The Great Solar Panel Tariff Adventure

In December, China upped the ante in its escalating energy trade disputes with the West when it filed a complaint against the EU with the World Trade Organization (WTO). [1] China asserted to the WTO that the EU’s feed-in-tariff (FIT) programs violate the Most Favored Nation and National Treatment provisions of the General Agreement on Tariffs and Trade (GATT). [2] In effect, this diplomatic parry from China turned a more limited dispute between the U.S. and China into a trilateral mess. Beyond straining diplomatic relations between China and the West, the Great Solar Panel Tariff Adventure poses a threat to the availability of cheap solar panels on domestic market.

The dispute arose when U.S. solar panel manufacturers were undercut by artificially cheap Chinese imports. China’s “Golden Sun” initiative subsidizes, on average, more than half of the capital costs associated with solar production facilities. According to American producers, this has led Chinese firms to dump solar panels into the U.S. market at a price more than ten percent below the average cost of production.The Commerce Department responded by imposing an average tariff of 30 percent on Chinese crystalline silicon PV cells. [3] Annual month-to-month import margins suggest that the action has curtailed Chinese imports by as much as 60 percent. [4] Domestic legal frameworks appear to confirm the tariff’s validity, with the U.S. International Trade Commission subsequently having voted to uphold the measure. [5]

Concurrently, the EU initiated an anti-dumping investigation which covered more than $25 billion of Chinese solar imports. [6] Given this history, China’s WTO complaint – coupled with its own anti-dumping investigation of European and American polysilicon exports – could be viewed as retaliatory. Nevertheless, the EU has consented to dispute settlement consultations with China, which have been ongoing since December.

A recent “Economist” opinion piece contends that American and European anti-dumping tariffs provide high risk with inadequate reward to domestic solar panel manufacturers and residential consumers. [7] Indeed, residential solar power prices will likely rise in the medium-term absent a trade compromise. There is no doubt that Chinese solar subsidies have led to dumping and inordinate market presence in the U.S. market. However, the U.S. Government has likewise increased subsidies to domestic solar producers by more than 250 percent over the last decade. The West’s condemnatory rhetoric toward China’s Golden Sun program, viewed in this context, is therefore more than a little questionable – if not outright hypocritical. The reality is that solar power is not price-competitive at this stage of its technical development. The relative efficiency of producer subsidies can be argued, but subsidization provides a corrective intervention to the entry barriers posed by conventional power sources. If the WTO denies China’s appeal – the likely outcome – there could be serious implications for both the Chinese-American diplomatic relationship and the future of the solar power market. With domestic production tax credits expiring, margins will be tight for U.S. producers in the short-term and innovation could be stifled. Without an influx of cheap solar panel imports, it is conceivable that solar power could become less cost-competitive. If the U.S. is serious about promoting cost-competitive solar energy, it must keep an open mind about subsidies – particularly to R&D and innovation. The practice occurs everywhere, even the US, and demonizing China is both counter-productive and hypocritical.

[1] http://www.nytimes.com/2012/11/06/business/global/china-retaliates-in-trade-dispute-with-europe.html?ref=todayspaper

[2] http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds452_e.htm

[3] http://www.nytimes.com/2012/10/11/business/global/us-sets-tariffs-on-chinese-solar-panels.html

[4] http://www.pv-tech.org/news/us_dept._of_commerce_announces_long_awaited_ad_and_cvd_rulings

[5] http://www.pv-tech.org/news/av_and_cvd_duty_orders_against_china_authorised_by_itc

[6] http://trade.ec.europa.eu/doclib/press/index.cfm?id=829

[7] http://www.economist.com/node/21555958

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