No one wants to buy products made with forced labor. But that’s exactly what’s happening across multiple industries tied to the Xinjiang Uyghur Autonomous Region (XUAR) in northwestern China. Since 2017, China has been detaining and persecuting Uyghurs, an ethnic minority native to the XUAR, and subjecting them to inhumane conditions, including internment camps, “re-education” efforts, and forced labor. 

In an effort to curb these human rights abuses and detangle U.S. industry from forced labor violations in China, the U.S. passed the Uyghur Forced Labor Prevention Act (UFLPA) in 2021. 

The legislation prohibits U.S. imports of any goods that have been mined, produced, or manufactured both wholly or in part in the XUAR. This will have sweeping impacts on multiple U.S. industries, particularly the automotive industry, whose supply chains are deeply tied to China. 

Below we’ll outline what the UFLPA does, how it impacts the automotive industry, and what auto firms can do to remain compliant and minimize risk throughout their supply chains.

Combatting Forced Labor in Supply Chains

As global supply chains have become more intertwined and complex in recent years, there has been a growing push for transparency, sustainability, and accountability for where and how products are sourced and made.  

While the U.S. has banned products by forced labor since 1930 under the Tariff Act, increasing concerns about labor abuses in China have led to tighter trade restrictions, most notably under the Uyghur Forced Labor Prevention Act (UFLPA). The UFLPA is part of a number of legislative actions governments have taken around the world to address these issues, including: 

The UFLPA, which went into effect June 21, 2022, establishes a rebuttable presumption that prohibits any goods that have been mined, produced, or manufactured in the XUAR from entering the U.S. This means the burden of proof is on importers to show that the goods-and any component parts-they’re importing are not sourced from or manufactured in Xinjiang. Any goods that are tied to the region are subject to seizure by the U.S. Customs and Border Patrol.  (Thus far, 961 million USD worth of shipments have been audited and detained).

What This Means for U.S. Importers

The U.S. Customs and Border Patrol (CBP) has secured additional funding to improve its methodologies to track and audit goods coming through U.S. ports. Beginning March 18, 2023, all shipments manufactured in China are now required to enter the U.S. with the postal code of the factory. If the shipment is missing a postal code (or the code is invalid or tied to the XUAR region), the system will alert CBP and the shipment may be seized. This increased scrutiny is even more significant as production in the XUAR is growing.

The Xinjiang region has strong production capacity across many key raw materials and industries, including oil and gas, aluminum, automotive, and agriculture (specifically cotton and tomatoes). And the Chinese government has lowered environmental regulations and spent billions of yuan to incentivize even more companies to establish themselves in Xinjiang. This means production capacity in these areas will continue to grow. And despite U.S. and global sanctions, the U.S.’s imports from the XUAR have been increasing. Between 2019 and 2020, the U.S. was the XUAR’s fastest-growing export market, growing by more than 250%.

As such, the UFLPA will be increasingly important to U.S. efforts to curb imports tied to forced labor in the region. The law requires that companies do more due diligence into their supply chain to avoid imports being detained-and potentially causing delays in operations-as well as potentially serious reputational, legal, and ethical risks.

How the Automotive Industry is Uniquely Impacted

The XUAR region hosts many companies that manufacture parts or process raw materials that go into the automotive industry. And that concentration is only expected to increase in the coming years as the auto industry, in particular, is a major target for economic growth in China. 

For example, China has long been a major global player in the production of aluminum. But in their 13th and 14th Five-Year Plans, the XUAR and Xinjiang Production and Construction Corps (XPCC) governments focused on the importance of expanding the region’s processing capacity for aluminum (as well as iron, steel, and other non-ferrous metals) as part of their ongoing efforts to expand their market capture of the auto industry. 

And those efforts have paid off. In 2021, China was already the biggest aluminum producer in the world. But under the past three Five-Year Plans, the XUAR grew from the 10th-highest aluminum-producing region in China to the second. Today, the XUAR’s production capacity is about 8 million tons per year, representing more than 20% of China’s capacity and almost 12% of the world’s. 

