Climate

The U.S. Decision on Chinese Solar Panel Imports: Why Tariffs Are Only A Partial Solution

We Need to Think Long Term About U.S.-China Clean Energy Trade

To keep the solar-panel market growing, the best thing the U.S. government can do is create a good environment for technology innovation, and that will require a combination of demand-side policies and protection from adverse price incentives. Photo: AP.

By Melanie Hart and Kate Gordon

The U.S. Department of Commerce early next week will issue a preliminary verdict on a trade petition filed by SolarWorld Industries America, Inc. That petition alleges that the Chinese government unfairly subsidizes crystalline silicon photovoltaic solar cells and modules by providing cash grants, tax rebates, cheap loans, and other benefits designed to artificially suppress Chinese export prices and drive U.S. competitors out of the market.

As a remedy SolarWorld wants the Commerce Department to levy import tariffs to alleviate damage from these artificially cheap panels on solar-panel manufacturers in the United States. At first glance this would seem to be a reasonable solution. A sustained look yields the same conclusion. But it is important to understand the dynamics of the U.S. solar-panel market—where our labor skills and ability to innovate are strong but where demand for solar panels is low due to the lack of any national commitment to lower carbon emissions or to diversify our sources of energy—to comprehend why import tariffs are not the only solution.

Indeed, this petition, along with a second action brought by SolarWorld accusing China of “dumping” its cheap solar panels into the U.S. market, has generated major controversy in the fledgling U.S. solar industry. Just about everyone seems to believe that Chinese officials are probably violating trade rules in this sector but there is substantial disagreement over what, if anything, the United States should actually do about it.

Our current trade institutions address illegal subsidies by levying import tariffs on imported subsidized goods. In theory when trade partners artificially suppress prices and export those underpriced goods to the United States, import tariffs should level the playing field by raising prices back up to natural market levels. In theory these tariffs are lowered over time and finally eliminated as the trade partner phases out its subsidies.

In the current case SolarWorld alleges that the Chinese government uses dumping and a variety of subsidies to artificially suppress solar panel export prices by a margin of at least 100 percent. SolarWorld has asked the Commerce Department to levy a comparable tariff to eliminate that price discrepancy.

Everyone agrees that imposing import tariffs on Chinese solar panels should benefit the U.S. solar module manufacturing industry. Solar-panel prices fell 50 percent in 2011, and that unusually steep price drop has eroded profit margins worldwide. Cheap Chinese manufacturing appears to have contributed to the price drop, so reducing the impact of Chinese prices on the U.S. market should slow the price decrease to a more sustainable rate and increase profit margins for U.S. manufacturers. U.S. tariffs on Chinese solar panels would also help manufacturers in other countries that do not provide these subsidies, such as some in the European Union, because those manufacturers also export to the United States and compete for U.S. market share.

What is less clear is how tariffs would affect the demand side in the United States.

Many U.S. solar-installation companies, which purchase solar panels and therefore benefit from low Chinese prices, fear that import tariffs will erode their profit margins, slow industry growth across the value chain, and make it even harder for solar energy to compete with traditional fossil fuels. Some of these solar-installation firms are so concerned that they have formed an opposition group to push back against SolarWorld’s trade petitions. That group—the Coalition for Affordable Solar Energy—claims that imposing high import tariffs on Chinese-manufactured solar panels would decimate the U.S. solar installation industry and eliminate thousands of jobs in that sector.

Solar energy already faces an uphill battle in the United States. The combination of heavyfossil-fuel subsidies and weak national-level political support for policies to spur demand for renewable energy can make it hard for emerging energy technologies to compete in our country. Some politicians have even attacked the few solar-industry development policies we do have in an attempt to reduce federal government spending on clean energy across the board.

The clean energy advocates who have supported solar-industry development throughout these political battles certainly do not want to throw more obstacles in the path of the solar-installation industry. But that does not mean that the United States needs cheap Chinese solar panels so badly that we should just roll over and let a foreign government break enforceable international trade rules. If the U.S. Department of Commerce finds that the Chinese government has acted illegally, then the Chinese government and the industry it is subsidizing should pay a price for that behavior. Under the current trade system that price is tariffs.

If the U.S. Commerce Department finds that Chinese government dumping and subsidies artificially suppressed prices by a significant amount and that the price decreases harmed the U.S. manufacturing industry, then it is possible that the resultant tariffs could be 100 percent or above. Contrary to what the Coalition for Affordable Solar Energy is claiming, that is not a reason to panic.

