U.S.-China Solar Trade Competition: 5 Myths And Realities

Myth

U.S. manufacturers should accept that they cannot compete with China

Reality

The United States is actually quite strong in higher-end manufacturing

One assumption underlying the cost argument is that we are not good at manufacturing—that China will always have lower costs and weaker regulations, and therefore it does not make sense to rock the boat in an effort to protect US manufacturing.

In reality, our nation is still a global manufacturing powerhouse. In 2010 manufacturing contributed $1.7 trillion to the U.S. economy. Manufacturing accounts for 60 percent of all U.S. exports. The United States ranks first in the world in manufacturing value added, meaning that the raw materials and processes used by the manufacturing sector result in products that add more value to the overall U.S. economy than is the case in any other country. The country was also the third-largest exporter of manufactured goods to the world in 2009. Despite drops in employment the U.S. share of global manufacturing output since 1970 has remained fairly constant at around 22 percent.

solar report, solarbuzz

image via Shutterstock

Clean energy investments are particularly good for manufacturing. As The Brookings Institution notes, over a quarter of all the jobs created in clean energy industries are in the manufacturing sector. Between 2004 and 2009, when federal support for wind energy was stable and installed capacity grew from 6.7 megawatts to 35,000 megawatts, manufacturing in that sector grew correspondingly, to nearly 250 facilities. By 2010 the wind sector had more than 400 U.S.-based manufacturing facilities.

While the solar industry has had a more turbulent time with manufacturing, perhaps in part because of unfair competition from China, domestic production in this sector also increased dramatically in 2010. According to the Solar Energy Industry Association, this demand was due primarily to strong growth in demand for solar, both globally and domestically, as well as to increases in manufacturing capacity.

Yet there were also some high-profile bankruptcies in the solar manufacturing arena in 2011, including Solyndra, a California-based manufacturing company that pioneered an innovative rooftop solar system that did not use polysilicon, but which went bankrupt when polysilicon prices went from an all-time high in 2008 through the floor in 2009. But the solar manufacturers that remain are, in general, those with innovative products and advanced manufacturing techniques, such as First Solar Inc. of Tempe, Arizona, andSunPower Corp. of San Jose, California.

What do all these stories and statistics tell us? Primarily, that solar manufacturing is indeed possible in the United States, and that location decisions of solar firms are driven in large part by strong market demand and access to innovative ideas and advanced manufacturing practices.

The United States is a leader in advanced manufacturing and can be a leader in strong demand for clean energy. Our country can and should be attractive to solar manufacturers so long as there is true price competition in the global marketplace. Moreover, we should be fighting hard to keep manufacturing in the United States precisely in order to maintain our competitive edge in innovation and advanced manufacturing.

Manufacturing is critical to maintaining the U.S. leadership in technology and innovation—a key to strong economic growth. Manufacturing firms are more likely to innovate than firms in other industries; 22 percent of manufacturing companies are active innovators compared to only 8 percent of nonmanufacturing companies. Manufacturing firms also perform the vast majority of private research and development. Despite comprising 13.4 percent of the nation’s gross national product—the largest measure of economic growth—manufacturing companies contribute 70 percent of private R&D spending.

In addition to what manufacturers spend on innovation, there is increasing evidence that our capability to innovate is linked to our ability to actually, physically, manufacture. Harvard University professors Gary Pisano and Willy Shih have written about the decline ofthe U.S. “industrial commons”—the collective R&D, engineering, and manufacturing capabilities that mutually reinforce each other to sustain innovation. For many types of manufacturing, geographic proximity makes for a much stronger  “commons.” Specifically, Pisano and Shih find that there are few high-tech industries where the feedback loop from the manufacturing process is not a factor in developing new products.

As an example of an industry in which innovation has followed manufacturing, they cite rechargeable batteries. Rechargeable battery manufacturing left the United States many years ago, leading to the migration of the batteries commons to Asia. Now new technologies (batteries for hybrid and electric vehicles) are being designed in Asia where the commons are located. Which begs the question, asked by a recent New York Times article on China’s increasing investment in research and development: “Our global competitiveness is based on being the origin of the newest, best ideas. How will we fare if those ideas originate somewhere else?”

Myth

Imposing tariffs would trigger a trade war with China, and that must be avoided at all costs

Reality

Maintaining a mutually beneficial trade relationship requires a steady hand, and fearful capitulation is not a winning strategy

What exactly are antitariff groups implying when they warn that enforcing trade rules will trigger a “trade war” with China? The logic behind the trade war argument is that if the United States responds to illegal trade activities by the Chinese government by enforcing our mutually agreed, extensively negotiated trade rules, then the Chinese government will then retaliate against U.S. companies by accusing the United States of its own trade misconduct and levying tariffs against U.S. products, or by simply shutting down relationships with U.S. companies.

This trade war argument basically assumes that facing Chinese retaliation would be worse than putting up with the initial misbehavior and that we are therefore better off putting our heads in the sand, ignoring Chinese government violations of our trade policies, and continuing on as usual.

These retaliatory fears are certainly valid. We can already see this coming in the current solar trade case. The Chinese companies targeted in the SolarWorld petition have already filed retaliatory trade complaints in China. China’s Ministry of Commerce is investigating Chinese trade complaints against six U.S. state-level renewable energy incentive programs, and it is slated to announce its findings on May 25, right after the U.S. antidumping announcement. U.S. upstream suppliers selling silicon and manufacturing equipment to China claim that in addition to the formal Chinese government investigation, some of their Chinese customers have threatened to terminate purchasing contracts if the SolarWorld case results in significant tariffs.

If China does take retaliatory action by levying tariffs on U.S. imports or switching to non-U.S. suppliers, U.S. companies could feel a big impact. But wouldn’t allowing China to violate international trade agreements ultimately have an even bigger, and more disastrous, impact on the U.S. economy? Would it not signal that the United States has now reached the point where we are too dependent on and afraid of China to enforce trade rules that Chinese leaders have explicitly agreed to? If so, that is a dangerous position to be in, and it likely would not have a good outcome for the U.S. economy.

It is important to remember that the U.S.-China trade relationship is mutual—China is also dependent on and strongly affected by the United States. The fact that Chinese companies and officials are up in arms about the SolarWorld case demonstrates that U.S. trade enforcement actions impose real costs, which is exactly what they were designed to do. If the United States can consistently demonstrate that it is willing and able to impose those costs, then those actions will increase Beijing’s estimates of the risks involved in targeting U.S. markets with WTO-illegal trade policies. And perhaps, consistency in trade enforcement on our side will help convince China to start playing by the rules across all its industries, not just solar manufacturing.

2 Comments

  • Reply May 22, 2012

    Eren Long

    Thank you Melanie and Kate!  Finally a published article that outlines in detail how China solar product production and export has created a chain effect throughout the solar industry.  The true issues are that China is violating anti-dumping laws and that Chinese manufacturers of solar products are receiving subsidies to remain poised as the number one leader in solar product manufacturing and export.  To quote what you said:  “RealityInnovation and demand-side policy, not cheap imports, are the real keys for solid and sustainable solar growth in the United States”…..is absolutely on point!  I do hope that the U.S. does the right thing and in turn the U.S. manufacturers invest in R&D to produce quality, competitive priced solar goods.  Yes!  Let’s keep the revenue here.

    Eren
    http://solaruniversecalifornia.com/

  • Reply June 7, 2012

    Miguel Coradin

    How to get panels in Dominican Republic with those prices???
    Our lives are getting to expensives talking about energy..
    Please give us a responsable response!!!!!!
    Miguel Coradin    
    sanjoseobrero128@hotmail:disqus .com

Leave a Reply