What Should the U.S. Do About Chinese Solar?

US and Chinese Flags

Over at Grist, David Roberts asks a straight-forward question: What do you think the U.S. should do about Chinese solar?  Roberts impetus:

“Why is solar making such dramatic progress in Germany, Italy, and Spain? Because Chinese companies are flooding the global market with cheap PV.

Why is solar grid parity (the point at which PV is competitive with retail electric prices, without subsidies) approaching so much fasterthan predicted? Because Chinese companies are flooding the global market with cheap PV.

That’s the story of solar today, for better or worse: cheap Chinese PV. The question is, what should U.S. policymakers do about it? That turns out to be a tough call.”

Roberts correctly points out that cheap Chinese solar panels are increasing the rate of deployment of solar PV worldwide.  He frames it strictly as a competitiveness issue: subsidized Chinese solar panels are much more competitive than U.S. solar panels, so what should U.S. policymakers do to rectify this disparity, if anything at all:

“One school of thought says that the U.S. should adopt a mercantilist approach and fight back against what it deems unfair Chinese competition. America should protect and grow its own solar manufacturing industry…One way to implement this is with trade tariffs, which is what the Obama administration did last month. Another way is by subsidizing U.S. companies. That’s what they’ve been doing since 2008, but Republicans have demonized this spending to the point that the loan guarantee program is paralyzed and the Sec. 1603 grant program wasallowed to lapse last month.

The other school of thought, which might be called, dare I say, neoliberal, says that cheap solar panels are a good thing. If the Chinese government is willing to massively subsidize them, we should welcome it. Solar prices will continue to drop for consumers all over the globe and solar power will spread faster. More clean energy! Putting a tariff on PV imports (or passing “made in America” provisions) just raises the price and slows the spread of solar in the U.S. It’s a net loss for humanity.”

But this framing misses a key point – Chinese green mercantilism isn’t just a big competitiveness problem, it’s a big innovation problem as well.  China currently employs nearly all types of mercantilist policies to artificially drive down the price of clean energy technologies.  In addition to currency manipulation (which provides a 20-40 percent benefit to Chinese products), China utilizes forced technology transfer, significant production subsidies, export dumping subsidies, a near monopoly on rare earth materials, state-owned enterprises, and a host of tax incentives, holidays, and government backed loans to undercut fair-market price or unfairly protect its industries from competition. Instead of investing in the development and innovation of clean technologies, China is spending the lion’s share of its public resources on boosting exports of existing technologies (which then require further subsidies by importing countries to be competitive with fossil fuels).

Many advocates gut reaction, like Roberts points out, is to look the other way because we’re getting cheaper solar and we can still do advanced solar technology development. But that isn’t necessarily the case. By undercutting the market, China is pushing out competing companies (for example, the high-profile bankruptcies of the last year) and locking-out investments in potentially more innovative, and long-term cost-competitive technologies. For instance, China’s solar exports are almost exclusively traditional crystalline solar PV and not next-generation designs that hold the promise of better performance and cost. China isn’t trying to develop better technologies, but instead shift exports from the rest of the world to its industries.

In the long-term, this shift will negatively impact investments in innovation making it a zero-sum game. Through this lens, as a result, doing nothing isn’t much of a solution. The United States must fight to ensure that China plays by the rules of global trade, which it is starting to do through the WTO but it needs to be more aggressive in doing (as does the rest of the developed world). In some cases that may mean tariffs. That scares many advocates, but the stakes are too high to not consider them as innovation is central to the widespread deployment of clean energy technologies. Yet there are other policy choices.  For example, Dartmouth Professor Matthew Slaughter recently proposed the United States and trade partners should establish a Clean Technology Agreement modeled after the very successful Information Technology Agreement to create a free-trade playing field for clean energy. In other words, there are options, but doing nothing isn’t one of them.

Image credit: futureatlas.com

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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.