Companies Brace for Impact of New Forced Labor Law

WASHINGTON — A sweeping new law aimed at cracking down on Chinese forced labor could have significant — and unforeseen — ramifications for American businesses and consumers.

The law, which took effect on Tuesday, bars products from entering the United States if they have ties to Xinjiang, the far western region where Chinese authorities have carried out a sweeping crackdown on Uyghur Muslims. and other ethnic minorities.

This could affect a wide range of products, including those using raw materials from Xinjiang or linked to the kind of Chinese labor and poverty reduction programs that the US government has deemed coercive – even if the finished product used only a tiny amount of material from Xinjiang somewhere along its journey.

The law presumes that all of these goods are made with forced labor and stops them at the US border, until importers can produce evidence that their supply chains do not touch Xinjiang, or involve foreign trade. slavery or coercive practices.

Evan Smith, chief executive of supply chain technology firm Altana AI, said his company had calculated that around one million businesses worldwide would be subject to enforcement action under the letter. full of the law, out of approximately 10 million businesses worldwide that buy, sell, or manufacture physical things.

“It’s not like ‘picking needles out of a haystack’ problem,” he said. “It affects a significant percentage of all everyday goods around the world.”

The Biden administration has said it intends to fully enforce the law, which could lead U.S. authorities to withhold or deny a significant number of imported products. Such a scenario is likely to cause headaches for businesses and sow further supply chain disruptions. It could also fuel inflation, which is already at its highest level in four decades, if companies are forced to look for more expensive alternatives or if consumers begin to fight over scarce goods.

Failure to fully enforce the law risks causing an uproar in Congress, which is in charge of oversight.

“The public is unprepared for what’s going to happen,” said Alan Bersin, former commissioner of U.S. Customs and Border Protection, who is now executive chairman of Altana AI. “The impact of this on the global economy and on the American economy is measured in billions of dollars, not millions of dollars.”

Xinjiang’s ties to a few industries, such as clothing and solar energy, are already well recognized. The apparel industry has raced to find new suppliers and solar companies have had to put many US projects on hold while they investigate their supply chains. But trade experts say the region’s links to global supply chains go far beyond these industries alone.

According to Kharon, a data and analytics firm, Xinjiang produces more than 40 percent of the world’s polysilicon, a quarter of the world’s tomato paste and a fifth of the world’s cotton. It is also responsible for 15% of the world’s hops and about one-tenth of the world’s nuts, peppers and rayon. It has 9% of the world’s beryllium reserves and is home to China’s largest wind turbine maker, which is responsible for 13% of global production.

Direct exports to the United States from the Xinjiang region – where Chinese authorities have detained more than a million ethnic minorities and sent many more into labor transfer programs organized by the government – ​​have dropped significantly over the past few years. But a wide range of raw materials and components are currently ending up in factories in China or other countries and then in the United States, according to trade experts.

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 United States will take decisive action against entities that participate in to the heinous use of force”. work.”

The Chinese government disputes the presence of forced labor in Xinjiang, saying all employment is voluntary. And it has tried to lessen the impact of foreign pressure to end abuses in Xinjiang by passing its own anti-sanctions law, which prohibits any company or individual from helping to enforce foreign measures deemed discriminatory against them. with regard to China.

Although the implications of the US law remain to be seen, it could end up transforming global supply chains. Some companies, for example in clothing, quickly severed their ties with Xinjiang. Clothing manufacturers have been scrambling to develop other sources of organic cotton, including in South America, to replace these stocks.

But other companies, namely large multinationals, have calculated that the Chinese market is too valuable to leave, say corporate executives and trade groups. Some have begun to wall off their Chinese and American operations, continuing to use materials from Xinjiang for the Chinese market or maintaining partnerships with entities operating there.

It’s a strategy that, according to Richard Mojica, a lawyer at Miller & Chevalier Chartered, “should suffice”, since US customs jurisdiction only extends to imports, although Canada, the United Kingdom, the Europe and Australia are considering their own measures. Instead of moving their operations out of China, some multinationals are investing in alternative sources of supply and making new investments in mapping their supply chains.

At the heart of the problem are the complexity and opacity of the supply chains that run through China, the world’s largest manufacturing hub. Goods often pass through many layers of business as they travel from fields, mines, and factories to a warehouse or store shelf.

Most companies know their direct suppliers of parts or materials well. But they may be less familiar with the vendors their primary vendor does business with. Some supply chains have many layers of specialist suppliers, some of whom may outsource their work to other factories.

Take automakers, which may need to source thousands of components, such as semiconductors, aluminum, glass, motors and seat fabric. According to research by McKinsey & Company, the consultancy, the average automaker has about 250 top-tier suppliers, but is exposed to 18,000 other companies across its supply chain.

The reluctance of Chinese authorities and some companies to cooperate with outside investigations into their supply chains adds to the complexity. China tightly controls access to Xinjiang, making it difficult for outside researchers to monitor conditions on the ground, especially since the start of the coronavirus pandemic. In practice, this could make it too difficult for US importers to maintain ties with Xinjiang, as they will not be able to verify that companies there are free from labor violations.

Companies whose goods are held up at the US border will have 30 days to give the government “clear and convincing evidence” that their products do not violate the law. Bersin said it would likely take several years for customs officials to put in place a full enforcement system.

Yet the government has already begun to strengthen its ability to control and restrain foreign goods.

John M. Foote, international trade and practice group partner at Kelley Drye and Warren, said U.S. Customs and Border Protection, which is responsible for inspecting and detaining goods at ports, is experiencing a strong increase in their numbers.

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

These amounts rival or exceed other government law enforcement offices, such as the Office of Foreign Assets Control, which administers U.S. sanctions, and the Bureau of Industry and Security, which oversees checks. export,” Mr. Foote wrote in a note to clients.

Any company whose supply chain crosses China must consider the risk of its products being subjected to scrutiny or detentions, he wrote, adding: “There are currently almost no companies in United States really prepared for this type of application”.

Leave a Comment