U.nited States General

GAO
April

Accounting

Office

Report to the Committee on Finance,
U.S. Senate, and the Committee on Ways
and Means, House ,of Representatives

1995

Understanding

GAWGGD-95-106

GAO

United States
General Accounting Office
Wa&iin,
D.C. 20548
General Government Division
B-257850
ApriI 3,1995
The Honorable Bob Packwood
Chairman
The Honorable Daniel P, Moynihan
Ranking Minority Member
Committee on Finance
United States Senate
The Honorable BiU Archer
Chairman
The Honorable Sam M. Gibbons
Ranking Minority Member
Committee on Ways and Means
House of Representatives
The People’s Republic of China has one of the world’s fastest growing
economies and has rapidly become one of the U.S.’most important trading
partners. In 1993, U.S. imports from China tot.aIed $31.5 billion, and U.S.
exports reached $8.8 billion. Since 1992, the United States and China have
entered into several trade agreements to help resolve bilateral trade
issues, such as U.S. market access in China and the U.S. prohibition on
importing goods made with Chinese prison 1abor.l In May 1993, President
Clinton signed executive order 12850.The executive order added a
requirement for the administration to review China’s compliance with the
August 7,1992, U.S.-China prison labor memorandum of understanding
(MOU)~ as part of the President’s annual assessment of China’s
most-favored-nation (MFN) status in 1994.3(See app. I for details about
China’s commitments under the MOU.)
Because of ongoing congressional interest in U.S. trade with China, we
self-initiated a review of recent issues regarding the U.S.-China MOU on
prison labor. SpeciticaIIy, our objectives were to describe (1) the US.
Customs Service’s assessment of China’s compliance with the prison labor
MOU and (2) the experience of the U.S. government in obtaining
information sufficient to enforce the prohibition against goods made with
Chinese prison labor since the MOU was signed. (See app. II for detailed
‘With certain exceptions, the importation of products made with prison labor is prohibited by section
307 of the Smoot-Hawley Tariff Act of 1930,as amended (19 USC. 1307 (1988)).
*According to officials at the Department of State, an MOU is considered by the United States to be a
binding international agreement.
“MFN is a commitment that a country will extend to another country the lowest tariff rates it

anythirdcoIlntly.
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information about U.S. laws and regulations prohibiting prison labor
imports.)

Results in Brief

Although in 1993 Customs was concerned that the Chinese government
had not sufficiently demonstrated a willingness to fullYl its responsibilities
under the prison labor MOUin a timely and thorough manner, Customs told
us that Chinese officials had shown more recent signs of cooperation. For
example, in March 1994 China signed an implementation agreement that
for the first time specified time frames and procedures for mutual
compliance with the MOU. Nevertheless, while this agreement may support
Customs’ability to obtain more timely responses to U.S. requests to visit
prisons suspected of producing goods exported to the United States,
Customs officials cited significant differences in China’s prison system
from those found in the United States, which may inhibit China’s ability to
comply with the MOU (e.g., incomplete or missing Chinese government
records).
Customs officials said they had experienced recent successes in obtaining
information from Chinese officials under the MOU sufficient to make
administrative determinations that prison labor may have been involved in
imported goods. However, officials at the Department of Justice told us
they were concerned whether the MOU or any other agreement could
provide Justice attorneys with the information necessary to defend
Customs’decisions in an efficient and inexpensive manner because of the
evidence that might be required in section 307 cases. Justice attorneys
must produce such information before the U.S. Court of International
Trade (CIT) to defend Customs’determinations to exclude products from
entering the United States because they were found to be made with
prison laboq4 such Customs determinations are referred to as “findings.”
In December 1994, in its first case ever regarding a Customs determination
that US. imports of Chinese goods were made with prison labor, CIT
upheld an affirmative Customs finding (Le., a finding that imported goods
from China had been made with prison labor).6 (See app. III for more
information about this err case.) CIT based its decision to uphold the
WT, located in New York City, is composed of nine judges. The power of the court is exercised by a
single judge, although under certain circumstances the Chief Judge may convene a panel. The court
has jurisdiction over a broad range of civil actions involving international trade, including jurisdiction
over section 307 cases. Final decisions of CIT can be appealed before the Court of Appeals for the
Federal Circuit.
&ChinaDiesel Imports, Inc. v. The United States, No. 94185, slip op. st 13 (ClT, Dec. 7,1994). This case
involved imports of Chinese diesel engines allegedly made with prison labor. The original Customs
determination in this case predated the MOU.

