On September 24, the Bureau of Industry, Security, Import and Export Control (BISIEC) of the Ministry of Commerce (MOFCOM) announced a formal investigation under China’s Unreliable Entity List (UEL) regime into PVH Group, a U.S. fashion retailer and owner of the Calvin Klein and Tommy Hilfiger brands, for its alleged refusal to source cotton from the Xinjiang region.1
The announcement stated that in order to safeguard national sovereignty, security, and development interests, and in accordance with the Foreign Trade Law, the National Security Law, and the Anti-Foreign Sanctions Law, MOFCOM has decided to launch an investigation into PVH. This decision follows recommendations and reports from relevant agencies and concerns allegations that PVH violated normal market transaction principles by disrupting transactions with Chinese enterprises, organizations, or individuals and implementing discriminatory measures related to Xinjiang products. This constitutes a substantial escalation of the use of the UEL compared to earlier, less formal actions against companies like H&M in the same industry as PVH which caused substantial reputational and commercial damage to the China business of such companies. It may be regarded as an instance of China’s increasing use of legal instruments to achieve foreign policy goals in a form of lawfare.
PVH is required to provide a written explanation and evidence regarding any discriminatory measures taken against Xinjiang-related products in the past three years within 30 days of the September 24 announcement, along with any other materials requested by the investigating authorities. During the investigation, PVH retains the right to present statements and defenses to the UEL Working Mechanism Office.
MOFCOM stated that it will conduct the investigation pursuant to law by questioning relevant parties, reviewing or copying pertinent documents and materials, and taking other necessary actions. PVH and related enterprises are expected to cooperate fully with the investigation.
Additionally, any organization or individual may report to the UEL Working Mechanism Office instances of PVH violating normal market transaction principles, disrupting normal transactions with Chinese entities, or taking discriminatory actions related to Xinjiang products by providing supporting evidence.
China first indicated its intention to establish the UEL regime in May 2019 as a countermeasure to U.S. export control enforcement actions against Chinese companies, later formalizing the Provisions on the Unreliable Entities List (UEL Provisions) in September 2020.2
The UEL regime applies to foreign enterprises, organizations, and individuals that threaten China’s national sovereignty, security, or development interests; or that suspend normal transactions with or discriminate against Chinese entities, thereby causing serious harm to their legitimate rights and interests.
Under the UEL Provisions, the Working Mechanism has the authority to initiate investigations ex officio or in response to suggestions or complaints from stakeholders, including Chinese companies negatively affected by foreign government restrictions. If the Working Mechanism decides to proceed with an investigation, it will issue a formal announcement. Upon concluding the investigation, the Working Mechanism will determine whether to include the relevant foreign entities on the UEL, considering such factors as the degree of harm to China’s national sovereignty, security, and development interests; the extent of damage to the legitimate rights and interests of Chinese enterprises, organizations, or individuals; and compliance with internationally accepted economic and trade rules, among other considerations.
The Working Mechanism may employ various investigative measures, including questioning involved parties, reviewing or copying relevant documents and materials, and other necessary methods. Foreign entities under investigation are allowed to present statements or defenses.
The Working Mechanism may suspend or terminate the investigation based on the actual circumstances; if, however, there is a significant change in the facts that justified the suspension, the investigation may be resumed.
If the Working Mechanism decides to include a foreign party on the UEL, a formal announcement will be made.
Foreign parties placed on the UEL may face one or more of the following restrictive measures: (a) restrictions or prohibitions on engaging in China-related import or export activities; (b) restrictions or prohibitions on investing in China; (c) restrictions or prohibitions on relevant personnel or transportation from entering China; (d) revocation of work permits, residence status, or stay permits for relevant personnel; (e) fines based on the severity of the harm caused; and/or (f) other necessary measures as determined by the government. These measures may grant the Chinese government increased latitude to impose additional restrictions and sanctions on listed entities, including asset freezes, physical detention in China, or even extraterritorial enforcement actions.
The MOFCOM announcement regarding PVH is notable for several reasons:
First, it marks the first instance in which MOFCOM has utilized the UEL to take enforcement action against a foreign company for ceasing to procure products from Xinjiang. Since the UEL regime was adopted, five American companies have been placed on the list, all of which have been defense equipment manufacturers supplying equipment to Taiwan, and typically the relevant subsidiaries rather than their parent companies.3 The investigation into PVH indicates that MOFCOM is expanding the application of the UEL beyond sovereignty-related issues, such as arms sales, to other politically sensitive issues like compliance with foreign sanctions, in this instance involving human rights allegations in Xinjiang.
Second, this marks the first time MOFCOM has formally initiated an investigation against a foreign company prior to making a decision under the UEL, rather than simply adding companies to the list without an investigation. The five U.S. defense companies previously sanctioned were placed on the UEL directly without a formal public investigation process. The initiation of a formal investigation in PVH’s case indicates that MOFCOM is placing a greater emphasis on due process under the UEL, inviting the scrutinized company to present evidence and explanations before a final decision is rendered in order to legitimize the proceedings.
Third, this investigation raises significant concerns within the foreign business community in China. Although China has introduced the Anti-Sanctions Law, blocking statute, and UEL regime in recent years, its enforcement actions have primarily targeted foreign individuals and organizations involved in active facilitation of sanctions against China or activities deemed harmful to national sovereignty, such as arms sales to Taiwan.
China in the past has generally acted cautiously before taking enforcement action against foreign businesses compelled to comply with their home countries’ laws, including economic sanctions and export controls. The investigation of PVH represents the first instance in which a foreign company ceased procurement from Chinese suppliers due to compliance with its home country’s laws. This expanded application of the UEL raises the risk that foreign companies which suspend or terminate business relationships with their Chinese business counterparts to comply with foreign sanctions, investment reviews, or export control regulations, even in the absence of a contract, may face investigations or sanctions under the UEL in the future.
