The Atlantic. 20 September 2021

Below is an article published by The Atlantic. Photo:Adam Maida / The Atlantic.

xecutives at the fashion brand Eileen Fisher are no strangers to China—or to its enormous benefits and dangerous pitfalls: The American outfitter began manufacturing its clothing there about a quarter century ago, but last year, it realized that working in China could no longer be business as usual.

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The catalyst was Beijing’s repression of China’s Uyghurs in the far-west province of Xinjiang. A series of reports exposed horrific abuses of the Muslim minority group, including mass detentions, torture, and forced labor in factories and fields. “There are some issues that that’s it, you draw the line, and forced labor is one of those,” Amy Hall, Eileen Fisher’s social-consciousness strategic adviser, told me.

What Hall and her colleagues did next highlights a generally unrecognized factor that is reshaping China’s role in the global economy: its human-rights record.

Starting in early 2020, Eileen Fisher launched its most rigorous investigation ever into its Chinese supply chain. Like many brands, it tended to deal directly with only a handful of factories, primarily those stitching and knitting the shirts, sweaters, and other shelf-ready clothes Eileen Fisher sells. Behind those stretched a pyramid of other factories—yarn spinners, fabric weavers, dye houses, and so on—with which Eileen Fisher had minimal contact. The company had been monitoring its direct suppliers for any abuses, but this time it inspected every stop on the chain—24 firms in all—not just for signs of forced labor but for any connection to Xinjiang. None of its suppliers, Eileen Fisher decided, could use any products from Xinjiang or have operations there. The brand enlisted specialized researchers to dissect financial records and other public documents, searching for shareholdings or other linkages to the region.

So far, Eileen Fisher has excised only one red-flagged supplier from its network (though there was no evidence of wrongdoing, or any direct links to Xinjiang). Perhaps more important than the result of the investigation, however, is the mere fact that an investigation was carried out at all, revealing the new reality that countless international companies producing and selling in China face.

The long-standing tension between the lure of China’s riches and revulsion over its authoritarian practices is escalating sharply, raising the costs, risks, and hurdles involved in doing business there. Companies are getting squeezed between the Beijing government, which is not just more repressive but overtly unapologetic about it, and Washington politicians, who are more vociferously critical of China’s behavior and more intent on countering it. The complexity of navigating this expanding minefield has the potential to disentangle China’s economy from that of the United States and other countries to a degree that tariffs, trade wars, and diplomatic temper tantrums have not.

China’s human-rights abuses aren’t new, nor are the hassles they have routinely created for global companies. Labor activists, for instance, have regularly accused the Chinese factories that supply international firms of treating workers poorly, leaving major brands scrambling to repair sullied reputations. Several countries, including the U.S., imposed economic sanctions on China after the massacre of prodemocracy protesters at Tiananmen Square in 1989.

For the most part, though, chief executives have been able to invest, manufacture, and market in China unimpeded by human-rights issues. The U.S. government complained about Beijing’s suppression of dissent and individual rights, but not enough to hamper the flows of capital and trade. After all, many in Washington believed, the bonds of business would eventually soften the harsh Communist regime. Chinese authorities, meanwhile, whined that criticism amounted to “interference” in their domestic affairs but were too desperate for foreign capital and technology to do much more.

In certain respects, this remains the case. U.S. investment in China has stayed more or less stable even as Beijing’s repression has intensified (though it did take a COVID-induced hit in 2020). “Of the people who are there now, I think very few of them think of China as optional,” Arthur Kroeber, the founding partner of the research firm Gavekal and a specialist in the Chinese economy, told me. “They consider China to be indispensable.”

That calculation, though, is under strain. In recent years, Washington has armed its criticisms with real teeth. Some of the more stringent measures taken against China have been a response to human-rights issues. The Commerce Department has blacklisted 67 Chinese companies and other entities for alleged involvement in the abuse of Uyghurs, restricting their ability to do business with American firms. Washington stripped Hong Kong of its special trade status with the U.S. over the crackdown on the city’s democracy movement. Human-rights issues are damaging China’s economic relations in other ways too: This year, the European Parliament shelved ratification of an investment agreement with China following tit-for-tat sanctions imposed over Xinjiang.

Perhaps no measure has caused bigger headaches than a U.S. prohibition on the import of cotton and tomato products from Xinjiang, introduced in the past year because of concerns over forced labor. (Cotton grown in the region accounts for about 20 percent of the world’s total.) As a result, roughly three-fourths of all shipments withheld by U.S. Customs on suspicion of forced labor this fiscal year have been related to Xinjiang, according to data supplied by U.S. Customs and Border Protection. One famous brand that got caught up in the net was Uniqlo, which had a consignment of shirts detained. (The Japanese clothier has insisted it “has a zero-tolerance policy for any human rights violation and strictly prohibits all forms of forced labor,” but according to CBP, it also withdrew its formal appeal of the action.)

“You’re responsible for knowing your supply chain,” AnnMarie Highsmith, the executive assistant commissioner at CBP, told me. “If you fail in this regard and don’t take this responsibility seriously, there are financial, reputational, and legal risks.”

Complying with U.S. requirements, however, can be a paperwork nightmare; customs officers demand documentation proving that no Xinjiang cotton is present in a product and that no forced labor was used to make it across the entire supply chain, and sometimes require maps of production locations. Yet a 2020 report by the Australian Strategic Policy Institute asserted that Chinese authorities facilitated the dispatch of tens of thousands of Uyghurs from Xinjiang, sometimes directly from detention centers, to factories in a range of industries across the country. The study went on to name major international companies with these Uyghurs working in their supply networks, including Apple, Nike, and Gap. (Nike said that it found no evidence of Uyghur forced labor in its supply chain and that it has strengthened practices to identify such risks, while Gap said it prohibits forced labor and, in a new policy, forbids any sourcing of products from Xinjiang. Apple said in an email to me that the company conducts regular inspections of suppliers and interviews with workers and “found no evidence of forced labor anywhere in our supply chain.”)

