Leveraging New Supply Chain Law to Increase Sales and Lower Costs

It has been nearly a year since U.S. Customs and Border Protection (Customs) began stopping imports with inputs from the Xinjiang region of China from entering the United States pursuant to the “rebuttable presumption” of forced labor under the Uyghur Forced Labor Prevention Act, or UFLPA.

Since then, thousands of shipments valued at nearly a billion dollars have been detained under this bipartisan legislation, which aims to prevent any products that were produced using forced labor from entering the U.S. market.

More than half the shipments detained by Customs under the UFLPA so far have yet to be released, and another 13% have been denied entry altogether. As a result, companies have had to scramble to find replacement sources in order to replenish inventory and fulfill orders while they work to get their detained shipments released.

These prolonged detainments and associated storage fees add up as companies work to identify and vet their supply chain partners, trace each step of their product manufacturing process, and compile the necessary documentation required to demonstrate that their supply chains do not touch Xinjiang and are free of forced labor.

Ultimately, companies that are unable to demonstrate UFLPA compliance to Customs’ satisfaction must reexport their product, may no longer import products created via the same (flagged) supply chain, and expose themselves and their future shipments to increased scrutiny at the border and a heightened risk of enforcement actions, penalties, and audits.

With UFLPA enforcement showing no signs of slowing down, the government says the law remains “front of mind” and that it is working to ensure that C-suites across the U.S. understand associated compliance obligations by publishing related guidance on a rolling basis. At this stage, retailers importing product from abroad would do well to trace their supply chains using a risk-based approach and prepare the documentary evidence needed to demonstrate UFLPA compliance should Customs come knocking.

The past year of costly open-ended detentions makes clear that a reactive approach will cost companies in time and resources. Fortunately, proactively updating a company’s import and social compliance program presents opportunities to concurrently improve a retailer’s public image and lower import duties–giving retail leaders the opportunity to justify and recoup associated compliance costs from the business development and cost savings perspectives.

Scope of Import Prohibition and Options for Retailers

The UFLPA import prohibition applies to any product, regardless of country of export or country of origin, that incorporates any type of raw material, component, or input from the Xinjiang region of China. It also applies to any products whose supply chains involve entities on the UFLPA Entity List or entities using workers/forced labor from Xinjiang.

If Customs suspects that a retailer’s shipment contains any such product, it will detain the shipment at the border, at which point the company will have three options:

1. Submit sufficient evidence to prove that the product’s supply chain does not involve Xinjiang, entities on the UFLPA list, or Xinjiang workers and therefore falls outside the scope of the UFLPA and can be released into the U.S.

2. Submit clear and convincing evidence proving that although the product’s supply chain touches Xinjiang, its production in no way involved forced labor.

3. Reexport the product and refrain from importing products created via the same supply chain

The law itself and Customs’ enforcement efforts are broadly supported by Congress and the American public alike. As Customs continues to receive staffing and budgetary increases geared toward ramping up enforcement (its budget more than doubled to $100 million this year), the agency has broadened its UFLPA priorities beyond the initial narrow concentration on products like tomatoes, cotton, and polysilicon from China.

Now more than half of the shipments detained by Customs under the UFLPA contain consumer electronics, and most do not originate in China (but may contain an input that touches Xinjiang).

Cause-Conscious Consumers

The purpose behind the UFLPA’s import prohibition is to prevent merchandise produced using forced labor from entering the U.S. market. So, while compliance with the law obviously protects retailers from a legal and sourcing perspective, the fairly involved supply chain assessment and program updates required to bring a retailer into compliance with the UFLPA also offer the company the opportunity to demonstrate its commitment to this important human rights initiative.

With the dizzying number of retail options now available to American consumers, differentiating your company based on its commitment to the eradication of forced labor offers an opportunity to attract like-minded customers. By looping a retailer’s advertising and public relations departments into the effort, the policies and procedures a company puts in place to prevent forced labor in its supply chains can be shared with cause-conscious consumers to demonstrate that the company’s principles are in line with their own and that the company is committed to supporting U.S. efforts to further this important cause.

From a branding perspective, this presents a long-term approach to attracting new customers, as efforts to eradicate forced labor from U.S. supply chains will be a bipartisan trade compliance priority for the foreseeable future.

Tariff Mitigation

The supply chain review required to address UFLPA risk offers retailers the opportunity to take a closer look at a product’s country of origin (COO) and import classification, both of which affect the duties a retailer must pay. The COO of a product depends on where each step of the manufacturing process occurs, while its classification depends on its characteristics as compared to the headings and rules of the Harmonized Tariff Schedule of the United States, or HTSUS.

Shifts in COO or HTSUS classification can result in significant duty savings. For example, shifting a product’s COO away from China means a retailer no longer must pay 25% in Section 301 duties. Assessing opportunities like this requires little more than gathering the necessary supply chain information (which should be gathered for UFLPA purposes anyway) and conducting a COO or classification analysis with the help of a Customs professional.