For one thing, many different factors are contributing to declining global solar prices. Chinese manufacturing certainly plays a role, but innovation is also important. Solar panels are becoming increasingly efficient (generating more energy per module), and manufacturers are steadily improving production processes to bring down costs. The U.S. solar manufacturing market is already fiercely competitive, so even without discounted Chinese imports other U.S. manufacturers—and other solar-panel exporters to the United States—should still have strong incentives to keep innovating to bring down costs.

It is possible that imposing import tariffs may slow the price decline or even create a temporary price bump in the U.S. market if U.S. customers shift orders from Chinese to non-Chinese manufacturers and the latter cannot keep up with demand. It is important to note, however, that one of the biggest problems facing solar-module markets worldwide isoversupply, so it should not be difficult to fill any gaps produced by a shift away from Chinese solar panels.

Furthermore, Chinese manufacturers would likely respond to import tariffs by shifting production to the United States or other overseas markets where the tariffs would no longer apply, so they would not be out of the game for long. They would, though, be investing in the United States or at least in countries, such as in the European Union, where trade standards are more comparable.

If Chinese companies do begin manufacturing here, they will find that the United States is in a strong competitive position to manufacture solar panels because of our skilled labor force, domestic supply of silicon, and strong manufacturing infrastructure. It certainly helps that China’s own labor costs are increasing: Boston Consulting Group recently estimatedthat within five years China’s manufacturing wages will be within 25 percent of those in the lowest-wage U.S. states (South Carolina, Alabama, and Tennessee).

The solar-panel industry is one in which labor costs play a smaller role than they do in less advanced, lower-tech manufacturing sectors. Labor accounts for only 3 percent to 4 percentof the cost of producing solar panels, meaning that higher labor-cost countries such as the United States should be in a strong position to increase solar-manufacturing capacity.

Given the volatility of global oil prices, the cost of transportation is currently much more important to most advanced manufacturers. High transportation costs mean that many manufacturers are looking to locate as close as possible to both their suppliers and their customers, so that they can keep costs down and maintain “just-in-time” manufacturing standards. And here is where the United States has a problem in solar.

We have inconsistent demand for these products, making it difficult for manufacturers to take the risk in spending the upfront capital to build new plants or expand existing ones. Demand-side policies have spurred solar growth in the past. In 2010, for example, the seven states with the strongest development policies accounted for 82 percent of new U.S. solar installations. In third-quarter 2011 that share increased to 89 percent. But political attacks on state-level renewable energy standards, the expiration of many federal clean energy support programs, and the lack of federal policies that would create sustained demand for renewable energy in the United States all play a part in making demand for solar far less stable than it is in the European Union countries or even in China itself.

Whether the U.S. solar market continues to grow, therefore, may depend much more on demand-side policies than on access to cheap Chinese imports.

Overall, then, it is not clear that import tariffs would harm solar-market growth in the United States over the long term. What is clear, however, is that long-term U.S. market exposure to illegal subsidization certainly would not only harm solar-panel manufacturers but possibly also slow growth across the value chain.

Chinese leaders look at the United States and want what we have. They want to become a global research and development powerhouse that creates and exports cutting edge technologies with big profit margins. China’s traditional command-and-control economic system was not good at creating those innovation incentives, so they are working to reform that system, but reform takes time.

In the meantime they are trying to fill the gap with heavy government subsidies. Problem is, that approach can actually reduce innovation, not only in China, but also in the United States. Bureaucrats are not adept at picking winning companies and winning technology standards. When Chinese officials heavily subsidize their favorite domestic solar manufacturers, those subsidies can reduce prices to levels that other firms cannot match, thus driving competitors out of the market and reducing incentives for innovation. When China exports those products to the United States, the same dynamic can play out here.

The long-term result is that a small number of heavily subsidized Chinese manufacturers could dominate the global solar market. That may make Chinese leaders happy, but if those firms are not producing the best solar technologies—for example, if their solar panels are not as efficient as they need to be to compete with traditional fossil fuels—that can slow solar-market development worldwide.

To keep this market growing, the best thing the U.S. government can do is to create a good environment for technology innovation, and that will require a combination of demand-side policies and protection from adverse price incentives.

Melanie Hart is a Policy Analyst on China Energy and Climate Policy at the Center for American Progress. Kate Gordon is Vice President for Energy Policy at the Center. This was first posted by CAP here.

See also:

 

9 Responses to The U.S. Decision on Chinese Solar Panel Imports: Why Tariffs Are Only A Partial Solution

  1. Sasparilla says:

    A very well written article IMHO.

    One question that should be asked with regard to the current dumping of Chinese panels – in 10 – 20 years and thereafter do we want the U.S. to be totally dependent on the Chinese for our solar panel production? I’d say that’s probably not a good idea for such a strategically important industry of the future.

