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New U.S. laws require companies to prove that imported goods aren’t tied to forced labor in China. This is especially true for the Xinjiang region.
Uyghur Forced Labor Prevention Act provides an additional presumption in the U.S. Tariff Act states that goods sourced or manufactured in Xinjiang, home to many Uyghurs and other Muslim minorities, are made with forced labor. Companies will need to prove that the products they import are not sourced from forced labor in order to be allowed to export them.
Companies are discovering that there is no simple way to do this, as U.S. Customs and Border Protection officials and activist investor watch. Analysts say that companies could encounter roadblocks when attempting to due diligence for complex supply chains, such as those for food, fabric, or minerals.
The law not only provides a compliance boost for companies like Nike Inc. and Apple Inc. but also adds an additional layer of environmental, social, and governance (ESG), concerns to corporate boards. Companies that fail to adhere to the law are subject to greater shareholder pressure regarding supply chain issues.
The law will take effect in June and is "a remarkably high bar, or an impossibly low bar to meet," Cullen Hendrix, a professor from the University of Denver's Korbel School of International Studies.
Challenges Ahead
The law was signed Dec. 23 by President Biden. It is intendedto force China to end the US and other countries' repressions of its Uyghurs and other Muslim minorities. The allegations are denied by China's foreign ministry, which stated that the measure "will only compromise the stability of global supply and industrial chains."
Beginning June 21, companies will need to provide strong documentation to U.S. Customs and Border Protection to prove that their products do not contain Uyghur components. This region is home to some of the most prolific areas of cotton and polysilicon in the world, which are used in solar panels.
Companies are looking into everything, from genetic testing textiles to third party auditors to make sure products aren’t made from forced labor in their supply chain. These solutions aren't always the best.
Most companies don't have the ability to monitor their supply chains and gather reliable data. It's difficult even for large companies," Michael Littenberg, a Ropes and Gray partner, said. Littenberg specializes in supply chain compliance and human rights.
Representatives from the energy, apparel, and tech sectors, such as Apple, Nike, BP America Inc., lobbied Congress for the law. Trade groups such as the American Apparel and Footwear Association and Consumer Technology Association also participated in the lobbying effort.
Littenberg stated that these companies are working to determine if their current procedures meet compliance requirements. He said that they are not aware of the requirements for documentation or whether each link in their supply chains can be vetted.
Littenberg stated that it would require more detailed understanding of supply chains and where the inputs come from than what most companies have done historically.
Material Risks
Final version of the law removed the requirement that public companies disclose to the U.S. Securities and Exchange Commission all business dealings with companies involved in Xinjiang.
However, investors and consumers may be more demanding of ethical product sourcing, according to Rachel Alpert, cochair of Jenner & Block’s National Security, Sanctions and Export Controls Practice. She stated that the law will likely increase the amount of information companies can disclose to investors as "material" risk.
She said that companies face additional risks such as shipments being held at border, supply-chains vetting deficiencies, or negative media reports about Xinjiang labor problems.
Alpert stated that this provides shareholders and government agencies with a stronger hook to examine companies for ESG issues.
Patricia Jurewicz is the founder and chief executive officer at Responsible Sourcing Network. She said that the new law increases the risk of companies not being allowed to sell goods. Her group works together with investors, human rights activists and companies to develop due diligence standards.
She stated that companies don't want their employees to pretend they are doing nothing.
However, taking action comes with its own risks. After asking its suppliers to stop using labor and products sourced from Xinjiang, Intel Corp. was met with backlash by Chinese officials as well as social media users.
Santa Clara, Calif.-based company issued an apology later for "causing trouble with our esteemed Chinese clients," saying that its efforts were meant to "ensure compliance with U.S. legal obligations."
Compliance Roadmap
In the last two years, the U.S. Customs and Border Protection issued a series orders prohibiting Xinjiang products from entering the U.S. including tomatoes, cotton, and silica-based products.
Uniqlo, a Japanese clothing retailer, was unable to fulfill one of the orders after Customs refused release a shipment it couldn't prove was made with forced labor. More information on Jingwang labor lawer
Alpert stated that such orders are "among the best information we can have about the level Customs has historically placed upon Xinjiang shipments."
CBP's Forced Labor Enforcement Task Force will provide more clarity through its forthcoming guidance. The task force issued a request to comment Jan. 24, on how to implement this law, and best practices for identifying Xinjiang-linked goods. source
Jurewicz stated that DNA analysis of Xinjiang-specific fibers can be performed if it is used at the right stage in the supply chain. However, it is less efficient if raw cotton from different regions is mixed together.
Hendrix from the University of Denver said that third-party audits could also be a possibility. However, Chinese authorities are known to harass and shut down operations. source
He stated that a credible third-party audit was going to be virtually impossible in Xinjiang.
Stephen Lamar, chief executive officer and president of the American Apparel and Footwear Association, stated that despite its difficulties, the law should streamline the process of getting goods through Customs. He said that much of the success depends on clear guidelines from U.S. authorities.
