Date: Friday, May 28th, 2021
Source: Sourcing Journal
U.S. Customs and Border Protection’s recent seizure of a Uniqlo shipment over suspected forced labor linked to China’s Xinjiang region has the apparel industry, if not exactly running scared, then at least riddled with anxiety about its implications for clothing imports destined for the American market.
It’s a landmark case—perhaps not on the scale of Roe vs. Wade, but significant enough to keep retail C-suiters in a state of low-grade anxiety at a time when fashion purveyors are feeling bullish about the post-pandemic surge in sales, according to Mark Burstein, industry principal at Logility, an Atlanta-based digital supply-chain traceability platform that helps companies create a “digital thread” of products and materials from source to store.
“Everyone had been focused on, ‘Oh, as long as the cotton didn’t come from Xinjiang, I’m safe,’” Burstein told Sourcing Journal. “But what this Uniqlo detainment has just uncovered is it’s not just about where the cotton comes from, it’s [about] every supplier [and] every tier.
The Port of Los Angeles/Long Beach had initially detained a shipment of men’s shirts from Uniqlo in January, citing a violation of a Withhold Release Order (WRO) on cotton and cotton items produced by the Xinjiang Production and Construction Corps (XPCC). CBP has accused the state-run paramilitary organization, which boasts a sprawling network of direct and indirect holdings within and outside China, of coercing Uyghurs, Kazakhs and other Turkic Muslim minorities into low-wage jobs against their free will.
The case made headlines this month after the Office of Trade posted a ruling rejecting a protest from Uniqlo, which argued that since the raw cotton used to produce shirts originated in Australia, Brazil and the United States, and not from Xinjiang, where the fiber is covered by a regional WRO, they were not subject to the order and should be released. But authorities said the Japanese retailer had failed to provide authorities with “substantial evidence” that the entities within the XPCC that processed the cotton into garments “did so without the use of forced labor.”
Customs officials also took issue with “substantial deficiencies” in the documentation that Uniqlo provided, including Chinese customs declarations that were “unsigned, undated and generally illegible,” invoices that did not reflect fabric composition percentages, an outdated code of conduct letter and the absence of timecards, wage-payment receipts and daily process reports to back up its claims.
Uniqlo, in other words, wasn’t able to provide a verified chain of custody, in the form of a compliance certificate or summary document, that chain-linked its transactions from the cotton fields to its shirts. And therein lies the problem, Burstein said. For most brands and retailers, their contractual and financial liabilities end at the first tier of cut-and-sew suppliers. “They may know who the nominated fabric supplier is, but very, very rarely are they going to know who the yarn spinners are,” he said. “And they’ll never be able to confirm the cotton sources, nor did they ever care. Until now.”
Indeed, cotton sourcing is part of a “very serious conversation right now and a top priority for fashion brands,” Nate Herman, senior vice president of policy at the American Apparel & Footwear Association (AAFA), an industry group representing hundreds of clothing and shoe brands, said in an emailed statement. “AAFA is doing everything to unite the industry to ensure traceability and to ensure that forced labor does not infect the supply chain.”
Fast Retailing, Uniqlo’s parent company, said it’s disappointed by CBP’s decision. “As a global company, we are committed to protecting the human rights of everyone in our supply chain,” a spokesperson previously told Sourcing Journal. “Uniqlo has strong mechanisms in place to identify any potential violations of human and worker rights.”
All Uniqlo items, the spokesperson added, incorporate “only cotton that originates from sustainable sources. This ensures that human rights are safeguarded. If we find evidence of forced labor or any other human-right abuses at any of our suppliers, we cease to do business with that supplier.”
The issue of supply-chain visibility has been a longstanding problem across all industries. A 2018 survey of 500 global procurement leaders by Deloitte found that 65 percent admitted to limited or no visibility beyond their first tier.
The number is likely higher with fashion, which is notorious for its fathomless levels of contracting and subcontracting. While 74 percent of 62 major brands and retailers with reported links to companies in the Indian textile-producing hub of Tamil Nadu have published a list of their first-tier manufacturers, according to a 2020 Fashion Revolution study, only 31 percent have divulged at least some of their textile production sites, such as those involved in spinning, knitting, weaving and fabric production.
“The step before ending human-rights abuses or understanding sustainable practices is [finding out] where things come from [and measuring] what’s at risk at each stage of the supply chain, so you say to your company, ‘Here’s why we might need to make some changes,’” said Justin Dillon, CEO and founder of FRDM (pronounced “freedom”), a San Francisco-based firm that uses enterprise-grade technology to help businesses manage supply-chain risks. “It’s very difficult to play whack-a-mole with really bad data. When you have a transparent supply chain, you can make more informed decisions.”
Seizures like Uniqlo’s are going to become more common, and not just in the United States, where a bipartisan coalition of lawmakers has been trying to usher a Uyghur Forced Labor Prevention Act into law, creating a so-called “rebuttable presumption” that any goods made in Xinjiang are the product of forced labor and banned from entering the United States unless clear and convincing evidence demonstrates otherwise. With the crystallization of trade pacts, such as the United States-Mexico-Canada Agreement, that make forced labor verboten, the trend toward mandatory due-diligence legislation and growing calls to expand Australia and the United Kingdom’s modern slavery laws, other countries are going to be “stepping into that as well,” Dillon said.
