Digging deeper: How US sanctions on Chinese PV may impact the market

The U.S. is taking a multifaceted approach to addressing forced labor allegations against Chinese suppliers of silicon and polysilicon. This article assess the impacts for the solar panel supply chain

by Ginger T. Faulk

On June 24, 2021, the Biden administration took several steps to respond to allegations of forced labor and human rights abuses against Uyghurs and other minority groups in China. These measures included the targeting of certain Chinese suppliers of silicon and polysilicon.

Related: US government halts certain PV panel shipments due to issues of forced labor in China

Of significance for U.S. solar projects, U.S. Customs and Border Patrol (CBP) issued a Withhold Release Order (WRO) instructing ports of entry to detain shipments containing “silica-based materials” that are “derived from or produced using” product manufactured by Hoshine Silicon Industry Co. Ltd., a company located in China’s Xinjiang region, or its subsidiaries. In addition, the Commerce Department added Hoshine and four other Chinese companies to the “Entity List,” essentially a ban on exports and re-exports of US goods and technology around the world to the listed entities. On the same day, the Department of Labor issued a special update to its “List of Goods Produced by Child Labor or Forced Labor,” to include polysilicon produced with forced labor in China.

CBP has identified just $6 million of direct imports from Hoshine (the target of the WRO) and $150 million in imports of downstream products using Hoshine materials over the last two and a half years. Comparatively, the U.S. Energy Information Administration reports that in the first quarter of 2021 alone, the U.S. imported $2.14 billion worth of solar panels. The relatively low import activity is due in part to the fact that solar cells produced in China are already subject to hefty “Section 301” (trade remedy) tariffs and therefore Chinese-produced cells are not widely used in solar products.

Yet, almost half of the world’s solar-grade polysilicon is produced in Xinjiang. Therefore, the continued expansion of U.S. import prohibitions and other measures against Xinjiang silicon and polysilicon suppliers will have increasing impacts not only on U.S. importers of third-country manufactured solar cells and panels containing Xinjiang-origin polysilicon but also may have supply and pricing impacts in the global supply chain.

The recent actions by the Biden administration arguably call for a coordinated industry response to forced labor risks in the solar supply chain in order to forestall disruptions of supply during a critical period for the sector and for meeting global emission reduction goals in power production projects worldwide.

CBP Withhold Release Order against Hoshine Silicon

Pursuant to Section 307 of the Tariff Act, the CBP Withhold Release Order subjects to detention at U.S. ports of entry silicon-based products from Hoshine Silicon (aka Hesheng Silicon Industry (Shanshan) Co., Ltd.) or its subsidiaries. In order to release the goods from detention, the importer must either re-export them from the U.S. or provide evidence demonstrating that the goods were not manufactured with forced labor. In recent months, CBP has issued similar orders covering other products from Xinjiang, including cotton, hair products, and tomato products. In order to secure release of Xinjiang-origin cotton products, for example, CBP advises that the importer may be required to submit time cards, wage payment receipts, and daily process reports that demonstrate the employment status of the employees who harvested the cotton. 

The Biden administration probably considers the Hoshine WRO to be a calibrated action because it only targets one silicon producer. Note, however, that the action affects much more than simply direct exports from Hoshine. It broadly applies to all silica-based materials “derived from or produced using” silicon produced by Hoshine. Accordingly, CBP has confirmed that the ban applies not just to the raw material itself, but also to solar cells and panels containing silicon manufactured by Hoshine. This includes solar panels and solar modules, whether produced in China or in third countries, derived from Hoshine-supplied silicon products. 

Hoshine is one of the largest global producers of metallurgical-grade silicon, which is the raw material needed to produce solar-grade polysilicon. The pure polysilicon is then converted into ingots that are sliced into thin wafers, and those wafers are ultimately used to create solar cells. Four of the top five polysilicon manufacturers in 2020 were located in China, and Xinjiang alone accounts for between 40 and 45 percent of solar-grade polysilicon supplies worldwide. 

Four of the top five polysilicon manufacturers in 2020 were located in China, and Xinjiang alone accounts for between 40 and 45 percent of solar-grade polysilicon supplies worldwide. 

On the other hand, Chinese-manufactured solar cells and solar panels make up a relatively small percentage of U.S. imports given that these are already subject to U.S. tariffs and antidumping duties. Under Section 301 of the U.S. Trade Act of 1974, the U.S. has imposed a tariff of 25 percent on solar panels where China is the country of origin of the panel itself or of the panel’s solar cells, and the U.S. also applies anti-dumping duties to these products, increasing the total import cost.

