Xinjiang Spiderweb: The most challenging trade compliance risk of all
Welcome to The Executive Perspective.
Trade compliance risks always pose a danger to companies, but with the signing of H.R. 6256 Uyghur Forced Labor Prevention Act?(UFLPA) into Public Law No:117-78 by President Joe Biden on December 23, 2021, I can say that we have entered a new era on trade compliance regulations, thanks to a new approach called "rebuttable presumption".
The “rebuttable presumption” implied in the UFLPA means that the burden of proof shifts from the U.S. government to private entities, in demonstrating that imported goods do not benefit from forced labor in the Xinjiang Uyghur Autonomous Region (XUAR).?
The scope of the UFLPA is broad and has the potential to impact a range of high-technology and low-technology industries with supply chain links to the People’s Republic of China (PRC), no matter how remote.
Moreover, the UFLPA covers “goods mined, produced, or manufactured wholly or in part with forced labor in the People’s Republic of China . . . especially in the Xinjiang Uyghur Autonomous Region,” which means that raw materials made with forced labor when incorporated into semi-finished or finished products are within the scope of these prohibitions. Further, the Act expressly addresses the importation of such goods from third countries - whether, for example, further processed, further manufactured, or assembled in third countries.
In plain English, if you're a company who is manufacturing in Xinjiang Uyghur Autonomous Region, or using raw materials, unfinished or finished products coming out of XUAR somewhere in your supply chain in one way or another, you’re going to need to prove that forced labor didn't make it. The presumption is now on the private entities.
There is also the Chinese side of the coin. Companies should also be aware that compliance with U.S. laws may potentially and automatically trigger risks under a range of Chinese laws, including the Chinese Anti-Foreign Sanctions Law.
On June 10, 2021, the Standing Committee of the National People's Congress of China (SCNPC) enacted the?Anti-Foreign Sanctions Law?(AFSL). The AFSL is the third in a series of anti-foreign sanctions blocking laws recently issued by the People's Republic of China (PRC) to protect China's sovereignty, security, internal affairs, and development interests by countering foreign sanctions.
The AFSL allows the Chinese government to create a "Counter-Control List" aimed at individuals and organizations directly or indirectly involved in "discriminatory restrictive measures" against the PRC, listing several restrictions, such as denying visas or freezing assets, that will apply to persons or organizations placed on the list.
It remains to be seen how aggressively the PRC intends to enforce the Blocking Laws but, there is a real mechanism in the hands of Chinese authorities to punish companies on these grounds, should they deem necessary to do so.
The challenge is this spiderweb of different fourth and fifth and sixth and seventh and eighth tier suppliers that companies have to trace back to determine whether forced labor is a part of their supply chain.
Consequently, the Xinjiang Spiderweb is very different from the export control world or the world of sanctions, where companies know the countries they’re forbidden to do business with.
The rebuttable presumption takes effect 180 days after the UFLPA is enacted and the clock has started ticking to comply with the new rules.
In light of all these, I believe companies should start working on following three bullets, sooner the better:
Should you think we can be of any help, please do not hesitate to contact me on my e-mail: [email protected]
Let's now carry on with putting global events in perspective.
Here are the latest developments on 8 global trends that I believe will shape the way we do business in 2022.
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1. Management Strategy
Get the Ball Rolling: What should your 2022 ESG strategy look like?
Business leaders need to focus on ESG design and a system of thinking that applies to how the economy will be shaped in the future, not just how it is structured today.
And this system of thinking must address how to translate corporate goals into practical, measurable and trackable ESG efforts in their businesses. Because, the train is about to leave the station as as global ESG assets could exceed $53 trillion by 2025.
First things first, business leaders should determine whether or not the ESG efforts are curbing company's competitiveness. Fears that excessive emphasis on ESG could harm a company’s competitiveness are not misplaced. In fact, there are valid questions about whether, if a company places too much energy into ESG objectives, it risks losing its focus on growth, market share, and profits.
