FLETF Pivots to Critical Minerals. Now What?

Unpacking the new UFLPA Entity Listings targeting magnesium.

There is an old Chinese idiom, dating back approximately 3000 years before the founding of PETA, which says kill the chicken to scare the monkey. The associated legend tells the story of a street performer who, in order to incentivize his weary dancing monkey to return to service, hatched a terrifying plan of public chicken execution.

I first heard this piece of bronze age wisdom several years ago, as it was reported to be a favorite of a senior U.S. trade official. In that official’s view, this was a compelling negotiating strategy for trade agreements. While one could certainly debate both the ethics and the efficacy of the idiom across different contexts, there is a certain logic to it, and not just for trade negotiation. You could argue that this is in fact the model of a number of trade sanctions regimes.

I thought about that as I considered the August 9, 2024 addition of five new companies to the UFLPA Entity List by the Forced Labor Enforcement Task Force (FLETF). The newly listed companies include a trio that are involved in the production of magnesium alloys and magnesium fertilizer, a mine in Xinjiang that is reported to hold copper, zinc, lead and silver deposits, and a Xinjiang-based construction company. The headline from these entity listings is reasonably clear: FLETF took a deliberate act to focus on these nodes of production and distribution for certain critical minerals. But what follows from here is substantially less clear.

It’s popular to think of the UFLPA Entity List as a type of sanctioning mechanism, but it differs in significant respects. Most sanctions regimes prohibit certain types of specifically defined transactions, and set stiff penalties for non-compliance, alongside an inviting voluntary self-disclosure mechanism. One of the benefits of such a model is that once a foreign entity is sanctioned, there’s a great deal of self-policing that happens within the business community. As a result, the government enforcement authority can afford to kill only the occasional chicken, and be reasonably assured that the monkeys will form steady stream of voluntary disclosures, nonetheless. A similar approach is evident under the Foreign Corrupt Practices Act (FCPA).

When a company is added to the UFLPA Entity List, however, the full scope of the compliance expectation on possible downstream purchasers is less than clear. As a practical matter, it’s probably true that the names of companies added to the UFLPA Entity List end up getting added to denied party screening databases, and that most Western or multinational companies will seek to avoid knowingly doing business with them. But if a listed entity is more than one tier removed in the supply chain of an importing entity, such screening will not generate a match. If there is an import flow of forced labor content into the U.S. market, it is likely to continue, unabated. Unlike with sanctions regimes, UFLPA penalties for non-compliance are ambiguous (at best), and as a result, the concept of voluntary self-disclosure holds no allure whatsoever.

Now before anyone jumps to the conclusion that what the UFLPA needs is an adjunct penalty mechanism, let me suggest that behavioral science has advanced quite a bit beyond the quaint wisdom of a Zhou-dynasty busker. Science has taught us that avian murder is not, in fact, the best way to get monkeys to dance—especially if the monkeys in question aren’t yet well trained. In this case, U.S. Customs (CBP) has the power to disclose certain information that would have a powerful effect on corporate behavior, and could incentivize more aggressive forms of risk-based supply chain mapping and tracing.

A closer look at the most recent round of entity listings makes this more clear.

The most significant of the recent entity listings appears to be a trio of related entities involved in magnesium production.¹ Although the Federal Register notice does not make the corporate relationships fully clear, public records indicate that Rare Earth Magnesium Technology Group Holdings, Ltd. (REMT) is a wholly-owned subsidiary of Century Sunshine Group Holdings, Ltd. (Century Sunshine). The websites for both of these companies plainly discuss their common magnesium production base in Xinjiang, which is Xinjiang Tengxiang Magnesium Products Co., Ltd. (the third magnesium company to be listed).

According to the Federal Register notice, the U.S. government found “reasonable cause to believe, based on specific and articulable information”, the Xinjiang magnesium production base was involved in a labor transfer type program, and that REMT and Century Sunshine source this magnesium to manufacture and sell “magnesium alloy products” (in the case of REMT) and “magnesium fertilizer and magnesium alloys” (in the case of Century Sunshine).

In the case of many UFLPA Entity Listings, the supply chain downstream from the listed entities is extremely opaque (if it is visible at all). In this case, however, a Google translation of the Century Sunshine website reveals a relatively uncommon level of detail about the company’s fertilizer products and sales markets, which is helpful in allowing us to think about the downstream movement of goods more specifically.

