The Biden administration has hit out at 17 countries for not doing enough to combat human trafficking and is warning of sanctions.
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The US administration called out several ally countries, including New Zealand, for backsliding in their efforts.
The annual US State Department Trafficking in Persons Report report cites the pandemic as a cause for a surge in human slavery.
The report says New Zealand has not initiated any prosecutions for labour trafficking and has weak prison sentences which undercut efforts to hold traffickers accountable.
New Zealand has been downgraded from the top Tier 1 to Tier 2 category, meaning it does not meet international standards for fighting trafficking.
The report classifies mostly authoritarian nations as Tier 3 including Malaysia, North Korea, China and Afghanistan.
A human rights group hopes the report has given the government a wake-up call about not doing enough to stop human trafficking.
Eleanor Parkes from the group, ECPAT Child Alert, said she was not surprised by New Zealand's status, and the only unexpected thing was how long it took to drop from tier one.
"I would definitely put it at Tier 2 rather than Tier 1. Tier placement isn't just based on the size of a country's problem, it's based on the government's efforts to address human trafficking.
"It means that the government isn't fulfilling their obligations under international law - they're not doing enough to eliminate human trafficking."
Parkes said more needs to be done on combating sexual exploitation in New Zealand.
The US State Department report recommended that New Zealand "amend the trafficking statute to explicitly define the sex trafficking of children as not requiring the use of deception or coercion".
US Secretary of State Antony Blinken delivers remarks on the release of the 2021 Trafficking in Persons Report. Photo: AFP / Pool / Ken Cedeno
It said that New Zealand authorities consistently failed to formally identify children in commercial sex, which is defined as a form of sex trafficking under international law, as victims of trafficking.
The report says seasonal workers from the Pacific are at risk of labour trafficking in New Zealand.
Parkes said the country is not fulfilling its human trafficking obligations under international law.
The US report also recommended that New Zealand increase efforts to identify victims of trafficking and "to vigorously investigate and prosecute sex and labor trafficking cases".
It said New Zealand needs to improve training provided to frontline law enforcement, labour inspectors and social service providers, increase public awareness of all forms of trafficking and increase resources for anti-trafficking law enforcement.
The report said that people from South and East Asia, the Pacific and some countries in Latin America are vulnerable to forced labour in New Zealand's agriculture, hospitality and domestic service sectors.
"The pandemic increased the reluctance of many foreign nationals to leave New Zealand, and those who breached their visa conditions as a result were increasingly vulnerable to exploitation," it said.
The report said experts assessed that New Zealand's Prostitution Reform Act which legalised sex work has lead to greater protections for those who willingly engage in commercial sex work.
"Traffickers continue to target vulnerable populations such as children, migrants and adult victims of domestic and family violence for exploitation in sex trafficking," it said.
Other countries downgraded - Ethiopia
The United States faulted Ethiopia for not demonstrating increased efforts to eliminate trafficking.
The report highlighted the conflict in Ethiopia's Tigray region that has killed thousands of people, displaced more than 2 million people and pushed hundreds of thousands to the brink of famine.
The report said that since the conflict began in November, international organisations increasingly reported armed actors were responsible for committing human rights abuses and gender-based violence, including potential trafficking crimes.
Ethiopians seeking asylum in Sudan were increasingly vulnerable to trafficking and unaccompanied children in the conflict areas may be vulnerable to recruitment by non-state armed groups, the report also warned.
Belarus
Belarus was cited for "key achievements" even if, as the report said, resident Alexander Lukashenko's government did not "fully meet the minimum standards for the elimination of trafficking."
The report made no mention of Lukashenko's brutal crackdown on ongoing protests over his claim of victory in a 2020 presidential election widely seen as being rigged.
Saudi Arabia
Saudi Arabia, a key US ally in the Middle East, was cited for "making significant efforts" toward eliminating human trafficking, the report said.
However, the government failed to meet minimum standards in a number of areas, including fining, jailing and deporting foreign workers for prostitution or immigration violations even though many may have been trafficking victims, the report said.
Israel
The report said Israel, Washington's closest Middle Eastern ally, had worked to eliminate human trafficking, but its efforts "were not serious and sustained" compared to the previous reporting period even accounting for the impact of the Covid-19 pandemic.
Victim identification policies "sometimes re-traumatized" victims and delayed their access to necessary care, sometimes for years, while the government reduced its overall efforts to investigate, prosecute and convict traffickers, it said.
China
The report repeated past charges that China has "a government policy or pattern of widespread forced labor," including through the continued mass arbitrary detention of more than one million ethnic Uyghurs and other Muslims in the western region of Xinjiang, where the United States has accused Beijing of committing genocide against the minorities.
Turkey
The United States added Turkey to the list of countries implicated in the use of child soldiers over the past year, placing a NATO ally for the first time in such a list, in a move likely to further complicate fraught ties between Ankara and Washington.
Malaysia
The State Department downgraded Malaysia to the worst ranking after a string of complaints by rights groups and US authorities over the alleged exploitation of migrant workers in plantations and factories.
- RNZ / Reuters
