Sovereigns’ imposition of mandates on the geographic composition of inputs sourced by private multinational corporations’ supply chains abroad to exact economic costs on foreign “bad actors” – both governments and non-state entities – is increasingly becoming the policy of choice for Washington.
The latest initiative on this front is the U.S. enactment at the end of 2021 of the “Uyghur Forced Labor Prevention Act,” which is intended to force China’s leadership from engaging in widely reported crimes against humanity and possibly genocide against the Uyghur population and other mostly Muslim ethnic groups in the country’s north-western region of Xinjiang. Many news outlets across the world have reported over a million minority Muslim Uighurs are believed to have been forced into reeducation camps. Analogous findings have been published by independent on-the-ground research by academics and independent international tribunals, which not surprisingly have been disputed by China’s state-run media.
More than a decade ago, provisions included in the Dodd-Frank Act to cut off international trade in “conflict minerals”— mostly gold, tungsten, cassiterite, and coltan – sourced from areas in war-torn eastern Africa controlled by rebels to curtail their access to financial resources were the first serious attempt by the Congress and the White House to conscript U.S. companies’ to be agents of political change abroad by mandating rules in the way firms manage supply chains.
In practice, however, the extraordinary complexity of modern global supply chains’ structure and the multitude of parties inherently involved across their various vertical channels, can result in the execution of such a strategy to be not only impotent but also produce unintended deleterious economic and political impacts on other parties in the locales being targeted for reform.
Contrasting the challenges of trying to use supply chain mandates to resolve Africa’s “conflict minerals” problem with those present in dealing with China’s treatment of Uyghurs in Xinjiang is instructive. As tough going as it has been in Africa, making appreciable headway in China will be exceedingly more difficult.
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Here are some reasons why.
Starkly Different Legal Frameworks, Regulatory Implementation and Enforcement Mechanisms
The “Uyghur Forced Labor Prevention Act” establishes a rebuttal presumption that any item shipped to the U.S. sourced, in whole or in part, from China’s Xinjiang region is produced by forced labor under the dictates of Beijing. Thus, unless proven otherwise, all such imports to the U.S. are deemed illegal. Specifically, firms must demonstrate to U.S. Customs and Border Protection (CBP) that products from Xinjiang, and likely anywhere else from China, were not produced by forced labor. This is not an inconsequential burden of proof to be met: an estimated 20 percent of garments imported into the United States each year include some cotton from Xinjiang.
Although the implementing regulations for the China-directed law are currently being drafted and will have a comment period before they are finalized, the new statute takes to a wholly different level an arguably more rational approach embodied in the “Dodd-Frank Act” regarding African “conflict minerals.” In the latter case, companies must disclose to the Securities and Exchange Commission (SEC) the extent to which their supply chains embody “conflict minerals”, if any, sourced from the Democratic Republic of the Congo (DRC) and specific neighboring countries (so-called “covered nations”).
Even so, the success of achieving the hoped-for conclusive identification of the locational sources of potential “conflict minerals” has been low. Only 48% of companies filing between 2014 and 2019 were able to report preliminary determinations as to whether the conflict minerals came from the DRC or neighboring states or from scrap or recycled sources.
Frankly, this is not much of a surprise considering the complexity in both the structure and functioning of international supply chains in the minerals sector the world over, inasmuch as raw materials products often undergo significant transformations once mined. Superimpose on this a state of affairs dominated by warring rebel groups that makes tracing the origins of minerals exceedingly difficult. It is hardy an environment conducive to meaningful operations of “market mechanisms” – especially those that foreign firms can rely on for making the determinations needed that their minerals are “conflict free”.
While achieving compliance with the Dodd-Frank provisions did impose appreciable costs initially, over time the process has become more routinized thus reducing reporting expenses. But the law did produce unexpected consequences: it has given rise to a new cottage industry of consulting outfits who specialize in assessing and documenting the composition of supply chains subject to the Dodd-Frank regulatory mandates.
As complex as the situation of regulating supply chains of Eastern African “conflict minerals” has become, it will likely pale in comparison to foreign companies’ efforts to obtain the requisite data credibly identifying which products, say cotton, contain elements, either in whole or in part, that have been sourced in Xinjiang. Afterall, in China the army, police and other organs of the state are (literally) omnipresent, including massive deployment of electronic surveillance, especially in Xinjiang. This will make companies’ attempts to trace the sources of products exceedingly difficult, if not impossible and even potentially dangerous to in-country personnel.
Contrasting Constellations of Local Stakeholders and in the Structure and Effectiveness of Governmental Authorities
One of the most striking differences between the attempt to combat fueling the supply chains of multinational corporations with “conflict minerals” from Africa and redressing the treatment of Uyghurs in China is the latter is fueled by official government policy.
And it is not just the policy of any government: one would be hard-pressed to think of any Communist regime in modern times with the sweeping authority exercised on a nationwide basis enjoyed by Beijing, especially under Xi Jinping. Indeed, as reflected by his recent ability to change China’s constitution to accord to him powers that rival, if not exceed, those of Mao Zedong, Xi has seemingly harnessed the exceptional loyalty of the country’s 1.4 billion people.
Xi surely has dissenters: one need only spend time in China and have frank, private discussions with close friends where there is a great degree of mutual trust. But his control of the national narrative about the internal security threat posed by the Muslims in Xinjiang to China’s should not be underestimated. In a word, Xi has been masterful in using the existence of the Uyghurs to promote a formidable degree of nationalism that serves his own purposes.