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The WRO’s most significant impact therefore is on U.S. imports of solar cells (or panels containing solar cells) that contain silicon from Hoshine but are manufactured in third countries. Two of those larger third-country manufacturers who reportedly source from Hoshine are in Germany and South Korea. The other six of the top eight polysilicon producers are in China and their products are therefore already subject to U.S. Section 301 and antidumping duties. According to a recent Sheffield Hallam University study, at least one of the top six Chinese polysilicon producers, Tongwei, does not source a large portion of its silicon from Hoshine.

Commerce Department “Entity List” Designations

On the same day as the WRO, the Biden administration placed the following five companies on the U.S. Commerce Department Entity List: Hoshine Silicon Industry (aka Xinjiang Daqo New Energy Co., Xinjiang East Hope Nonferrous Metals Co., Xinjiang GCL New Energy Material Technology Co., and Xinjiang Production and Construction Corps). Most of these companies also have a role in China’s solar-grade polysilicon supply chain. 

Xinjiang Daqo New Energy Co. manufactures monocrystalline silicon and polysilicon used in solar PV systems.

Xinjiang East Hope Nonferrous Metals Co. is a subsidiary of East Hope Group based in Shanghai with a stated plan to expand its polysilicon production capabilities.

Xinjiang GCL New Energy Material Technology Co. is unit of GCL New Energy Holdings and a producer of polysilicon. 

Xinjiang Production and Construction Corp. (“XPCC”) is a state-owned enterprise involved in commercial operations in Xinjiang.  XPCC has also been added to the U.S. Treasury Department Specially Designated Nationals and Blocked Person (“SDN” List).

As a result, the export or re-export of U.S. goods and technologies to companies or persons on the list are subject to Commerce Department license requirements. This action is, for the most part, symbolic – affecting these producers only to the extent that they are reliant on U.S.-origin goods, technologies or software in their production processes.

Policy alternatives and industry initiatives

A number of options have been explored for addressing forced labor allegations in the polysilicon supply chain, ranging from increased transparency and disclosure requirements for public companies, to expansion of WROs and up to and including the type of comprehensive sanctions – designation on a blocked persons list – applied to XPCC. Blocking sanctions such as the sanctions applied to XPCC should be considered only as a last resort as these have wide-ranging financial repercussions in supply chains outside of the U.S.  by effectively barring sanctioned persons from the global financial system.

Enhanced reporting requirements would, for example, mandate global purchasers of polysilicon to investigate their supply chain and disclose the results to investors. In other words, the U.S. could use the market and the pressure of investor groups to pressure producers to increase transparency in Xinjiang and eliminate forced labor internments. Such actions could be a prelude to forced divestment or non-investment in companies that do not provide sufficient transparency on labor issues to their publicly traded customers or as a prelude to expanded sanctions targeting these companies. 

At the same time, U.S. solar project operators are encouraged to advance their own industry initiatives to combat human rights abuses in the supply chain and transition away from problematic suppliers. There is growing consensus among importers that the solar industry must take action to move their supply chains away from manufacturers that allegedly rely on forced labor. For example, the Solar Energy Industries Association recently released a supply chain tracking tool (the Solar Supply Chain Traceability Protocol) which is a set of guidelines intended to help solar companies meet compliance obligations and “provide customers with assurances that their solar products are free of unethical labor practices.” The growing use of such industry measures reduces the need for more far-reaching governmental measures that threaten to disrupt solar supply chains at a critical time for global climate change initiatives. 

About the Authors

Ginger T. Faulk (left) is a partner at Eversheds Sutherland, a global law practice with 74 offices in 35 jurisdictions and represents multinational companies in matters involving U.S. government regulation of foreign trade and investment.

Paige Spraker contributed to this article. She is currently participating in Eversheds Sutherland’s Summer Associate Program.

Author

  • Jennifer Runyon has been studying and reporting about the world's transition to clean energy since 2007. As editor of the world's largest renewable energy publication, Renewable Energy World, she observed, interviewed experts about, and reported on major clean energy milestones including Germany's explosive growth of solar PV, the formation and development of the U.S. onshore wind industry, the U.K. offshore wind boom, China's solar manufacturing dominance, the rise of energy storage, the changing landscape for utilities and grid operators and much, much, more. Today, in addition to managing content on POWERGRID International, she also serves as the conference advisory committee chair for DISTRIBUTECH, a globally recognized conference for the transmission and distribution industry. You can reach her at Jennifer.Runyon@ClarionEvents.com

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