The pressure on U.S. companies importing goods from overseas to document that their supply chains are free from forced labor has never been greater or more critical. In June 2022, the Uyghur Forced Labor Prevention Act (UFLPA) was enacted into law. To date, this is the only federal law in the U.S. focused specifically on Environmental, Social & Governance (ESG), and it passed by overwhelming majorities in both houses of Congress. The ongoing expansion of the global economy and the devastating impact of the COVID-19 pandemic on supply chains have contributed to enhanced risks and probabilities that forced labor will penetrate a company’s supply chain. The U.S. government has pledged to strictly enforce the law and eliminate trade in goods made with forced labor, requiring companies now, more than ever, to focus on responsible sourcing and documenting their risk mitigation strategies. For this reason, it is imperative that importers have a comprehensive process in place to fully vet their suppliers, including confirming that the supplier can verify the sources of all inputs used in the manufacture or production of the imported merchandise. Companies effectively need their supply chains to be “comply chains.”
“The U.S. has long denounced the use of forced labor in the production or manufacturing of imported goods,” said Damon V. Pike, who leads the Customs and International Trade Services group at BDO. “Specifically, the Tariff Act of 1930 prohibits the importation of merchandise mined, produced or manufactured, in whole or in part, in any foreign country by forced or indentured labor, including forced convict or child labor. At the international level, the International Labour Organization’s 1998 Declaration on Fundamental Principles and Rights at Work sets out the commitments and obligations of its members to eliminate all forms of forced labor, child labor, and employment discrimination.”
Forced labor is defined as any work or service exacted from an individual under the menace of a penalty for nonperformance and for which the worker does not voluntarily offer to work or provide services. In effect, forced labor exists where coercion, intimidation, violence or other means are used to compel an individual to work. Included within the scope of this definition is indentured labor, which U.S. Customs and Border Protection (CBP) defines as “work or services performed pursuant to a contract, the enforcement of which can be accomplished by process or penalties.” Forced or indentured labor involving children is also included.
Forced labor has attracted increasing scrutiny by governments, regulators, human rights organizations, investigative journalists, consumers and investors. Some jurisdictions have introduced policies, trade rules and/or legislation that ban products made with forced labor from entering their borders and others require businesses to take steps and report on measures taken to mitigate the risk of force labor in their supply chains. A few examples include the following:
Although the U.S. Tariff Act of 1930 prohibits the importation of goods made in whole or in part with forced labor, until 2016, the act contained a broad exception. The exception allowed the importation of certain forced labor-produced goods if the goods were not made “in such quantities in the United States as to meet the consumptive demands of the United States.” The “consumptive demand” exception provided suspected violators with a defense to forced labor enforcement actions. This changed with the enactment of the Trade Facilitation and Trade Enforcement Act of 2015, which repealed the consumptive demand exception after going into effect in 2016.
The elimination of the consumptive demand exception led to a noteworthy increase in the number of U.S. enforcement actions identified as WROs. A WRO is the mechanism through which CBP can detain merchandise based on information that reasonably indicates the use of forced labor and gives the importer 90 days to disprove the allegation or face the potential seizure of the merchandise. While CBP has focused on products from China including polysilicon, cotton and tomatoes, WROs have been issued on shipments from other countries relating to products such as palm oil and gloves from Malaysia, tomatoes from Mexico and sugar from the Dominican Republic.
Heightened concerns about the treatment of the Uyghur minority in the Xinjiang Uyghur Autonomous Region (XUAR) region of China prompted the U.S. Congress (with overwhelming support from both sides of the aisle) to enact the UFLPA in 2021, with the new law becoming effective in June 2022. The UFLPA creates a rebuttable presumption that:
The enactment of the UFLPA significantly raised the stakes for importers of goods originating in China especially because now any good originating in whole or in part from XUAR is presumed to made with forced labor. Many producers in China use raw materials from XUAR but any finished good produced anywhere is also subject to UFLPA.
The UFLPA also requires that importers demonstrate due diligence, effective supply chain tracing and supply chain management measures (down to the raw materials) to ensure they do not import any goods covered by the UFLPA. Importers need to have robust and comprehensive supply chain tracking processes in place to be able to rebut the presumption of forced labor for any shipments from the XUAR region. Enforcement of the legislation is expected to intensify and implementing regulations are being drafted.
