Raising the Ante on China Trade: Complying With and Making Claims Under the UFLPA

Section 307 of the Tariff Act of 1930 prohibits the “importation of all goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor or/and indentured labor under penal sanctions.” U.S. Customs has, going back to the 1950s, enforced this prohibition through the use of Withhold Release Orders (WROs) and Findings, as laid out at 19 CFR 12.42-45. CBP is, at present, enforcing 54 active WROs and 9 Findings across 11 countries, including China.

Citing the ongoing genocide, crimes against humanity, and other human rights abuses committed by the People’s Republic of China (China) against ethnic and religious minority groups in the western part of the country, Congress acted to strengthen CBP’s ability to enforce the forced labor prohibitions set forth in Section 307 of the Tariff Act of 1930 by enacting the Uyghur Forced Labor Protection Act (UFLPA) on 23 December 2021. To this end, the UFLPA applies a presumption that goods produced/manufactured (either wholly or in part) or mined in the Xinjiang Uyghur Autonomous Region (XUAR) or by entities designated on the UFLPA Entity List are made with forced labor and prohibited from entering the U.S. This presumption, it should be noted, extends to goods made with made with inputs sourced from either the Xinjiang region or entities on the UFLPA Entity List, regardless of the locus of an article’s production, manufacture, or extraction. Notwithstanding the explicit reference to the Uyghur ethnic minority group in the UFLPA’s title, the Act’s provisions are applicable to the other ethnic minority groups within the XUAR, including, for example, the Kazakh and Kyrgyz peoples.

The paucity of independent third-party auditors available in what is already a restrictive information environment, considered in conjunction with the reluctance of foreign suppliers to cooperate on account of China’s Anti-Foreign Sanctions Law, will likely make it difficult for U.S. importers to obtain the information needed to challenge UFLPA enforcement actions. The compressed timeframe for responding on a pre-admissibility decision basis to a UFLPA-related detention notice will further complicate importer efforts to comply with and/or make claims under the Act. The combination of these considerations will, in turn, have the effect of increasing customs compliance and enforcement risk for the U.S. trade community.

Achieving UFLPA Compliance: Supply Chain Due Diligence, Tracing, & Management

The key to avoiding unwanted UFLPA scrutiny involves ensuring that no forced labor is used in the production, manufacturing, or extraction or merchandise, components, or metals imported into the U.S. The foregoing is especially true for importers who recently received Known Importer Letters or import what CBP considers to be high-risk commodities (apparel, cotton, tomatoes, and polysilicon). This outcome can be avoided pursuant to the development and deployment of:

  • Due diligence systems and processes designed to engage with suppliers on the identification, assessment, and remediation of violations; facilitate the realization of internally managed forced labor audits and independently conducted third-party verifications; secure written commitments, certifications, and affidavits from suppliers regarding their compliance with U.S. forced labor requirements (including, for example, the use of written codes of conduct); train employees and agents on forced labor risks and best practices; monitor supplier compliance; review the UFLPA Entity List; and verify system implementation and effectiveness; and
  • Supply chain tracing capabilities that enable importers to map all stages of production, manufacturing, or extraction processes (i.e., from raw material to imported article); identify supplier identities, roles, and interrelationships up and down the supply chain; obtain relevant transactional documents, factory production reports, worker recruitment and wage reports, etc.; and
  • Supply chain management measures that include internal controls focused on the prevention/detection of forced labor risk and operating/accounting systems backed by audited financial statements.

The Operational Guidance for Importers document published by CBP on 13 June 2022 and the Strategy to Prevent the Importation of Goods Mined, Produced, or Manufactured with Forced Labor in the People’s Republic of China document published by DHS on 17 June 2022 specify, in this vein, a non-exhaustive set of supply chain due diligence, tracing, and management resources for the benefit of the trade. Importers that look to and act on the systems, processes, capabilities, and tools noted in the aforementioned set of resources will be better positioned to demonstrate compliance with the UFLPA. Those that do not, on the other hand, run the risk of becoming the target of an enforcement action following the UFLPA’s entry into force on 21 June 2022.

UFLPA Enforcement Actions & Claims

In the event CBP has reason, on the basis of its case-by-case review of shipments for UFLPA compliance, to believe a violation has occurred, it will use the procedures and measures contained in the agency’s regulatory framework to evaluate the merchandise and, if necessary, take enforcement action. These procedures and measures can include detentions, exclusions, and seizures. This approach supersedes the forced labor enforcement strategy utilized by CBP prior to 21 June 2022.

The UFLPA and related Guidance/Strategy documents set forth two pathways for challenging forced labor actions undertaken by CBP. The requirements associated with each of these pathways are set out in the sections that follow.

Out of Scope Challenges

The first pathway centers on importations which an importer believes to be outside the scope of the UFLPA. Importers can, in this regard, present information that the imported goods and their inputs are sourced completely from outside the Xinjiang region and have no connection to the UFLPA entity list. Specific examples of the kinds of information that can be submitted in support of such a challenge are identified in Section VI (B) of the DHS Strategy document and Section IV (B) and (D) of the CBP Guidance document. Unlike the situation with the second kind of challenge possible under the UFLPA, discussed below, no evidentiary standard has been defined for challenges under this pathway.

