviate poverty, not forced labor.

Steve Vickers, a former senior Hong Kong police officer who runs a corporate security consulting firm there, said companies “are now caught in the middle of what is truly a messy dilemma.”