In January 2021, the popular clothing brand Uniqlo was surprised to learn that U.S. Customs and Border Patrol (CBP) had blocked a shipment of its shirts from entry at the Port of Los Angeles. Customs officials suspected that the shirts were made from cotton picked by forced labor in the Xinjiang Uyghur Autonomous Region (XUAR) of China.
While six of the seven styles didn’t have cotton in them and were eventually released, the seventh did. Uniqlo tried to prove that cotton was not produced in any part by forced labor, but when it did so its evidence was unconvincing. Uniqlo was unable to fully list its production steps and furnish a full production record for the shirts. Because the apparel retailer couldn’t provide real transparency into the source of that shirt and its cotton, the shipment was not released, and Uniqlo and its parent company, Fast Retailing, took a financial and reputational hit.
Uniqlo’s experience five years ago is indicative of a new wave of regulations and initiatives that have begun to crop up around the supply chain in the last few years. These regulations generally have one of two goals: to strengthen the resilience of the U.S. supply chain or to protect the environment and people.
Uniqlo’s shirts, for example, were seized under a series of orders issued by the U.S. Department of Homeland Security in 2020 prohibiting the import of goods made by forced labor from XUAR. These orders were followed by the passage of the Uyghur Forced Labor Prevention Act (Public Law No. 117-78) by Congress in June 2022.
Since then, the regulatory focus on curbing forced labor in the supply chain has only increased. For example, one of the 30 actions that the Biden Administration announced in November 2023 to strengthen supply chains was risk mapping for labor rights abuses that will be done under the auspices of the Department of Labor (DOL).
In the past, sanctions and laws prohibiting the importation of goods produced with forced labor were only weakly enforced. But since the passage of the UFLA, Customs has been rigorous in its scrutiny. It’s particularly important for the textile and apparel industries to pay close attention to the source of their clothes and materials, due to China’s heavy presence in those industries’ supply chains. Currently 20% of the world’s cotton comes from China, and 90% of **ital{that} cotton comes from the Xinjiang region.
In the face of this increasing scrutiny, the question then becomes: How can U.S. companies ensure their supply chains are reducing the risks of noncompliance with the UFLPA, and can those best practices be relied on for similar regulations in the future?
The what and why of the UFLPA
It’s no secret that forced labor has been used throughout human history. Despite every generation pushing back harder against its use than the generations that came before, such practices remain a thorn in the side of those who want to do business ethically. The practice has proven difficult to fully stamp out. Currently many governments use sanctions to dissuade companies from doing business with companies, individuals, or public entities that utilize forced labor, but the problem still persists.
In XUAR, religious and ethnic minority groups, such as the Uyghurs, have suffered human rights abuses for years. In many cases, these ethnic minorities are being forced to work to produce goods that are then sold around the world. As a means of holding China responsible for these conditions and to dissuade the broader global market from doing business with the companies in Xinjiang that exploit forced labor, the U.S. passed the UFLPA.
Conceptually, the UFLPA is very simple: Any goods mined, produced, or manufactured either completely or in part in the Xinjiang region of China are not allowed to be imported into the United States. If CBP has a suspicion that a shipment trying to enter the country might violate this rule, the onus is on the company importing the shipment to provide proof that it’s not tied back to the XUAR. That’s where it gets tricky. The company’s supply chain visibility and automation processes are crucial tools in providing this proof and clearing goods for entry.
Risks of noncompliance
In the past, enforcement around human-rights regulations and sanctions orders was famously minimal. But recently this has changed. The CBP tracks the statistics of the shipments it has held and then either released or denied entry into the U.S. as part of the UFLPA. From the enactment of the UFLPA through the end of 2023, more than half of the shipments held were eventually denied—2,669 versus 2,437 that were released. The shipments denied totaled $580 million in goods.
In addition to the financial penalties that can accompany violations, the delay that occurs when a shipment is inspected by the CBP also represents a major risk to supply chains. Holding a crucial shipment up for days or weeks can throw a carefully designed business plan into disarray. Companies that can very clearly document the origins of the goods in their shipment are less likely to suffer such a delay.
If the CBP does then find that a company’s shipment does not comply with the UFLPA, that shipment can be denied entry into the U.S. If that happens, the ramifications are increased exponentially. Missing shipments can lead to missed product launches and sales and have a direct impact on trade agreements and partnerships that could bubble up into impacts on entire sourcing strategies. This can further balloon to reputational risks, both in the realm of consumer perception and brand damage, but also among stakeholders and partners. A company with shipments in violation of the UFLPA might find stakeholders divesting themselves or pushing for new leadership or partners looking to renegotiate their contracts because of increased risk on their own part.
