Forced Labor Loophole Closed, Fashion Brands Beware
BY: ELIZABETH G. KURPIS
A storm may be brewing at U.S. ports of entry and the economic damage that will be left in its wake is unclear. One thing is for certain, however; the fashion industry should be concerned. Up until this year, the Tariff Act of 1930, which prohibits the importation of goods made with any type of forced or child labor, contained a “consumptive demand” exemption that made enforcement of the law next to impossible. To put this in practical terms, out of all products imported into the U.S. since the law was enacted in 1930, there have been only 39 cases where goods were seized due to forced or child labor suspicions. Considering the vast number of goods imported to this country each day, such a low number of seizures over such a large span of time is astounding.
The “consumptive demand” exemption effectively allowed for the import of goods made by forced or child labor so long as there was a demand for those products in the U.S. that could not be met through supply here. By way of example, if Americans wanted sneakers, and the demand for sneakers could only be met by foreign manufacturers that employ slave labor, the U.S. would allow those sneakers to be imported and sold here.
This all changed on Feb. 24, 2016 when President Obama signed into law the Trade Facilitation and Trade Enforcement Act of 2015, a Senate approved bipartisan initiative that closed the decades-old loophole that allowed importation of such controversial goods. Now that the “consumptive demand” exemption has been abolished, U.S. Customs Border Protection may seize, and commence forfeiture of, any imported goods suspected of being produced using forced or child labor by issuing a detention order. To execute this, CBP plans to initiate investigations of companies suspected of employing such labor, and scrutinize them based on recommendations from third-party petitions (including petitions from competitors and public interest groups) and other government agencies, such as the U.S. Department of Labor and Immigration and Customs Enforcement.
In addition to CBP stopping items at U.S. ports of entry, U.S. Homeland Security investigation agents will be located in 46 countries across the globe to inspect varying points of supply chains that may be connected to this illicit practice. Just as important, Congress will be called upon to review a yearly report that details the number of times merchandise was denied entry due to forced labor concerns, as well as provides a description of the goods that were rejected. This annual report will add pressure to customs agents to show active trade enforcement of the U.S. prohibition by CBP, and signals a likelihood of a huge uptick in the agency’s issuance of detention orders.
Although these reforms are aimed at all businesses that import goods produced overseas, some industries, such as food and apparel, are far more likely to feel its affects. For instance, since March 10, 2016, when the law went into effect, CBP has already issued two withhold release orders, one of which was for goods produced by Tangshan Sanyou Group and its subsidiaries. Tangshan produces viscose/rayon fiber, among other things, and CBP determined that their goods would be stopped at customs based on information indicating that the products were being made with convict forced labor. To put the effects of this in perspective, a quick Google search of Tangshan now reveals that the manufacturer is permanently closed. As a result, the fashion industry is on high alert for a number of reasons:
1. Countries Involved in the Production of Fashion Goods
The countries (e.g., China and Bangladesh, among others) where such goods are produced, whether an entire garment or accessory or the textiles or materials used in constructing the respective goods, tend to be considered high risk in terms of the potential use of forced or child labor.
2. Materials Used to Produce Apparel and Accessories
Whether it’s rayon fibers from China or cotton from Kazakhstan, the materials used in apparel and accessories again run a very high risk of being produced by forced or child labor, depending on country of origin.
3. Unknown Extension of the Law
If a customs agent is tasked with evaluating shirts manufactured in Bangladesh imported from a law-abiding supplier, but the shirts were made with buttons produced by a subcontractor that employed children, how far does legal liability go? If Saks Fifth Avenue carried these shirts, for instance, would they be liable, and how would this affect their bottom line should these goods be seized upon importation? How far does a fashion company have to go to ensure its suppliers and any subcontractors do not use forced labor? These questions relating to “degree of separation” have not yet been answered, and as a result, the ambiguity could lead to millions of dollars’ worth of apparel and accessories being seized upon entering the U.S.
4. Economic Repercussions Unique to the Fashion Industry
Unlike other industries, fashion companies operate under strict delivery schedules, especially if they are producing or selling four collections per year. The coordination between design and production to delivery must be seamless. Issuance of a customs detention order for their goods would be fiscally catastrophic for both emerging and established fashion companies if their deliverables were not able to arrive on time.
What can be done by fashion companies looking to be proactive when it comes to forced and child labor practices in their supply chain? Unfortunately, the answer is quite complex, but with the “consumptive demand” exemption repealed, fashion companies now have the opportunity to reassess their supply chains and how they verify that labor laws are not being violated. Because both the legal and reputational stakes are so high, including the moral implications of violation of such a law, fashion companies should consider addressing the pitfalls head on by preliminarily following some of the suggested policies and procedures below:
1. Review the U.S. Department of Labor’s two lists of products from different countries (i.e., Trafficking Victims Protection Reauthorization Act of 2005 and Prohibition of Acquisition of Products Produced by Forced or Indentured Child Labor) that it has reason to believe are made using forced or child labor. Custom officials will likely turn to these to prioritize countries and sectors for investigations going forward;
2. Identify supplies relevant to their company that are most likely to be produced using forced or child labor;
3. Identify suppliers that are known to use forced or child labor;
4. Identify countries that maintain laws that allow products to be produced using forced or child labor;
5. Make sure that they know who is supplying their suppliers and which subcontractors are being employed, if any;
6. Conduct more comprehensive audits of suppliers, and immediately shift to alternative sources if they find out that their current supplier is using forced or child labor;
7. Develop new compliance systems to identify potential forced labor in their supply chains;
8. Create new codes of conduct that set forth the measures taken to prevent forced and child labor, which should apply to all companies involved in the production of the company’s goods and its supply chains;
9. Look for third-party certification programs that will certify whether certain products imported are produced by forced or child labor; and
10. If a company suspects that forced or child labor exists in its supply chain, consider voluntary disclosure to mitigate the risk of penalties.
With the institution of the law, it is hard to say how CBP will choose to enforce the prohibition on imported goods made through forced or child labor and how far liability will extend. What we do know, however, is that the law surrounding this practice is now significantly strengthened. Accordingly, fashion companies need to be more aware of those they do business with, and ensure that they develop compliance programs, perform due diligence and have updated policies and procedures in place to combat any potential liability resulting from the law. At the very least, a company needs to show that it made all reasonable efforts to ascertain the type of labor utilized at each point in its supply chain. Otherwise, it risks being faced with severe penalties legally, fiscally and reputationally, the damage from which may prove difficult to overcome going forward.
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