Forced labor law will affect business, consumers

WASHINGTON — A sweeping new law aimed at cracking down on Chinese forced labor could have significant — and unexpected — effects for American companies and consumers.

The law, which took effect Tuesday, bars products from entering the United States if they have any connection to Xinjiang, the far-western region where Chinese authorities have taken widespread crackdowns on predominantly Muslim Uighurs and other ethnic minorities.

This can affect a wide range of products, including those using any raw materials from Xinjiang or the types of Chinese labor and poverty alleviation programs the US government has deemed coercive – even if only a small amount in the finished product. Be content in somewhere during your travels from Xinjiang.

The law assumes that all of these goods are made with forced labor and are held at the US border unless importers can provide evidence that their supply chain does not touch Xinjiang, or that slavery or Does not involve coercive practices.

Evan Smith, CEO of supply chain technology company Altana AI, said the company calculates that around 1 million companies globally would be subject to enforcement action under the full letter of the law, with about 10 million businesses worldwide that buy, sell or manufacture. are doing. physical goods.

“It’s not like a ‘pull the needles out of the haystack’ problem,” he said. “It’s touching a meaningful percentage of all the everyday goods in the world.”

The Biden administration has said it intends to fully implement the law, which could allow US officials to detain or stop a large number of imported products. Such a scenario is likely to cause headaches for companies and lead to further disruption in the supply chain. It could also fuel inflation, which is already running at a four-decade high, if companies are forced to look for more expensive alternatives or consumers start competing for scarce products.

The failure to fully enforce the law is likely to outrage Congress, which is in charge of oversight.

“The public is not prepared for what is about to happen,” said Alan Bursin, former commissioner of US Customs and Border Protection. “The global economy and its impact on the American economy are measured in many billions of dollars, not millions of dollars.”

The relationship between Xinjiang and some industries such as apparel and solar is well recognized. The apparel industry has scrambled to find new suppliers, and several US projects have had to be put on hold while solar firms scrutinize their supply chains. But trade experts say the links between the region and global supply chains extend far beyond just those industries.

According to data and analytics firm Kharon, Xinjiang produces more than 40% of the world’s polysilicon, one-quarter of the world’s tomato paste and one-fifth of global cotton. It also accounts for 15% of the world’s hops and about a tenth of the global nut, chili and rayon. It holds 9% of the world’s reserves of beryllium, and is home to China’s largest wind turbine manufacturer, accounting for 13% of global production.

Direct exports to the United States from the Xinjiang region – where Chinese authorities have detained more than 1 million ethnic minorities and sent many more to government-organised labor transfer programs – have declined sharply over the past few years. But a wide range of raw materials and components find their way into factories in China or other countries, and then in the United States, trade experts say.

In a statement on Tuesday, Commerce Secretary Gina Raimondo called the passage of the law “a clear message to China and the rest of the global community that the US will take decisive action against entities that participate in the abhorrent use of forced labor.”

The Chinese government disputes the presence of forced labor in Xinjiang, asserting that all employment is voluntary. And it has tried to blunt the influence of foreign pressure to curb abuse in Xinjiang by passing its own anti-sanctions law, which prohibits any company or individual from taking foreign measures it sees as discriminatory against China. Helps to implement.

While the implications of the US law remain to be seen, it could transform global supply chains. Some companies, for example in apparel, are severing ties with Xinjiang. Apparel manufacturers are scrambling to develop other sources of organic cotton, including in South America, to replace those stocks.

But other companies, namely large multinationals, have calculated that China’s market is too valuable to leave, say corporate executives and business groups. Some have begun to close their Chinese and US operations, continue to use Xinjiang materials for the Chinese market, or maintain partnerships with entities operating there.

This is a strategy that Richard Mojica, an attorney at Miller & Chevalier Chartered, said “should suffice,” as US customs jurisdiction extends just to imports, although Canada, the United Kingdom, Europe and Australia have their own measures. are considering. Instead of moving their operations out of China, some MNCs are investing in alternative sources of supply and making new investments in mapping their supply chains.

At the heart of the problem is the complexity and ambiguity of the supply chain that runs through China, the world’s largest manufacturing hub. Goods often pass through multiple layers of companies as they make their way from farms, mines, and factories to a warehouse or store shelf.

Most companies are well acquainted with their direct suppliers for parts or materials. But they may be less familiar with the vendors with whom their primary supplier does business. Some supply chains have multiple layers of specialized suppliers, some of whom may contract out their work to other factories.

For example, a car manufacturer may need to purchase thousands of components such as semiconductors, aluminium, glass, engine and seat fabric. According to research by McKinsey & Company, a consultancy firm, the average carmaker has about 250 Tier-One suppliers, but is exposed to 18,000 other companies throughout its supply chain.

Adding to the complexity is the reluctance by Chinese authorities and some companies to cooperate with external investigations into their supply chains. China strictly controls access to Xinjiang, making it impossible for outside researchers to monitor conditions on the ground, especially since the start of the coronavirus pandemic. In practice, this can make it very difficult for US importers to maintain any relationship with Xinjiang, as they will not be able to verify that businesses there are free of labor violations.

Companies whose goods are detained at the US border will have 30 days to provide “clear and convincing evidence” to the government that their products do not violate the law. Bursin said it could take customs officials several years to build a comprehensive enforcement system.

Nevertheless, the government has already begun to increase its capacity to check and detain foreign goods.

John Foote, a participant in the International Trade and Practice Group at Kelly Dry and Warren, said US Customs and Border Protection, which is responsible for inspecting and detaining goods at ports, was undergoing a major expansion in staffing.

It has used $5.6 million to hire 65 new people this year for forced labor enforcement, and paid an additional $10 million to handle detentions at its ports. For 2023, the White House has requested $70 million to create another 300 full-time positions, including customs officials, import specialists and trade analysts.

These amounts are higher than other government enforcement bureaus, such as the Office of Foreign Assets Control, which administers US sanctions, and the Bureau of Industry and Security, which oversees export controls, Foote wrote in a note to clients.

Any company with a supply chain running through China would have to consider the risk that its products could face investigation or detention, they wrote, adding that “almost no company in the United States is currently subject to this type of enforcement.” Not really ready for that.”

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