As Washington escalates its raft of trade controls against China, the US Uyghur Forced Labor Prevention Act is likely to be a key piece of legislation impelling the momentum. Now more than ever, multinationals may have to be more artful in engineering the separation of their Chinese and non-Chinese business operations – and the origins of their parts.
The US is mulling an end to the de minimis provision that allows shipments valued under US$800 to enter the world’s largest consumer market, a move largely aimed at Chinese exports. Such a move would escalate a raft of trade controls Washington has already placed against China, including controls on semiconductor technology and outbound investment.
In many ways, a key piece of legislation impelling the momentum is the US Uyghur Forced Labor Prevention Act (UFLPA). Passed in late 2021, the ambition of the UFLPA is far more comprehensive than the “small yard, high fence” scope of containment policies, as it seeks to restrict imports in toto from an entire region inextricably linked to global supply chains. Growing political pressure and technical know-how within the retooled oversight agencies portend much more robust UFLPA enforcement across a growing category of goods.
This is likely to be one of the more conspicuous developments in the US’ international trade posture in 2024. The Biden administration signaled last week that it may escalate controls on China’s access to sophisticated semiconductor technologies, as Commerce Secretary Gina Raimondo vowed “we will do whatever it takes.” Alongside these tech controls, Washington has existing policy weapons it could use to target the extent to which Xinjiang is embedded in global supply chains, including in strategic industries suffused with Chinese overcapacity. Early signs of enhanced enforcement action suggest a particular focus on the automotive sector.
Washington’s new trade Zeitgeist
The Biden administration has never quite succinctly enunciated its trade doctrine. Reindustrializing the country, de-risking, and an emphasis on labor rights and the environment have been moving parts of a vast policy machine.
A renewed focus on supply chains, which have become ever more complex and specialized as globalization has advanced, is at the core of this otherwise disparate agenda.
The UFPLA is a case in point and epitomizes the complexity and scope of Washington’s new trade agenda. In the words of international trade law expert John Foote, the UFLPA is “the most trade impacting law that was not actually crafted as trade legislation. It was adopted, ultimately as a piece of human rights legislation”.
The core raison d’etre for the UFPLA is the extensive body of evidence suggesting that forced labor is an integral pillar of Beijing’s objective to eradicate or at least Sinicize Uyghur Muslim culture, through coercing Uyghurs into adopting the lifestyles and values of China’s Han majority.
The UFPLA’s sweeping “rebuttable presumption” assumes that, unless proven otherwise (a very high bar given the opacity of Xinjiang), all goods shipped from Xinjiang are made using forced labor by Uyghur or other Muslim minorities. As well as facilitating the seizure of goods at US ports, the UFPLA has instituted an Entity List. The shipments of companies on the Entity List are automatically impounded at US ports irrespective of their geographic origin.
The enormity of the UFPLA’s ambition is difficult to overstate. As a conduit point for the sprawling Belt and Road Initiative’s Eurasian economic corridor, Xinjiang is far from an economic backwater. According to official figures, exports are booming, totaling more than US$45 billion in the first 11 months of 2023.
Xinjiang produces roughly 50% of the world’s polysilicon, 25% of its tomatoes, and 20% of its cotton. The western region is also a sizable producer of textiles, steel, and quartz. Xinjiang now produces about 9% of global aluminum and plays a growing role in automotive supply chains.
As a global workshop for raw materials and metals production, Xinjiang goods invariably pass through several intermediaries straddling multiple borders before ultimately ending up in Western markets. An incredibly granular understanding of global supply chains with dense networks of suppliers and sub-suppliers is required to preclude the possibility of Xinjiang content ending up in finished goods. The challenge for US authorities has been exacerbated by Uyghur work groups being routinely dispatched to work in other parts of China.
A work in progress
After the bill’s passage in December 2021, U.S. Customs and Border Protection (CBP), overseen by the Department of Homeland Security (DHS), had just 180 days to work out how to enforce the UFPLA.
The CBP faced a steep learning curve, possessing little Mandarin language capability or supply chain mapping expertise. The CBP has had to lean heavily on the expertise of academics and non-governmental organizations (NGOs) to keep up.
One group that has been particularly instrumental is the Forced Labour Lab at Britain’s Sheffield Hallam University. The Lab’s methodology (largely focusing on parsing publicly available Chinese company reports and press releases) is explicitly geared toward exposing Western companies’ complicity with Uyghur human rights’ abuses. The DHS hired the consultancy of Laura Murphy, an expert on forced labor practices who has led the Lab’s work since 2019.
Tellingly, almost all the additions to the UFLPA’s Entity List to date which were not already on other sanctions lists, were identified in Sheffield Hallam’s research. One example is automotive supplier Sichuan Jingweida Technology Group, which was named in a 2022 report as having accepted Uyghur laborers transferred from Xinjiang in 2018. Jingweida, which counts China’s SAIC Motor Corp. and EVTech (which in turn supplies Nio, Renault, and Volkswagen) as major customers, was ultimately added to the Entity List in December 2023.
