Forced Labor Regulations Materially Impact U.S. and European Supply Chains

August 2, 2023
Geraint John

By Geraint John

Forced labor is becoming an ever more impactful source of supply chain risk as new regulations on both sides of the Atlantic begin to bite.

In the United States, the Uyghur Forced Labor Prevention Act (UFLPA) has seen more than 4,600 imported shipments worth over $1.6 billion intercepted by U.S. customs officials in its first full year of operation. This week, U.S. customs added new Chinese companies to the list of those restricted from selling their products in America.

The law seeks to stop products associated with forced labor in China’s Xinjiang region from entering the U.S. Recently, a growing list of companies have been accused of flouting the legislation. They include the parent company of printer manufacturer Lexmark International, power tool maker Milwaukee Tool and Nike Canada.

In Europe, automotive firms BMW, Volkswagen and Mercedes-Benz have also been accused of using forced labor in their Chinese supply chains. If true, they would be in contravention of Germany’s new Supply Chain Due Diligence Act (SCDDA). The SCDDA came into force in January.

This specific complaint, brought by a Berlin-based non-profit, has yet to be proven. However, it is a stark warning to larger companies that they need to up their game when it comes to managing forced labor risk in their extended supply chains.

Regulations Address a Growing Global Problem

Forced labor is defined by the International Labour Organization (ILO) as “all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.”

According to a recent report, as many as 50 million workers worldwide may be enduring forced labor or “modern slavery” conditions. The report estimates this number has grown by 25% over the past five years. The report argues that this increase is due to global trade conducted by G20 developed nations.

A new Interos survey of 750 procurement leaders in North America and Europe underlines the significance of new supply chain regulations that seek to tackle this issue. It found that:

  • 80% of those in the U.S. and 71% in Canada see the UFLPA as having a significant or moderate impact on their organizations. Energy and A&D sectors were the most affected.
  • 61% overall think the SCDDA will have a significant or moderate impact. This rises to 77% in the energy and financial services sectors.

The UFLPA has a direct operational impact. Violations lead to the physical detention of shipments at entry ports, as well as cost and reputational implications. The SCDDA, meanwhile, gives the German government powers to levy fines of up to 2% of a company’s annual turnover. They may also be banned from competing for public contracts for up to three years.

Revealed: The Highest Risk UFLPA Goods

Of the 4,651 shipments detained by U.S. Customs and Border Protection (CBP) under the UFLPA to the end of June, 872 (19%) were denied entry, 1,849 (40%) were released and almost 2,000 were awaiting a decision.

But Interos’ analysis of CBP’s data reveals that shipments of specific products from certain countries are much more likely to be rejected than others. In particular:

  • Almost half (46%) of all shipments detained (worth $1.37 billion – 84% of the total value) were electronic products. However, just 3% of CBP decisions resulted in these being refused entry. The vast majority are shipped from Malaysia.
  • In contrast, customs rejected almost two-thirds of industrial raw materials and more than 62% of pharmaceutical and chemical products. Well over half of apparel, footwear and textiles met the same fate (see chart).
  • Vietnam has the highest proportion of shipments denied entry (49%), with 89% of raw materials and 69% of apparel, footwear and textiles rejected. This demonstrates that attempts to skirt the UFLPA by shipping from outside China don’t always work.
  • China itself is the second riskiest originating country for U.S. imports, with 40% of CBP decisions denying its shipments entry. Compare to an 11% rejection rate for Thailand and just 2% for Malaysia.
  • China’s highest risk category is apparel, footwear and textiles (64% rejected). This was followed by pharmaceutical and chemical products (62%) and raw materials (44%). At the other end of the scale, just 14% of agricultural products and 8% of consumer products were denied entry by CBP officers.

Products at Greatest Risk From UFLPA

Percentage of CBP decisions where shipments are denied entry, June 2022 – June 2023

Source: U.S. Customs and Border Protection

Polysilicon – a key raw material in the production of solar panels – is one high-risk product targeted by the UFLPA. More than 40% of the world’s supply of polysilicon comes from Xinjiang. Following previous action against Chinese imports, Vietnam is now the biggest exporter of solar panels to the U.S. Vietnam accounts for one-third of solar panel shipments in 2021.

Actions That Companies Need to Take

Companies can take similar actions to manage forced labor risk and comply with both the UFLPA and SCDDA. At a foundational level, they include establishing a robust risk management and due diligence system capable of identifying and remediating illegal practices.

Interos’ recent survey found that nearly two-thirds of procurement leaders believe they have made significant or moderate progress on forced labor with their suppliers over the past three years (see chart).

Forcing the Issue on Forced Labor

Progress made with suppliers in the past three years

n=750 procurement leaders

Source: Interos Resilience Survey 2023

However, as with other ESG issues, one of the main challenges around forced labor is a lack of sub-tier supply chain visibility. This ranked as executives’ joint top barrier to progress alongside a lack of reliable data for setting and tracking goals.

To support their regulatory compliance efforts on forced labor, procurement leaders need to:

  • Use supply chain mapping and risk-scoring tools to pinpoint high-risk relationships with both direct and indirect suppliers in geographies prone to forced labor.
  • Ensure that existing direct and sub-tier suppliers are not on, or being added to, any restrictions lists, including those specific to the UFLPA.
  • Harness detailed risk intelligence to help identify and mitigate forced labor risks before selecting or onboarding new suppliers in China or other at-risk countries.
  • Keep a close eye on high-risk raw materials and products shipped by Chinese or other firms based in Vietnam, Malaysia, Thailand, Mexico and other countries on the U.S. CBP watchlist.

Supply chain regulations impose a heavy burden on companies. They require time, money and resources to ensure compliance. 79% of CPOs we surveyed agree with that view.

But the same proportion also believes that regulation forces their organizations to do a better job of managing supply chain risk. 70% say it even enhances their competitive advantage in the market.

So the message on forced labor, as with other types of supply chain risk, is that it pays to invest. Organizations can derive value from both complying with emerging regulations, but also proactively developing greater operational resilience.

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