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government on several factors involving evidence obtained from Chinese
government documents. Justice officials believe these factors may not be
present in future cases primarily because the information used as evidence
is no longer published in China Justice officials, therefore, still have
concerns regarding the Department’s ability to sustain Customs’findings
in future cases that may arise under section 307.
-

Background

Following the Chinese government’s June 1989 crackdown on protesters
in Tiananmen Square, President Bush and Congress began a debate about
linking renewal of China’s MFW status t0 improving human rights
conditions in China. Among the trade-related issues raised in this debate
was the U.S. government’s concern about China’s exporting goods made
with prison labor to the United States. Although Customs officials have no
authoritative estimate of such exports from China to the United States,
they told us that the amount appears to be small6 The Bush administration
determined that, in many cases of suspected violations, U.S. officials
would need cooperation from law enforcement officials in China to gather
sufficient evidence concerning Chinese prison facilities to enforce the
section 307 prohibition.7 As a result, the United States began negotiations
with China in 1991 to reach an agreement to improve U.S. access to
information needed to enforce section 307. In early August 1992, the
United States and China signed the prison labor MOU providing for the
exchange of information between both countries regarding their
respective prison facilities. Specific terms for implementing the Mou were
negotiated in a separate statement of cooperation signed on March 13,
1994.
The MOU provides for the United States and China to exchange information
about prison facilities for the enforcement of their own laws. Not only
does section 307 in U.S. law prohibit importing prison labor products, but
the Chinese government prohibits exporting them as well. In general, the
provisions of the MOU allow either country to request (1) respondent
country investigations of facilities suspected by the requesting country to

6According to Customs, as of October 19,1994, five cases had proceeded through the administ&ve
process to final determination regarding illegal Chinese exports to the United States since 1990.
Customs makes such determinations when probable cause exists that cetin imported goods are
subject to provisions of section 307 and are therefore prohibited from importation; these
determinations must be approved by the Secretary of the Treasury. Two of the five final
determinations remain in force, and two have been withdrawn. The fifth one resulted in a criminal
conviction.
‘For further information on China’s prison system, see Foreign Affairs: Forced Labor in the People’s
Republic of China {GAONXAD-90-244BR, July 23,199O).

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be exporting goods made with prison 1ab0r,~and (2) visits arranged by the
respondent country to allow officials of the requesting country to visit
suspected facilities to gather evidence to resolve allegations of trade in
prison produced goods. Other provisions of the MOU allow either country
to request available information and evidence from the respondent
country in a form admissible in judicial or administrative proceedings of
the requesting country,
The U.S. Customs Service and the Department of Justice are the primary
agencies tasked with enforcing U.S. laws against importing goods made
with prison labor. Customs investigates violations of prison labor laws and
makes administrative determinations to exclude products from the United
States that it determines are in violation of section 307. The Justice
Department defends all Customs determinations challenged in U.S. courts,
and prosecutes criminal cases brought under section 1761(a) of title 18,
U.S. Code.gFor example, Justice officials concluded their first case
defending au affirmative Customs determination involving US. imports of
Chinese products before CITon December 7,1994; however, Customs’
determination of this case predated the MOU.
In addition to Customs and the Justice Department, the State Department
plays an important negotiating and diplomatic role. Customs and the State
Department cooperated to negotiate the prison labor MOU and, at certain
times, the State Department worked with Customs in monitoring progress
on the MOU. In 1993, Customs made investigating illegal importation of
forced labor goods a priority under its 1993 national trade enforcement
strategy and sent one full-time staff member to Beijing primarily to focus
on prison labor issues.
On May 26, 1994, President Clinton decided to renew the granting of IWN
status to China for another year. His decision was based on the State
Department’s positive assessment of China’s emigration policies pursuant
to the requirements of the Jackson-Van& amendment to the Trade Act of

%I this report, a “respondent” country refers to the country answering a request to exercise options
laid out in the MOU. A “requesting” country refers to the country that is seeking to use one of the
MOLT’soptions.
gOn April 23,1%X!, the E. W. Bliss Company of Hastings, MI, pleaded guilty to violating two counts of
the criminal code for importing Chinese stamping machiies made with prison labor. The E. W. Bliss
Company was fined $76,000and ordered to reexport the 31 stamping machines that had been seized by
Customs. Thii case predated the M O W and is the only criminal case that Justice officials were aware
of, in which an importer of Chinese goods made with prison labor was convicted and fined.

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1974 (P.L. 93-6 l&1975). I0 In addition, on reviewing progress under the
prison labor MOU, the President determined that China was in compliance
with the MOU’S provisions. Furthermore, following the criteria established
in his May 1993 executive order 12850,the President reviewed China’s
overall progress with various nonmandatory human rights conditions
listed in that executive order. The President also said that compliance with
the Jackson-Vanik legislative requirement would be the only condition
specified for renewing China’s MJ?N status during his administration.

