After Christmas, we blogged about the enactment of H.R. 6256, the US Uyghur Forced Labor Prevention Act. Primary provisions of the legislation include a rebuttable presumption that goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in China’s Xinjiang Uyghur Autonomous Region (XUAR) are banned from importation into the US. Cotton, tomatoes and polysilicon are specifically called out as part of a list of “high-priority sectors for enforcement.” To lift the ban, companies must follow due diligence as framed in the law’s language and obtain a determination from US Customs and Border Protection (CBP). This importation ban goes into effect June 21, 2022 – notwithstanding legal challenges that may be filed and delay the effective date.
Polysilicon is a critical material in solar panels, and China – especially the XUAR – produces the vast majority of the world’s supply, making the importation ban particularly worrisome for U.S. solar panel manufacturers. But polysilicon manufacturers outside of China are not covered by the US law. Among other countries that currently produce polysilicon are the US, Germany, Japan and Malaysia. There is a question of how much additional capacity those companies have to make up for import shortages from China that are sure to happen immediately following June 21, 2022. But at least some relief may be available – even more if reopening mothballed production plants in South Korea and Tennessee can be justified.
In addition, Bloomberg reported that China is bringing 2 million tons per year of additional production capacity online, with a quarter of that projected to start up before the end of 2022. Importantly, much of the new production is located outside of the XUAR. After the XUAR due diligence guidelines for importers are established, China will be ready with even more capacity. At least some of that will be outside of XUAR, which may possibly ease the due diligence burden for US importers.
Some US solar panel manufacturers may see minimal disruption as a result of H.R. 6256 if they can lock in polysilicon production from non-Chinese sources. Of course, in the short term, competition for non-Chinese origin material will be significant, driving prices up. Those increases may be temporary, with prices rationalizing once there is a clear path (i.e., due diligence process and mechanism) for rebutting the presumption applicable to Chinese-origin materials.
What This Means
Companies should look to H.R. 6256 as a lesson in preparation and contingency planning. Remember that the law doesn’t limit “high priority sectors” to tomatoes, cotton and polysilicon, so other materials, products and goods will almost certainly be pulled in at some point. In the interim, it would be prudent for companies in every sector to think about what actions they would take if their products or raw materials became subject to the importation ban and due diligence requirement.
- For purposes of planning it is reasonable to assume the CBP due diligence guidance will be in place. However, that doesn’t mean a due diligence program (such as one available via an industry association) meeting the requirements will be ready. Consider options for developing and executing H.R. 6256 due diligence on your own.
- Explore/identify alternate supplies and countries of origin of products, goods and materials. Limiting this task to only your existing suppliers misses the point – identify as many new sources as possible in this contingency planning exercise. Considering recycled/reclaimed material can also be an option.
- Get information about production capacities at those alternate locations and even a basic idea about potential ESG risks at those locations. For instance, if one potential alternate location employs child labor, that location should be avoided, or – depending on the criticality of the material/product – could be earmarked for a site visit or other form of assessment to determine if they should indeed be considered as an alternate. You don’t want to end up trading a problem for the same problem at another location/company.
When facing the specter of an importation ban, advance knowledge and planning can be critically important in speeding business recovery, or even avoiding disruption altogether. Between H.R. 6256’s importation ban and CBP Withhold Release Orders (WROs) issued in recent months for latex gloves from Malaysia and palm oil from Indonesia, it is clear that the US government is serious about using those tools for ESG matters.
