Five Practical Tips for Mitigating China Supply Chain Risks

7 min

Does your business supply chain include the People’s Republic of China (China)? If so, it is more important than ever to undertake robust due diligence and risk mitigation efforts regarding your imported goods. As part of the Biden administration’s growing campaign to counter forced labor in American supply chains, the U.S. government recently issued an updated and comprehensive supply chain business advisory (Supply Chain Advisory or Advisory). The Advisory provides considerations for businesses with potential exposure to the Xinjiang Uyghur Autonomous Region (Xinjiang) of China in particular, and the robust due diligence that is increasingly expected of U.S. companies in order to combat human rights issues in the region. The Supply Chain Advisory also provided an overview of key actions taken by the U.S. government to date in response to forced labor in Xinjiang.

Based on a shared set of concerns about forced labor in the global supply chain, the European Union (EU) also recently issued a business advisory. These measures present compliance risks and considerations of their own. China has pushed back in response to the increasing pressure from the United States and its allies. Given this quickly evolving environment, below we summarize these issues and provide five practical tips for your business’s supply chain activities in China.

Xinjiang Advisory

The updated Supply Chain Advisory is an interagency effort by the Office of the United States Trade Representative (USTR) and the Departments of State, Treasury, Commerce, Homeland Security, and Labor to draw attention to supply chain risks for U.S. businesses with imports connected to Xinjiang. Given concerns that China continues to carry out genocide against Uyghurs and other minority groups in the region, the Advisory recommends that U.S. businesses and individuals be aware of their legal exposure when dealing with entities or individuals linked to the abuses in Xinjiang. Notably, such actions carry the possibility of running afoul of criminal statutes, sanctions, export controls, and import prohibitions.

According to the Supply Chain Advisory, public reports identify a large number of industries in Xinjiang where labor abuses may be occurring. Examples from the Advisory include business activities involving agriculture, cell phones, construction, cotton, electronics assembly, footwear, gloves, noodles, stevia and sugar, textiles, and toys. More specifically, key categories of business or supply chain risk include:

  • Sourcing labor or goods from Xinjiang or entities connected to Xinjiang
  • Assisting or investing in the development of Chinese surveillance tools used in Xinjiang, for example, through joint ventures and research partnerships with PRC government officials and departments or Chinese companies known to develop such tools
  • Supplying U.S.-origin commodities, software, and technology to entities engaged in surveillance and forced labor practices, like cameras, tracking technology, or biometric devices and,
  • Aiding in the construction and operation of internment facilities or in the construction and operation of manufacturing facilities in close proximity to the camps and reportedly operated by businesses accepting subsidies from the PRC to subject minority groups to forced labor

Other U.S. Government Actions

The release of the updated Supply Chain Advisory is consistent with additional efforts by the Biden administration to counter forced labor, including through enforcement and issuance of Withhold Release Orders (WROs) and increasingly tight export controls on goods to China, particularly with continued additions of Chinese companies to the Commerce Department’s “Entity List” of restricted parties.

The uptick in new WROs began in 2020 under the prior administration and has continued into 2021.  Not only has the Biden administration continued to seize shipments that potentially violate existing WROs; the administration has also continued to issue new WROs. In May 2021, Customs and Border Protection (CBP) issued a WRO against a Chinese fishing fleet owned and operated by Dalian Ocean Fishing Co., Ltd, because of the company’s reported use of forced labor, blocking its exports of tuna, swordfish, and other seafood from entry into the United States. Similarly, in June 2021, CBP issued a second WRO against Hoshine Silicon Industry Co. Ltd., a company located in Xinjiang, and its subsidiaries. The WRO prohibited the entry of all silica-based products, including polysilicon and other materials used to make components for solar panels, electronics, and other goods. In announcing the WRO, Homeland Security Secretary Alejandro Mayorkas repeated President Biden’s pronouncement at the recent 47th Group of Seven (G7) summit in June 2021 that the United States will not tolerate any forced labor in its supply chains.

