The United States, Canada, and the United Kingdom have each taken significant actions in recent weeks in response to reports of oppression of Uyghurs and other ethnic minorities in the Xinjiang Uyghur Autonomous Region (XUAR) of China. As discussed in previous client alerts, the U.S. government has repeatedly stated that the Chinese government is engaged in systemic human rights abuses against the Uyghur people and other ethnic and religious minorities in XUAR, and elsewhere in China. In the first conversation between the leaders of the two countries since the U.S. elections, President Biden raised concerns last week with President Xi Jinping about human rights abuses in Xinjiang. On February 16, 2021, President Biden asserted that China will face repercussions for its oppressive actions and that the U.S. will “stand up for human rights.” This enhanced pressure from the U.S. on China follows from the January 19, 2021 determination by former Secretary of State Pompeo that China’s actions in XUAR constitute “genocide” and “crimes against humanity,” an assessment with which the new Biden Administration has agreed.
The Canadian and UK governments have also expressed concerns about human rights abuses in XUAR, and they recently made coordinated announcements of new measures that are intended to address such violations. Australia is also considering a ban on products made with forced labor in China (Banning Goods Produced By Uyghur Forced Labour), and a report from the Australian Senate Foreign Affairs, Defence and Trade Legislation Committee is expected in May. Collectively, the actions discussed in this alert indicate that global pressure on China, with respect to its treatment of Uyghurs and other minorities in China, is increasing, with significant consequences for companies’ global supply chains.
United States Customs and Border Protection Issues WRO for Imports of Cotton and Tomatoes from XUAR
On January 13, 2021, U.S. Customs and Border Protection (CBP) issued the most aggressive U.S. enforcement action to date related to alleged forced labor in XUAR—a Withhold Release Order (WRO) designed to block all imports of cotton and tomatoes that originate from, or were processed in, XUAR. While this is a significant expansion of the company-focused WROs typically issued by CBP, it is also not the complete regional ban of all products from Xinjiang contemplated in the Uyghur Forced Labor Prevention Act, which passed the U.S. House of Representatives last year by an overwhelming majority. An updated version of that legislation was introduced in the new Congress on January 27, 2021, and thus still has a good chance of passage.
China’s production of cotton and tomatoes is concentrated in Xinjiang and CBP asserts that $9 billion worth of cotton products and $10 million worth of tomato products were imported into the U.S. from China last year. This WRO will have significant consequences for apparel textile and other companies that rely on complex global supply chains with a nexus to XUAR cotton, as well as businesses in the food and restaurant industry that rely on imports of tomato products from that region.
Scope of the WRO
Key components of the WRO include:
- It is applicable to all raw, intermediate, and finished cotton or tomato products that originate from, or are processed in, XUAR. This includes cotton or tomato products that have a nexus to XUAR, even if they are further processed or shipped through a third country.
- Given XUAR produces 85 percent of the cotton grown in China, all cotton products from China will be scrutinized due to the widespread comingling of cotton from different sources in China shortly after harvest.
- The WRO is effective immediately at all U.S. ports of entry. No carve-outs or enforcement delays are included in the order. Directions to this effect have been sent to all port directors. Working with CBP’s National Targeting Center and its Office of Trade’s National Threat Analysis Center, teams at the port of entry will flag suspect shipments for inspection.
Enforcement challenges related to a WRO as wide-ranging as this one are acknowledged by CBP, particularly in light of resource constraints in its Office of Trade. On January 27, 2021, Brenda Brockman Smith, the Executive Assistant Commissioner in CBP’s Office of Trade, said that “We are committed to taking a scalpel approach and are looking and continuing to gather information and ensure that our targeting is focused on the highest risk.” To assist in that process, CBP has been working to use new chemical and molecular tracing technology that—in concert with import and shipping-based data—will aid in effective identification and seizure of relevant goods. As social audits related to the region are viewed skeptically by the U.S. government due to factors including the harassment of auditors, extreme secrecy, and surveillance in XUAR, CBP’s new testing technology may help to create a bright line for action against goods originating from XUAR. It is also clear that numerous U.S. government agencies are cooperating through the sharing of intelligence in this enforcement effort, which also has trade and bilateral implications for U.S.-China relations.
