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5 Myths and Realities About U.S.-China Solar Trade Competition

Our Nation Cannot Capitulate to China’s Solar Technology Ambitions

SOURCE: AP/ Ed Andrieski

Workers with Namaste Solar Electric install solar panels on the Carriage House at the governor's mansion in Denver.

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Tomorrow the U.S. Department of Commerce will announce its preliminary ruling on an “anti-dumping” petition filed by SolarWorld Industries America, Inc. against Chinese solar panel manufacturers. SolarWorld claims the Chinese government is providing subsidies to Chinese solar manufacturers that would be illegal under World Trade Organization rules, thereby artificially lowering the price of these panels, and then dumping the cheap panels on the U.S. market. SolarWorld petitioned the Commerce Department to levy two different types of trade remedies: countervailing duties (to offset the subsidies) and tariffs (to discourage dumping).  

The Commerce Department in March unveiled its remedy for the countervailing duties, also known as subsidy tariffs. Those tariffs were relatively low, ranging from 2.9 percent to 4.73 percent, which is less than most sales taxes around the United States. Chinese manufacturers breathed a collective sigh of relief after that first announcement, but they are now gearing up for the next round of tariffs, which many industry analysts expect to be much higher.

They may well be right. The countervailing duty decision required Commerce Department investigators to track down specific evidence of Chinese government subsidies—a difficult task given China’s nonmarket, nontransparent policy environment—but the antidumping calculations simply compare Chinese panel prices in the U.S. market with panel production costs in a surrogate market economy, like Thailand or India. This type of comparison generally results in a higher tariff.     

The specifics of this case speak most directly to the U.S. solar industry, of course, but also to trade enforcement in general and the U.S. economy more broadly. In this column we will examine the five most common arguments we’ve heard from the antitariff contingent in the U.S. solar industry, and why we think these arguments don’t hold water—drawing larger lessons about the key role of trade enforcement to the health of U.S. companies and our economy.

The bitterly divided U.S. solar industry

First, we need to explain why this case has sparked such a huge debate within the U.S. solar industry. On one side of the debate are solar installation companies and project developers for whom low solar panel prices mean lower project development costs overall.  On the other side are U.S.-based solar manufacturers who compete directly with Chinese imports. They claim that artificially suppressed Chinese manufacturing prices are making it impossible for other solar panel manufacturing companies to survive.  

There is actually a third group of companies that is equally concerned about this case but generally less vocal. These are the companies that sell solar manufacturing equipment and other upstream products, such as polysilicon, to China. Those companies generally side with the installers in opposing tariffs, not because they do not believe there is wrongdoing on the Chinese side but because they are afraid tariffs might trigger retaliatory action from China that would most likely target them.

The companies on the various sides of this debate all have their own interests at stake and their opinions on the case are driven by their individual desires to protect their bottom lines. That is very understandable. That is what our market system incentivizes—pursue your own interests to maximize profits.

But some of these companies have used more theoretical arguments to support their position against the trade case, focusing on the larger issue of whether this trade petition—and trade enforcement in general—is or is not good for the U.S. solar industry and for the U.S. economy as a whole. So let’s turn now to those claims and the underlying realities.   

Myth

Trade enforcement is a losing proposition because imposing tariffs will slow solar industry growth in the United States

Reality

Innovation and demand-side policy, not cheap imports, are the real keys for solid and sustainable solar growth in the United States

Solar cell and module prices have declined rapidly in recent years—falling by 50 percent in 2011 alone—and Chinese manufacturing has been a major contributor to the price decline. Solar installation companies and other tariff opponents argue that the only way to reach grid parity with fossil fuels is to keep solar energy prices low, while the only way to keep prices low is to keep those low-cost Chinese imports coming. Never mind what the Chinese government may or may not be doing to generate those prices. And never mind whether those activities do or do not violate international trade rules.

This antitariff argument assumes that if import tariffs raise the price of Chinese-manufactured panels in the U.S. market, U.S. consumers would no longer have access to cut-rate panels, and the lack of Chinese pricing competition would reduce the declining price trajectory in the U.S. market more broadly. Higher U.S. market prices would then, in theory, make solar projects less attractive to investors, thus slowing industry growth. Alternatively, if cheap Chinese panels keep coming into the United States, the theory is that prices overall will continue to go down, ultimately leading to more domestic solar installations.

