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Tariffs on Chinese Solar Are Bad for Us All

Garvin Jabusch

Trade War
Trade War photo via Bigstock

The United States Department of Commerce Thursday, and of all things at the behest of a German-owned company, SolarWorld AG (SRWRF.PK), imposed extreme tariffs on China-made solar panels and modules of between 31% and 250%, making them much less affordable for U.S. consumers. Commerce took the additional extraordinary step of making the tariffs retroactive for 90 days to prevent U.S businesses and homeowners from getting a decent price on the basis that their local dealer/installer bought panels before the date of their decision. Solar in this country just got a lot more expensive and the 100,000 domestic solar industry jobs (mostly installing and servicing) created over the last five years are now at risk. Also, oil, coal and gas suddenly can remain price competitive with solar in the U.S. for far longer than market forces would otherwise dictate. Longer term, it could make the U.S. may the last dirty, expensive, fossil-fuels based economic backwater economy in the developed world.  Jesse Pichel, Managing Director and Senior Equity Research Analyst covering Clean Technology companies at Jefferies has clearly summarized the situation:

Environmentalists and the unemployed should be equally disappointed with this decision because lower cost solar panels make solar more competitive with dirty fossil fuels. It should be clear by now that there are more U.S. jobs on the installation side of the solar business than on manufacturing. These cases have a chilling effect on business and it will linger for a long time. It’s unfortunate that SolarWorld has taken this scorched Earth approach and that they are distracting from the growth of U.S. jobs and affordable solar energy.

Slowing down solar development is undesirable in general. Remember, solar at scale represents almost limitless power at a zero cost of fuel, meaning it has the power to emancipate us from hundreds of billions spent every year of fossil fuels. I find it sad and funny that we think a few billion in tax cuts will stimulate the economy and lubricate the recovery, but we fail to see that limitless, nearly free energy would have that same effect, but at many times the scale and all while creating hundreds of thousands of new, quality jobs. So it’s not surprising that many American solar companies oppose the decision. As reported in the New York Times:

“Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. Opponents of the tariffs say that the United States benefits from cheap Chinese production. They point out that Chinese companies often turn to American companies to buy the factory equipment and polysilicon they need to make solar panels, and installers hire local American workers to set up and service rooftop systems.”

Let us not forget that the U.S. exports raw polysilicon to China, and that business will now be at retaliatory risk as “the Chinese industry would file a trade case at the Chinese commerce ministry against American exports of polysilicon.”  The ‘American made factory equipment’ and ‘local American workers’ also stand to suffer.

In addition, tariffs by definition are inflationary. A customer who now has to pay significantly more for his or her preferred brand of panel is experiencing inflation, but so too is the customer buying the American made panel that now is free to cost far more than it did yesterday due to the absence of tough competition. With panels of all kinds going up in price, so does the cost of electricity they produce, meaning the portion of the grid they supply will get more  expensive, making the blended grid electricity rates go up, in turn driving up the costs of every home and business that use electricity.  Inflation all around, then.   

The problem isn’t, as claimed by Commerce, that China has been dumping unfairly priced solar panels on the U.S., it’s that our domestic solar industry as a whole has not remained competitive in the face of fierce global competition. China’s panels are competitive because "[t]hey've figured out that clean-energy manufacturing will be an area of major growth and are investing vastly more than we are to support it." In the U.S., we’ve invested a fraction as much as China into solar and other clean energy sources, so naturally, we’re behind them on the cost curve. Commerce’s decision will do little to slow the growth and technological progress of solar globally; it will just mean the U.S. won’t be competing in this key piece of powering the future economies.

There are of course American firms, such as New Hampshire based GT Advanced Technologies (GTAT), who have managed to compete very well with Chinese solar without Commerce’s protectionism.  Tom Gutierrez, CEO of GT Advanced Technologies, recently had this to say on the opinion page of the Boston Globe:

I look at the time and energy invested in this investigation and wonder: Why, and what for? This is counterproductive to the primary objective of the US solar industry: Getting solar to grid parity. Tariffs, charges of dumping, possible trade tensions — these only enable high-cost manufacturing to continue, resulting in higher solar costs for US consumers. In the end, such moves negatively impact the growth of high-quality solar jobs in the United States.

Instead of carrying water for foreign-owned businesses, we should reward the traits that ensure success in the global marketplace: Business adaptability and commitment to innovation. To win in this race, it’s really about hard work and figuring out how to survive and thrive against highly-motivated competition. We need to be fostering real innovation — not rewarding inefficient businesses that seek government handouts.  GT and many other US-based companies have proven that we can compete against fierce Asian competitors and win. We just have to run better businesses.

Right. Or as I said in a previous post back in January 2011, “we should try competing instead of complaining.” And Gutierrez makes another interesting point, if these tariffs are disliked by many of the U.S. companies they’re meant to protect, who are they really for? What’s their real purpose?  It’s difficult not to notice, as Susan Wise, spokeswoman for SunRun, told Forbes, that “[i]f finalized, this decision would move us backward in the effort to make solar affordable for Americans,”. “It would make prices higher at the exact moment when solar power is starting to become competitive with fossil fuels in more markets.” [Italics mine.]

