Companies prepare for the impact of the new forced labor law

WASHINGTON — A sweeping new law aimed at cracking down on Chinese forced labor could have significant — and unforeseen — ramifications for American businesses and consumers.

The law, which took effect Tuesday, bars goods from entering the United States if they have any ties to Xinjiang, the far-western region where Chinese authorities have carried out a sweeping crackdown on Muslim Uyghurs and other ethnic minorities.

That could affect a wide range of products, including those that use raw materials from Xinjiang or have a connection to the kind of Chinese labor and poverty alleviation programs that the US government has deemed coercive, even if the finished product uses only a small amount of material. of Xinjiang somewhere along his journey.

The law assumes that all of these products are made with forced labor and detains them at the US border until importers can produce proof that their supply chains do not touch Xinjiang or involve slavery or coercive practices.

Evan Smith, chief executive of supply chain technology company Altana AI, said his company estimated that roughly one million companies worldwide would be subject to enforcement under the full letter of the law, from approximately 10 million companies worldwide that are buying, selling or manufacturing physical things.

“This is not like a ‘pulling needles out of a haystack’ problem,” he said. “This is touching a significant percentage of all everyday goods in the world.”

The Biden administration has said it intends to fully enforce the law, which could lead to US authorities detaining or rejecting a significant number of imported products. Such a scenario is likely to cause headaches for businesses and sow more supply chain disruptions. It could also boost inflation, already at its highest in four decades, if businesses are forced to look for more expensive alternatives or if consumers start to compete for scarce products.

Failure to comply with the law in its entirety is likely to provoke an outcry from Congress, which is charged with oversight.

“The public is not prepared for what is going to happen,” said Alan Bersin, former US Customs and Border Protection commissioner and now CEO of Altana AI. “The impact of this on the global economy and the US economy is measured in many billions of dollars, not millions of dollars.”

The links between Xinjiang and some industries, such as clothing and solar, are already well recognized. The apparel industry has scrambled to find new suppliers, and solar companies have had to halt many US projects while they investigated their supply chains. But trade experts say the connections between the region and global supply chains are far more expansive than just those industries.

According to Kharon, a data and analytics firm, Xinjiang produces more than 40 percent of the world’s polysilicon, a quarter of the world’s tomato paste and a fifth of the world’s cotton. It is also responsible for 15 percent of the world’s hops and about a tenth of the world’s walnuts, peppers, and rayon. It has 9 percent of the world’s beryllium reserves and is home to China’s largest wind turbine manufacturer, which is responsible for 13 percent of global production.

Direct exports to the United States from the Xinjiang region — where Chinese authorities have detained more than a million ethnic minorities and sent many more to government-organized labor transfer programs — have fallen sharply in the last years. But a wide range of raw materials and components now find their way to factories in China or other countries, and then to the United States, trade experts say.

In a statement Tuesday, Gina Raimondo, the commerce secretary, called the law’s passage “a clear message to China and the rest of the global community that the United States will take decisive action against entities that engage in aberrant use.” of manpower.”

The Chinese government questions the presence of forced labor in Xinjiang, saying all employment is voluntary. And it has sought to mitigate the impact of foreign pressure to stop abuses in Xinjiang by passing its own anti-sanctions law, which bars any company or individual from helping enforce foreign measures deemed discriminatory against China.

Although the implications of the US law remain to be seen, it could end up transforming global supply chains. Some companies, for example clothing, have quickly cut ties with Xinjiang. Clothing manufacturers have made efforts to develop other sources of organic cotton, including in South America, to replace those stocks.

But other companies, namely the big multinationals, have calculated that the Chinese market is too valuable to give up, corporate executives and trade groups say. Some have begun to wall off their operations in China and the US, continue to use Xinjiang materials for the Chinese market, or maintain partnerships with entities operating there.

It’s a strategy that Miller & Chevalier Chartered attorney Richard Mojica said “should suffice” as US customs jurisdiction extends only to imports, though Canada, the UK, Europe and Australia are considering their own. measures. Instead of moving their operations out of China, some multinationals are investing in alternative sources of supply and making new investments in mapping their supply chains.

At the heart of the problem is the complexity and opacity of the supply chains that run through China, the world’s largest manufacturing hub. Goods often pass through many layers of business on their way from fields, mines, and factories to a warehouse or store shelf.

Most companies know their direct suppliers of parts or materials well. But they may be less familiar with the suppliers that their main supplier does business with. Some supply chains have many layers of specialized suppliers, some of whom may outsource their work to other factories.

Take the example of automakers, which may need to purchase thousands of components, such as semiconductors, aluminum, glass, engines, and seat fabrics. The average automaker has about 250 tier one suppliers but exposure to 18,000 other companies across its supply chain, according to research from McKinsey & Company, the consultancy.

Adding to the complexity is the reluctance of Chinese authorities and some companies to cooperate with outside investigations into their supply chains. China strictly controls access to Xinjiang, making it impossible for outside investigators to monitor conditions on the ground, especially since the start of the coronavirus pandemic. In practice, that could make it difficult for US importers to maintain ties to Xinjiang, since they won’t be able to verify that companies there are free of labor violations.

Companies whose goods are detained at the US border will have 30 days to provide the government with “clear and convincing evidence” that their products do not violate the law. Mr. Bersin said it is likely to take several years for customs officials to develop a comprehensive compliance system.

Still, the government has already begun to increase its ability to control and detain foreign products.

John M. Foote, a partner in the international trade and practice group at Kelley Drye and Warren, said U.S. Customs and Border Protection, which is responsible for inspecting and detaining goods at ports, was experiencing a huge expansion in staffing.

It has used $5.6 million to hire 65 new people this year to enforce forced labor, and set aside an additional $10 million for overtime pay to handle detentions at its ports. By 2023, the White House has requested $70 million to create another 300 full-time positions, including customs officers, import specialists and trade analysts.

These amounts rival or exceed other government enforcement offices, such as the Office of Foreign Assets Control, which administers U.S. sanctions, and the Bureau of Industry and Security, which oversees export controls, Foote wrote in a statement. note to customers.

Any company with a supply chain that stretches through China should consider the risk that their products could face scrutiny or arrests, he wrote, adding: “Almost no company in the United States today is really prepared for this kind of of application”.

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