Five best practices
To avoid fines or disruptions, it’s recommended that companies look to enable the following capabilities in their supply chain:
1. Detailed mapping of the supply chain. Supply chain mapping—the process of gathering data on suppliers, their suppliers, and those who work for or are connected to them—is a crucial step in creating transparency that can identify potential UFLPA risks. Some third-party supplier management systems allow for companies to input critical details on tier-n suppliers, subcontractors, and intermediaries such as their owners, partners, facility locations, and more. Further, some software can send out detail-gathering questionnaires to suppliers on an automated basis. When high-risk names or details come back from the surveys, those details can be flagged if that system automatically checks them against up-to-date risk factors.
2. Supply chain traceability. Companies should be able to, ideally, catalog every stage of a product’s lifecycle from the final delivery back to the sourcing of the raw materials, even if it’s multiple suppliers back in the sourcing line. Every component must be traceable. This is, of course, an incredible amount of information, but automation tools can fill in known blanks and cut down on the manual time that would go into collecting this data. For example, if you are beginning to work with Supplier A for the first time, the system may already have the details for some of Supplier A’s subsuppliers. For instance, Supplier A may be using the same subsupplier for rubber as Supplier B, which you already work with, so you already have that raw material sourcing traced.
Once all that data is in the system, it can be cataloged and indexed in a way that makes it possible to bring it back up easily, with an entire timeline of a product’s components available for review.
3. Comprehensive documentation. By maintaining a detailed and easily accessible library of documentation around the sourcing of raw materials, audits, due diligence activities, and any mitigation or remediation steps taken when a violation is found, the process for CBP screening and compliance checks will be faster, easier, and less disruptive.
If possible, companies should build into their supplier management system specific UFLPA risk questionnaires that require suppliers to agree that their goods are not and will not be produced in the XUAR region and/or with forced labor. Regardless of actions that the supplier takes down the road, it helps a company’s case with the CBP immensely if these terms are agreed to by the suppliers and easily accessible during an investigation.
4. Risk-based due diligence. It’s important that a company is able to show that they’ve done their due diligence in identifying any potential UFLPA violations and then taking mitigating measures such as divesting from a supplier who is in violation or requiring that supplier to use a different materials source for the company’s orders.
This includes screening potential and existing suppliers against the Department of Homeland Security’s UFLPA entity list. (Those companies that have screened potential suppliers against the Office of Foreign Assets Control sanctions list will find the process to be similar.) Companies should also routinely reassess current suppliers. After all, a supplier could be clear for now, but start using a XUAR-based supplier in a few months—or one of your subsuppliers could start doing so—and supply chain managers will not want to be the last ones to find out.
5. Contract management and enforcement. Supply chain managers should build UFLPA (and other forced labor regulation) compliance right into their supplier contracts and have agreements to comply with UFLPA as part of the data-gathering surveys sent out during onboarding. Mandating that all suppliers adhere to these policies, and laying out a robust and clear plan for what will happen if a supplier is found to have broken compliance helps with any CBP auditing as well as making it clear to suppliers that the company takes the UFLPA seriously. The company can consider actions like conducting audits of suppliers without prior announcement and enforcing punitive measures if compliance is not met.
The growing importance of transparency
The UFLPA is a significant regulation that U.S. companies cannot afford to ignore. Even if all your suppliers are domestic, it’s possible that they have suppliers who can trace materials’ origins back to Xinjiang, and that means the risk of noncompliance and potential monetary, reputational, and disruption-based damage could be lurking within your supply chain.
For U.S. companies looking to steer clear of such an outcome, the above best practices are a vital starting point. They’re crucial for UFLPA compliance, but the structure of transparency, accountability, and illuminated risk will transfer well to complying with any new regulations we may see down the road—whether they be aimed at reducing forced labor; enhancing environmental, social, and governance (ESG) efforts; or addressing another area supply chain managers may find themselves responsible for in the near future. Supplier transparency and accountability is going to be the norm more than ever in the coming years, and supply chains that don’t delay in enabling it will benefit the most.
Furthermore, as supply chain professionals, we have a direct hand in the flow of the very goods that make societies run and keep people safe, healthy, and happy. Who we decide to work with, and who we support with our businesses, has a material impact on the world. By working to create a more transparent supply chain, we can do our part in making a more ethical society.
