Navigating Transparency and Compliance Through Collaboration and Trust Building.

As most brands, retailers and importers know (or should know), the United States Customs and Border Protection (CBP) has issued an all encompassing WRO regarding imports from the Xinjiang Uyghur Autonomous Region (XUAR) in China that includes cotton and tomatoes.

Although we believe this policy is shortsighted and misdirected (more about political posturing than an effective or practical tool to address an ongoing humanitarian crisis in Western China and the needs of farmers and workers)--it invites much needed dialogue about transparency, traceability and ethics of global commercial supply networks and perhaps portends a new era whereby mandatory trade compliance, rather than a voluntary "ESG" compliance among brands, retailers and suppliers, will become the primary driver of social and environmental progress.

However, we also recognise that there is little time at present for philosophical debate when over $42 billion of dollars of textiles and clothing China that are imported into the US each year and it is now clear that the risks that face brands, retailers and suppliers is commercial, legal and material to the daily operations of business and the critical bottom line. Ethics (and sustainability) is fast becoming more than a 'nice to have' to fit for glossy annual sustainability reports or the meandering final five minutes of a quarterly earnings call--it is now front row and centre when it comes to sourcing and procurement. Finally.

The latest WRO released in January states:

"For cotton products: Affidavit from yarn producer and the source of raw cotton that identifies where the raw cotton was sourced. Purchase Order, Invoice, and Proof of Payment for the yarn and raw cotton. List of production steps and production record for the yarn, including records that identify the cotton and cotton producer of the raw cotton. Transportation documents from cotton grower to yarn maker. Supporting documents related to employee's that picked the cotton, time cards or the like, wage payment receipts, and daily process reports that relate to the raw cotton sold to the yarn producer."

Learn more here.

This essentially means that to bring finished goods (t-shirts, jeans, sheets, etc.) from China (elsewhere potentially) into the United States, you have to know your supply chain. This includes new practices that need to be developed and more broadly, that you are able to identify each supplier and processor at all tiers of the value chain behind each product imported, including importing agent, assembly (CMT), finishing, fabric mill, spinning mill, merchant, gin, middleman/commission agent (if relevant), farmer/farm organisation.

The requirement includes collecting and remitting declarations and affidavits from each of these suppliers along the chain as well as disclosures of purchase orders, invoices, transaction proof of payments and any supporting documentation that brands, retailers and importers will have to present to the CBP for review under the WRO provisions. This applies to all incoming shipments arriving at United States ports of entry (largely, Los Angeles, San Francisco and Seattle and others.

As such, several of our clients including brands, retailers and suppliers have asked us to help engage their direct suppliers and other suppliers upstream in a more efficient, effective and meaningful way. In doing it themselves, they have found that simply asking for this documentation from their direct suppliers is tedious, inefficient and impractical as most direct suppliers lack the knowledge and access to this information and many resent that brands, retailers asking for this information is about shifting liability (to suppliers) rather than taking responsibility for their supply chains. Further, suppliers along the chain have shared real concerns about disclosing proprietary and sensitive commercial information to their clients (brands, retailers) that could potentially undermine their competitive advantage when it comes to disclosing names of upstream suppliers/vendors, fabric and yarn qualities procured, sustainability certifications (e.g. the ominous transaction certificate) and pricing, e.g. cost of fabric, yarn and fibre relative to the FOB price charged on finished goods to brands and retailers. It's akin to a brand or retailer sharing with their consumers that their $200.00 MSRP pair of jeans that claim to be ethically and sustainably made, may, in fact, not actually be ethical or sustainable at all. Further, most brands making these claims are unable to qualify their burden of proof because many of claims come with fragmented data, certificates and audits that lack the material evidence to substantiate the claims--the same applies for most suppliers. In addition to disclosures, asking supplier for the information requested by the CBP also requires supplier to reveal costs and other proprietary commercial knowledge. It too is akin to a brand being asked to disclose that the same pair of $200.00 MSPR jeans cost them $11.00 FOB of which is comprised of comprised of $6.00 in labour, $5.00 in fabric and trim. I do not imagine this would be a particularly comfortable conversation for brands to have with their consumers and the same exists for suppliers with their brands and retailers clients.

