Congress recently and quietly repealed the “consumptive demand exception” to the ban on importation of goods make with forced, child or indentured labor set out in Section 307 of the Tariff Act of 1930, as amended [19 U.S.C. §1307].  The little-noticed changed could have serious consequences for United States importers.

Section 307 and the History of the Exemption:

Section 307 of the Tariff Act of 1930 prohibits the importation of goods made using prison or indentured labor[1]. Prison labor has been interpreted to include any labor performed by workers in custodial conditions.[2]  However, the “consumptive demand exception” in Section 307 has authorized Customs to allow the import of goods made with forced or indentured labor if the goods are not produced in the United States in such quantities as to meet domestic “consumptive demand”.

            Because of the consumptive demand exception, although Section 307 has been in force for nearly 85 years, Customs authorities have effected only 39 exclusions during that time.[3] Following the repeal of the consumptive demand exception, additional exclusions are expected.

            Goods produced by convict labor are prohibited from entry under all circumstances. The “consumptive demand exception” applies only to goods produced by forced and indentured labor. China Diesel Imports v. United States, 855 F.2d 380 (Ct. Int’l Tr. 1994).

            Section 910 of the Trade Facilitation and Trade Enforcement Act of 2015, enacted February 24, 2016, eliminated the consumptive demand exception. The elimination became effective with respect to goods imported on and after 15 days from the enactment of the act, i.e., March 11, 2016.

Actions Triggering an Exclusion of Goods Under Section 307

             Section 12.42(a) of the Customs Regulations provides that any Customs officer with reason to believe or suspect that goods imported are being made with prison or forced labor are to forward their information to the Commissioner of Customs, who will make a finding whether goods should be excluded. Section 12.42(b) of the regulations contains a provision for private parties to make such allegations. Specific requirements appear in the regulations, including a now-moot requirement that petitions address the consumptive demand exception.

            If the Commissioner of Customs determines that the evidence shows a likelihood that goods are produced with prison or forced labor, he will notify port directors of Customs not to release such goods when imported.  Findings that classes or kinds of goods are made with forced labor are published in the Customs Bulletin and Federal Register. As of this writing, only a single such determination is in effect, involving furniture, clothes hampers and palm leaf bags made in Ciudad Victoria, Mexico.

Private Party Petitions to Have Goods Excluded Based on 19 U.S.C. §1307

            On rare occasions, domestic groups have brought suit in the United States Court of International Trade, challenging Customs’ denial of petitions to exclude prison- or forced-labor goods from entry. These cases have generally been dismissed by the court, for lack of standing and/or failure to address the consumptive demand exception

            In  International Labor Rights Fund v. United States, Slip Op. 05-110 (Ct. Int’l Tr. 2005), several labor and fair trade non-government organizations (NGO) sued Customs under the Administrative Procedure Act, contending that Customs had improperly denied their petition to exclude cocoa from Cote d’Ivorie from entry on the ground that it was harvested with child labor. The Chocolate Manufacturers Association, as intervenor, presented evidence that the United States produces miniscule amounts of cocoa, mainly in Hawaii, and could not meet domestic demand. The Court held that the “consumptive demand exception” deprived the plaintiffs of the ability to show “injury in fact” and thus deprived them of standing under the APA:

            This domestic consumptive demand exception provided for in the latter half of [§1307] is crucial given the facts of this case.  The parties agree that no domestic cocoa production industry exists in the United States sufficient to meet domestic consumptive demand. In such instances, the statute expressly prohibits application of any of the provisions found within it.  As a result, the regulations promulgated pursuant to the statute, which merely direct how Customs will implement the directives of the statute, can neither be invoked nor relied upon by plaintiffs in this case.  Therefore, any injury relying on 19 C.F.R. 12.24 cannot be redressed by this court where the consumptive demand exception applies.

          In McKinney v. Department of the Treasury, 799 F.2d 1544 (Fed. Cir. 1986), a Congressman and several NGOs sued to compel the exclusion from entry of various goods produced in the former Soviet Union, allegedly from prison and forced labor. The Federal Circuit indicated that the plaintiffs lacked prudential standing to bring the case (in which the consumptive demand exception was not considered).

            In light of the elimination of the consumptive demand exception, it can be expected that petitioners will have a greater claim to standing to challenge a Customs decision not to investigate a prison or forced labor claim under Section 307.

            It is likely that Customs will also self-initiate more exclusions. As of this writing the U.S. Department of Labor maintains an index of prison/child labor allegations. Many of these are likely to generate petitions to ban imports.

Importer Remedies Under Section 307

            If Customs excludes imports from entry under Section 307, the importer may file a protest against the exclusion. If its protest is denied, the importer may commence suit in the Court of International Trade to seek review of the protest denial.

            In the CIT, Customs’ liquidation decisions are entitled to a statutory presumption of correctness. The burden of coming forward with proof to defeat the presumption rests with the importer. Once the presumption is overcome, the Court must decide the case on the basis of the preponderance of the evidence.

            In China Diesel Imports v. United States, 855 F. Supp. 380 (Ct. Int’l Tr. 1994), an importer challenged the exclusion of certain small diesel engines made in China from entry into the United States. The engines had been produced in a Ministry of Justice factory under a program known various as “Reform through Labor” or “Education through Labor”. The CIT concluded that there was insufficient domestic production of competitive engines, but held that since the engines in question were made from convict labor, they were absolutely excluded.

Elements of a Compliance Policy

            Customs is expected to propose revisions to its regulations to reflect the elimination of the consumptive demand exception. Importers will need to adopt policies to reflect the change – not only examining their own direct imports, but also the supply chain for imported goods they may purchase on a “domestic duty paid” basis.

            Even if a company is not the importer of materials facing a forced or child labor accusation, such an accusation can cause serious damage to the company’s brand equity. Companies need to take action now.

[1] Prior to its amendment, Section 307 read:

Sec. 1307. Convict-made goods; importation prohibited

All goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor or/and indentured labor under penal sanctions shall not be entitled to entry at any of the ports of the United States, and the importation thereof is hereby prohibited, and the Secretary of the Treasury is authorized and directed to prescribe such regulations as may be necessary for the enforcement of this provision. The provisions of this section relating to goods, wares, articles, and merchandise mined, produced, or manufactured by forced labor or/and indentured labor, shall take effect on January 1, 1932; but in no case shall such provisions be applicable to goods, wares, articles, or merchandise so mined, produced, or manufactured which are not mined, produced, or manufactured in such quantities in the United States as to meet the consumptive demands of the United States.

“Forced labor”, as herein used, shall mean all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily. For purposes of this section, the term “forced labor or/and indentured labor” includes forced or indentured child labor.

The highlighted language has now been deleted from the provision.

[2] Thus, some years ago, we prevailed upon Customs to bar the importation of certain custom windows being made in Canada by prisoners in a “work release” program. Since the workers were required to return to prisons or jails for the evening, the program was viewed as prison labor for purposes of Section 307.

[3] One exclusion of note involved gloves, made by a prison workshop in Alabama, which were exported to Mexico for finishing and packing. CBP blocked the gloves from returning to the United States, citing the prison labor performed domestically.