How America Should Deal With the Taliban
Avoiding the Diplomatic Errors That Doomed the U.S. Withdrawal
U.S. President Donald Trump’s reported request to Oval Office staff to “bring me some tariffs” may soon be answered by an unlikely source: the solar power industry. In a recent decision on a case at the U.S. International Trade Commission (ITC), commission members unanimously (4-0) decided to open the door to protectionist measures against crystalline solar panel imports from nearly every country. As of 2016, an estimated 87 percent of U.S. solar installations use foreign-assembled panels, which means that the ruling could bring a future that is significantly less bright for solar energy in the United States. Although many doubt that the U.S. president’s “America First” trade policy will create new jobs or improve trade imbalances, the ITC’s recommendation will allow him to test that stance via solar power by January 12.
PROTECTING THE SUN
The original petition was filed with the trade commission in April by two companies, SolarWorld and Suniva, which are both currently undergoing bankruptcy proceedings. Using a rarely implemented clause of the Trade Act of 1974 (the most recent such case was undertaken in 2002 in the steel industry), the two companies claimed that domestic solar manufacturing had suffered from rapidly increasing imports. The petitioners based their claim on the need to protect domestic manufacturing jobs—perhaps a way to appeal to the president—but their American bona fides are not entirely clear since their ownership structures include funding from Germany, China and Qatar.
Almost immediately, nearly all of the rest of the U.S. solar industry decried the petition because of its potential detrimental impact to U.S. solar installations. Now the ITC will have to make recommendations to Trump about how to implement the decision, and he will have wide leeway to enact measures that could threaten about half of expected U.S. solar installations and 88,000 American jobs in the next five years, according to the Solar Energy Industries Association.
As a result of the ITC’s September vote, the U.S. solar industry will remain in a period of uncertainty until at least January 2018, when Trump will likely make a final decision. In the meantime, uncertainty has caused a panel supply shortage in the United States as large buyers have stockpiled panels to hedge against tariff risk, leaving smaller buyers subject to the whims of the administration. If tariffs are imposed, uncertainty may continue, with importing countries likely to submit challenges at the World Trade Organization (WTO) and foreign suppliers facing a difficult decision about how (and if) to serve the U.S. solar market.
The issue of U.S. solar protectionism has been widely covered since the case began, but what tends to be missing from the analysis is that the United States is not alone. India, too, will soon reach a preliminary decision on a solar trade case, which could see the country imposing tariffs on products from China, Malaysia, and Taiwan. Taken together, the United States and India represent nearly one-fourth of the global solar market, and new import duties could curtail their solar installation ambitions.
According to GTM Research, an energy transition–focused research and consulting firm, 56 countries have introduced protectionist measures of some kind on solar panels over the past five years. In the same time frame, the proportion of the global solar market subjected to import duties, tariffs, or domestic content requirements has doubled, from 18 percent to 36 percent. On net (and outside of China), less than 20 percent of the total installed capacity in 2017 will be free of some kind of trade barrier, down from 97 percent in 2009 and 2010. Protectionist trade measures have already stifled nascent solar markets in Brazil and Turkey, and ended booms in the European Union and South Africa. Although annual installations have risen every year since 2000, this is largely due to business agility rather than policy.
87 percent of U.S. solar installations use foreign-assembled panels.
In large part, these protectionist measures have been aimed at China. The first shot across the bow came in 2011, when a coalition led by SolarWorld issued formal accusations that Chinese manufacturers had benefited from improper subsidies and had dumped materials into the U.S. market. In 2014, the findings of the resulting investigation led to antidumping and countervailing duties on some entities in China and Taiwan that export solar cells to the United States and were found in violation of global trade rules at the WTO. These measures were ineffective in their efforts to protect U.S. manufacturing from supply-demand imbalances: U.S. panel manufacturing capacity declined by 27 percent from 2011 to 2013 due to market oversupply. Simultaneously, importers were bringing Chinese solar cells through Taiwan to circumvent the tariffs. After the Taiwan loophole was closed, the domestic market stabilized on tariff-free capacity.
Even so, China has come to dominate the global solar panel manufacturing landscape. Chinese companies represent two-thirds of global solar manufacturing, and the country has been a global leader in using industrial policy to promote renewable energy domestically. As the West has tried to level the playing field, such as with the EU’s imposition of a Minimum Import Price (MIP) regime, which sets an artificial price floor for Chinese-imported solar panels, Chinese manufacturers have simply set up operations in Southeast Asia and Taiwan.
Indeed, production of solar modules in Asia outside of China has risen by 162 percent since 2012, largely sparked by the requirements of the European MIP and essentially defeating the protectionist purpose of the initial measures.
Against the backdrop of a so-called trade war between the United States and China over everything from U.S. trade deficits to technology, intellectual property rights, and aluminum foil, a relatively small industry such as solar panels might be attractive to Trump as a symbolic battleground. And according to estimates by the Peterson Institute for International Economics, economic protection measures launched by the Trump administration in its first 100 days will nearly double the percentage of total U.S. imports covered by special tariffs.
56 countries have introduced protectionist measures of some kind on solar panels over the past five years.
Yet evidence from previous such measures in solar technologies suggests that these measures do little to provide long-term improvements for domestic manufacturers. Much of solar power’s recent growth is attributable to its newfound economic competitiveness against other resources—most notably natural gas. Even with protectionist measures in place, higher-cost domestic manufacturing often finds insufficient demand for its product, since the resulting solar installations have lost their competitive edge.
Safeguard tariffs have also been shown to be ineffective at fostering long-term competitiveness. A 2013 Georgetown University Law study of three U.S. trade cases petitioned under Section 201 of the Trade Act of 1974 (a relatively rare action—only 73 petitions have ever been filed under this provision) found that “none of the three industries achieved sustained competitiveness after safeguards terminated.” The last case petitioned under Section 201, back in 2002, resulted in a 30 percent tariff on imported steel, which cost an estimated 200,000 jobs before the tariff was dropped.
The efficacy of the European Union’s MIP, which allows Chinese firms to do business in the EU without paying punitive duties by instead selling at or above the minimum price, quickly disintegrated as panel prices fell below the fixed duty rate. Many top manufacturers voluntarily left the agreement, others built new factories in Southeast Asia and Turkey, and some even started illegally shipping Chinese products into the Eurozone. Very quickly, the MIP ceased functioning as a price-setting determinant and has largely become obsolete.
Likewise, in South Africa, local content requirements (a form of protectionism aimed at boosting domestic manufacturing or services industries) strangled the Renewable Energy Independent Power Producer Procurement (REIPPP) program, a government-led tendering program for renewable energy projects that has been lauded around the world for attracting foreign investment and driving down unit costs. As the program progressed, project developers faced difficulty meeting stepped-up local mandates without using South African panels, which were more than 10 percent costlier than imported ones, stifling domestic demand.
Precedent suggests that the kind of tariffs now being sought in the U.S. solar market will not have the desired effect. Rather, they are likely to halt an industry at a key inflection point. Solar energy is no longer an infant industry, and price distortions will only serve to cripple it. The Trump administration’s commitment to safeguarding domestic manufacturing jobs may mistake political rhetoric for economic fact in putting “America First.”