Impact of EU forced labour regulation on Chinese solar products

The EU market is highly dependent on Chinese solar products, with up to 90% of modules coming from China. According to InfoLink’s customs data, China’s module exports to the EU in 2022 and 2023 accounted for around 50% of the global total, and 35% for the first quarter of 2024, indicating the importance of EU market to Chinese manufacturers.

Chinese module makers are actively seeking overseas markets to consume products due to surplus across the supply chain. Prices continue to fall amid fierce market competition. The price difference between Chinese and Europe-made modules sits at EUR 0.05-0.08/W, weakening the competitiveness of EU modules as Chinese modules have advantages in terms of cost effectiveness, technology, and generation efficiency. As a result, some solar manufacturers and associations called for the EU and member states to subsidize local manufacturers, purchase local modules or impose tariffs on Chinese solar products to ease the operation cost pressure and strengthen competitiveness of local modules.

The EU and member states including Germany, Spain, and Italy have introduced incentives and policies to support local supply chain. Moreover, the European Parliament and Council of the European Union have reached a provincial agreement on prohibiting products made with forced labour on the Union market on March 5. The draft law was proposed on Sept. 14, 2022, seeking to establish an implementation guideline through carrying out investigation, building a database of forced labour risk areas and products, and forming partnerships with the third-party countries. 

After a debate on regulation against forced labour products taking place on April 22, the EU Parliament approved the regulation with 555 votes in favour, 6 votes against and 45 abstentions. The text of the Regulation will need the final formal approval from the EU Council expected in May (the time is subject to the official timeframe published by the EU). The Regulation will be published in the Official Journal after receiving approval and enters into force the next day. EU member countries must implement the law within three years. The key practices of the law are as follows:

1. Investigations (having regard to Article 11, 15-30):
   The EU member states or the EU Commission (if the investigation involves a third country) have the right to investigate whether forced labor is involved in the company's goods, product supply chain and manufacturers, and the initial investigation needs to be completed within 30 working days. If the results of the investigation show that there is forced labor, the company's products will have to be withdrawn from the Union market, and the products that have just entered the EU borders will be confiscated by the authorities, and the products will be donated, recalled, or destroyed according to the regulations. Products of strategic or other importance to the EU will be detained and companies in breach of the rules will be fined. Companies involved in the investigation may re-import their products into the EU market if they subsequently remove the fact that forced labor exists in the supply chain of the product.

2. High-risk areas or products (having regard to Article 8):

   The EU Commission will draw up a list of high-risk areas for forced labor, which will be used as a criterion to decide whether to carry out an investigation. In addition, importers and exporters will be required to submit to the EU Customs detailed information on the manufacturers and suppliers of the products they wish to enter the EU market.

3. Digital tools and cooperation, including with third countries (having regard to Article 6, 7, 9, 10, 12, 31):

   The EU will set up a single portal for forced labor, which will contain relevant guidelines, information on bans, risk areas, public sector information, public evidence, assistance measures for SMEs, and reports on enterprises or products subject to forced labor. It will also set up a multilateral cooperation network to assist member states in exchanging information and enforcing relevant trade agreements. In addition, if the government of the third country in which the company in question is located agrees, the EU Commission can cooperate with the government of that country to investigate whether forced labor practices exist in the supply chain of the company's products.

The EU Commission will likely approve the Regulation in May. Although the law covers a wider range and does not target specifically compared to the U.S.’ Uyghur Forced Labor Prevention Act (UFLPA), the implementation involves more countries and thus may result in diversion. Yet, the EU may earmark China’s Xinjiang as well as cells and modules as key observation targets in the future, as the law allows member countries or the EU Commission to identify products or areas with high risk in forced labour. This means that they may proactively investigate Chinese solar manufacturers suspected to be involved in forced labour or use polysilicon from Xinjiang, potentially bringing obstacle for Chinese solar products to enter the EU.

At present, Chinese modules do not need to provide certificate of origin for polysilicon or wafer to enter the EU. Also, there’s not much price difference between modules made of polysilicon from Xinjiang and non-Xinjiang polysilicon. Moreover, when the Regulation enters the legislative process, some European distributors have also requested Chinese manufacturers to ship modules using non-Xinjiang polysilicon. Manufacturers will prepare certificates and plan production in advance. Examining the capacity of Xinjiang and non-Xinjiang polysilicon during 2022 and 2026, polysilicon capacity in Xinjiang continues to rise year on year but the ratio of Xinjiang polysilicon and non-Xinjiang polysilicon has been decreasing gradually, indicating that Chinese polysilicon makers are expanding to regions outside of Xinjiang. It’s expected that Chinese manufacturers can continue to export modules made of non-Xinjiang polysilicon to the EU. Therefore, the Regulation is estimated to have limited impact on demand and price of Chinese modules in the EU market, but the actual situation will still depend on the enforcement efforts of the member states and the enforcement of EU Commission in the future.

When the Regulation enters into force in the future, whether the EU will introduce a list of forced labor investigation against Chinese solar manufacturers remains to be monitored. Moreover, if the EU decides to amend the Regulation to make it stricter, Chinese manufacturers exporting to the EU will face increasing production costs and impact the spot price in the EU market as well as demand for Chinese modules. By then, solar installation progress in the EU will take the hit if local capacity hasn’t improved.

Overall, the EU Commission may greenlight the Regulation in May or by the end of first half. However, the Article 39 regulates every member country to carry out the law within three years but there’s no specific time of implementation. As local EU distributors and Chinese manufacturers have already come out with ways to respond to the Regulation when it enters the legislative process, it is expected that the impact on module prices and demand in the EU market will be limited, but the overall situation will not become clearer until the law is implemented, and the dynamics of the law should be observed continuously.