Companies must take a multipronged approach to stay on the right side of a strict new U.S. law aimed at curbing forced labor in China, compliance experts said, with steps such as sourcing products from other countries and visiting Chinese suppliers for spot checks.
The Uyghur Forced Labor Prevention Act, which went into effect last month, gives U.S. Customs and Border Protection the power to block importing goods with ties to Xinjiang, the home region of China’s Uyghur minority group, because those goods are presumed to be made with forced labor. Companies can in theory rebut that presumption, but the burden is heavy.
Compliance experts and companies, particularly those that deal with cotton, tomatoes and solar-panel ingredient polysilicon—Xinjiang exports explicitly flagged as enforcement targets in the statute—are scrambling to understand how the law will be enforced in practice. They expect a period of painful adjustment.
“A lot of companies are flat-footed right now,” said
chief executive of Exiger LLC, a risk and compliance software company. “I don’t think that they appropriately and properly prepared.”
Mr. Daniels said he is starting to see clients consider switching to suppliers in other countries, such as Vietnam, or in some cases even acquiring their China-based suppliers so that they can exercise direct control. Raw materials commonly associated with China can also be found elsewhere, he said, adding that India has ample supplies of rare-earth materials now commonly sourced from China.
“We think we have to diversify the supply,” he said. “There are opportunities to purchase in allied countries that offset the risk.”
Technology offers some solutions. Mr. Daniels said Exiger software can go through a database of trade paperwork in an effort to determine the ultimate source of goods, for example, if a hypothetically untainted Brazil-based supplier has actually been receiving goods from Xinjiang.
Some large companies have been proactive in complying with the law, Mr. Daniels said. One client, a global technology company, in February identified a problematic Xinjiang-linked supplier and severed the relationship, he said.
For companies maintaining relationships with Chinese suppliers, there are practical difficulties.
Even if trade relations between the U.S. and China were cordial, Xinjiang’s remoteness would make it a difficult region in which to oversee business operations for even the most sophisticated multinational companies and their compliance teams. The region is closer to central Asia’s capitals than to China’s populous east coast, with its largest city, Urumqi, located about 2,500 miles from Shanghai.
Chinese authorities have sharply criticized the U.S. law. In December, China’s government called the allegations regarding the use of forced labor “vicious lies concocted by anti-China forces,” saying U.S. acts “totally violate market principles and commercial ethics.”
China-based suppliers are under heavy pressure not to cooperate with their U.S. customers’ efforts to perform supply-chain due diligence, said
Judith Alison Lee,
co-chair of the International Trade Practice Group at law firm Gibson Dunn & Crutcher LLP.
“It’s extremely difficult,” Ms. Lee said. “There’s not an easy answer. It really is a very challenging time for us.”
Her advice to companies is to carefully consider the language they use in requests to suppliers, avoiding “hot button” terms like directly citing the U.S. forced-labor law and instead making more neutral requests to learn about where they are sourcing their inputs.
Ms. Lee said she expects enforcement to be strict due to the close scrutiny that Congress has given this issue. U.S. Customs, for example, must report directly to Congress any Xinjiang-tied products it allows into the U.S. along with the agency’s reasons.
Companies would likely require “almost courtroom evidence” on the provenance of goods to pass muster, she said, adding she recommends businesses use investigative firms, third-party resources and tactics like live or teleconference visits to check on suppliers.
a partner at law firm Covington & Burling LLP, said that while no solution is going to give 100% comfort to a company, making a strong effort to know its supply chains can demonstrate a good-faith commitment to compliance.
U.S. Customs currently has limited resources and, at least at first, will likely seek to focus its enforcement efforts on the “worst actors” in high-profile sectors including cotton, apparel, tomatoes and silica-based products, Mr. Feldman said.
Everyone is in “uncharted territory,” he said. “The government recognizes that, and will hopefully work collaboratively with the business community to address this issue both effectively and pragmatically.”
Write to Richard Vanderford at [email protected]
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