Why it’s hard to purge U.S. supply chains of forced labor | Live with Lizzi Lee

Good investing starts with an edge, and our ChinaEDGE intelligence database and newsletter reports help you get sharp on China. Every week, our host Lizzi Lee interviews the most knowledgeable minds on China for analysis of the ever evolving business and technology ecosystem.

In this episode of Live with Lizzi Lee:

Eliot Chen, a staff writer at the Wire China, discusses the multiple ways in which products affiliated with Xinjiang Production and Construction Corps (XPCC), the Chinese state-run paramilitary conglomerate on the Uyghur Forced Labor Prevention Act’s (UFLPA) Entity List, still find their ways to U.S. store shelves.

Below is a transcript of the video:

Lizzi: Joining me today is Elliot Chen, a staff writer at the Wire China. Eliot has been following the U.S. Customs’ enforcement of the Uyghur Forced Labor Prevention Act, a law that went into effect in June this year, which is meant to stem the import of goods linked to forced labor in Xinjiang.

So Elliot, the U.S. placed the XPCC on the forced labor prevention act’s entity list. What exactly is XPCC? Can you explain that to our audience?

Eliot: Sure. Thank you very much for having me on, Lizzi. Just to start off with, I can talk a little bit about what is the XPCC. The XPCC is the Xinjiang Production and Construction Corps.

It’s a conglomerate based out of Xinjiang, that is, in the words of James Millward, the Georgetown University scholar, in his description to my colleague, who wrote profile on the XPCC, a state-owned enterprise on steroids.

It’s a company that at once has a lot of political influence and a lot of economic influence. It’s involved in agriculture and industry, it has stakes in a lot of companies, including several publicly listed firms, but is also involved in prison management, media, and education.

And several NGOs and researchers have pinpointed it as one of the organizations responsible for setting up these detention camps for Uyghurs, facilitating forced labor transfer programs in Xinjiang in which Uyghurs are forcibly moved in order to work, and a lot of these other industries.

For a number of years now, the XPCC and its leaders have been sanctioned by the U.S. for their involvement in what a number of countries have described as serious human rights violations and potentially even crimes against humanity.

The XPCC leaders are on nearly every U.S. sanction list. The Treasury Department has frozen the XPCC’s assets, and a group of countries now have prohibited some of the XPCC’s major exports, including things like cotton, tomatoes, polysilicon, which is the key ingredient in solar panels from being imported into the U.S.

The story that we looked at is, given how all of these sanctions, how is it possible that we’re still managing to find XPCC goods in the United States?

Lizzi: Right. So, let’s talk about that. Your story followed a particular XPCC-affiliated product, jujubes or red dates. According to the import ban under the Forced Labor Prevention Act, they should not be seen in U.S. stores. But you do find them everywhere in U.S. supermarkets. I wonder if you can talk a little more about the multiple ways XPCC products can hide their true origins and end up in the United States.

Eliot: Our story kind of began several months ago when one of my colleagues was in one of these Asian supermarkets on the outskirts of D.C. in Virginia and discovered a bag of dates that had the words Bingtuan on it.

As you just showed, what we were trying to understand was then, how is it that they can not only bring the goods into the U.S., but market them under their own name?

As I think a lot of Chinese consumers will know, Xinjiang dates themselves are kind of a marker of quality for a lot of Chinese consumers in much the same way, U.S. consumers might see Florida oranges or Georgia peaches as kind of like a marker of high-quality. Xinjiang dates sell well in China. They sell well in other countries for Chinese consumers.

The kind of challenge for a lot of these producers is, on the one hand, you want to be able to market the goods in a way that is attractive to consumers, but also you kind of must hide their origin given all of these sanctions and restrictions so that regulators don’t know when you’re breaking the customs.

The key challenge is, there are a lot of things that are public in terms of records of how goods are shipped. International shipping records are something that are easily viewable by the public and by researchers.

The challenge is then how do we understand how goods are moved around within China?

And so, we identified three major ways that some of these companies, in the case of one product that we trace in detail, they obfuscate and hide their identity in order to move around in China and then get their goods into the U.S.

Method No. 1 Is what we call “the do-nothing shipper.” So “the do-nothing shipper” is a company. In this case, the one that we looked at was a shipper called Taishan Wuhu food processing company that was based out of Guangdong

Already to begin with, this is a company that’s not in Xinjiang. If you’re looking at its record, it doesn’t necessarily immediately raise red flags. But there are a couple of interesting things about this company. This is one that was shipping large containers full of thousands of tons of red dates to the U.S.

But there are several things about the company that seem interesting. For one, it’s closed. If you look at the company records, the company is no longer operational.

And so it doesn’t really make sense that they’re still actively sending things to the U.S..

The key point with this is that the company itself acts as an intermediary, so they might not necessarily even be taking an inventory.

But what they’re doing is by putting their name on the paperwork, they’re hiding the true producer or manufacturer of the good. When Customs looks at the paperwork, they see this Taishan company rather than Xinjiang.

Method No. 2 is what we call “the out-of-province subsidiary.” So the XPCC and a lot of other Xinjiang companies aren’t just registered in Xinjiang, but they’re registered in a lot of other provinces around China.

And there are some legitimate reasons for doing this. Maybe they want to expand into new markets in other areas of China.

But human rights researchers have also identified this as a common way to shield the production bases in Xinjiang from oversight and from export restrictions.

