China’s coronavirus outbreak continues to damage the supply chain worldwide. But another sickness in China could eventually cause as much damage: the use of forced Uighur labor in factories all over China. China’s Coronavirus was initially limited to Hubei province and China’s oppression of Uighurs and other Muslims was initially limited to Xinjiang. At first, the negative effects of the coronavirus were primarily confined to its formative province, but it eventually spread throughout China and it is now spreading throughout the world. Coronavirus is being actively combatted by the Chinese government and it ultimately will be contained. In contrast, the Uighur forced labor program is being actively promoted by the Chinese government and it has already infected China’s entire supply chain, with devastating effect.

China’s forced labor virus is its program where Uighurs and other Muslims from Xinjiang have been detained in prison (so-called “re-education”) camps, along with more general oppression of Muslims in the province. In its most recent Freedom in the World Report, Freedom House describes China’s forced labor program in the following terms:

One of the year’s most appalling examples of domestic repression—made more frightening by the absence of a coordinated

international response—was the Chinese Communist Party’s ongoing campaign of cultural annihilation in Xinjiang. Mass violations of the basic freedoms of millions of Uighurs and other Muslim minorities in the region, which were first brought to light in 2017, continued in 2019, with hundreds of thousands of people sentenced to prison or detained for forced indoctrination. The crackdown also included forced labor, the confinement of detained Muslims’ children in state-run boarding schools, and draconian bans on ordinary religious expression.

The deployment of tens of thousands of security officers and state-of-the-art surveillance systems enable constant monitoring of the general population, converting Xinjiang into a dystopian open-air prison.”

This forced labor virus has quickly spread to infect China’s entire manufacturing supply chain. The process has been described in detail in the meticulously researched and documented report from the Australian Strategic Policy Institute (ASPI) International Cyber Policy Centre: Uyghurs for Sale: ‘Re-education’, forced labour and surveillance beyond Xinjiang (ASPI Report). Every company or individual that has products made in China or buys products from China or imports products or from China or contemplates doing any of these things should read the entire report.

Per the ASPI Report and like the coronavirus, China’s forced labor infection of the Chinese supply chain moved in two stages. Like the Wuhan coronavirus, Stage One of China’s forced labor program led to the infection of predominately one region — Xinjiang. And like COVID-19, Stage Two, saw the infection move to virtually every region of China where manufacturing takes place. See the ASPI Report at Page 14. A quick review of that map shows a spread of infection very similar to the spread of the coronavirus from Hubei Province.

Stage One: Local Infection.

In Xinjiang, the Chinese government announced that the Muslim inmates that had survived its so-called re-education camps had “graduated.” Upon graduation, these survivors were then moved into forced labor in factories located within Xinjiang. Estimates are that over 4,400 Chinese enterprises established “satellite factories” in Xinjiang to take advantage of the slaves being provided by the Xinjiang government. These factories are mostly in labor intensive industries, dominated by clothing and footwear. As would be expected, this pool of forced labor has already infected the supply chain for foreign buyers. The ASPI Report lists 54 large and well-known foreign companies that are purchasing goods manufactured by forced labor.

As was the case with the coronavirus, these confirmed findings are no doubt just the “tip of iceberg” of the true extent of the infection. It should be assumed that nearly all products purchased from factories operating in Xinjiang are infected in the same way. That is, the burden must be placed on Xinjiang factories to prove they are not using forced labor in their production. There is an additional difficulty here. As noted above, the Xinjiang factories are primarily satellite factories of larger Chinese companies based outside Xinjiang. Due to the sensitivity of the issues and the illegalities stemming from using forced labor, these Chinese companies almost never reveal to their foreign buyers that production is actually being done in Xinjiang. It is therefore critical to confirm the actual place of production as opposed to the location of the offices of the parent company.

Stage Two: Infection of the Entire Supply Chain

As reported by ASPI, in Stage Two of the infection, the Chinese government organized a program where hundred person “batches” of Muslims from Xinjiang get shipped around China to work in prison-like conditions. The impact of these mobile forces of involuntary servitude is significant: the number of forced laborers is large and the infection of China’s supply chain is widespread.