    Previously the Chinese did this exact thing in the rare earths industry (where the U.S. was the dominant global player previously) – the Chinese dumped every other producer out of the market (completely) over the last decade then over the last couple of years raised export prices (not internal prices though) of rare earths by orders of magnitude (or in the case of Japan whom they had another non related trade issue with they just started shutting off exports of rare earths as a trade weapon – Japan uses them in electronics, high efficiency electric motors, NiMH batts, cell phones).

    Here’s a good chart showing the import increase from China:

    http://cleantechnica.com/2012/03/07/china-swallows-u-s-solar-trade-surplus-grows-a-big-one-in-1-year/

    Here’s a great chart showing the price declines of their panels over the last couple of years (going from $4 watt to close to $1 watt):

    http://cleantechnica.com/2011/11/28/china-solar-price-projections-vs-actual-price-drops/

    Regarding subsidies, US subsidies were $1.4 billion over multiple years (much of which came from a one time jolt in the economic stimulus package of several years ago), while the Chinese amount was $34 billion according to the (DOE) in 2010 alone.

  2. SecularAnimist says:

    The US government should start providing subsidies to solar manufacturers that dwarf the subsidies the Chinese government provides to Chinese manufacturers. And both nations can then compete to see who can “illegally” flood the world with cheap, mass-produced photovoltaics.

    Trade rules are all very nice. But when we are facing an existential threat to human civilization, to hell with them.

  3. Mark says:

    I agree, who cares where they’re manufactured. just get them installed.

    This is a waste of time.

    and, I read elsewhere, if we want the jobs, that the biggest labour component of solar is the installation. Which seems to be verified in the article that labour is 4 percent of the cost of manufacture.

  4. Harry says:

    If our country had rational regulations for dealing with Thorium, we would not be subject to China’s dominance in REEs. All high tech will be built in China until we develop our own resources. China is leveraging REEs to lure manufacturing and to secure intellectual property. We are currently “throwing away” all of the REEs that we could possibly need due to outdated regulations.

  5. Raul M. says:

    hi,
    Did solar world finish buying Shell solar?
    The name change was during 2 thousand what year?
    Anyway, why is it bad for a gov. To subsidize?
    It does seem amazing for an oil company to complain of gov. Subsidies.
    Anyway Shell solar panels are great products and even with the new name they should be a fine product.

  6. Don Pickard says:

    That $34 Billion is not quite what most think it is. If it’s the money that I seem to recall that it is, it is actually just available lines of credit that are provided to a number of the largest Chinese manufacturers, not for their own consumption, but for financing to buyers of projects supplied by those manufacturers.

    One of the big problems with Solar is that you’re buying 30 years worth of Energy upfront, and not enough financial institutions have gotten on board on lending. Most don’t even know how to do the required calculations yet. That is what this money is designed to replace.

  7. Don Pickard says:

    Disagree.

    For one thing, these Chinese manufacturers are buying a large amount of equipment from US technology companies like GT Solar, Fluor, etc.

    For another, yes, this WILL increase prices, and it will slow growth in the US. If you slow growth, then your local markets will mature slower, and the fact is that maturing markets dramatically decrease the balance of System costs, ireespective of what is paid for equipment.

    Better that the US support our industry similar to the Chinese, then we could compete, but speaking as a Solar Activist of many years, I know very well that the natural reaction to the technology when I bring it up to most Americans is Resistance. They think it’s good for calculators and not much else. It’s a cultural problem in the US, as much as economic.

    The Chinese market for Solar is going to DWARF the American market. They won’t be building infrastructure in the same way that the US has, they will skip ahead to the newest technologies. Tarriffs will just hurt the abilities of US companies to enter those markets.

    As it is, Chinese companies that have been listed on US exchanges have been kicked in the nuts over and over for 4 years now by our friends on Wall Street (and we know that they would never manipulate a market, or do anything unethical). As such, these companies have HAD to abandon these markets as a source of funds for growth, and have had to turn to Chinese and foreign Bond investors, and NO they haven’t gotten cheap rates on these bonds.

    Americans need to think differently about this thing (and note that Solarworld is NOT American). We need to think about working WITH the Chinese. There are so many niches to be developed in these markets, but as it is, the Chinese are simply dominating them all, not because they are supporting the industry, but because we are NOT supporting the industry.

  8. Raul M. says:

    Didn’t the oil companies own and control almost all photovoltaics except for the little small light meter in cameras. For years.
    If they could do that once and let solar power stand mostly idle without real push for success…
    It may be that in China they are starting their solar programs from a different perspective.
    And they do seem to appreciate that solar power may be assisted in it’s growth.

  9. Mark E says:

    Instead of subsidizing their own supply side, China ought to stimulate US demand by getting us to turn off our own fossil fuel subsidies.