The Uyghur Forced Labor Prevention Act – Potential Impact on Critical Minerals Supply for Clean Energy Technologies

Alert
|
11 min read

In the over five months since the Uyghur Forced Labor Prevention Act ("UFLPA") entered into force, companies have grappled with how to assess and mitigate compliance risks. Lack of transparency by US Customs and Border Protection ("CBP") with respect to UFLPA enforcement to date has complicated these efforts.1 In addition to imports of products specifically identified as high priority for enforcement in the statute (cotton, tomatoes and polysilicon), an emerging area of focus and controversy, considering the implications for the green economy transition, is critical minerals.

Upon entry into force on June 21, 2022, the UFLPA established a rebuttable presumption that goods produced wholly or in part in the Xinjiang Uyghur Autonomous Region ("XUAR") of China, or by certain identified entities, are made with forced labor, and therefore subject to an import prohibition in the United States.2 The US government has recently signaled that it will dedicate significant resources to bar imports of any product category where supply chain visibility suggests the possibility of forced labor.3

There is a strong likelihood that CBP will pay especially close attention to imported critical minerals and products containing critical minerals (1) because a significant portion of these materials come from China and (2) owing to stakeholder reports concerning critical minerals production in XUAR. Because of the vital importance of critical minerals to a range of sectors, including but not limited to clean energy technologies, and given the challenges associated with demonstrating traceability, this represents a new area of significant risk for US importers.

Critical Minerals in XUAR

Critical minerals – including aluminum, cobalt, graphite, iridium, lithium, magnesium, nickel, niobium, platinum, tin, titanium, tungsten and zinc4 – are those identified as being "essential to [US] economic or national security and vulnerable to disruption."5 Among other uses, critical minerals are essential components of many clean energy technologies, from electric vehicle ("EV") batteries to wind turbines and electricity networks, and thus in high and growing demand.6

Critical mineral production and processing is highly concentrated in a small number of countries, including countries with significant perceived political risk. China is the top processor of most critical minerals relevant to the energy transition, and also leads production of key intermediary products such as battery cells, polysilicon and wind turbine components.7 Although China does not dominate upstream operations for all critical minerals (but rather mid- and downstream operations), it bears noting that at least 120 different types of mineral deposits are found in XUAR, including critical minerals such as beryllium, and XUAR-based companies are involved in processing activities. Certain minerals are processed for export in XUAR, and others are sold into intra-China supply chains (for example, to large Chinese battery makers).

Therefore, any imports from China containing these materials are at risk of detention under UFLPA. This is especially true given recent reporting suggesting that critical minerals in XUAR may be produced and/or processed using forced labor.8 Citing such reports, on September 29, 2022, US lawmakers Michael T. McCaul and August Pfluger sent a letter to the CBP Commissioner, seeking information on how CBP would screen imports of critical minerals from China under the UFLPA.9 The lawmakers requested a response by October 15, 2022, but as of the date of this alert, CBP has not publicly responded. Further, on November 16, 2022, the Congressional-Executive Commission on China published its 2022 Annual Report, urging Congress and the Administration to fully implement UFLPA, and for the Forced Labor Enforcement Task Force to update and expand the UFLPA Entity List.10

Implications for US Environmental Targets

Supply of critical minerals must expand rapidly in order to keep pace with the projected growth of renewable energy production, EV sales and other elements of the global energy transition.11 To mitigate anticipated supply constraints, the United States is investing heavily in domestic production and processing capacity,12 and bolstering critical minerals supply chains with friendly trading partners. However, for the time being, the United States remains heavily reliant on foreign sources, particularly China.

Whether the United States can target forced labor while also working to achieve its ambitious energy transition targets – given that this depends in large part on reliable access to critical minerals, as recently reaffirmed at COP27 – remains to be seen. The US government has set a goal to reach 100 percent carbon pollution-free electricity by 2035, and to reduce carbon pollution from automobiles and other forms of transportation.13 This will be impossible without, for example, huge quantities of lithium and cobalt, supply for both of which is dominated by China. To the extent that critical minerals used for clean energy technologies are detained pursuant to UFLPA, this could exacerbate supply constraints and create a bottleneck on the road towards 2035. This policy balancing act could affect the government's calculus as to the breadth and intensity of UFLPA enforcement.

