Trump's Tariffs on Solar Cells and Modules Don’t Protect American Interests

January 26, 2018 4:15 PM
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REUTERS/Stringer

High tariffs imposed by the Trump administration on imported solar cells and modules in late January were described by the US Trade Representative (USTR) as a defense of American workers and businesses. In fact, few Americans will “win” from the administration’s move. Not only will tariffs raise the price of solar technology in the United States, jeopardizing 23,000 jobs in solar installations, marketing, and development, they also will impede growing segments of US solar manufacturing reliant on export markets. It is no wonder that the Solar Energy Industry Association (SEIA), the US trade association, opposed the tariffs because of predicted job losses. While there were 38,000 jobs in solar manufacturing in the United States at the end of 2016, all but 2,000 made something other than cells and panels, many of them benefiting from the larger markets spurred by lower imported input prices.

These tariffs are intended to strike a blow against China’s unfair industrial practices. Unfortunately, the president’s actions do nothing to address the very real longer-term challenges for American workers posed by Chinese policies. Simply put, unilateral tariffs are not an effective counterweight to Chinese high-tech ambitions.

The latest round of solar tariffs derives from Section 201 of the Trade Act of 1974, which authorizes the president to impose trade restrictions, such as tariffs, when the US International Trade Commission, an independent federal agency, determines that increased imports are a substantial cause of serious injury to domestic producers. There is no doubt that imports from China have eroded parts of the US solar industry. Indeed, as the USTR notes, by 2017 American cell and module manufacturers had all but disappeared.

China's Industrial Subsidies and US Trade Policy

Chinese solar is a case study in how industrial subsidies can be used to craft globally competitive sectors. The Chinese industry’s global market share in cells and modules rose from a mere 1 percent in 2001 to 65 percent by 2012, thanks in part to government support for repatriation of highly-skilled scientists trained abroad and state provision of resources necessary for their companies to achieve international competitiveness. Entrepreneurial dynamism, lower costs, and vital scale economies engendered a virtuous cycle of productivity growth that propelled global sales of Chinese solar cells and modules. By the time the United States levied antidumping and countervailing duties on Chinese imports in 2012, substantial overcapacity had already led to retrenchment in China, resulting in the bankruptcy of some Chinese firms.

With solar imports growing and prices falling rapidly from 2012 to 2016, two American-based companies petitioned for protection under Section 201. In granting that protection this year, the Trump administration imposed tariffs on imports from almost all countries, beginning at 30 percent in the first year and declining to 15 percent by the fourth year. The decision allows a limited number of cells to be imported without the additional tariff, although the US market is many times larger than this amount, ensuring that the tariff will make solar cells more expensive at a time when the United States should be encouraging renewable energy as an alternative to fossil fuels.

US Actions Have Come Too Late

The US action is a perfect example of closing the barn door after the horse has left. The two companies who petitioned for protection are in no shape to lead an American revival. Suniva is a majority Chinese-owned company that no longer operates after filing for bankruptcy in the United States last year. No one has stepped forward to buy its assets. SolarWorld AG, the German company that owns SolarWorld Americas, filed for insolvency and, while reportedly adding jobs in response to the new import taxes, it is trying to sell its US unit. As noted by Thomas Prusa, an international trade expert based at Rutgers University and a former consultant to the industry, the small scale and dated technology of the two petitioners are no match for newer and much larger operations in Asia. He also notes that the protection offered under the Section 201 tariffs is unlikely to induce long-term investment in a new American manufacturing facility.

Techno-industrial policies, such as China’s solar subsidies, pose tough challenges for countries that initially create and produce new technologies. On the one hand, the loss of jobs due to subsidized imports is widely viewed as unfair and policymakers are under pressure to respond. Indeed, this general understanding of fair trade is reflected in World Trade Organization (WTO) agreements, which allow countries to tax imports deemed unfairly subsidized by home governments. On the other hand, economic forces driving an industry overseas once a technology becomes routinized make such efforts extremely costly. The likely loss of downstream jobs, greater frictions in export markets, and slower progress toward greener energy indicate exactly how self-defeating the Section 201 tariffs on solar will be for the United States.

Unilateral safeguard tariffs are ineffective and risk US isolation

Given these challenges, what can we learn from the latest attempt to combat industrial subsidies with trade policy? The first lesson we might consider is that unilateral safeguard tariffs are an ineffective way to ensure US competitiveness in emerging technologies. Because they rely on claims of substantial injury, Section 201 claims are inherently backward looking. By the time enough jobs have been lost to warrant protection, the technology has been adapted to lower-cost production locations, and domestic firms have stopped making the investments needed to keep American operations viable. As in the solar case, tariffs will harm American consumers and erode downstream competitiveness with little to no success in reversing the industry’s decline.

A second lesson from the history of trade conflict over solar panels is that unilateral tariffs are not an effective way to bring the Chinese to the negotiating table. Instead, such an approach invites collateral damage to other US interests. Following the 2012 imposition of US countervailing and antidumping duties on imports of solar cells and modules, China launched its own unfair trade investigation into US exports of polysilicon, the raw material used in manufacture of photovoltaic solar cells. The resulting Chinese tariffs on imports from the US essentially closed the world’s largest market to US producers. The US industry shrunk and some production moved offshore, hardly a win for American workers.

A final lesson is that unilateral action by the United States risks the loss of markets that remain open to competitors. As in the United States, European solar cell manufacturers also suffered because of China’s rapid rise to market dominance. While the European Union threatened to place countervailing and antidumping duties on Chinese imports, it negotiated “market adjustments” with the Chinese. The resulting minimum import prices were roundly criticized for their negative impact on European solar installations, yet the Europeans escaped retaliatory duties. Their polysilicon industry expanded its Chinese market share while US production withered under Chinese tariffs.

There are better alternatives than managed trade

These observations suggest that existing trade remedies, including countervailing and antidumping duties, are too slow, cause too much collateral damage, and leave individual countries isolated from global markets. In announcing the new solar tariffs, the United States signaled its intention to pursue a bilateral deal to end the conflict: “The U.S. Trade Representative will engage in discussions among interested parties that could lead to positive resolution of the separate antidumping and countervailing duty measures currently imposed on Chinese solar products and U.S. polysilicon.” It is unclear what such a deal would entail, although the European minimum import price might offer a useful clue to the likely outcome. This statement suggests a preference for managed, rather than competitive, global markets, an outcome at odds with American interests as a technological leader and the world’s second largest exporter.

Some Americans will applaud the Trump administration for responding to Chinese policies seen as predatory and harmful to America’s key industries. Such rejoicing will be short-lived, however, because current policies are short-sighted. Over the long term, tariffs are unlikely to effectively defend American industry. While large and sophisticated, the US market accounts for a smaller share of global sales each year. Higher import taxes hurt American consumers and downstream businesses and, by making innovation less imperative, reduce long-term competitiveness in the domestic industries they aim to protect. The alternative offered by the USTR, managed trade, offers the specter of administratively set prices, higher trade barriers, fewer incentives for innovation, and fragmentation of the global economy.

Looking ahead, as China continues to pour resources into R&D, attract foreign investors willing to share technology for market access, and pump out millions of science and engineering graduates, the United States needs a focused strategy for domestic and international renewal. On the home front, long-term American competitiveness can be enhanced by infrastructure investment, education and training, public heath, and reduced commercial frictions. Internationally, the United States can lead the upgrading and updating of global trade rules, including disciplines on trade-distorting industrial policies. These long-term strategies may provide less immediate gratification than slapping tariffs on imports today, but they are far more likely to benefit American workers in the years to come.

Follow Mary E. Lovely on Twitter.

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