U.S. Blocks Imports from China Due to Suspected Forced Labor, Continuing its Aggressive Enforcement Actions and Leading to Potential Supply Chain Disruptions

U.S. Blocks Imports from China Due to Suspected Forced Labor, Continuing its Aggressive Enforcement Actions and Leading to Potential Supply Chain Disruptions

September 17, 2020, Covington Alert

On September 14, 2020, U.S. Customs and Border Protection (CBP) announced five Withhold Release Orders (WROs) against products from certain factories and companies doing business primarily in the Xinjiang Uyghur Autonomous Region (XUAR) of China based on allegations of forced labor. CBP and other U.S. government departments and agencies have repeatedly stated that the Chinese government is engaged in systemic human rights abuses against the Uyghur people and other ethnic and religious minorities in XUAR, and elsewhere in China. The five WROs are fairly narrowly tailored and apply to certain products from individual companies and factories, though their impact may still be significant. There is also the potential for additional WROs in the relative short term regarding human rights abuses and forced labor in XUAR and elsewhere in China, including the prospect of a broader and more generalized WRO that could cause greater disruption to supply chains, particularly regarding cotton and tomato products.

The Scope of the Five New WROs. The recently announced WROs prohibit the importation of goods from the following training center, factories and companies:

• All products made from the Lop County No. 4 Vocational Skills Education and Training Center in XUAR. 

• Hair products made in the Lop County Hair Product Industrial Park in XUAR. 

• Apparel produced by Yili Zhuowan Garment Manufacturing Co., Ltd. and Baoding LYSZD Trade and Business Co., Ltd in XUAR. 

• Cotton produced and processed by Xinjiang Junggar Cotton and Linen Co., Ltd. in XUAR. 

• Computer parts made by Hefei Bitland Information Technology Co., Ltd. in Anhui, China.

Three of the five WROs are focused on specific companies and two of the WROs are directed to all products made with labor from the “Vocational Skills Education and Training Center” and the Lop County Hair Product Industrial Park in XUAR. While XUAR is the focus, the WRO on computer parts made by Hefei Bitland Information Technology Co. relates to Anhui province, near Shanghai. It is unclear whether this WRO is due to Hefei Bitland exporting products from XUAR or engaging in work sharing programs with ethnic minorities from XUAR, or whether it is unrelated to that region entirely.

These WROs are significant because most of them are focused on factories, training facilities, or companies that are associated with production in XUAR. The WROs cite information reasonably indicating that products were made using prison and forced labor, or by ethnic groups forced to work in “re-education” internment camps. Other forced labor indicators also cited by CBP include highly coercive/unfree recruitment, the restriction of movement, isolation, intimidation and threats, withholding of wages, and abusive working and living conditions. Even if multinational companies do not source directly from these facilities, any company with a supply chain that includes component parts or materials with a nexus to XUAR should be particularly rigorous in assessing its supply chains and taking appropriate steps to mitigate issues identified.

How Businesses Should Respond. In response to these new WROs and the potential for a broader or regional WRO that could be applicable to more products sourced from XUAR, companies should conduct due diligence of their supply chains to the greatest extent possible for any evidence of the use of forced labor in China, particularly those with a nexus to XUAR. Due diligence programs should draw on recognized international standards, such as the United Nations Guiding Principles on Business and Human Rights, and be tailored to the particular risks presented by XUAR and China more broadly. Components of an effective due diligence program generally include:

• Developing and implementing supplier policies, such as codes of conduct, that set forth requirements and expectations (either contractual or otherwise) related to forced labor risk in supplier operations;

• Conducting comprehensive supply chain mapping to develop a better understanding of supply chains and whether products are sourced in XUAR or other regions of China that may themselves source from XUAR;

• Performing risk assessments and screening of new suppliers to determine whether there is any nexus with problematic jurisdictions and to develop a better understanding of the labor policies and practices of the supplier and its business partners;

• Implementing an audit program for existing suppliers based on their risk profile to monitor potential forced labor risks, and utilizing best practices such as announced and unannounced audits, adequate language and cultural interpretation tools, and opportunities for independent verification of facilities, documents, and worker accounts;

• Utilizing other due diligence tools, such as traceability systems that can map geographic product origin, and credible third party databases that provide information on specialized risk indicators tailored to a particular region, industry, or supplier; and

• Applying incident remediation procedures to respond effectively to “red flags” or confirmed incidents involving violations of labor rights, in turn reducing the risks associated with forced labor in XUAR and related regions.

Heightened U.S. Government Scrutiny on Forced Labor in China. CBP has significantly ramped up enforcement of the forced labor prohibitions contained in Section 307 of the Tariff Act of 1930, as its Office of International Trade, spurred by intensified Congressional oversight and public reporting, has adopted an aggressive approach to forced labor issues. As referenced in previous Business and Human Rights alerts, issuance of WROs by CBP has increased dramatically since the 2016 repeal of the “consumptive demand” exemption under the Trade Facilitation and Enforcement Act of 2015. Fewer than 40 WROs were issued between 1953 and 2015, but in 2019, CBP issued seven WROs, and 12 WROs have now been issued thus far in 2020, with eight of them related to products made in China, many of which involve a direct nexus with XUAR. These five new WROs reflect the increasing seriousness of the U.S. government in holding companies to account for alleged human rights abuses in their supply chains, particularly regarding forced labor of ethnic minorities in XUAR and elsewhere in China.