Scope and
Methodology

with the prison labor MOU, we interviewed officials from Customs as well
as the State Department. We also reviewed reports and cables prepared by
both Customs and the State Department that discussed prison labor issues
regarding Chin3 these documents generally corroborated the information
we received from U.S. officials. To identify the experiences of Customs
and the Justice Department regarding the enforcement of section 307, we
met with headquarters and regional officials at the U.S. Customs Service
and at the Department of Justice in Washington, D.C., and New York City.
We also spoke with Customs officials at the U.S. embassy in Beijing,
China, and the U.S. mission in Hong Kong. In addition, we discussed the
issues raised by Customs and the Justice Department with officials at the
State Department to obtain their views. We obtained the background and
history of the prison labor MOU from documents prepared by the Library of
Congress, Congressional Research Service, and the State Department.
In December 1994, we obtained oral comments on a draft of this report
from various officials at the U.S. Customs Service and the Departments of
Justice and State. Their comments are presented on pages 11 to 12. We did
our work between November 1993 and December 1994 in accordance with
generally accepted government auditing standards.

‘Orhe Jackson-Vanik amendment prohibits extending, or sets conditions upon the President’s ability to
extend, MFN status to nonmarket (or centrally planned) economies. The amendment SJIOWS
such
countries to receive MF’N status only if the President determines that the country permits free and
unrestrict& emigration.

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Assessing China’s
Compliance W ith the
1992 F’rison Labor
MOU

impasse concerning China’s compliance with the letter and spirit of the
August 1992 prison labor MOU, I1 The issue centered on the lack of timely
and thorough responses from the Chinese government to U.S. requests for
information and visits under the MOU.
First, according to Customs’testimony, the Chinese government had not
provided timely responses to U.S. requests that China officially investigate
suspected prison facilities and that China make arrangements for U.S.
officials to visit those facilities. Customs reported that, as of
September 1993, Chinese officials had responded in 16 of the 31 cases that
the U.S. government requested investigation and had granted 1 of the 5
visitation requests made at that time.12Customs told us that by
December 1993, Chinese officials had finally concluded investigation of all
3 1 alleged prison labor cases requested by the United States. However,
Customs officials remained concerned that the amount of time spent for
each Chinese investigation varied from case to case, and that they could
not depend on a timely response.
Second, Customs’testimony also indicated that Chinese investigations did
not provide the evidence necessary for Customs to resolve prison labor
cases and that therefore US. visits to suspected prison facilities were
required. Customs told us that much of the information provided by the 31
investigations that Chinese officials had concluded as of December 1993
was insuffmient for Customs to resolve its cases. Consequently, Customs
required additional information obtained through U.S. visitations in order
to complete its work. However, Customs officials also encountered delays
when requesting that the Chinese government arrange visits to Chinese
facilities. According to Customs, as of December 1994, four of the original
five visitation cases requested in 1992 were still pending.
While Chinese officials eventually responded to the initial 31
investigations, the U.S. government remained concerned about the
implementation of the MOU. During a visit by the Secretary of State in
March 1994, both countries signed another agreement, known as the
“Statement of Cooperation on the Implementation of the Memorandum of
Understanding Between the United States and China on Prohibiting Import
“Testimony of George J. We&, Commissioner, U.S. Customs Service, Before the House Foreign
Affairs Subcommittee on International Economic Policy and Trade, September 9,1993 (102nd
Con-,
2nd session).
‘me U.S. government may request off&I visits to Chinese facilities when it believes that initial
Chinese investigations did not provide the information and evidence necessary to resolve specific

CEE!S.

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and Export Trade in Prison Labor Products.” This agreement specified
time frames and procedures for investigating and visiting facilities in
which goods were allegedly made with prison labor. The agreement did
not specify terms for addressing the thoroughness of Chinese
investigations cited by Customs officials. During the Secretary of State’s
trip to China, the United States presented another 20 requests for
investigation.
officials stated that significant differences in China’s prison
system from those found in the United States may limit China’s ability to
compIy with the MOU.One primary factor affecting Customs’assessment of
the Chinese government’s compliance with the MOU is the current status of
business and personnel records that are kept in China, including those in
prison or detention facilities. The MOU states that
Customs

“Upon request, each Party will furnish to the other Party available evidence and
information regarding suspected violations of relevant laws and regulations in a form
admissible in judicial or administrative proceedings of the other Party.” (Emphasis added.)

However, Customs and State officials agreed that the standards for record
keeping in Chinese prisons were not based on the same standards as those
used in the United States. Customs officials reported that Chinese prison
records they reviewed were often incomplete or missing altogether.
Customs officials maintained that the Chinese government was still
developing its ability to meet U.S. government information needs and to
produce records of prison labor investigations in a more thorough manner.
In addition, Customs officials stated that their ability to retrieve such
documents was limited by China’s lack of data processing methods and
equipment commonly used to maintain these records in the United States.