Century Sunshine lists five popular Chinese fertilizer brands that the company produces, and notes that its product sales network covers “mainland China”, where the fertilizer is popular for helping to grow food and cash crops such as “tea, fruit trees, vegetables, peanuts, bamboo and eucalyptus”.

Now, you could have a philosophical debate about when magnesium fertilizer (produced with magnesium that the U.S. government has reasonable suspicion to believe was made with forced labor) is used to grow peanuts, whether the peanuts have been produced wholly or in part with forced labor for purposes of the U.S. forced labor import ban. (I’d be in the ‘no’ camp on that one; such fertilizer has been consumed in China, and that’s the end of the line.) But the risk of supply chain links to the United States seems more substantial for magnesium alloy.

Here again, a Google translation of the REMT website is uncommonly illuminating. According to REMT, its magnesium alloys are used in “transportation, 3C electronics [computer, communication and consumer electronics], and aerospace sectors.” REMT further notes that “magnesium alloy new materials are used in new energy vehicles, biomedicine, 5G base stations, magnesium building modules, magnesium-based hydrogen storage materials, magnesium batteries, and other fields.” Unlike fertilizer, which reaches the end of its life cycle once scattered upon the soil, it seems plausible that many of these applications for magnesium alloys could ultimately reach the United States for consumption.

What will CBP do in response to these entity listings, in order to promote the outcome envisioned under the law? (My request for comment from CBP was not returned prior to press time.) At the risk of oversimplification, I assess that CBP has essentially three options.

Option 1: CBP could do nothing. Magnesium is not a high priority sector, and CBP has not published any traceability demand related to the mineral or products that might contain it. CBP has a statutory obligation to prioritize enforcement in certain areas, and FLETF has defined those areas as cotton, tomatoes, polysilicon, seafood, PVC and aluminum. In other words, in the target-rich environment of UFLPA enforcement, CBP has more than enough other content to attend to.

Under the UFLPA, the primary consequence (and the only legal consequence) of UFLPA Entity Listing is that CBP is directed to apply a presumption that any content that was produced or mined by such company was made with forced labor, and so, is prohibited from importation into the United States. But if CBP chose not to detain any merchandise related to these entity listings, it’s unlikely anyone would ever know.

CBP’s current approach for reporting UFLPA detention activity is considerably opaque. Products like 5G base stations, or building modules, not to mention biomedicines are classified in vastly disparate locations across the HTSUS. CBP’s approach to reporting (which discloses detention information on the basis of broad buckets, spanning multiple chapters of the HTSUS) is so general, that it would be impossible for any interested stakeholder to know whether CBP had, or had not, chosen to detain any merchandise related to these entity listings.

If CBP decided not to effectuate any detentions related to these entity listings, it seems safe to say that the effect of these entity listings would be limited. If you’re a trader of products containing magnesium, that might be welcome news, but it also might not be great for the sustainability of the UFLPA. In an ecosystem where plenty political leaders are focused on the importance of enforcement, such an approach probably bodes poorly for both chickens and monkeys.

Option 2: CBP could initiate detention activity against products containing magnesium on an ad hoc basis, under the same level of transparency currently captured in UFLPA enforcement. This approach (call it catch-as-catch-can) would allow CBP to pursue its statutory mandate of preventing the importation of content produced by these listed entities, but presents at least three major disadvantages.

One disadvantage is that, as with Option 1, public awareness of such detention activity would be extremely limited to nonexistent. CBP could undertake dozens, or even hundreds of detentions of products containing magnesium content, and it’s entirely possible that no one would ever know (apart from the individual affected importers).

A corollary disadvantage is that no company would be prepared for such detention activity, as CBP has not published any traceability demand linked to magnesium. (See this document, which contains CBP’s published traceability demands, and contains no reference to magnesium.) A published traceability demand is simply a description of what CBP is looking for in the context of an applicability review. At its best, it is an objective standard of an evaluation for which an importer can prepare, and on the basis of which CBP will evaluate evidence of traceability.