Looking Ahead

The scope of CBP's enforcement under the UFLPA will depend in part on whether it has sufficient resources to look beyond high-priority sectors. The 2023 US Department of Homeland Security funding package, once passed, is expected to include a significant budget for UFLPA enforcement. In June 2022, the House Appropriations Committee recommended $15.74 billion for CBP total, including $89.8 million for preventing the importation of items made with forced labor. The Senate Appropriations Committee appears poised to recommend a similar funding level; however, the DHS spending bill has not yet come to the floor of either chamber, and funding levels will remain static through at least December 16, 2022, pursuant to the continuing resolution signed on September 30, 2022. Therefore, FY2023 DHS funding levels will not be confirmed until later this year or early 2023.

Regardless of budget, questions remain as to how CBP will enforce UFLPA with respect to critical minerals and other "non-priority" products. Recent guidance from CBP hints at one potential tool: the deployment of an automated "UFLPA Region Alert," whereby CBP's Automated Commercial Environment will add a mechanism for flagging some imports clearly falling within UFLPA's scope, using the combination of a declared China country of origin and a manufacturer postal code indicating XUAR-origin. For imports from China, the system will require users to input a valid Chinese postal code, and "[u]sers will receive a warning message when a Uyghur region postal code has been provided."14 In doing so, the system will provide "an early notification to importers of goods that may have been produced in [XUAR]." Originally scheduled to be deployed on December 15, 2022,15 the system has been postponed "until further notice." On November 3, 2022, CBP announced the formation of a Trade Support Network UFLPA Region Alert working group in order to "get input from the trade community on the proposed impacts of this enhancement," and solicited volunteers to join the working group. It is not clear how/if the new system, once deployed, will flag offending imports from China containing inputs from XUAR, but manufactured in/exported from a non-XUAR Chinese postal code.

In a related development, the Commercial Customs Operations Advisory Committee ("CCOAC"), comprised of US companies, issued a non-public proposal to CBP to treat data collected from vessel manifests as confidential.16 The CCOAC proposal was quickly challenged by various stakeholders, including Senators Marco Rubio and Chris Smith, who argued that "attempts to make data collected from vessel manifests confidential and to get CBP to provide importers with advance notice whenever it suspects forced labor is being used … would make it easier for importers to bring in shipments tainted by the [Chinese Communist Party's] forced labor apparatus."17

The opaque and evolving nature of CBP's UFLPA enforcement leaves importers of Chinese goods – specifically in high-risk sectors and more broadly (i.e., of critical minerals) – in a challenging position. Companies must ensure adequate policies and procedures to identify, assess and address forced labor risks in their supply chains and demonstrate the absence of any nexus to XUAR or listed entities. CBP recently implemented mandatory forced labor requirements for participants in the Customs Trade Partnership Against Terrorism ("CTPAT") and CTPAT Trade Compliance programs. With respect to critical minerals, companies struggling to demonstrate traceability may be able to leverage new tools such as the Extended Minerals Reporting Template and associated resources developed by the Responsible Minerals Initiative, as well as data-driven tracing technologies such as blockchain to trace critical minerals from source to customer. Despite the challenges, one thing is clear: importers of products containing critical minerals – the supply chains for which very likely run through China – must develop a plan for ensuring compliance under the UFLPA.