Benefits, Problems,
and Limitations
Regarding U.S.
Enforcement of
Prison Labor Laws
MOU Useful but Not Fully
Tested

According to Customs officials, the prison labor MOU has assisted Customs
in obtaining information sufficient to make determinations under section

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307 of the Smoot-Hawley Tariff Act of 1930, as amended. Customs officials
told us that the M O U had been helpful in facilitating the gathering of
information from China and had improved Customs’ability to bring some
cases to closure. For example, since December 1993 Customs offkials
utilized information obtained through official visitations under the M O U to
make determinations on two cases regarding imports of socks produced
and of grapes harvested allegedly using Chinese prison labor. However,
Customs offkials concluded that there was no evidence of prison labor
exports of these products to the United States and that there was thus no
reason for Customs to exclude these items. Thus, according to Customs
officials, it is too soon to tell whether the MOU w-ill be useful to Customs in
its efforts to collect incriminating evidence. Customs officials said it is
untested whether the Chinese government will be as cooperative in
providing evidence where exported goods have actually been
manufactured with prison labor.

Justice’s Concerns

Justice officials are concerned whether the M O U or any other agreement
could provide Justice attorneys with the information they need in an
efficient and inexpensive manner, if the Justice Department has to defend
affirmative Customs’findings before CIT.The principal reason for the
Justice Department’s concern is that much of the information collected by
Customs under the MOU, such as interviews with Chinese prisoners, may
not be admissible at trial under U.S. law. Justice officials are concerned
about the extent to which the U.S. government may have the burden of
producing evidence that might be required to sustain Customs’findings in
future section 307 cases.
According to Justice officials, in litigating section 307 cases the
Department sought application of the standard prescribed for informal
adjudicatory proceedings under the Administrative Procedures Act (APA).~~
Under APA, judicial review of agency adjudicatory decisions would usually
be limited to the record compiled by the agency. For example, the review
would essentially concern whether a reasonable basis existed for the
Customs offricer’s determination at the time the finding was made.
Therefore, CITwould not decide whether the agency’s finding was factually
correct, and the importer would not be allowed to introduce new evidence
that had not been part of the record before Customs’determination. Most
importantly, any evidence that was properly considered by Customs in
reaching its determination would be admissible as part of the record in
such a proceeding. Consequently, information gathered under the MOU,
L”6U.S.C.706, 1988.

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such as the testimony of U.S. officials who interviewed Chinese inmates,
could be cited as part of the record in support of a Customs finding.
If err did not apply the APA standard of review in section 307 cases, the
alternative would be to conduct a -de novo review. In a -de novo review, err
makes its own fmdings concerning whether the goods in question were
prison labor exports; that is, err adjudicates all factual issues and the
importer is able to introduce new evidence. The problem for the Justice
Department in defending a Customs determination to exclude imports
under section 307 is that in a trial de novo, the rules of evidence in some
instances might not allow admission of certain evidence developed by
Customs in making its determination. For example, the testimony of U.S.
government witnesses who interviewed Chinese prison inmates might at
times be precluded by the rule against hearsay.
Justice officials agreed that the scope of the present MOUwas broad
enough to cover the various kinds of evidence that might be required in a
de novo proceeding. Such evidence might include commercial and
-~
personnel records of the factory in question; the live testimony of the
prison official responsible for keeping such records; and, in some
instances, a sample of the factory’s product submitted for material
i3Id~SiS*
Nevertheless, Justice officials remained concerned about whether they
would be able to successfully defend Customs’findings in a -de novo
proceeding for several reasons. For example:
The Chinese government’s willingness to adhere to the MOU when the
United States seeks evidence--such as commercial or personnel records
or a sample of a factory’s product-is still untested.
l
According to Justice officials, even if the Chinese government furnished all
available evidence, the evidence required in a -de novo proceeding under
section 307 may often not exist. As noted earlier, the current system of
maintaining business and personnel records in Chinese prisons is not
baaed on the same standards as those used in the United States, according
to Customs.
. Even where commercial and personnel records are maintained by prison
factories in China, other aspects of the Chinese penal system may limit
U.S. officials’ ability to obtain information specific enough to defend a
Customs determination under section 307. For example, just the fact that a
prison has a factory does not necessarily mean that all goods
l

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manufactured are those produced by prisonersi Justice officials stated
that this may pose a problem if it becomes necessary to establish that at
least one factory worker-who was a prisoner on a particular
date-worked on a specific product that was exported to the United
States.

CIT Made Its First
Determination on
Imported Goods Made
W ith Chinese Prison Labor