Business leaders must also be guided by a framework that is transparent and consistent in addressing current events that highlight injustice.?Recently, boards have been challenged to ensure that they are consistent in defending racial justice across all racial, ethnic, and religious groups.
For the sake of employees, customers, and clients, corporations must be more transparent on how business leaders will handle these concerns, and broader ESG issues, as they emerge.?
One thing is certain, if a company does not focus enough on ESG, it risks falling behind in the market, losing the support of employees, customers, and investors, and potentially even losing the license to trade in more stringent regulatory environments.
However, finding the correct balance will not be easy, because the parameters will vary across sectors and geographies, as well as over time. What is essential is that boards should consistently review their focus on ESG and judge whether they are managing it correctly.
2. Geopolitics
Understanding the Kazakh Trade-Off: How the west traded Russian action in Kazakhstan with Russian inaction in Ukraine
During my visit to Turkey in late December 2021, I was invited to talk about global trends in 2022 in a meeting organized by Outbound Investments Business Council of Foreign Economic Relations Board (DE?K) of Turkey.
In that meeting, I remember getting serious questions about the situation in Ukraine, given its proximity to Turkey's primary trading partner, the whole EU itself.
And my answer was "In a time when the U.S. is building a deterrent military presence in South China Sea to counter rising Chinese military threat in the Pacific Rim, I can say that a serious military incursion into Ukraine by both sides is very unlikely. We should expect a trade-off in Ukraine which will make Russia happy enough to freeze the hostilities and free U.S. off spending military effort in Euro Atlantic to focus more on Pacific Rim."
When we think of geopolitics, we should always consider the delicate balance in between Euro-Atlantic Security Architecture and Asia-Pacific Security Architecture. No matter how mighty your military capabilities are, the cost of a deterrent military build-up on both world stages can amount to mammoth spendings.
Looking at what is happening in Kazakhstan now, the Russian action in the country might be proving what I have foreseen back in 2021 right.
U.S. policy makers must be well aware of the fact that a Russian military incursion into Ukraine this time cannot be countered with economic sanctions as it was the case with Crimea back in 2014. Because the fall of Ukraine means the EU is next in line, especially Hungary and Poland.
Russia, on the other hand, is closing into a critical election in 2024, where Putin needs a success story to feed the feeling of "national pride" amongst his voter base by following a well-known path: Enlargement towards Soviet sphere of influence. As the west and south-west of Moscow is now touching the NATO wall, a viable option is to go south.
In consequence, Russian paratroopers have been sent to Kazakhstan at the request of the Kazakh president to help "stabilize" the country. They were sent under the authority of the Collective Security Treaty Organization (CSTO). It's thought 2,500 soldiers have been sent to Kazakhstan, from other CSTO states but mostly from Russia.
Why Kazakh president thought 2,500 Russians can stabilize the country, while there is a 100.000 man strong up-and-ready Kazakh army at his disposal, is the key question here.
A little note here; Russian forces in Kazakhstan is being led by Russian General Andrei Serdyukov who is also known for having led the operation to occupy Crimea in 2014 and leading the Russian military intervention in Syria in 2019.
What does it mean for companies doing business or having stakes in Kazakhstan?
I guess the answer lies in the famous saying by Charles Darwin:
"It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change."
3. Manufacturing and supply chains
Transportation Electrified: The U.S. is coming back in the game with new battery cell gigafactories
History showed us that when the U.S. faces a problem, it doesn't just solve the issue, but overwhelms it. A similar approach, I think, is on its way for electric vehicles (EV) technology.
The efforts of electrifying transportation has become one of the focal points of energy transition from fossil fuels to renewables as the world tries to go electric, sales of EV have been increasing at a good pace.
In 2020, global EV sales increased at an annual 39% and reached 3.1 million units despite the COVID-19 pandemic. First estimates show that 2021 had become a new record year with 5.6 million units sold. This means a growth of 83% year on year. Forecasts suggest that annual global EV sales will reach 30 million by 2030.