This level of industry capture puts automotive companies at risk for producing or sourcing parts that are tied to human rights abuses. 

In fact, one recent investigative report uncovered massive links between western car brands and Uyghur abuses. It found 96 companies relevant to the auto industry are mining, processing, or manufacturing in the Uyghur Region, with over 100 international auto manufacturers at risk of sourcing from those companies. 

Key Takeaways:

  • All major car brands are at risk of sourcing from companies linked to Uyghur abuses
  • Steel and aluminum materials have the highest risk exposure
  • Other high-risk parts include tires, interiors, windshields, and batteries 

The Inflation Reduction Act

These findings are all the more concerning in light of the Inflation Reduction Act (IRA), which includes an electric vehicle tax credit for consumers based on strict sourcing guidelines for the car manufacturer. 

The IRA, passed in 2022, incentivizes consumers to invest in clean energy solutions, including electric vehicles. But for consumers to claim the electric vehicle tax credit, the car must meet sourcing and domestic assembly and processing requirements: 

  • 50% of the value of the components of the EV battery must be manufactured or assembled in North America. 
  • 40% of the value of the battery’s critical minerals must be extracted or processed in the U.S. or a U.S. free-trade agreement partner.

China is the top processor of most critical minerals and other downstream products in the clean energy sector. This means auto companies must be able to trace their supply chain all the way down to raw materials to compete for increasing consumer demand. Plus, if auto companies are impacted by the UFLPA and unable to import critical parts or materials, it could negatively impact their ability to leverage the IRA and compete in the growing EV market. 

How Automotive Firms Can Comply with the UFLPA

Automotive companies with supply chains linked to the XUAR must do due diligence to understand their n-tier supplier network and implement compliant sourcing policies. 

What Is Required

To comply with the UFLPA, companies must show that they have:

  • Fully complied with UFLPA guidance
  • Completely and substantively responded to all queries to ascertain whether products were mined, produced, or manufactured wholly or in part by forced labor
  • Demonstrated, by clear and convincing evidence, that the products are compliant.

To do this, companies must provide: 

  • Comprehensive supply chain mapping
  • Transaction records
  • Documentation showing a due diligence system or process
  • Documentation of supply chain management measures
  • Documentation that traces the supply chain for the goods
  • A complete list of workers at the entity under review
  • Proof that the workers are there voluntarily and not subject to forced labor conditions

Recommended Actions

The U.S. CBP recommends companies:

  • Create strong supplier policies and agreements that outline a clear code of conduct forbidding the use of forced labor 
  • Screen and evaluate all new and existing suppliers based on these policies 
  • Implement a due diligence system (including monitoring supplier compliance, mapping the supply chain, and risk assessment) 
  • Train employees and procurement officers on sourcing best practices and the risks of forced labor
  • Adhere to a robust risk management process

How Craft Can Help

With the heightened risk of forced labor abuses associated with the auto industry, automotive companies must know their supply chains inside and out. Yet, the sheer size of China’s production capacity combined with opaque global supply chains makes compliance with the UFLPA (and new EV standards) a monumental task.   

Companies need to be able to source and trace all supplies and component parts to their origins. To do this, they need reliable, up-to-the-minute supplier data that maps across the entire supplier network. 

That’s why it’s critical to rely on a supplier intelligence platform that gives companies a comprehensive view of their entire supply chain. Leverage key supplier data to identify potential risks, uncover new opportunities, and demonstrate compliance with confidence with Craft’s suite of tools and capabilities, including:  

Locations: See all regions where a company has a presence, beyond just headquarters. 

N-Tier Mapping: Map your whole supply chain including downstream suppliers to get a full picture of your supplier network down to raw materials.

Compliance & Risk Data: After identifying what companies are in your supply chain, expand your dataset to uncover risks, politically exposed people (PEP), mergers and acquisitions, sanctions lists, and first-party data. 

Alerts: Solve supply chain issues proactively with timely news and events alerts that automatically notify you of key changes or updates in your supply chain.