Now that President Biden has signed into law a measure banning all imports from China’s Xinjiang Uyghur Autonomous Region on the rebuttable presumption of forced labor, a leading risk-analysis firm anticipates “sizable” disruptions that will require businesses to turbocharge their due-diligence processes or flee to other destinations due to the global supply chain’s inherent complexity.
The Uyghur Forced Labor Prevention Act, said Sofia Nazalya, senior human-rights analyst at Verisk Maplecroft, is the biggest strike to date against the cotton-rich territory, where accusations of the persecution and exploitation of Uyghurs, Kazakhs and other Turkic Muslim minorities are rampant, though Beijing has vehemently and vociferously denied them.
For U.S. companies, the new law’s sweeping scope and high evidentiary standard create “arguably the most challenging legal and operational hurdles they face thus far with respect to Xinjiang,” Nazalya wrote in a research note published Wednesday. Its requirement to “ensure that goods mined, produced, or manufactured wholly or in part with forced labor…are not imported into the United States” demands a level of traceability that most, if not all, will struggle to grapple with without comprehensive supply-chain mapping and due-diligence strategies.
While cotton, tomatoes and some polysilicon products have been flagged as high-priority enforcement targets, the extension of the forced labor presumption region-wide is “likely to make the importation of Xinjiang goods too fraught with legal and operational risks for it to be practical for many U.S. companies,” she added.
One “key differentiator” with the current form of the text, which reconciles differences between Senate and House of Representative versions, however, is that it strips the requirement for companies conducting business in the United States to disclose to the Securities and Exchange Commission any businesses relationships with certain entities associated with Xinjiang.
“This buys companies more time to assess Xinjiang-linked operations before relocating elsewhere,” Nazalya said. “However, for companies in the apparel and textiles industry, the law is likely to be ‘old news’ given the ban on cotton earlier this year. Most apparel companies are likely to have already implemented contingency plans or are in the process of doing so.”
Supply-chain visibility will remain critical to mitigating the risk of having shipments seized by U.S. customs, though questions remain about the law’s ability to root out all occurrences of Uyghur forced labor, since Xinjiang provides 85 percent of China’s cotton, which in turns accounts for 25 percent of the world’s supply of the fiber.
“Reports suggest that half of China’s exports of cotton semi-finished products are exported to Asian garment manufacturing hubs, where international intermediary factories produce finished garments,” Nazalya said. “For apparel and textile companies to adequately meet their legal obligations under the UFLPA, they will have to ascertain that none of the cotton that goes into the garment production of their extensive, and very often highly complex, factory supply chain is sourced from Xinjiang.”
Nazalya said the law is also unlikely to change Beijing’s repressive position against the Uyghurs and that the replacement of Xinjiang Communist Party chief Chen Quanguo is “likely an indication of the next phase of control planned for the region and not a pivot from its current position.”
“As U.S.-China tensions continue to escalate, companies will have little choice but to perform a delicate balancing act,” she added. “On one hand, they are bound to U.S. and other international regulatory and legal requirements, but in doing so risk a fragile presence in China where they are likely to receive hostile treatment from both the government and consumers. As has been the case in recent months, we expect that more companies are likely to be caught in the crosshairs.”
To guarantee that they are “in no shape or form” sourcing from Xinjiang, companies will have to extend their compliance pathway beyond Tier 1 suppliers in the region, Nazalya said.
“The ability to fully map out supply chains to include the suppliers of intermediaries is key to having a more accurate picture of a company’s exposure to forced labor in Xinjiang,” she said. “Without this, Xinjiang products—namely cotton, agricultural products and polysilicon—will continue to find its way into international supply chains, meaning companies may continue to inadvertently profit from Uyghur forced labor.”