On December 23, 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act (the “UFLPA”), which passed Congress with strong bipartisan support. With the UFLPA, the US has targeted imports of goods sourced from or produced in the Xinjiang region of China in an effort to address allegations of forced labor. Until now, similar orders had focused only on certain products – computer parts, cotton and cotton products, silica-based products, apparel, and hair products – from Xinjiang or from certain Xinjiang producers. The new measures will affect a wide range of industries and supply chains around the world. Companies are obliged to apply heightened diligence and transparency requirements in Chinese-based supply chains, and anticipate extended shipment delays for US imports and possible shifts in global apparel, food, solar, electronics, and automotive sectors, among others.

Background

The UFLPA was a bipartisan effort following on the heels of congressional action dating to 2019 in reaction to alleged human rights abuses against ethnic minorities in Xinjiang. It was enacted as part of a whole-of-government effort to combat alleged forced labor abuses in Xinjiang:

-US Customs and Border Patrol (“CBP”) has issued Withhold Release Orders (“WROs”) applying to cotton, tomato, apparel, hair products, silica-based products, and computer parts from Xinjiang.

-The Bureau of Industry and Security (“BIS”) of the Department of Commerce added more than 50 Chinese entities on the Entity List.

-The Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury designated more than a dozen persons on the Specially Designated Nationals and Blocked Persons List (“SDN List”) under the Global Magnitsky Human Rights Accountability Act.

-The US Department of State imposed visa restrictions against China Communist Party officials “believed to be responsible for, or complicit in, the unjust detention or abuse of Uyghurs, ethnic Kazakhs, and members of other minority groups in Xinjiang” as well as their family members.[1]

The UFLPA calls for a ban on the import of “all goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of China, or by persons working with the Xinjiang Uyghur Autonomous Region government for purposes of the ‘poverty alleviation’ program or the ‘pairing-assistance’ program.” These programs, per the UFLPA, subsidize the establishment and operation of manufacturing facilities in the Xinjiang Region.

In fact, CBP’s authority to withhold release of imports suspected of involving forced labor already has existed for almost 100 years under Section 307 of the Tariff Act of 1930, which prohibits importing into the US any product that was “mined, produced, or manufactured wholly or in part by forced labor, including forced or indentured child labor.” CBP enforces the prohibition through the issuance of WROs.

CBP first began issuing WROs relating to Xinjiang in 2016. Most recently, in 2020 and 2021, CBP issued a series of WROs. Some apply to listed companies and their subsidiaries while others apply to the entire Xinjiang region:

In one of its first major actions under the Biden Administration, on June 24, 2021, CBP issued a WRO instructing ports of entry to detain shipments containing “silica-based materials” that are “derived from or produced using” products manufactured by Hoshine Silicon Industry Co. (“Hoshine”). Hoshine is one of the largest global producers of metallurgical-grade silicon, the raw material needed to produce solar-grade polysilicon that is used to create solar cells. In addition, BIS added Hoshine and four other Chinese companies to the “Entity List,” banning exports, re-exports, or transfers of US goods and technology to the listed entities. When the new order under the UFLPA goes into effect, the 2021 restrictions will be viewed merely as a preview to a much more pervasive region-wide and not sector-specific import ban that will reverberate through a wider variety of supply chains.

The US government has identified the following industries as involving heightened risk due to potential forced labor in Xinjiang:

Where there is suspicion that the goods contain materials originating in Xinjiang, these industries’ products will likely be held at customs as banned from imports into the US on suspicion of being sourced with forced labor.

What does the Uyghur Forced Labor Prevention Act do?

Pursuant to the UFLPA, 180 days after enactment of the Act, on June 21, 2022, CBP will apply a “rebuttable presumption” that applies to any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Region or produced by the entities listed by the Task Force. This “rebuttable presumption” will apply except when the CBP determines that the importer has:

(a) fully complied with the guidance described in the China forced labor strategy and any regulations issued to implement that guidance;

(b) completely and substantively responded to all inquiries for information submitted by the CBP to ascertain whether the goods were mined, produced, or manufactured wholly or in part with forced labor; and

(c) shown, by clear and convincing evidence, that the good, ware, article, or merchandise was not mined, produced, or manufactured wholly or in part by forced labor.

CBP advises that the importer may be required to submit time cards, wage payment receipts, and daily process reports that demonstrate the employment status of the employees in order to meet the burden of proving the lack of forced labor. In fact, textile companies whose cargoes got held up at US ports pursuant to Section 307 have needed to prove such evidence to CBP to get the goods released.

Finally, the UFLPA calls for increased enforcement of WROs. Within 30 days of making its determination, CBP will submit a public report to congressional committees identifying the good and evidence it has considered. The UFLPA provides for the Forced Labor Enforcement Task Force (the “Task Force”), in consultation with the Secretary of Commerce and Director of National Intelligence, to develop a strategy for supporting enforcement of CBP WROs.

What does this mean for companies?

The UFLPA is distinguished from a CBP WRO, which subjects to detention at US ports of entry products produced by listed entities or, in many cases, any products derived from or incorporating such products because the UFLPA’s rebuttable presumption will subject any and all goods sourced from or produced in XUAR to the import ban. The release process under the UFLPA will be what it has been for WROs.

To release the goods from detention, the importer must either re-export them from the US or provide evidence demonstrating that the goods were not manufactured with forced labor. In practice, goods subject to a CBP WRO are banned from entering the US until and unless the importer can convince CBP that it should not be withheld.