1 In its October 2022 Monthly Operational Update, CBP stated only that "In October 2022, CBP targeted 398 entries valued at more than $129.8 million for suspected use of forced labor in the production of imported goods, including goods subject to the Uyghur Forced Labor Prevention Act and Withhold Release Orders." See US Customs and Border Protection, "CBP Releases October 2022 Monthly Operational Update" (Nov. 14, 2022), available at https://www.cbp.gov/newsroom/national-media-release/cbp-releases-october-2022-monthly-operational-update.
2 See previous White & Case client alerts here, here and here.
3 In a September 27, 2022 article in the Wall Street Journal, US interagency Forced Labor Enforcement Task Force ("FLETF") chairman Robert Silver emphasized that, while the UFLPA designates priority products for enforcement, CBP is "looking closely at any other product category where forced labor may come into play …." For more information see White & Case's October 2, 2022 alert here.
4 The US Geological Survey regularly issues a list of critical minerals, and the most recent list, from 2022, includes 50 minerals. See 2022 Final List of Critical Minerals, 87 Fed. Reg. 10,381 (Feb. 24, 2022).
5 The White House, "FACT SHEET: Securing a Made in America Supply Chain for Critical Minerals," Feb. 22, 2022, available at https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/22/fact-sheet-securing-a-made-in-america-supply-chain-for-critical-minerals/.
6 For more information on critical minerals and their uses, see White & Case's September 22, 2022 article here.
7 Luc Leruth, Adnan Mazarei, Pierre Régibeau, and Luc Renneboog, "Green energy depends on critical minerals. Who controls the supply chains?" Peterson Institute for International Economics, Aug. 2022, available at https://www.piie.com/sites/default/files/documents/wp22-12.pdf.
8 The New York Times reported in June 2022 that the Xinjiang Nonferrous Metal Industry Group, a mining conglomerate based in XUAR, employs hundreds of ethnic Uyghurs and other ethnic minorities under "work transfer programs," which the United States "consider[s] a red flag for forced labor." Ana Swanson and Chris Buckley, "Red Flags for Forced Labor Found in China's Car Battery Supply Chain," THE NEW YORK TIMES (June 20, 2022). Bloomberg also reported in July that Ganfeng Lithium Co., China's top lithium producer, is currently exploring projects in XUAR. Ganfeng has contracts to supply battery-grade lithium to EV producers Tesla and BMW, raising concern amongst investors. David Stringer and Annie Lee, "Ganfeng Draws Tesla, Electric Cars Into Xinjiang Labor Debate," BLOOMBERG (July 17, 2022).
9 Letter from Hon. Michael T. McCaul and Hon. August Pfluger to Hon. Chris Magnus (Sept. 29, 2022) ("Although Xinjiang-originated polysilicon and cotton have received the most attention, recent reports combined with the extreme difficulty in tracing the supply chain for critical minerals indicate an extremely high risk that imports of these products could violate the [UFLPA]").
10 See Congressional-Executive Commission on China, "2022 Annual Report" (Nov. 2022), at 34-35 (also recommending that Congress and the Administration sanction individuals under the Trafficking Victims Protection Act and UFLPA; encourage foreign governments/legislatures to adopt legislation/regulations modeled on UFPLA; expand the US Department of Commerce's Entity List to include any company engaged in biometric surveillance aiding in atrocity crimes in XUAR; continue to use sanctions authorities (Global Magnitsky Sanctions Program and the Uyghur Human Rights Policy Act, as amended by UFLPA) to sanction persons for XUAR abuses; and monitor and support a Tier 3 designation for China in the US State Department's Trafficking In Persons Report).
11 According to the International Energy Agency, because green power generation requires many times more mineral inputs than the fossil fuel-based equivalent, "[s]ince 2010 the average amount of mineral resources needed for a new unit of power generation capacity has increased by 50% as the share of renewables in new investment has risen." "The Role of Critical Minerals in Clean Energy Transitions," International Energy Agency, available at https://www.iea.org/topics/critical-minerals. For more discussion on the projected critical minerals deficit, see White & Case's September 22, 2022 article here.
12 In addition to implementing core components of President Biden's agenda on healthcare and tax reform, the Inflation Reduction Act includes several funding provisions aimed at bolstering domestic and regional production of and demand for critical minerals. For example, the IRA makes substantial revisions to the EV tax credit to require regional sourcing of critical minerals used in EV batteries. Second, the IRA introduces a new "advanced manufacturing" tax credit for domestic production of critical minerals. Third, the IRA includes a $500 million appropriation for "enhanced" use of the Defense Production Act, which President Biden recently invoked to support critical minerals production. Fourth, the IRA authorizes $40 billion in loan guarantees under Title XVII of the Energy Policy Act of 2005, which could bolster recent efforts to leverage the Title XVII program to support domestic production of critical minerals. For more information on IRA provisions relating to critical minerals, see White & Case's August 2, 2022 alert here.
13 See White House, FACT SHEET: President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target Aimed at Creating Good-Paying Union Jobs and Securing US Leadership on Clean Energy Technologies (Apr. 22, 2021).
14 US Customs and Border Protection, "Notional Development & Deployment Schedule for Automated Commercial Environment (ACE)" (Oct. 26, 2022).
15 Id.
16 Joshua Goodman, US businesses propose hiding trade data used to trace abuse, ASSOCIATED PRESS (Oct. 17, 2022).
17 Website of Senator Marco Rubio, Press Release: Rubio, Smith Vow to Oppose US Business Efforts to Weaken Uyghur Forced Labor Bill (Nov. 2, 2022).

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2022 White & Case LLP

Top