On December 7,1994, in China Diesel Imports, Inc. v. the United States, CIT
issued its first determination regarding imported goods that Customs had
earlier determined were made with Chinese prison labor.” In November
1991, Customs excluded diesel engines manufactured in China under
section 307 as goods made by convict or forced labor. The importer, China
Diesel, Inc., filed suit before CITseeking entry of the merchandise. In its
preliminary opinion, issued in June 1994, CITrefused to apply the APA
standard of review and held that it must adjudicate all factual issues in a
trial -de novo.16However, in its December 7,1994, judgment, CITheld that
the importer had the burden of proving that its diesel engines were not
made, in whole or in part, with convict labor. Because CIT concluded that
China Diesel, Inc., had not met this requirement, it upheld Custom’s
determination that the engines in question were convict made and found
that Customs had properly excluded them from entry into the United
States.
Despite the outcome of China Diesel, Justice officials still have concerns
regarding their ability to gather evidence efficiently and inexpensively in
section 307 cases under a -l__
de novo standard of review. Justice officials told
us that the outcome of China Diesel may have depended on certain
circumstances that may not be present in future cases. For example, in
reaching its decision regarding the China Diesel case, CIT said that it had
relied heavily upon various Chinese government and reference
publications, which appeared to identify as a penal institution the facility
in which the engines were manufactured. According to the CIT’Sdecision,
these documents alone would have sufficed to sustain Customs’
determination. Justice officals said that this evidence is not likely to be
available in future cases because the Chinese government has ceased
identifying such penal facilities in its publications as of 1990.
14Etidentiary problems arise because in China, many former prisoners continue their employment in
prison factories after their sentences have been completed. In addition, family members of prisoners
are often employed in the same factories.
IsNo. 94-186,slip. op. (CR, Dec. 7,1994). The original Customs determination in this case predated the
MOW.
16No.94-90,slip. op. (CIT, June 2, 1994).

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According to Justice officials, the problems in gathering evidence in China
do not reflect any inadequacy in the scope of the MOU that was negotiated
with the Chinese government Rather, such difficulties reflect the
differences in commercial practices and court standards between the two
countries. Justice officials stated that these problems are typical of the
obstacles faced by the U.S. government or private companies seeking
evidence in some developing countries for the purposes of litigating
related issues in the United States.
Justice officials therefore question whether the current MOU,or any other
agreement negotiated with China, would be able to provide the evidence
that might be required under a -de novo review of section 307 cases.
According to the Justice Department, Congress could address the problem
by modifying section 307 to require that a judicial review be conducted
under APA standards for informal adjudicatory proceedings. However, it
would be very difficult to modify the MOU to accommodate the needs of a
--de novo review.
While Customs determinations and CITreviews under section 307 are civil
proceedings, title 18 provides criminal penalties for the knowing
importation or transportation in interstate commerce of convict or
prison-made goods. l7 If a case is brought before a criminal court, the
standard of evidence required would be even greater than that in a --de novo
review in a civil proceeding. In U.S. criminal proceedings, Justice
prosecutors would have to prove beyond a reasonable doubt that the
importer knowingly transported the goods in question.

Agency Cmnments

We obtained oral comments on a draft of this report from officials at the
US. Customs Service and the Departments of Justice and State. At the
Customs Service, on December 1,1994, the Director for Fraud
Investigations and the Director of the Far East Desk, both in the Office of
Enforcement; the Associate Chief Counsel for Enforcement in the Office
of the Chief Counsel (regarding legal issues); and an Import Specialist in
the Office of Trade Operations concurred with the information as
presented. In general, Customs officials stated that this report was a well
balanced and fair presentation of the prison labor MOU and of Customs’
views on the MOU. They provided other minor suggestions that we
incorporated where appropriate.

-.
‘?Title 18 U.S.C. 1761(a).

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On December 1,1994, we discussed a draft of this report with a Senior
Attorney of the General Litigation and Legal Advice Office in the Criminal
Division at the Department of Justice. The draft was also reviewed by the
Acting Chief of General Litigation and Legal Advice, Criminal Division. On
December 8,1994, we discussed a d.raft of this report with the Director of
Commercial Litigation, Civil Division, at the Department of Justice. These
Justice officials said that no agreement would ensure U.S. officials the
ability to obtain information from China suffkient to withstand -de novo
judicial review in US. courts. We strengthened this point in the report.
Overall, they agreed with the information in the report as presented and
provided other minor suggestions that we incorporated where appropriate.
On December 8,1994, we discussed a draft of this report with the Deputy
Director of the Office of Chinese and Mongolian m
and a Senior
Attorney in the Office of the Legal Adviser at the State Department. They
viewed the MOUas adequate to assist the US. government in obtaining
information from China and said that it was too early to determine the
outcome of any U.S. judicial review. While the MOU has not been fully
tested thus far, we believe the views of the Justice Department presented
here provide useful insight in anticipating future enforcement concerns
regarding China State officials also suggested other minor changes, which
we included in this report where appropriate.
We are sending copies of this report to the U.S. Trade Representative; the
Secretaries of State, the Treasury, Commerce, and Justice; and the
Commissioner of the U.S. Customs Service. We will make copies available
to others upon request.
The mqjor contributors to this report are listed in appendix IV. If you have
any questions about this report, please call me on (202) 512-4812.

