After years of the U.S. government sanctioning Chinese companies for enabling forced labor in Xinjiang, China is threatening to use a sanctions list of its own. Its target is the U.S. company PVH Corp, owner of fashion brands Calvin Klein and Tommy Hilfiger.

In September, China’s Ministry of Commerce announced it would investigate PVH on suspicion of “violating normal market principles” relating to products originating from Xinjiang, the autonomous region where Western governments and human rights groups allege China is operating a program of forced labor.

The move highlights a dilemma PVH and other American companies face doing business in China: complying with U.S. law — the Uyghur Forced Labor Prevention Act (UFLPA) prohibits imports of products made through forced labor in China — risks Chinese retaliation. 

Beijing could now punish PVH by adding it to its unreliable entity list, making it difficult for it to trade in and with China. If PVH is listed, it would be the first consumer goods company to suffer this fate. Other U.S. companies on the list include defense manufacturers Lockheed Martin and RTX Corporation, because of their arms sales to Taiwan. 

PVH IN CHINA

PVH’s footprint in China is smaller than that of other apparel companies like Nike and Adidas. Its sales in the whole Asia Pacific region accounted for just under one fifth of PVH’s $9.2 billion of revenue in 2023, according to its financial results. Even so, PVH sees China as an “important growth engine,” its chief executive Stefan Larsson noted in its latest annual report.

“China would probably be a single digit percentage of [PVH’s] total sales, so it’s not really big compared to the business in Europe, but it is fast growing,” says David Swartz, senior equity analyst at Morningstar. “In the last couple of conference calls, the company has given more disappointing numbers from China. The growth numbers fell off in the last quarter significantly, which the company attributed to China’s economic situation.”

Nike, Adidas and Sweden’s H&M Group all faced consumer boycotts in China in 2021 after they expressed concern about findings from civil society groups and media organizations related to forced labor in Xinjiang. Those boycotts were largely driven by Chinese netizens rather than government entities, making the investigation into PVH potentially more serious, according to one analyst.

“This is an escalation,” says Cullen Hendrix, senior fellow at the Peterson Institute of International Economics (PIIE). “It’s making an example of a relatively less important brand or set of brands, in order to deter potential actions by larger brands.”

Xinjiang’s Shadow

About 20 percent of the world’s cotton is produced in Xinjiang, according to the U.S. Department of Labor. PVH includes Xinjiang on its list of jurisdictions where it doesn’t allow direct or indirect sourcing of materials, according to its 2022 corporate responsibility report. However, PVH and other companies are at a high risk of indirectly sourcing materials from Xinjiang because of steps taken by major Chinese apparel suppliers to obscure their business in the region, according to a December 2023 report by Sheffield Hallam University’s Helena Kennedy Centre.

“There’s no real way that any of these companies can be certain that none of their cotton comes from that region,” says Swartz from Morningstar. “The cotton can easily be shipped from China to Thailand or Vietnam or somewhere else, and no one would really know where it came from originally.”

There’s not really an obvious way to thread this needle that doesn’t have significant reputational harm for these brands, either in China or in the United States.

Cullen Hendrix, senior fellow at the Peterson Institute of International Economics (PIIE)

Using ownership data from WireScreen combined with evidence from the Helena Kennedy Centre report, it’s possible to see how companies such as PVH can have indirect links with other firms that operate in Xinjiang, even if they have taken steps to remove products from the region in their supply chains.

PVH lists 120 suppliers from China in its latest supplier disclosure report. One of these is Henan Shengtai Clothing Co., Ltd, also known as Henan Sunrise Apparel Ltd.

Henan Shengtai Clothing is 100 percent owned by Sunrise Intelligent Manufacturing Group through two of Sunrise’s subsidiaries. Sunrise sources cotton and labor from Xinjiang, according to a report by the Helena Kennedy Centre at Sheffield Hallam University. The report made no finding that Henan Shengtai itself sources products or labor from Xinjiang.

One of Sunrise’s largest shareholders is Youngor Group, which holds a 15.85 percent stake in Sunrise. Youngor is a Ningbo-based company that is dominant in China’s textile and apparel industries.

Youngor holds a 56 percent stake in Anhui Xinhao Textile Technology Co., Ltd, which in turn is the sole shareholder of Akesu Youngor Textile Company Ltd, a firm based in Xinjiang, and Anhui Xinya New Materials Co., Ltd. In December 2023, the U.S. government added Anhui Xinya New Materials to its UFLPA Entity List. The U.S. said that Anhui Xinya has used a labor transfer program called Xinjiang Aid to recruit persecuted minorities from Xinjiang.

“PVH maintains strict compliance with all relevant laws and regulations in all countries and regions in which we operate,” PVH said in a statement to The Wire. “We are in communication with the Chinese Ministry of Commerce and will respond in accordance with the relevant regulations.”

Although China is trying to encourage more foreign investment, PIIE’s Hendrix says it’s unlikely to get any easier for multinationals to handle issues related to Xinjiang.

“I’m skeptical of the idea that China is not willing to pay significant costs to essentially stay the course in terms of its policies in Xinjiang,” says Hendrix. “There’s not really an obvious way to thread this needle that doesn’t have significant reputational harm for these brands, either in China or in the United States.”

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