A Preliminary Study on the so-called “Uyghur Forced Labor Prevention Act”

Author：Wang Feng, Dai Menghao

On 23 December 2021, U.S. President Joe Biden signed the so-called “compromised” version of the Uyghur Forced Labor Prevention Act (the “UFLPA” or “Act”) introduced in Congress into law. The compromised version, based on the original Senate bill (S.65), has retained the main contents of the original version despite certain deletions and adjustments. The UFLPA tightens restrictions on the importation into the United States of goods originating in the Xinjiang Uyghur Autonomous Region of China (“Xinjiang”) or by entities operating business involving Xinjiang, and grants the United States Government the authority to impose further restrictions on such entities. The Act damages China’s sovereignty and is strongly opposed by the Chinese government. It is foreseeable, however, that the measures in the Act will have a significant impact on the existing international supply chains and cross-border trade.

From the perspective of business operation, we understand that enterprises will be concerned with the impact of the Act on their business. The following questions, for example, are what they may ask.

(1) If we do not have raw materials purchased from Xinjiang, but we are involved in an industry concerned by the United States, will the United States require us to provide supply chain traceability evidence?

(2) If we have employees from Xinjiang, will the United States Government put us under monitoring?

(3) If we trade with a U.S. importer on FOB or similar incoterms, and have received all or the majority of the payment, and the title of the goods has been transferred, are we still obliged to provide supply chain traceability evidence?

(4) Is the United States Government restricting all products from China?

(5) Are there any remedies?

Given that detailed regulations of the Act have not been fully disclosed, and the operations of each enterprise are different, we cannot share more rigorous analyses and suggestions at present. Whereas we will conduct a preliminary analysis of the potential impact of the implementation of the UFLPA based on its provisions and relevant measures and requirements of the United States on trade controls related to Xinjiang in the past. We hope this will be of some inspiration and reference.

01 Which industries, enterprises and organizations may be identified as so-called “involved with forced labor”?

According to the UFLPA, the Forced Labor Enforcement Task Force, composed of representatives from the Department of Homeland Security, the Department of State, the Department of the Treasury, the Department of Justice, the Department of Labor and the Office of the United States Trade Representative, will identify the key elements of the alleged forced labor, including the “poverty alleviation” program, the “pairing-assistance” program and other government labor scheme, based on which the Task Force compiled the following lists:

(1) A list of entities in Xinjiang that mine, produce or manufacture wholly or in part any goods, wares, articles and merchandise with so-called forced labor;

(2) A list of entities in mainland China outside Xinjiang that participate in the labor transfer employment program of the government of Xinjiang to recruit, transport, transfer, harbor or receive minority labor;

(3) A list of products mined, produced or manufactured wholly or in part by entities in the foregoing two lists;

(4) A list of entities that exported products described in list (3) from China into the United States;

(5) A list of entities that source material from Xinjiang or entities working with the government of Xinjiang for purposes of the ‘‘poverty alleviation’’ program, the ‘‘pairing-assistance’’ program or any other government labor scheme; and

(6) A list of high-priority sectors for enforcement, including cotton, tomatoes and polysilicon.

According to Section 3(a) of the UFLPA, the foregoing products (including those produced by the foregoing entities) are specifically prohibited from entry from any ports of the United States.

It should be noted that, although the list of high-priority sectors for enforcement as set out in Section 2(d)(2)(B)(viii) of the UFLPA only covers for the time being cotton, tomatoes and polysilicon, the three major categories of products for which the U.S. Customs and Border Protection (“CBP”) has issued Withhold Release Orders (“WRO”), referring to Annex 2: Illustrative List of Industries in Xinjiang in which Public Reporting has indicated Labor Abuses may be Taking Place of the 2021 Xinjiang Supply Chain Business Advisory, the following industries are likely to be included in this list:

