Date: Friday, July 7, 2023
Source: Sourcing Journal
Eric Choy, executive director for trade remedy and law enforcement at U.S. Customs and Border Protection, compares the application of the Uyghur Forced Labor Protection Act, a.k.a. the UFLPA, to the five stages of grief.
“There’s denial, anger, bargaining, depression, acceptance,” he said at a recent fireside chat with research and data analytics firm Kharon.
Much of the past year since the law’s implementation was spent on denial and anger, Choy noted. Now, “we’re definitely in the bargaining stage.” With any luck, he said, everyone’s emotions—those of importers, most of all—will continue trundling down the path until they reach their final if inevitable conclusion.
“Generally, I think we’ve seen positive trends by the importing community, by manufacturers as well, to consider how to de-risk their supply chain,” he said. “There’s a lot of active energy that’s ongoing in that space.”
Much of that momentum involves businesses distancing themselves from China’s far-western Xinjiang Uyghur Autonomous Region, where authorities have carried out a campaign of persecution against Uyghurs and other Muslim minorities, subjecting them to forced labor, extrajudicial detention and other crimes against humanity.
The UFLPA, which went into effect last June, enforces the blanket assumption that all goods made in whole or in part in the region are the product of forced labor and therefore barred from entering the United States.
In that time, the agency has seen a “quadrupling” of engagement, Choy said, though he admitted to differences of opinion in how the law is being operationalized and the perceived gaps in its enforcement. While the army veteran didn’t spell out Capitol Hill’s mounting vexation with the de minimis provision, which allows shipments valued under $800 to sidestep taxes, duties and fees, as well as more stringent oversight, including under the UFLPA, he said that CBP stands ready to “implement whatever our congressional partners give to us to enforce.”
CBP wants to continue its dialogue with members of the trade, too, Choy said. If there’s one thing he’s learned over the past year, it’s that communication is paramount.
“We realize that there’s a lot of new capabilities that are being developed to…help identify where risks exist within supply chains,” he said. “We know there’s a lot of work that trade associations and companies are doing proactively to find efficiencies in enforcement and due diligence, and so we’ll look for those opportunities to collaborate.”
Even so, importers have frequently complained about a lack of clarity over why certain shipments are detained and what kind of evidence, if any, might trigger a release. Some have even expressed consternation over “secret information” that isn’t being shared but could prove helpful to facilitating lawful trade. They say that the agency’s efforts at providing more information, such as the UFLPA statistics dashboard, which shares data on enforcement actions, are a good start, but it’s still difficult to parse trends or figure out specific red flags.
So far, CBP has identified tomatoes, cotton and polysilicon-based products as key priorities, in part due to the Withhold Release Orders (WRO) that preceded the UFLPA and in part due to the volumes those commodities make up. Any other details, however, have been described as “law enforcement-specific” and “business confidential information.”
One recent ruling, which CBP published in its customs bulletin in April before pulling it down without explanation shortly thereafter, caused a stir among the trade community because it appeared to show a broadening of enforcement scope or, at the very least, the imposition of a higher standard of evidence for releasing shipments suspected of violating the UFLPA.
The detained shipment, which consisted of Muji sweaters from Cambodia, predated the UFLPA by two months but still fell under a WRO on Xinjiang cotton. Despite the importer furnishing chain-of-custody documents showing that the raw cotton was produced in India, processed into yarn and subsequently fabric in China albeit outside Xinjiang, and then converted to clothing in Cambodia, CBP concluded that the evidence was insufficient “to establish either that the goods were not produced, wholly or in part, with forced labor or, in the alternative, that their supply chain is not linked with the XUAR.” The agency also said that it was in possession of documents proving that one of the companies in that supply chain had a nexus with Xinjiang, though it redacted the precise information.
Muji, which has touted its use of Xinjiang cotton in products sold outside the United States before, has said that it complies “with the laws and regulations of each country and region, and [is] taking all necessary steps to respect human rights and manage labor standards.”
