In 2019, the US imposed sanctions against China in reaction to “serious human rights abuse against ethnic minorities in Xinjiang . . .” The sanctions followed reports of mass arbitrary detention and severe physical abuse, among other serious abuses targeting Uyghurs and other ethnic minorities in the region. To date, US sanctions have focused on textile goods made from Xinjiang cotton but recently a new area of concern has been identified. Based on reports that up to 45% of polysilicon used in solar panels comes from Xinjiang, there is an emerging possibility that sanctions may be imposed on solar panels containing polysilicon from China, which would materially impact the future development of global solar energy projects.
Trade risk is increasing with respect to Chinese solar panels
It has recently been reported that the Biden administration is considering whether to impose sanctions on polysilicon or solar panels from Xinjiang. Last month, in response to a question regarding “slave labor coming out of China” during a House Foreign Affairs Committee hearing, climate envoy John Kerry said, “Xinjiang Province not only produces some of the solar panels that we believe are being in some cases produced in forced labor by Uighur[s], but also there are significant amounts of a certain rare earth mineral that’s used in the solar panels themselves.” Kerry confirmed that the Biden administration is considering introducing additional sanctions in this regard.
China is the world’s largest polysilicon producer, and almost half of the world’s solar-grade polysilicon is produced in Xinjiang.
What are the implications for purchasers of solar panels made from Xinjiang polysilicon?
1. Direct legal jeopardy
On its face, taking action against polysilicon suppliers from Xinjiang would be consistent with the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) prior actions adding a number of Xinjiang entities to its Specially Designated Nationals And Blocked Persons (SDN) List, which imposes comprehensive blocking sanctions on designated persons. US persons are flatly prohibited from dealing, directly or indirectly, with persons on the SDN List, as well as any entity that is 50% or more owned by an SDN. While the sanctions apply in the first instance to US persons, most global financial institutions will not transact with SDNs due to risk to US correspondent bank account relationships.In addition, non-US persons may also be subject to “secondary sanctions” risk of designation as a result of providing goods or services to SDNs.
2. Reputational risk
Aside from enforcement risks, the documented reports and international attention on forced labor practices in Xinjiang means that reliance on Xinjiang suppliers in any aspect of a supply chain presents significant reputational risks.
For example, reputational concerns have led major brands such as Calvin Klein, Gap, H&M, IKEA, Patagonia, and Tommy Hilfiger to stop purchasing cotton sourced from Xinjiang. At the same time, firms that decline to deal with Xinjiang for any reason face potential backlash from Chinese authorities and consumers. Indeed, this has particularly been the case for brands that issued statements against sourcing cotton from Xinjiang.
3. Financing challenges
Financial institutions, including non-US financial institutions, are generally conservative in their approach to sanctions compliance in order to protect their access to US dollar-denominated correspondent banking accounts. Thus, companies continuing to engage in transactions with designated Chinese solar or polysilicon producers – whichever the sanctions may be – risk having their transactions rejected or blocked by banks.
4. Supply chain disruptions
Since Xinjiang produces almost half of the world’s solar-grade polysilicon, sanctions against Xinjiang companies producing polysilicon are likely to cause a material increase in the price of polysilicon. These price increases would materially impact the future development of global solar energy projects.
International trade issues have previously split the solar energy industry. The US antidumping and countervailing duty investigations of Chinese solar panels caused a deep rift between, on the one hand, domestic solar panel producers competing against low-price Chinese imports and, on the other hand, solar developers seeking the cheapest possible panels to facilitate the construction of solar projects.
A similar division is now likely between human rights advocates and the solar industry. Indeed, Democratic members of the House Ways and Means Committee recently urged US Customs and Border Protection to block the importation of solar panels made with polysilicon from Xinjiang on the grounds that the imports were produced with forced labor. Blocking the importation of such panels would have a negative impact on the Biden administration’s clean energy agenda, setting up a direct conflict between climate change and human rights concerns. Solar energy companies will need to monitor the situation carefully and explore measures by which they can demonstrate that forced labor is not an element of their supply chain and also develop alternative sources of supply.