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Xinjiang Supply Chains Come Under Growing Scrutiny

The Uyghur Forced Labour Prevention Act, designed to counter China’s systematic use of Uyghur forced labour, has joined the statute books in the US. It stands for more than just protest, for it portends an era of much greater government intervention in global supply chains.

Damaged goods: Uyghur workers prepare irrigation canals for a cotton plantation in Xinjiang, China. Image: Joerg Boethling / Alamy

The Uyghur Forced Labour Prevention Act (UFLPA) works by establishing the rebuttable presumption that ‘any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China’ are the product of forced labour, and therefore that such goods are prohibited from being imported into the US. This powerful presumption upends traditional enforcement: rather than assuming that goods are admissible until proven otherwise, US customs will now presume that anything incorporating any amount of Xinjiang content is ‘guilty’ until proven innocent.

The UFLPA was enacted in reaction to the Chinese government’s long-standing policies of repression in Xinjiang, which many have labelled as a genocide. Aside from the brutal humanitarian disaster – which had seen the surveillance, detention, forced labour, and internment of at least 2.6 million Uyghurs by November 2020 – the Chinese government’s policy in Xinjiang is designed to use the region's rich material wealth to spur economic development that will benefit the Chinese state – and not the Uyghur people. In recent years, the Chinese government has doubled down on its policies, despite international condemnation – denying genocide and offering subsidies to Chinese businesses employing Uyghur forced labour in Xinjiang. There have even been calls from official Chinese state media to deliberately increase foreign dependence on the region as a way to compel acceptance of China’s policies in the region.

The upshot has been a significant level of integration of Xinjiang into the global economy. Xinjiang is a critical region not only for the production of cottontomatoes and polysilicon – but also for more advanced industries such as battery manufacturingautomobile production and pharmaceuticals. As Xinjiang moves up the manufacturing value chain, it becomes even more deeply embedded in global commerce. Already, the region’s economic footprint is enormous – Altana’s recent research looked at the Xinjiang forced labour ecosystem, and found that the wider corporate networks of entities tied to forced labour in Xinjiang include nearly one million entities – with nearly seven million trade connections to the wider world. We saw transactions by entities tied to forced labour with entities in 183 countries and 590 different industries (with NACE codes being used as a proxy for industries). Uyghur forced labour is potentially everywhere.

The UFLPA’s design intentionally captures this broad swath of trade activity. By including the crucial language ‘wholly or in part’, Congress signalled its intent to enforce the UFLPA against goods that touch Xinjiang at any part of their supply chain. For instance, even if cotton from Xinjiang is sent first to Vietnam to be spun into fabric, and thence to Korea to be turned into finished clothing, it is still presumptively banned from entering the US. This small bit of legalese will require firms to understand their entire extended supply chain, from original input to finished good.

The UFLPA presages an era in which supply chains are increasingly made objects of public concern – and not just private supply

No one firm can presume that its supply chain is free from connections to Xinjiang – despite much wishful thinking. In the course of our research, we saw forced labour permeating global trade: pharmaceutical inputs from Horgos being transformed into generic drugs in India for transhipment around the world; textiles from Aksu being moved to Vietnam for shipment abroad; and chemical brighteners from Urumqi being integrated into infants’ diapers to be sold in the US, just to name a few examples. Under the UFLPA, any one of these transactions is the potential target of enforcement action, unless the importer can show by ‘clear and convincing evidence’ that they were not the result of forced labour.

The problem is that most firms cannot see their supply chains in enough detail to truly understand where they might be vulnerable to forced labour. As recent supply chain debacles have shown, firms lack the level of supply chain visibility which would allow them to avoid basic imbalances in supply and demand – let alone to see where Uyghur forced labour nests within complicated, multi-tier supply chains. The private sector’s status-quo tools for combatting forced labour – audits, surveys and exhaustive investigations – are still crucial, but simply cannot be deployed at the level required by the UFLPA.

The UFLPA presages an era in which supply chains are increasingly made objects of public concern – and not just private supply. The only parallel in recent memory is the change that overcame the banking industry in the wake of the 9/11 terrorist attacks, when terrorist financing reform completely remade how banks onboarded and serviced customers. As more countries wake up to the risks posed by supply chains with national security vulnerabilities, ecological externalities, and basic failures in environmental, social and governance (ESG) compliance, more regulation will come, requiring more visibility. The UFLPA is inaugurating an era in which governments, investors and companies themselves increasingly demand supply chains which are resilient, secure, compliant and equitable.

For firms, this is both a challenge and an opportunity. Companies will have to invest significantly in new technologies and organisational structures in order to achieve supply chain visibility. But for those that do, the promise of new ways to unlock value awaits. For instance, greater supply chain visibility will mean that firms can more easily discover how their supply chain intersects with potential geopolitical or environmental risk, allowing them to implement proactive safeguards against disruption. As firms understand more about their upstream suppliers and downstream customers, they can push ESG standards out to their broader networks, making the whole economic system healthier.

The pandemic laid bare the fragility of just-in-time supply chains, while Russia's invasion of Ukraine highlighted the national security risks of globalised interdependence

For states, securing supply chains is more than a humanitarian imperative – it is a necessity in light of increased uncertainty. The coronavirus pandemic laid bare the fragility of just-in-time supply chains, while Russia’s invasion of Ukraine highlighted the national security risks of globalised interdependence. As Germany and the EU move to implement tighter forced labour regulations impacting supply chains, observers should not be surprised to see more global pushes for regulation impacting national security, sustainability and governance concerns.

Post-Brexit, the UK has a special opportunity to be a leader in this area. A global economic powerhouse with new-found regulatory freedom, the UK has the flexibility to re-imagine supply chain governance and to forge trusted supply chains with European and global partners. The UK could use its influence to push high standards of governance throughout the world – for instance, it could lead on creating a ‘climate club’, offering favourable trading terms to countries who adhere to stringent environmental standards. Or it could boost UK security by strengthening links to overseas semiconductor suppliers. It could start by closely watching the implementation of the UFLPA and continental legislation, with an eye to strengthening the Modern Slavery Act to more robustly prevent Uyghur forced labour.

The UFLPA promises to change global commerce for the better, not only in stepping up enforcement against Uyghur forced labour, but also in inaugurating an era in which countries regulate their supply chains more closely. Whatever happens, there is no going back to an era of opaque, sprawling and brittle supply chains. By engaging between and among businesses and governments through a shared source of supply chain truth, it will be possible to better coordinate supply and demand, build resilient supply chains, surface and mitigate sustainability and compliance concerns, and share and validate supply chain behaviour with regulators. And that is something to be excited about.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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