“There has definitely been a surge in broad regulatory activity that makes it more difficult and riskier to do business in China,” Stephen Lamar, the president of the American Apparel & Footwear Association, which counts many U.S. brands sourcing in China among its members, told me. “That’s only accelerated the need not just to sever your nexus [with Xinjiang] but to prove your nexus is severed.”

Beijing has further complicated matters with its belligerent response. Reveling in the perceived success of its authoritarian system, China is defending its illiberal practices with more swagger than ever before. Going beyond simple denials of human-rights abuses—including those toward Uyghurs—China’s diplomats and state-media propagandists make the case that the government, by fulfilling the material needs of its citizens, upholds its own conception of human rights and the Western version is a foreign imposition on Chinese society and culture. In March, Hua Chunying, the spokesperson for China’s Foreign Ministry, ticked off a litany of historical atrocities committed by Western powers, including the Atlantic slave trade and the Holocaust, to paint them as hypocrites who “have been using human-rights issues as a pretext” to “frustrate China’s development.” President Xi Jinping, in a July speech commemorating the 100th anniversary of the Communist Party’s founding, made clear that his administration no longer has to heed the world’s concerns. “We will not … accept sanctimonious preaching,” he said.

That’s the message delivered to foreign businesses by a campaign against major fashion brands over their stand on Xinjiang. In March, Chinese internet users called for boycotts of various companies after uncovering corporate statements expressing concern about forced labor and pledges not to use Xinjiang cotton. The Swedish retailer H&M was hit particularly hard: Its stores in China, for example, quickly emptied of customers, and its products vanished from Chinese online shopping sites.

Though Chinese authorities characterized the campaign as the result of spontaneous public outrage, they regularly employ economic coercion against countries and companies they perceive as acting against Chinese interests. But this time was different. The Chinese seemed to be looking not merely for the usual tacit acceptance of their illiberal practices but active affirmation. Rejection of Xinjiang cotton has become a surrogate for disapproval of China. The Chinese actor Zhou Dongyu, for example, tore up her contract as brand ambassador for Burberry because the company hadn’t “clearly and publicly stated its stance on cotton from Xinjiang.”

For brands, the balancing act of appeasing all sides—always precarious—has become more treacherous. After Nike got targeted over Xinjiang cotton, its stock value declined because of fears that its sales in China, which account for about a fifth of its revenue of branded products, would take a hit. In an attempt to assuage market jitters, John Donahoe, Nike’s chief executive, awkwardly invoked Abraham Lincoln, telling investors “we are a brand of China and for China.” That, in turn, raised eyebrows in America. Former Vice President Mike Pence, in a July speech, specifically cited Donahoe’s comment when questioning corporate America’s loyalty to its home country.

“Companies are incredibly vulnerable about the ESG issue,” Mike Gallagher, a Republican congressman from Wisconsin who advocates a tougher line on China, told me, using the initialism for “environmental, social, and governance” issues. “There are a lot of people in Congress that are objecting to the constant lecturing we’re getting on ESG when the same people … are the most invested in China,” he continued. “If they don’t recognize the hypocrisy, at some point I think Congress is going to force them to recognize the hypocrisy.”

Beijing, too, could be poised to compel chief executives such as Donahoe to take a stand. In June, China introduced new legislation that allows it to penalize companies doing business in China that adhere to U.S. sanctions. It’s not clear yet how Beijing intends to employ this new tool, but in theory, it could force companies to choose between American and Chinese law.

That could put international firms with large businesses in China into an ugly position, facing the ire of one or the other of the world’s great powers. But it’s also a fight Beijing would likely lose. China possesses tremendous market leverage over many global companies, but ultimately, it’s just one market, and most multinationals, especially Western ones, are unlikely to defy Washington. If Beijing uses its anti-sanctions legislation too aggressively, it could drive foreign investment away and possibly even compel international companies to pick up and leave.

Meanwhile, politicians, activists, and consumers in the U.S. are turning the heat up on corporate management as well. Pressure is mounting on Olympic sponsors to boycott the 2022 Winter Games in Beijing in protest of China’s human-rights horrors. The pending Uyghur Forced Labor Prevention Act, which would ban all Xinjiang products from entering the U.S., passed in the Senate in July by unanimous assent. If it passes in the House, the burden on importers from China will become even heavier. Further congressional action may loom. “That bipartisan pressure … is only going to intensify,” Gallagher said. “I would expect more legislation on it, more scrutiny, not less.”

That holds out the prospect that the world’s business map will be redrawn, with supply chains and investment redirected from China to less contentious locales. It could also lead to a more isolated China, with Chinese companies, forced to show loyalty to their home government and consumers, restricted in their ability to operate elsewhere. Barring some drastic change in China’s government, doing business there will probably become more and more challenging. Companies will have to make painful decisions about where to invest and manufacture, and where to find new customers and growth.

“This tension only becomes bigger over time,” said Gavekal’s Kroeber. “You have the U.S. committed to this very adversarial attitude, and China is committed to this very unpleasant style of governance, and both of those trends are going to be accentuated. So for people caught in the middle, including these companies, it’s just going to be a tighter and tighter squeeze.”