China Forced Labor Law Prompts Sweeping Supply Chain Reviews

A new US law that aims to weed out Chinese goods made with forced labor is catching some companies by surprise, triggering a swath of industries to untangle the roots of their hazy supply chains.

The Uyghur Forced Labor Prevention Act assumes that any product made with goods even partially sourced from the Xinjiang region of China has been made with forced labor, and therefore can’t be imported into the US unless a company can prove otherwise.

The documentation requirements have long been on the radar of companies like Apple Inc., Nike Inc., and BP America Inc., which lobbied Congress before the law was enacted last year. And while the US government has eyed tomatoes, cotton, and polysilicon as the top forced labor risks for years, other companies from such sectors as tech, life sciences, and mining industries are now grappling with compliance.

The law, which took effect in June, “almost snuck up on some people” that were “perhaps not appreciating” its breadth, said Jon Drimmer, a partner at Paul Hastings.

Even big box retailers and commercial airlines are seeking advice on the UFLPA, according to Miller Chevalier partner Richard Mojica, who said he’s heard from a range of industries seeking to ensure that their upstream suppliers are complying with the law.

The Biden administration demonstrated this broad purview earlier this month when a cross-agency advisory on business in Xinjiang listed a “non-exhaustive” inventory of industries, including cell phones, cleaning supplies, hospitality services, and toys, that have been identified as using forced labor in the region.

US Customs is also putting firms on notice with “Known Importer Letters”—warnings that say a business has previously imported merchandise from locations or entities that are potentially subject to the law. The agency, in addition, released a list of Chinese entities in Xinjiang that US companies must avoid because of forced labor concerns.

“A lot of companies maybe didn’t recognize how much this was going to affect their business when [the law] first came out,” said Sean Koehler, counsel at Wiggin and Dana.

One Customs letter, for instance, went out to an electrical equipment company that sources items classified as EAR99—low-technology consumer goods that typically don’t require a license, he said.

The Known Importer Letters “woke up” some businesses, Koehler said, especially those that didn’t previously think they were importing products linked to forced labor. “It really concerned them.”

Supply Chain Layers

The UFLPA aims to put pressure on the Chinese government for allegedly detaining minorities in Xinjiang, the autonomous region in northwestern China that is home to some 12 million Uyghurs. Reports show that Uyghurs and other Muslim citizens are held in prison camps in Xinjiang and forced to harvest cotton, for example. China has repeatedly denied that it is committing such human rights abuses.

A draft Known Importer Letter on the US Customs website says “it is incumbent upon” businesses to apply due diligence and effective supply chain tracing and management to ensure that their imports aren’t linked in any way to forced labor in China.

Many companies, under that advisory, will have to collect far more detail about what goods make up their products—akin to the ingredients list “on a cereal box,” said Ken Rivlin at Allen & Overy.

Businesses are finding it difficult to peel back the layers of their supply chains to ensure that they’re mapping out the full scope of production, attorneys say.

To refute claims that goods are linked to forced labor, they may have to produce evidence on who did the work, what they were paid, how they were hired, and what the labor conditions are, according to US Customs guidance released last month.

Some lawyers said securing such granular information on hiring contracts and time cards may prove virtually impossible.

A supply chain, never simple, can be “like a family tree, except that you can have exponentially more members of the family,” said John Foote, a partner at Kelley Drye & Warren.

There are also emerging concerns about the government’s ability to enforce the law given the increased resources required.

President Biden’s budget request for fiscal year 2023 sought over $70 million for UFLPA enforcement. A June Homeland Security report said US Customs needs another 300 positions to “effectively implement” the law, including officers, import specialists, scientists, technical experts, paralegals, and support staff.

That kind of funding is unprecedented for the enforcement of a single law, said Foote.

Even so, enforcement so far has been aggressive, lawyers said. In one case, US Customs detained products from a major unnamed solar company in June and sought information about the source of its quartzite, a raw material far back in its supply chain.

Investor Pressure

Shareholders are also putting companies to the test on human rights and labor conditions as part of their environmental, social and governance (ESG) goals, a trend that could translate into shareholders asking companies to specifically confirm that they have no links to Uyghur forced labor.

“Businesses simply have no excuse for dragging their feet,” said Louisa Greve, director of global advocacy at the Uyghur Human Rights Project. Many, she said, would have cut such ties long ago if they were serious about a zero-tolerance policy for forced labor.

“Companies have had years to recognize the extremely high ESG risk of doing business with Xinjiang entities,” she said.

The Walt Disney Co., criticized in 2020 for filming “Mulan” in the Xinjiang province, faced a shareholder proposal in March by the National Legal and Policy Center seeking an annual report on the company’s plans to determine the human rights impacts of working with countries including China. The vote was ultimately unsuccessful but more efforts are expected.

Nike faces an investor proxy proposal filed in July asking it to adopt a policy to stop sourcing cotton and other materials from China. A similar proposal in August 2021 secured only 27% of the vote.

Volkswagen, too, is facing criticism over its presence in Xinjiang. Shareholders and the German government have reportedly pressed the carmaker about its operations in China, with company’s CEO saying in April that he’s sure its Xinjiang car factory is not using forced labor.

China Crackdown

The UFLPA is geopolitically complex, considering that China is a top US national security concern and a global manufacturing hub.

Some companies have already had to manage backlash in China. Walmart Inc. found itself in hot water when Chinese consumers accused its retailer Sam’s Club in December of pulling Xinjiang-produced products from its app. US chipmaker Intel Corp. apologized after its opposition to Xinjiang labor sparked fallout in China late last year.

The White House, in highlighting its latest actions to counter forced labor in Xinjiang in June, acknowledged that clean energy supply chains and others sectors face challenges.

China dominates the market for polysilicon, a staple of the solar industry which has seen price surges in recent months because of demand. Electric vehicle makers such as BMW AG and Tesla Inc. also have links to Chinese lithium suppliers for car batteries.

Adam Smith, a partner at Gibson Dunn who previously worked on the National Security Council in the Obama administration, said it will be very difficult—and unrealistic—for some companies to dislodge themselves from China.

Regardless, US firms need to be mindful of risks from Chinese-linked manufacturers, even those deep in their supply chain, said Foote.

Documentation that supplies aren’t tied to forced labor in Xinjiang is “now effectively a requirement or condition of market access,” Foote said. “If you cannot obtain that information for your supply chain, you have a problem that is due for a reckoning.”