Early last year, amid mounting reports of forced labor and human rights abuses in China’s Xinjiang Uyghur Autonomous Region (XUAR), U.S. outdoor apparel maker Patagonia resolved to stop sourcing cotton from China. From April 2020 on, the brand’s global suppliers had to vet and eliminate any links to the world’s largest cotton producer. The decision wasn’t easy. China accounts for roughly 20% of global cotton supply, and Xinjiang produces some of the highest-grade cotton in the world.
“We had to walk away from business partners, we had to redesign styles to fit the substitute cotton, and we had to do away with styles that we could no longer make because the quality of cotton was no longer available,” says Wendy Savage, director of social responsibility and traceability at Patagonia, which declined to say what products it had discontinued.
Patagonia isn’t alone.
U.S. retailer L.L.Bean pledged to eliminate Chinese cotton from its supply chain by the end of this year, citing “extremely troubling” reports about Xinjiang.
Victoria’s Secret parent company L Brands has committed to eliminating Chinese cotton from its supply chains, too. L Brands told Fortune it used tools provided by supply chain analytics firm Sourcemap to map most of its apparel supply chain in 2019 and cross-referenced its suppliers against a list of companies prohibited by U.S. sanctions related to Xinjiang.
“In 2020, we started conducting chain of custody audits on cotton products to ensure cotton fiber does not come from China and will continue to conduct these audits to ensure cotton fiber is from an approved country,” an L Brands representative said.
California-based women’s-wear maker Reformation—which launched in Los Angeles in 2009 and bills itself as a sustainable fashion brand—is another retailer that’s stopped using cotton from China because it couldn't guarantee cotton sourced elsewhere in China hadn’t been mixed with stock grown in Xinjiang. The XUAR produces over 85% of China’s cotton crop.
“Unfortunately, it’s not even as simple as just saying that you’re not going to source within the XUAR. The opaque nature of supply chains in the region means it really has to be the entire country,” says Kathleen Talbot, Reformation’s chief sustainability officer and vice president of operations.
U.S. fashion brands and retailers are facing an unprecedented supply chain crisis over Xinjiang, but few are willing to talk about it for fear of disrupting their operations in China. Beijing fervently denies allegations of human rights abuses in Xinjiang and tacitly threatens companies that speak against it. Fortune asked more than two dozen apparel companies how they’ve responded to reports of human rights abuses in Xinjiang. Only Patagonia and Reformation—which earn little to no revenue in China—made representatives available for interviews. But regulatory action has forced all apparel companies that do business in the U.S. to address the possibility that their cotton supply is corrupted by forced labor, whether they speak publicly about it or not.
In January, U.S. Customs and Border Protection implemented a seizure order on all goods containing cotton sourced from the XUAR, citing “the Chinese government’s exploitation of modern slavery.” The Worker Rights Consortium, an independent labor rights organization, estimates the seizure order will disqualify $20 billion of apparel sales in the U.S. per year—about 5% of the total $368 billion U.S. clothing and footwear market.
To release a seized shipment, importers must prove the goods are free of Xinjiang-sourced cotton. But that seemingly straightforward requirement has exposed a hidden truth about the fashion industry: Few brands know for sure where their cotton comes from.
‘A wild goose chase’
According to the UN Economic Commission for Europe, only 34% of fashion brands implement tracking and tracing in their supply chains, which means they can follow raw materials as they go from farm to shop floor or retroactively determine where exactly a product came from. Most retailers only strike partnerships with so-called Tier 1 suppliers—factories that sew finished products—and leave the business of sourcing materials to those suppliers. The materials are delivered along a winding value chain of merchants, known as Tier 2, Tier 3, and Tier 4 suppliers, with Tier 4 representing the farm level.
Adopting a deliberately myopic view of the supply chain cuts costs for a brand, but it also limits its ability to respond to crises—such as a sudden order to exclude cotton from a region in China.
Of the 16 brands that responded to Fortune’s request for comment, most provided links to public statements in which they expressed concern over reports of abuses in Xinjiang and pledged to conduct reviews of their supply chain, in some cases revealing what little oversight they had before.
Patagonia and Reformation—brands built on the ideal of responsible sourcing—maintain more comprehensive supply chain oversight than the majority of fashion retailers, which helped them respond to and investigate the issues in Xinjiang. But such diligence is demanding, requiring audits, interviews with factory workers, reams of documentation, and careful nurturing of relationships.
“It can sometimes feel like a wild goose chase, because when we make a demand of our suppliers, they have to then enforce it among their suppliers,” Talbot says. In the garment industry, a single company might have thousands of sub-suppliers and contractors spread across its supply chain. Talbot says it’s taken Reformation “a few years to feel like we have the systems and tools in place to trace effectively.”
