Add Supply Chain Labor Risks to Corporate Counsel’s Checklist

Managers of globally integrated firms are accustomed to managing supply chain risk and disruptions. These include pandemics, supplier bankruptcies, contract breaches, shipping and logistics problems, payment risks, political instability, and trade wars.

The Trump-initiated and Biden-continued sanctions on China and the post-Covid-19 rush to build up supply chain resilience are but two examples of the need to remain fleet-footed in a rapidly changing market environment.

Labor is one supply chain risk, however, that’s been underestimated. US companies face new labor-related threats in today’s legal and political environment.

Some of these are local and familiar, such as the renewed interest in organizing unions at major companies including Starbucks Corp. and Amazon.com Inc. and an upswing in US strike activity. But other labor risks involve working conditions in foreign suppliers—over which buyer firms usually have no direct control.

While global economic integration has created incentives and opportunities to outsource and offshore production and services, it has also posed reputational and now increased legal risk for firms that are highly dependent on global procurement and supply chains.

Many companies—especially consumer-facing ones—have enacted supply chain labor compliance programs to mitigate reputational risk. But a new set of legal risks are coming on board that can create potential costs and supply chain disruptions, and these risks must be planned for.

One example is the 2021 Uyghur Forced Labor Prevention Act, or UFLPA, which aims to punish and eliminate human rights abuses against Chinese Uyghurs, including compulsory labor that benefits Chinese firms.

While US firms have had to comply with US bans on the importation of goods made with forced labor, the law has been fairly limited in scope and seldom enforced. But legislators have been increasingly eager to target goods made in conditions that violate social norms, especially in countries such as China that are in political tension with the US.

Customs and Border Protection has been far more proactive enforcing the UFLPA, with $2.6 billion of goods subject to CBP reviews and enforcement actions to date. Even Volkswagen recently had thousands of high-end Porsches, Bentleys, and Audis impounded by CBP, delaying their sale and delivery to customers until an electronic part could be replaced.

Unlike the general ban on goods made with forced labor, the UFLPA creates a rebuttable presumption that a good that was made in or contains a component sourced from the Xinjiang region of China is presumed to be made with forced labor.

To rebut that presumption, importers must demonstrate they have fully complied with CBP guidelines, including due diligence and effective supply chain tracing. They also must show “clear and compelling evidence” that the imported good doesn’t have content made with forced labor, which is no small task.

A second labor-related supply chain risk is the increasing use of labor chapters that have been included in US trade agreements ever since the first such instrument attached to the NAFTA agreement in 1994.

In the most recent iteration of NAFTA, the United States-Mexico-Canada Agreement, the three countries negotiated a new and aggressive tool—the Facility Specific Rapid Response Labor Mechanism. The mechanism effectively allows the US or Canada to lodge a complaint with Mexico regarding a specific manufacturing or mining facility that is alleged to violate Mexican law on freedom of association and collective bargaining.

The US has filed 20 complaints to date since 2021, which is a notably fast clip. Some of those complaints have been against subsidiaries of US companies. The economic implications of a complaint aren’t minor.

Once a complaint is filed, the US Trade Representative can ask CBP to prevent goods produced from the facility in question from entering the country. This means delays and potentially increased costs if a dispute panel finds a facility has violated the law, as the US is permitted to impose penalties or increased tariffs on that good.

A third risk is the potential enactment of due diligence laws, particularly in Europe. Large US firms subject to the California Transparency in Supply Chains Act are already familiar with its due diligence reporting requirements. This law has had little practical impact besides increasing regulatory burdens, but the newer due diligence laws rolling out in Europe are a different story.

France and Germany already enacted laws that created specific requirements and even liabilities. A long-negotiated but currently stalled EU-wide transparency law could introduce extensive due diligence requirements for firms worldwide. These include establishing a risk identification and management system, preventative measures, complaint procedures, and contractual provisions with suppliers to ensure human rights abuses are prevented.

Companies that don’t comply could be subject to significant fines of up to 2% of global revenue. Additionally, firms could be liable to individuals for labor and other human rights violations that were caused by their suppliers.

So, what to do? All firms need to analyze whether they are vulnerable to these new legal and supply chain risks. If so, a responsible person or team should be designated to oversee supply chain risk management. The German Supply Chain Act requires this, but it’s a good idea for all firms regardless if it’s a legal requirement.

Managers—particularly in small and midsize enterprises—should combine resources to identify and prevent supply chain risks through existing organizations or newly created organizations. There is more value in sharing information through collective action than through competition. Companies should also partner with organizations that can help with compliance and legal process, such as the Responsible Contracting Project.

Labor rights abuses in the supply chain are increasingly not just a reputational threat, but present legal and business risk as well. These developments require proactive measures to guard against unanticipated supply chain disruptions and liabilities.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kevin Kolben is professor of business law and member of the department of supply chain management at Rutgers Business School.

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