The ASPI report “reveals that Chinese factories outside Xinjiang are also sourcing Uyghur workers under a revived, exploitative government-led labour transfer scheme. Some Chinese factories appear to be using Uyghur workers sent directly from “re-education camps. The Australian Strategic Policy Institute (ASPI) has identified 27 factories in nine Chinese provinces that are using Uyghur labour transferred from Xinjiang since 2017. Those factories claim to be part of the supply chain of 83 well-known global brands. Between 2017 and 2019, we estimate that at least 80,000 Uyghurs were transferred out of Xinjiang and assigned to factories through labour transfer programs under a central government policy known as ‘Xinjiang Aid’ (援疆).” ASPI Report at Page 4.

As with the Stage One forced labor numbers for Stage One, ASPI’s Stage Two data should be viewed as simply the “tip of the iceberg”; we should assume the actual numbers are much higher.

The description of conditions in these prison factories is grim. Here is a description of a large factory in Qingdao, a cosmopolitan city far from Xinjiang (where I lived for many years):

Photographs of the factory in January 2020 published by the newspaper show that the complex was equipped with watchtowers, razor wire and inward-facing barbed-wire fences. Uyghur workers were free to walk in the streets around the factory compound, but their comings and goings were closely monitored by a police station at the side gate equipped with facial recognition cameras. The Uyghur workers at the Taekwang factory speak almost no Mandarin, so communication with locals is largely non-existent, according to the newspaper. They eat in a separate canteen or a Muslim restaurant across the road from the factory, where the ‘halal’ signs have been crossed out. They live in buildings next to the factory that are separate quarters from those of the Han workers. ASPI found evidence that inside the factories, the workers’ ideology and behaviour are closely monitored. At a purpose-built ‘psychological dredging office’ (心理疏导室), Han and Uyghur officials from Taekwang’s local women’s federation conduct ‘heart-to-heart’ talks, provide psychological consulting and assist in the uplifting of the ‘innate quality’ (素质) of the Uyghur workers—in order to aid their integration. ASPI Report at Page 59.

Those offices and roles are also present in Xinjiang’s ‘re-education camps’. See the ASPI Report at Page 10.

Factories around China engage in this program because it makes economic sense for them to do so. The export led, high labor content, low value added factories of China have been under intense economic pressure over the last decade. The supply of cheap migrant labor has dried up. So without a new source of super-cheap but hard working laborers, they cannot survive. The “Uyghurs for sale” program perfectly meets their needs. In addition to drastically cutting their labor costs, Chinese companies that use forced labor also see increases in their social credit score. See China’s New Company Tracking System: Comply, Comply, Comply.

Since the Chinese government is promoting its Muslims for sale policy, there is even more money to be made. As explained by ASPI:

The business of buying and selling Uyghur labour can be quite lucrative for local governments and commercial brokers. According to a 2018 Xinjiang provincial government notice, for every rural “surplus labourer”, transferred to work in another part of Xinjiang for over nine months, the organiser is awarded Ұ20 (US$3) [Stage 1 local infection]; however, for labour transfers outside of Xinjiang, the figure jumps 15-fold to Ұ300 (US$43.25). [Stage Two: National Infection] Receiving factories across China are also compensated by the Xinjiang government, receiving a Ұ1,000 (US$144.16) cash inducement for each worker they contract for a year, and Ұ5,000 (US$720.80) for a three-year contract. ASPI Report page 15.

China’s Forced Labor Infection Poses Reputational Issues for Foreign Companies.

Now that Stage Two has spread forced labor all over China, China’s supply chain has become completely infected. The ASPI Report documents more than 80 well-known foreign companies purchasing their products from factories that use forced labor that can be traced to Xinjiang. ASPI Report, Appendix 1, pages 31 — 37. As the Appendix shows, China’s forced labor infection has now moved beyond labor intensive industries to virtually all of China’s export industries. No foreign company is safe from this.