Allan I. Mendelowitz, Managing Director
International Trade, Finance,
and Competitiveness

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Contents

1

Letter

16

Appendix I
China’s Commitment
Under the 1992 Prison
Labor MOU
Appendix II
U.S. Laws and
Regulations
F’rohibiting Imports
Made With Prison
Labor
Appendix III
The Case of China
Diesel Imports v. the
United States

24

Appendix IV
Major Contributors to
This Report

Abbreviations
APA
CIT

Mm
MOU
hge

14

Administrative Procedures Act
Court of InternationaI Trade
most favored nation
memorandum of understanding
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Appendix I

China’s Commitment Under the 1992 Prison
Labor MOU
On August 7,1992, the United States and China concluded the prison labor
MOU establishing four mutual commitments for exchanging information
about respective U.S. and Chinese prison facilities.’ Throughout these
negotiations, the Chinese government was highly concerned that access to
Chinese facilities would appear to violate China’s sovereignty over its
domestic affairs. Therefore, according to State Department documents,
specific terms were included in the MOU to address this concern. In
particular, it is the mutual nature of the MOU that allows officials of both
countries the opportunity to obtain the information needed from the other
country to satisfy domestic enforcement needs.
The MOU lists four broad provisions applicable to both countries. The
terms of the MOU allow both countries to request
l

l

l

l

investigations of facilities suspected by the requesting country to be
exporting goods made with prison labor,
information on law enforcement and whether these facilities are in
compliance with the respondent country’s regulations,
evidence regarding suspected violations of the respondent country’s laws
and regulations in a form admissible in the requesting country’s judicial or
administrative proceedings, and
visits arranged by the respondent country to allow offkials of the
requesting country to view suspected facilities.
After the MOUwas signed, government officials in China and the United
States became concerned about the terms for satisfactory implementation
of the agreement. Customs off&& told us that the lack of time fkames
and procedures for carrying out the prison labor MOU rendered the
agreement diflicult to administer. In addition, Chinese government
officials were concerned, once information had been exchanged, that the
United States was not promptly resolving pending cases. In late 1993, the
Chinese government placed a hold on any further requests for visits and
information until the United States had resolved those cases already
opened. The United States and China continued to negotiate the specific
terms for implementation 18 months after the MOU had been signed.
‘To obtain assistance from other countries on customs-related matters, the United States may enter
into a Customs mutual assistance agreement. According to Customs officials, such agreements provide
a basis for cooperation and investigation in the areas of commercial fraud, narcotics trafficking, and
expolt control. The assistance is provided for losein all proceedings, whether judicial, administrative,
or investigative. However, according to State Department documents, during early negotiations in
November 1991,representatives of the United States and China were unable to agree on such an
arcangement as a framework for cooperation According tn Customs and State officials, no other
country has signed an agreement similar to China’s I!392prison labor MOU with the United States. As
of December 1994,Customs officials were working with Chinese officials to negotiate a Custonas
mutual assistance agreement+

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Appendix I
China’s Commitment

Under the 1982 Prison

LaborMOU

On March 13, 1994, the United States and China signed a “Statement of
Cooperation on the Implementation of the Memorandum of Understanding
Between the United States and China on prohibiting Import and Export
Trade in Prison Labor Products.” The statement of cooperation was
intended to aid the timely investigation and visitation of prison labor
facilities where goods were allegedly made with prison labor. The
statement of cooperation acknowledged both countries’ laws and
regulations regarding importing and exporting products made with prison
labor. It also recognized the good intentions and efforts already made by
both countries in implementing the prison labor MOU.
The statement of cooperation then specified the following procedures to
be followed under the MOU:
. “First, when one side provides the other side a request, based on specific
information, to conduct investigations of suspected exports of prison
labor products destined for the United States, the receiving side will
provide the requesting side a comprehensive investigative report within SO
days of the receipt of the written request. At the same time, the requesting
side will provide a concluding evaluation of the receiving side’s
investigative report within 60 days of receipt of the report.
“Second, if the United States Government, in order to resolve specific
outstanding cases, requests a visit to a suspected facility, the Chinese
Government will, in conformity with Chinese laws and regulations and in
accordance with the MOU, arrange for responsible United States diplomatic
mission officials to visit the suspected facility within 60 days of receipt of
a written request.
“Third, the United States Government will submit a report indicating the
results of the visit to the Chinese Government within 60 days of a visit by
diplomatic officials to a suspected facility.
“Fourth, in cases where the U.S. government presents new or previously
unknown information on suspected exports of prison labor products
destined for the United States regarding a suspected facility that was
already visited, the Chinese Government will organize new investigations
and notify the U.S. side. If necessary, it can also be arranged for the US.
side to again visit that suspected facility.
+ “Fifth, when the Chinese Government organizes the investigation of a
suspected facility and the U.S. side is allowed to visit the suspected
facility, the U.S. side will provide related information conducive to the
investigation. In order to accomplish the purpose of the visit, the Chinese
side will, in accordance with its laws and regulations, provide an
opportunity to consult relevant records and materials on-site and arrange
l

l

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Appendix I
China’s Commitment
Labor MOU

Under the 1882 Prison

visits to necessary areas of the facility. The US. side agrees to protect
proprietary information of customers of the facility consistent with the
relevant terms of the Prison Labor MOU.
. “Sixth, both sides agree that arrangements for U.S. officials to visit
suspected facilities, in principle, will proceed after the visit to a previous
suspected facility is completely ended and a report indicating the results
of the visit is submitted. ’

