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Cowen: Why Uyghur Forced Labor Act Poses ‘Large Risk to Retail’

Legislation that would prohibit the majority of imports from the Xinjiang Uyghur Autonomous Region because of suspected human-rights abuses could strain already taut U.S.-China tensions to their breaking point and pose a “large risk to retail” if enacted, analysts said Tuesday.

The U.S. House of Representatives is set to mark up its version of the Uyghur Forced Labor Prevention Act—which focuses on restricting imports from the region suspected of harboring forced labor in sectors including textiles—at 2 p.m. on Wednesday, Cowen & Co. analysts noted in a research brief. Another bill, called the Endless Frontier Act, introduced Wednesday by Senate Democratic Leader Chuck Schumer, Republican Senator Todd Young and others, calls for $100 billion in five-year investments aimed at closing the tech competitiveness gap with China.

Based on its coverage, Cowen says Farfetch, LVMH and Tapestry bear the greatest revenue risks given their exposure to and reliance on China’s 1.4-billion-strong consumer base, which has demonstrated an insatiable appetite for luxury goods. On the sourcing front, however, both Boot Barn and Revolve, stocks in luxury and retail analyst Oliver Chen’s coverage sphere, have much to lose amid escalating tensions, given that roughly 80 percent of China’s cotton production has links to Xinjiang and even companies that don’t directly source from the region could employ fabrics blended with its cotton, he added.

Roman Schweizer, managing director for Cowen’s Washington Research Group, with a focus on aerospace and defense, raised the issue of “increasing friction points with China, which should present risks to retailers and brands, given the paramount importance of China to both sourcing and demand,” Chen wrote in the report, citing a recent call with the D.C.-area expert.

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The “potential impetus for political aggression should be monitored,” Chen added, echoing Verisk Maplecroft’s project of a 58 percent likelihood of the United States and China clashing in a military confrontation in the next 12 months.

In recent weeks, many Western powers have aligned on their opposition to allegations of abuses against Uyghurs, Kazakhs and other Turkic Muslim minorities in the Xinjiang region in northwestern China, which several have branded as meeting the definition of “genocide.” Last month, the U.S., Canada, European Union and the U.K. announced sanctions on several Chinese officials, prompting retaliatory measures against numerous U.K., U.S. and Canadian actors from the world’s second-largest economy.

While China remains a critical market for luxury revenue growth, the actual risk to turnover might be difficult to determine should Covid-related restrictions ease, however. Beijing is also quick to retaliate against real or perceived offenses. (Witness last month’s dramatic uproar over H&M, Nike and other brands that expressed concerns over forced labor in Xinjiang.) More fashion businesses could find themselves in the challenging position of choosing between pandering to the Chinese market or addressing the social-justice concerns of its Western ones.

“We acknowledge if the current rhetoric is compounded by mounting tensions between the U.S. and China with a widespread boycott against Western brands, our luxury companies could suffer substantial topline declines,” Chen said. “However, we do note Chinese consumers highly covet Western luxury brands with limited alternatives from local brands. Further, boycotting luxury purchases could negatively affect the government’s initiative to increase at-home consumption as consumers could travel abroad to purchase luxury goods as Covid-related risks abate.”

Though the U.S. has backed off from rumors it was banding together with allies to boycott the 2022 Beijing Olympics, Cowen warned that any such rejection of a China-hosted games “will only worsen” the Sino-American relationship, noting that retailers and brands benefitting from the Olympic halo could experience “sales pressure at home and in China.”