Recent developments in the US and EU relating to the regulation of products deemed to have been made with forced labour indicate a global shift towards enhanced and even mandatory supply chain disclosures, underpinned by human rights due diligence.
On 21 June 2022, the US Government enacted the Uyghur Forced Labor Prevention Act (UFLPA), which creates a rebuttable presumption goods mined, produced, or manufactured, in whole or in part, in China’s Xinjiang Uygur Autonomous Region (Xinjiang), or by entities in China identified as being linked to forced labour, are prohibited from importation into the US under Section 307 of the Tariff Act of 1930. The Tariff Act empowers the US Customs and Border Protection to issue Withhold Release Orders (WROs) and make findings which preclude goods found to have been produced in whole or in part in a foreign jurisdiction using forced labour from entering the US.
On 14 September 2022, the European Commission published a proposal (EU Proposal) for a regulation that would, if passed, similarly ban any products deemed to have been made with forced labour from entering EU Member States.
Cumulatively, it is anticipated that the impact of these regulations on global trade will be significant – in 2020, it was estimated that together, the US and EU account for approximately 29% of global import trade. The UFLPA places the onus on companies seeking to import goods from Xinjiang and other regions in China into the US to examine and conduct extensive human rights due diligence on all components of their supply chains in order to prove the goods they import were not made with forced labour. In contrast, the EU Proposal would place the onus on EU Member States’ national authorities to prove that goods were made with forced labour in breach of the rules, and applies equally to imports, exports and products marketed within the EU.
Forced labour in Xinjiang a catalyst for import bans
The UFLPA and proposed EU regulations have been developed in response to extensive and credible reports of systematic persecution of Xinjiang’s Uyghur ethnic population, including significant use of forced labour. Recently, the United Nations Office of the High Commissioner for Human Rights released a report concluding that ‘serious human rights violations’ are occurring in Xinjiang, potentially amounting to crimes against humanity.
The UN Special Rapporteur on Contemporary Forms of Slavery similarly observed in a report to the UN Human Rights Council in September this year that ‘it is reasonable to conclude that forced labour among Uighur, Kazakh and other ethnic minorities in sectors such as agriculture and manufacturing has been occurring in the Xinjiang Uighur Autonomous Region of China’.
The widespread use of forced labour in Xinjiang is of significant concern for businesses globally, as Xinjiang is increasingly China’s manufacturing powerhouse.
The region is one of the world’s largest producers of cotton, tomatoes and polysilicon in global supply chains, accounting for 20% of global cotton, 18% of global tomato, and 45% of global polysilicon production and processing (a key component of in solar panels). Particularly problematic is China’s dominance in the global supply chain for the manufacture of solar panels and systems, producing 83% of solar cells and 74% of solar modules globally.
Implications of the UFLPA and EU Proposal for global trade
The rebuttable presumption introduced under UFLPA covers raw materials mined in Xinjiang and processed in other regions in China or components manufactured in Xinjiang for goods produced in other regions, or any products shipped through third party countries. Goods mined, produced or manufactured by entities identified on the UFLPA Entity List are also prima facie prohibited from importation.
In order to rebut the presumption that goods imported or sourced from Xinjiang are deemed to be made with forced labour and are therefore prohibited from entry into the US market, importers must produce ‘clear and convincing evidence’ to the contrary. This evidence may take the form of detailed supply chain descriptions, employment records and controls designed to ensure that workers are voluntarily recruited, and provenance of each component of goods, including raw materials and other inputs.
Given the limited access companies have to conduct audits and human rights due diligence on suppliers and operations within Xinjiang, and within China more broadly, this legislation will likely have the effect of preventing the importation of any goods coming from or through Xinjiang. Any Chinese entities credibly linked to forced labour will likely face the same consequences.
The proposed EU regulation will, if passed, have significantly wider reach than the UFLPA, preventing any products made with forced labour from being marketed or imported into EU Member States (not just those originating from Xinjiang, China). However, EU Member States’ national authorities will be responsible for implementing and enforcing the prohibition at their borders, and the onus is on Member States to prove goods are in breach of the regulation.
The EU Proposal is currently being considered by the European Parliament and the Council of the European Union and, if passed, will commence operation 24 months after its entry into force. The EU Proposal is one of several recent regulatory developments in the EU directed to enhancing human rights protections and supply chain transparency. (For more information, see our previous article discussing the EU’s proposed Corporate Sustainability Due Diligence Directive).
Australian developments on the horizon
In April 2022, the Australian Government ratified the International Labour Organisation’s Protocol of 2014 to the Forced Labour Convention 1930, which imposes legally binding obligations on states to prevent and address forced labour.
The Australian Labor Party’s election platform suggested that a Labour Government may consider introducing a rebuttable presumption, similar to that under the UFLPA, which would require businesses importing products, or importing from jurisdictions, identified as high risk for forced labour to prove that those goods were not made using forced labour.
A statutory review of Australia’s Modern Slavery Act review is also underway and will consider whether the Act should be amended to expressly require reporting entities to undertake human rights due diligence on their operations and supply chain, and whether enforcement measures such as civil penalty provisions should be introduced. The Review will conclude in March 2023 and a report summarising the Review’s findings will be tabled with Parliament shortly thereafter.
Implications of the UFPLA and EU Proposal for Australian businesses
The import restrictions imposed by the US Tariff Act and UFLPA, and the proposed EU regulations, apply to goods rather than the jurisdiction where the importer is domiciled. As such, any Australian business that exports goods to the US or EU, or whose goods form part of another importer’s supply chain servicing those jurisdictions, will be subject to the new laws.
Falling foul of the import bans may have significant financial and potentially reputational consequences for businesses. To comply with the evolving regulatory landscapes at home and abroad, Australian businesses will need to develop, implement and enhance their human rights due diligence, supply chain mapping and risk management policies and processes.
Australian businesses should also anticipate and be ready to comply with increasingly onerous contractual obligations in their supply arrangements with trading partners operating in the EU and US. At a minimum, Australian businesses that form part of regulated entities’ supply chains should document, and be prepared to provide, supply chain and workforce information to the ultimate importers to assist them to meet the evidentiary burden imposed under the UFLPA.
Forced labour in supply chains is a global and pervasive issue, and Australian businesses need to acknowledge that it is not a matter of ‘if’ but ‘where’ forced labour is occurring in their supply chain. Businesses should also be aware of the significant financial and logistical barriers to conducting human rights due diligence on suppliers, particularly those located outside of Australia or obscured in the lower tiers of their supply chains.
Implementing sophisticated human rights due diligence programs and supply chain management takes time. Australian businesses should not underestimate the impact of the US and EU laws and the global shift to enhanced and even mandatory supply chain disclosures, underpinned by human rights due diligence.
A useful starting point is to identify what measures and management processes your business currently has in place, identify the gaps in processes, implementation and expertise, and take steps to address those gaps.