The US ban on cotton from China's Xinjiang has forced the textile industry to shift to the domestic market, resulting in a significant shortfall.
After Hong Yongcheng noticed his American customers growing reluctant to renew their orders—a shift he attributed to increasing restrictions on Chinese imports—he made an unexpected decision.
Instead of attempting to win back these hesitant overseas buyers, Hong launched a new production line in the Xinjiang Uygur Autonomous Region, an area where exports to the U.S. are nearly impossible due to stringent trade bans.
"I don't see much hope in regaining American orders, so producing from Xinjiang no longer matters, as most of our customers are now domestic," Hong explained. "At least we can reduce costs."
Hong's decision to expand in Xinjiang made him an ideal participant for the China-Eurasia Expo held in Urumqi, the regional capital, last June. Authorities invited him to showcase his locally produced goods and contribute to promoting the region's economy.
However, since the sweeping U.S. export ban on Xinjiang products took effect two years ago, many of China's textile and apparel manufacturers have struggled to fill the gap in demand. Global retailers have faced increasing pressure to cut ties with Xinjiang—the largest cotton-growing region in China—following allegations of forced labor, which first emerged in the U.S. and the European Union as early as 2019.
International clothing brands, including Nike and H&M, responded to these concerns in 2020 with public statements disavowing any association with the region. When Western legislatures began to introduce related legislation the following year, these statements resurfaced, sparking outrage among Chinese internet users.
In response, Chinese netizens called for a boycott, using the hashtag "I support Xinjiang cotton" to encourage consumers to shun products from the foreign brands in question and instead support local goods as an act of patriotism.
Despite the massive size of the domestic market, Hong acknowledged that it cannot fully compensate for the loss of foreign customers.
"While our costs have been cut in half by producing in Xinjiang, our overall profits are nowhere near what they used to be," he admitted. "The orders just don't add up."
**The Need for an Alternative**
Xinjiang, a vast region in China's far west, is roughly three times the size of France and supplies one-fifth of the world's cotton and 90 percent of China's own supply. The region has been at the center of international controversy, as governments and media outlets—mainly in the U.S. and Europe—have accused local authorities of detaining an estimated one million members of Muslim ethnic minority groups and subjecting many to forced labor.
Beijing has repeatedly denied these allegations, but the Uygur Forced Labor Prevention Act, which bans all imports from Xinjiang unless a "rebuttable presumption" of forced labor can be successfully challenged, was passed by the U.S. Congress in late 2021 and enacted in June 2022.
"We were losing one-third of our business just from American customers cutting their orders," Hong said, highlighting the significant impact of the ban on his business.
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Beijing responded firmly to the U.S. ban, with the Foreign Ministry stating that companies choosing to forgo what they described as the "best cotton in the world" were ultimately harming themselves. However, the impact of this ban—set to last eight years, though likely to be extended indefinitely—has placed significant strain on Xinjiang's local economy, which was already among the lowest in nominal GDP in China before the ban took effect.
While public data on the full economic impact of the ban is limited, the region has experienced a dramatic 54.6% drop in foreign direct investment, with only USD 50.14 million invested in 2021, according to local government figures. In terms of trade, Xinjiang's total exports to the U.S. in 2023 were valued at approximately USD 373 million—a staggering 92% decline from 2020, based on data from Urumqi customs.
Historically, Xinjiang has relied heavily on assistance from other regions and the central government to fuel its economic development. Since 2015, local authorities have implemented a variety of investment incentives, aiming to grow the textile and apparel industry through tax rebates and subsidies for electricity and transportation.
For business owners like Hong Yongcheng, who has run his towel factory in the export-heavy Jiangsu province for over a decade, the ban forced a reconsideration of their business strategy. The decision to move production to the remote, arid region of Xinjiang came only last year when the situation became particularly dire.
"We needed to find a way out," Hong explained. "We lost one-third of our business just from American customers canceling orders. And the irony is, we weren't even using Xinjiang cotton in our production—we imported it from Pakistan."
Hong's move highlights the broader challenges facing businesses in the region. While relocating to Xinjiang may offer cost reductions and align with government incentives, the loss of international customers and the uncertainty surrounding the ban's duration create a precarious business environment. The region’s economy, heavily dependent on the textile sector, continues to grapple with the consequences of global trade policies and shifting geopolitical dynamics.
As businesses in Xinjiang adapt to these challenges, they must navigate a complex landscape of domestic market reliance, international scrutiny, and the ongoing need for innovation and resilience in the face of economic adversity.
Hong said the drop-off began in 2020 among his customer base, mostly buyers for international hotel brands. “They faced pressure to drop Chinese suppliers.”
Revenues went down 60 per cent. In response, the company has moved the lion’s share of its exports to a mix of closer markets, including South Korea, Japan and several countries in Southeast Asia.
“Before the sanctions, 70 per cent of our business was exporting overseas, half to the US,” Hong said. “Now it’s the complete opposite. Seventy per cent are local orders.”
Hong said his company decided to open a production line in Xinjiang after being offered a rent-free factory by the local government, 10 times the size of their 2,000-square-metre (21,528-square-foot) facility in Jiangsu.
“Electricity and labour costs are half of what we pay in Jiangsu. We just needed to buy our own equipment and use cotton from Xinjiang in production,” Hong said.
Thanks to heavy government subsidies like these, Xinjiang’s textile and apparel industry has grown considerably. By October 2023, there were 3,725 companies registered for the fabrics business in Xinjiang, almost six times the count from 2014. More than one-third came about via investments from elsewhere in the country, official figures revealed.