But this theory doesn’t comport with the basic realities of international trade. In fact, if the Chinese government—or any other foreign government—is indeed engaging in “dumping” by using WTO-illegal methods to reduce export prices and drive foreign firms out of the market, the end result of those practices will be Chinese market dominance. If that dominance is due to natural market forces, it is not necessarily a bad thing. But if it is due to state subsidies, that is problematic, because that would mean state officials in China are determining which companies and technologies dominate this critical global market, and those officials may not choose well.

Competing with entrenched fossil fuels will require more than cheap imports. It will require the absolute best technology the world can make. The way to get that technology is by giving all clean-tech firms strong market incentives and to allow the market, not state bureaucrats, to select the winners. To do that, we have to keep the global manufacturing market vibrant and diverse. That means not allowing Chinese subsidization to determine which firms and which technologies come out on top.

The other effect of a government-created Chinese monopoly on solar panels is that once Chinese companies drive out their competition from the solar manufacturing sector, they will immediately start raising prices to increase their profits and start to wean off of government subsidies. We are currently seeing a similar pricing pattern in the global rare earths market. China has around one-third of the world’s rare earth supplies but controls 90 percent of the global market, primarily because lax regulatory oversight enabled Chinese companies to mine cheaply and price everyone else out of the market.

Now the Chinese government is restricting exports and raising prices, triggering panic among rare earth consumers who are now almost completely dependent on China for a major commodity, so when Chinese prices rise consumers have no alternative but to pay more. This is exactly what antidumping legislation is designed to prevent—not low prices, but the eventual price fixing. Low prices can be bad for some sectors of the industry, but they are always good for consumers. The eventual price fixing, however, hurts everyone.

Finally, the fact is that whether or not China is violating trade rules, low-priced imported panels are not the only factor driving U.S. market growth. Demand-side policies are just as important. Panel prices are already low enough to stimulate market interest. Tariffs will not change that. Even before the 2011 price plunge, the U.S. solar market was expanding, and it is unlikely that tariffs will bring panels back up to 2010 prices. If you look within the U.S. market, there is a huge amount of variation from state to state, and that variation is primarily due to differences in state incentives.

Even when prices are held constant, strong policy incentives—such as renewable energy standards, feed-in tariffs (which require utilities to buy renewable power and integrate it into the grid at a set price), and rebates or tax credits for installation of solar panels—result in more solar investment. In the third quarter of 2011 the seven states with the strongest demand-side policies accounted for 89 percent of the U.S. market. What the other states are lacking is not cheap Chinese solar panels—the entire U.S. market has access to those—it is good demand-side policies. That is the real key to U.S. market success.

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.

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, and SunPower 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 of the 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.

Myth

U.S-China trade tensions are bigger than solar so they shouldn’t be fought in the solar domain

Reality

The best approach to trade enforcement is a fact-based approach—we should address alleged rule violations where they occur

There are those who think the SolarWorld case, and the solar industry in general, is not the right place to have larger discussions about the U.S.-China trade relationship. Scaling up renewable energy is a strong public good, the argument goes, so we should not undermine that objective by bringing trade claims when Chinese subsidies are actually helping U.S. installers do more to promote solar energy in this country.

But the only honest way to address trade issues with China is on a case-by-case basis, as objectively as possible. That is exactly what the domestic trade resolution procedures at the U.S. Department of Commerce and the international procedures at the World Trade Organization are designed to do. Those institutions take trade complaints out of the hands of politicians—who almost always have political incentives to overreact or underreact to trade accusations against China regardless of the facts—and put them into the hands of independent arbiters.  

At present, a large portion of the trade allegations levied against China are in the clean energy sphere. The reason is clear: Chinese leadership decided that clean energy is their country’s “historic opportunity” to finally surpass the United States in a major technology sector. Chinese government institutions at all levels—national, provincial, and local—are directing massive subsidies to green energy companies in direct support of that goal. When U.S. clean energy companies face stiff competition from Chinese rivals and the latter appear to be benefitting from such generous government support, that can easily trigger suspicion and trade complaints on the U.S. side, particularly when low Chinese prices are driving U.S. companies out of the market.

How much China is providing to its clean energy sectors in subsidies, and whether the subsidies are illegal under our trade agreements with China, can be difficult to ascertain. Many of China’s green energy development policies are not transparent. As is the pattern with most Chinese laws and regulations, those policies give subnational provincial government agencies wide discretion to support local companies as they see fit, and subnational agencies generally do not share the details with foreign observers. When China joined the World Trade Organization in 2001 Chinese leaders promised to submit subsidy reports on those subnational programs every two years but they have never done so. That is a clear violation of China’s WTO commitments. Overall, due to these transparency problems, it can be hard to determine just how much support a particular Chinese company is getting and whether that support violates trade rules.

