Tuesday, July 21, 2020

The Emerging Business, Compliance, Human Rights, and Sanctions Nexus--the Case of the Management of Global Production and Chinese Uighurs

Pix Credit: "US Sanctions Companies Over Muslim Abuse Complaints"

In January 2019 I asked: "What happens when the trajectories of Chinese Socialist Human Rights and the emerging global consensus on business and human rights responsibilities in global production chains collide? " (Human Rights Without Chinese Characteristics and Global Production Chains Within China: Xinjiang and Badger Sportswear as a Harbinger of Dissonance in Human Rights Risk Management). I suggested this presented difficult challenges, especially for U.S. companies navigating the increasingly difficult currents of US, Chinese, and International soft law frameworks. I suggested that "While the early years of developing consensus practices around supply chain human rights responsibilities had focused on the developing world, conflict and weak governance zones, it appears that such principles may be applied now to manage the supply chain practices of enterprises in all states." (Human Rights Without Chinese Characteristics and Global Production Chains Within China).

Pix Credit: Atlantic Council 2018
Those currents have become far more difficult to manage, and the use of global supply chains as a regulatory object has complicated, the compliance and human rights calculus of companies engaging in work in China and with Chinese companies. But the de-coupling now moving into fuller gear, combined with the increasing popularity of targeted human rights and corruption  sanctions as a regulatory tool (e.g., Human Rights First ReportMagnitsky legislation (UK Parliamentary materials); US Treasury Dept Magnitsky Act Resource Center; and in specific application The Congressional-Executive Commission on China (CECC): Xinjiang, its Uyghurs, and the Potential Expansion of Global Magnitsky Sanctions to Chinese Officials; Magnitsky Act: Raab to name first foreign citizens facing sanctions), has made compliance decisions much more complex, the the regulatory repercussions much more serious for non-Chinese enterprises whose production chains include work within China or with Chinese enterprises. 

The effect is to augment enterprise responsibility to engage in robust human rights due diligence compliance actions as part of their responsibility to respect human rights under the UN Guiding Principles for Business and Human Rights framework (augmented by an increasing number of diligence mandates in the UK, France, Australia and other places respecting specific human rights harms), by adding a layer of mandatory sanctions based due diligence based on targeted sanctions produced by administrative officials under an authority delegated to them by national legal schemes designed to achieve specific normative objectives. 

The US has emerged at the forefront of this movement. The target has been the Uighur population of the People's Republic of China whose treatment has been increasingly criticized by American officials, including the influential CECC (e.g., here) and civil society groups. In July 2020, the US Commerce Department
added to its economic blacklist 11 Chinese companies implicated in what it called human rights violations in connection with China's treatment of Uighurs in Xinjiang. The department said the companies were involved in using forced labor by Uighurs and other Muslim minority groups. They include numerous textile companies and two firms the government said were conducting genetic analyses used to further the repression of Uighurs and other Muslim minorities. * * * It was the third group of companies and institutions in China added to the US blacklist, after two rounds in which the Trump administration cited 37 entities it said were involved in China's repression in Xinjiang. (US adds 11 companies to economic blacklist over China's treatment of Uighurs).

This comes days after the US Attorney General criticized some of the more influential US companies by name, in the tech and entertainment fields, for serving as the American face of the "black hand" of Chinese interference in the American homeland (e.g., here).  China had earlier announced retaliatory measures against US elected officials.
China has announced retaliatory sanctions against three Republican lawmakers and a US ambassador as the row over Uighurs treatment in Xinjiang continues. Chinese Foreign Ministry spokesperson Hua Chunying told a regular press briefing on July 13 that the “corresponding sanctions” have been imposed on Senators Marco Rubio and Ted Cruz, Congressman Chris Smith, and the US ambassador-at-large for international religious freedom, Sam Brownback. (China Announces Retaliatory Sanctions On US Envoy, Lawmakers Over Xinjiang Row).

For US companies, or companies that may otherwise be subject to scrutiny and regulation (given their nexus of contacts and the character of the production chains), the consequences will be significant. The US, like most liberal democrat states remains committed to the great principles of privatized economic activity and the preeminence of the market, which ought not to be subject to direct regulation.  However, such regulatory ad control objectives can be more efficiently realized through a combination of delegated diligence (compliance and risk mitigation) obligations and, increasingly, the responsibility to implement targeted sanctions. One moves here from law to management in the regulation of economic activity with normative objectives. It is only a small step from a targeted   sanctions regime to the construction of a social credit based data driven ratings-reward system for business management. In this case all one might need would be the funding of the large private foundations to set up and legitimate such a structure. That is not far fetched and would preserve the facade of law based state government, and compliance-risk based market regulatory regimes.

These emerging interlinked regulatory structures--international and societal, national and compliance based, and mandatory and sanctions based--will have a profound effect on the way that companies approach their responsibilities to respect human rights, but also their approach generally to their philanthropic and sustainability objectives.  They will also have a secondary effect on the way on which China will operate its Belt and Rad Initiative--certainly to the extent that sanctions follow companies (and others) abroad, it will have an effect on their ability to partner with forms that are directly or collaterally subject either to the mandatory reach of sanctions, or the informal calculus of human rights due diligence in the shadow of sanctions regimes. Lastly, to the extent that this is not taken into account in the making of the proposed Comprehensive Business and Human Rights Treaty it will sink even deeper into irrelevance.

