Policymakers must think hard before expanding regulation requiring firms prove that each and every part of a supply chain meets US requirements.
Background: Two weeks ago, more than 13,000 Volkswagen-made autos—including Porsches, Audis, and Bentleys—were impounded in ports by US authorities. The reason: US officials suspected that a small electronic subcomponent in one of the vehicles’ parts may have been made by forced labor in Western China. Until Volkswagen can disprove this with “clear and convincing” evidence, it cannot deliver the autos to dealers.
Zooming in: The US enacted the US Uyghur Forced Labor Prevention Act in 2021 (UFLPA) with the undeniably honorable intention of preventing forced labor. What’s new is that—in a change from prior regulation from 1930—the act presumptively assumes that any part or other raw material made in Xinjiang province has been produced by forced labor. Unless a firm can prove otherwise, any products with such value-add produced in Xinjiang at any point in their supply chain are banned from entry into the US.
Why this matters: Having studied supply chains for more than 20 years, I propose that proving a supply chain is pure through and through is spectacularly hard to do so.
Most firms have poor visibility into their supply chain. One survey by Resilience360 and Business Continuity Institute in a survey of 350 global manufacturers and retailers found that only 36% knew the geographic location of all their Tier-2 suppliers. Because supply chains often extend many tiers below that, knowing where each and every part, raw material and so on is located is beyond most firms. Even the large automotive firms with their sophisticated supply chain management staff and databases are often in the dark. How can smaller or less sophisticated firms (i.e., the majority of the US economy) manage it?
There is a large amount of forgery, obfuscation and other fraud with respect to certification by suppliers in many regions of the world
It’s still fuzzy what “clear and convincing proof” means in practice.
The Big Picture: The history of regulation suggests that regulations expand in scope over time, not shrink.
Assuming a product’s entire supply chain does not meet regulations unless proven otherwise could easily expand beyond forced labor. For example, what if any part or material from Russia in a supply chain is banned?
How deep into the supply chain will a ban be enforced? For example, what if the chemicals used by a Canadian firm to produce fertilizer for Mexican produce comes from a banned region? Will the Mexican produce require documentation before crossing the border? What if the oil to make the fertilizer comes from Iran?
Bottom Line: US Policymakers need sort out the scope, breadth and enforcement or these regulations before expanding them to other areas. Actions that are needed include:
Create traceability standards that constitute “clear and convincing evidence.”
Define exactly a supply chain starts and stops.
Expedite the “census” of US suppliers announced last November to give firms alternatives to prohibited suppliers.
Consult with supply chain experts to ensure that importation bans achieve their goals without grinding US industry to a halt.