After a pause in 2022, there has been much talk of the continuation, or resumption, of a wave of retail bankruptcy cases as we begin 2023. 2022 was highlighted by Revlon's filing (discussed here: Revlon May Signal Another Wave of Retail Bankruptcies | Retail & Consumer Products Law Observer (retailconsumerproductslaw.com)). Revlon pointed to a number of issues that led to its filing, including most prominently, supply chain issues. Severe impediments in the supply chain – whether the inability to source product or the costs and delays in received goods — have been cited by many debtors since Revlon since as a leading cause of their distress. And it may get much worse before it gets better, particularly for companies that source, directly or indirectly, from China.
In December 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act (UFLPA) which bans goods made with forced labor located in China's Xinjiang Uyghur Autonomous Region. Very generally, the law imposes a rebuttable presumption that a product with any nexus to Xinjiang is made with forced labor. Accordingly, an import that is produced in a third country but includes a component from Xinjiang is subject to the prohibition. In order to overcome the presumption, importers must establish by clear and convincing evidence that product was not made using forced labor. The law took full effect on June 21, 2022.
In order to defeat the law's presumption, companies that source goods from China will have to engage in a thorough review of their supply chains from the finished product to raw materials to determine whether any goods are made in Xinjiang and, if so, whether they were made with forced labor. This is very difficult, made more challenging by the need to "prove a negative." Tasked with enforcing the law is U.S. Customs and Border Protection (CBP) which will detain goods if there is a reasonable suspicion that goods are subject to the UFLPA. CBP will make the determination if the supply chain information provided by importers is sufficient to prove their goods falls outside the scope of the UFLPA or if goods manufactured in Xinjiang were made with forced labor. If product is detained, it could reasonably take 8-9 months to obtain and provide the necessary supply chain documents and receive a determination from CBP.
The effects of the UFLPA are likely to be wide ranging. The categories of goods exported from and around Xinjiang range from apparel, solar products, electronics, tomatoes, automotive parts, and many other consumer and industrial goods. Producers of PVC are aplenty in the region. Indeed, the effects of the law are only beginning to be felt. In 2022, almost $500 million of goods were targeted by the CBF. Just a blip given the magnitude of supply chain issues that faced retailers and others last year. Things may change rapidly in 2023. CBP has recently been allocated more than $100 million for the calendar year to enforce the law and has much improved analytics tools at its disposal. While the distortive effects that enhanced enforcement will have on the supply chain are unknown, this additional hurdle may not be factored into many projections for continued pain in the retail sector.
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