The region has also ramped up trade with its five Central Asian neighbours – Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan – which were the recipients of 66.9 per cent of Xinjiang’s exports during the first six months of 2024.
Customs data showed the value of these shipments totalled 147.6 billion yuan (US$20.7 billion), a 23.9 per cent increase compared to the same period last year.
Apparel and footwear now represent 60.7 per cent of China’s total export value to the five countries, with electronics coming in at 30 per cent, according to 2023 customs figures.
But the surge in trade with Central Asia has only made up for some of the shortfall in China’s textile exports, a problem exacerbated by lethargy in the broader economy.
Manufacturers in the field exported US$67.2 billion of goods in the first quarter, a year-on-year slump of 6.9 per cent according to Chinese customs data. Shipments to the US, EU and Japan shrunk by 18.4 per cent, 24.7 per cent and 8.7 per cent respectively during the period.
The trend is unlikely to be reversed any time soon, as the US has continued to strictly scrutinise the region’s textile trade and update the scope of its legislation accordingly. The state-owned Xinjiang Tianshan Wool Tex Stock, one of Xinjiang’s largest garment companies, was added to the act’s list of proscribed firms in September 2023 along with two other enterprises. Five metals and chemical companies were added to the list on Thursday, according to Reuters.
A person with direct knowledge of the company’s operations said it exported 20,000 fewer pieces of clothing in 2023 compared to 2022. There is no public information on how many pieces of clothing the company produces each year.
“Orders from the US are now virtually zero. The US and France used to be our biggest customers, but during the Covid period, France started cutting orders, too. Fortunately, Germany’s orders have remained stable,” the person said, adding other export destinations are unlikely to account for the loss of business.
China’s textile sector reported an export value of US$293.6 billion last year, an 8.1 per cent drop in export value compared to 2022. Fabrics and clothing contributed 8.6 per cent to the total value of China’s 2023 exports – a figure that also fell on a year-on-year basis, but only by 4.6 per cent.
Sheng Lu, a professor of fashion and apparel studies at the University of Delaware, said while China’s sector will “undoubtedly remain one of the world’s most competitive” given its manufacturing capabilities, geopolitics will continue to be a drag on exports.
“Due to deteriorating relations, sourcing from China is regarded as high-risk for US fashion companies,” Lu said. “This pushes [these] companies to reduce their ‘China exposure’ and move orders elsewhere. For Chinese manufacturers that heavily rely on exports, the worst may be yet to come.”
China reported weaker than expected economic growth in the second quarter of 2024, with a 4.7 per cent expansion year on year falling short of the government’s annual target of “around 5 per cent”. A slackening of demand appears correlative, as retail sales rose 2 per cent in June, year on year – a noteworthy slide compared with the 3.7 per cent growth seen in May, and the slowest rate of increase since China lifted its coronavirus restrictions at the end of 2022.
Clothing sales were hit particularly hard during that month, with a drop of 1.9 per cent reported despite growth of 1.3 per cent in the first half of the year. Of the discretionary items that Chinese consumers said they would cut back on when “uncertain about their financial prospects”, clothing ranked near the top. These results were published on July 9 in the 2024 McKinsey China Consumer Report, after a survey of nearly 12,000 respondents was conducted last year.
All these are worrying signs for Chinese policymakers, who have repeatedly stressed the importance of shifting the primary source of economic growth from manufacturing to consumption.
Hong, meanwhile, has been dealing with numerous challenges. On top of receiving smaller orders from hotels and restaurants for his towels this year, fierce competition from domestic players – bordering on “price-slashing”, he said – has led him to expect another 30 per cent drop in sales by December.
Chen Li, an analyst from Chinese think tank Anbound, said weak foreign and domestic demand, along with geopolitics-induced shifts in supply chains, would mean more undercutting among clothing manufacturers.
“Low prices lead to a decline in companies’ profit margins. In the long run, it will hinder corporate growth because companies are unable to invest more resources in brand-building, product innovation, and marketing,” Chen said. “Small and medium-sized enterprises will become extremely fragile, and likely to be eliminated in the market, thus having a major impact on the economy in the long run.”
With manufacturers duking it out over a shrinking pool of domestic demand, Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, said many will look to move production out of the country.
Now most of our buyers are Chinese … This has pushed our prices down further
Li Qingrong, Sichuan Firstlady Textile
“Those with access to the international market [will] seek to expand overseas,” Zhang said. “It is a trend I expect to continue for the coming years.”
Sun Ruizhe, president of the China National Textile and Apparel Council, named “Arabic, Southeast Asian, Central Asian and African countries” as top destinations for Chinese businesses in a July speech to members.
With the broader economic picture still hazy, however, some companies are content to stay put.
Li Qingrong, general manager of Sichuan Firstlady Textile – another company promoting its wares at the China-Eurasia Expo in Urumqi – said business went down by one-third since Japanese clothing brand Uniqlo cancelled its orders over cotton sourced from Xinjiang.
“Now most of our buyers are Chinese,” she said. “They know how things work and exactly how much production costs, unlike foreign buyers who usually buy at a higher price. This has pushed our prices down further.” She expects another 20 per cent drop in sales by the end of the year.
“We don’t have particular plans, the economy is not looking great for everyone,” she said, adding that her family-owned business has nearly 300 employees
Hong, still adjusting to running a factory in Xinjiang, said he has started to plan for the future despite this year’s gloomy outlook.
“We have to change our business model, from customising for other brands to creating our own brand for domestic customers,” Hong said.
“These things take time. We need to produce our products to a higher quality so even if we sell fewer, we can sell it at a higher price,” he said. “I think labelling products as ‘made with Xinjiang cotton’ would still do well in China.”
