DOC China Solar Tariff Ruling Will Boost Innovation

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The Department of Commerce (DOC) has released a preliminary ruling to impose a 31 percent “anti-dumping” tariff on 62 Chinese solar PV manufacturers (and a 250 percent tariff on all other Chinese solar manufacturers) in addition to the 2.9 to 4.73 percent tariff imposed in March for illegal subsidies. The reaction to the preliminary ruling has been varied, as the tariff would impact the solar supply-chain differently depending on whether you’re a U.S. installer, intermediate components supplier, or final manufacturer.  But one thing is certain: the DOC ruling is a positive step towards boosting solar industry innovation.

From 2000 to 2011, China increased its global solar PV export market share from 2 percent to 54 percent, or a compound annual growth rate of 115 percent. This remarkable export growth, in addition to significant deployment subsidies in the United States, has helped solar PV costs decrease 75 percent in the last 10 years.  But what’s the character of that cost decline?  According to a recent McKinsey study a share of the decline is economies of scale – i.e. greater solar PV production reduces unit costs – which in reality is a mix of incremental innovations in production and manufacturing efficiency.  Some of the decline is also oversupply and low silicon prices caused by too much product flooding the market, largely caused by big, low-cost Chinese suppliers that are effectively pushing U.S. firms out of the market.

So what makes this situation special enough to result in U.S. tariffs? Two words: green mercantilism, or the adoption of policies that give a country an unfair advantage to boost exports in clean tech. As the DOC found, Chinese suppliers aren’t winning solely on technological merit and lower labor costs.  They’re winning by not playing by the same rules as all other solar manufacturers. Chinese solar firms are not only benefiting from numerous Chinese government subsidies, they are gaining market share by illegally (under the WTO) selling their solar products at below-market cost. Taking the DOC ruling at face value, this practice (called “dumping”) is giving Chinese manufacturers a 31 percent cost advantage compared to U.S. competitors.

So the DOC ruling aims to level the playing field so U.S. and Chinese solar manufacturing firms can compete fairly.  This would result in two benefits. First, it would slow, and hopefully reverse U.S. solar panel manufacturing decline. A recent NREL study found that U.S. solar manufacturers actually have a 5 percent cost advantage compared to similar Chinese solar products (not including unfair Chinese subsidies and dumping), so the tariff eliminates the biggest reason why this advantage isn’t playing out in the market.  And second, it would increase the incentive for emerging solar technologies, new ideas, and more innovative firms to remain or enter the market.  Entrepreneurs and firms are more likely to invest in real innovation if they can foresee potential profits from their risky investments.  If China is undercutting the market unfairly, it significantly increases the risk of making these investments, effectively acting as a deterrent to innovation. In other words, by eliminating China’s unfair cost advantage, the tariff would encourage more innovation in the solar industry. This is important because innovation – and not subsidized Chinese solar PV – is what is needed to make solar cost-competitive with fossil fuels everywhere without subsidies.  Thus the tariff ruling is potentially a big win in developing a cost-competitive and subsidy independent solar industry.

Of course, there will be some negative impacts.  In the short-term, those downstream in the solar supply-chain like roof-top installers may be adversely affected. A 30 percent tariff, passed on completely to consumers as higher-priced solar products, would result in 5-10 percent high cost solar modules.  In absence of more government subsidies or Chinese manufacturers shifting its supply-chain to other countries to avert the tariff, higher costs could potentially reduce the number of solar projects in the United States. This has led some in the solar industry to lash out. Coalition for Affordable Solar Energy (CASE) President Jigar Shah stated that SolarWorld, the company that brought the trade dispute to the DOC, “received one of its biggest subsidies yet – an average 31% tax on its competitors. What’s worse, it will ultimately come right out of the paychecks of American solar workers.” From this perspective, cheaper solar PV, no matter if it’s illegally subsidized or not, is still cheaper solar PV. Any actions to address market distortions are akin to just raising prices and hurting the solar industry.

But this perspective is wrong, short-sighted and potentially dangerous.  Fighting an unfair subsidy with counterveiling duties is anything but a subsidy to SolarWorld.  It’s simply letting companies compete on the basis of market forces.  And while the marginally higher prices might reduce some solar installations, all this will do is shift jobs around, not result in a net loss of jobs.  If somewhat fewer people or firms buy solar panels, they will spend that money elsewhere creating jobs in other industries.

This perspective is even worse if considered within the framework of our climate challenges.  We need solar to be cheaper than fossil fuels so it can be globally deployed to reduce carbon emissions to near-zero by mid-century.  How far can government subsidies – Chinese or otherwise – of first-generation solar PV take us to that goal? It simply can’t. If we allow Chinese green mercantilism to decimate the U.S. solar manufacturing industry, we would be left with a few firms producing potentially subpar technology when what in fact need are second, third, and fourth generation designs to meet our climate goals. China’s ability to rapidly take a technology to scale is still important and could be helpful to accelerate new technology market deployment, but only if it doesn’t stifle global clean energy innovation.

The choice is twofold: we can allow China to play by different rules to benefit from artificially lower priced solar PV in the short-term, but less innovation over time or we can level the playing field and allow technological progress and innovation to lower costs and grow the industry. Choosing the former may be great in the short-term, but puts the industry at a disadvantage in the long-term. Instead, if we’re serious about addressing climate change and growing a robust industry that continues innovating and producing jobs (like those solar installers Jigar is fighting for), the latter choice is the right one.

Image attributed to EHSManager Blog.

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About the author

Matthew Stepp is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF) specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.