Europe’s business leaders are warning that a raft of incoming EU legislation will put companies on a direct collision course with laws in China, which could lead to partial “decoupling” of some supply chains.
One of the laws bans products made using forced labour and another requires big firms to conduct human rights and environmental audits of their overseas suppliers. Both have been adopted by the European Union but will take effect in 2027 after a three-year grace period.
Businesses will be required to prove their suppliers are in line with EU environmental and social standards, and also that there is no forced labour in their supply chains. Companies fear the new rules will put them in the cross hairs of Chinese authorities.
The EU Chamber of Commerce in China pointed to the example of US fashion giant PVH Group, which was this week subject to a Commerce Ministry investigation for “unreasonably boycotting Xinjiang cotton and other products without factual basis”.
While the ministry did not specify what PVH is accused of doing, it is thought to be related to its historical compliance with US rules outlawing the sale of cotton from Xinjiang because of concerns over forced labour.
“The announced investigation has therefore raised concerns among foreign companies operating in or doing business with China, given that many of them are subject to the same compliance challenges,” the EU chamber said.
Beijing has repeatedly and firmly denied accusations of human rights abuses against minorities in Xinjiang, and argued that its policies in the region were designed to eradicate extremism and terrorism.
Business groups worry that efforts to comply with the laws – including gathering information from Chinese suppliers – may contravene China’s sweeping anti-espionage and data transfer laws, which they claim are vague and hard to understand.
“There will be difficult choices to make … in the worst case scenario you will have to decouple your business operations,” said Luisa Santos, deputy director general at the Confederation of European Business (BusinessEurope).
Santos pointed to the uncomfortable position that Chinese suppliers would face if they were asked to hand over information that could be seen to flout the ill-defined laws in Beijing.
“It goes both ways, sometimes they will be in an impossible situation. They are confronted with: I’m going to respect what you are asking me, or I’m going to respect the laws of my country,” she said.
“And, of course, I think when you’re based in one country, you have to respect the laws of your country.”
Adhering to the rules may prove difficult for firms operating in Xinjiang, where independent audits can be impossible to conduct.
Last week, German car giant Volkswagen ran into trouble when an audit that it claimed cleared it of allegations of using forced labour in the region was found to have fallen short of international standards, in an investigation by the Financial Times.
As a result, 50 lawmakers from across the world called for Volkswagen to withdraw from Xinjiang, where human rights groups say they have documented evidence of widespread forced labour – charges denied by the Chinese government.
The chamber is calling for Beijing to “create the conditions” for independent audits to take place, arguing that European companies find themselves “increasingly caught between a rock and a hard place”.
“If they cease operations in, or sourcing from, regions like Xinjiang they may face a severe backlash from both government and consumers in China; if they stay, they risk negative consequences from their home and other international markets, including reputational damage and penalties under European and/or US legislation.”
It is not the first time such concerns have haunted European industry. In 2021, Swedish fashion retailer H&M found itself the subject of a consumer boycott in China after raising concerns over alleged human rights abuses against Uygur Muslims in Xinjiang.
While the EU’s forced labour ban does not name the western Chinese region, it was written with Xinjiang in mind. The European Commission wants to cut products made there out of EU supply chains while staying within World Trade Organization rules.
Despite the regulatory pushback, exports from Xinjiang to the EU’s 27 member states rose by 141.2 per cent in August compared to a year earlier, according to calculations based on Chinese customs data.
Chinese companies have also complained about the duelling compliance requirements that are evolving in Europe and China.
The EU’s new foreign subsidies regulation (FSR) – aimed at weeding out illegal state subsidies on the books of non-European firms operating in the single market – can oblige Chinese firms to hand over detailed information, including on their parent companies in China.
Chinese state-owned airport scanner company Nuctech sued the EU after being raided under FSR, arguing that complying with the investigation would force it to violate China’s criminal laws. The General Court in Luxembourg found the commission’s raids were legal.
Michel Struys, a Brussels-based regulatory partner at law firm Hogan Lovells, said the clashes were “a symptom of an illness that runs much deeper”, pertaining to a widening chasm in the global trading system.
“For companies navigating this, it’s going to be a nightmare,” he said.