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Appendix II

U.S. Laws and Regulations Prohibiting
Imports Made With Prison Labor
Since 1890, the United States has banned importing goods made by convict
labor. The current prison labor statute, section 307 of the Smoot-Hawley
Tariff Act of 1930, as amended (19 U.S.C. 1307 (1988)) was preceded by
section 51 of the Tariff Act of 1890, which was intended to protect
domestic labor from manufactured goods produced by foreign convict
labor.’ During consideration of section 307, a Senate amendment was
offered to extend the provision to include goods produced by “forced
labor or/and indentured labor.” Since some Members of Congress were
concerned that the humanitarian aspects of the proposed amendment
might harm the U.S. consumer, the Conference Commit$,eeon the 1930
Tariff Act added a caveat, the “consumptive demand” clause. This caveat
specified that the statute would not apply to goods produced by “forced
labor or/and indentured labor” that were not produced “in such quantities
in the United States as to meet the consumptive demands of the United
States.” CIT described section 307 as follows:
“Congress intended to protect domestic workers and producers from unfair competition.
But this concern as well as any desire to improve foreign labor conditions were clearly
subordinate in section 307, as enacted, to concern for the American consumer’s access to
merchandise not produced domestically in quantities sufficient to satisfy consumer
demand.“2

Thus, section 307 is intended primarily to protect U.S. producers’,
consumers’, and workers’ rights, rather than to promote human rights in
other countries.
Under section 307, the Secretaxy of the Treasury is charged with
developing regulations to enforce this provision of the law. The Secretary
of the Treaswy has delegated to the U.S. Customs Service the
responsibility for administering the prohibition on impoting goods made
by convict or forced labor. To enforce a ban on imports, Customs must
gather evidence and determine whether the goods were produced by
forced or convict labor. However, such a determination cannot be
established by a simple examination of the goods themselves. Customs
may investigate when allegations are made that merchandise is imported
or is likely to be imported in violation of section 307. In investigating a
suspected violation, Customs commonly obtains information from sources
that include foreign interests, importers, domestic producers, and others.

‘[cb 1244,26St& 667,624(1690)~
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- at 1233.

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Appendix II
U.S. Laws and Regulations Prohibiting
Imports Made With Prison Labor

If the information reasonably indicates that the merchandise may fall
within the purview of section 307, the Commissioner of Customs is to
advise all district directors in charge of U.S. ports to withhold release of
the merchandise. The importer must then produce a ceticate of origin,
signed by the foreign seller or owner, that contains sufficient information
showing that prohibited labor was not used. If, despite the importer’s
evidence, there remains probable cause to conclude that certain
merchandise is subject to the provisions of section 307 and consequently
prohibited from importation, Customs is to publish its finding in the
Federal Register. Such a finding must be approved by the Secretary of the
Treasury. Once the importer has filed a protest with Customs and the
protest has been denied, the importer can then file suit in CITto try to
overturn the Customs determination.
If Customs suspects that prison labor goods are being imported
intentionally, Customs may refer the case to a U.S. attorney for criminal
prosecution. U.S. law provides criminal penalties for the knowing
importation or transportation in interstate commerce of convict or
prison-made goods3

Title 18 U.S.C. 1761(a) states: ‘Whoever knowingly transports in interstate commerceor from any
foreign country into the United States any goods, wares, or merchandise manufactured, produced, or
mind, wholly or in pazt by convicts or prisoners, except convicts or prisonem on parole, supervised
release, or probation, or in any penal or reformatory institution, shall be fined not more than $60,000or
imprisoned not mote than two year, or both.”

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Appendix III

The Case of China Diesel Imports v. the
United States
Background

In November 1991, the U.S. Commissioner of Customs issued a detention
order advising all district directors to withhold the release of certain
Chinese diesel engines that had been imported to the United States. The
U.S. importer, China Diesel Imports, Inc., previously denied that the
engines had been produced with prohibited labor. However, in
January 1992, Customs de&mined again that the diesel engines had been
produced with convict and/or forced and/or indentured labor and
therefore should be denied U.S. entry according to 19 U.S.C. 1307. China
Diesel fled suit in CITon October 16,1992, to challenge the protest denial
and to assert that the diesel engines should have been allowed entry into
the United States.’