Some of those tools are fairly high-tech. In March, Reformation launched a line of jeans spun from a cotton featuring a pigment that only shows up under UV light. The dye is introduced at the cotton gin—where fibers are separated from seeds—and is tracked all the way to the store floor. The owner of the cotton gin sources cotton from its own cotton farm, so Reformation feels confident saying this technology tracks cotton all the way to the farm level, and proves the finished product was sourced from an approved supplier.
“Having that level of visibility and partnership at the farm level is really challenging for brands to develop,” says Talbot. Even with deep insight into their supply chains, Patagonia and Reformation found too many unanswered questions to comfortably continue sourcing cotton from China and pulled out.
“Between the scale of the issue and the lack of access to information we can rely on, there’s no way for us to control what’s happening in China,” says Patagonia’s Savage. “This situation is unprecedented.”
Retailers ordinarily rely on third-party audits and documented receipts to verify the origin of raw material supplies. But the auditing system has flaws. Amelia Pang, author of Made in China: A Prisoner, an SOS Letter, and the Hidden Cost of America’s Cheap Goods, says even trusted factories may cover up where they source their cotton from by blending crops from different fields together and then forging documents to pass audits.
In Xinjiang, government surveillance has made it impossible for auditors to conduct candid, off-site interviews with workers, which are key to determining whether labor is voluntary. In July 2020, a U.S. government report said auditors had reportedly been “detained, harassed, threatened, or stopped at the airport” by Xinjiang authorities. The local populace, meanwhile, is under surveillance from facial-recognition cameras and phone-tracking apps, which police reportedly force Uyghurs to install. According to the Wall Street Journal, the government’s policies in Xinjiang compelled at least five auditing firms to stop working in Xinjiang entirely by September 2020.
Patagonia and Reformation had the tools to assess the risk Xinjiang posed to their supply chains and still cut the country’s cotton from their goods. Most other brands don’t have the capacity to judge how vulnerable their supply chains are to the alleged abuses in Xinjiang; if they directed manufacturers to eliminate Xinjiang cotton from their products, they would be hard-pressed to prove whether manufacturers followed through or not.
‘Xinjiang cotton’ as a selling point
Yet not every brand is leaving China, or even Xinjiang. Japanese fashion giants Muji and Uniqlo continue to use “Xinjiang cotton” as a tagline in advertisements, playing up the “superb quality” of the region’s bounty. Both companies believe their auditing work is sufficient to weed out forced labor.
Muji’s parent company, Ryohin Keikaku, told Fortune it had conducted “enhanced” audits of its supply chains in Xinjiang and found “no significant issue…except for those issues that can be corrected by farms or ginning factories [themselves].” The company also said it no longer ships products made with Xinjiang cotton to the U.S., owing to the seizure order—suggesting Muji is confident it can separate Xinjiang cotton from its other supply sources.
Tadashi Yanai, the CEO of Uniqlo parent Fast Retailing, said in an earnings call in early April that the company would “keep an eye” on its cotton supply chain and halt business with suppliers if it finds evidence of forced labor. However, U.S. customs agents seized a Uniqlo shipment in January over concerns the garments had been produced by forced labor in Xinjiang. According to the New York Times, customs agents said documentation provided by Uniqlo contained “numerous deficiencies” including “unsigned, undated, and generally illegible China customs declarations.”
Uniqlo did not respond to Fortune’s request for comment. In a statement online, the company said it had submitted “appropriate documentation” to Customs and Border Protection but admitted “the CBP did not give clearance” to a shipment of cotton shirts.
Muji and Uniqlo, which bring in a hefty portion of sales from their home market, are under less economic pressure to eliminate Xinjiang cotton than U.S. brands. Japan accounted for 61% of Muji’s revenue in 2020, while Europe and North America contributed 6.5%, combined. Sales at Uniqlo parent Fast Retailing skew similarly: Japan made up 40.9% of revenues in the first half of fiscal 2021, while North America and Europe combined contributed only 8.4%.
The Japanese government has not placed import restrictions on materials sourced from Xinjiang, so there’s little legal pressure for Japanese brands to switch sources, and both Muji and Uniqlo have a compelling financial incentive to continue sourcing from the region: access to the Chinese market.
‘Rightfully concerned’ about boycott risks
Beijing dismisses the accusation that the government is persecuting ethnic minorities in the XUAR as a political smear campaign orchestrated by “the West.” The government has leveraged China’s massive consumer spending power against brands that, in Beijing’s view, show too much support for the Western narrative. In March, China’s tech titans launched a sudden boycott against Swedish fashion giant H&M after the Communist Youth League—an affiliate of the China Communist Party (CCP)—shared screenshots of an old H&M statement expressing “concern” over reports of abuses in Xinjiang.
