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China and U.S. Relations Further Complicate Supply Chain Problems

China and U.S. Relations Further Complicate Supply Chain Problems Background Image

Following the passage of the Uyghur Forced Labor Prevention Act in late December 2021, companies are facing increasingly high standards to import goods from China. The Act bans the import of all goods made “in whole or in part” in the Xinjiang region of China (the “XUAR”) unless companies are able to prove by clear and convincing evidence to U.S. Customs and Border Protection (“CBP”) officials that the goods were not made with forced labor. This “rebuttable presumption” against the importation of goods produced in the XUAR is set to take effect on June 21, 2022.

This Act represents the most forceful legislative response yet to the growing evidence of forced labor occurring in Xinjiang, and heightens the already-strong burden being placed on companies seeking to import from China. The U.S. government began blocking imports from the region in September 2020, and has since issued various Withhold Release Orders (“WROs”) and made numerous additions to the Bureau of Industry and Security’s Entity List. These efforts, now combined with the Uyghur Forced Labor Act, has resulted in U.S. ports barring imports directly from the XUAR, as well as downstream products made in third countries that incorporate inputs produced in the XUAR. U.S. ports are also barring imports of goods produced by companies that have worked with the XUAR government in order to use Uyghur forced labor outside of the region.

The Act will have a widespread impact on a variety of U.S. industries. Raw materials such as polysilicon (a component in solar panels), cotton, coal, sugar, tomatoes, and chemicals from the XUAR have found their way into many global supply chains, and arrive at U.S. ports directly from China as well as via other countries that import materials from the region to produce goods that eventually reach the United States. Companies producing goods such as solar panels, toys and sports equipment, apparel, electronics, hair products and hair extensions, textiles, and more should review their supply chains thoroughly to determine if the Act may apply via indirect ties to the XUAR, even if they are not importing goods from the region directly.

The Act provides for an exception to its ban on imports from the XUAR if the importer has fully complied with the guidance described in the Act, completely and substantively responded to all inquiries for information submitted by U.S. CBP to ascertain the origin of the goods, and “by clear and convincing evidence,” proved that “the good, ware, article or merchandise was not mined, produced, or manufactured wholly or in part by forced labor.” Notably, the Act does not specify what types of evidence might suffice to establish by clear and convincing evidence that goods are not the product of forced labor. Instead, the Act tasks the Forced Labor Enforcement Task Force (“FLETF”), an entity created by a 2020 executive order issued by President Trump, with publishing an enforcement strategy containing “guidance to importers with respect to … the type, nature, and extent of evidence that demonstrates that goods originating in the People’s Republic of China … were not mined, produced, or manufactured wholly or in part with forced labor.”

Companies that do find they have supply chain exposure to the XUAR should expect significant supply chain diligence and documentation obligations once the Act goes into effect, in order to defeat the presumption of Uyghur forced labor. Drawing on prior CBP guidance and examples of adequate tracing measures for products previously placed under WROs by the U.S. government, companies should expect to be able to produce, for example: affidavits from processing facilities identifying where raw materials were sourced, purchase orders, invoices, and proof of payment for raw materials, a list of production steps and a production record for goods, transportation documents for products manufactured in multiple facilities, supporting documentation with respect to workers sourcing raw materials (e.g., time cards; wage payment receipts; daily process reports for raw cotton sold to yarn producer), evidence regarding the importer’s anti-forced labor compliance program, and any other relevant information that the importer believes may show that the shipments were not subject to the import ban. It is likely that the requirements to be published by the FLETF will exceed the already high requirements established by previous measures to eradicate forced labor from supply chains globally.

While the FLETF’s publication regarding what constitutes clear and convincing evidence under the Act is still forthcoming, it is not too soon for companies with ties to the XUAR in any capacity to begin examining their supply chain, conducting thorough due diligence, and preparing the detailed evidence and documentation that will likely be required in order to import products despite the Act’s presumption. With many multinational corporations already facing shortages over supply chain issues, the passage of the Uyghur Forced Labor Prevention Act, while a strong move towards ending human rights’ abuses occurring globally, will undoubtedly affect a variety of U.S. industries reliant on Chinese imports. Companies in a diverse array of industries should be aware of the potential consequences of this Act, and prepare accordingly.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.