On January 13, 2021 the United States Customs and Border Protection (CBP) expanded the blanket Withhold Release Order (WRO) initially issued on December 2, 2020 and will detain all shipments containing cotton, cotton products and tomato products originating from the Xinjiang Uyghur Autonomous Region (XUAR). Here’s an excerpt from the January 13 statement:
The U.S. Department of Homeland Security announced today that U.S. Customs and Border Protection (CBP) personnel at all U.S. ports of entry will detain shipments containing cotton and cotton products originating from the Xinjiang Production and Construction Corps (XPCC).
Forced labor is a priority CBP issue, and the 2020 election results probably won’t curb that momentum. The most recent data shows that from October 1, 2020, through December 31, 2020, CBP detained 90 shipments of goods subject to WROs. Implication: businesses that bet on this one being just another case of brow-beating run a significant risk in the near term.
XUAR Facts and Figures
The Chinese government plans to double manufacturing capacity in the XUAR by 2025, with a focus on apparel and textiles. The following table shows the XUAR’s top exports in 2019.
The XUAR’s true role in global supply chains is difficult to determine but assumed to be much more prominent than export data reveals because the XUAR produces components and ingredients that are then incorporated into finished products within China.
Importers Call for Clarity
In response to importers’ requests for transparency regarding the documentation required to secure the release of goods, on February 12, 2021, CBP issued answers to frequently asked questions covering topics like detention of shipments, proof of admissibility, certificate of origin, and due diligence. Here are the key points:
- The WRO is not limited to cotton and tomato products produced in the XUAR; it also covers products made in other parts of China and third countries using inputs from the XUAR. Downstream products produced outside of XUAR that incorporate these inputs may also be detained. For example, a garment produced in Vietnam of fabric knit in China is covered by the WRO, if the cotton was picked in XUAR. Customs is primarily targeting shipments with a known nexus to XUAR, reportedly based on an unpublished internal list of manufacturers in the region. However, the WRO gives Customs authority to seize cotton and tomato products produced anywhere if any inputs are from XUAR.
Implication: If you haven’t already, map your supply chain using digital twin technology, a virtual mirror of your physical supply chain operations that lets you run multiple what-if scenarios before you activate any changes and make adjustments in real time.
- To prove admissibility, CBP instructs that importers should submit the required documents to the port detaining the goods. Essentially, importers must provide transaction documents for every tier of the supply chain proving absence of nexus with the XUAR. Unfortunately, importers typically do not have that level of visibility to their upstream supply chain.
Implication: Be prepared to invest in technology for your business, and perhaps for key suppliers’, which creates and maintains a dynamic compliance certificate displaying chain of custody.
- Importers without relationships with the upstream suppliers/manufacturers must have verifiable and comprehensive social compliance procedures in place. CBP requires that the entire supply chain is documented in order to provide evidence that forced labor is not used at any tier. However, in recognition of the complex supply chains for these products, CBP advised that importers can prevent the risks of forced labor by having a “comprehensive and transparent social compliance system in place.” CBP directs importers to the forced labor section of its Informed Compliance Publication on Reasonable Care, which basically requires importers to evaluate their entire supply chain for forced labor risks and implement forced labor remediation plans.
Implication: When exploring the business implications of import bans, you’re going to have to do the work of comprehensive supply mapping and auditing one way or another.
Additional (Possible) Business Implications of Import Bans Worth Considering
Companies, especially larger ones with market presence, may be called upon to exert leverage via business relationships and sourcing choices. This has already begun. Brands report increasing challenges in engaging their Chinese suppliers, which tend to be supportive of the Chinese government’s policies. Nevertheless, companies — especially market leaders — should decide now if their approach will be proactive or reactive.
Next, consider that governments aren’t the only entities interested in traceable supply chains. Traceability is likely to be a growing consumer demand. New technologies hold promise to support a more rapid scale-up of traceability, with greater reliability. In particular, isotope and microbe tracing may enable identification of product origin to help confirm sourcing information provided by suppliers. As noted, distributed ledger systems or other shared databases may also assist in the scale-up of traceability.
Finally, consider the challenge faced by companies that complete an exhaustive supply chain analysis only to discover they face a major hurdle establishing a financially viable, diversified supply chain precisely because of China’s dominance in certain sectors. Establishing alternative hubs with vertical integration is likely to prove challenging.
What Does This Mean for Importers?
Right now, importers must focus on complying with the CBP’s rules while thinking longer term about developing comprehensive compliance plans to reduce risk to their supply network and brand reputation.