Behind the largely symbolic tariffs imposed on Chinese solar panels by the Obama administration is a need to keep the renewable energy field open.
Solar panels are ugly, they are expensive and the power they produce is almost meaningless in the overall energy mix of the world’s two largest economies, the United States and China.
Yet the unsightly black photovoltaic (PV) panels are now a symbol of innovation, holding the promise of green jobs and leadership in the clean-tech economy. Little wonder that the administration of U.S. President Barack Obama finds itself balancing the demands of U.S. producers to keep their Chinese competitors at bay against the desire to avoid increasing trade tensions with China, while keeping U.S. consumers who want cheap Chinese panels – along with the 100,000 American workers that the solar support industry claims to employ – happy. It’s a big challenge, but the Obama administration has made good decisions.
U.S. solar producers in October filed suit accusing Chinese manufacturers of receiving illegal Chinese government support in the form of preferential loans, subsidized land and similar benefits. U.S. imports of Chinese solar panels have skyrocketed in recent years, from US$ 640 million in 2009 to US$ 3.1 billion in 2011, according to U.S. Department of Commerce data. U.S. producers want stiff tariffs and duties to keep Chinese solar producers out.
But this case was never just about solar panels. Washington missed its first deadline for announcing tariffs for Chinese solar panels in February – the same month that Xi Jinping made his trip to Washington. When the decision to impose tariffs came in late March, the penalties were only symbolic. Investors in the Chinese companies cheered the light penalties: Stocks of three leading Chinese solar companies rallied more than 12 percent on the news.
The tariffs which range from 2.9 to 4.73 percent have little but nuisance value. The head of one U.S. solar company that uses Chinese panels to assemble full systems told The New York Times that the tariffs would only push the price of a US$ 600 solar system to US$ 610, in other words, the tariffs will add about the price of two cups of coffee at Starbucks. The tariffs imposed by the commerce department allow the Obama administration to say that it is standing up to China but they don’t put any real barriers to trade. This is a preliminary ruling and the final penalties announced in the summer could be higher – especially if the political temperature heats up.
The impact is clear: Even in an election year in which China is emerging as an important issue, the U.S. is still open to business for Chinese solar manufacturers.
The mild penalties announced by the U.S. shouldn’t obscure the fact that China’s industry has some serious problems.
Savage competition among Chinese domestic players has resulted in spectacular price falls. The spot price of polysilicon, the key ingredient in PV panels, has fallen more than 90 percent since 2008. Prices of silicon panels fell about half last year. Chinese solar makers are burning through cash and many are posting significant losses. Chinese banks potentially have a lot to lose as well. According to data sourced to Mercom Capital Group, in 2010 China Development Bank promised to lend almost US$ 32 billion to five Chinese solar companies. The US$ 31.8 billion in credits made up the top five debt deals in the world for the solar industry that year.
Viewed from the perspective of the companies that brought the anti-dumping suit against the Chinese manufacturers, subsidized finance and a variety of other Chinese government favors and incentives have been a disaster for the industry. Profitability has been destroyed, driving some companies out of business and making it difficult for others to fund innovation.
From another perspective, the steep decline in prices has brought forward the time in which solar is competitive with conventional forms of power. In fact, solar advocates such as Suntech Power’s CEO Shi Zhengrong claim that solar is already competitive with conventional power in many places.
Important as the trade dispute is, there are other tremors shaking the industry. Germany is eliminating subsidies. This phasing out of feed-in tariffs (which have guaranteed a subsidized price for solar power producers who sell their electricity into the grid) is hurting prospects for what has been one of the world’s largest solar markets. The largest U.S. solar company, First Solar, has responded to the cutback in German subsidies by idling production lines in Germany and canceling expansion projects, including a new solar factory in Vietnam. The company, which says that these cutbacks will result in a US$ 100 million charge this year, said on a recent conference call to analysts that solar has never been deployed without large subsidies.
The solar dispute reflects deep frustration among many Americans that China’s rise seems to reflect not just hard work and lower costs but a variety of unfair advantages by not playing by the same rules. It is an easy election year issue, especially given the fact that the U.S. trade deficit with China jumped to US$ 295 billion last year, according to U.S. data.
China has signaled that it will not be a passive punching bag. In a move that reflects China’s increasingly assertive policies, Beijing responded to the initial U.S. solar industry complaint by saying in November that it would begin its own investigation into several U.S. states’ support for clean energy, including California. If the modest penalties on Chinese solar panels stand, it is a good bet that the Chinese investigation will quietly fade away. Still, there are a number of other outstanding trade and economic issues causing tension between China and the U.S. The alleged under-valuation of the yuan remains a perennial complaint from Washington, though it seems to have been pushed to the background. More recently, the U.S. has filed disputes about Chinese export policies on rare earths.
At a time when both countries are going through potential leadership changes, any one of these issues has the chance to flare up. But the apparent fading of the solar dispute appears for now to be a triumph of common sense, good economics and good energy policy.
Originally published in Caixin. Can be accessed at english.caixin.com/2012-04-05/100376268.html