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Companies Sourcing China Goods Need Forced Labor Reviews

Feb. 10, 2022, 9:00 AM

All companies sourcing goods from China, both directly and indirectly, must take note of recent legislation targeting goods made with forced labor from China’s Xinjiang Uyghur Autonomous Region (XUAR).

On Dec. 23, 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act, which bans imports from Xinjiang and imposes sanctions on foreign individuals responsible for forced labor in the region.

Importantly, the UFLPA creates a rebuttable presumption that any product with any nexus with Xinjiang or with trafficked Uyghurs is made with forced labor. This means that an import that is produced in a third country but includes a component from Xinjiang is also subject to the prohibition. To overcome this presumption, an importer will have to establish by clear and convincing evidence that an import was not made using forced labor.

The law, including the rebuttable presumption provision, will take full effect on June 21. In the meantime, the Department of Homeland Security has issued a notice seeking comments on how best to ensure merchandise produced with forced labor is not imported into the U.S.

Immediate Action By Companies Sourcing From China

What does this mean for companies sourcing goods from China? They will have to immediately undertake a wholesale review of their supply chains to determine whether any goods they import are made with forced labor in China, all the way back to the raw materials.

Just as important are the parts and components purchased from U.S. and foreign suppliers—goods from second and third-tier suppliers (and beyond) are also covered by the UFLPA.

Government import restrictions on goods made with forced labor are not new and provide a roadmap on how U.S. Customs and Border Protection will enforce the UFLPA.

In 2016, Congress passed legislation prohibiting the import of merchandise made in whole, or in part, in any foreign country by forced labor, including forced child labor. This law resulted in U.S. Customs issuing “Withhold Release Orders” on particular goods and/or regions when information “reasonably, but not conclusively,” indicates that merchandise made with forced labor is being imported. Xinjiang cotton and tomatoes have been a particular target of the WRO process.

How can companies prepare for the implementation of the UFLPA? Several steps to consider include:

  • Reviewing and updating company supplier ethics and procurement code;
  • Creating a compliance program to account for UFLPA requirements;
  • Updating qualification procedures for suppliers;
  • Training procurement and compliance personnel; and
  • Performing transaction testing of high-value imports to test strengthened due diligence efforts.

Additional Considerations

In addition to implementing a compliance program to combat forced labor in the supply chain, companies sourcing from China should generally be reviewing existing and prospective transactions to identify areas where applicable non-Chinese law, such as the UFLPA, may conflict with many new China laws, such as the Anti-Foreign Sanctions Law, enacted in June 2021 (AFSL).

The AFSL permits the Chinese government and aggrieved private parties to take countermeasures if a foreign country “violates international law and basic norms of international relations…, or adopt[s] discriminatory restrictive measures against Chinese citizens and organizations, and interfere[s] in [the PRC]'s internal affairs.”

While commentators have initially focused on the use of the AFSL to react to U.S. sanctions against Chinese parties, the broad language of the AFSL can impact any law, such as the ULFPA, that can result in a U.S. party terminating (or refusing to do business with) a Chinese supplier.

The AFSL provides an aggrieved Chinese supplier with a private right of action to sue the breaching non-Chinese party in Chinese courts. It also provides the Chinese government with the ability to blacklist non-Chinese parties and implement many draconian measures, including conducting asset seizures or denying visas for key personnel working in China.

Revisions to Procurement Processes, Supply Agreements

To respond strategically to these circumstances, companies should generally look for ways to avoid or mitigate conflicts between the UFLPA (and other U.S./non-China law) and Chinese laws like the AFSL.

This is often an intensive task that incorporates a review of policy-driven objectives, including:

1) Strengthening criteria for breaches of representations and warranties, consequential remedies and indemnification. Practically, companies should consider relying more on commercial terms (compared to regulatory compliance) as possible events of breach of contract. Companies should carefully examine whether express references to non-China law (such as the ULFPA, Foreign Corrupt Practices Act, or Defense Acquisition Rules) should be deleted and replaced with terms that address these laws substantively.

2) Considering the impact of newly developed (or developing law), such as those relating to data security that could have a material impact on business models that rely on relative free-flow of data exchange, particularly with respect to development, use, storage and cross-border transmission of data. Such conditions could be used to justify a business reason to trigger possible termination of a business transaction or relationship.

Companies also need to carefully review the manner in which such reviews are conducted as the methodology used and information that is likely to be gathered as a result can also trigger AFSL and other Chinese law considerations, such as applicable China state secrets and data security laws.

A careful review is particularly important to publicly traded companies that have disclosure obligations. The strategy selected and its implementation can be material to such businesses.

Proper vetting and consideration by management and corporate boards should be considered to comply with applicable duties of care and mitigate risk of both potential commercial and shareholder liability.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

David R. Stepp is a partner in the Los Angeles office of Crowell & Moring. He provides multinational companies with strategic advice on global customs and international trade compliance matters.

Evan Y. Chuck is a partner in the Los Angeles office of Crowell & Moring and is a member of the firm’s International Trade and Corporate Groups. He leads the firm’s Asia practice.