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May 04, 2023

The Uyghur Forced Labor Prevention Act Puts Your China Imports in Danger

Home | China Law Blog | The Uyghur Forced Labor Prevention Act Puts Your China

Home | China Law Blog | The Uyghur Forced Labor Prevention Act Puts Your China Imports in Danger

Robert Kossick

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Since the launch of the Uyghur Forced Labor Prevention Act (UFLPA) in the summer of 2022, there has been an undercurrent of discussion in the trade community regarding the law's real intent. Is the law intended to weed out products made with Xinjiang Uyghur Autonomous Region (XUAR)-linked forced labor without having any collateral adverse impact on legitimate U.S.-China trade and investment? Or is the law, in de facto terms, intended to function as a mechanism to curtail U.S. economic engagement with China?

This discussion grew organically from the way the law not only did away with the requirement that a prior U.S. Customs and Border Protection (CBP) investigation form the basis of any detention, but also imposed supply chain documentation requirements that are nearly impossible to satisfy, at least for the small- and medium-sized entities (SMEs) that account for approximately 40% of all Chinese imports into the United States.

This situation is not altogether surprising given the substantial number of measures taken by different agencies and branches of the U.S. government to address China's WTO-inconsistent trade practices and to ensure national security, prominent recent examples of which include:

Despite recent administration statements downplaying the importance of U.S.-China decoupling as a policy objective, it is still too early to make a definitive conclusion regarding the UFLPA's intent. That said, a number of recent developments highlight the chilling effect it is having on U.S. economic engagement with China. Though these developments have proven costly and disruptive for U.S. business, they have been especially damaging to SMEs that do not have (i) the leverage needed to secure supply chain-related documentation from suppliers/manufacturers; (ii) the resources needed to perform the due diligence specified in the CBP guidance and Forced Labor Enforcement Task Force (FLETF) strategy documents and/or detention notices; (iii) the financial muscle to pursue a China + 1, nearshoring, or similar operational engineering strategy; and (iv) the opportunity to procure the materials, parts, components, subassemblies and/or finished goods essential to their operational viability from alternative suppliers/manufacturers. These recent developments include:

Indications of stepped-up UFLPA enforcement activity is visible throughout the newly released UFLPA Dashboard. The average number of UFLPA detentions has increased from 306 per month in 2022 to 686 per month so far in 2023, a 124% rise. This rate is expected to increase even further now that CBP has implemented an ACE-based Region Alert that is keyed to XUAR postal codes. The merchandise associated with these detentions comes from an expanding number of countries (in order of statistical prominence: Malaysia, Vietnam, China, and Thailand) and a shifting yet comprehensive set of industries (spanning almost all chapters of the Harmonized Tariff Schedule of the United States).

Reports of CBP taking an active interest in products and materials which fall outside the "high priority sectors" (i.e., cotton/apparel, tomatoes, and polysilicon) identified at the law's inception come out on a monthly, if not shorter, basis (for example, PVC, aluminum, vinyl flooring, chemicals, auto parts, electronics, etc.). In line with the foregoing, the average number of shipment refusals has jumped from 39 per month to 98 per month, a 151% increase. This tendency has been interpreted as being driven by an underlying need to free up space at the ports, though it could also reflect the growing number of human resources CBP is now deploying in connection with forced labor issues. Finally, the average total monthly value of detained shipments has risen from $94 million in 2022 to over $200 million in 2023, a 112% increase. These actions have resulted in a total combined value of UFLPA detentions in excess of $1 billion since the law went into effect. These trends are not slowing down or reversing. Nor do they bode well for SMEs.

The Congressional Executive Committee on China (CECC) recently sent a letter to Department of Homeland Security (DHS) leadership outlining its concerns regarding the department's forced labor enforcement practices and reiterating its expectation that the UFLPA have a "robust" implementation. Specific points of concern noted by the CECC include: (i) the tendency for importers to seek relief through the filing of "out of scope" – as opposed to "exception" – challenges; (ii) the relatively static nature of the UFLPA Entity List; (iii) the detection of a growing number of attempts to thwart the law's application through transshipment; and (iv) the use of high volume, low value de minimis shipments to avoid forced labor scrutiny.

As CBP addresses the implementation issues raised by the CECC, importers can expect to see greater emphasis placed on in scope exception challenges, an expanding UFLPA Entity List, and increased scrutiny of transshipment practices and de minimis transactions. These outcomes are made even more likely as CBP continues ramping up the human resources it can deploy to address forced labor issues.

Despite repeated assurances at last month's Trade Facilitation and Cargo Security Summit (TFCSS) about "understanding the frustration" of SMEs when it comes to proving the negative of forced labor, there appears to be little real interest in aligning CBP or congressional action with this rhetoric. This sense was first picked up on through informal conversations at last year's TFCSS in which CBP officials stated that it was not their responsibility to make available data otherwise within the agency's possession to SMEs (or, more generally, the trade) for the purpose of better complying with the due diligence requirements of the UFLPA.

