us and chinese flags with freight port

Supply Chain Scrutiny Is the New Normal

October 3, 2023

Regulation of supply chains has taken on increased urgency amid rising geopolitical anxiety among key importing markets around economic reliance on adversaries. With the Uyghur Forced Labor Prevention Act (UFLPA) entering its second year of enforcement in the United States and the EU on the verge of enacting its own supply chain due diligence regulations, it has become increasingly important for businesses to understand the underlying motivations behind, and the likely progression of, the policy agendas in both markets in order to effectively respond to and mitigate reputational and operating risks.

Supply chain regulation in the United States has been inextricably linked to China anxiety

In the United States, Section 307 of the Tariff Act of 1930 has prohibited the importation of products made wholly or in part using forced labor for nearly a century. But the law had rarely been used to block imports—between 2000 and 2016 Customs and Border Protection (CBP) did not issue a single withhold release order (WRO) under Section 307 and this meant pressure on companies to conduct due diligence was low.

This was in big part due to the fact that the “consumptive demand” clause—which had allowed exceptions when comparative products did not exist in the United States—was removed in 2015. It was also a consequence of limited funding for CBP enforcement as well as years of general optimism around globalization, free trade and spreading American values through economic entwinement, particularly with China.

With the rise of populism and the protectionist orientation of the Trump Administration, growing anxiety over American reliance on China in strategic sectors, as well as investigative Western news reports of government-directed forced labor campaigns in China’s Xinjiang region following his election, tough-on-China rhetoric and action became a rare point of bipartisan consensus. In June 2022, the UFLPA came into effect, creating a rebuttable presumption that asserted goods made wholly or in part in Xinjiang likely used forced labor therefore were inadmissible into the United States.

The UFLPA has turned out to be the single biggest disruptor in supply chain regulation in the United States. According to CBP’s UFLPA Enforcement statistics, only 13% of shipments (measured by value) detained under the UFLPA are coming from China, meaning that companies need to be able to track individual product flows throughout the supply chain as well as map supplier networks all the way upstream in order to effectively both mitigate against the risk, and address the disruption of UFLPA-related enforcement activity. Companies in sectors that have been targeted for enforcement, such as apparel, solar panels and electric vehicle components, are particularly vulnerable to detentions.

U.S. congressional scrutiny of corporate links to Xinjiang and China more broadly has also ratcheted up with the formation of the House Select Committee on China in January 2023. The Committee, and particularly its chairman Mike Gallagher (R-WI), has been aggressive in naming and shaming companies for their supply chain links to Xinjiang. While the UFLPA has created a need for U.S. importers to conduct comprehensive geographic mapping to try and rule out links to Xinjiang, forthcoming legislation in the EU will likely necessitate a more comprehensive due diligence approach.

Key differences define the European approach

The European Union is also in the process of enacting legislation with far-reaching consequences for how companies manage their supply chains. At its center lies the Corporate Sustainability Due Diligence Directive (CSDDD), which mandates companies to ensure their business operations—and those of their suppliers—comply with environmental and human rights obligations.

First announced in 2021, the CSDDD was soon joined by parallel acts to address specific concerns—notably a Deforestation Regulation and a Forced Labor Regulation. Both the CSDDD and the Forced Labor Regulation remainwork in progress—the former will likely be finalized by the end of 2023 or early 2024, while the latter has been delayed.

Like in the United States, these initiatives have coincided with heightened political challenges to companies’ cross-border operations, as the EU and its member states push for economic and technological “de-risking” and amid increasingly complex commercial relations with China. But business leaders should be aware of key differences between the philosophies and approaches taken by the UFLPA and its closest European counterparts.

Take the CSDDD; this broad legislation’s reach goes well beyond any single geography or issue. It is the product of an unprecedented push for a green transition that has defined this European Commission’s mandate (ending in 2024). As one of the pillars of the European Green Deal, the CSDDD represents a significant shift in focus, from classification and disclosure to substantive horizontal rules addressing the environmental and human rights impacts of business operations.

Although the exact thresholds of the CSDDD remain under negotiation, it will undoubtedly scope in any large company active in Europe—regardless of where their operations, or those of their supply chain, take place.

Perhaps more analogous to the UFLPA is the Forced Labor Regulation, but here too, key differences result from distinctions in Europe’s relationship with China and the global trading system. While China has featured extensively in the legislative debates, the Regulation itself—at least in the form of its original proposal—seeks to avoid political tensions by not explicitly focusing on a particular geography. And despite some early calls for an import ban, the European Commission ultimately opted for a more WTO-friendly market surveillance mechanism to enforce the prohibition. The result is legislation with broader geographic reach, where businesses will be primarily responsible for ensuring products made with forced labor do not make it to the European market.

The EU’s extensive legislative effort on supply chain due diligence is a reflection of the 2019-2024 European Commission’s willingness and motivation to regulate business in the interest of environmental and human rights concerns.

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