The Chinese variant of the XS will take two physical SIMs.
Which makes the reason suspect.
An eSIM a thin end of a wedge. Apple want control of your operator access eventually.
You can fit an SD card and a physical SIM in a watch. It's just a lie that Apple don't have space for microSD card, 3.5mm jack and two real SIMs. It's about control and partly (like the notch) about differentiation. Not about cost or space.