For example, in January 2021, CBP stopped a UNIQLO shipment of men’s cotton shirts that had arrived at the Port of Los Angeles / Long Beach pursuant to the XPCC cotton WRO. UNIQLO was required to provide various detailed records of the production chain (including timecards, salary records, and transportation records) from the raw cotton grower to the bulk trader to the yarn maker to the finished product. While UNIQLO argued that the shirts were not produced by XPCC, the burden is on the importer to prove the negative; even if UNIQLO eventually succeeds in convincing CBP, the shipment will have been delayed for months. Thus, the new WRO will also trigger shifting of supply chains by companies that do not want to take that risk.

In addition to customs consequences, a variety of measures may be applied to Xinjiang-affiliated entities. For example, an Entity List designation prohibits exports and reexports of all US goods, software and technology to those entities absent a license from BIS. Even more, those listed on the SDN List are prohibited from dealing, directly or indirectly, with US persons and are likely blocked from the global financial system altogether.

1. Shifting of Supply chains

When the rebuttable presumption under the UFLPA becomes effective on June 21, 2022, all goods sourced from or produced in XUAR – including any goods incorporating or derived from such goods in any amount – will essentially be banned from entering the US pending a favorable determination by Customs.  In other words, there is no de minimis requirement for the import ban. Therefore, companies should expect and plan for global supply chain pricing and sourcing issues.

For instance, as 40-45 percent of the world’s solar-grade polysilicon comes from Xinjiang, the US solar projects industry will start to suffer even greater supply chain headaches. Currently, the WRO only applies to silica-based materials if the silicon was produced by Hoshine. Under the rebuttable presumption, it will extend to any products containing either silicon or polysilicon produced in China. This is expected to impact the supply and pricing of polysilicon worldwide. China produces more than 65% of the world’s silicon and around 89% of the world’s polysilicon. Most of the polysilicon production is believed to be outside of Xinjiang. Since Xinjiang is not a transparent place at present, it is hard to say exactly how much. US importers will likely encounter third-country suppliers who are reluctant to dig as deeply as the UFLPA demands.

In order to avoid import delays, component and product manufacturers in third countries (for example, Germany and South Korea) will seek to shift their supply chains to products that are not sourced from or produced in XUAR, if possible. Those efforts are beginning now in anticipation of the June effective date.

2. Heightened Supply Chain Transparency and Recordkeeping Obligations in Affected Sectors

Companies – especially those in industries listed above as identified by the US government to be higher risk – need to establish heightened supply chain transparency obligations. Supply chain transparency will help companies in the uphill battle of meeting the burden to prove the absence of forced labor. Up to now, transparency in Chinese in-country supply chain has been lacking, which makes it difficult to forecast the future impacts of the UFLPA. Without such transparency, it will be nearly impossible for companies to convince the CBP, “by clear and convincing evidence, that the good, ware, article, or merchandise was not mined, produced, or manufactured wholly or in part by forced labor.”

Transparency and recordkeeping will go hand-in-hand, and both will be necessary to navigate the UFLPA waters. In addition to requiring transparency on all levels of the supply chain, companies also need to keep records of the entire supply chain to be able to quickly and easily provide such records to CBP as evidence of lack of forced labor, if and when necessary.

3. Reputational and Banking risks

Aside from US sanctions enforcement risks, reliance on Xinjiang suppliers in any aspect of a supply chain presents significant dual-sided reputational risks. For example, due to reputational concerns, major brands, such as Calvin Klein, Gap, H&M, IKEA, Patagonia, and Tommy Hilfiger, stopped purchasing or committed to stop purchasing cotton sourced from Xinjiang.

There is also reportedly backlash from Chinese authorities and consumers. Brands that issued statements against sourcing cotton from Xinjiang, such as Burberry, thereafter faced a public backlash from Chinese consumers. Intel issued an apology to its Chinese customers after facing backlash for telling its suppliers that it would not be using forced labor or goods sourced from XUAR.

Banks in particular are highly attuned to OFAC primary and secondary sanctions-enforcement risks, as well as the above-mentioned reputational risks. In view of the 9- and 10-figure sanctions-related settlements, even non-US financial institutions are generally conservative in their sanctions compliance and risk appetite. Sanctions pose an existential risk to some banks that rely on access to US correspondent banking accounts in order to deal in US dollars. Thus, aside from the CBP order, banks and companies continuing to engage in transactions directly or indirectly with sanctioned Chinese producers risk having their transactions rejected or blocked by the US and global financial systems.

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Vedia Biton Eidelman is an associate in Eversheds Sutherland’s International Trade Practice. She advises clients on a wide range of regulatory matters, including sanctions (OFAC) and antiboycott matters; antidumping, countervailing duty and safeguard actions before the US International Trade Commission (ITC) and the US Department of Commerce (DOC); export controls (ITAR and EAR); national security controls on investment in US entities (CFIUS); trade policy issues such as free trade agreement negotiations; customs matters; and transactional due diligence.

[1]  M. Pompeo, “The United States Imposes Sanctions and Visa Restrictions in Response to the Ongoing Human Rights Violations and Abuses in Xinjiang,” (July 9, 2020), https://2017-2021.state.gov/the-united-states-imposes-sanctions-and-visa-restrictions-in-response-to-the-ongoing-human-rights-violations-and-abuses-in-xinjiang/index.html.