The U.S. government’s determination to enforce the UFLPA was recently underscored when the Senate Finance Committee announced a probe into the U.S. automotive industry’s supply chain. The probe targets mining and materials and was initiated, in part, by a U.K. university study finding that numerous automakers were linked to Chinese companies located in XUAR. The study focused on silicon, steel, copper and aluminum. Silicon is of particular interest because China produces roughly 70% of the global supply of silicon and the XUAR alone may account for up to half of the world’s polysilicon. Silicon is a critical component in the production of semiconductors which, in turn, are a key input in automobiles and electronics (and other items that use electronics, such as industrial machinery).
Importers should realize that if an allegation of forced labor is made against goods they import into the U.S., it may be too late to investigate whether those goods were made in whole or in part by forced labor given the potential challenges of mapping an entire supply chain in a 30-day time period (the time allowed under the statute once CBP identifies a particular shipment and withholds entry). Such a task is time- and resource-consuming, especially given the need to track each supplier and vendor in the chain and confirm the country of origin of each raw material used in making the finished goods.
Each supplier must be able to fully document the origin of each input and be able to provide a detailed description of their supply chain and chain of custody from the raw material to the imported good. This chain of custody must include a list of suppliers associated with each step of the production process and be supported by transactional and shipment documents. Having such a process would demonstrate the requisite level due diligence needed to avoid the importation of goods made in whole or in part with forced labor and provide evidence against the presumption of forced labor for products, including components or raw materials thereof, originating in the XUAR. In essence, the importer must validate the origin of all raw materials and the finished good. Finally, importers should use this opportunity to confirm that CBP’s rules for “substantial transformation” are met to properly declare the country of origin of the finished good upon import.
Accordingly, importers should proactively assess their supply chain risks associated with sourcing procedures, as well as the risk that materials, parts, or components are sourced from suppliers using forced labor from the XUAR in violation of the UFLPA. Additionally, importers should verify that their suppliers can sufficiently document the origin of the material inputs used in the production of their imported products.
To rebut the presumption of forced labor for goods of XUAR origin, importers must respond to all CBP requests for information about merchandise under review and demonstrate by clear and convincing evidence that the goods, wares, articles, or merchandise were not mined, produced, or manufactured in whole or in part by forced labor. And, as explained above, the UFLPA also requires that importers demonstrate due diligence, effective supply chain tracing and supply chain management measures to ensure that they do not import any goods that fall within the scope of the UFLPA.
To successfully rebut the presumption of forced labor, importers must be ready and able to produce documentation clearly demonstrating the following:
The documentary requirements importers must meet to rebut the presumption of forced labor are extensive and include the following:
To prepare for this sea change in the way CBP operates, companies should consider taking immediate steps to develop an effective source tracing program and be able to comply with the documentary requirements well before goods are detained by the agency. Such steps include:
Taking the above steps can not only help companies avoid the loss of time, sales and reputation if CBP excludes their merchandise because of a finding of forced labor, they are necessary for the company to remain eligible for beneficial treatment under CBP’s Customs Trade Partnership Against Terrorism (CTPAT) Trade Compliance program. Benefits under CTPAT include shorter wait times at the border, front-of-the-line inspections, possible exemption from examinations and business resumption priority following a natural disaster or terrorist attack. For trade compliance professionals, these benefits provide support in carrying out their daily duties to help keep the supply chain running smoothly.
As demonstrated by the recent U.S. Senate probe of automobile manufacturers, certain commodities are considered by the U.S. government to be subject to a high risk of forced labor. In addition to agricultural products, minerals, chemicals and textiles/apparel, polysilicon is at the top of the list given that half of the world’s known supply comes from XUAR. Given its use as the key building block of semiconductor chips, the import of any item containing chips—which are ubiquitous in consumer products, including automobiles, electronics, solar panels and electric vehicle batteries—are ripe for targeting by CBP. For polysilicon, an importer must provide complete records of transactions that identify all entities involved in the manufacture, manipulation or export of a particular good and the country of origin of each material used in the production process. This includes flow charts mapping each step of the procurement and the production of all materials, going back to the locations of the quartzite used to make polysilicon, the location of the manufacturing facilities producing the polysilicon and the locations of the factories producing downstream products used to make imported goods.
In summary, importers must have robust supply chain mapping and source tracing mechanisms in place to be able to know exactly where their products are sourced (including any raw materials), where they are produced and by whom. Importers must also be prepared to document their engagement with suppliers and their assessment of forced labor risks, as well as remediation measures. If CBP invokes a presumption of forced labor against any products being imported into the U.S., the importer must be prepared to rebut the presumption within 30 days. They must have sufficient documentation to respond to CBP’s request for information regarding the exact shipment and exact merchandise that is being detained. Failure to do so could result in potential seizures or the exclusion of goods, a loss of sales and revenue, and—most importantly—a negative and potentially irreversible impact on the company’s overall brand and reputation.
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