CBP has broad discretion and authority in initiating investigations and issuing WROs. Any person or entity who believes goods are being produced with forced labor may petition the agency to investigate, and CBP may also begin an investigation based on information it learns from any source, including through the media or a civil society group. A WRO may be issued where CBP finds that information available “reasonably but not conclusively” indicates use of forced labor. There is no obligation for CBP to provide evidence at any stage during this process.

One area also notable for the uptick in enforcement activity is Executive Branch sanctions against individuals and entities suspected of being involved in human rights abuses in China. The Treasury Department’s Office of Foreign Assets Control (OFAC) has imposed asset freezes and visa bans against several government-affiliated individuals and private companies under the Global Magnitsky Act and related Presidential Executive Order 13818 due to their involvement in serious human rights abuses occurring in XUAR. Similarly, over the past year, the Commerce Department’s Bureau of Industry and Security (BIS) has placed nearly 50 Chinese entities, including both governmental bodies and private companies, on the U.S. Entity List due to their involvement with various human rights abuses related to XUAR, including mass arbitrary detention, forced labor, involuntary collection of biometric data, and genetic analysis targeting ethnic minority populations. A comprehensive U.S. inter-agency Business Advisory published this summer jointly by the Departments of State, Treasury, Commerce, and Homeland Security regarding XUAR-related risks was partially in response to allegations of human rights abuses from civil society, non-governmental organizations, and think tanks.

The U.S. Congress has also heightened its bipartisan scrutiny of the treatment of Uyghurs and other ethnic minorities in XUAR. In addition to the Uyghur Human Rights Policy Act of 2020, which President Trump signed into law in June, pressure from Congress for further action is intensifying. Typically, it would be unusual for two separate bills addressing the same subject matter to be enacted by Congress in a single term. However, given the increased focus on Uyghur human rights issues, and the broad bipartisan support, it is possible that additional legislation may pass Congress before the end of 2020. Several pieces of legislation are currently pending. The Uyghur Forced Labor Prevention Act, introduced in both the House and Senate in March 2020, aims to prevent any goods manufactured with forced labor in XUAR from entering the U.S. and could impose significant audit and certification obligations on companies doing business with ties to XUAR. The Uyghur Forced Labor Disclosure Act, introduced in the House in March 2020, would amend the Securities Exchange Act of 1934 to require companies to disclose in their annual reports whether they have imported goods manufactured in the Xinjiang region. Any measure restricting imports into the U.S. would need to originate from the House.

In addition to pending legislation, Congress has also accelerated its public scrutiny of Uyghur-related rights in the last month. In August, a joint briefing on “China’s Oppression of Muslim Uyghurs in Xinjiang” was held by the House Committee on Oversight and Reform’s Subcommittee on National Security and the House Foreign Affairs’ Subcommittee on Asia, the Pacific, and Nonproliferation, where bipartisan calls for further action were voiced. The Trade Subcommittee of the House Ways and Means Committee also held a hearing on September 17 on “Enforcing the Ban on Imports Produced by Forced Labor in Xinjiang.”

The broader deterioration in the U.S.-China bilateral relationship, including the focus on China in the current U.S. presidential election, could also galvanize further Congressional and Executive Branch action over the coming months on human rights-related issues in XUAR. Given the broad bipartisan support on this issue, sustained Executive Branch and Congressional activity, including the accelerated use of WROs, is likely to continue regardless of the presidential election outcome.

Impact of the New WROs. The potential impact of these WROs is significant, particularly on products made with cotton, including but not limited to apparel. According to the U.S. Agriculture Department, about 85 percent of China’s cotton is grown in XUAR, and in turn, that cotton, and other fabrics made in the region, are used to make clothing and other cotton goods in other countries, which are then imported into the U.S. Last year alone, the U.S. imported close to $50 billion worth of textiles from China. Companies will need to assess the extent to which their supply chains may be impacted, especially if the Administration issues a regionally-based WRO that could apply broadly to products made in XUAR, particularly cotton-based goods, which officials are still actively considering.

Companies can face reputational as well as legal, regulatory, and operational impacts for conducting business in XUAR and elsewhere in China. In addition to the risk of enforcement actions and sanctions implemented by the U.S. government, consumer and investor activists are increasingly well-organized and able to exert significant pressure on companies perceived to be involved with operations involving forced labor and other human rights risks. In this context, while risk is centered around XUAR-related issues, even companies without supply chains in that region may face risk, either due to XUAR imports within China, work sharing programs involving ethnic minorities from XUAR, or simply forced labor risks identified in other regions of the country. These issues all create uncertainty and exacerbate risk, including for reputational harm.

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Covington is one of the very few U.S.-based international law firms that has specialized expertise and a growing global practice devoted to advising multinational clients on Business and Human Rights (BHR), including forced labor allegations resulting in WROs. In conjunction with our active Customs practice—including former CBP Commissioner Alan Bersin—Covington is particularly well positioned to advise companies on how to navigate CBP, assess risks to corporate supply chains, manage crisis communications and reputational damage that may result from allegations of forced labor, and mitigate the risks that goods may be impacted as a result of a WRO or allegations of forced labor in its supply chain.

Should you wish to consult with our experienced team about the existing or potential future WROs pertaining to XUAR, please reach out to any of the professionals listed below.