U.S. companies told to adapt as Washington fights against forced labor in China: 'It's going to be a very different environment'

By Nicole Greenberg

Congress probes American corporations suspected of links to forced labor in China, as Uyghur Forced Labor Prevention Action has one-year anniversary

A focus on forced labor and enforcement actions to fight against it are "here for some time," according to a U.S. Customs and Border Protection official.

"It's going to be a very different environment in the years to come," said Eric Choy, executive director for trade remedy law enforcement for CBP's Office of Trade.

He advised American industries to carefully monitor their supply chains for risks of forced labor, as he spoke Wednesday during a webinar run by analytics company Kharon and titled "A Fireside Chat with CBP: UFLPA Enforcement, Year One and Beyond."

One year ago, Congress attempted to crack down on forced labor through the UFLPA -- the Uyghur Forced Labor Prevention Act. The act was passed in 2021 and then took effect on June 21, 2022. It was authored by Massachusetts Democratic Rep. Jim McGovern, who said he wanted to "stop the government of China from exploiting the Uyghur people" by blocking the importation of goods manufactured in whole or in part by forced labor in the country's Xinjiang province.

A report from the Simon-Skjodt Center for the Prevention of Genocide examined Beijing's treatment of Uyghurs and other Muslim minorities in Xinjiang and helped inspire the UFLPA.

The act permits CBP to automatically detain shipments from any enterprise on a "UFLPA Entity List." Twenty-two China-based companies sit on the list, which has been updated once in the year since the law's implementation.

CBP seized 679 shipments connected to forced labor with a total value of $40.5 million over the past year, according to a UFLPA dashboard. The apparel, footwear and textile industry has faced the brunt of CBP's effects, with its 330 seized shipments comprising nearly half of the total blockages. The industrial and manufacturing materials sector has followed with 168 blocked shipments.

Of the blocked imports, China accounts for the highest value with $20.1 million worth of shipments blocked to date, followed by Vietnam with $13.4 million and Malaysia with $6.8 million.

However, a January report in CBP's Frontline Magazine revealed that enforcement of the act is an ongoing challenge. For example, enterprises in Xinjiang manage to circumvent the UFLPA by harvesting products like jujubes, a type of red date popular in Asia, in the Uyghur region but shipping them from other areas.

Though this practice of transshipment is legal, and even typical for the agriculture industry, it has become normal operating procedure for Chinese producers to obfuscate the origin of goods from Xinjiang in the wake of the UFLPA, according to CBP.

CBP's Choy said the agency has seen companies working to get around the UFLPA.

"We've seen shifts in company identities, movements of companies," he said, adding that other maneuvers include "port shopping, certainly getting into weird contractual obligations with their importers, and we're seeing a lot of documentation issues." There also has been "certain deliberate obfuscation," Choy said.

On April 11, the chairs of the Congressional Executive Commission on China wrote a letter to the Department of Homeland Security outlining their concerns with the enforcement of the UFLPA. The leaders of the CECC, which is a U.S. government agency that monitors human-rights issues in China, said they "believe that UFLPA's enforcement is making an impact, putting substantial political and economic pressure on the government of the People's Republic of China (PRC) and forcing global corporations to investigate and disclose supply chains." However, they requested greater transparency regarding CBP's review process, accelerated efforts to expand the UFLPA entity list, a plan to address the transshipment challenge and a strategy to prevent companies like Chinese fast-fashion retailer Shein or online marketplace Temu from taking advantage of UFLPA loopholes.

At Wednesday's virtual discussion, Choy said CBP will "continue to invest over the coming year to improving communications modalities, continue to push product on cbp.gov that provides clarifying information based upon the questions we received" and "will proactively engage upon requests."

Though enforcement continues to be a challenge, Choy said CBP is "emboldened" by its progress. In the second year of the UFLPA, the agency will "look to the environment, identify where risks exist and make sure that when we identify that risk we're going to enforce," he said.

Congress's increased attention toward forced labor implicates publicly-traded American companies in addition to the 22 China-based corporations on the UFLPA Entity List.

The recent inclusion of Xinjiang Zhongtai Chemical -- a Chinese manufacturer of PVC -- to the list of banned imports on June 9 has potential repercussions for the U.S. flooring industry. A report from the Helena Kennedy Centre for International Justice connects the supply chains of major U.S. flooring sellers Mohawk (MHK), LL Flooring (LL) and Home Depot (HD) to that PVC manufacturer.

A spokeswoman from Home Depot told MarketWatch said the company probed its suppliers in response to the report.

"We take forced labor risks very seriously and prohibit the use of forced or prison labor in our supply chain. We have investigated the allegations in the report to ensure our suppliers are in compliance with the applicable laws and contractual commitments," she said.

Mohawk Industries and LL Flooring did not immediately respond to request for comment.

Since the passing of the UFLPA, congressional committees have continued to investigate potential forced labor practices in the apparel and automotive industries as well.

Sen. Ron Wyden, an Oregon Democrat and chair of the Senate Finance Committee, initiated a probe into possible use of Chinese forced labor in the auto industry in December, questioning Honda (7267.TO), Ford (F), General Motors (GM), MercedesBenz (MBG.XE), Stellantis (STLAM.MI), Toyota (7203.TO) and Volkswagen about their practices.

In May, the House Select Committee on the Chinese Communist Party addressed Chinese forced labor in the apparel industry, sending an investigatory letter to brands Nike (NKE), Adidas (ADS.XE), Shein and Temu, whose parent company PDD Holdings (PDD) recently moved its headquarters to Ireland from Shanghai.

"We believe forced labor is an increasingly critical policy factor in corporate decision-making on China," said Height Capital Markets analyst Benjamin Salisbury in a note on Wednesday.

CBP's Choy said there are American importers undertaking the due diligence to "de-risk" their supply chains from forced labor in accordance with the UFLPA. However, companies that knowingly import goods produced with forced labor could face criminal investigation. Choy said that "once that risk is made aware to you, the potential that [a commodity] could be made with forced labor, there could be potential civil and criminal liabilities."

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06-22-23 1203ET

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