It is important for importers to recognize that the UFLPA, to the extent 19 CFR 151.16 provides only 30 days to “respond” to a detention notice (as compared to the 90 days granted under CBP’s WRO-related regulations, significantly compresses the time importers have, on a pre-admissibility decision basis, to make their case. While CBP has indicated that extensions of this time period will be granted, importers who intend to assert that their merchandise is outside the scope of the UFLPA should nonetheless ensure that the information they plan to present is gathered, organized, vetted, and ready to go. Translating documents written in foreign languages into English for submission purposes will help expedite CBP’s review. Importers who determine during the detention stage that they will not be able to secure the information needed to prevail on an out of scope challenge may export (at their own cost) allegedly violative merchandise.

In the event an importer’s out of scope challenge succeeds, CBP will release the merchandise in a way that neither puts the importer to the task of having to obtain an exception nor requires the submission of a report to Congress. If, alternatively, CBP excludes the merchandise on the ground that it comes within the scope of and violates the UFLPA, importers may file a protest in accordance with 19 CFR 174. Should, further, CBP file a seizure notice in connection the importation of merchandise that comes within and violates the UFLPA – an action CBP has indicated it will only pursue in the case of fraud – importers may file a petition in accordance with 19 CFR 171.

Exception Challenges

The second pathway available to importers for raising challenges under the UFLPA involves imports which, despite coming within the scope of the Act, qualify for an exception to its rebuttable presumption. To succeed in securing an exception to the rebuttable presumption, an importer must, in the course of timely responding to a detention notice (or, in the event admissibility has been denied, laying out arguments in support of an exclusion-related protest or seizure-related petition), persuade CBP that it has fully complied with the guidance set forth in the DHS Strategy document, responded completely to all CBP requests for information, and demonstrated, using clear and convincing evidence, that its imports were not mined, produced, or manufactured wholly or in part by forced labor. Exception claims made by importers who are CTPAT-certified will, to the extent possible, be given processing priority over those submitted by importers who are not. Specific examples of the kinds of evidence that can be used to support a request for an exception to the application of the UFLPA’s rebuttable presumption are set forth for the benefit of the trade community in Section VI (C) of the DHS Strategy document and Section IV (A-C and E) of the CBP Guidance document. What constitutes clear and convincing evidence has been fleshed out by CBP in administrative ruling HQ H317249 (Mar. 5, 2021).

Importers who present evidence that persuades CBP their in scope importations merit the granting of an exception to the UFLPA’s forced labor presumption will, as the case may be, have their merchandise released, admitted, or remitted. Upon the granting of an exception, CBP must, within 30 days, submit a publicly available report to the appropriate Congressional committees specifying both the goods involved and the evidence submitted. This requirement may, for the way it opens up the door to Congressional scrutiny of CBP action, have the effect of making the agency less willing to grant exceptions. Importers who fail to persuade CBP that their merchandise merits the granting of an exception can, assuming they did not timely export the goods, expect to receive either an exclusion or seizure notice.

Summary

The UFLPA adds a whole new layer of complexity and risk to importing merchandise from China. As U.S. importers move forward in this new, tougher trade environment, they will do well to keep in mind the following practice points:

  • The UFLPA, as unpacked in the CBP Guidance and DHS Strategy documents, supersedes, effective 21 June 2022, the adjudicative processes used by CBP in connection with forced labor WROs and Findings.
  • It will be hard to overcome the information requirements associated with the making of claims in opposition to UFLPA enforcement actions. CBP acknowledges as much when it notes that the UFLPA’s information requirements “may make it difficult for importers to comply.”
  • This difficulty will be exacerbated by four considerations: (i) the possibility that China’s Anti-Foreign Sanctions Law will, in the absence of compelling long-term supply commitments, disincentivize supplier cooperation; (ii) the challenge of finding reliable, independent third-party verification services; (iii) the significantly shortened timeframe importers will have, on a pre-admissibility decision basis, for securing and submitting information in support of UFLPA claims; and (iv) the fact that the UFLPA does away with the opportunity to use the de minimis nature of violative content as a basis for sidestepping forced labor enforcement actions.
  • There may be some delay in the UFLPA’s full implementation as CBP builds up its enforcement capabilities from a manpower perspective. That said, enforcement activity is, on an immediate basis, expected to focus on products which correspond to either high-priority sectors or entities on the UFLPA’s Entity List.
  • Ambiguity with respect to the way in which the UFLPA will or will not apply to an importer’s particular transactional circumstances can be preemptively resolved pursuant to the filing of a ruling request with CBP.
  • UFLPA enforcement actions can be challenged in one of two ways. The first is by presenting evidence showing that the merchandise is outside the UFLPA’s scope. The second involves presenting a claim that merchandise which is otherwise in scope nonetheless qualifies for an exception to the UFLPA’s rebuttable presumption. The latter claim must be supported by clear and convincing evidence and requires, if successful, CBP to submit a report to Congress.
  • UFLPA claims submitted by CTPAT-certified entities are, to the extent practicable, given priority processing.
  • Importers can manage UFLPA enforcement risk by adopting and implementing robust supply chain due diligence, tracing, and management measures.
  • Importers whose merchandise has been detained under the UFLPA have the option of exporting same, provided the goods have not yet been made the subject of an exclusion or seizure action by CBP.
  • Importers should, in light of the elevated costs (i.e., tariffs, shipping, etc.) and risks associated with Chinese merchandise, continue to diversify their supply chains and production processes. Onshoring, nearshoring, and operational engineering are strategies that can, in this connection, be used by importers to control the costs and mitigate the risks associated with the importation of Chinese merchandise.