| A U.S. Coast Guard vessel patrols in the Port of Los Angeles near a container ship. Beginning June 21, the U.S. will implement a trade restriction on shipments linked to China's Xinjiang region. Source: Mario Tama/Getty Images News via Getty Images |
Almost two years after America's solar industry started trying to insulate itself from alleged labor abuses in China, companies are about to find out if their supply chains can withstand a new U.S. trade ban.
U.S. Customs and Border Protection, or CBP, on June 21 will begin enforcing the Uyghur Forced Labor Prevention Act, which outlaws products made in China's Xinjiang region unless importers can prove goods were not produced with forced labor. The U.S. government has accused Beijing of persecuting Uyghurs and other Muslim minorities in Xinjiang, and Congress singled out polysilicon, a key ingredient in most solar panels, as one of several sectors requiring high-priority enforcement.
No one outside the U.S. government, however, knows for sure how the embargo will be executed. The Forced Labor Enforcement Task Force, which is chaired by the Secretary of Homeland Security, is due to release an implementation strategy the same day the law takes effect. That document will include a list of entities that the task force has determined are either making goods in Xinjiang using forced labor or are involved in transferring people from the region to work in other parts of China.
"We believe the period of initial enforcement will be marked by uncertainty, if not chaos," Height Securities LLC, a capital market firm, said June 8 in a research note.
Implementing the Uyghur Forced Labor Prevention Act is expected to increase the number of transactions subject to CBP review and enforcement from less than 1 million annually to more than 11.5 million, members of the Congressional-Executive Commission on China said in a May funding request to Congress.
How aggressive will CBP be?
The level of disruption experienced by importers will largely depend on how strictly the government enforces the new law.
"Customs could be super aggressive in the detention decisions and determinations that it makes and cause just a really considerable amount of disruption for supply chains," said John Foote, a partner at law firm Kelley Drye & Warren LLP.
The Solar Energy Industries Association said most companies are prepared to handle additional scrutiny from the U.S. government.
"In anticipation of this policy, most importers into the U.S. market moved their supply chains out of Xinjiang, implemented our traceability protocol, or something like it, and had independent audits conducted of their entire supply chains," John Smirnow, vice president of market strategy for the lobbying group, said in an emailed statement.
Located in western China, Xinjiang is a "major industrial engine" for Beijing, and "global supply chains across key and foundational industries" are exposed to alleged labor abuses there, Horizon Advisory, a geopolitical consulting firm, said in a report this year. As of 2019, the region accounted for 25% of global production of tomato products, 19% of cotton production, 13% of wind turbines and 5% of aluminum, according to a report from C4ADS, a nonprofit focused on global conflict and security issues.
For America's solar market, import disruptions from the U.S. trade restriction could be particularly damaging.
A cornerstone of the Biden administration's efforts to limit climate change, the solar industry has been roiled this year by a separate trade investigation by the U.S. Commerce Department that has limited equipment supplies and raised prices. U.S. solar panel imports were down 46% year over year in May.
Xinjiang produced around 45% of the world's supply of polysilicon for the solar industry in 2021, according to Johannes Bernreuter of Bernreuter Research.
"Our sense is that investors may not fully appreciate the potential risks to solar" from the new law, analysts at Roth Capital Partners LLC, an investment bank, said in a May research note. The U.S. government "may be looking for big wins right out of the gate," the analysts said, and solar could be "on the shortlist for one of those wins."
The Chinese Embassy in Washington denied allegations of human rights abuses in Xinjiang.
"The U.S. acts totally violate market principles and commercial ethics. Such moves will only undermine the stability of global industrial and supply chains, disrupt international trade order and hurt the U.S.' own interests and credibility," embassy spokesperson Liu Pengyu said in an emailed statement. "China will take necessary measures to safeguard the legitimate rights and interests of Chinese enterprises and workers."
Western solar companies have been on notice since October 2020 that they could be exposed to alleged human rights abuses in China. However, while some Chinese manufacturers said they moved quickly to reroute U.S. supply chains away from Xinjiang, others were slow to respond, analysts have said.
