Corporate Supply Chains and the Elimination of the Consumptive Demand Exception

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President Obama signed the Trade Facilitation and Trade Enforcement Act of 2015 into law in February of this year.  In doing so, he eliminated the “consumptive demand exception,” a long-standing loophole in the general prohibition against the importation of goods made with forced labor.

U.S. law has long prohibited the import of “goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor.”  The consumptive demand exception allowed companies to import goods produced with forced labor if the “consumptive demand” for those goods in the United States exceeded the capacity of domestic production.

Now that the exception has been eliminated, the potential impact on U.S. companies that import certain products and commodities is significant, especially in light of increasing awareness and concern regarding the existence of forced labor in many product supply chains. The recent release of the 2016 Global Slavery Index by the Walk Free Foundation highlights a truly somber reality in stating that approximately 45.8 million people are enslaved around the world.

Companies should be aware that detention orders could be imposed on products for which components are linked to forced labor, as the law prohibits the importation of goods produced “wholly or in part” by forced labor. Looking ahead, it should be assumed that U.S. Customs and Border Protection (“CBP”) will receive an increasing number of petitions from a range of stakeholders alleging that certain imports are linked to forced labor. Notably, in April, the International Labor Rights Forum (“ILRF”) filed a petition requesting that CBP bar the import of certain cotton products that are allegedly made with cotton produced using forced labor in Turkmenistan. ILRF filed a similar petition in 2013 with regard to goods produced with cotton from Uzbekistan.

At this time, much remains to be seen with regard to how CBP will seek to enforce the prohibition on forced labor now that the exception has been lifted. CBP is in the process of revising the relevant regulations and, in early May, announced the formation of new Trade Enforcement Task Force, which will focus on, among other issues, the enforcement of the forced labor prohibition.

That said, it is clear that enforcement has already increased. In the 85 years preceding the elimination of the exception, CBP only issued 39 orders detaining shipments of specific goods due to forced labor concerns. Since the exception was eliminated, CBP has issued three detention orders, all with regard to the shipment of goods from China that were allegedly produced with convict labor. The most recent detention order, issued on May 20, impacts stevia extracts and their derivatives, which are used in many soft drink products.

On June 1, CBP issued a press release regarding its most recent order and CBP Commissioner R. Gil Kerlikowske is quoted as stating that,

[i]t is imperative that companies examine their supply chains to understand product sourcing and the labor used to generate their products…CBP is committed to ensuring U.S. values outweigh economic expediency and as part of its trade enforcement responsibilities, will work to ensure products made with forced labor do not cross our borders.

What remains to be seen is what types of evidence CBP will rely on in making decisions to stop the import of certain goods.  Petitioners seeking to have CBP act to detain certain imports must show that particular shipments are affected by forced labor and cannot rely on general allegations that forced labor is associated with certain products and/or countries. That said, initial detention orders can be issued on the basis that evidence “reasonably” but not “conclusively” indicates that goods fall within the scope of the prohibition.

As CBP works on the applicable regulations and as it increases its enforcement capabilities, it would be wise for companies to assess the relative risk that products that they import rely in whole or in part on the use of forced labor. This risk assessment could include a review of the key source countries for specific products and product components and consultation with resources like the U.S. Department of Labor’s annual list of goods that it has reason to believe are produced with child or forced labor. As companies assess their level of risk, they should consider potential modification to their sourcing practices as well as ways in which they might engage with key suppliers in their efforts to mitigate the risk that forced labor exists in their supply chains.

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