On November 30, 2020, the U.S. Customs and Border Protection (“CBP”) placed all cotton and cotton products from Xinjiang Production and Construction Corporation (“XPCC”) and its subordinate and affiliated entities on the Withhold Release Orders (“WRO”) list. XPCC is a Chinese state-owned enterprise (“SOE”) which produces around 17 percent of the Xinjiang’s cotton and employs approximately 12 percent of the region’s population, according to CBP commissioner Mark Morgan. CBP issued the WRO against XPCC based on “information that reasonably indicates the use of forced labor” in the region.
Withhold Release Orders are issued by the U.S. government when information reasonably but not conclusively indicates goods were made in whole or in part using Forced Labor. Merchandise detained under a WRO order must be exported immediately or a substantial submission made that provides specific information showing that the goods were not made with forced labor. To obtain a release of any shipment that has been subjected to a WRO, a certificate of origin along with this detailed statement regarding the merchandise’s production and supply chain origin must be submitted to CBP. CBP makes a determination on a case-by-case basis.
Experts estimate that the U.S. imported $11 billion of cotton textile and apparel products from China in 2019. Considering that Xinjiang produces around 85% of China’s cotton, this WRO designation will affect billions of dollars’ worth of imports into the U.S. as it places a significant roadblock on importing any cotton-based products. The company-specific action falls just short of a provincial cotton ban but DHS Deputy Secretary Ken Cuccinelli claims that XPCC is so embedded in the region’s economy that targeting its products will have a similar effect as a region-wide ban. Cuccinelli explained that, “I wouldn’t say it’s a de facto ban, but as you see XPCC’s reach is quite extraordinary in the region.”
Even with this XPCC-specific action, the possibility of a region-wide ban remains on the table. Senate and House Democrats on the Senate Finance Committee and Way and Means Committee respectively have pressured CBP to issue a cotton ban on all of Xinjiang. Since the introduction of the Uyghur Forced Labor Prevention Act in April 2020, there have been an increasing number of U.S. government actions targeting economic and political actors in Xinjiang.
The effect of the supply chain for large clothing brands remains in question. Although companies may be able to prove they source from different factories in Xinjiang, it could be more difficult to prove supply chains are free of Xinjiang cotton. The trickle-down effect could spill over into fellow Asian textile and apparel producers if they contain cotton from China. At this time CBP has announced it expects companies to “self-police”, but could take steps to detain products if a company claims ignorance about the origin of cotton. In order to mitigate risks of CBP detention of cotton-based products from China, importers should ascertain the full-extent of their product’s origin and be prepared to complete a certificate of origin should CBP require it.
This WRO is different than, and separate from, the sanction on XPCC by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) in July; OFAC allowed for (now expired wind down periods to transition from any business with XPCC. According to the OFAC designations, the “XPCC is a paramilitary organization in the XUAR that is subordinate to the Chinese Communist Party (CCP). The XPCC enhances internal control over the region by advancing China’s vision of economic development in XUAR that emphasizes subordination to central planning and resource extraction. The XPCCs structure reflects a military organization, with 14 divisions made up of dozens of regiments.” Under the OFAC sanctions, all “property and interests in property” of XPCC and of any entities that are owned, directly or indirectly, 50 percent or more that are in the United States or in the possession or control of U.S. persons, are blocked; OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods or services from any such person. This means that even apart from importing and other activity blocked by the WRO, any other interaction with XPCC is prohibited.