Tomorrow the U.S. Department of Commerce will announce its preliminary ruling on an “anti-dumping” petition filed by SolarWorld Industries America, Inc. against Chinese solar panel manufacturers. SolarWorld claims the Chinese government is providing subsidies to Chinese solar manufacturers that would be illegal under World Trade Organization rules, thereby artificially lowering the price of these panels, and then dumping the cheap panels on the U.S. market. SolarWorld petitioned the Commerce Department to levy two different types of trade remedies: countervailing duties (to offset the subsidies) and tariffs (to discourage dumping).
The Commerce Department in March unveiled its remedy for the countervailing duties, also known as subsidy tariffs. Those tariffs were relatively low, ranging from 2.9 percent to 4.73 percent, which is less than most sales taxes around the United States. Chinesemanufacturers breathed a collective sigh of relief after that first announcement, but they are now gearing up for the next round of tariffs, which many industry analysts expect to be much higher.
They may well be right. The countervailing duty decision required Commerce Department investigators to track down specific evidence of Chinese government subsidies—a difficult task given China’s nonmarket, nontransparent policy environment—but the antidumping calculations simply compare Chinese panel prices in the U.S. market with panel production costs in a surrogate market economy, like Thailand or India. This type of comparison generally results in a higher tariff.
The specifics of this case speak most directly to the U.S. solar industry, of course, but also to trade enforcement in general and the U.S. economy more broadly. In this column we will examine the five most common arguments we’ve heard from the antitariff contingent in the U.S. solar industry, and why we think these arguments don’t hold water—drawing larger lessons about the key role of trade enforcement to the health of U.S. companies and our economy.
The bitterly divided U.S. solar industry
First, we need to explain why this case has sparked such a huge debate within the U.S. solar industry. On one side of the debate are solar installation companies and project developers for whom low solar panel prices mean lower project development costs overall. On the other side are U.S.-based solar manufacturers who compete directly with Chinese imports. They claim that artificially suppressed Chinese manufacturing prices are making it impossible for other solar panel manufacturing companies to survive.
There is actually a third group of companies that is equally concerned about this case but generally less vocal. These are the companies that sell solar manufacturing equipment and other upstream products, such as polysilicon, to China. Those companies generally side with the installers in opposing tariffs, not because they do not believe there is wrongdoing on the Chinese side but because they are afraid tariffs might trigger retaliatory action from China that would most likely target them.
The companies on the various sides of this debate all have their own interests at stake and their opinions on the case are driven by their individual desires to protect their bottom lines. That is very understandable. That is what our market system incentivizes—pursue your own interests to maximize profits.
But some of these companies have used more theoretical arguments to support their position against the trade case, focusing on the larger issue of whether this trade petition—and trade enforcement in general—is or is not good for the U.S. solar industry and for the U.S. economy as a whole. So let’s turn now to those claims and the underlying realities.
Trade enforcement is a losing proposition because imposing tariffs will slow solar industry growth in the United States
Innovation and demand-side policy, not cheap imports, are the real keys for solid and sustainable solar growth in the United States
Solar cell and module prices have declined rapidly in recent years—falling by 50 percent in 2011 alone—and Chinese manufacturing has been a major contributor to the price decline. Solar installation companies and other tariff opponents argue that the only way to reach grid parity with fossil fuels is to keep solar energy prices low, while the only way to keep prices low is to keep those low-cost Chinese imports coming. Never mind what the Chinese government may or may not be doing to generate those prices. And never mind whether those activities do or do not violate international trade rules.
This antitariff argument assumes that if import tariffs raise the price of Chinese-manufactured panels in the U.S. market, U.S. consumers would no longer have access to cut-rate panels, and the lack of Chinese pricing competition would reduce the declining price trajectory in the U.S. market more broadly. Higher U.S. market prices would then, in theory, make solar projects less attractive to investors, thus slowing industry growth. Alternatively, if cheap Chinese panels keep coming into the United States, the theory is that prices overall will continue to go down, ultimately leading to more domestic solar installations.
But this theory doesn’t comport with the basic realities of international trade. In fact, if the Chinese government—or any other foreign government—is indeed engaging in “dumping” by using WTO-illegal methods to reduce export prices and drive foreign firms out of the market, the end result of those practices will be Chinese market dominance. If that dominance is due to natural market forces, it is not necessarily a bad thing. But if it is due to state subsidies, that is problematic, because that would mean state officials in China are determining which companies and technologies dominate this critical global market, and those officials may not choose well.
Competing with entrenched fossil fuels will require more than cheap imports. It will require the absolute best technology the world can make. The way to get that technology is by giving all clean-tech firms strong market incentives and to allow the market, not state bureaucrats, to select the winners. To do that, we have to keep the global manufacturing market vibrant and diverse. That means not allowing Chinese subsidization to determine which firms and which technologies come out on top.
The other effect of a government-created Chinese monopoly on solar panels is that once Chinese companies drive out their competition from the solar manufacturing sector, they will immediately start raising prices to increase their profits and start to wean off of government subsidies. We are currently seeing a similar pricing pattern in the global rare earths market. China has around one-third of the world’s rare earth supplies but controls 90 percent of the global market, primarily because lax regulatory oversight enabled Chinese companies to mine cheaply and price everyone else out of the market.
Now the Chinese government is restricting exports and raising prices, triggering panic among rare earth consumers who are now almost completely dependent on China for a major commodity, so when Chinese prices rise consumers have no alternative but to pay more. This is exactly what antidumping legislation is designed to prevent—not low prices, but the eventual price fixing. Low prices can be bad for some sectors of the industry, but they are always good for consumers. The eventual price fixing, however, hurts everyone.
Finally, the fact is that whether or not China is violating trade rules, low-priced imported panels are not the only factor driving U.S. market growth. Demand-side policies are just as important. Panel prices are already low enough to stimulate market interest. Tariffs will not change that. Even before the 2011 price plunge, the U.S. solar market was expanding, and it is unlikely that tariffs will bring panels back up to 2010 prices. If you look within the U.S. market, there is a huge amount of variation from state to state, and that variation is primarily due to differences in state incentives.
Even when prices are held constant, strong policy incentives—such as renewable energy standards, feed-in tariffs (which require utilities to buy renewable power and integrate it into the grid at a set price), and rebates or tax credits for installation of solar panels—result in more solar investment. In the third quarter of 2011 the seven states with the strongest demand-side policies accounted for 89 percent of the U.S. market. What the other states are lacking is not cheap Chinese solar panels—the entire U.S. market has access to those—it is good demand-side policies. That is the real key to U.S. market success.