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PracticalESG

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Keeping you in-the-know on environmental, social and governance developments

Ed. note: Today’s post comes from guest contributor Pepijn van Haren, a Director in the New York City office of Wallbrook Advisory Limited and Andrew McCracken, a Director in Wallbrook’s London office.

On 23 December 2021, US President Joe Biden signed into law H.R. 6256 the Uyghur Forced Labor Prevention Act, banning goods from China’s Xinjiang region unless importing companies can prove the products/goods/materials were not made with forced labour. Underlining the current bipartisan consensus in Washington D.C. over China policy, the bill passed both houses of Congress with near-unanimous support.

The law targets all items “mined, produced, or manufactured” in Xinjiang, the northwestern region of China where, since 2017, the Chinese government has reportedly detained over 1 million Uyghurs and members of other ethnic groups. US authorities and international human rights organisations have accused China of widespread human rights abuses in Xinjiang, including forced labour, forced sterilisations and torture. Beijing has consistently denied these claims.

Although importing goods manufactured by slave labour was already prohibited in the US, the new law places the burden of proof on companies, who must demonstrate that imports from Xinjiang are not linked to forced labour or face an importation ban. Significant questions remain over how US authorities will enforce the law. Supply chains for many raw materials and products – including petroleum, cotton, minerals and sugar – can frequently be traced back to Xinjiang, and the early months of 2022 are expected to see significant lobbying efforts by global corporations as the Biden administration drafts guidelines for importers.

The cost of compliance

Opponents of the bill have raised concerns that it could lead to supply chain disruptions in key industries, such as renewable energy and clothing. Manufacturers operating in Xinjiang produce an estimated 45% of the world’s solar-grade polysilicon, a core material in most solar modules. Xinjiang also produces around 20% of the global cotton supply, and some of the world’s highest quality cotton.

Recent attempts by clothing retailers to address concerns over cotton linked to Xinjiang has highlighted two key challenges companies face in this area: Chinese attempts to punish firms that boycott Xinjiang, and the difficulty of unravelling global supply chains. Nike and H&M each faced boycotts in China after voicing concerns over allegations of forced labour in Xinjiang, underlining the risks faced by companies for whom China represents both a major market and key supplier.

The new US law is also set to run into the realities of the sprawling supply chains on which much of the global economy is based. For most clothing retailers, tracing cotton back to the farm from which it originated is currently not possible. Much of the technology needed to increase traceability – data sharing platforms built on blockchain technology, and isotope and microbiome tracing – remains under development. Forced labour concerns regarding products potentially sourced from Xinjiang are exacerbated by the difficulties in conducting reliable audits of working conditions in the region.

One Direction…

The new US law is the latest move in a global effort to compel companies to trace and disclose their supply chains. The United Nations Guiding Principles on Business and Human Rights outline firms’ responsibility to prevent adverse human rights impacts to which they may be linked “as a result of their business relationships”, while the UK Modern Slavery Act (2015) requires companies to outline the steps they have taken to ensure supply chains are free from slavery and human trafficking. Further legislation in this area is imminent: the European Union plans to introduce new rules for mandatory human rights and ESG due diligence. The recently enacted Supply Chain Act in Germany – criticized by some over its perceived lack of ambition – nonetheless requires companies to assess risks associated with their direct suppliers.

Fortunately, companies seeking to demonstrate their commitment to human rights and compliance with the expanding body of legislation governing supply chain traceability have several options at their disposal. Some sectors have formed industry-wide initiatives that pool information on supply chains and are developing new tracing mechanisms. Conducting human rights due diligence on direct suppliers can also be a key first step to reducing the risks of exposure to forced labour abuses, while human rights impact assessments help businesses to identify and address the adverse effects their activities may have on rights holders.

It is clear that – irrespective of the state of Sino-US relations – developing a better understanding of supply chains will be a major challenge for global business over the following decades.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for more than 35 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting at the height of regulatory development, working across a range of disciplines. He was one of the firm’s leading environmental compliance and management… View Profile