Recently, the Council of the European Union (EU) formally adopted the Regulation on the EU Market Ban on Products Involving Forced Labor, which will come into effect after publication in the EU Official Journal and set a three-year transition period. This new regulation will comprehensively prohibit the sale and supply of any products involving forced labor on the EU market, as well as prohibit the export of such products from the EU market, marking the entry of global supply chain governance into a stricter compliance era.

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The coverage of this regulation is extremely broad, involving all aspects of a product's full life cycle, from raw material extraction and harvesting to manufacturing, and all stages of the supply chain. Notably, industries such as photovoltaics, textiles and electric vehicles will be the focus of the regulation. Once the EU authorities confirm that the product involves forced labor, the relevant enterprises not only face a ban on the sale of products, but also need to bear all the costs of market withdrawal and disposal.

Compared with the UFLPA in the United States, this EU regulation has a more general applicability. If the U.S. regulation focuses more on specific regions and industries, the EU's new rules reflect its systemic thinking in global supply chain governance. This difference actually reflects the different orientations of Europe and the United States in supply chain governance strategies: the United States focuses more on ensuring supply chain security through geopolitics and the return of local industries, while the European Union is committed to constructing a unified system of global rules.

For global enterprises, the challenges posed by the ban are not limited to those directly exporting to the EU. Due to the highly interconnected nature of global supply chains, even companies that do not directly export to the EU may be affected. For example, when a company's products end up in the EU market through multiple layers of supply chains, its supply chain compliance will be equally scrutinized. What's more, as global regulation tightens, other countries and regions are likely to introduce similar measures, meaning that supply chain compliance will become a fundamental threshold for companies to compete globally.

A three-year transition period may seem generous, but given the complexity of supply chain adjustments, companies need to start preparing immediately. This includes not only conducting comprehensive supply chain due diligence to ensure that there is no forced labor in their supply chains, but also establishing traceability systems, improving internal compliance systems, and building closer relationships with suppliers. Particularly in the current context of increasingly strengthened global ESG governance, companies need to view supply chain compliance as an important investment in enhancing global competitiveness, rather than simply a cost of compliance.

In the face of this major shift, Chinese companies should take a more proactive stance to meet the challenge. Combined with the practical experience of domestic enterprises in global supply chains in recent years, we can build an all-round response strategy framework for enterprises from multiple dimensions, such as supply chain transformation and upgrading, digitalized traceability, supplier management, and international cooperation. The following six key areas of layout suggestions will help Chinese enterprises grasp the first opportunity in this new situation of global supply chain governance:

Lay out supply chain transformation and upgrading in advance

In recent years, the photovoltaic and new energy automobile industries have demonstrated the importance of Chinese companies in the global supply chain. However, the introduction of new EU regulations means that companies need to re-examine their existing supply chain structure. Over the past few years, some Chinese PV companies have established production bases in Southeast Asia, and this experience of supply chain diversification and layout is worth learning from. It is recommended that enterprises utilize the three-year transition period to build a globally competitive green supply chain network through collaborative innovation upstream and downstream of the industrial chain.

Build a digital supply chain traceability system

With the increasing refinement of global supply chain governance, the traditional paper documents and manual management mode can hardly meet the compliance requirements. Some leading Chinese manufacturing enterprises have begun to adopt blockchain and other technologies to establish product traceability systems, realizing full traceability from raw materials to final products. This digital transformation not only meets compliance requirements, but also improves supply chain operational efficiency, giving companies a long-term competitive advantage.

Deepening Supplier ESG Management

Over the past few years, Chinese companies have accumulated a wealth of experience in supplier management. However, the new regulations have put forward higher requirements for supply chain transparency. It is recommended that enterprises establish a graded and categorized supplier ESG assessment system, conduct regular supplier audits, and help suppliers improve their compliance capabilities through training and technical support. This synergistic development model has been validated in some of the leading enterprises in the domestic industry, and the effect is remarkable.

Strengthen international exchange and cooperation

In the face of an increasingly complex international trade environment, the model of fighting alone is difficult to sustain. It is recommended that enterprises actively participate in international industry organizations, and maintain communication with regulators in the EU and other markets to keep abreast of policy trends. At the same time, we can consider cooperating with international certification bodies to carry out third-party audits in advance to enhance the international recognition of supply chain transparency.

Investment in talent and system construction

Compliance is not only a technical issue, but also a reflection of management capabilities. It is recommended that enterprises increase the cultivation and introduction of relevant talents and set up professional supply chain compliance teams. At the same time, they should integrate ESG concepts into corporate culture and attach great importance to supply chain compliance from a strategic point of view. Some large enterprises in China have established specialized ESG committees, which is worth promoting.

Innovative Compliance Management Tools

With the increase in regulatory requirements, traditional compliance management tools may be difficult to meet the demand. Enterprises may consider developing or introducing professional supply chain risk management systems to identify and warn potential risks in advance through technical means such as big data analysis. Some leading companies have already started to try to optimize their supply chain management by using artificial intelligence technology, and have achieved good results.

For Chinese enterprises, this ban is not only a challenge, but also an important opportunity for them to transform to high-quality development. In the short term, it will indeed increase the operating costs and compliance pressure of enterprises. But in the long run, it is also an opportunity for Chinese companies to improve their supply chain management and integrate into the high-end of the global value chain. The implementation of the above recommendations needs to be gradual, and enterprises can formulate a phased implementation plan according to their actual situation. Especially for small and medium-sized enterprises, they can start from the highest-risk areas and gradually improve the supply chain compliance system. 

Editor's Note:

The introduction of the EU forced labor ban marks a new era in global supply chain governance. It is not only a trade compliance requirement, but also reflects the trend of rising global ESG standards. While this puts short-term compliance pressure on companies, in the long run, this change will help drive global supply chains in a more sustainable and responsible direction. For enterprises eager to maintain competitiveness in the global market, only by saving for a rainy day and proactively adapting to higher standards of international rules can they win more room for development in the process of global supply chain restructuring.