The Complexities of the U.S. Decision on Chinese Solar Panel Imports

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

Washington, D.C.–(ENEWSPF)–March 15, 2012. The U.S. Department of Commerce early next week will issue a preliminary verdict on a trade petition filed by SolarWorld Industries America, Inc., which 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. Today the Center for American Progress released “The Complexities of the U.S. Decision on Chinese Solar Panel Imports,” “Combating China’s Trade Subsidies Isn’t the Entire Answer,” and “Filling in the Gaps in Our Trade Intelligence,” which all discuss the complexities and challenges involved in providing a level playing field for U.S. companies.

“The Complexities of the U.S. Decision on Chinese Solar Panel Imports” addresses the controversy surrounding the SolarWorld trade petition. Everyone agrees that imposing import tariffs on Chinese solar panels should benefit the U.S. solar module manufacturing industry. Cheap Chinese manufacturing appears to have contributed to a solar panel price drop of 50 percent in 2011, eroding profit margins worldwide. Reducing the impact of Chinese prices on U.S. and other foreign manufacturers should slow the price decrease to a more sustainable rate and increase profit margins. 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.

What is less clear is how tariffs would affect the demand side. 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. We already 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. The combination of heavy fossil-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. 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, and under the current trade system, that price is tariffs.

Though Chinese manufacturing certainly plays a role in declining global solar prices, 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. 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.

“Filling in the Gaps in Our Trade Intelligence” asserts that for President Obama’s new Interagency Trade Enforcement Center to function effectively, we must still fill in large gaps in our intelligence in the following three areas:

State-owned enterprises and subsidies, so we can craft and enforce rules and treaties that truly protect firms and workers from unfair competition
Export finance, in order for the U.S. government to provide access to appropriate levels of export finance for those who need it—and at levels that are in line with the financing other governments provide their businesses
Export promotion, so that the United States can have better data on the more active role foreign governments tend to play in negotiating deals to boost their exports, effectively rendering us more competitive

In addition to the need for rigorous enforcement of trading rules, such as the Obama administration’s actions in bringing more major trade cases against China than any of its predecessors and proactive creation of an interagency trade enforcement task force to exist within the U.S. Trade Representative’s office, “Combating China’s Trade Subsidies Isn’t the Entire Answer” states that we need to up our own game by:

Modernizing our basic infrastructure to allow businesses to more effectively collaborate and compete in domestic and international markets
Investing in more science and math education and workforce development to ensure our workers are able to participate fully in a technology-driven economy
Crafting finance policies to make more public and private capital available to innovators and bolster our culture of entrepreneurship
Honing our research and development policies so that we invest not just in basic research but also in the full innovation lifecycle, from invention to development to commercialization
Retooling our government’s approach to trade and competitiveness to encourage our nation’s unique competitive strengths

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