The third disadvantage is merely the consequence of the first two. If the importing public does not know which imported goods have been subject to detention related to these magnesium entity listings, and if there is no published traceability demand related to magnesium, that means that the effectiveness of these new entity listings is entirely on the shoulders of CBP. If magnesium from these listed entities is in fact produced with forced labor, and if such content is to be prevented from importation into the United States, CBP alone will be the party responsible for finding the magnesium needle in the haystack. The power of the private sector will remain untapped. Which brings me to . . .

Option 3: CBP could make just two modest adjustments to its public disclosure practices, engage in a judicious volume of detention activity where it has reasonable cause for doing so, and in so doing help train the whole cavalcade of monkeys.

The first needed adjustment to CBP’s public disclosure would be to craft and publish a traceability demand related to magnesium. If CBP is going to effectuate a detention based on magnesium, what exactly would an importer need to prove in order to navigate an applicability review and demonstrate that the UFLPA does not apply? This is not a complicated determination; it essentially amounts to proof the magnesium source of supply. But it needs to be articulated and published, in order to serve as a common point of reference for both CBP and the trade down the line. If a trader wants to be able to navigate a magnesium-related detention under the UFLPA with minimal disruption, this sort of traceability demand would be the standard of evaluation.

Once the traceability demand is published, CBP could proceed to effectuate detention activity where it has reasonable cause to do so. FLETF takes pains to ensure that it has reasonable cause for the entity listings in the first place; CBP should (and by all accounts, does) take pains to ensure that its detention decisions are comparably well justified. The U.S. government has not determined that all magnesium is produced with forced labor. FLETF has not even added magnesium as a high-priority sector under the UFLPA. Accordingly, the mere presence of magnesium in an imported product should not be a sufficient basis for CBP to undertake detention activity. Rather, there must be some reasonable cause to believe that the merchandise CBP wishes to detain is linked to the newly listed entities.

When that is the case, CBP could effectuate a detention, which would give rise to the second needed adjustment to CBP’s public disclosure. CBP should identify the basic coordinates—say, six-digit HTS subheading and country of origin—of the detained merchandise, and identify what traceability demand was imposed on such detention.

For example, if CBP had reasonable cause to believe that a certain Chinese organic chemical containing magnesium could be linked to REMT, it might effectuate a magnesium-related detention of a product classified in subheading 2933.79. Or, if CBP had reasonable cause to believe that a Korea-made cellular base station could be linked to Century Sunshine, it might effectuate a magnesium-related detention of products classified in subheading 8517.50. By the same token, if CBP concludes that all magnesium fertilizers produced by these newly listed entities are fully consumed outside the United States, it would not effectuate any detentions of products in subheading 3101.00 (for fertilizers), even if such products are known to contain magnesium.

By disclosing only the country of origin and 6-digit tariff classification of the detained goods, CBP would provide the business community with the optimal combination of information that would incentivize further supply chain mapping and tracing. Companies engaged in the business of importing organic chemicals, or cellular equipment, that contain magnesium, would be on notice that CBP had found reasonable cause to believe that some such products appear to have supply chain links to the newly listed entities. Companies wishing to ensure that they do not encounter unnecessary customs delays at the border would be incentivized to focus their mapping and tracing efforts on these, and adjacent, product categories and countries of origin.

In the iterative evolution of UFLPA enforcement, it’s important for CBP to be responsive to new and different information. This isn’t the first time FLETF has added companies to the UFLPA Entity List that are involved in making products not currently covered by a traceability demand (the December 2023 addition of Sichuan Jingweida and COFCO Sugar comes to mind), and it won’t be the last. CBP isn’t a member of FLETF, and so doesn’t get to vote on entity listing decisions. But it is an observer, and so closer coordination between FLETF and CBP regarding what CBP will do following an entity listing of a company involved in a new product category is certainly possible.

Legend Science has it that the power of focused enforcement and enhanced transparency to shape the incentives to behavior should not be underestimated.

1. The August 9 entity listings also include a Xinjiang based construction company (Kashgar Construction Engineering (Group) Co., Ltd. The Federal Register notice asserts that this company “manufactures structural components and materials for construction”. It is not clear that any such structural components or construction materials are sold for the export market.

The August 9 entity listing also included the Ashele Copper Mine, which has been subject to significant public allegations in the past by Sheffield Hallam University, and raises even more complicated questions with respect to supply chain mapping and tracing, which I do not address here today.