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US Sets Trade Policy Sights on China’s Xinjiang

Thomas Nielsen — Tue, 19 Mar 2024 20:33:35 +0000

As Washington escalates its raft of trade controls against China, the US Uyghur Forced Labor Prevention Act is likely to be a key piece of legislation impelling the momentum. Now more than ever, multinationals may have to be more artful in engineering the separation of their Chinese and non-Chinese business operations – and the origins of their parts.

The US is mulling an end to the de minimis provision that allows shipments valued under US$800 to enter the world’s largest consumer market, a move largely aimed at Chinese exports. Such a move would escalate a raft of trade controls Washington has already placed against China, including controls on semiconductor technology and outbound investment.

In many ways, a key piece of legislation impelling the momentum is the US Uyghur Forced Labor Prevention Act (UFLPA). Passed in late 2021, the ambition of the UFLPA is far more comprehensive than the “small yard, high fence” scope of containment policies, as it seeks to restrict imports in toto from an entire region inextricably linked to global supply chains. Growing political pressure and technical know-how within the retooled oversight agencies portend much more robust UFLPA enforcement across a growing category of goods.

This is likely to be one of the more conspicuous developments in the US’ international trade posture in 2024. The Biden administration signaled last week that it may escalate controls on China’s access to sophisticated semiconductor technologies, as Commerce Secretary Gina Raimondo vowed “we will do whatever it takes.” Alongside these tech controls, Washington has existing policy weapons it could use to target the extent to which Xinjiang is embedded in global supply chains, including in strategic industries suffused with Chinese overcapacity. Early signs of enhanced enforcement action suggest a particular focus on the automotive sector.

Washington’s new trade Zeitgeist

The Biden administration has never quite succinctly enunciated its trade doctrine. Reindustrializing the country, de-risking, and an emphasis on labor rights and the environment have been moving parts of a vast policy machine.

A renewed focus on supply chains, which have become ever more complex and specialized as globalization has advanced, is at the core of this otherwise disparate agenda.

The UFPLA is a case in point and epitomizes the complexity and scope of Washington’s new trade agenda. In the words of international trade law expert John Foote, the UFLPA is “the most trade impacting law that was not actually crafted as trade legislation. It was adopted, ultimately as a piece of human rights legislation”.

The core raison d’etre for the UFPLA is the extensive body of evidence suggesting that forced labor is an integral pillar of Beijing’s objective to eradicate or at least Sinicize Uyghur Muslim culture, through coercing Uyghurs into adopting the lifestyles and values of China’s Han majority.

The UFPLA’s sweeping “rebuttable presumption” assumes that, unless proven otherwise (a very high bar given the opacity of Xinjiang), all goods shipped from Xinjiang are made using forced labor by Uyghur or other Muslim minorities. As well as facilitating the seizure of goods at US ports, the UFPLA has instituted an Entity List. The shipments of companies on the Entity List are automatically impounded at US ports irrespective of their geographic origin.

The enormity of the UFPLA’s ambition is difficult to overstate. As a conduit point for the sprawling Belt and Road Initiative’s Eurasian economic corridor, Xinjiang is far from an economic backwater. According to official figures, exports are booming, totaling more than US$45 billion in the first 11 months of 2023.

Xinjiang produces roughly 50% of the world’s polysilicon, 25% of its tomatoes, and 20% of its cotton. The western region is also a sizable producer of textiles, steel, and quartz. Xinjiang now produces about 9% of global aluminum and plays a growing role in automotive supply chains.

As a global workshop for raw materials and metals production, Xinjiang goods invariably pass through several intermediaries straddling multiple borders before ultimately ending up in Western markets. An incredibly granular understanding of global supply chains with dense networks of suppliers and sub-suppliers is required to preclude the possibility of Xinjiang content ending up in finished goods. The challenge for US authorities has been exacerbated by Uyghur work groups being routinely dispatched to work in other parts of China.

A work in progress

After the bill’s passage in December 2021, U.S. Customs and Border Protection (CBP), overseen by the Department of Homeland Security (DHS), had just 180 days to work out how to enforce the UFPLA.

The CBP faced a steep learning curve, possessing little Mandarin language capability or supply chain mapping expertise. The CBP has had to lean heavily on the expertise of academics and non-governmental organizations (NGOs) to keep up.