A research nonprofit that’s based in D.C. identified over 3000 of these subsidiaries. We found one of them, this company that is based in Qingdao, which is actually linked to the XPCC. But that was kind of acting as the manufacturer, a key intermediary again between Xinjiang and supermarkets in the U.S.

Method No. 3 is specific to some of these companies. There’s a lot of stuff that happens with company registration and its details in order to hide its identity.

So for example, when we looked at this company that is based out of Qingdao. Originally it was a subsidiary of a company in Xinjiang that itself was a subsidiary of the XPCC.

It’s very clear, looking at its original record that this is a company that is the child of a company that is the child of the XPCC.

But then starting around 2019, we could see that the records were being changed.

There was some renaming going on, so the company was transferred to a third party that has nothing to do with the XPCC.

And it was principally involved in the export of Korean snack foods.

And so if, say, a customs investigator today was to look at that record, it wouldn’t be apparent that that company is actually linked to Xinjiang.

And the third thing that it did was in 2020, it completely renamed itself as well. It’s no longer apparent that the company itself operates or deals in red dates, but we still managed to find some evidence that the company was operating as such.

On its website, the company mentioned its cooperation with the XPCC. We also saw job postings that mentioned this is an industry that is still works in red dates production.

Lizzi: So multiple ways in which a company can hide its true origin through out-of-province operations, through name changes, etc. to do that.

I also wanted to talk a little bit about enforcement. As you know, the forced labor bill has a rebuttable assumption which stipulates that changing originated goods must be considered made with forced labor unless proven otherwise. But how is it actually enforced in practice?

Eliot: Yeah, that’s a great question. I think the first thing that we have to know about how enforcement of restricting imports made with forced labor is done in the U.S. is they actually have a very limited history.

For about a hundred years, the U.S. has on paper made it illegal to import goods that are made with forced labor.

But in practice, until 2016, there was a massive loophole that allowed most of these goods to end up in the U.S. anyway, known as the consumptive demand clause, which basically stated that if the U.S. is not able to provide enough supply of a good, then it can be imported anyway.

And you know, if you’re importing something from abroad, chances are there isn’t enough supply at home. Basically, everything was allowed in with very little restriction around 2016.

Finally, this loophole is closed. For the first time, customs investigators, U.S. Customs and Border Protection and CBP got money to start to enforce the forced labor prevention.

The challenge, though, is that it takes a long time to get funding, to build up manpower, and to build up knowhow on how to enforce these things. And part of it is that this is inherently very difficult.

Unlike with drugs or with nuclear material, there’s no sniffer dog or X-ray machine that will tell you if a product is made with forced labor.

It’s really an intelligence game where you need to be able to look at records and know a lot of background about companies.

The basic tools available to the government are very limited when you ship something to the U.S. When you fly in on a plane, you have to fill out a sheet of paper with commercial codes which is a customs invoice that says, where did the good come from, what was the factory, etc. But overall, they ask very little.

And if you’re able to provide some of these intermediaries that we talked about on the declaration form, then it can be very possible that a good made in Xinjiang can come in without having to state at all that it’s made in Xinjiang. What needs to be done to enforce this law in practice is you need a lot of manpower. You also need a lot of additional tools, supply chain tracking technology, for example.

And so, we’re seeing now kind of a new kind of cottage industry of startups that are emerging, that are trying to fill this gap, providing supply chain intelligence, providing know-how for the government, for private companies who might want to know a little bit more about their supply chains.

These are some of the things and some of the challenges as to why enforcement is quite difficult now.

Lizzi: And you’ve spoken to multiple experts on this topic. How do they generally evaluate the effectiveness of the force labor law in terms of tackling the human rights abuses that The U.S. government identifies in China?

Eliot: I think the first thing to know is that it’s still very early days. So we publish our investigation into how rebates were coming in August.

At the time, the Uyghur Forced Labor Prevention Act had only been in force for about two months. It was enacted properly in late June of this year.

You talk to people who are involved in CBP and Customs, you talk to businesses, and I think there’s broad agreement that it’s still very early days.

Regulators and companies still need time to figure out how to enforce and how to comply with the law.

You know, part of the reason why we were able to see these XPCC goods coming in is this: right now, the other challenge is about priorities.

There are a couple of industries that currently constitute high-priority sectors that the U.S. government is particularly concerned about. Xinjiang makes cotton, tomatoes, and the polysilicon linked to the solar industry — some of the things that we talked about.

They’re the ones that are really receiving a lot of scrutiny.

And there’s already been kind of news reports about polysilicon shipments that have been held up in U.S. ports, pending investigations.

I think it’s difficult to evaluate the overall effectiveness of this law right now, because not everything is being scrutinized equally.

I think the other thing to remember as well, in addition to what we said earlier about this law being very new, is that the funding required to enforce the law is still trickling in.

Congress allocated a certain amount of money this year in order to enforce the law.

But CBP itself has said we need potentially 70 million more, and 150 full-time employees in total if we’re really going to enforce this law properly. 150 is a lot of people.

For comparison, the Office of Foreign Assets Control under the Treasury Department, that’s the main office that is responsible for the specially designated nationals’ sanctions list.

This is the list that, you know, people like Vladimir Putin, Assad are on. These are serious human rights violators that are being sanctioned by the U.S. The office responsible for that is 200 people. The UFLPA office eventually may have 150 people. But it doesn’t have that amount now.

I think it’s an indication that the U.S. is taking this very seriously and is willing to invest serious money into enforcing this law. But we’re not necessarily at the point where it has all the money and manpower to do that yet.