PUBLIC SCRUTINY OF FORCED LABOR RISKS in global supply chains has intensified in recent years. On June 2, the United States proposed additional tariffs of between 10% and 12.5% on 60 countries, including the European Union (EU), the United Kingdom, and China, over what it described as their failure to prevent the importation of goods produced with forced labor. The EU and other countries, including China and India, rejected those allegations.
While these actions focus on foreign governments and imported goods, they are also likely to contribute to the increasing attention on the sourcing decisions of U.S. firms in the context of forced labor. This firm-level attention is reinforced by long-standing U.S. regulations that block the entry of goods produced wholly or in part with forced labor. As a result, U.S. importers can face reputational, legal, and regulatory costs when their supply-chain linkages expose them to forced labor risks.
Publicly accessible shipment records can reveal which U.S. importers are connected to particular suppliers, origin regions, and products, including those associated with forced labor risks. For civil society watchdogs, journalists, NGOs, and other third parties, these records are an important tool for tracing potential forced labor exposure across global supply chains.
Yet the same transparency regime that requires the public accessibility of these records also contains a confidentiality mechanism. Under Customs and Border Protection’s (CBP) manifest confidentiality program, importers can request the redaction of their own identities and those of their suppliers from public shipment records. The rationale for this program is related to traditional notions of proprietary costs: Disclosure could reveal commercially sensitive sourcing relationships and expose importers to competitive harm. However, redaction can also make it more difficult for third parties to trace forced labor risks and connect them to U.S. import activity.
In a recent paper, Wharton accounting professor Sandra G. Schafhäutleand New York University Stern School of Business accounting professor Gurpal S. Sran examine the relation between forced labor scrutiny and firms’ redaction behavior.
The paper, titled “Redacted Identities in Shipment Records: Evidence From Forced Labor Scrutiny in Supply Chains,” is based on a study of about 100 million maritime shipment records from 2013 through 2023. The authors use these records to identify instances of U.S. importers seeking redaction of identifying information in public shipment records.
Essentially, the study highlights a significant factor that motivates supply chain opacity beyond traditional notions of competitive harm: When forced labor risks are detected in importers’ supply chains, firms may face lasting reputational damage, legal costs, and the possibility of follow-on regulatory costs. The findings therefore shed light on “a relevant but understudied force that could incentivize non-disclosure in global supply chains: the costs associated with the scrutiny of forced labor risks,” the paper states.
Patterns in Redactions
The study’s main findings are as follows:
- About one in four maritime shipments have redacted identities, and the share of redacted identities is generally increasing over time.
- The share of redacted identities is higher for shipments from countries with high vulnerability and weak government responses related to forced labor risks.
- The share of redacted identities increases when scrutiny intensifies, as captured by publicly disclosed high-risk lists and recent events related to international cotton and apparel sourcing.
Schafhäutle and Sran support their hypothesis of a link between redaction behavior and forced labor scrutiny through a number of tests. One test focuses on cotton and apparel shipments from China during the 2017-2023 period, when public scrutiny and regulatory enforcement of forced labor risks in these supply chains increased substantially.
The authors examine changes around a report by the Australian Strategic Policy Institute (ASPI) that linked the alleged mass transfer of Uyghurs and other ethnic minorities to factories in China, raising global concerns over forced labor. This public scrutiny event was followed by regulatory enforcement, including import restrictions and the passage of the Uyghur Forced Labor Prevention Act (UFLPA) in 2021. The UFLPA effectively created a blacklist of specific suppliers or localities like Xinjiang in China, with the possibility that the blacklist would grow over time based on continued monitoring by third parties, such as investigative journalists and civil society, and continued enforcement by regulators.
“Firms do not intentionally source from suppliers that use forced labor. But in practice … some risky linkages may remain, and if those linkages become public, they could face reputational, legal, or regulatory costs.”— SANDRA SCHAFHÄUTLE
The study finds a significant increase in the share of redacted identities in cotton and apparel shipments from China after these events. It also finds that “exposed trade names,” or names of importers who “heavily sourced” cotton and apparel from China before the series of public scrutiny events, are “significantly more likely to disappear relative to non-exposed trade names” after the series of events. Those effects are less pronounced for trade names with many observable shipments (i.e., highly visible trade names). The authors interpret this pattern as being consistent with the notion that “redaction is a less effective strategy for importers that are large and already highly visible to third parties,” the paper states.