Canada Implements Range of Measures Designed to Address Human Rights Violations in XUAR
On January 12, 2021, the Canadian government expressed that it “is gravely concerned with evidence and reports of human rights violations . . . involving members of the Uyghur ethnic minority and other minorities within the [XUAR]” and announced a series of measures to address the situation. These measures include:
- A prohibition on imports of goods produced by forced labor. Canada amended its Customs Tariff Act in July 2020 to include a prohibition on the importation of goods produced by forced labor, consistent with its commitments under the Canada-U.S.-Mexico Agreement. A Backgrounder published with the government’s announcement on Xinjiang measures notes that “[t]his legislation provides a basis for enforcement against goods produced by forced labor originating in or transferred from Xinjiang.”
- A Xinjiang Integrity Declaration for Canadian companies. Canadian companies that are sourcing directly or indirectly from Xinjiang or from entities relying on Uyghur labor, established in Xinjiang, or seeking to engage in the market, will be required to sign a declaration when engaging with the Trade Commissioner Service. The declaration requires a company to affirm, among other things, that it is aware of the human rights situation in Xinjiang and is not knowingly sourcing products or services from a supplier implicated in forced labor or other human rights violations. A failure to comply in good faith could result in the withdrawal of trade advocacy support and financial support from Export Development Canada.
- Export controls. Canada will deny export permits where there is a substantial risk that the export would result in a serious violation of human rights or international human rights law. Particular scrutiny will be applied to exports of technology and services that could be misused or diverted towards government surveillance, repression, arbitrary detention, or forced labor.
- Advice and awareness raising. Global Affairs Canada has issued an advisory to caution Canadian businesses about the risks associated with supply chain exposure to entities that engage in human rights abuses, including forced labor in Xinjiang and involving Uyghur ethnic minorities. The government also intends to: issue enhanced advice to Canadian businesses on due diligence and risk mitigation; convene discussions with businesses and NGOs to raise awareness of the risks of doing business in Xinjiang; and seek a comprehensive third-party analysis of areas of exposure to forced labor involving Uyghurs, with a view to providing Canadian companies with further advice on the risks of doing business in the region.
United Kingdom Announces Package of Measures to Address Human Rights Violations in XUAR
On the same day as the Canadian announcement, the British Foreign Secretary stated in the House of Commons that “evidence of the scale and the severity of the human rights violations being perpetrated in Xinjiang against the Uyghur Muslims is now far-reaching, and it paints a truly harrowing picture.” He announced that the UK government would be adopting a package of measures to help ensure that British public or private sector organizations are not complicit in, or profiting from, human rights violations in XUAR. The announcement addressed the following specific measures:
- Export controls. The UK will review existing export controls restrictions that apply to XUAR, to identify and prevent the export of goods that could contribute to human rights abuses in the region.
- Guidance for business. The Foreign, Commonwealth and Development Office issued updated guidance on business risks in China, which includes provisions expressly addressing business and human rights, and the situation in XUAR. The guidance warns that “[b]usinesses directly or indirectly providing goods and services to authorities in Xinjiang are at risk of unintentionally facilitating human rights violations,” and cautions that “[b]usinesses with supply-chain links in Xinjiang face particular reputational, economic and legal risks due to extensive and credible evidence of forced labour programmes.” The guidance encourages businesses to conduct “careful and robust due diligence,” but notes that such due diligence can be challenging due to limits on access to XUAR and the inability of workers to speak freely. The guidance will be backed by a ministerial campaign of business engagement to reinforce the need for UK organizations to take action to address the human rights risks in XUAR.
- Public procurement. The UK will provide guidance and support to public bodies to use public procurement rules to exclude suppliers where there is sufficient evidence of human rights violations in supply chains. Compliance with the guidance will be mandatory for all central government departments, non-departmental bodies, and executive agencies.
- Strengthening the Modern Slavery Act. Finally, the Foreign Secretary confirmed that the Home Secretary will introduce legislation to update and strengthen the Modern Slavery Act. The new legislation will ensure that, for the first time, organizations that are obliged to publish a transparency statement will face financial penalties for non-compliance. However, the government has not yet committed to a timetable for the introduction of the necessary bill and has indicated that this proposal will only be progressed when parliamentary time allows.
Although these measures have attracted cross-party support, it was clear from the House of Commons debate that followed the announcement that many prominent parliamentarians had hoped the UK government might take even more robust action. In particular, there have been repeated, cross-party calls for the introduction of sanctions against officials responsible for the human rights abuses in XUAR. The Foreign Secretary indicated that the UK government is continuing to keep under review the possibility of new sanctions designations, and has committed to continuing consultation with international allies, but is clearly unwilling to provide a rolling commentary on potential future sanctions designations.