China’s forced labor infection poses a major issue for foreign companies importing from China. The media is having a field day with all this and the damage to reputation has already begun. The below is but a smattering of worldwide media highlighting this issue:

We have for a while now been talking about the reputational risks inherent in using Chinese factories to make your products and in The Top 14 China Wild Cards/Future Risks, I noted how there might be a tipping point when many in the US and EU and elsewhere become so bothered by China’s actions as to refuse to have anything more to do with China.

There may be a tipping point when consumers in the US and the EU and elsewhere become so troubled with how China treats its Uyghur and Tibetan populations (see this and this) or how it is acting against Hong Kong or Taiwan or with its efforts to exert control outside China. These sorts of things are leaking out more of late as the bloom is off the rose and we are hearing more and more from our own clients (American and otherwise) saying that they are having employees refuse to go to China or consumers complaining about their goods being made in China. Take a company like Patagonia which has a stellar reputation for caring about the environment and people and even goes so far as to call itself The Activist Company; how much longer can it maintain its moral high ground while still having some of its products made in China?

We are nearing or at that tipping point right now. My law firm has a thriving Health and Wellness practice, representing all sorts of companies that pride themselves on providing “healthy, sustainable, and ethically sourced products . . . that align with their personal values.” Needless to say, many of these companies that get their products from China are very concerned about China using forced labor. One of our China lawyers recently told me that “I must hear the phrase ‘last straw’ about China at least ten times a day.”

China’s Forced Labor Infection Poses Serious Legal Issues for Foreign Companies.

But for many foreign companies, there is a much more significant problem. It is a violation of their own country’s law to import product from a foreign country manufactured with forced labor. So the moral decision for the importer has been supplanted by a clear legal ban. In the United States, for example, 19 U.S. Code § 1307 states as follows:

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 shall not be entitled to entry at any of the ports of the United States, and the importation thereof is hereby prohibited, and the Secretary of the Treasury is authorized and directed to prescribe such regulations as may be necessary for the enforcement of this provision.

“Forced labor” as herein used, shall mean all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily. For purposes of this section, the term “forced labor or/and indentured labor” includes forced or indentured child labor.”

U.S. companies have been accustomed to ignoring this law because the consumptive demand clause allowed a “get out of jail free” exception. This exception allowed forced labor imports in cases where the U.S. did not produce sufficient quantities to meet the demands of domestic consumption. What many U.S. importers have ignored is that the consumptive demand clause was repealed in 2016. There is no more exception. The rule now applies to all products and the penalty for violation is severe: seizure of shipments and criminal penalties.

In response to the repeal of the consumption demand clause, U.S. Customs has set up a program that imposes substantial burdens on U.S. importers. As stated by U.S. Customs:

The Trade Facilitation and Trade Enforcement Act of 2015 was signed by the President on February 24, 2016. The law repealed the “consumptive demand” clause in 19 U.S.C. § 1307. The clause had allowed importation of certain forced labor-produced goods if the goods were not produced “in such quantities in the United States as to meet the consumptive demands of the United States.” Repeal of the consumptive demand exception should enhance CBP’s ability to prevent products made with forced labor from being imported into the United States.

Lest anyone think that forced labor claims involving product imports do not really exist in the real word, the fact that my law firm is working on a big forced labor case right now ought to convince you otherwise. And, not surprisingly, we are in talks with other companies about taking on additional such cases.

How Companies Must Deal with China’s Forced Labor Issues.

In the same way that measures are being taken to prevent the coronavirus from entering the U.S., Customs is working to prevent the disease of Chinese forced labor from being imported into the U.S. So U.S. importers need to take the measures required by U.S. Customs to deal with the issue. Every importer of products must develop a written program dealing with the forced labor issue by taking affirmative action to reduce their risks. There are no exceptions and there is no “get out jail free” card.

In subsequent posts, we will describe what is required to deal with the threat of importing forced labor goods and we will take a look at how this issue is playing on social media.