Indeed, the means by which Xi has been able to persuade the hearts and minds of the Chinese citizenry about the “Uyghur problem” goes way beyond what Xi himself says in speeches and television addresses. The policy levers at Xi’s disposal through his regulatory sway over the production decisions, including choice of inputs to use, by the state-owned-enterprises (SOEs) that dominate the Chinese economy are sweeping. Such is also the case in terms of Beijing’s control over domestic consumer choices by determining what products are to be sold in stores, including the extent to which goods produced by foreign firms will be made available to Chinese shoppers.
Barring a wholesale change in Xi’s grip on power, China’s governance regime is unified and iron clad.
Herein lies the complexity of the challenge facing the U.S. — or others in the global community — in altering China’s policy towards its Uyghur population: while the target for change is readily identifiable—the national governmental apparatus anchored in Beijing and infiltrated throughout the country—Xi’s commanding sway over the levers of control and propaganda among civil society and the SOEs will make compliance of Washington’s new law by U.S. firms operating in Xinjiang (or elsewhere in the country) nearly impossible. They will face the choice of either disregarding the law (presumably unlikely) or removing themselves from operating in sectors where the law applies, ceding market share to other foreign firms or to Chinese firms. Nothing might make Beijing happier.
In fact, it should be no surprise that in the face of the passage of Washington’s new law, not only have the supplies of goods from Xinjiang been removed from the shelves of U.S. firms selling within China, thus depriving them of sales revenue, but Beijing also has threatened to impose financial penalties on such firms’ Chinese operations.
To say that the new law will test the “commercial patriotism” of American firms—and their shareholders—to comply with U.S. regulations in China is an understatement.
This is a very different situation from the one in the eastern provinces of the DRC over access to, control of, and revenue earned from, the mining of valuable minerals. Rather than the presence of a readily identifiable government counterpart as in China (such as it is), in Eastern Africa there is just the opposite: a governance vacuum.
The looting of minerals—often mined by children—is being carried out by factions of the Congolese National Army and various armed rebel groups, including the Democratic Forces for the Liberation of Rwanda, and the National Congress for the Defense of the People, a proxy Rwandan militia group. Official government entities have de minimis control.
Not surprisingly, the result has been an economic environment bereft of investment conditions in which business—domestic or foreign—can be sensibly conducted; the impoverishment of the local DRC citizenry; and a significant drain on minerals-based revenues that make it to the national government’s coffers in Kinshasa.
One would presume that notwithstanding those in the DRC who profit from this conflict—and there is no shortage of evidence that corruption is well entrenched in certain segments of the country—the majority of the domestic population would be allied with efforts, including those from abroad, to bring about conditions for peace, economic stability, and growth. Yet, as noted above, even in such an environment, mechanisms to induce foreign firms’ use of supply chains as instruments to engender such change have not been very effective.
Bilateral Versus Multilateral Approaches
The U.S. is largely alone in instituting a regime that would regulate private companies supply chains to ban imports from Xinjiang. As limited as reliance on such a strategy may prove to be for the reasons argued above, it is still arguable that a U.S.’ bilateral approach towards China utilizing such a strategy might be far more effective if it was structured multilaterally.
Think back to the Trump Administration’s trade policy with China. While it failed for many reasons, at its core it was due to Trump’s insistence to go mano a mano with Xi—that is bilaterally. In large part this is an outgrowth of Trump’s insular view that all business transactions are akin to closing real estate deals, which, of course, constitute his lifetime occupational calling card.
The reality, of course, in today’s globalized economy, international supply chains and trade flows are multi-tiered and complex. Procedural or policy modifications usually require many players to act in a collective, multilateral fashion. This is 2022, not 1822.
Perhaps if the Congress and the Biden team are truly interested in trying to make the new law have an effect, they might work in tandem with allies on this enterprise.
To this end, there is a related area where a collective paradigm is being utilized: the imposition of sanctions on certain senior Chinese officials involved in the execution of the country’s Uyghur policies. Coordinated actions, such as travel bans and asset freezes, have been taken by the U.S., the U.K., EU, and Canada, among others.
At present, targeted Chinese officials include a former Secretary of the CCCP Political Affairs Committee of Xinjiang, who is believed to be the mastermind of the Uyghur internment program; the head of the Xinjiang Production and Construction corps; and the Chair of Xinjiang’s Public Security Bureau. Still, as history shows, focusing sanctions on individuals is far less likely to engender meaningful change in deleterious policies institutionalized by “bad actor” states.
In contrast, the supply chain policies put in place to deal with mitigation of Africa’s conflict minerals problems have been increasingly structured on a collective basis.
Besides the U.S., the U.K. and the EU, a number of other OECD countries have implemented conflict mineral reporting practices. And several non-OECD states, such as China, India and the UAE have also introduced similar regimes, albeit with different levels of sophistication and rigor.
Across the globe there should be, and for the most part there is, little disagreement that the use of forced labor, whether of certain ethnicities, or of age groups, such as children, is reprehensible. The same can be said for systems mandating re-education, indoctrination, or re-culturalization of segments of a country’s population.
The challenge, of course, is to find the most effective and swiftest path towards the elimination of such practices. Certainly, it’s a question of exacting pressure and disincentives on those people and institutions responsible for their execution. Yet the solution is unlikely to be a one-size-fits-all formulation because the genesis of such conduct is deep-seated, and its perpetuation is fueled by multi-dimensional societal and political complexities.