This understanding was recently reinforced when, in the course of a broad-ranging exchange focused on improving the implementation of the UFLPA, the Congressional committee officials with whom a colleague and I spoke did not come across as eager to hear detailed, practice-derived anecdotes offered to illustrate and underscore the viability-threatening challenges faced by SMEs in providing clear and convincing evidence to rebut the law's presumption of forced labor. "Improving implementation" of the UFLPA entailed, in the context of our exchange with the Congressional committee officials, content inputs that could be used to increase detentions and justify refusals – two outcomes which can, by implication, be counted on to have a chilling effect on U.S. economic engagement with China. Because so many SMEs depend, frequently in the absence of realistic alternatives, on unfettered access to Chinese materials, parts, components, subassemblies, and/or finished goods, this disregard for the impact of the UFLPA on SMEs could end up threatening the economic well-being of the United States.

CBP guidance, FLETF strategy, and detention notice documents identify the broad range of supply chain information required to demonstrate that merchandise is free of the taint of XUAR-related forced labor. Generally considered, the scope of CBP's interest runs from raw materials to finished goods. Chinese suppliers/manufacturers are, however, frequently reluctant or unable (where, for example, poor recordkeeping practices result in a supplier/manufacturer not genuinely knowing who is in its supply chain) to cooperate with U.S. importers in providing this information.

Contract manufacturing agreement transparency and record production commitments can be signed off on with no real intent of being honored, screening questionnaires can be filled out in a manner designed to tell U.S. importers what they want to hear, Bills of Material can be haphazardly completed with information that is essentially unhelpful, postal codes can be supplied in a way that is calculated to not trigger Region Alerts, and entity names can be massaged so as to avoid UFLPA Entity List hits.

In a related vein, it is hard to envision a Chinese factory fully opening its files up to an independent third-party auditor or U.S. importer on a verification visit. And the foregoing considerations don't even get into documentation-level, data reliability threatening misclassification and/or misrepresentation practices that can come into play in the context of goods subject to AD/CVD orders, special duties (for example, Sct. 301, Sct. 232), or other U.S. regulatory regimes (the Lacey Act, for example). This propensity on the part of Chinese suppliers/manufacturers to not cooperate is especially germane to SMEs, many of which lack the leverage necessary to compel transparency and record production.

Even where a Chinese supplier/manufacturer is inclined to cooperate, that entity may not be able to do so on account of China's anti-foreign sanctions and blocking laws. Not surprisingly, few U.S. companies – and even fewer U.S. SMEs – are able to secure the full set of supply chain documents needed (per CBP and FLETF publications) to overcome the rebuttable presumption regarding goods with a XUAR or UFLPA Entity List nexus. This outcome facilitates the chilling of U.S. economic engagement in China at the same time it highlights the disproportionately adverse effect the UFLPA has on SMEs.

The final development involves the quantity and quality of due diligence tools and data provided by the U.S. government to the trade. Notwithstanding the detailed nature of official forced labor guidance and strategy documents, CBP's unwillingness to furnish information that might "show its hand" (and, consequently, enable better UFLPA compliance), ends up working to the detriment of those importers with the scarcest resources available for conducting forced labor due diligence – i.e., SMEs. It is noteworthy that CBP declines to provide a more granular level of insight into the HTSUS subheadings associated with the merchandise it is targeting, refrains from publishing detailed specification and/or scope information in connection with the products/materials it detains (for example, what exactly comes within the scope of "polyvinyl chlorine"?), abstains from updating the UFLPA Entity List in real time, and refuses to share the open source shipment data or XUAR-related postal codes that could be used by SMEs (and large corporations, too) to map their supply chains, avoid forced labor bad actors, and respond more effectively to UFLPA detentions. These practices, considered in conjunction with the fact that an estimated 45% of U.S. supply chain managers do not have visibility beyond their tier one suppliers/manufacturers, are significant. The simple truth is that each of these inputs could be made available to U.S. importers, and doing so would uphold the worthy objectives of the UFLPA in a way that avoided causing unnecessary collateral damage to resource-restricted SMEs. But, at the end of the day, CBP chooses not to. And SMEs are now at a greater risk of being thrown under the bus. Is this really about stopping the importation of merchandise made with forced labor in a way that does not shut down legitimate trade? Or is this about something else?

As the preceding discussion makes clear, the forced labor burden placed on U.S. business, generally, and SMEs, particularly, is substantial and growing. Information is imperfect, the stakes are high, there is no silver bullet, and expectations are stringent. As CBP relates in this last connection, an "inability to trace supply chains back to the cradle should inform an importer's business risk calculation."

The following practice pointers can be used by U.S. importers to navigate the diverse considerations that go into the "business judgments" which the UFLPA almost invariably requires:

As we have written before, the issue of XUAR-related forced labor is not going away. To the contrary, it is now, per FLETF, a "top tier" compliance and enforcement issue for CBP. This is made abundantly clear in the statistics reported on the UFLPA Dashboard, as well as through a near-daily stream of congressional or administrative actions and pronouncements.

