State Dept Warns Top US Firms To Replace Supply Chains Exposed To China's Xinjiang

Now that the Senate has joined the House in its condemnation of China's National Security Law, and on Thursday passed by unanimous consent a bipartisan bill to impose sanctions on Chinese officials who threaten Hong Kong’s limited autonomy, as well as the banks and firms that do business with them, we eagerly await when (and perhaps, if) Trump will sign the legislation into law (according to a WSJ report from Thursday, the White House hasn’t responded to a request for comment over whether the president will support the bill).

And since it is unlikely that Trump will object to the veto-proof law - after all, the last thing he wants is to be seen as easy on China ahead of the election - on Friday, the State Department warned top American companies including Walmart, Apple and Amazon over risks faced from maintaining supply chains associated with human rights abuses in China’s western Xinjiang region, according to a letter seen by Reuters on Thursday. 

"It is critical that U.S. companies and individuals be aware of the large-scale human rights abuses perpetrated by the PRC government in Xinjiang," Keith Krach, Undersecretary of State for economic growth, energy and the environment wrote on July 1 according to Reuters. "Businesses should evaluate their exposure to the risks that result from partnering with, investing in, and otherwise providing support to companies that operate in or are linked to Xinjiang," he said in the letter which was sent to trade groups.

The warning comes at a time when the United States has been ratcheting up pressure on China over that country’s treatment of Muslim Uighurs in Xinjiang and Beijing’s new national security law for Hong Kong. It also follows a U.S. government advisory sent out on Wednesday which said that companies doing business in Xinjiang or with entities using Xinjiang labor could be exposed to “reputational, economic, and legal risks”.

Naturally, China was hardly impressed by the latest escalation, and when he was asked about the U.S. government's warnings over supply chain risks linked to Xinjiang, Chinese foreign ministry spokesman Zhao Lijian said that allegations of forced laboer were fabrications.

“Some people in the U.S. keep on saying they care about ethnic minorities in Xinjiang while also taking all kinds of measures to oppress Xinjiang companies,” he said at a daily news conference in Beijing.

As Reuters further notes, in a call with reporters, Krach said the complex nature of supply chains was making companies vulnerable to potential risks and urged them to be more vigilant. He did not say how many U.S. companies might have been entangled in such supply chains.

The real question, of course, is not Xinjuang, but how far will the US push China, and how long before all China-based supply chains receive a similar warning, resulting in an unprecedented hit to global trade. In any event, the bottom line is clear: US corporations are now under the clock to shifting most if not all Chinese supply chains away from the country. Needless to say, the inflationary consequences of such a transition - which will take years to complete and billions of dollars to be optimized - can not be underscored enough. And since this is happening at a time of global demand-side deflation, the most likely outcome will be a brutally painful burst of stagflation which could last for years.