international regulatory enforcement
The United States, Canada, and United Kingdom Take Action on Forced Labor in Xinjiang
Over the past year, the U.S. Government took a number of notable actions related to the Xinjiang region to address its concerns regarding forced labor in the region. The U.S’s key foreign allies, including Canada and the United Kingdom, have recently followed suit. The groundwork for those actions was set out in a multi-agency U.S. business advisory issued on July 1, 2020, cautioning businesses regarding the risk of doing business with companies with supply chain links to entities involved in forced labor and human rights abuses in the Xinjiang Uyghur Autonomous Region (the “XUAR” or Xinjiang) and China.
Following the issuance of this 19-page document, the Trump Administration used various economic sanctions, import restrictions and export controls directed at forced labor in XUAR. It designated as “Specially Designated Nationals” (“SDNs”) and placed on the Department of Commerce Bureau of Industry and Security (“BIS”) entity list various Chinese government entities and officials believed to be tied to human rights abuses in the XUAR, blocked goods from certain companies determined to have incorporated forced labor in the region, and imposed restrictions on exports of technology that could potentially be used to surveil Uyghurs and other ethnic minorities in the XUAR. Many of these actions were specifically aimed at the Xinjiang Production and Construction Corporation (“XPCC”), which was designated an SDN by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) on July 31, 2020. U.S. Customs and Border Protection (“CBP”) also imposed a ban on the importation into the United States of “cotton and cotton products” from XPCC and its subordinate and affiliated entities through CBP Withhold Release Orders. The outgoing Trump administration, after months of speculation, issued a “regional” ban on “cotton, tomatoes and downstream products” from the XUAR region, a measure that marks a change in approach, as such import bans have historically been directed at specific products sourced from targeted companies, rather than a targeted geographical area.
These U.S. measures impose obligations on companies, particularly those in the apparel, electronics, and food sectors whose supply chains rely significantly on China to carefully assess their suppliers and counterparties to avoid conducting business with sanctioned entities or sourcing goods that cannot be imported into the United States. Relevant companies should also expect to have a thorough understanding of their supply chains, from raw products to finished goods, as CBP has been issuing lengthy questionnaires to apparel and retail companies, requesting information regarding connections to forced labor in Xinjiang, including documentary evidence to support that workers at factories overseas are legitimately employed.
More recently, the United States’ key allies have recently announced similar measures. In Canada, the Minister of Foreign Affairs and the Minister of Small Business, Export Promotion, and International Trade announced a series of measures in Canada to combat forced labor and human rights violations. Specifically:
- A prohibition of imports of goods produced wholly, or in part, by forced labor, consistent with Canada’s Customs Tariff Act (as amended on July 1, 2020).
- A requirement that Canadian companies sign a Xinjiang Integrity Declaration if they:
- source directly or indirectly from Xinjiang, or from entities relying on Uyghur labor
- are established in Xinjiang, or
- seek to engage in the market, if the companies wish to receive services and support from the Trade Commissioner Service (TCS). The declaration confirms that companies are aware of Canadian law regarding the prohibition of forced labor, recognize the Government of Canada’s expectations that companies operating abroad will act in a manner consistent with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights and other standards of responsible business conduct, and are aware of the human rights situation in Xinjiang. By signing the Declaration, companies also affirm that, to the company’s knowledge, they: abide by all relevant laws, respect human rights, and seek to meet or exceed OECD Guidelines for Multinational Enterprises and the UN Guiding Principles; are not directly or indirectly sourcing products from Chinese entities implicated in forced labor or other human rights violations related to the XUAR; and commit to conduct due diligence on suppliers in China to ensure there are no such linkages.
- Issuance of an Advisory on doing business with Xinjiang-related entities, in the spirit of the U.S. advisory.
- Imposition of export controls that include denying export licenses where a substantial risk exists that the export would result in a serious violation of human rights or international human rights law under Canada’s Export and Import Permit Act (EIPA).
- Support for increasing awareness for Responsible Business Conduct linked to Xinjiang and
- Commission of a study on forced labor and supply chain risks.
Over in the United Kingdom, the Foreign Secretary announced steps that, in his view, are designed to ensure that U.K. companies, and companies that do business in the U.K., do not profit from forced labor in the XUAR. He also proposed a new set of export controls, new guidance to companies operating in Xinjiang, and a commitment to extend the U.K. Modern Slavery Act. Specifically:
- A review of Xinjiang-related export controls, to determine whether products will be subject to future export controls.
- Detailed guidance to U.K. business reflecting specific risks faced by companies with links to Xinjiang and underlining the challenges of effective due diligence there, akin to the U.S. and Canadian advisories.
- Guidance, as well as support, for U.K. public bodies to use public procurement rules to exclude suppliers where there is evidence of human rights violations in supply chains. Central government, non-departmental bodies, and executive agencies will be compelled to abide by the rules.
- Consistent with the results of a prior government recommendation to increase compliance with the Modern Slavery Act, imposition of financial penalties for organizations that fail to fulfill their obligations to publish annual modern slavery statements.
The European Parliament has also taken action, adopting a resolution in December 2020 that called for imposition of sanctions and request for an international observation group to conduct independent observations in the XUAR.
The Chinese government has started to push back on some of these sanctions. The Chinese State Council has promulgated new rules entitled “Measures for Blocking the Improper Extraterritorial Application Laws and Measures” which entered into force on January 9, 2021. They require that Chinese persons and entities subject to foreign measures prohibiting economic and trade activities report those measures to China’s Ministry of Commerce (“MOFCOM”) within 30 days. If an interagency task force headed by MOFCOM determines that the measure is unjustified, it will issue an order to restrict its application. The rules would also allow Chinese citizens or companies to sue for compensation, if their interests are damaged by the application of foreign laws.
In short, these countermeasures from the PRC government could pose difficulties for companies, as companies that restrict their dealings with subject Chinese entities and sectors in response to U.S. measures, particularly in connection with the risk of U.S. secondary sanctions, could cause companies to violate PRC laws, and vice versa. We view these developments as having the potential to contribute to the further decoupling of the U.S. and Chinese economies in certain sectors. This is particularly the case, as the Biden Administration has already made key appointments and staffing changes in the State Department and National Security Council, elevating the profile of positions focused on human rights, thus suggesting that issues related to the XUAR will continue to be an area of disagreement in U.S.-China relations.
We will provide regular updates as the tensions, and government responses, continue to mount.