Rising geopolitical tensions between the U.S. and China continue to pose a challenge to global supply chains. The introduction of Western-led supply chain due diligence laws including the Uyghur Forced Labor Prevention Act (UFLPA) has motivated companies to consider diversifying supply chains away from China. Additionally, continued geopolitical competition between the U.S. and China over advanced technologies has resulted in disruptions to the semiconductor, chip manufacturing, and rare metals supply chains.
Chinese-linked supply chains increasingly vulnerable to forced labor laws
The adoption of forced labor legislation among Western nations has increased risks for companies with supply chain links to China due to widespread evidence of forced labor programs in various regions of the country including Xinjiang and Tibet. Besides the reputational and regulatory risks involved, forced labor laws can also disrupt manufacturing activities because imports needed for production can be detained if they are suspected of being wholly or partially produced in the Xinjiang Uyghur Autonomous Region (XUAR) of China.
As of June 30, 2023, the U.S. Customs and Border Protection (CBP) has detained 4,651 shipments with a combined value of $1.64 billion under the UFLPA with 872 shipments denied entry into the United States. CBP data indicates that less than half of detained shipments under the UFLPA originates from within China with over 1,393 shipments detained from Malaysia and another 1,447 originating from Vietnam. Most shipments detained from outside of China involve electronic products – suggesting that the CBP continues to scrutinize solar panels, integrated circuits, and consumer electronics produced outside of China for any links to polysilicon sourced from Xinjiang.
The U.S. has also continued to expand the UFLPA entity list to cover more Chinese companies with a further four entities and eight subsidiaries formally identified as having forced labor links in Xinjiang between June and August 2023.
The UFLPA entity list only identifies companies that have been formally tied to forced labor in Xinjiang and does not provide companies with a full picture of all suppliers with links to human rights abuses in China.
Internal data from Everstream has already identified more than 400 companies with credible links to forced labor within Xinjiang, suggesting that the UFLPA entity list will continue to expand to include more companies in the future.
China responds to semiconductor restrictions
In addition to forced labor legislation, companies and supply chains could also face increasing disruptions from Chinese trade restrictions as the country seeks to respond to U.S. export controls on its advanced semiconductor sector.
China has responded to increasing restrictions on its semiconductor sector by imposing export curbs on shipments of gallium and germanium effective from August 1. Both metals are used in the semiconductor and electronics sectors – gallium is popularly used as a conductor while germanium can also be used to produce infrared detectors and solar cells.
China is a key global supplier of both metals with the country controlling 68% of refinery production of germanium and 98% of raw gallium production. The export ban could cause short-term volatility in the availability and prices of both metals since global stockpiles of gallium and germanium outside of China are only expected to last between two to three months. Supply shortages of both metals are possible until Chinese exporters are able to obtain export approval permits, although it is unclear at this point how many approvals the Chinese government is willing to grant.
The Chinese government has also reacted to restrictions on its chip sector by further increasing investments in indigenous chipmakers. Government investments via China’s national semiconductor fund, also known as the National Integrated Circuit Industry Investment Fund, or the “Big Fund,” were briefly stopped in 2022 but regained steam shortly after the October 2022 chip export bans announced by the US. The fund, rebranded as “Big Fund II” after 2019, has increased investments for new foundries by around $3.5 billion, signaling the country’s efforts to be self sufficient in chip manufacturing. Current restrictions on the import of advanced semiconductor machinery have also led to a greater focus on alternative chip manufacturing technologies within China such as gallium nitride (GaN) semiconductors and chiplet technologies.
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