In today’s Finshots, we tell you how banned Xinjiang cotton still sneaks its way into the supply chains of popular global clothing brands.

But before we begin, if you’re someone who loves to keep tabs on what’s happening in the world of business and finance, then hit subscribe if you haven’t already. If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.

The Story

Uniqlo is in hot water. Just a few days ago, its CEO, Tadashi Yanai, declared that the Japanese clothing giant isn’t using Xinjiang cotton. And that didn’t sit well with Chinese consumers.

Now, if you’re wondering why this has caused such a stir, here’s some context. Xinjiang, a region in China, is famous for producing some of the finest cotton in the world. Until 2021, it accounted for a staggering 85% of China’s cotton production and nearly a quarter of the global supply.

But there’s a dark side to this. That year investigations revealed that much of this cotton was linked to forced labour. Reports claimed that the Uyghurs, a Turkic ethnic group, predominantly Muslim, living in Xinjiang, were being coerced into picking cotton under government “labour transfer programs” disguised as poverty alleviation schemes.

Suddenly, the world’s best cotton had a stain on it — human rights violations.

Naturally, the revelations sparked outrage. Western brands like H&M, Adidas, Nike and Burberry distanced themselves from Xinjiang cotton, declaring that they wouldn’t source materials tied to forced labour. The US, China’s biggest buyer of finished textiles and apparel, went a step further and banned imports of goods linked to Xinjiang altogether.

With the pressure mounting, the demand for Xinjiang cotton started to decline. In fact, the China Cotton Association estimated an 8% drop in Xinjiang’s cotton production last year and a 5% reduction in planting areas.

But China wasn’t having it. The government repeatedly denied the forced labour allegations, brushing them off as Western propaganda aimed at stifling Chinese industries. And in response, Chinese consumers began boycotting brands that shunned Xinjiang cotton.

Amidst all of this though, there was one brand that managed to stay neutral, dodging both the boycotts and the storm of Chinese outrage. And that was Uniqlo. It never openly discussed its sourcing or ties to Xinjiang cotton, letting it escape much of the consumer fury.

But now that its CEO has explicitly made it clear that there’s no Xinjiang cotton at Uniqlo, the backlash has begun. Chinese consumers are turning their backs on Uniqlo, accusing it of rejecting Xinjiang cotton, and rejecting China in the process.

But that’s only half the story. The other interesting bit is that even when brands like Uniqlo declare that they’re steering clear of Xinjiang cotton, a lot of it still sneaks into the supply chain.

Yup, you read that right. Recent tests on apparel sold by major retailers in the US and worldwide found traces of banned Chinese cotton in nearly 20% of the samples. It’s a reminder that Xinjiang cotton continues to haunt the fashion industry, despite efforts to cut ties.

How does this happen, you ask?

Well, one sneaky way Xinjiang cotton used to make its way into the US was by exploiting a loophole called the de minimis rule. Until 2022, this provision allowed shipments worth less than $800 enter the US without regular customs checks or import duties. It helped simplify low-value imports.

But some e-commerce companies found a way to game the system. They shipped tons of small packages, each under the $800 limit, to dodge scrutiny. Customs officials had too many packages to check and not enough data to identify their origins. This made it nearly impossible to catch and stop goods tied to forced labour.

The US soon realised this and has since closed this loophole. Under the Uyghur Forced Labor Prevention Act (UFLPA), products linked to forced labour are now blocked, no matter the shipment value. And with stricter rules in place, manufacturers found it hard to slip Xinjiang cotton through unnoticed. So what did they do?

They got creative and found roundabout ways to keep it in the supply chain. Well, take the example of Uniqlo itself. The brand sources its apparel from manufacturers worldwide, but its biggest manufacturing hub is China. And among its suppliers is Lu Thai Textile, a company highlighted in a Sheffield Hallam University case study, because its shipping data was publicly accessible.

Lu Thai is based in Shandong, a province in eastern China. And until 2019, it exclusively sourced its cotton from Xinjiang. But after the forced labour controversy erupted, Lu Thai’s annual reports conveniently stopped disclosing where it got its cotton from.

But there’s a catch. The company’s government subsidies told a different story. Its 2020 annual report revealed that Lu Thai received grants specifically for shipping cotton and cotton yarn out of Xinjiang. And given that Xinjiang supplies the majority of China’s cotton, it’s highly likely that Lu Thai never fully cut ties with the region. And if that’s the case, some of that cotton may have quietly found its way into Uniqlo’s stock too.

Besides, since this cotton would be flagged if shipped directly from China to the US, it often took a detour — exported to an intermediary country like Bangladesh, Vietnam, Indonesia, Cambodia or even India first before making its way to the US. Here, this cotton would be blended with local cotton in the intermediary country and turned into finished products. By the time these garments were exported to the US, the labels only show the final country of manufacture, making it nearly impossible to trace the cotton back to its Xinjiang roots.

Now, this got us curious. So we took a closer look at Lu Thai’s latest annual report to see if Xinjiang cotton is still sneaking into the supply chain through roundabout routes.

But here’s the twist. The company now claims that it sources its cotton from overseas rather than relying on domestic supplies. And that might make sense since China now increasingly uses Xinjiang cotton for its domestic industry while importing the rest from countries like the US, Vietnam and Brazil.

Also, Lu Thai’s report hasn’t mentioned subsidies for transporting cotton yarn since 2021. So unless there’s some clever rewording at play, it’s more likely that Xinjiang cotton isn’t making its way into Uniqlo’s supply chain through Lu Thai anymore.

But we can’t say the same for its other Chinese suppliers or other clothing brands. Because the fact that tests still find Xinjiang cotton in products banned for forced labour raises a lingering question ― can we really trust which brands are truly free from apparel tied to forced labour?

We’ll leave you with that thought. Until next time…

Don’t forget to share this story on WhatsApp, LinkedIn and X.

📢Finshots has a new WhatsApp Channel!

If you want the sharpest analysis of all financial news without the jargon, Finshots is the place to be! Click here to join.

The Tata Group has spent thousands of crores on buying Taiwanese companies, but why? 🤔

Well, it looks like they want to become a critical part of Apple’s supply chain. All the companies they are buying are iPhone manufacturers. They spent over ₹1000 crores on buying Wistron and have also got into a 60-40 joint venture with Pegatron.

But why is a company that built its legacy on heavy industries like steel and power trying to be a glorified phone assembler?!

Find out in this video of FinshotsTV.