The EV sales growth means that the demand for electric vehicle batteries will grow as well. U.S. Department of Energy (DoE) projects worldwide lithium battery market could double in the next decade.
The United States has been planning to become one of the forerunners in global battery cell production, and according to the DoE, 13 new battery cell gigafactories are expected to become operational in the United States by 2025.
Ford plans to open three gigafactories, two of them being a joint venture with South Korea’s SK Innovations. The South Korean company also plans to build two factories of its own.
General Motors plans to build four, again as joint ventures with a South Korean partner, LG.
Stellantis is teaming up with LG and Samsung to build two factories, and Toyota and Volkswagen will build one each.
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And of course there is Tesla’s new “Gigafactory Texas” in Austin.
4. Energy Security
Yamal vs. Nord Stream 2: Putin implies EU should choose its poison
Yamal pipeline that usually sends gas from Russia to Europe was stuck in reverse after three weeks on Monday, pushing up prices in Europe at a time of political tension between Moscow and the West.
Eastbound volumes on the Yamal pipeline stood at 7 million kilowatt hours an hour (kWh/h) on Monday. The pipeline carries about one sixth of Russia's annual gas exports to Europe and Turkey. Consequently, wholesale prices in Europe were up 5% adding pressure on the market along with lower wind output and weather outlook.
In the meantime, traders are trying to take advantage of high gas prices in Europe as more LNG cargoes are being diverted from Asian markets to the European ones. 14 LNG tankers, mainly from U.S. and West African suppliers, were diverted to Europe last week, up from previous week’s 8.
Not surprisingly, some European Union lawmakers have accused Russia, which supplies more than 30% of the bloc's natural gas, of using the crisis as leverage. They say Moscow has restricted gas flows to secure approval to start up the newly built Nord Stream 2 pipeline, which will supply gas to Germany.
Notably on the other side of the ocean, U.S. Senate plans to vote this week on Republican legislation to enact new, crippling sanctions against the Nord Stream 2 natural gas pipeline project from Russia to Germany.
The vote stems from a deal between Majority Leader Chuck Schumer (D-N.Y.) and Sen. Ted Cruz (R-Texas) in December 2021, which made way for the confirmation of dozens of President Biden’s ambassador nominees.
The big question this week is whether Democrats, most of whom oppose Nord Stream 2 just as much as Republicans, will vote to approve new sanctions or side with the White House.
Passage would require 60 yes votes.
5. Legislation
Under Legislative Fire: Airbnb is getting grilled on its Xinjiang operations
Two U.S. senators have targeted home rental firm Airbnb over its listings in China’s Xinjiang Region. Senators Jeff Merkley and James McGovern sent the company a letter, asking about some of its listings in the region.
The U.S. Government says China commits human rights abuses against Uyghur Muslim minority in Xinjiang, while China denies such allegations.
The two legislators cited a website that reported more than a dozen Airbnb listings in Xinjiang are on land owned by Xinjiang Production and Construction Corps (XPCC), which was blacklisted by the U.S. Treasury Department in 2020. The Department has frozen the company’s assets in the United States and prohibited American citizens and businesses from making deals with it and its officials.
The senators’ letter underlined that the U.S. State Department designated XPCC as a “quasi-military organization” which is involved with forced labor and possible other human rights abuses in Xinjiang.
The designation quasi-military organization means an organization?whose organizational structure, subculture and functions are similar to those of a professional military, but is not part of a country's armed forces.
Democrat senators Merkley and McGovern also said they question Airbnb’s commitment to human rights and anti-discrimination in China given its sponsorship to the 2022 Winter Olympics in Beijing.
6. Sustainability Strategy and Decarbonization
The North Sea Zephyr: German coalition partnered up with Canada on new wind farms
German energy giant RWE and Canada’s Northland Power announced last week their plans for a joint venture to build 1.3 gigawatts (GW) of offshore wind farms off the German coast.
RWE will own 51% and Northland Power will own 49% of the joint venture. The two firms, which already cooperate on offshore wind, decided to expand partnership following Germany’s ambitious target to expand solar and wind energy to phase out fossil fuel powered energy production.
