The Department of Commerce has issued a final decision in a year-long solar trade case. And it’s made the Chinese very upset.
After investigating whether China is providing unfair subsidies to domestic solar manufacturers, thus allowing companies to dump product into the U.S. market below cost, the Commerce Department has confirmed its decision to slap tariffs of up to 35 percent on Chinese-made solar cells.
Over all, the tariffs are slightly higher than expected, with mixed results for different companies. The chart below, provided by the Coalition for Affordable Solar Energy, shows the differences between the preliminary anti-dumping tariffs (AD) designed to penalize dumping and the countervailing duty tariffs (CVD) that were designed to counteract domestic subsidies in China:
Tariffs Still Apply only to Cells
Crystalline silicon solar panel manufacturing is a four-step process: (1) producing silicon crystals, (2) turning crystals into wafers, (3) turning wafers into cells, and (4) turning cells into panels.
The Commerce Department’s initial countervailing duty and antidumping rulings apply tariffs specifically to Chinese-manufactured photovoltaic cells, sold either as-is or manufactured into panels. The problem: that creates a potential loop hole. Chinese manufacturers can simply offshore the cell-production (step #3 above), keep the rest of the production process in-country, and evade U.S. tariffs even though the final product (step #4 above) is still manufactured in China.
Some of the big Chinese solar panel manufacturers have already invested substantial resources to set up that exact process and evade the tariffs. That does not sit well with some U.S. solar panel manufacturers. Several members of Congress recently petitioned the Department of Commerce to close that loophole.
What does this decision mean?Technically, the outcome of this case will not be complete and final until the International Trade Commission (ITC) rules on whether the Chinese panel imports have caused material injury (serious harm) to the U.S. industry. That is not expected until November. Most likely, the ITC will rule that injury did occur. Most analysts do not expect that to change from initial unanimous injury finding — meaning this decision is most likely a final one.
The Chinese certainly won’t be happy.
“The United States is inciting trade friction in new energy and sending a negative signal to the whole world about protectionism and obstructing the development of new energy development,” said China’s Commerce Ministry spokesman in a statement after the ruling.
Some Chinese government agencies and solar manufacturers may respond with retaliatory action against U.S. companies. The biggest potential targets for that type of action are companies like DuPont and Applied Materials that sell upstream products to China. If those companies face serious retaliatory threats, that is a clear violation of global trade rules, and the U.S. government should do everything it can to protect them from harm.
China’s Problems Are Much Bigger than Tariffs
It is important to note, however, that although the Chinese solar industry may react with bluster and threats, many leaders in Beijing actually take a broader view. In a recent interview, a leading Chinese clean energy and climate policy official acknowledged that China’s solar energy problems are primarily due to domestic factors, not foreign trade tariffs.
The reality is that China’s solar problems go much deeper than tariffs. Chinese banks loaned huge amounts of money to Chinese solar manufacturers in recent years, partly because the market has good growth potential, but also because the Chinese government designated green energy sectors as priority industries for state support. That is a good policy from Beijing’s perspective. But the problem is, local governments had a hand in determining who got that capital, and too many local governments all wanted their own favorite companies in the mix. The result was massive overcapacity.
Now many Chinese solar manufacturers have to close their doors. That is a natural part of the growth cycle in infant industries — lots of companies dive in to these new markets chasing new growth opportunities, but market forces eventually weed out the weaker players so that only the strong survive.
Weeding out the weaker players is fine from Beijing’s perspective, but China’s local governments take a different view. When state banks give big loans to Chinese companies, local governments often serve as guarantors, even when that is not actually stipulated in the lending contracts. China’s big state-owned banks are political heavyweights, and they have ways to make local governments cover those loans when companies default. China Development Bank, for example, has in the past refused to fund any new projects in a particular region until existing loans are paid off. If local governments want to keep infrastructure developments and other critical projects rolling forward, they have no choice but to comply.
That means China’s local governments will all continue to fight to keep their local companies in the mix, whether or not that makes sense for the country and the industry as a whole. Those survival strategies could very well include more retaliatory action against U.S. companies — even though that would not help China in the long run — because railing against U.S. “protectionism” is an easier sell than admitting that you are propping up weak market players just because they happen to be in your home region.
Although the Commerce Department has wrapped up its investigation on solar, this is only the beginning of a long and complicated series of trade battles over clean energy.
Melanie Hart is a Policy Analyst for Chinese Energy and Climate Policy at the Center for American Progress. Stephen Lacey is Deputy Editor of Climate Progress.