U.S. trade policy and forced labor concerns: Identifying risks to your supply chain
The treatment of forced labor concerns in U.S. trade policy has been of long-standing congressional and executive branch interest. As described below, U.S. administrations have recently focused much of their attention on imports from the Xinjiang region in China, using a range of authorities to identify and/or block imports (and some exports) involving that region. Companies importing products from this region (as well as companies importing from other “high risk” products/regions as described in this alert) should be aware of and seek to mitigate risks as discussed below.
Recent U.S. regulatory and administrative actions
Sec. 307 and customs “Withhold Release Orders” (WRO)
Under Sec. 307 of the Tariff Act of 1930, upon receiving a report that items are being, or are likely to be, imported, U.S. Customs and Border Protection (CBP) may initiate an investigation. If CBP finds that such imports may be the product of forced labor, they may issue a WRO, which allows for blocking entry of such goods, or seizing such goods to the extent they have already entered. WROs typically have targeted specific goods from specific producers.
China has been the focus of the majority of Sec. 307 actions since 2016. Of currently active or partially active WROs, 20 involve China or Chinese-based entities. Most recently, CBP issued:
- A region-wide WRO on imports of cotton or tomato products from Xinjiang in January 2021; and
- A WRO against silica-based products made by Hoshine Silicon Industry Co., Ltd in June 2021.
Actions to evade a Sec. 307 WRO can result in enforcement actions and substantial monetary penalties, in addition to the risk of blocking or seizure of goods as previously noted.
The U.S. Senate recently passed legislation – the Uyghur Forced Labor Prevention Act - that could substantially restrict import of all goods mined, produced or manufactured wholly or in part in the Xinjiang region and/or produced by any party identified in a list required to be published in accordance with the legislation (identifying parties engaged in production of goods benefitting from forced labor). It is currently unclear if this legislation will be taken up by the U.S. House of Representatives and signed by the Biden administration before the Congressional recess in August, and the industry may still have additional opportunities (or “an opportunity”) to comment on its impact.
U.S. Department of Labor (DOL) listings of countries/products of concern
The DOL maintains a list of goods produced with forced labor and countries where such goods are produced. Although this list does not automatically result in a Sec. 307 WRO, import ban or other prohibition, if goods are listed, there is a presumption that enhanced due diligence for product/country combinations is required for importers to verify that imported goods do not contain items that are produced from forced labor. Failure to conduct such due diligence could impact penalties imposed in a Sec. 307 enforcement action.
U.S. Department of Commerce, Bureau of Industry and Security (BIS) export restrictions
In June 2021, the BIS added Hoshine, Xinjiang Daqo New Energy, Xinjiang East Hope Nonferrous Metals, Xinjiang GCL New Energy Material Technology and XPCC (which was previously subject to sanctions designation) to the U.S. Entities List. These designations prohibit export of items “subject to the EAR” (U.S.-origin items, as defined by the Export Administration Regulations).
General System of Preferences (GSP) reviews
An additional tool of U.S. trade policy focused on forced labor has been its impact on granting of trade preferences, including lowered customs duties, through the GSP program. In 2019, the U.S. revoked GSP preferences for a large number of products imported from Thailand as a result of Thailand’s failure to meet standards regarding worker rights, including prohibiting and enforcing forced labor restrictions. The U.S. Trade Representative (USTR) monitors and conducts periodic reviews of various countries’ GSP status and it is expected that such reviews will continue to increase their focus on forced labor issues. Additional U.S. legislation that would tie GSP status to the previously noted DOL findings is also pending.
Identifying and managing forced labor risks to your supply chain
Risk-based analysis of current supply chain
As described above, there is a substantial focus by U.S. regulators on suppliers based in China with respect to forced labor. That said, importers should not focus solely on specific imports from China. Instead, a broad risk-based approach should be used to analyze potential risks to a company’s supply chain. The DOL list is a good place to start in terms of identifying country/product combinations that are subject to heightened risk.
Due diligence and working with your supply chain partners
In addition to the risk-based analysis noted above, an initial review should be conducted regarding your first tier suppliers (and customers) to verify that no Sec. 307 WRO or similar orders, sanctions designations or other specific restrictions are applicable.
As noted above, additional due diligence should be applied on a risk basis, based on the type of imports/locations involved. Some considerations in conducting due diligence include:
- Identifying and using standardized due diligence processes (preferably occurring before contract signing or purchasing) and incorporating those processes into your regular business operations.
- Referring to standards and tools published by the U.S. Government, including CBP, DOL, and a comprehensive intra-agency guide regarding human rights risks in conducting business in Xinjiang issued by the U.S. Department of State.
- Standardizing documentation and communications with suppliers, including requests for information regarding their sourcing partners.
- Use of third party provider databases or information should be considered, particularly for downstream suppliers in industries/locations of concern.
- Companies should have an established mechanism to respond to WROs impacting their supply chain, including the ability to identify, halt and report non-compliant shipments.
The U.S., as well as other countries, international organizations and NGOs, are likely to continue to focus on forced labor issues in supply chains. The trend of increased enforcement (through WROs and sanctions designations) and legislative efforts is also likely to continue. With these trends in mind, it will be imperative for companies with an international supply chain to stay up to date on changes to the regulatory landscape both within and outside of the U.S. and to implement effective supply chain risk management processes to adapt to and comply with such changes.