EARTHSYS 247

Brandon Hsiung

Solar tariffs may harm the Industry theyre trying protect

In a matter of 14 days on May 17th, the US Department of Commerce (DOC) is expected to make a ruling implementing additional solar import tariffs that will have a large negative impact on the nascent solar energy. The proponents of this tariff argue that China is participating in illegal dumping of solar panels (i.e., subsidized selling below cost) and that a tariff will protect US solar jobs against this activity. While I recognize that a tariff can protect some parts of the industry, I also realize that the short and long term negative ramifications outweigh that slim benefit. In the short term, tariffs would raise prices on a growing but fragile solar industry causing reduced demand and overall job loss. In the long term, we could see a variety of negative impacts such as a US-China trade war or a coddled US solar industry become even less competitive. Based on this imbalance of negative to positive impact, I firmly believe that the DOC should stay away from imposing any tariffs that could cause irreparable harm to the solar industry, the economy, and our environment. Before we dive into the issues with tariffs, lets first examine whether China is in fact guilty of dumping. Dumping is defined as the act of selling a product below cost, or selling a product in a foreign market for substantially less than its domestic pricei. The US media and DOC claim that Chinas large subsidies, in the form of low cost loans, have in fact depressed prices below costs. Theyre right, but only about the loans. Chinese solar companies have been given access to loans worth over $30 billion USD.ii Yet access to loans does not imply a low interest rate or that the companies are in fact drawing down on these loans. Both are necessary to arbitrarily depress prices. If we take China manufacturer Suntech, the worlds largest producer of solar panels, as a proxy, we see that neither of these cases is trueiii. First, Suntechs interest rate is closer to 6% and is actually variable (i.e., it change with the market rate). Second, the company has only drawn down 10% of its $7 Billion credit facility (i.e., $700 million). In contrast, domestically, we have Solyndra, a company which leveraged its Department of Energys loan guarantee to secure $535 million at a 1% interest rate.iv To me it sounds like China is offering regular business loans, while the DOE seems to be offering loan guarantees that smell an awful lot like the subsidization that China is accused of. Even if China is dumping, wont tariffs help domestic industry compete with the low-cost of labor in China? Yes and no. Creating a tariff will raise the price of imports and help the solar panel manufacturing in the short term but there is a high cost paid by the rest of the solar value chain. As solar panels become more and more like commodities, the bulk of the jobs and value captured in the US are downstream in installation, maintenance, and financing. v This overall price increase would decrease the demand for solar in general, thus harming all of the downstream jobs. This would lead to fewer consumers with money in the market, ultimately costing the overall economy. In the long term, the hope is that the protection afforded by the

1/2

EARTHSYS 247

Brandon Hsiung

tariffs will help the struggling solar manufacturing industry become more competitive. There has been no proof that protected industries become more efficient. In fact, we should expect the opposite. Because the domestic industry is price protected by the tariff, they have no incentive to optimize for efficiency, but instead optimize for asset growth. Eventually when the industry is large enough to export beyond the US, it will find that it cannot compete against players which have survived a free market. vi All of the negative effects I listed above pale in comparison to the worst case scenario of a trade war. If China feels slighted by onerous solar tariffs, they may retaliate with tariffs of their own. The US would have no other recourse except to raise more tariffs. This escalation would start a trade war where everybody would lose out. vii China would lose its largest consumer and the US would lose its low cost manufacturer. Suffice it to say, both countries would suffer greatly. An industry like solar, which is viewed as non-essential by many, would simply be priced out of competitiveness. Whether China is dumping or not, the negative short term and long term effects of tariffs would weaken an already fragile solar industry and should serve as reason for the US DOC to not pass tariffs against Chinas solar exports. The US government should instead heed advice from Lord Sterns highly regarded Economics of Climate Change paper In order to mitigate the potentially disastrous effects of climate change, countries need to transition to low-carbon economies. Greater international co-operation to accelerate technological innovation and support for the development of low-carbon, highly-efficient technologies can act as accelerants in this transition. While this transition will bring challenges for competitiveness, it will also bring opportunities for growth. viii In short, the US government should stop thinking about import tariffs and start thinking about mechanisms to accelerate investment in domestic renewable energy.
i

Feenstra, Roberta. Advanced International Trade: Theory and Evidence Princeton Press 2003 Wesoff, Eric. The Reality of Chinas Billions in Solar Loans Greentechmedia, September 28, 2011 iii Suntech Annual Report 2011 iv Miosk, Matthew & Greene, Ronnie. 'Connected' Energy Firm Got Lowest Interest Rate on Government Loan ABC News Sept 7, 2011 v Bessinger, Ken. U.S. tariffs on Chinese solar cells fuel debate about green jobs Los Angeles Times, April 23, 2012 vi Falck et. al Industrial Policy for National Champion MIT Press July 22, 2011. vii Coneybeare, John. Trade Wars: The Theory and Practice of International Commercial Rivalry. Columbia University Press 1987 viii Stern, N. (2006). "Stern Review on The Economics of Climate Change (pre-publication edition). Executive Summary". HM Treasury, London.
ii

2/2