Leibowitz: Trading with the Enemy?

Now, pressure is increasing on the private sector to restrict trade even in the absence of conflict. The current increasing tension with China is causing concern among American and global companies.

About 20 years ago, I helped launch a coalition of American companies called “USA Engage,” a group that sought to limit executive power to impose economic sanctions on global trade for non-economic reasons. But the sanctions in those days dealt with smaller markets than China—Cuba, Sudan, Iran, Iraq, Libya, North Korea, Bosnia, Serbia and Kosovo were the targets then.

But the continuing issue is when (or whether) government can reasonably require business to stop profitable commerce in the absence of open conflict. That is a debatable issue that is increasingly in the news.

One of the most recent examples involves the Uyghur Muslims in the Chinese province of Xinjiang. Uyghurs are Sunni Muslims; they were relatively peaceful until after the Communist revolution when many ethnic Chinese migrated to the region. By the 1990s, the Han Chinese made up 40 percent of the population. Tensions between the ethnic Chinese and the Uyghurs intensified and the central government took sides in the dispute.

Xinjiang is a landlocked and sparsely populated province in the far west of the country, mostly rural and the center of cotton production in China. China has been accused of interning Uyghur Muslims and forcing them into re-education camps. Allegations have multiplied that the Chinese government has forced the Uyghurs to work in the cotton trade for low or no wages as part of their “re-education.” China denies these accusations.

As of January 2021, U.S. Customs and Border Protection has “detained” shipments of cotton, tomatoes and their “derivative products” produced in the “Xinjiang Uyghur Autonomous Region.” U.S. importers of goods from this region are now subject to “Withhold Release Orders” from CBP, which means that CBP won’t let U.S. importers take possession of their imports until CBP looks into the forced labor allegations. Because 90 percent of the cotton produced in China comes from Xinjiang, anything with cotton in it (apparel, bed linens and the like) is likely to be detained indefinitely. CBP has announced: “Importers are responsible for ensuring the products they are attempting to import do not exploit forced labor at any point in their supply chain.”

How exactly are the importers supposed to do that? Customs does not say. Some observers are worried that Customs could penalize importers for not “ensuring” that their imported goods do not “exploit forced labor,” leading to massive delays and potential penalties. Clearly, the only possible way to prevent liability is to avoid, not only Xinjiang goods, but goods from China altogether. That will be hard to do—but the U.S. may be ready to encourage U.S. multinationals to abandon Chinese suppliers. Uyghurs are also involved in manufacturing and energy extraction in Xinjiang.

This is an action far more serious, potentially, than 25% tariffs on steel or 10% tariffs on aluminum. If goods are detained, they could be held indefinitely by Customs, disrupting supply chains. While the detained goods may be re-exported to other countries (many of which have not similarly restricted these goods), the effect will be to take jobs out of the United States.

Is there a better way to address forced labor in Xinjiang? There is no doubt that U.S. multinational corporations have little ability to influence the behavior of the Chinese government over its treatment of the Uyghurs. The WROs seem to be encouraging multinationals to do something that cannot possibility succeed. That is a dangerous precedent—prohibiting trade with the enemy should be confined to wartime

But more such trade restrictions could be coming. It’s conceivable that Customs could issue WROs on products from other countries for trade-related issues, such as labor rights or environmental practices. Looking back on the USA Engage experience of 20 years ago, the clear consequence of overusing these WROs will be to drive commerce out of the United States, where other countries are not as concerned with these issues.

Does the U.S. government have a responsibility to create conditions where supply chains can be adjusted without crippling penalties or delays? If it does, the U.S. should encourage alternative suppliers to help U.S. businesses compete in global commerce. That is the connection between such issues as building infrastructure in the U.S. and elsewhere, and easing pandemic-related business restrictions before creating rules that businesses cannot cope with due to lack of resources and clout in other countries. Already, U.S.-based companies like Nike and H&M have seen their business interests in China harmed by Chinese reaction when they fail to reject the notion that there might be forced labor in Xinjiang.

This situation could get worse for companies in many industries and countries other than apparel and tomatoes in China. Withhold release orders have been issued for goods coming from other countries too. Typically, they have been very narrow; but the use of “general” WROs could increase beyond cotton and tomatoes and even beyond China.

Lewis Leibowitz

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