The Truth is Transparent

The truth is that very few brands, retailers, importers and their direct suppliers know anything about their upstream value chains or the provenance of raw cotton, let alone what the labour and social conditions (and environmental, but let's park that for now) exist on the farms where cotton is grown. This same challenge exists among most upstream fabric mills and many spinning mills that purchase cotton from third-party merchants who are often unwilling to share provenance or related commercial information that would undermine their competitive position in business. Still many merchants do not know the exact provenance of and conditions under which the cotton purchased was grown and ginned as there exists a complex network of middlemen, farm groups, farmers and others that make it difficult to have this level of visibility.

Although we suspected this given our experience working at raw materials and understanding of common commodity trade practices, we have recently learned how complex and deep the challenge is when we spoke with one of the largest and influential spinning mills in China earlier this year followed by other spinning mills, fabric mills and suppliers in China and around the world who were willing to share insight into their experience with complying to brands and retailers requests.

The Chinese spinning mill we first spoke with shared with us openly that most of the cotton they purchased was from domestic merchants (about 70-80%). They did not know the gin location or whether it came from Xinjiang, Hebei and Shandong provinces or outside of the country in some cases. If they did, they said the cotton from outside Xinjiang was in limited supply and often poorer quality and would not support the demand and product and commercial requirements for producing many of the yarns and fabrics they needed to supply to their clients. This was because Xinjiang produces over 60% of all the cotton consumed by spinning mills in China and offers a wide range of qualities from medium staple to long staple varieties at a cost that is subsidised through domestic trade schemes. Further, when asked about switching from domestic cotton to imported cotton from outside of China, they shared that it was a priority for US clients, but was difficult to operationalise at scale due to quotas and other trade encumbrances (quality, pricing, timing) that exist on cotton from USA, Brazil, India and Australia going into China. Lastly, this same spinner also shared that they exported a substantial amount of yarn to other countries including Vietnam, Cambodia, United States and Europe to fabric mills operating in those countries who then sold fabric to cut and sew facilities in those countries or elsewhere. These garments likely received a "made in" label such as "Proudly Made in the USA" or "Made in Italy." Yet in reality, those products were likely only cut and sewn in those countries and it is often not known where the fabric, trim and others components of the finished goods were sourced. Some countries legally require additional materials disclosure that follow “made in” labels with "of imported materials" if the fabric and trim were importer. However, none actually say, "Made in the USA of fabric knitted in Los Angeles, yarn spun in China and raw cotton from Xinjiang." Is this the future? If you read the WRO closely--it is actually the present.

Yet to most people’s surprise, including myself, this change has happened in matter of months since the first WRO was issued in early 2020 and did not come from consumers pressure, generate this or generation that, or a sudden willingness among brands, retailers and their suppliers “open up,” and tell all. It came from government and regulation--which is a good thing. Nonetheless, here we are, the brands, retailers and suppliers alike are having to collect this information and share it to ensure the supply chain and trade keeps on moving—and going forward this will become business as usual not only within the United States but Europe too and all around the world.

Anyhow, you get the point--mapping your products from finished goods, to fabric, to yarn to fibre is not easy feat and why we decided to offer a service outside of Direct-to-Grower programme to help brands, retailers and their suppliers in China and around the world to design a commercial approach that does not encumber trade while improving your ability to meet compliance obligations in situations where you lack visibility, influence or create unintended legal risks when it comes to trade and anti-trust law.

We know that a lot of service providers have begun to offer solutions to these challenges which shows the demand traceability now and in the future. These services offer mapping blockchain and innovative on-product markers such as DNA, pigments, isotopes, etc. but the truth is that this is first and foremost a human challenge followed by a technology challenge. This human challenge requires collaboration, learning, partnership, understanding and trust—which together are the pre-requisites for transparency and enabling physical traceability. Certainly, many of these solutions can help but they are only as good as their users willingness to engage and participate in disclosure and transparency and that starts with purposeful and meaningful engagement with your direct suppliers, their suppliers and their suppliers, suppliers—including the farmers themselves who sit on the furthest end of the value chain away from CBP inspections. It is these farmers, who may or may not know whether there exists forced or compromised labour on their farms or on farms nearby, that could share with you whether the cotton grown is made ethically or not and by whose set of ethics we are using as a benchmark? Chinese? American? Human Civilisation? Granted there are absolutes when it comes to forced and slave labour that must be addressed, and the evidence is clear that XUAR crosses the line, but it is far more nuanced on a farm then it is in a factory and this requires deeper, more meaningful engagement from farmer to consumer.