“Spreading rumors to boycott Xinjiang cotton while trying to make money in China? Wishful thinking!” the Communist Youth League posted on China’s Twitter-like Weibo, alongside photos of H&M’s statement. China is H&M’s fourth-largest market, accounting for roughly 5% of the brand’s total $22 billion in sales in 2020.
As the Youth League’s post went viral—liked over 400,000 times—e-commerce leaders Alibaba and JD.com removed H&M’s virtual storefronts from their websites; domestic mapping leader Baidu Maps removed the more than 500 H&M China store locations from its online maps; and Uber-like Didi Chuxing blocked customers from setting H&M stores as pick-up or drop-off locations.
Greg Gilligan, chairman of business lobby group the American Chamber of Commerce in China, said on a call with journalists in May that “companies are rightfully concerned” about the risk of boycotts in China.
The risk of Chinese boycotts is higher for Muji and Uniqlo than it is for most U.S. retailers. Muji’s East Asia unit—which covers South Korea, Taiwan, Hong Kong, and mainland China—generated 28.4% of company revenue last year. Revenue at Fast Retailing’s “Greater China” segment was 25.8% of its total for the first half of fiscal 2021.
Meanwhile, the companies that have spoken out about their response to alleged abuses in Xinjiang are notably less exposed to the Chinese market. Patagonia says China accounts for roughly 1% of its global sales revenue, while L Brands earned roughly 5% of sales in the Greater China region, which includes Taiwan, Hong Kong, Macau, and mainland China, according to the company’s latest annual report. Reformation declined to say how much it earned from sales in China, but noted it has no physical stores in the country. L.L.Bean, a privately held company, doesn’t report sales by region.
Looking for guidance—and not getting it
Silence on the Xinjiang matter has become an untenable option for most brands, as human rights organizations and governments—primarily led by the U.S.—continue to scrutinize Beijing’s treatment of Uyghurs in the region. In January, the day before leaving office, then–Secretary of State Mike Pompeo labeled Beijing’s persecution of ethnic minorities in Xinjiang “genocide,” referencing reports that Chinese authorities have forcibly sterilized Uyghur women—an allegation Beijing denies.
Although other governments have condemned China for committing human rights abuses in Xinjiang, none have joined the U.S. in labeling Beijing’s crimes in Xinjiang as genocide. But Pompeo’s successor, Antony Blinken, has maintained the designation. In March, the EU and Canada also joined the U.S. in applying sanctions against several Xinjiang officials and companies accused of perpetrating human rights abuses, including the XPCC, a paramilitary conglomerate that produces 40% of Xinjiang’s cotton output.
The sanctions have increased the risk for retailers that fail to keep a comprehensive view of their supply chains. Some U.S. companies reportedly lobbied against a bill, the Uyghur Forced Labor Prevention Act, which passed the House with bipartisan support last year and would presume products made “in whole or in part” in Xinjiang are guilty of exploiting forced labor. Lobby groups reportedly wanted Congress to ease the burden of proof and clearly define what constitutes sufficient auditing.
“When these issues come up…we then look to government to give us very specific expectations in the form of regulations or laws that say what behavior is acceptable and encouraged and what behavior is not,” Gilligan said when asked how AmCham China members were responding to the situation in Xinjiang.
In July, Hong Kong–based Esquel Group—one of the world’s largest shirt producers and a textbook example of a Tier 1 manufacturer—sued the U.S. government for essentially upholding a presumption of guilt, rather than a presumption of innocence, when it imposed sanctions on the shirtmaker in November last year.
The Trump administration included Esquel’s Xinjiang subsidiary on a blacklist of companies that the government says exploit Uyghur forced labor. In its lawsuit, Esquel argues that the U.S. has provided zero evidence to show Esquel employs forced labor and notes that third-party audits have found “no evidence of forced labor or coercion.”
The Senate did not vote on the Uyghur Forced Labor Prevention Act, which would presume companies operating in Xinjiang are guilty of exploiting forced labor, before adjourning last year; nor did it take up a similar bill introduced to the Senatearound the same time.
Sen. Marco Rubio (R-Fla.) introduced an amended version of the Senate bill in January this year, which passed with a unanimous vote of approval on July 14. The bill includes a new clause, absent from the 2020 version, requiring the government to provide “guidance” to importers on “the type, nature, and extent of evidence that demonstrates” goods weren’t made with forced labor.
But the outcry over human rights issues in Xinjiang has already spurred some brands to enhance their supply chain management, regardless of what the Senate guidance might be. For many retailers, the risk of not knowing where their cotton comes from has grown greater than the cost of finding out.
