U.S. Blocks Imports From Key Chinese Supplier of Raw Material Used in Solar Panels, Electronics, and Other Goods

June 25, 2021, Covington Alert

On June 24, 2021, U.S. Customs and Border Protection (CBP) issued a new Withhold Release Order (WRO) prohibiting the importation of silica-based products made by Hoshine Silicon Industry Co. Ltd. (Hoshine), a company located in the Xinjiang Uyghur Autonomous Region of China, based on allegations of forced labor. Silica is a raw material used to make components for solar panels, electronics, and other goods. The WRO applies to silica-based products made by Hoshine and its subsidiaries as well as materials and goods, including polysilicon—a primary input in most solar panels—derived from, or produced by, these silica-based products.

The WRO is based on information that CBP believes reasonably indicates that Hoshine has used forced labor to manufacture silica-based products. A report published earlier this year alleged that Hoshine has participated in government programs involving the transfer of Uyghur workers to provide labor and has connections to forced labor through its quartz supplier and ties to the Xinjiang Production Construction Corps (XPCC).

The issuance of the WRO was announced by the White House alongside related government action:

1. The addition of Hoshine and four other companies—XPCC, Xinjiang Daqo New Energy, Xinjiang East Hope Nonferrous Metals, and Xinjiang GCL New Energy Material Technology—to the Entity List maintained by the Department of Commerce’s Bureau of Industry & Security. This action, which supplements the prior designations of 48 other entities to the Entity List for their suspected connections to human rights abuses in Xinjiang, restricts the export, re-export, or in-country transfer by anyone of commodities, software, and technology subject to U.S. export controls jurisdiction under the Export Administration Regulations where such entities are parties to the transactions. Notably, the Entity List designation of XPCC expands on XPCC’s previous designation for U.S. property blocking sanctions on the List of Specially Designated Nationals and Blocked Persons maintained by the Department of the Treasury’s Office of Foreign Assets Control. As a result of that earlier designation in 2020, U.S. persons are prohibited from engaging in, supporting, or facilitating virtually any transactions with, or for the benefit of, XPCC or entities directly or indirectly owned 50% or more by XPCC. Moreover, any property or property interests of XPCC or entities of which it owns 50% or more must be blocked (i.e., “frozen”) if they are in, or come within, the United States or the possession or control of a U.S. person. XPCC’s Public Security Bureau—though not the entirety of XPCC—also was previously designated for trade restrictions on the Entity List in 2020.

2. The addition of polysilicon to the Department of Labor’s “List of Goods Produced by Child Labor or Forced Labor.” This list is non-binding but indicative of government concerns surrounding labor rights violations in the polysilicon manufacturing process in Xinjiang.

While the WRO does not block imports of all silica or polysilicon from Xinjiang, further restrictions may be imposed in the coming months. The White House briefing on the new WRO indicates that CBP is continuing to investigate allegations related to polysilicon and other industries in Xinjiang and elsewhere. It is possible that CBP may take a staggered approach to the issuance of WROs related to Xinjiang silica or polysilicon as it did in relation to Xinjiang cotton, where it initially targeted imports of cotton produced by a particular manufacturer (XPCC) and subsequently issued a region-wide WRO.

CBP has significantly increased the use of WROs in recent years to address forced labor issues, with an emphasis on Xinjiang (see our prior alerts here and here). Goods covered under the new WRO will be subject to detention at the port of entry where they arrive. Importers will have the option either to re-export the goods to a location outside the U.S. within three months or to petition CBP to release the goods by demonstrating that they were not produced with forced labor.

The potential impact of the WRO and related actions discussed above is significant. According to industry analysts, for example, approximately 45% of the world’s polysilicon supply is produced in Xinjiang, and Hoshine is among the largest producers in the region. Electronics and other goods also may be impacted. Companies operating in the solar energy and electronics sectors, and any other sectors reliant on silica-based products, will need to assess the extent to which their supply chains may be impacted by the actions discussed above and take steps to mitigate associated legal, reputational, and operational risks. Such steps might include risk assessing relevant supply chains to identify links to Hoshine or other manufacturers with ties to Xinjiang (given the potential for further CBP action in the future); implementing strategies to mitigate risk, including supplier engagement processes and traceability protocols; evaluating whether to update contractual terms to account for emerging Xinjiang-related risks; preparing for CBP action and associated supply chain disruption; assessing whether any dealings with parties newly added to the Entity List involve items subject to U.S. export control jurisdiction; and assessing whether supply chain exposure to silica-based products produced in the Xinjiang region may warrant disclosures to commercial counterparties or in securities filings.

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Covington is one of the few U.S.-based international law firms that has specialized expertise and a global practice devoted to advising multinational clients on Business and Human Rights, including in relation to Xinjiang-related risk mitigation strategies. In conjunction with our active Customs practice—which includes former CBP Commissioner Alan Bersin —and our experts in environmental law, the renewable energy sector, and trade controls, Covington is well positioned to advise companies on how to navigate interactions with CBP, assess risks in solar and other impacted supply chains, manage crisis communications and reputational risk that may result from allegations of forced labor, assess the potential contractual and commercial impacts of WROs, and evaluate potential disclosure obligations.

If you have any questions concerning the material discussed in this client alert, please contact any of the members of our Energy, Environmental, Customs, Trade Controls, and Business and Human Rights practices.