One group that has been particularly instrumental is the Forced Labour Lab at Britain’s Sheffield Hallam University. The Lab’s methodology (largely focusing on parsing publicly available Chinese company reports and press releases) is explicitly geared toward exposing Western companies’ complicity with Uyghur human rights’ abuses. The DHS hired the consultancy of Laura Murphy, an expert on forced labor practices who has led the Lab’s work since 2019.

Tellingly, almost all the additions to the UFLPA’s Entity List to date which were not already on other sanctions lists, were identified in Sheffield Hallam’s research. One example is automotive supplier Sichuan Jingweida Technology Group, which was named in a 2022 report as having accepted Uyghur laborers transferred from Xinjiang in 2018. Jingweida, which counts China’s SAIC Motor Corp. and EVTech (which in turn supplies Nio, Renault, and Volkswagen) as major customers, was ultimately added to the Entity List in December 2023.

Show me results

Through external research collaboration and the integration of tools like AI-powered supply chain mapping software, the CBP is making up for lost time. As of February, the CBP has detained over 7,000 shipments of goods traced to Xinjiang worth more than US$2.6 billion, with the vast majority of these having arrived Stateside in the last year.

This figure is almost certainly only a drop in the ocean. As was made clear in the July 2023 strategy update by the interagency taskforce overseeing UFLPA enforcement, the CBP now has the means to move beyond the initial high-priority sectors of cotton, tomatoes, and polysilicon to “all sectors identified by NGOs”. This includes copper, aluminum and steel products, lithium-ion batteries, tires, and other automobile components.

The Entity List, which had 20 companies until June 2023, has now grown to 30. The DHS has publicly stated that expanding the list is a priority.

Increased technical capacity and new hires are driving more rigorous enforcement. Another factor is a hefty dosage of political pressure – or indeed cover – provided by an eclectic coalition of NGOs, Uyghur groups abroad, and sympathetic members of Congress.

A late January 2024 letter published by the bipartisan Congressional Select Committee on the Chinese Communist Party – which has been influential in setting the hawkish tenor of congressional discourse – is instructive.

The letter exhorts the DHS to add companies “outside the People’s Republic of China” to the Entity List and “exponentially” increase testing and enforcement action at ports. The former could be a point of tension in US trade relations with Vietnam and Malaysia. Both countries have been the largest point of origin for shipments seized under the UFLPA, as Chinese companies have become more adept at circumventing tariffs and concealing Xinjiang content.

Another focus of the Select Committee’s campaign is changing the rules around de minimis eligibility for high-risk items. Under the de minimis provision, goods valued at less than US$800 are not subject to routine customs checks and duties. The Select Committee has been vociferous in highlighting concerns that e-commerce giants Temu and SHEIN are using de minimis as a loophole to ship textiles containing Xinjiang cotton.

Automotive industry in the crosshairs

There are strong early signs that the CBP’s enhanced capacity and political sentiment on the Hill are galvanizing more aggressive enforcement.

In an unprecedented development that has raised hackles in the Western automotive industry, an undisclosed number of vehicles were detained at US ports in mid-February. The cars, reported to be in the thousands and belonging to Porsche, Bentley, and Audi, allegedly contain a subcomponent produced by a company in western China.

It is understood that the Volkswagen (VW) parent group – which owns these three brands – alerted US authorities after it was made aware of the subcomponent by one of its primary China-based suppliers. The subcomponent in question was ultimately manufactured by one of the VW network’s indirect suppliers far, far down the supply chain.

For VW, this was just one part of a mensis horribilis. VW is now actively reassessing the future of its joint venture (JV) with SAIC in Xinjiang after the German newspaper Handelsblatt published evidence showing that the JV used Uyghur forced labor in the construction of a test track for cars in 2019.

VW’s February pledge to review its JV comes after a highly controversial company audit published in December 2023 appeared to exonerate VW of allegations of forced labor at its Xinjiang factory. On cue, the Select Committee in February wrote to VW Group Chief Executive Officer Oliver Blume urging his company to cease operations in Xinjiang.

VW is now in an acutely invidious position, having bet heavily on the Chinese market (and its partnership with SAIC) as a key plank of its strategy to remain globally competitive against China Inc.’s electric vehicle (EV) juggernaut. Closing its Xinjiang factory, as seems to be the only tenable option at this stage, risks inevitable blowback from Beijing – even if this chagrin is largely performative so regulators can use it to deter other companies.

