Select Committee Publishes Report and Recommendations on Chinese Forced Labor

As highlighted in prior Trade Alerts, the U.S. has increased its attention on the use of forced labor in the manufacture of imported goods, with a particular focus on goods made in whole, or in part, from materials sourced in the Xinjiang Uyghur Autonomous Region (XUAR) of China. These enforcement efforts culminated in the enactment of the Uyghur Forced Labor Prevention Act (UFLPA) in June 2021. However, the U.S. Congress is pushing for even stronger measures against China and the use of forced labor (for prior coverage, see the trade alert dated June 24, 2022, the alert dated January 6, 2023, and the alert dated February 13, 2023).

On May 24, 2023, the United States House Select Committee on China published its first set of conclusions and recommendations regarding U.S. policies against the alleged mistreatment of Uyghurs and other minorities in China. Recommendations of the committee that are likely to impact companies include:

• Passing the Uyghur Human Rights Sanctions Review Act, which would require the Treasury Department to sanction 10 entities for their complicity in alleged abuses; 
• Considering legislation to further isolate already sanctioned entities;
• Providing additional resources to enforce the UFLPA more rigorously and preparing a comprehensive list of all complicit companies;
• Passing legislation amending the Tariff Act of 1930 to reduce the de minimis threshold for duty-free shipments into the U.S., with a particular focus on foreign adversaries, including China;
• Passing legislation that contains outbound investment restrictions or other disincentives for institutional investors to invest in Chinese companies that support the Chinese Communist Party’s policies in the XUAR and the Uyghur genocide. (An example is the DITCH Act (H.R. 9385) introduced in the 117th Congress, which denies tax exemptions to organizations investing in problematic PRC entities. This act currently has been referred to the Senate Finance Committee.) 
• Expanding the UFLPA Entity List to include Chinese companies in the XUAR and throughout the country that have ties to forced labor. Companies outside China that re-export products made with forced labor in China should also be eligible for inclusion on this list (see below for recent developments).

UFLPA Enforcement Statistics

On July 1, 2023, U.S. Customs and Border Protection (CBP) updated its enforcement statistics regarding the UFLPA. As of the date of the update, CBP had detained over 4,600 shipments with a collective value of over USD 1.6 billion. (It should be noted that detained shipments can be excepted and released if the importer can demonstrate by clear and convincing evidence that the goods were not made with forced labor.)

The electronics industry was by far subject to the most detentions, likely because electronics contain microchips made with silicon and the XUAR is the world’s largest source of this substance. The electronics industry was followed by the apparel/clothing and industrial/manufacturing materials industries.

Also notable is that the majority of denied shipments in terms of value came from Malaysia (USD 977 million), followed by Vietnam (USD 397 million). Denied shipments originating from China only amounted to roughly USD 206 million.

CBP Adds Two Companies to the UFLPA Entity List, with More to Come

On June 12, 2023, CBP added two China-based companies to the UFLPA Entity List, bringing the number of companies on this list to 22. Merchandise produced by Xinjiang Zhongtai Chemical Co., Ltd. and Ninestar Corporation together with eight of the latter company’s Zhuhai-based subsidiaries is prohibited from entering the U.S. because of the forced labor involving the Uyghur minority in China. 

Additionally, on July 11, 2023, the Homeland Security Undersecretary and Chairman of the Forced Labor Enforcement Task Force (FLETF) told the Congressional-Executive Commission on China that FLETF has an “active pipeline of referrals” and that “we anticipate more additions in the coming months.” Most of these referrals are believed to come from private sector competitors of the targeted companies.

SEC Seeking More Detailed Disclosures UFLPA Compliance

On July 17, 2023, the U.S. Securities and Exchange Commission (SEC) announced that, among other information specific to China, it is seeking more information from companies regarding their compliance with the UFLPA. The SEC provided the following language in its sample letter:

 We note that you appear to conduct a portion of your operations in, or appear to rely on counterparties that conduct operations in, the Xinjiang Uyghur Autonomous Region.  To the extent material, please describe how your business segments, products, lines of service, projects, or operations are impacted by the Uyghur Forced Labor Prevention Act (UFLPA), that, among other matters, prohibits the import of goods from the Xinjiang Uyghur Autonomous Region.

This development underscores that the full resources of the federal government of the U.S. are coordinated in enforcing UFLPA on multiple fronts. The law was a result of an interagency government taskforce comprised of the Departments of Homeland Security, State, Labor, Commerce and Justice – which taskforce is still in operation.

Conclusion

Companies should be proactively taking steps now to map their supply chains to verify that:

• No party on the UFLPA Entity List is a party to the transactions;
• None of their direct suppliers use forced labor in producing the imported merchandise, to include evidence of on-site factory visits and documentation confirming the origin of all raw materials; and
• The direct suppliers have undertaken similar measures to validate that their own suppliers do not use forced labor based on on-site factory assessments and evidence of origin.

Additionally, mapping and documenting the supply chain may help uncover overlooked efficiencies in current sourcing arrangements and provide additional duty-saving opportunities.

How BDO can help

BDO can help clients assess their supply chain risk and confirm that current procedures and processes are effective in preventing products or component materials made by forced labor from appearing in U.S. supply chains.

BDO has strategically collaborated with SourceMap specifically to help our clients map their supply chains, quantify risk and understand whether their business practices are sufficient to prevent imported goods made by forced labor from appearing in U.S. supply chains. Through a new teaming arrangement with the world’s leading software solution for supply chain mapping (Sourcemap) and a collaboration with an outside law firm in China, BDO offers a full range of services to address all aspects of UFLPA compliance.