RWE plays a big part in Germany’s wind target, being one of the biggest players in the wind farm development industry. The company plans to triple the capacity of turbines to 8GW by the end of the decade from 2.4 GW as part of a 50 billion euro investment plan.
The new offshore wind cluster that will be formed by the partnership includes a total of three offshore wind leases, which are located north of the island of Juist. One offshore site (N-3.8) with a capacity of 433 megawatts and was already secured by the partners in the latest German offshore wind auction. The other two leases will add 900 MW of capacity and are expected to be auctioned in 2023. For both sites, the new joint venture holds step-in rights.
Germany’s new Social Democratic Party coalition government says it wants to achieve 40 GW from offshore sources by 2035 and 70 GW by 2045.
At the end of 2021, they took the?first steps?toward opening up additional areas for future renewable energy development to meet the ambitious goals for growth in the sector. Currently, Germany is third in the world with 7.8 GW of operational offshore wind generation capacity.
The three offshore wind farms that will be built in the North Sea are expected to start operations between 2026 and 2028.
7. Rare Earth Minerals and Mining
Dominating the Supplies: China creates rare earth superpower with three company merger
China Minmetals Rare Earth Co. recently said it will merge with two other Chinese rare earth producers under the state assets regulator, creating a “super company” in the strategic industry.
China is already dominant in global rare earth production, and efforts to consolidate the nation’s rare earth companies have been considered as a way to increase influence over pricing.
China’s 85-90% control over the sector means a problematic reliance for the West on Chinese supply, especially at a time when relations are tense.
Minmetals Rare Earth has signaled such a restructuring in September 2021. The company said the merger was approved by the State-owned Assets Supervision and Administration Commission.
The merger will see Minmetals Rare Earth, Chinalco Rare Earth & Metals Co and China Southern Rare Earth Group Co transfer into a new company, which was not named yet.
The new company will be second only to China Northern Rare Earth Group in terms of output. It will account for around 70% of China’s heavy rare earths production.
This will mean that pricing of some key rare earths, such as dysprosium and terbium, will be in the hands of one company.
Dysprosium is increasingly in demand for the permanent magnets used in electric-car motors and wind-turbine generators, while terbium is used in fuel cells.
8. Defense and Armament
Shift in U.S. Arms Sales Policy: U.S. weapons exports to foreign governments fell 21% last year
U.S. weapons exports to foreign governments fell 21% annually in fiscal 2021 to $138 billion, the U.S. State Department announced.
Main reason is assessed to be a policy change as the Biden Administration has followed a less aggressive sales practice than the Trump Administration, emphasizing human rights when evaluating arms sales.
The fiscal period, which ended on September 2021, included $3.5 billion worth of AH-64E Apache attack helicopters to Australia and $3.4 billion worth of CH-53K helicopters to Israel.
Prior fiscal year’s arms sales had totaled $175 billion.
Biden Administration’s human rights concerns, including a pause of offensive weapons sales to Saudi Arabia after civilian casualties in Yemen, had affected the fall in sales. Biden intends to announce a new weapons export policy that emphasizes human rights.
The final year of Trump Administration had seen high one time sales of fighter jets, including Japan’s purchase of 63 F-35 stealth fighters worth $23 billion.
There are two main ways in which foreign governments can purchase arms from US companies. The first is direct commercial sales negotiated between the government and the company, and the second is foreign military sales, where a foreign government usually contacts a Defense Department official at the US embassy in its capital. Both methods require US government approval.
The US State Department also said that direct military sales from US companies fell 17% to $103 billion in fiscal year 2021 from $124 billion in fiscal year 2020, while sales that are arranged through the US government fell 31% to $34.8 billion in 2021. from $50.8 billion in the previous year.
That's all from this edition of The Executive Perspective. Hope to see you again on Wednesday Jan 19th, 2022. Please feel free to comment or share as you wish.
Cheers.