Sweeping CBP Action Threatens Border Detentions for Billions of Dollars of Cotton-Containing Goods From China
On December 2, 2020, the U.S. Department of Homeland Security (“DHS”) announced that U.S. Customs and Border Protection (“CBP”) will begin detaining shipments of cotton-containing products from China, based on the concern that those products could contain cotton produced by the Xinjiang Production and Construction Corps (“XPCC”) with forced or prison labor. The XPCC is an entity responsible for an estimated 30 percent of cotton production within China, or an estimated 6-7 percent of annual global cotton production. Shipments will be detained pursuant to a Withhold Release Order (“WRO”) in the latest – and most far reaching – action taken against goods made with forced Uyghur labor in the Xinjiang Uyghur Autonomous Region (“Xinjiang”). WROs are issued pursuant to Section 307 of the Trade Act of 1930, which prohibits the importation of products made with forced labor including forced child labor, in whole or in part.
Ramping Up Actions Against Xinjiang Forced LaborThroughout 2020, the U.S. has taken a series of actions intended to counteract alleged state-sponsored human rights abuses in China. A joint advisory issued on July 1, 2020 by the U.S. Department of State, the U.S. Department of the Treasury, the U.S. Department of Commerce, and the U.S. Department of Homeland Security, indicated that the U.S. plans to use all available tools to ensure U.S. businesses have no commercial or supply chain ties to forced Uyghur labor.
In July 2020, the Office of Foreign Asset Control (“OFAC”) imposed sanctions on the XPCC for involvement with alleged human rights abuses. The XPCC is a paramilitary entity with a significant role in running the local economy (including cotton production), administration, and social services, and boasts an ownership interest in as many as 800,000 other entities.
The WRO against the XPCC will have an overlapping but distinct consequence from the OFAC sanctions designation. The OFAC designation prohibits transactions between any U.S. person or entity within the U.S. and the XPCC, or any entity beneficially owned or controlled by the XPCC  The WRO against the XPCC is intended to ensure no cotton grown or produced by the XPCC enters a U.S.-bound supply chain, regardless of whether there is any U.S. person involved in such supply chain.
In September 2020, CBP issued five WROs on finished goods made by manufacturers in Xinjiang. The WRO against the XPCC will have a far greater commercial impact than these earlier WROs, not only because the XPCC is a much larger entity, but also because to the extent the XPCC has any intersection with U.S. bound supply chains, it does so further “upstream”, given its role in cotton production. The value of cotton-containing shipments from China which might contain cotton produced by the XPCC is estimated by DHS to be in billions of dollars.
Cotton Supply Chain Due DiligenceThe WRO against cotton and cotton-containing products produced by the XPCC is likely to lead to significant trade disruptions for companies importing cotton-containing products from China. It is likely that many companies will need to engage in more extensive supply chain due diligence than has previously been required as a condition for importing into the United States, and those importers with sophisticated sustainable sourcing operations will need to explain their programs to CBP. That said, this is also a novel use of the WRO mechanism by CBP, and we expect that some detentions of merchandise may be contested on legal grounds.
Kelley Drye & Warren LLP has a team of experts with deep experience on CBP’s enforcement of Section 307, the complexity of global supply chains, and sophisticated sustainable sourcing programs. If you have further questions or require assistance navigating these challenges, please let us know.