Agriculture (besides cotton and tomatoes, including hami melons, korla pears and garlic)
Cell Phones
Cleaning Supplies
Construction
Cotton, Cotton Yarn, Cotton Fabric, Ginning, Spinning Mills, and Cotton Products
Electronics Assembly
Extractives (including coal, copper, hydrocarbons, oil, uranium, and zinc)
Fake hair and human hair wigs, hair accessories
Food processing factories
Footwear
Gloves
Hospitality Services
Metallurgical grade silicon
Noodles
Printing Products
Renewable Energy (polysilicon, ingots, wafers, crystalline silicon solar cells, crystalline silicon solar photovoltaic modules)
Stevia
Sugar
Textiles (including such products as apparel, bedding, carpets, wool, viscose)
Toys

It is highly likely that enterprises in such industries with factors involving Xinjiang in their employment and supply chains will be subjected to the Act. It is highly advisable for such enterprises to pay attention to the follow-up actions of the United States and the risk of trade controls and economic sanctions.

In addition, according to Section 4(c) of the UFLPA, the Secretary of State will formulate, based on consultations with the Secretary of Commerce, the Secretary of Homeland Security and the Secretary of the Treasury, to the extent practicable, a list of:

entities in China or affiliates of such entities that use or benefit from so-called forced labor in Xinjiang; and
Foreign persons that acted as agents of the entities or affiliates of entities described in the preceding subparagraph to import goods into the United States.

According to Section 4(c)(3) of the UFLPA, the United States Government has the authority to impose economic sanctions on such entities pursuant to the Global Magnitsky Human Rights Accountability Act and relevant laws.

02 What products may be focused by the United States Government?

As discussed above, the list of high-priority sectors for enforcement as set out in Section 2(d)(2)(B)(viii) of the UFLPA only covers for the time being cotton, tomatoes and polysilicon, three major categories of products for which CBP has issued WRO. With reference to Annex 2: Illustrative List of Industries in Xinjiang in which Public Reporting has indicated Labor Abuses may be Taking Place of the 2021 Xinjiang Supply Chain Business Advisory, however, the products of the enterprises in the abovementioned 20 industries are also focused and may be controlled by the United States Government. It cannot be excluded that the United States Government requires the exporters or producers of such products to provide evidence that there is no forced labor involved.

03 How does the United States Government determine that the imported goods are not made with so-called “forced labor”?

Section 3(a) of the UFLPA applies a rebuttable presumption that goods are made with forced labor unless they meet all the conditions outlined in Section 3(b) of the UFLPA, i.e., the importer of record has fully complied with the guidance described in Section 2(d)(6) and any regulations issued to implement that guidance, and completely and substantively responded to all inquiries for information submitted by the Commissioner of CBP to ascertain whether the goods were made wholly or in part with so-called “forced labor”, and by clear and convincing evidence, that the goods did not involve forced labor. The guidance referred to in this Section, although not yet officially published, covers, at least the following, as required by Section 2(d)(6) of the UFLPA:

due diligence, effective supply chain tracing and supply chain management measures to ensure that such importers do not import any goods mined, produced, or manufactured wholly or in part with so-called forced labor from China, especially from Xinjiang;
the type, nature and extent of evidence that demonstrates that goods originating in China were not mined, produced or manufactured wholly or in part in Xinjiang; and
the type, nature and extent of evidence that demonstrates that goods detained or seized by CBP were not mined, produced or manufactured wholly or in part with forced labor.

The recent CBP enforcement cases and relevant Q&A show that CBP has imposed very strict requirements on compliance and evidence proving that there is no forced labor involved. As we mentioned in the article New Trends in International Supply Chain Compliance from a Shirt Detention Case, CBP ruled against a well-known international apparel brand U in 2021 for violating a WRO. The ruling reflects that, take textile as an example, only when U proves that there are no violations of any WRO in each step of its production process “starting from yarn” can it be recognized as compliant with the requirements. This means that in addition to the compliance reviews on upstream suppliers, importers also need to conduct due diligence on the entire textile supply chain from cotton growers to yarn manufacturers, fabric manufacturers, and garment manufacturers. Just imagine how high the cost might be. In the frequently asked questions about polysilicon WRO released by CBP, requirements on proof are very similar – a standard Certificate of Origin is not sufficient to prove that the products are not made with so-called “forced labor”, and importers must provide a detailed statement as outlined in 19 C.F.R. § 12.43(b). Specifically, additional documentation including, but not limited to the following, may be requested:

Affidavit from the provider of the silica-based product about the origin and components of the silica-based product;
Purchase orders, invoices and proof of payment for the materials of the products;
Complete production process and records of the products;
Transportation documents for the products and the materials;
Daily manufacturing reports of the products;
A list of upstream suppliers of the products;
Documents of proof regarding the importer’s anti-forced labor compliance program.