After the U.S. issued a trade restriction in 2021 against a raw material supplier in Xinjiang, CBP seemed unimpressed with how solar companies reacted, Roth analysts have said. As a result, they said the industry may not be "well positioned" to comply with the new law.
Philip Shen, a managing director and senior research analyst at Roth, declined to comment.
CBP did not respond to a message seeking comment.
Extensive documentation required
Few of the solar panels imported to the U.S. today come from China, the result of American tariffs that helped push manufacturing into Southeast Asia in recent years. While China retained almost all production of the silicon ingots and wafers that form the building blocks of solar panels, some factories for those components are now being built elsewhere.
Currently, 15.8 GW of silicon ingot and wafer capacity is operational outside of China, up from 9.3 GW in 2021, according to Clean Energy Associates, or CEA, a supply-chain management and market intelligence firm. That non-China capacity is expected to grow to 18.5 GW by the end of this year or early next, and to up to 30 GW in 2023, assuming all new projects are completed, said Joseph Johnson, senior manager of market intelligence at CEA, in an email.
While most of the existing factories are expected to use polysilicon that is also made outside of China, there will not be enough non-China ingot and wafer production this year to meet U.S. demand, CEA said. Without more of those factories, some polysilicon made outside of China will flow into the country to be turned into silicon wafers, which will then be shipped to cell and panel factories in Southeast Asia, Johnson said.
"That entry into China is what many suppliers are hoping to avoid with their non-China ingot/wafer expansions," Johnson said. "Suppliers believe that by having their non-China factory receive non-China polysilicon, they can remove any doubt about mixing or Xinjiang contamination concerns."
In guidance issued June 13, CBP said that for shipments containing polysilicon linked to Xinjiang or to listed entities, importers will have to document their supply chains from factories that make finished goods down to the most basic raw materials. Goods sourced from factories that use polysilicon from inside and outside of Xinjiang are at risk of being detained, the agency added.
The guidance identified the sort of evidence companies can provide to CBP to try to demonstrate that they are complying with the law or should be exempt from it.
Importers of all kinds of goods will have to show due diligence and supply chain tracing and management "to ensure that they do not import any good made, in whole or in part, by forced labor, especially from the Xinjiang Region," CBP said. "This requirement extends throughout the entire supply chain, to include goods that may be shipped from elsewhere in [China] and to third countries for further processing."
Foote, of Kelley Drye & Warren, said the guidance was the most "useful" that CBP has ever published on the topic of forced labor enforcement. However, it also revealed "questionable interpretations" about how much proof the agency may require for importers to demonstrate that shipments should not be subject to the new law, he said.
Ultimately, the entity list that is being compiled by the Forced Labor Enforcement Task Force may be the most "enduring and defining" part of the new trade law, Foote said.
"There are certainly hundreds and probably thousands of Chinese entities that fit one or more of the descriptions of the entity list under the [Uyghur Forced Labor Prevention Act]," Foote said. If the task force includes every one of those organizations on its entity list, it could be "deeply disruptive."
'Show us the receipts'
The uncertainty has left analysts trying to discern how the Biden administration will enforce the law, based in part on its efforts to try to mitigate disruptions in the solar market caused by the U.S. Commerce Department investigation.
"What we're seeing today is that the Biden administration is not willing to abandon rapid decarbonization if there's an administrative process that is getting in the way; that they're going to maintain their goals, and that the other agencies, even if they have separate missions, will need to be aligned on what we need to do to rapidly decarbonize," said Christian Roselund, a senior policy analyst at CEA.
However, President Joe Biden continues to face pressure from Congress to take a hard line with China on human rights. China and its political leaders "must understand that the United States will not be party to its genocide and crimes against humanity," a group of bipartisan lawmakers on the Congressional-Executive Committee on China wrote in a letter to Biden on June 6.
For all the solar industry's talk about fighting forced labor, "companies are not willing to show us the receipts," said Laura Murphy, a professor of human rights and contemporary slavery at Sheffield Hallam University in the U.K. who has studied solar supply chains.
"Where they used to announce in press releases every deal they made for polysilicon, suddenly, the whole industry is silent on this. It means they are also being silent about human rights abuses, in an effort to protect their relationships in China," Murphy said in an email. "Consumers and governments should be very wary of these silences."
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