The U.S. Commerce Department’s countervailing duty and antidumping procedures are designed to investigate these problems on a fact-based, case-by-case basis. Commerce Department investigators view the evidence and if they find wrongdoing, levy tariffs accordingly. The alternative to this fact-based approach would be to put trade issues in the hands of elected politicians who would immediately involve companies and other groups that contribute to their political campaigns—contributors who are likely to reward general China-bashing. With politicians at the helm, tariff decisions would be much more erratic, thus contributing to market uncertainty (since investors would have no idea what to expect in these disputes) and give lobbyists (including Chinese-funded lobbyists) more influence over these decisions.   

Myth

The U.S. solar market would be much better off if SolarWorld would drop the petition and allow the U.S. government to negotiate a private solution with China

Reality

If U.S. companies drop trade petitions in response to China’s real or implied threats then capitulation wins out over negotiation—and capitulation is a losing game

The Coalition for Affordable Solar Energy, or CASE, the group of companies who strongly oppose levying tariffs on Chinese solar panels, has repeatedly called on SolarWorld to drop these trade petitions. CASE would prefer to take dispute resolution away from the Commerce Department, and instead have the Obama administration step in to negotiate a mutually agreeable settlement with China. They make a strong case that the Obama administration would be more likely to take the general public interest in getting solar installations to scale, and the potential negative impact of tariffs on those installations, into account and would balance those interests against the impact of Chinese subsidies on the U.S. solar manufacturing sector.

As a result of this proposed balancing exercise, CASE expects that a bilateral negotiation would result in much lower tariffs (compared to what the U.S. Department Commerce might impose) or a price floor, possibly in exchange for Chinese promises to reduce or eliminate the contested subsidies. But such a balanced outcome is highly unlikely, either in the case of the solar industry or in the many other cases in which U.S. companies face unfair Chinese trade competition.

There is certainly nothing wrong with negotiation, of course. In general, the more the United States and China engage on trade issues and share their concerns, the better. What CASE is calling for, however, is capitulation, not negotiation.

One of the biggest barriers to a balanced U.S.-China trade relationship is that so many U.S. companies avoid filing trade petitions due to fears that China will retaliate against them. Many U.S. companies strongly suspect—based on their conversations in China—Chinese officials and enterprises would respond to formal filings with punitive market-access reductions. That risk is too great for companies depending on the China market to keep their businesses afloat, so many U.S. companies keep quiet and put up with short-term problems to protect their longer-term relationship with Beijing.

The end result is that the United States winds up tacitly accommodating a wide range of trade violations, eroding our economic competitiveness. 

U.S. companies already face enough political pressure from Beijing to avoid and drop these trade complaints. We do not want them to face the same pressures here at home. Just as we should protect the rights of individual citizens to use the judicial system to file legal complaints, we should also protect and support the rights of individual companies to use our trade institutions to file trade complaints, even if other sectors of the industry find those complaints inconvenient.

It is also important to note that in private conversations with this column’s authors, at least some of the companies lobbying for a negotiated settlement in the SolarWorld case claim that Chinese officials and their Chinese customers are leaning heavily on them to do so by, for instance, threatening to reduce market access for companies who are not visibly and loudly opposing the SolarWorld trade petitions in Washington. Based on those conversations it appears the Chinese government is using U.S. companies as levers to influence Washington’s willingness to take enforcement action, and that is a disturbing trend. The best way to avoid that problem is to keep these decisions where they are now—in the hands of independent investigators at the Department of Commerce, where trade investigations are largely isolated from political pressure and less susceptible to Chinese interference.

The bottom line is that a true negotiated agreement with China, if China is indeed violating its trade obligations, would result in the United States extracting some array of promises or concessions from China—ideally promises to remove the policies that caused the trade frictions in the first place. If that is our end goal, then we should let the Commerce Department process play out first. If that process results in very low tariffs, then we can assume that China’s behavior does not warrant high-level political negotiations. But if the tariffs are significant, then we have a clear signal that there is something to negotiate about—and we will subsequently be at a good starting point for negotiations, because the Chinese government will be keen to find a solution less onerous than the high-tariff status quo.

The Chinese government will certainly do everything in its power to strengthen its negotiating leverage in bilateral trade disputes. We should do the same.

Melanie Hart is a Policy Analyst on China Energy and Climate Policy at the Center for American Progress. Kate Gordon is Vice President for Energy Policy at the Center.

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