CBP emphasizes that the above list of documents is not exhaustive, and will analyze, based on the documents, whether the imports are proved not involving so-called “forced labor” case-by-case. We believe evidence collection, analysis and judgment case-by-case are a serious challenge that all U.S. importers and Chinese exporters will need to face.

The author of this article was engaged in supply chain management in foreign-invested companies for about 14 years, and believes that the above requirements, though feasible in theory, are very difficult to achieve in practice. For every seemingly simple process, any technical issue in the actual processing may lead to the inability of distinguishing the source of raw materials. For instance, it is difficult for spinning enterprises to distinguish between long-staple cotton from Xinjiang and that imported from the United States after the cotton blending process. Moreover, the material data in an enterprise’s ERP system (such as Material Master Data) is limited in the management of material sources. Therefore, we hope that the following part will give enterprises a preliminary understanding of the logic of the United States Government on traceability issues, and help them devise specific solutions based on their actual conditions.

04 Possible restrictions and penalties of the U.S. Government for violations of the UFLPA

Section 1(6)(B) of the UFLPA provides the United States Government with the authority to impose comprehensive economic sanctions, export controls and import restrictions against Xinjiang and enterprises conducting Xinjiang-related business. Sections 3 and 5 of the UFLPA provide for related restrictions, including:

Import restrictions

According to Section 3(a) of the UFLPA, CBP shall apply a presumption that any goods mined, produced or manufactured wholly or in part in Xinjiang or produced by an entity defined by the United States as participating in the so-called forced labor involving Xinjiang are products made with so-called forced labor, and such goods are prohibited from entry from any ports of the United States.

Economic sanctions

According to Section 5(a) of the UFLPA, Section 6(a)(1) of the Uyghur Human Rights Policy Act of 2020 (the “UHRPA”) is amended by adding Subsection (F) to include “serious human rights abuses in connection with forced labor” in the report required. The President shall exercise all the powers granted to the President under Section 6(c) of the UHRPA and the International Emergency Economy Power Act (the “IEEPA”) to impose sanctions on entities, including:

Asset blocking if such property and interests in property are in the United States, come within the United States or come within the possession or control of a United States person;
Visa and travel bans, including the denial of a visa to a foreign person and the revocation of current visas;
Penalties. The civil and criminal penalties provided for in Section 206 of IEEPA apply to a foreign person or a United States person that violates, attempts to violate, conspires to violate, or causes a violation of the foregoing asset blocking sanctions[1]. We will not go into details here about the penalties related to economic sanctions.

Obviously, unlike the previous practice of imposing temporary import restrictions on certain products and enterprises involving Xinjiang by CBP under Section 307 of the Tariff Act of 1930 (19 U.S.C. 1307) through WRO, the United States Government, with the authority granted under the UFLPA, extends import restrictions to the entire Xinjiang and enterprises conducting business involving Xinjiang. By connecting the UFLPA with UHRPA, the United States Government can impose sanctions on enterprises even if the business involving Xinjiang does not involve export to the United States, as long as the enterprises are found by the United States as involving so-called forced labor. This means that the service sector and other tertiary industries may likewise be subject to the restrictive measures of the UFLPA. For example, according to the Xinjiang Supply Chain Business Advisory issued on 13 July 2021, the United States identified hospitality industry in Xinjiang as one of the industries that probably involve so-called forced labor. Although the hospitality industry does not involve the import or export of goods, the United States Government has the authority under the UFLPA to impose follow-up sanctions on entities engaged in international tourism in Xinjiang. It is highly advisable for enterprises to pay attention to this.