VW’s issues are only the thin edge of the wedge. As far back as December 2022, a report from the Sheffield Lab suggested that over 50 international automotive companies were “sourcing directly” from Xinjiang or from Chinese companies who have accepted forced labor transfers.

Chinese-owned companies with aggressive battery or EV export ambitions including Contemporary Amperex Technology (CATL), SAIC, Volvo Cars, Nio Inc., and GAC Aion New Energy Automobile Co., were also named as having a material Xinjiang footprint.

The scope of this problem extends right down into the weeds of automotive supply chains. A February 2024 Human Rights Watch (HRW) report raised severe concerns over aluminum procurement practices. The report explicitly names Tesla, Toyota, General Motors, and BYD as being at risk of using Xinjiang-sourced aluminum.

With US officials evincing particular concern that Europe will become a “dumping ground” for goods made in Xinjiang, forced labor could become another point of dispute in the transatlantic trade relationship. In late February, opposition from Germany and Italy scuppered the adoption of the European Union’s own belated forced labor law, the Corporate Sustainability Due Diligence Directive (CSDDD).

Conclusion

The growing preparedness of Washington to enforce existing regulations gels with the current anxiety over China’s automotive expert ambitions, and more generally its colossal industrial overcapacity. These anxieties may encourage even more assertive enforcement of the UFLPA for strategic industries.

With China desperate to retain foreign investment and concurrently moving to beef up due diligence, multinationals are between a rock and a hard place. As supply chains bifurcate, companies may have to be more artful than ever in engineering the separation of their Chinese and non-Chinese business operations – and the origins of their parts.

Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.

To read the full article published by the Hinrich Foundation, click here.

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The Complication of Concentration in Global Trade

Thomas Nielsen — Thu, 12 Jan 2023 16:28:34 +0000

Concentration in the origins of traded products is widespread, prompting questions about whether to diversify or decouple.

At a glance

No region is close to being self-sufficient. Every region relies on trade with others for more than 25 percent of at least one important type of good.
About 40 percent of global trade is “concentrated.” Importing economies rely on three or fewer nations for this share of global trade.
Three-quarters of this concentration comes from economy-specific choices. In these cases (30 percent of global trade), individual countries source a product from only a few nations, even when global supply options are diversified.
Over the past five years, the largest economies have not systematically diversified the origins of imports. All have vulnerabilities, some more than others.
Informed reimagination of global trade requires a granular approach¸ both in mapping concentrated trade relationships and in deciding on action—whether to double down, decouple, or diversify.

We live in a highly interconnected world. Every region relies on imports for more than 25 percent of at least one important type of good, according to recent McKinsey Global Institute (MGI) research. Interconnections have created broad benefits over time, improving efficiency, increasing global product availability, and fostering economic growth. But recent supply chain disruptions, Russia’s invasion of Ukraine, and rising tensions between China and the United States have highlighted the importance of resilience. Firms and policy makers alike are examining where inputs come from and, in some cases, contemplating reconfiguring or even breaking certain long-standing trade ties.

Concentrated global trade creates complications. On the one hand, concentrated trade relationships can reflect and drive efficiency gains. On the other, interruption of concentrated trade flows can be particularly disruptive if products are harder to replace on short notice due to a lack of visibility and alternatives.

Where do concentrated trading relationships exist across products and between countries? In the face of new disruptions, how should companies and countries adjust these relationships, if at all? To examine these questions, this article builds on the findings of MGI’s recent research on global flows, analyzing concentration across more than 120 countries, roughly 6,000 products, and eight million individual trade corridors.

About 40 percent of global trade is “concentrated”

For many products, countries rely on a diversified pool of trade partners. This is particularly true for larger economies. For example, China imports crude oil from more than 40 economies, and the United States imports cars from more than 25 nations.

However, for 40 percent of global trade, the importing economy relies on three or fewer nations for the supply of a given resource or manufactured good. These “concentrated” trade relationships exist in all sectors, at all stages of the production process, and in all economies. Narrowing the focus further, about 15 percent of global goods trade corresponds to cases where the importing economy relies on only two or fewer nations. Laptops, chromium, and palm oil are all examples.

Three-quarters of concentrated trade comes from economy-specific choices

In some instances, concentration arises because only relatively few economies export a given product, defined as “global concentration.” Soybeans are an example; Brazil and the United States account for more than 90 percent of globally traded supply.

