News broke this February that customs officials in the United States had confiscated thousands of cars made by Volkswagen. The VW brands impacted included Porsche, Bentley and Audi. Authorities claimed that the cars included parts made with forced labor in China’s Xinjiang region.
The US, along with other nations, has accused China of human rights abuses, including forced labor in Xinjiang Uygur Autonomous Region (XUAR). To counter this, the US government enacted Uyghur Forced Labor Prevention Act (UFLPA) to prohibit the importation of goods that are suspected of being made by forced labor.
VW is certainly not the first major automaker to fall afoul of the UFLPA. In 2022, a report from Sheffield Hallam University found that every large car manufacturer was at a high risk of sourcing parts linked to Xinjiang. Nor do automotive companies exclusively face this problem. It impacts many other industries, such as consumer electronics and clothing.
CBP Seizures
President Biden signed the UFLPA into law on December 23, 2021. It has been in force since June 21, 2022. US Customs and Border Protection (CBP) has significant powers under this law. CBP can seize any imported goods suspected of being made, wholly or in part, with forced labor in Xinjiang.
By February 2024, CBP had issued Withhold Release Orders (WROs) on over 7,000 shipments worth $2.6B. The most frequent products suspected of being in violation of the law include:
- Electronics
- Apparel, footwear and textiles
- Industrial and manufacturing materials
- Agriculture and prepared products
- Consumer products and mass merchandising
To have their goods returned, companies must be able to prove that they have not violated the law.
However, if your company does not import from China, it does not mean that you are in compliance with the law. Your UFLPA risks may be wearing a disguise. CBP has stopped more shipments from Malaysia and Vietnam than from China itself.
How are Companies Reacting?
Many companies have been slow to react to new laws and regulations like the UFLPA, and the German Supply Chain Due Diligence Act.
The challenge for many companies is this: they don’t know who all of their upstream suppliers are.
This is due to the complexities of global supply chains. Many enterprises have no visibility beyond Tier 1 suppliers. As a result, issues like forced labor and environmental impact are hard to identify and measure.
Nonetheless, the complexity of compliance requirements is not an excuse. Companies dependent on global trade must adhere to all import and export regulations — including the UFLPA.
Furthermore, a head in the sand approach is becoming untenable. Companies face ever greater accountability across their supply chains.
There has also been a profound shift in the culture around corporate social responsibility. Goods made with forced labor are simply not acceptable. Consumers increasingly expect companies to adhere to Environmental, Social and Governance (ESG) mandates.
In addition, new regulations will keep coming, such as the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD). Companies will find it increasingly difficult to ignore human rights abuses and other issues in the supply chain.
Supplier Transparency
Some industries have better knowledge about their supply chain, so they can handle due diligence better. But overall, new rules are making companies confront the risks of lack of supplier transparency. Many realize that they are not prepared enough. Oftentimes, they are reactive when problems arise, instead of planning ahead for new legislation.
However, a combination of consumer sentiment and regulatory pressures, in the form of fines and confiscated goods, will force companies to be more proactive.
This means understanding who your trade partners and suppliers are. It also means knowing who their suppliers are in turn. If, or when, you uncover concerns about your suppliers, you will need to take action.
This could include disruptive actions such as ditching suppliers and/or changing sourcing strategies. Using a single supplier for critical parts is more than just a risk. It could be an existential threat to a company.
The good news for large enterprises is that they have significant leverage over suppliers. Therefore, greater collaboration and supplier development may be a better response. Either way, non-compliance with the UFLPA is no longer an option.
Learn more here about how QAD helps enterprises manage suppliers.