Germany’s SolarWorld AG, which brought the case to the Commerce Department, does not have the best record of defending its own industry.  In Germany, they have long lobbied to lower solar feed-in tariffs, meaning, effectively, they’ve been trying to stop receiving free money. What sane business does that?  I’m sure SolarWorld’s shareholders are stymied by the company’s anti-profit attitude.  Both efforts, to reduce subsidies in Germany and to start a solar trade war between China and the U.S., point to a company that does not have its industry’s best interests in mind. It may be worth remembering that a large part of SolarWorld AG used to be Shell Oil’s “crystalline silicon” division.  Shares of SolarWorld AG are up “as much as 18 percent” the morning after the tariff announcement, but U.S. based manufacturer First Solar (FSLR) has been off by as much as 5.8 percent this morning.

In Saudi Arabia, they must be laughing. Commerce’s handout, to let U.S. solar manufacturers run inefficient operations that produce solar modules too expensive for many domestic consumers, ensures we’ll be dependent on Saudi oil and other fossil fuels for a long time to come. Meanwhile, the Saudis are installing $109 billion worth of solar capacity to power their own domestic economy. They want to stop powering their own country with oil so they can sell every drop they can find and pump to us, which should be easy if we have a lot less solar to displace their costly crude.  Too bad we just ceded the advantage in getting Saudi’s solar business to Chinese firms. 

Commerce is expected to issue its final order making Chinese solar tariffs permanent in July or August. Let’s hope by then that they can be persuaded to allow free markets to reign.  

GAA Logo Blog (1)Disclosure: Green Alpha is long GTAT, but has no positions in other companies mentioned

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."



was posted on AltEnergyStocks.com.


       

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Comments

Gavin, I agree with many of your points, but to not acknowledge that there have been illegal subsidies doled out to Chinese module manufacturers is to ignore the truth. One merely need look at a company like LDK Solar for an example. If they were a US-based company, they would not have access to the credit markets - frankly, they would be bankrupt. Instead, they remain one of the largest global solar wafer/module companies.

While one might (and you do) argue that the net benefit of this is positive (from an enviro/economic standpoint), I can't say that this is as clear cut as you would make it out to be. First, the price drop spurred on by the artificially cheap money lavished on the solar companies put a lot of interesting start-up technology companies out of business. Had many of them been able to raise the money to pursue the various compound semiconductor technologies out there, we may in fact actually have cheaper modules than the $0.58 cent ex-poly modules that Trina Solar reported making this morning. Polysilicon-based modules face physical limits on their cost reductions - more advanced compound semiconductors may be able to go far lower. In a free market, who is to say what would have happened?

The second point on this is, for anybody that has been to a Chinese solar plant (versus a German one, for example), the first thing you will notice is that the level of environmental controls is not the same. This has certainly gotten better since 2007, but it is still readily apparent that the environmental advantage of a Chinese solar panel is not the same as that of one manufactured in a different country.

That aside, I'm not sure I disagree with most of your points. I just wanted to make sure you capture the whole truth.

Ben,

Thanks for your comments; I appreciate your careful thinking on the topic, which is more than a lot of people are doing these days with respect to solar.

Your main point, that Chinese solar companies like LDK are being unfairly supported by their home government is, for me, largely one of semantics. The difference between a country providing unfair support to a given industry, and making a commitment to ensure that an industry identified as key to the national economy, future, jobs and infrastructure does not fail is arbitrary. I could as easily argue, to paraphrase you, that GM, for example, had they not had access to U.S. Treasury bailout money, would be bankrupt. Instead, they remain one of the largest global automotive companies. Yet, we don’t see a lot of nations hitting GM cars with huge tariffs. Which anecdotally supports my thesis that Commerce’s trade barriers exist as much to defend fossil fuel interests as they do U.S. based solar. Oil in this country has access to government advantages far beyond the ability to tap credit markets, being subsidized outright at a far greater scale than is renewable energy. That’s separate topic, but my point is that Commerce seems to have very arbitrarily decided what’s “unfair,” unless one concedes that they’re actually protecting coal, etc., in which case, the tariffs themselves are unfair handouts to old, borderline competitive sources of energy.

The idea that had LDK been allowed to fail the result would have been lower module prices today is tough to argue, because who can say? It’s kind of a ‘parallel universe’ assertion. But, in general, it’s safe to say that industries that receive more support achieve scale cost benefits more readily than those that do not. I hope your ideas around compound-semiconductor based modules come to fruition, however, because ultimately what we really need is for solar to become so cheap that it makes fossil fuels based electricity production look crazy.

- Garvin

Garvin,

GM doesn't export cars it manufactures domestically, so government subsidies do not distort the Chinese domestic market (except in the sense that many of its suppliers manufacture there). Moreover, if you look at the implied cost of capital charged by Uncle Sam (who still owns 32% of GM) on the GM bailout, it is WAY higher than the 4.75% debt LDK was pulling down from Uncle Wen. Finally, the Chinese solar manufacturing industry never even hinted at being domestically focused until global markets started to dry up (2011 China shipments from Chinese module manufacturers were ~10%). Simply put: this was Mercantile Economics, not Ricardean Economics.

Far more importantly, I would suggest that the net economic effects of cheaper panels today are entirely marginalized by the fact that solar generation is still less than 1% of our installed fleet. You're right: we benefit from cheaper solar panels on this very small fringe. However, as we cross into that magical land called “grid parity” (say in 5-10 years) and solar becomes a non-trivial portion of overall generation, it would have been nice to have had a domestic manufacturing base that could have capitalized on the jobs and wealth created.

Alas, most of these companies lay dead or dying in a pool of cheap China Development Bank debt. RIP, parallel universe that never was.

Ben

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