However, most concentration arises when individual countries source from only a few trading partners even when global supply options are diversified, defined as “economy-specific concentration.” Wheat provides an illustration; while 15 economies provide 90 percent of globally traded supply, most countries import wheat from only two or three economies.

Important examples of economy-specific concentration abound across all sectors, from raw materials to final products

Economy-specific concentration is particularly pronounced in the food value chain, both in agriculture—including in staple central crops such as wheat, rice, and maize—and in food and beverages for many everyday goods ranging from fresh beef to beer.
Concentration is high in both mining and electronics, in both cases driven in part by concentrated globally traded supply. Electronics has the highest proportion of globally concentrated trade of any manufactured goods sector, driven by mobile phones and laptops originating in China. In mining, 50 percent of all trade by value is in products supplied by three or fewer economies, most prominently iron ore, of which Australia and Brazil are the primary exporters.
Most energy resources are not particularly concentrated for individual economies, but pipeline natural gas is. Because of the infrastructure needed to transport it, most countries import their pipeline supply from geographically proximate partners.

Over the past five years, the largest economies have not systematically diversified the origins of imports

Every country participates in concentrated trade relationships. Every country sources at least 20 percent of imports (by value) from three or fewer trading partners. Imports to smaller economies, which have smaller trading volumes, are, on average, 50 percent more concentrated. But even large economies often develop concentrated relationships with trading partners for specific products. For example, the United States imports nearly all of its semitrailer trucks and light goods vehicles from Mexico, while Mexico imports nearly all of its maize, propane, and refined petroleum products from the United States.

Looking at a range of large economies across regions—Brazil, China, Germany, India, South Africa, and the United States—each has a distinctive “concentration fingerprint.” Economies have often been most vulnerable to disruptions in sectors where domestic consumption relies on inputs that come from a concentrated set of trading relationships. China relies more on concentrated relationships in mining; for Germany, it is energy resources and agriculture; and for Brazil, India, South Africa, and the United States, it is electronics.

Between 2016 and 2021, these large economies largely did not diversify origins of imports. In fact for all countries examined, concentration fingerprints remained fairly stable, with most sectors not registering more than a 10 percent change in concentration. It has yet to be seen whether the political and economic disruptions of 2022 triggered shifts that register in sector-level trade data.

Informed reimagination of global trade requires a granular approach

In a world that demands resilience, firms and policy makers are reexamining supply chains and trade relationships. Informed reimagination of what comes next requires a granular approach, both in mapping concentrated trade relationships and in deciding on action—whether to double down, decouple, or diversify. Not every concentrated relationship is a source of vulnerability. Nor can every product be substituted. Decision makers can develop a portfolio of actions to derisk growth by tailoring the option by product and trade corridor:

Double down. Some concentrated trade relationships are sources of competitive advantage, for instance providing access to technologically advanced inputs. Reinforcing such relationships to make them more resilient may be optimal.
Decouple. Concentrated trade relationships may create levels of risk beyond the appetite of the business, for instance if policies restrict flows between countries, and it may make sense to spin off or divest such flows while pursuing new domestic sources of production. However, by trimming sources of supply, decoupling tends to increase rather than decrease overall levels of concentration.
Diversify. Countries and firms can often address economy-specific concentration by reconfiguring trade relationships by tapping into additional sources of supply, or by partnering to pool sourcing risk. When alternative supply is not an option, such as when trade is globally concentrated, business and policy makers may look to redesign products or production processes to shift away from concentrated inputs.

By having a clear-eyed view of concentration, decision makers can calibrate effective strategy and reimagine, rather than retreat from, their global footprints. This is not only about managing risk. A transparent and up-to-date understanding of concentration, combined with the right measures to manage interdependencies, can be a source of competitive advantage. Organizations that demonstrate thoughtful management of concentrated exposures are likely to be more resilient in a changing world.

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Olivia White is an MGI director and a senior partner in the San Francisco office; Jonathan Woetzel is an MGI director and a senior partner in the Shanghai office; Sven Smit is chair of MGI and a senior partner in the Amsterdam office; Jeongmin Seong is an MGI partner in the Shanghai office; and Tiago Devesa is an MGI fellow in the Sydney office.

To read the full summary, please click here.

To read the full report, please click here.

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