Los Angeles Port
In this Sept. 10, 2004 file photo, ships carrying containers are loaded and unloaded at the Port of Los Angeles.
For human-rights advocates—Dillon is also CEO of Made in a Free World and SlaveryFootprint.org—this is a good thing. A benchmark published Wednesday by the KnowTheChain initiative found that 37 of the world’s biggest fashion companies failed to score even 50 percent in their efforts to address some of the worst forms of exploitation in their supply chains. There is a “substantial gap” between policy and practice, the report noted, suggesting company efforts to end forced labor are mostly lip service. Legislation with teeth could change that.
“I think regulatory headwinds are picking up. And I think companies are being asked to build a new workflow that—no judgment—I just don’t think has been a priority,” Dillon said. “It’s something new that’s emerging. A friend of mine likes to say, whether or not you’re interested in transparency, transparency is interested in you. You have to be transparent now, whether you like it or not.”
A need for clarity
Still, importers—and the attorneys who advise them—have expressed frustration with what they describe as a lack of clarity from CBP about what constitutes proof of admissibility. No less than the U.S. Government Accountability Office has agreed with them. In March, the government watchdog dispatched a brief recommending that border authorities publish a description of its WRO revocation and modification process, noting that it would help the private sector comply with the law.
“It’s a little bit of a gray area of exactly what is needed and how much is needed and what the standard is for proving that something is not made with forced labor and therefore admissible, versus failing to meet your burden of proof and therefore the item is not admissible in the United States,” Dana Watts, a counsel at Miller & Chevalier who specializes in customs law, told Sourcing Journal.
While all importers have a “duty of reasonable care” to take measures ensuring that forced labor isn’t in their supply chains, she said, the understanding of what that means is “evolving.” And because most decisions about apparel shipments are made at the port level, there have only been a handful of forced-labor rulings and a “paucity of information that gives insight into CBP’s thinking.”
“It’s still difficult for importers to know, at a practical level, what documentation they need to support if their goods are detained,” Watts said. “In the not-so-distant past, a lot of ways that importers would address things like [environmental, social and governance] would be to have a code of conduct and have that part of their supply contracts.”
With CBP requesting documents that reach into the recesses of the supply chain or across every rung in the supply ladder, a lot of importers will have to grapple with “a shift in thinking,” she added.
Nathan Peeters, a spokesman for CBP, said that the organization requires evidence “refuting each identified indicator of forced labor,” along with evidence that “policies, procedures, and controls are in place to ensure that forced labor conditions are remediated.”
The agency also engages with the petitioner in “remediation dialogue via questions or requests for additional information throughout the review,” he added.
The China conundrum
Increasing shipment detentions and the public-square flogging of rulings in the media may discourage companies from sourcing cotton and cotton apparel from China, “given the financial and reputational risks involved,” said Sheng Lu, associate professor of fashion and apparel studies at the University of Delaware.
“Understandably, fashion companies may feel it like a ‘mission impossible’ to continue sourcing cotton apparel from China and fully meet [the] WROs’ requirements for supply chain traceability and documentation,” he told Sourcing Journal, pointing to recent trade data showing that only 15.4 percent of U.S. cotton apparel came from China in 2020, a “significant” dip from the 27 percent in 2018. The CBP ruling on Uniqlo, he added, “reminds us that we should not underestimate the impact of WROs on fashion companies’ sourcing practices.”
Ultimately, importers can’t just insist that forced labor doesn’t exist in their supply chains. They have to show their work.
“Brands that are able to maneuver through this already previously had a very secure supply chain and very well-documented systems in place, and at the end of the day, they’ve had boots on the ground, understanding exactly what happens,” said Wayne Buchen, vice president of strategic sales at Applied DNA Sciences, whose CertainT platform enables the molecular tagging of raw materials and products to track their provenance. “The brands and importers that are having the biggest challenge are the ones who have always said, ‘I’m just going to tick the box, it’s good enough for me.’ But ticking the box is no longer good enough.”
Buchen doesn’t believe that brands can entirely exit China, especially if they want to continue selling to the Chinese market. But it’s a delicate tightrope that they’ll have to walk, and the only way companies will be able to navigate this balancing act is together.
“We haven’t all said, ‘Let’s get into a room, let’s close the door and let’s openly discuss this situation, and just not worry about our brands or our competitors or anything else, but let’s work for the best of the future on how we’re going to be successful, not now, but over the next five to 10 years,” he said. “Because you’re going to have to rely on China. Like it or not, China’s going to be there.”
In any case, CBP’s net may spread to include cotton and cotton products from countries other than China. Xinjiang cotton accounts for 85 percent of Chinese cotton, which in turn makes up one-fifth of the world’s supply.
“China sells a lot of cotton fabric in Vietnam, Philippines, Cambodia. Bangladesh,” said Burstein from Logility. “Very soon. I bet you’re going to see CBP starting to stop garments, ‘Oh this is from Vietnam, let me see that chain of custody so I know the cotton that they used in your product from Vietnam doesn’t have forced labor that took place in China.”
Importers, he added, need to not only know their verified chain of custody but also monitor it. “And I don’t think people are prepared to do that right now,” Burstein said.