05 When will the restrictions under the UFLPA come into effect? Will there be any additional measures?

According to Sections 2, 3, and 5 of the UFLPA, the following key timeline have been set for the subsequent implementation of the UFLPA:

Public comment

Not later than 30 days after the date of the enactment of the UFLPA, the Forced Labor Enforcement Task Force will solicit public comments on the enforcement rules of so-called forced labor for no less than 45 days;

Public hearing

Not later than 45 days after the close of the public comment period, the Forced Labor Enforcement Task Force will conduct a public hearing on proposed enforcement measures regarding so-called forced labor (including measures that can be taken to trace the origin of goods, offer greater supply chain transparency, and identify third country supply chain routes for goods made with so-called forced labor in China).

Development and submission of strategy

After the public hearing, the Forced Labor Enforcement Task Force, in consultation with the Secretary of Commerce and the Director of National Intelligence, shall develop a strategy for supporting enforcement and its scope of application, and submit a report on enforcement to the appropriate congressional committees no later than 180 days after the date of the enactment of the Act. In addition, enforcement by CBP regarding so-called forced labor shall also begin no later than 180 days after the date of enactment of the Act. According to Section 5 of the UFLPA, the President shall submit to the congressional committees no later than 180 days after the date of enactment of the Act an interim report that identifies the subjects subject to sanctions and impose appropriate sanctions.

As a result, it is expected that all enforcement and regulatory requirements of the UFLPA will be implemented within six months.

The House version of the UFLPA (H.R.1155) includes provisions requiring U.S.-listed companies to disclose in their annual and quarterly reports details of transactions, revenues and profits with entities on the Department of Commerce’s Entity List for Xinjiang-related issues and entities presumed to be involved in so-called “forced labor” under the UFLPA. Although the current UFLPA does not adopt these provisions, the House of Representatives has reintroduced the so-called new Uyghur Forced Labor Disclosure Act (the “UFLDA”), which largely adopts the disclosure requirements of the UFLPA (H.R.1155) for U.S.-listed companies. In addition, the U.S. Department of Commerce has kept adding Chinese entities to the Entity List under Section 744.11 of the Export Administration Regulations (the “EAR”) for Xinjiang-related issues. On Xinjiang-related issues, the United States is expected to impose comprehensive restrictions on areas including investment, export controls, import restrictions and economic sanctions.

06 Differences between the UFLPA and the U.S. export controls and sanctions

At least for the 20 categories of enterprises mentioned above, the implementation of the UFLPA means new compliance risks for international trade supply chains. Unlike the U.S. export control restrictions on China previously known to many enterprises, the trade controls under the UFLPA have the following characteristics:

1. Extreme traceability risk

The core of the restrictive measures under the UFLPA lies in the in-depth control of the upstream supply chain. Different from the export control regulatory system formulated based on the EAR, which centers on controlled items, with export, re-export and other controlled behaviors as key nodes, and controls the downstream end users and end uses of controlled items, under the UFLPA, CBP’s control measures on goods made with so-called forced labor are a comprehensive traceability review of the upstream supply chain of imported goods. This requires the enterprises to conduct not only due diligence on their direct suppliers but also a comprehensive review of the information of the suppliers’ upstream suppliers. The restriction requirements under the UFLPA will thus be passed on to the source of the supply chain. Considering that the existing trade compliance systems of many enterprises are often based on the control of downstream end users and end uses, such a compliance management system may not be able to meet the UFLPA requirements in practice.

2. Differences in sectors

The sectors covered by the UFLPA are broader than those subject to export controls. According to the revisions of the EAR and the updates of the Commercial Control List since 2018, the U.S. export controls on China mainly focus on several high-tech fields such as civil-military integration, emerging technologies and key fundamental technologies, and the impact on industries such as daily consumer goods and agricultural products is limited. However, according to the relevant provisions of Xinjiang Supply Chain Business Advisory and the UFLPA, textiles, food processing, and daily consumer goods are among the industries expected to be directly affected by the UFLPA.

According to the “Belt and Road” export statistics for 2020 (see the chart below) and the above-mentioned industries targeted by the UFLPA, we can roughly see that the UFLPA covers China’s major export sectors.