On June 21, the United States government implemented laws under the Uyghur Forced Labor Prevention Act that have a significant impact on consumer goods companies’ supply chains. This stems from the U.S. condemning forced labor and repression of minority groups in the Xinjiang region in China, including Muslim Uyghurs.
The resulting supply chain disruption, affecting many middle market apparel companies, will most likely include a major source of cotton and other raw materials. According to the regulation, all exports that contain any part or component from the Xinjiang region will be stopped from entering the U.S.
“If there’s a part or a piece of an input that is coming from the Xinjiang region, then that shipment will be considered containing forced labor and will not be allowed into the country,” said Elva Muneton, acting executive director of the task force implementing the new law, according to Bloomberg.
China has provided nearly 28% of all cotton imports since 2020. The Xinjiang region is a major cotton producer for China for this much-needed good. Middle market companies already facing supply chain disruptions and supply shortages will most likely require additional strategies to reset sourcing of cotton.
In addition to the goods blocked by regulation, there is also a risk of retaliation from China. Foreign ministry spokesman Zhao Lijian commented, “If the act is implemented, it will severely disrupt normal cooperation between China and the U.S., and global industrial and production chains,” according to Bloomberg.
Looking ahead
What’s a middle market consumer goods business to do? Here are three considerations:
- Look at sourcing labor conditions for the entire supply chain. Companies already investing in greater transparency into meeting environmental, social and governance criteria may be a step ahead of these new regulations. Others should follow suit.
- Develop business analytics and forecasting tools to help make decisions quickly. Assess current inventory levels using data to make smart decisions around what’s truly needed for upcoming seasons like back-to-school and the holidays. Having the right product on hand will lower demand for excess.
- Consider recycled supply options to augment new material supply disruptions. Companies investing in reused and recycled materials are seeing gains in consumer brand value and new ways to combat supply chain issues.
The takeaway
As businesses work to recover from the pandemic’s affect, this regulatory impact may present additional disruptions. Consumer goods companies may be looking at disruptions to both short- and long-term trade with two of the largest economies in the world.