Firms and Forced Labor Risks
Schafhäutle noted that their findings are significant in the context of the increasing pressure firms face over supply chain transparency and corporate social responsibility. “Firms do not intentionally source from suppliers that use forced labor,” Schafhäutle said. “But in practice, it is difficult to eliminate all forced labor risks from global supply chains. Supplier audits, for example, can help, but they are not perfect. So, firms may still worry that some risky linkages remain and that, if those linkages become public, they could face reputational, legal, or regulatory costs. Our paper suggests that redaction may be one way firms try to manage that remaining exposure.”
As the paper puts it, “Importers may therefore seek confidentiality for reasons beyond traditional notions of competitive harm, such as limiting exposure to forced labor scrutiny.” The authors make it clear that their findings “do not imply that importers choose to redact their identities to knowingly hide the presence of forced labor in their supply chains,” nor do the authors observe the actual occurrence of forced labor in suppliers’ production facilities linked to importers.
A Gap Between Intent and Outcome?
Forced labor is prevalent worldwide. About 27.6 million people were in forced labor at any given time in 2021, according to an ILO report cited in the paper. The ILO defines forced labor as work or services performed under threat of penalty and without the individual’s voluntary consent and proposes a set of indicators, such as vulnerability, deception, restriction of movement, isolation, physical and sexual violence, intimidation, and threats, to identify forced labor conditions.
The paper traces the history of laws aimed at addressing forced labor in U.S. import activity. Since 1930, U.S. law has prohibited the importation of goods produced wholly or in part with forced labor. According to Schafhäutle, the U.S. has “one of the oldest forced-labor import provisions, with enforcement becoming increasingly stringent in recent years.” Other jurisdictions are also moving in a similar direction, she added, including through import bans and supply-chain due diligence requirements aimed at reducing forced labor in supply chains.
Because forced labor is difficult to identify within global supply chains and CBP faces resource constraints, such import regulations depend heavily on the ability of third parties to investigate forced labor risks and trace goods back to the importers, suppliers, countries, and products involved. That makes public shipment records an important part of the broader governance system.
CBP is required to make shipment data on “goods imported by boat” into the U.S. publicly available (although other transportation modes remain confidential). At the same time, importers can request redaction of their identities and those of their suppliers in publicly accessible shipment records. These redactions remove identifying information from shipment records for two years on a rolling basis, and requests can be resubmitted indefinitely.
According to Schafhäutle, importers can request redactins on the CBP website in a simple online process that takes about half an hour. “Regulators note that redaction provisions are a necessary component of open data initiatives,” she said. “However, based on our knowledge, there are no processes in place to comprehensively monitor and understand the reasons underlying importers’ redaction requests.” Importers who seek those redactions are not required to demonstrate that disclosing their identities or those of their suppliers would reveal competitively sensitive information or otherwise harm their market position, the paper points out.
The Pros and Cons of Supply Chain Transparency
Transparency in supply chain sourcing has both advantages and disadvantages for importers. Firms that actively manage risks in their supplier relationships could position themselves as responsive to stakeholders’ demands for information and risk mitigation.
Based on a determinants analysis for a subset of firms, Schafhäutle said redactions are less likely when firms have institutional ownership or when firms are larger, with the latter being potentially related to such firms making more due diligence investments in their supply chain networks. “Firms that heavily invest in due diligence want to signal that they are high-type firms and thereby distinguish themselves from other firms that may make more limited or no investments in supply chain due diligence.”
However, when firms cannot address forced labor risks comprehensively and effectively across their entire supply chain, supply chain transparency could invite reputational and legal costs. Third-party watchdogs such as civil society organizations and the media could engage in “name-and-shame” campaigns if they find evidence of labor or human rights abuses in the supply chains of importing firms, leading to significant reputational damage, the paper notes. Watchdogs could also tip off regulatory enforcement agencies, leading to further costs for importing firms, such as import restrictions and new legislation.
Read the full article by Sandra Schafhäutle / Wharton
