The challenge of blocking Chinese cotton to help the Uyghurs

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Hello from Brussels. Just in case you thought the vaccine diplomatic wranglings and trade wars were dying down, the EU this week contrived to crank up tensions with Russia, after the European Medicines Agency questioned the ethics behind trials of the Sputnik V jab. Given that Vladimir Putin is trying to use the vaccine as an unsubtle form of diplomacy in the EU, this was regarded in Moscow as somewhat provocative, as though the EMA were some geostrategic strike force rather than an assemblage of technocrats. More vaccine trade tensions to come, no doubt, especially since India, champion of overriding intellectual property rights to boost production worldwide, is now rather unfortunately restricting its own output to the domestic market for the moment.

Today’s main piece focuses on the dilemma facing governments in rich nations over companies that buy cotton and clothes from Xinjiang in China, while Tall Tales looks at how trade is bouncing back from the Suez Canal blockage. Charted Waters examines the UK’s trade relationship with France.

Exporting EU standards to China will come at a cost

Labour standards in clothing supply chains used to be a fairly straightforward debate. Companies in rich countries sourced clothes from poor. Critics accurately noted the factories concerned had working conditions well below western standards. The critics’ critics correctly countered that they beat life on the farms the workers had come from, and were very good at reducing poverty. And that was basically it.

The situation with European and American companies and the Uyghurs is different, not just because the low-cost labour is forced but because those businesses are in China to sell as well as to buy. 

Trade Secrets wrote on Tuesday about the difficulties companies such as H&M and Nike have faced trying to bridge multiple cultures, which have made them the target of consumer boycotts and official opprobrium in China. But the Uyghur forced-labour issue also presents dilemmas to rich-world governments, as their use of an expanding array of trade tools is complicated by companies operating in multiple markets.

Desiree Leclercq, of Cornell University, a former US trade representative official, said of China: “Western efforts to prohibit sourcing have become a true battle of global powers and a real test to this new system of trade governance.”

The US, along with Canada and the UK, has imposed bans on cotton goods from Xinjiang. The EU is looking to create similar legal powers to block imports. China experts reckon one function of the official Chinese reaction against H&M is to try to influence such legislation, just as Ericsson finds it politic to argue against banning Huawei from 5G systems in Europe.

Mareike Ohlberg, from the German Marshall Fund think-tank in Berlin, said: “The Chinese government is very sensitive to legal developments in Europe, and scaring European companies in China is intended to put pressure on them to speak up against forced-labour legislation in their home countries.” One of the best arguments for supply chain labour standards legislation is that it enable companies to tell governments such as China’s that their hands are tied. China seems to want to force businesses to show they have done their part in untying them.

Import bans are in any case inefficient tools. Xinjiang is reckoned to produce 85 per cent of China’s cotton and 20 per cent of world supply. It’s hard to determine the provenance of cotton, especially once it’s gone through one of the many production stages before it turns up in a T-shirt in a container in Rotterdam or Los Angeles. There are various clever ways that officials can track products through global supply chains, including DNA testing, but foreign investigators can’t get access to Xinjiang to analyse the cotton at source. The US import bans haven’t actually blocked that much, and Canadians can fairly easily buy products openly labelled as made from Xinjiang cotton.

Even on their own terms, those bans affect only cotton clothes sourced in China for export, while the fastest-growing global consumer markets are in China itself. In theory, the likes of H&M could run two separate supply chains, one for its Chinese retail outlets buying from local producers and one for rich-world economies sourcing from suppliers elsewhere, though that would presumably carry substantial reputational risk in both rich markets and in China.

It’s here that another EU initiative might be more relevant, but politically even tougher. As we’ve written before, the idea of forced-labour import bans in Europe grew out of an earlier “due diligence” proposal, still being considered, of making companies legally responsible for conditions throughout their supply chains. In theory (the idea is still being developed), that could make EU-headquartered companies such as H&M liable for forced-labour sourcing in Xinjiang, even if they only sold those clothes in China.

An extraterritorial due diligence law would fit well with the EU’s idea that the bloc should be exporting European values through its trade policy. It would, however, alarm European companies (German multinationals are usually the most vocal) who fear being forced to pull out of their operations in Xinjiang and maybe elsewhere in China.

Unlike an EU-wide import ban, which creates a level playing field by catching equally all companies selling in the bloc, such a law would disproportionately affect EU-headquartered businesses relative to counterparts based elsewhere. As such, it’s going to be a slog to bring one in, presumably with China’s government mobilising all the European industry lobbies and sympathetic politicians it can to harry the European Commission every step of the way. We admire the EU’s ambition, but we don’t envy them the task.

Charted waters

It seems that post-Brexit teething problems between the UK and France are easing a little. Out today are preliminary figures from French customs that show trade flows are now close to the average seen over the second half of last year, before the end of the Brexit transition period.

Column chart of % change compared with monthly average  Jun-Dec 2020 showing France's goods trade with the UK improved from January's low

Tall tales of trade

Last week we cast doubt on the idea that the Suez blockage by the Ever Given container ship would wreak permanent damage to globalisation. Well, it looks like that’s likely to be true in the short to medium term as well.

Various colleagues report that shipping companies found ways to work round the disruption, a boom in European ports is on the way as the backlog of ships arrives and a record number of new container ships are being commissioned. It’s true that, as a Trade Secrets colleague explains here, ports and shipping companies have been under pressure recently.

But that’s more to do with a resurgence of consumer demand after it turned out that the pandemic didn’t do that much damage to trade or growth after all. As problems go, that’s not a bad one to have. It’s not a worldwide depression, it’s not the demise of international supply chains and it’s definitely not the end of globalisation.

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