Among the orders, applies to all cotton produced and processed by Xinjiang Junggar Cotton and Linen. Another was slapped on apparel made by Yili Zhuowan Garment Manufacturing and Baoding LYSZD Trade and Business.

Other sanctioned products include hair products manufactured at the Lop County Hair Product Industrial Park in the region, and computer parts produced by Hefei Bitland Information Technology.

China is the world’s second largest cotton producer, with 85 per cent of the output originating from the autonomous region alone in 2019, according to US Department of Agriculture and Rural Affairs. The US imported US$50 billion worth of textiles from China last year.

The September 14 orders came about two months after the US added 11 Chinese companies to its so-called Entity List for complicity in China’s campaign of repression, mass arbitrary detention and the use of forced labour. Beijing has rejected those accusations.

This explainer seeks to differentiate the two sets of prohibitive measures, the impact on the affected companies and how they could possibly extricate themselves from the predicament.

What are the differences between the two sets of sanctions?

Both sanctions are very different in their scope and effect, though they are related and based on the same underlying policy concerns and objectives, said Sydney Mintzer, a partner in the international trade and customs practice at law firm Mayer Brown.

The Commerce Department’s Entity List designation is an export control restriction that seeks to restrict the 11 companies from directly receiving US goods or technologies.

A WRO is issued once the government has developed a reasonable suspicion that merchandise is being, or is likely to be, imported into the US and is produced using forced labour. The CBP will block all merchandise within the WRO scope from entering the US market, Mintzer said.

What is the impact on companies that are put on the Entity List?

The impact can be devastating for any company that relies at least in part on US components, software or technology as part of its supply chain, according to Mayer Brown.

It can significantly impact or sever ties with suppliers and also hurt relationships with financial institutions, customers and business partners, said Tamer Soliman, global head of export controls and sanctions practice. Even for the largest companies, such a designation can impose severe constraints on operations with potentially crippling effects on the designated company’s business.

Any company placed on the Entity List would be well advised to evaluate the impact on its commercial relations and consider its options, including the possibility of seeking removal from the list.

How can these companies seek removal from the Entity List?

Companies seeking removal from the Entity List can prepare and submit a petition for delisting to an inter-agency committee. The body is chaired by the Department of Commerce, and includes the departments of State, Defence, Energy and Treasury, where appropriate.

Based on his experience, getting removed is a long and complex process, he added. It requires a strategic understanding of national security and foreign policy interests at stake, and how the company’s activities may implicate or undermine those concerns.

Accordingly, companies should only submit such a petition after careful review of the reasons why they have been placed on the list, and what arguments they may have for removal from it.

There are also potential judicial avenues for removal. These are, however, less common and typically available after the administrative process has been exhausted.

Besides, as Entity List designations are based on an exercise of national security and foreign policy authorities, courts will generally be highly deferential to the agency in the absence of extraordinary circumstances, Mintzer added.

What is the impact of WROs on affected companies?

The CBP will prevent their merchandise from entering the US within the scope of the WRO, said Tamer Soliman, global head of export controls and sanctions practice at Mayer Brown.

However, the issuance of a WRO is not the end of the regulatory process. If the importer contests the WRO, it can submit to the CBP, within 3 months, a certificate of origin and a detailed statement countering forced labour allegations, said Mintzer.

If the proof submitted does not establish the admissibility of the merchandise, or if none is provided, the merchandise can be seized. This process provides an avenue for exclusion from the scope of the WROs.

Can the US government prove that the garment companies’ cotton are sourced from Xinjiang?

The burden is on the US importer to demonstrate that its merchandise is not produced with forced labour, according to Mayer Brown.

Providing the details necessary to convince the CBP can be complex. Companies would be wise to conduct a thorough due diligence of their supply chains, Mintzer said.

A supply-chain audit that ensures no forced labour is utilised would at a minimum include tracing the imported merchandise back to its source and ensuring that policies and procedures are in place at the original producer that shows compliance.

The good news is that companies have successfully been excluded from their WRO scope after conducting those necessary due diligence and audits.

How will the sanctions impact the global textile industry?

“The garment-making industry is prepared for losing part of the businesses after the US imposed the import ban,” said Yuan Lamei, wo works at a Jiangsu-based state-owned manufacturer. “It is not a devastating blow to our company, since the American market represents just a small portion of our total sales,”

She believes many Chinese garment companies will be able to find ways to overcome the setback. They could source cotton from other regions, or try to diversify into non-US markets.

The sanction will probably do little to cotton prices, given the weak demand for textile raw materials amid the global economic slowdown, said Stanley Szeto, chairman of Hong Kong-listed fashion producer Lever Style. The group does not use cotton from Xinjiang, he added.

It would be difficult to implement the sanctions effectively, he said, since cotton sourced from different places, such as China, India and Pakistan, is often mixed at yarn mills in various locations and countries. If a mill wants to be opaque, it would be difficult to trace the origin, he said.

“Even if the entire western world bans Xinjiang cotton in all its apparel imports, and even if it manages to close such loopholes, Xinjiang cotton will still find its way into garments sold in China and other developing countries,” said Szeto, who is also the honorary chairman of Hong Kong Textile Council.

Will the sanctions induce Chinese textile companies to relocate to other countries?

Xinjiang-produced cotton goes into fabrics and garments produced all over South and Southeast Asia, Szeto said. Avoiding Chinese-made fabrics or garments does not mean buyers are not using cotton from the region.

Hence, banning Xinjiang cotton by itself will not prompt textile or garment factory owners to move out of China at this stage. If the US government escalates its sanctions by banning all Chinese-made textiles or garments, such a relocation plan may be inevitable, he said.

Additional reporting by Daniel Ren in Shanghai