Nor, by the same token, are AI, machine learning, predictive analytics, and science-based testing solutions going away. This is evident in the way the National Artificial Intelligence Initiative frames its mission as leading "the world in the development and use of trustworthy AI in the public and private sectors," and preparing "the present and future U.S. workforce for the integration of AI systems across all sectors of the economy and society." Though the current application focus of these technologies is largely on forced labor, law and policy makers are – in spite of the validity and reliability kinks that remain to be worked out – already exploring new ways to bring the supply chain and origin visibility enabling capabilities of AI, machine learning, predictive analytics, and scientific testing solutions to bear on an expanding set of commodities, goods, and green trade issues (agriculture, seafood, mining, timber, carbon emissions, etc.).

Bigger picture, the combination of these legislative, administrative, and technological developments is driving change on the global trade stage, regardless of the pronouncements made with respect to the narrow scope of intent associated with a law like the UFLPA. Though these changes do not happen overnight, emerging trade data consistently reveals a world that is "reglobalizing" along geopolitical, ideological, and supply chain fault lines.

The UFLPA is, to the extent it helps shut down the flow of merchandise produced with forced labor, a well-intentioned law. That said, this assessment only holds if/when the operation of the law does not simultaneously hinder legitimate trade and/or have a disproportionately adverse effect on a certain class or category of U.S. business.

As this post lays out, there are a number of problematic considerations that attach to the UFLPA: the elimination of the prior investigation requirement, the broad presumption of forced labor, the essentially unrealistic documentation requirements, the short timeframe for pursuing an applicability review, the insufficiency of due diligence resources made available to the trade, the potentially dubious reliability of data-driven conclusions, etc. Are these considerations, when viewed in tandem with the potential non-availability of alternative suppliers/manufacturers and the expansive nature of economic engagement U.S. SMEs have with China, the hallmarks of a law that is both tough and smart? Or, if the UFLPA's current operation has the de facto effect of jeopardizing the operational viability of U.S. SMEs, can it reasonably be concluded that the UFLPA opens the door to a costly set of unintended consequences? Consequences that might have been overlooked in the early rush to get the law on the books? Time will tell.

U.S. businesses – big and small alike – whose operational viability requires economic engagement with China must recognize how the worlds of law, policy, practice, and technology have, for better or for worse, converged – and they must adapt accordingly. This means developing and implementing a customized strategy to navigate the challenging due diligence requirements of the UFLPA.

Those that are able to follow the practice pointers and resources set forth in this post will have a greater probability of avoiding the costly supply chain disruptions that can be occasioned by UFLPA detentions and refusals. Despite the predominantly pessimistic outlook presented here, the UFLPA Dashboard demonstrates that a minority of applicability reviews do result in the release of merchandise. But this kind of outcome success requires both determination and resourcefulness – especially when viewed against the backdrop of a U.S. government posture that can best be characterized as adversarial and uncooperative.

Those U.S. importers who, alternatively, neither recognize the changes that are occurring across the trade compliance landscape nor leverage the practice pointers and resources identified in this post run the risk of having their shipments detained and refused on UFLPA grounds. More fundamentally, importers that are unable to satisfy the due diligence requirements of the UFLPA will find themselves having to choose between finding a supplier/manufacturer whose goods do not carry the taint of Uyghur-related forced labor (an expensive and uncertain proposition), abandoning those national markets which prohibit the importation of merchandise made with forced labor (the U.S., Canada, Mexico, the EU, Australia, etc.), or shutting down. To the extent that each of these options would either threaten or kill the operational viability of a class of business that plays a vital role in securing our national economic well-being, it is hard, in pragmatic terms, to have an unqualified enthusiasm for the UFLPA. Maybe that would be different if it were the case that these U.S. SMEs could simply do what they did in China in the U.S. But that ship left the harbor decades ago … and isn't coming back.

The world of trade policy and practice has changed radically since 2015, and the odds of succeeding in this complex and rapidly transforming regulatory environment are increasingly stacked against U.S. SMEs with limited resources, experience, and leverage.

If you are a U.S. SME doing business with China, don't get caught flat footed. Act now to confirm the forced labor status of the Chinese origin merchandise you seek to import into the United States. Or, in the alternative, put in place a plan that will minimize UFLPA costs/disruptions and maximize the probability that your business remains a going concern.

Author's note: This post references "Chinese" suppliers/manufacturers. Please note that the content associated with such references is applicable to any supplier/manufacturer whose product has an XUAR or UFLPA Entity List nexus, regardless of the country of origin of said product.

Robert Kossick

Robert is a Board Certified International Attorney, Licensed Customs Broker, and Certified Export Specialist whose practice focuses on the planning, compliance, enforcement, and security dimensions of U.S. import and export transactions. With over twenty years of professional experience, Robert brings seasoned, specialized, and multicultural know-how and perspective to the analysis and resolution of customs and trade issues.

China Business, International Business

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