Elise Shibles, head of Sandler, Travis & Rosenberg’s forced labor practice, said that neither Section 307 of the 1930 Tariff Act nor CBP’s regulations prohibit the import of goods where one of the entities in the supply chain might be linked with someone else but that entity did not contribute to the manufacturing of the actual goods in that particular shipment.
“My concern is, is customs inappropriately expanding what Section 307 actually covers?” Shibles told Sourcing Journal. “There is [also] a concern that…the importer is presenting evidence without knowing what the opposing evidence that they’re trying to rebut is.”
CBP did not respond to a request for clarification about the ruling.
Less surprising is the fact that the cargo’s Cambodian origin didn’t save it from CBP’s crosshairs. Choy, speaking in the Kharon chat, acknowledged that third-country risk is “probably the highest risk that’s out there.” The majority of UFLPA detentions to date—more than 80 percent, in fact—have sprung not from China but from Malaysia, Vietnam and elsewhere.
“We know that over the last 10 to 15 years, the PRC has offshored much of its manufacturing, especially in some of these commodity areas that can provide them more beneficial duty tariff rates, can provide them more beneficial countries of origin or other classification that benefits their processing,” he said, using an acronym for the People’s Republic of China. “And unfortunately…it kind of helps them with regards to the evasion of the forced labor laws, right?”
Choy said that CBP takes a risk-based approach. Xinjiang contributes 90 percent of China’s cotton, which in turn makes up, say, half of what enters Vietnam. As such it’s “reasonable [to assume] that that cotton is making its way somehow into the manufacturing of a significant amount of commodities…in Vietnam, or further elsewhere down the supply chain,” he said.
For most companies, it’s not simply enough to map their supply chain, but it’s also necessary to overlay that information with news feeds, risk data and supplier watch lists so they can be “one step ahead,” Leonardo Bonanni, CEO and founder of supply chain traceability platform Sourcemap, said at a webinar last month. The UFLPA Entity List, which lists bad actors with known links to coerced labor, has proved insufficient, he said. And by the time a detention has happened, it’s “always too late” to do anything.
“Knowing who your suppliers are, but also having a pretty good understanding of which parts and materials and when the contractual relationships were active [is crucial],” he said. “It is important to get into detail as much as possible for manufactured goods.”
Any business that has waited to implement new supply chain management solutions is certainly regretting it now because these processes take time, Bonanni said. The UFLPA, after all, is only one part of a cavalcade of due diligence legislation emerging globally, from deforestation to digital product passports. In the case of forced labor, Canada and Mexico have new restrictions as part of the United States-Mexico-Canada Agreement. Australia, the European Union and Japan are also looking at tightening regulations.
“It’s essentially the common denominator with all of these laws, whether they deal with environmental issues, social issues or even business continuity, resilience and other kinds of nearshoring, friendshoring issues,” he said. “So everyone has to map their supply chain [which] means they have to know who their indirect suppliers are and keep track of it in a way that they can also report on it—not necessarily publicly for all of these laws, but certainly at the request of regulators.”
Choy’s advice to companies: follow the commodity flows. Most of the complications arise not at the Tier 1 level but at Tier 3 and beyond.
“If you’re importing a specific commodity from a third country that’s highlighted as a high-risk country of having these inputs…the natural steps in developing a strategy is to just start going through your supply chain and identifying [potentially problematic] affiliate[s] or subsidiar[ies],” he said. “And then from there, you can kind of start peeling the onion back and trying to figure out what kind of risk management decisions you need to make. But the first steps are to get to that point.”
To be effective, compliance with the UFLPA has to be a “top tier, C-suite” issue, Choy said, though he often hears about confusion within companies about who should be running point.
“Those companies that really push and talk about being responsible businesses, their values of protecting human rights and the environment—those are definitely companies that are moving quickly and swiftly,” he said. “But I think if you just go back to what companies can do, first and foremost is to do something.”