US-China relations: how will Washington's 'forced labour' law impact Xinjiang's economy?

After a sweeping US ban on products from China's Xinjiang region came into effect last month, all eyes are again on the autonomous territory in the country's far west.

Washington's Uygur Forced Labour Prevention Act has effectively blocked American imports of all products wholly or partially sourced from Xinjiang, where China has been accused of committing rights abuses such as forced labour against Uygur Muslims and other minorities - allegations that Beijing has repeatedly denied.

The ban, which lasts for eight years, is expected to unleash far-reaching effects on the global supply chain, as Xinjiang produces around half of the world's polysilicon - a material crucial to solar panel production - a quarter of the world's tomato and a fifth of global cotton.

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The three sectors, together with apparel, have been identified by US Customs as at "high-risk" of exposure to forced labour and will be scrutinised under the act.

In the future, the region could face even more scrutiny, with lawmakers in the European Union mulling a similar ban.

We take a look at what all this could mean for Xinjiang's economy.

The ban directly impacts exports from the region, so some drag on the economy is expected. But in reality, Xinjiang's economy is not export-driven despite bordering eight nations - more than any other provincial-level jurisdiction in China.

Last year, the share of exports in the region's gross domestic product (GDP) was 8 per cent, according to local government figures. The rate for China as a whole was 20 per cent, World Bank data showed.

In the first five months of 2022, Xinjiang's exports increased 57.5 per cent year on year, totalling US$8.48 billion.

As a less developed inland region, most of Xinjiang's products for export tend to be low-value added. In 2021, labour-intensive products such as garments, shoes and boots accounted for 51.4 per cent of the total exports, while mechanical and electrical machinery made up 28.3 per cent. Agricultural products accounted for 3.9 per cent.

Shallower trade flows from Xinjiang compared to the rest of China could contribute to volatility in annual growth, but many of the region's biggest trade partners have friendly relations with the country.

Xinjiang's top export destinations are neighbouring Central Asian nations, including Kazakhstan, Kyrgyzstan and Tajikistan. Trade with the three countries accounted for 69.9 per cent of Xinjiang's total trade volume in 2021, while trade with countries taking part in the "Belt and Road Initiative" made up 87.3 per cent, according to data from Urumqi Customs.

In contrast, the share of Xinjiang's exports to the US are minimal, which has nevertheless been on the decline over the past few years amid allegations of human rights abuses.

In 2018, exports to the US were 3.5 per cent of the region's total, while in the first five months of this year, the share dropped to 0.7 per cent, according to South China Morning Post calculations based on customs data.

Although Xinjiang's exports are less dependent on Western countries, it does not mean the region's trade will be unaffected, as the US ban includes all products with any inputs from the region.

For example, the share of Xinjiang exports to Southeast Asian countries has been rising in the past few years, with many of the products used for further processing.

For downstream buyers in third countries, complying with the US law essentially means no more imports of raw material and primary products from Xinjiang.

For the tomato farming and processing industry, further action from the European Union targeting alleged forced labour in the region would be highly disruptive. Italy is a major destination for Xinjiang-made tomato products, with the country accounting for around 20 per cent of the region's total exports.

But for other sectors, the biggest impact may not come from direct trade.

Even though it is a major global producer of cotton, Xinjiang does not export much raw cotton or yarn, which is mostly consumed locally or sold to other provinces to be made into cloth, garments or other textile products for domestic and overseas markets.

For Chinese apparel exporters who want to continue doing business with the US, shifting to foreign cotton is now a must. This has resulted in a massive stockpile of unsold Xinjiang cotton this year, most of which began building up before the act took effect.

For Xinjiang's polysilicon industry, which has been encouraged by supportive policies and subsidies from Beijing, many producers have started to circumvent risks by shifting operations outside the territory, while existing facilities in the region focus on supplying the domestic market, experts said.

Xinjiang is one of the poorest regions in China. Last year, its per capita GDP was 61,725 yuan (US$9,204), 76 per cent of the national average.

Like other less-developed regions, Xinjiang's revenue is highly dependent on central government transfers.

From 2014-19, Beijing's annual transfers to Xinjiang expanded from 263.69 billion yuan to 422.48 billion yuan, totalling over 2 trillion yuan and representing more than 30 per cent of the region's total GDP in those six years, according to official data.

Another major source of funding comes from the "pairing assistance" initiative. Under the programme, which was established in 1997, China's prosperous coastal provinces are "paired up" with cities and counties in poorer regions like Xinjiang to send investment and personnel to help with development.

A total of 19 cities and provinces from the country's most developed areas have pumped 96 billion yuan worth of investment into Xinjiang and helped with more than 10,000 projects in the region from 2014-19, according to official data.

The programme has been strongly criticised by the US government, which has accused Beijing of subsidising companies to establish factories in labour-intensive industries that have used forced labour.

Some companies involved in the scheme have been put on the US entity list, which means their products or any products using their inputs cannot enter the US, unless importers provide "clear and convincing" evidence their supply chains are free of forced labour.

Allegations of 'forced labour' have clouded foreign investment decisions in Xinjiang over the past few years.

Total utilised foreign direct investment (FDI) was US$237 million in 2021 - less than half the level of 2013.

Hong Kong is the leading source of FDI in Xinjiang, accounting for 94 per cent of the region's total utilised overseas investment in 2019 and 26 per cent in 2020, according to Xinjiang's statistics bureau, though analysts say it might mostly be from Chinese state-owned enterprises.

The number of foreign enterprises registered in Xinjiang also plunged last year, from 8,994 at the end of 2020 to 2,899 in December 2021, according to Wind, a Chinese financial data provider.

Some European companies have withdrawn from Xinjiang because they have been unable to carry out third-party audits on local supply chains to ensure compliance with the US law, the European Union Chamber of Commerce in China said last month.

Local firms are seen as incapable of meeting the very high requirements of US customs, and the chamber warned more companies will leave if the issue is not addressed.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.