China Diesel and the
Standard of Review

Before CIT issued its first opinion in China Diesel, the Justice Department
argued that the standard of review applied by CIT should be limited to the
records used by Customs in making its determination. Such a hearing
would be based on the Administrative Procedures Act (APA) (5 U.S.C. 766,
1988) standard of review, which is usually limited to the agency’s compiled
record.
On June 2, 1994, CIT refused to apply the APA standard of review and held
that it must adjudicate alI factual issues in this case. Such a proceeding is
called a -de novo review. In a -de novo review, CIT would make its own
findings concerning whether the goods in question were prison labor
exports, and the importer would be able to introduce new evidence.
Moreover, in a trial -de novo, the rules of evidence might not allow
admission of much of the informal testimony that was developed and
related orally by Customs officials under the MOU. The testimony of
government witnesses who spoke with Chinese prison inmates, for
example, might be precluded by the rule against hearsay.
On December 7, 1994, CIT upheld Customs’right to exclude, under section
307, diesel engines manufactured in China. In upholding Customs’
exclusion, CITheld that the importer had the burden of proving that the
diesel engines involved in the case were not made, in whole or in part,
with convict labor and that the importer had not met this burden. China
Diesel Imports, Inc., did not file an appeal within the 60 days allowed after
the CIT’Sdecision.
In reaching its conclusion in China Diesel, CIT said that it had relied most
heaviIy upon Chinese government documents and reference publications.
LChinaDiesel Imports, Inc. v. The United States, No. 9490, slip

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op.at 13 (ClT, June 2,19!94).
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Appendix III
The Case of China Diesel Imports V. the
United States

The documents appeared to identify the facility where the engines were
manufactured as a “Reform through Labor” facility. CIT held that such
facilities were penal, and the inmates who worked in them were convicts.
err stated that these documents alone would have provided sufficient
evidence to uphold Customs’determination. In addition, CIT staeed that its
conclusion was corroborated by (1) testimony of State Department
officials that their tour of the Chinese facihty had been staged, and by
(2) failure of the Chinese factory manager to appear at the trial.

Other Issues Arising From
China Diesel

CITalso reached two conclusions regarding the application of the
consumptive demand clause of the 1930 Tariff Act. F’irst, err held that the
clause’s exception of imported goods made with forced and/or indentured
labor applies h-tinstances when the product is not available and not
merely, as the government argued, when domestic industry lacked the
capability to produce goods in question. Second, err ruled that the
consumptive demand exception does not apply to convict-made goods.
This second conclusion was particularly significant, because previous
courts had declined to decide whether importing a product produced with
convict labor is permissible when domestic production is insufficient to
satisfy domestic demande2
In defending Customs’determination, Justice off.&& stated that the M O U
was particularly useful to the presentation of the U.S. government’s case.
F’irst, the Chinese government had arranged a tour of the facility according
to the terms provided in the MOU. Second, because the MOUprovides that
each party furnish “available evidence and information regarding
suspected violations of relevant laws and regulations in a form admissible
in judicial or administrative proceedings of the other party,” err allowed
the Justice Department to draw inferences from the Chinese government’s
apparent unwillingness to allow the factory manager to testify. Justice
officials explained that, were it not for the language of the MOU, the U.S.
government would normally not have been permitted to argue that the
failure of the factory manager to appear suggested that his testimony
would be damaging to the importer’s case.

Justice Officials’ Concerns
Regarding Future Cases

Despite the outcome of China Diesel, Justice officials stiil have concerns
regarding their ability to gather evidence efficiently and inexpensively in
section 307 cases under a -~
de novo standard of review. They are concerned

%ee McKinney v. United states Department of the T~asury 614 F. Supp. 1226(CIT 1986).

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Appendix III
The Case of China Die.4
United States

Imports

V. the

that the outcome of the case may have depended on certain circumstances
that may not be present in future cases. These circumstances include
(1) the availability of Chinese government and reference publications that
identified the facility in question as a “Reform through Labor” facility.
According to Justice officials, the Chinese government ceased identifying
“Reform through Labor” facilities in its publications as of 1990.
(2) the availability at trial of the State Department officials who conducted
the on-site investigation. Justice officials explained that the U.S.
government personnel who conduct the factory tour may not always be
available to testify.
(3) the paucity of evidence produced by the importer. Even assuming that
future courts place the burden of proof on the importer, the U.S.
government may nevertheless be required to produce evidence in order to
refute evidence introduced by the importer3
Finally, because different CITjudges may decide similar cases differently,
the future application of CIT decisions is unclear unti the issue in question
is decided by the Court of Appeals for the Federal Circuit. Thus, despite
the decision in China Diesel, it is uncertain whether CIT will apply a -de
novo standard of review in future section 307 cases.

Evidence which, if unexplained or uncontradicted, is sufficient to sustain judgment in favor of the
plaintiff, is called prima facie evidence.

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Appendix IV

Major Contributors to This Report

General Government
Division, Washington,
D.C.

Virginia C. Hughes, Assistant Director
Elizabeth Sirois, Assistant Director
Anthony L. Hill, Project Manager
Jaime L. Dominguez, Deputy Project Manager
Rona Mendelsohn, Evaluator (Communications Analyst)

Office of the General
Counsel, Washington,
D.C.

Sheila Ratzenberger, Assistant General Counsel
Richard R. Perruso, Attorney

Far East Regional
Office

Kathleen M. Monahan, Senior Evaluator
Joyce L. Akins, Senior Evaluator
Karen Strauss, Evaluator

(260071)

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