Bringing Solar Manufacturing Back

In his State of the Union address, President Obama proclaimed that he would not cede the solar industry to China through a lack of commitment. Unfair Chinese trading practices demand that he keep this pledge immediately or risk surrendering the industry to China.

The United States created the solar industry and its technological leadership ensured its development. Bell Labs' researchers invented the first silicon solar photovoltaic device in 1954 and government researchers furthered industrial development. Despite the 2009 recession, the U.S. government invested $7.1 billion in solar R&D, compared to $1.32 billion from the E.U., and nothing from the rest of the world, including China. Yet today, China accounts for three-fifths of the world's solar-panel production and exports 95 percent of its production, much of it to the United States.

Against this backdrop, an epic battle is now occurring. Seven U.S. manufacturing companies, the Coalition of American Solar Manufacturers (CASM), filed antidumping and countervailing duty complaints against China with the U.S. International Trade Commission (ITC) and Commerce Department. CASM has argued that imported, illegally subsidized Chinese solar cells and panels are destroying U.S. manufacturing jobs and injuring the U.S. industry. Almost immediately, Chinese exporters and some U.S.-based assemblers and installers challenged the U.S. manufacturers, arguing that reducing subsidized Chinese imports would reduce U.S. jobs, through higher consumer prices and dampened demand for solar panels. They have warned of a "trade war" and have telegraphed threats of retaliation. So far, preliminary rulings from the ITC and Commerce have favored the U.S. manufacturers.

A key issue in the case is the billions of dollars in subsidies that the Chinese government has provided its manufacturers. The Chinese government heavily subsidizes export-oriented solar production through low-cost capital, free utilities, energy and land. Chinese state-owned banks make large loans with flexible, if any, repayment dates, to increase companies' production capacities and scale economies. Our data show Chinese solar companies carry substantially more debt than U.S. companies. For 2011-2020, China's National Development and Reform Commission allocated about $792.6 billion in direct investments into solar production. China's Five-Year plan has acknowledged that this capital-intensive industry requires large upfront investments.

Domestically, the Chinese government favored Chinese companies. In 2010, China's Ministry of Finance chose Yingli to supply 70% of the modules for one project's first phase over foreign companies' bids. Yingli received $114 million in prepayments, or 35% of the total purchase price in advance as an instant rebate. To meet capital shortfalls, Yingli also obtained additional low-cost loans from at least seven other state-owned banks.

U.S. subsidies, on the other hand, focus on trade-neutral consumption. That is, U.S. consumers receive subsidies regardless of whether the solar panels they purchase are made in the United States or China. U.S. consumption subsidies give no preference to U.S. manufacturers, offering more consistent benefits to assemblers and installers. Finally, these subsidies are significantly smaller than Chinese subsidies.

Chinese subsidies have allowed Chinese manufacturers to sell below cost and begin a drive to push competitors out of business. Aggressive cost-cutting Chinese manufacturers have used substantial production subsidies to employ price competition against U.S companies. As a result, many U.S. solar companies have moved production to Asia or outsourced. The trend began with contracting out value-chain parts (e.g., conversion of polysilicon to wafers), expanded to outsourced module manufacturing for branded-cell manufacturers, and evolved to joint ventures that moved all upstream production offshore. Essentially, higher- value manufacturing is moving to China, while lower-value assembly and installation is staying in the U.S.

Unfortunately, the United States' commitment to solar energy may result in the loss of domestic higher-value productions' benefits. Technological innovations, which occur not just in labs but also on factory floors, constitute major reasons why solar-panel prices have fallen. By offshoring production, companies offshore innovations as well. Additionally, higher-value-adding manufacturing employees receive higher pay, and have substantially higher job-multiplier effects than lower-value-adding assemblers and installers. In short, if we allow the Chinese to drive the remaining U.S. manufacturers out of the market, we are offshoring the type of advanced, next generation manufacturing we should want to have here in the United States. Without U.S.-based competitors, Chinese solar companies would have no need to maintain low prices. Indeed, our research has shown that without generous government subsidies, many Chinese manufacturers would face bankruptcies, incentive enough to raise prices and to recapture lost profits after destroying the competition.

President Obama continued, "So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it." Carpe diem, Mr. President.

Originally published in the The Hill's Congress Blog, February 7, 2012.