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US automakers grapple with customs crackdown on materials made by forced labor

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Xinjiang is a manufacturing and metal processing hub covering one-sixth of China's landmass.
Source: Feng Li/Getty Images AsiaPac via Getty Images.

Automakers might have to shift supply chains as US Customs officials increasingly detain metal imports from companies suspected of using forced labor in the Xinjiang region of China.

The US government and the United Nations Human Rights Office, along with several nongovernmental organizations, have alleged that the Chinese government is forcing the Indigenous Uyghur population to work in industrial parks in Xinjiang. The US enacted the Uyghur Forced Labor Prevention Act (UFLPA) in December 2021, ordering US Customs and Border Protection (CBP) to block shipments linked to Xinjiang unless importers can prove goods were not made with forced labor.

Beijing has consistently denied reports of human rights abuses in Xinjiang.

The UFLPA initially focused on imports of cotton and tomatoes, as well as polysilicon used in solar panels, but an update released July 26 said the CBP would also monitor "potential risk areas" including aluminum, steel, copper, lithium-ion batteries and automobile parts.

In March, the CBP started in earnest to detain base metals imports suspected to be in violation of the UFLPA, according to agency data. Industry participants warn that automakers and battery makers have not mapped out their supply chains sufficiently to be certain that any imported materials have not been connected with entities suspected of using forced labor.

"Automakers absolutely must know their supply chains down to the raw materials, and it appears that they are far from that at this time," Laura Murphy, professor of human rights and contemporary slavery at Sheffield Hallam University in the UK, told S&P Global Commodity Insights. "In places where [automakers] do not have and cannot quickly gain visibility, they should immediately shift supply chains."

Surge in metals detainments

Detainments of metals imports under the UFLPA leaped 273.3% month over month to $5.6 million in March, according to data from the CBP's Forced Labor Division. That month, the US Senate Finance Committee expanded its investigation into the US auto supply chain's link to Uyghur forced labor. Detainments jumped another 221.4% in April, hitting $18 million before declining to $10.4 million in August, CBP data shows.

Detainments from the automotive and aerospace industries have stayed below $1 million per month except for July, when they rose to $2.4 million, according to CBP data.

The US made up only 5.5% of China's exports of aluminum products in 2022, down from around 16% in 2017, but the nation remains the biggest importer of China's aluminum alloy wheels, accounting for 34% of total exports in the first eight months of 2023, according to S&P Global Market Intelligence Global Trade Analytics Suite.

Xinjiang is home to substantial copper and iron reserves, according to Market Intelligence data, and the region has become a processing hub, especially for aluminum. Lithium is a more recent addition to the region's product list: China-based Zhicun Lithium Industry Group Co. Ltd. started production at the first lithium project in the region in July, according to local media reports.

The UFLPA might challenge automakers to find new sources of auto parts such as electric vehicle batteries, electronics, interiors and tires, all of which allegedly have exposure to forced labor, according to "Driving Force," a report led by Murphy about automotive supply chains and forced labor in China.

"In the end, these restrictions (tariffs or sanctions on Chinese battery components and auto parts) will slow the ramp-up of US battery production, and US consumers and downstream [original equipment manufacturers] will take on the rising costs, because China dominates the EV battery supply chain," Zhang Jinhui, senior analyst at consultancy ICCSINO, told Commodity Insights in an email.

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Suppliers in the shadows

The lack of visibility into Chinese supply chains will make the increasingly prevalent border reviews a challenge for both US automakers and CBP, researchers said.

Supply chains are "fragmented" and often rely on multiple intermediaries that "aggregate materials from various sources," Daniel Solomon, partner at Miller & Chevalier with a focus on international corporate compliance, told Commodity Insights.

The UFLPA has not yet had any impact on the aluminum supply chain, according to Yang Fuqiang, senior manager of the aluminum department at Chinese metal information agency Antaike. As aluminum ingots from multiple sources are melted down to produce downstream products, it is difficult for foreign companies to track whether Xinjiang materials were used. And some companies have shifted to non-Xinjiang suppliers to avoid unnecessary troubles.

Automakers will get little cooperation from producers inside Xinjiang. The government would likely leverage a company's access to the Chinese marketplace against attempts to investigate their supply chains, Horizon Advisory founders Emily de La Bruyère and Nathan Picarsic told Commodity Insights. And without help from local companies, US carmakers will struggle to get definitive proof that they are not using forced labor in their supply chain.

Automakers will need more than just written statements from suppliers claiming they do not use forced labor.

"CBP prefers an article that says something definitive about where [importers] get their labor or something definitive that shows investment in labor," Exiger LLC CEO Brandon Daniels told Commodity Insights. Exiger offers AI-based supply chain management solutions.

CBP declined to expand on how it would identify materials using forced labor, telling Commodity Insights that it implements a "dynamic, risk-based approach" to UFLPA enforcement.

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Automakers in the headlights

General Motors Co., Mercedes-Benz Group AG, Toyota Motor Corp., Stellantis NV, BMW Group and Honda Motor Co. Ltd. told Commodity Insights that they take forced labor allegations seriously and complete supply chain due diligence on the matter.

"We actively monitor our global supply chain and conduct extensive due diligence," a GM spokesperson said, adding that the automaker is willing to terminate business relationships if forced labor is found in its supply chain.

Toyota said it maps out suppliers of direct parts and components, as well as sub-suppliers, and also reviews NGO reports "to identify and resolve any discrepancies."

Stellantis said it monitors its suppliers and has not found "any Xinjiang-originating products in our supply chain."

A Mercedes-Benz spokesperson said the company "makes spot checks with its suppliers in China and other countries" and calls on its direct suppliers to apply its sustainability and responsibility standards "in their upstream value chains." Mercedes said it was not aware of any shipments detained by the CBP.

Volkswagen AG has been criticized by shareholders and activists for operating a plant with a Chinese company in Xinjiang. The company announced in July that it would carry out an external audit of the facility.

Ford Motor Co.'s planned battery plant in Michigan has prompted three congressional inquiries into a partnership with Contemporary Amperex Technology Co. Ltd. (CATL). The inquiries focus on CATL's links to Zhicun Lithium and whether batteries produced at the factory would be eligible for EV tax credits under the Inflation Reduction Act of 2022.

Audi AG, Honda, Tesla Inc., Ford, GM, Mercedes-Benz, Toyota, Volkswagen and others were named in the "Driving Force" report as automakers with exposure to the Xinjiang region.

Down the road

"If you really want to be compliant with the legal mandate that is emerging in the United States, and if you want to be ethical in the way you do the business, you probably need to actually decouple from the Chinese marketplace," Horizon Advisory's Picarsic said.

But China's market share of mineral processing and battery manufacturing makes such a goal difficult to reach, despite incentives from the US government, which is seeking to diversify and localize supply chains.

"Decoupling is a component of rebalancing, but to ostracize half the market is not a long-term beneficial strategy in the United States, UK, Japan or any other auto market. It's not even a realistic expectation," Exiger's Daniels said.

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