Lastly, it is not clear how China's response--and they will respond in time--will affect the ability of firms to engage in economic activity in China and with Chinese firms.  The ultimate result may be an acceleration of decoupling with some clever grey area activity between sanctions centers. But it is too early to tell. One will expect to see both a strengthening of separation except perhaps in the retail sector, and a greater ush to the construction of a Socialist business and human rights normative structure.  Its absence will make projection of economic power that much more challenging, especially where the primary political objective is to construct an autonomous and appealing alternative to what is characterized as "western" globalization. But as a defensive mechanism I would expect as well a substantial acceleration and refinement of social credit (data based governance)  applied to business enterprises in which compliance with sanctions may cause a reduction in social credit scoring (and thus greater difficulty in securing credit, access to markets, governmental approvals, etc.).

The reporting for Reuters (picked up by the global press) by David Shepardson and Diane Bartz, follows.

U.S. adds 11 firms to economic blacklist over China's treatment of Uighurs
David Shepardson, Diane Bartz

5 Min Read

(This July 20 story corrects spelling of last name to Cheh in paragraph 19.)

By David Shepardson and Diane Bartz

WASHINGTON (Reuters) - The U.S. Commerce Department added to an economic blacklist on Monday 11 Chinese companies it said were implicated in human rights violations regarding China’s treatment of Uighurs in the western Xinjiang region.

The step, which leaves the firms unable to buy components from U.S. companies without U.S. government approval, prompted an accusation of slander from China, which vowed to take measures to protect its companies’ rights.

The Commerce Department said the companies were involved in using forced labor by Uighurs and other Muslim minority groups.

Among them are numerous textile companies and two firms the government said were conducting genetic analyses used to further the repression of Uighurs and other Muslim minorities.

It was the third group of companies and institutions in China added to the U.S. blacklist, after two rounds in which the Trump administration cited 37 entities it said were involved in China’s repression in Xinjiang.

“Beijing actively promotes the reprehensible practice of forced labor and abusive DNA collection and analysis schemes to repress its citizens,” Commerce Secretary Wilbur Ross said in a statement.

In Beijing, a foreign ministry spokesman said the United States was trying to oppress Chinese companies and slander China’s policies in Xinjiang under the pretext of protecting human rights.

“We urge the U.S. to correct its mistakes,” Wang Wenbin told a news conference on Tuesday, adding that China would take all necessary measures to protect its companies’ legitimate rights.

The companies added to the blacklist include Nanchang O-Film Tech, a supplier for Apple’s iPhone that hosted Apple chief executive Tim Cook in December 2017, according to O-Film’s website. It is also a supplier to Amazon.com Inc and Microsoft, according to an April congressional letter.

The U.S. companies did not immediately comment.

The list includes two subsidiaries of Beijing Genomics Institute (BGI), a genomics company with ties to the Chinese government, Senator Marco Rubio said.

He said the additions will “ensure that U.S. technology does not aid the Chinese Communist Party’s crimes against humanity and egregious human rights abuses against Uighurs and other minorities in Xinjiang, including the forced collection of DNA.”

BGI Genomics, the listed unit of BGI, said in a stock market statement that Beijing Liuhe BGI, one of the subsidiaries added, fell under its management. Beijing Liuhe BGI’s 2019 net profit only accounted for less than 1% of its net profit, it added.

It said that it would work to verify the reasons for its subsidiary’s inclusion on the list and actively communicate with the U.S. Commerce Department. It added that it would do its best to eliminate any negative impact.

Also newly on the list are KTK Group Co, which makes more than 2,000 products for high-speed trains, ranging from electronics to seats; and Tanyuan Technology Co, which assembles high thermal, conductive graphite reinforced aluminum composites.

KTK said in a statement it had no investments in the United States and did not rely on U.S. technology. It said its exports to the United States accounted for less than 0.5% of its total 2019 revenue.

Tanyuan Technology said its inclusion on the list would not materially affect its daily operations.

Another blacklisted company is Changji Esquel Textile Co, which Esquel Group launched in 2009. Esquel Group produces clothing for Ralph Lauren, Tommy Hilfiger and Hugo Boss.

In a letter to Ross on Monday, Esquel Chief Executive John Cheh asked for the unit’s removal from the list. “Esquel does not use forced labor, and we never will use forced labor,” Cheh wrote. “We absolutely and categorically oppose forced labor.”

Efforts to contact the other companies in China were unsuccessful.

Also on the banned roster is Hetian Haolin Hair Accessories Co. On May 1, U.S. Customs and Border Protection (CBP) said it was halting imports of the company’s hair products, citing evidence of forced labor.

On July 1, CBP seized in Newark a shipment of almost 13 tons of hair products worth over $800,000 with human hair that it said originated in Xinjiang.

The Commerce Department previously added 20 Chinese public security bureaus and companies including video surveillance firm Hikvision, as well as leaders in facial recognition technology SenseTime Group Ltd and Megvii Technology in connection with China’s treatment of Muslim minorities.

Reporting by David Shepardson and Diane Bartz; Additional reporting by Gabriel Crossley and Roxanne Liu in Beijing, Meg Shen in Hong Kong and Shanghai Newsroom; Editing by Richard Pullin, Clarence Fernandez and Mark Heinrich

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