How Businesses Should Respond
Responding to the U.S. WRO prohibiting import of cotton and tomato products from XUAR
As discussed in previous alerts, Section 307 of the Tariff Act of 1930 prohibits the importation of merchandise mined, produced or manufactured, wholly or in part, in any foreign country by forced labor. 19 USC. § 1307. Pursuant to regulations implementing Section 307, CBP can initiate investigations into goods suspected of being made by forced labor, whether on its own initiative or based on information from NGOs or other organizations. A WRO may be issued where information “reasonably but not conclusively indicates” that goods were produced, in whole or in part, through forced labor. After a company’s goods are seized, a company has 90 days to demonstrate the products seized were not made with forced labor. If CBP is satisfied with the evidence presented, it will release the goods for entry. If CBP concludes that exculpatory evidence is insufficient and maintains that the goods were made with forced labor, the goods may be exported to another destination outside of the United States. Alternatively, the exclusion of goods can be protested, and the denial of a protest can be challenged in the U.S. Court of International Trade.
In addition to the risk of having goods detained and potentially seized, companies should note that CBP has the authority to issue civil penalties against companies that do not exercise “reasonable care” when importing merchandise into the U.S. CBP has exercised its authority to issue civil penalties when goods are imported in violation of an existing WRO. CBP has issued civil penalties on at least one occasion, as discussed in our October alert. CBP also has been collaborating with Immigration and Customs Enforcement on identifying particular cases to be referred for criminal investigation and potential prosecution. While no companies have yet faced criminal charges based on forced labor in their supply chains, companies should expect increased scrutiny in this regard in 2021.
CBP has not publicly discussed the types of evidence it considers sufficient to warrant lifting a WRO against specific goods. Nevertheless, companies that may be affected by this WRO should compile as much information about potentially affected supply chains. For example, companies should focus on:
- Demonstrating traceability. Exculpatory forensic evidence will be viewed as particularly reliable data in this regard. For example, companies may want to consider securing forensic analysis of cotton used in suspect imports. Such forensic evidence is likely necessary to receive any WRO modification on the basis that a company’s supply chain is free of forced labor. Relevant certificates of origin and commercial agreements will also be useful.
- Additional documentation. Documentation such as commercial invoices, purchase orders, transportation receipts, and other evidence establishing the source of raw materials and intermediate processing locations can also help to support a submission to CBP. Affidavits from persons with direct knowledge of the manufacturing process and origin of the cotton or tomato source may also be helpful.
- Supply chain due diligence. An overall description of the company’s efforts to identify and eliminate forced labor from its supply chain should be prepared for submission to CBP.
Responding to the developments in the UK and Canada
The developments in the UK and Canada further reinforce the need for companies with supply chains linked to China to ensure that they have robust due diligence programs in place to identify and address forced labor risks in those supply chains. As discussed in a prior alert, effective due diligence programs should draw on recognized international standards, such as the United Nations Guiding Principles on Business and Human Rights, and should be tailored to address key risks. For companies whose supply chains have ties to China, due diligence should include a particular focus on identifying raw materials, processing operations, or labor linked to XUAR (which notably may include workers transferred from XUAR to other parts of China). As the UK and Canadian business advisories highlight, due diligence efforts in the region should focus on known risks such as a lack of transparency on the origins of goods, internment terminology (e.g., “vocational training,” “education” centers, and poverty alleviation programs), XUAR government incentives, and factory locations (e.g., factories near detention or internment facilities). More broadly, components of an effective due diligence program may include:
- Developing and implementing supplier policies, such as codes of conduct, that set forth requirements and expectations related to forced labor risk in supplier operations;
- Conducting comprehensive supply chain mapping to develop a better understanding of supply chains and whether raw materials, intermediate processing steps, or finished or semi-finished products are sourced in XUAR or from suppliers in other regions of China that may themselves source from XUAR;
- Performing risk assessments and screening of new suppliers to determine whether they have ties to XUAR and to develop a better understanding of the labor policies and practices of suppliers and their business partners;
- Implementing an audit program for existing suppliers based on their risk profiles to monitor potential forced labor risks, and employing best practices such as announced and unannounced audits, adequate language and cultural interpretation tools, and opportunities for independent verification of facilities, documents, and worker accounts;
- Using other due diligence tools, such as traceability systems that can help to confirm geographic product origin, and credible third party databases and other sources that provide information on risk indicators tailored to particular regions, sectors, or suppliers; and
- Applying incident remediation procedures to respond promptly and effectively to “red flags” or confirmed incidents involving violations of labor rights.
In addition to these measures, which are generally applicable across sectors, technology companies should take particular care to track and ensure compliance with export control measures, which are a feature of both the Canadian and UK announcements. We discussed similar U.S. export control considerations in our July alert.