Sourcery X HAP

The advantage of working with Sourcery and our partner HAP is that we are together we have developed an approach that puts humans first called Dynamic Assurance. As an independent and neutral third-party who can engage with any supplier and farmers confidentially to understand their challenges and ensure trust, communication and efficiencies when navigating through this new trade compliance and collecting this information and documentation needed to present to the CBP.

Our approach is one of collaboration and understanding, rather than compliance and fear--which allows us to have honest, open and real dialogue with suppliers to understand their challenges, risks and concerns in disclosing this information to Sourcery and HAP so that overtime their clients (buyers) in the USA and around the world can shift their sourcing practices to ensure a future of full transparency from farm to finished good through our Direct-to-Grower programme. Our data and information will also help governments around the to develop common sense trade policy that changes economic behaviours through a balance of incentives (tax advantages and preferential tariffs) and compliance (tax/trade penalties) to ensure true market transformation.

Although the WRO issue is top of mind for everyone because of the immediate legal and financial repercussions that it portends for brands, retailers and suppliers, it is estimated that some 55% of global raw cotton around the world is sourced with various forms of modern slavery whether its forced labour, slave labour or child labour and if known would also fall under the US Federal statute 19 U.S.C. 1307 which prohibits the importation of merchandise produced, wholly or in part, by convict labor, forced labor, and/or indentured labor, including forced or indentured child labor or similar laws that exist in Europe and other countries around the world.

At this point, it is no secret that forced labour is a major concern around the world in both developing and developed nations. According to the The International Labour Organization (ILO) effects some 20 million people who are subjected to forced labor or modern slavery in the private economy. WWhile the U.S. Department of Labor (DOL) annual report documents the presence of forced labor in 70 countries across a wide and diverse set of consumer products. This is especially the case in major cotton growing regions where an estimated 50 million farming households often have to rely on migratory and low-skilled labour pools to manage, pick and process cotton.

As we consider what is happening, time will tell if the USA, UK and soon the 27 European nations states are doing this for political posturing and grandstanding between West and East or if they are truly interested in addressing the humanitarian labour crisis around the world--much of it happens in their own back yards. We believe it to be the latter.

If you are a brand, retailer, importer or supplier and are interested in our support and guidance, please let us know--we are here to help: connect@thesourcery.io .

WRO Transparency and Disclosure Service

True transparency requires more than traceability, it requires human engagement, trust and a adopting a transformative approach to sourcing products involves more than designing, costing and remitting a product purchase order and waiting six to nine months for your goods to arrive--it requires collaboration, innovation and communication between brands, suppliers and everyone from farmers to the consumers and that is why we exist--to help you transform.

In the interest of expediency, transparency and internal budgetary decision making for our clients, Sourcery and HAP can help collect this critical information on your behalf on up to 10 product SKUs for $20,000 USD and $1,500 USD for each SKU thereafter (depending on complexity of product and supply chain).

Approaching this on a SKU level basis, may seem daunting, impractical and not scalable given that many brands and retailers have thousands of SKUs manufactured in China or countries who use Chinese yarn and fabric in their products. Yet, given our experience it is the only way as most brands, retailer and their direct suppliers remain disconnected from upstream suppliers including farmers. As such, we have to start somewhere and that requires a product by product, supply chain by supply chain approach.

Together, Sourcery and HAP have the knowledge, experience and trained teams on the ground in China, Hong Kong and around the world to help. Please inquire at connect@thesourcery.io .

Although this is dark and scary place to be right now in our industry for everyone--from farmers to consumers—we’re here to navigate through this together and I assure you the future is brighter and more transparent than ever before.

Author: Crispin Argento is the Managing Director of Sourcery. Prior to The Sourcery, Crispin served as the Executive Director of the Organic Cotton Accelerator (OCA) where he led the development of its pioneering direct-to-farm platform. Before that he did the same in cashmere with NOYA Fibers.