The U.S. Department of Commerce has also continued to add to its list of export-controlled entities, particularly for entities in China. On July 9, 2021, for example, the Commerce Department updated its Entity List to include 34 entities, 14 of which were entities in China with purported ties to human rights abuses in Xinjiang. In publishing the new designations, Commerce emphasized in an accompanying press release that these entities have enabled the Chinese government’s “campaign of repression, mass detention and high-technology surveillance” against Uyghurs and other ethnic minorities.

China’s Anti-Sanctions

In response to the increasing pressure from the United States and global allies on these issues, China has hit back, enacting an “anti-foreign sanctions law” in June, which is intended to punish countries that enact anti-China measures and individuals and companies that comply with the measures.

The new law is triggered by any sanctions by any third countries that target China, Chinese entities or companies, or Chinese individuals. It grants the Chinese government the authority to add government agencies or individual policymakers, or their immediate family members, to a sanctions list. Penalties under the new law may include travel restrictions, asset freezes, and prohibitions against conducting certain business activities in China or with Chinese entities.

Best Practices for U.S. Companies

Considering the Biden administration’s increasingly tough stance on forced labor issues, U.S. businesses must remain wary of potential exposure to the compliance risks arising out of their business activities in China. Below are five best practice tips for U.S. businesses to consider along these lines:

Tip No. 1: Increase auditing and other supply chain due diligence measures, and monitor for any warning signs of possible forced labor.

Especially if you continue to source goods with any potential nexus to the Xinjiang region, be attentive to the following warning signs in particular:

  • A foreign entity conceals the origin of its goods and ownership.
  • A Xinjiang entity discloses high revenue but has a low number of employees paying into the PRC’s “social security insurance program.”
  • A Chinese entity makes veiled references to internment, such as “Education Training Centers,” “Xinjiang Aid,” ethnic minority graduates, and re-education.
  • A Xinjiang entity receives PRC assistance as part of its poverty alleviation efforts or mutual pairing assistance program or is in receipt of certain subsidies.
  • A foreign entity uses nonstandard hiring practices or PRC recruiters.
  • A foreign entity references an XPCC-affiliated entity.
  • A Chinese entity operates in or near internment camps and prisons in Xinjiang, or operates businesses owned by or contracting with a prison enterprise

Tip No. 2: Keep abreast of developing sanctions, WROs, and other restrictions related to forced labor.

Pay close attention in particular to the lists of goods included on the Department of Labor’s “List of Goods Produced by Child Labor or Forced Labor”; the names of companies on the Department of Commerce’s “Entity List”; the names of products and companies subject to the Withhold Release Orders enforced by CBP; and the names of entities on the Department of Treasury’s Specially Designated Nationals (SDN) and Blocked Persons lists.

This should include consulting experienced trade counsel on matters and supplying appropriate training and resources to personnel responsible for business compliance programs.

Tip No. 3: Conduct independent on-site audits of suppliers in China, where possible.

This promotes greater supply chain transparency. Please keep in mind that, because of the anti-sanctions law in China, it may be increasingly difficult to secure independent and reliable information and advice from Chinese entities, law firms, etc.

Tip No. 4: Consider shifting supply chains to other sources.

Consistently evaluate your current supply chain and consider mitigating risk by moving to other sources, including sources outside China.

Tip No. 5: Know that lack of supply chain visibility is no defense.

The times when a company knew only the first or second level of its supply chain are gone, particularly where it comes to China and the Xinjiang region. Ignorance is no defense; in fact, it is counterproductive because it sets a company back in the event that CBP comes knocking, in which case importers must push that much harder to put together an origin-to-destination paper trail that will satisfy an inquiry or detention notice from the agency. This can include the need to obtain supporting purchase records, production documents, and labor documentation, similar to that required during an unfair trade investigation (i.e., antidumping or countervailing duty verification).

We continue to monitor developments associated with this and other U.S.-China sanctions and export control issues. If you have any questions regarding how the U.S. government’s growing efforts to counter forced labor in U.S. supply chains may affect your business, please reach out to Venable’s International Trade and Logistics Group for guidance.