The Case for U.S. Tariffs on Chinese Solar Panels

With the U.S. Commerce Department's preliminary decision in May to impose 31-percent anti-dumping tariffs on Chinese photovoltaic (PV) solar panels, some commentators have warned that this is the first shot in a job-killing trade war with China. Professed fears of a trade war are as predictable as night after day. Fortunately, the hand wringing is largely unnecessary. Prediction of a trade war is largely a dangerous myth.

Historically, U.S.-China trade disputes follow a different pattern. In fact, China, while complaining loudly, tends to comply with trade-case findings rather than retaliating in response. Why? Because Chinese trade-policy makers are rational political players. They make decisions based on political and economic interests, including jobs and growth. They rarely suffer self-inflicted wounds (or even self-inflicted paper cuts). A trade war with China would hurt the U.S. but would mortally wound China.

The U.S. market remains central to China's export-led development. In 2011 exports to the U.S. represented 21 percent of China's total exports and 8.3 percent of China's GDP. Conversely, exports to China represented 3.7 percent of the U.S.'s total exports and less than 0.5 percent of U.S. GDP. With European markets collapsing, China's dependence on the United States is increasing.

China's solar-manufacturing industry relies especially heavily on foreign markets, including the US. Currently, Chinese solar-panel manufacturing capacity is 32 times greater than domestic consumption. As a result, China exports 95 percent of its production. U.S. anti-dumping tariffs will encourage domestic consumption in China, thereby reducing the growth in China's carbon footprint.

China's need to export has led to the recent solar-trade dispute. Over the past seven years China has gone from a non-factor to the world's biggest player in the solar sector. Thanks to Chinese overproduction, prices for solar panels have plummeted. In an industry where prices dropped an average of 10 percent a year, prices suddenly fell 50 percent as Chinese firms jockeyed to grab market share. However, Chinese solar panels may not remain cheap for long. Our research, along with Chinese CEOs' statements, shows that Chinese solar manufacturers will raise prices after driving out U.S. manufacturers.

As China's market position grew, American manufacturers suffered. Twelve American manufacturers have had significant layoffs or have shuttered completely. These manufacturing jobs that the U.S. is losing to China pay better and have three times greater ripple effects than installation jobs. Between 2010 and 2011 the U.S. went from a $540-million trade surplus with China in solar products to a $1.6-billion deficit. Chinese solar-panel exports rose nearly 1,000 percent. Simultaneously, Chinese imports of U.S. polysilicon dropped 20 percent as China ramped up domestic production.

Under threat, SolarWorld, the largest U.S. solar manufacturer, filed a trade case alleging that the Chinese manufacturers received World-Trade-Organization-illegal subsidies and have sold their cells and panels below cost. Through Commerce's investigation and the U.S. debate, three interesting facts became apparent.

First, a distinction exists between WTO-legal subsidies and WTO-illegal subsidies. WTO-legal subsidies include money that any foreign or domestic manufacturer can access, such as money SolarWorld received from the state of Oregon. WTO-illegal subsidies include money for domestic manufacturers, such as the $7 billion identified by the U.S. Department of Energy that went to Wuxi Suntech for exports.

Second, the Chinese are not the low-cost manufacturers. Analysis of the U.S. and Chinese PV industry by the Energy Department's National Renewable Energy Laboratory found that the Chinese operate at a 5-percent cost disadvantage, once shipping costs come into the mix.

Finally, even with government subsidies, Chinese solar panel firms hemorrhaged cash. For example, earlier this month, LDK Solar received an emergency Rmb2bn loan from state-owned banks to fund operations and keep the firm out of bankruptcy. In fact, Commerce deemed both Trina and Wuxi Suntech uncreditworthy for large portions of the years since 2005.

Unsurprisingly, after SolarWorld filed its case, Chinese companies filed their own trade complaints against six U.S. state-level renewable-energy incentive programs. China's Ministry of Commerce is investigating and will announce its findings shortly.

But even if China imposes its own tariffs, a trade war will not ensue. The U.S. tariffs may, in fact, signal the beginning of a sustainable solar industry. The tariffs will likely push some bankrupt Chinese firms out of the market. The Commerce decision also gives the U.S. government the opportunity to urge China to end trade-distorting subsidies. In the past, when the U.S. government has threatened actions, China has brought its practices into line with the rules more often than not.

Simply put, rather than retreat, Commerce's decision provides a chance for the U.S. government to move forward.

As its officials develop policy with a newly assertive China, the U.S. needs to assert its rights under the trade laws, as well. The U.S. enforcing its trade laws does not translate to "starting a trade war." China knows these laws well and also knows that following the rules, rather than reckless retaliation, best serves its interests.

This piece was originally published in the Financial Times on May 25, 2012. The authors' forthcoming book on the subject is Subsidies to Chinese Industry: State Capitalism, Business Strategy and Trade Policy (Oxford University Press).