Show me results
Through external research collaboration and the integration of tools like AI-powered supply chain mapping software, the CBP is making up for lost time. As of February, the CBP has detained over 7,000 shipments of goods traced to Xinjiang worth more than US$2.6 billion, with the vast majority of these having arrived Stateside in the last year.
This figure is almost certainly only a drop in the ocean. As was made clear in the July 2023 strategy update by the interagency taskforce overseeing UFLPA enforcement, the CBP now has the means to move beyond the initial high-priority sectors of cotton, tomatoes, and polysilicon to “all sectors identified by NGOs”. This includes copper, aluminum and steel products, lithium-ion batteries, tires, and other automobile components.
The Entity List, which had 20 companies until June 2023, has now grown to 30. The DHS has publicly stated that expanding the list is a priority.
Increased technical capacity and new hires are driving more rigorous enforcement. Another factor is a hefty dosage of political pressure – or indeed cover – provided by an eclectic coalition of NGOs, Uyghur groups abroad, and sympathetic members of Congress.
A late January 2024 letter published by the bipartisan Congressional Select Committee on the Chinese Communist Party – which has been influential in setting the hawkish tenor of congressional discourse – is instructive.
The letter exhorts the DHS to add companies “outside the People’s Republic of China” to the Entity List and “exponentially” increase testing and enforcement action at ports. The former could be a point of tension in US trade relations with Vietnam and Malaysia. Both countries have been the largest point of origin for shipments seized under the UFLPA, as Chinese companies have become more adept at circumventing tariffs and concealing Xinjiang content.
Another focus of the Select Committee’s campaign is changing the rules around de minimis eligibility for high-risk items. Under the de minimis provision, goods valued at less than US$800 are not subject to routine customs checks and duties. The Select Committee has been vociferous in highlighting concerns that e-commerce giants Temu and SHEIN are using de minimis as a loophole to ship textiles containing Xinjiang cotton.
Automotive industry in the crosshairs
There are strong early signs that the CBP’s enhanced capacity and political sentiment on the Hill are galvanizing more aggressive enforcement.
In an unprecedented development that has raised hackles in the Western automotive industry, an undisclosed number of vehicles were detained at US ports in mid-February. The cars, reported to be in the thousands and belonging to Porsche, Bentley, and Audi, allegedly contain a subcomponent produced by a company in western China.
It is understood that the Volkswagen (VW) parent group – which owns these three brands – alerted US authorities after it was made aware of the subcomponent by one of its primary China-based suppliers. The subcomponent in question was ultimately manufactured by one of the VW network’s indirect suppliers far, far down the supply chain.
For VW, this was just one part of a mensis horribilis. VW is now actively reassessing the future of its joint venture (JV) with SAIC in Xinjiang after the German newspaper Handelsblatt published evidence showing that the JV used Uyghur forced labor in the construction of a test track for cars in 2019.
VW’s February pledge to review its JV comes after a highly controversial company audit published in December 2023 appeared to exonerate VW of allegations of forced labor at its Xinjiang factory. On cue, the Select Committee in February wrote to VW Group Chief Executive Officer Oliver Blume urging his company to cease operations in Xinjiang.
VW is now in an acutely invidious position, having bet heavily on the Chinese market (and its partnership with SAIC) as a key plank of its strategy to remain globally competitive against China Inc.’s electric vehicle (EV) juggernaut. Closing its Xinjiang factory, as seems to be the only tenable option at this stage, risks inevitable blowback from Beijing – even if this chagrin is largely performative so regulators can use it to deter other companies.
VW’s issues are only the thin edge of the wedge. As far back as December 2022, a report from the Sheffield Lab suggested that over 50 international automotive companies were “sourcing directly” from Xinjiang or from Chinese companies who have accepted forced labor transfers.
Chinese-owned companies with aggressive battery or EV export ambitions including Contemporary Amperex Technology (CATL), SAIC, Volvo Cars, Nio Inc., and GAC Aion New Energy Automobile Co., were also named as having a material Xinjiang footprint.
The scope of this problem extends right down into the weeds of automotive supply chains. A February 2024 Human Rights Watch (HRW) report raised severe concerns over aluminum procurement practices. The report explicitly names Tesla, Toyota, General Motors, and BYD as being at risk of using Xinjiang-sourced aluminum.
With US officials evincing particular concern that Europe will become a “dumping ground” for goods made in Xinjiang, forced labor could become another point of dispute in the transatlantic trade relationship. In late February, opposition from Germany and Italy scuppered the adoption of the European Union’s own belated forced labor law, the Corporate Sustainability Due Diligence Directive (CSDDD).
Conclusion
The growing preparedness of Washington to enforce existing regulations gels with the current anxiety over China’s automotive expert ambitions, and more generally its colossal industrial overcapacity. These anxieties may encourage even more assertive enforcement of the UFLPA for strategic industries.
With China desperate to retain foreign investment and concurrently moving to beef up due diligence, multinationals are between a rock and a hard place. As supply chains bifurcate, companies may have to be more artful than ever in engineering the separation of their Chinese and non-Chinese business operations – and the origins of their parts.
Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.
To read the full article published by the Hinrich Foundation, click here.