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The Next Battle in Our Trade War with China

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Update: Whether the U.S. is going to turn up the heat in a global war over solar energy is a question that will have to wait for another day. The Commerce Department announced this morning that it would delay until Thursday the announcement of whether it will launch an international trade investigation that could culminate in Washington imposing additional tariffs on Chinese solar-panel makers. (The announcement was scheduled for today, but snow closed the federal government yesterday.) The allegation, filed last month by SolarWorld Industries America Inc., is that China has "dumped" solar panels onto the U.S. market at illegally low prices. Chinese panel makers and the Chinese government have disputed the claims.

Renewable energy, for years a rallying cry of San Francisco’s Birkenstock crowd, may or may not save the melting glaciers. It is, however, attracting K Street’s Gucci loafer set. To understand why, consider the latest Washington battle in a global war over solar power. 

Tomorrow, the U.S. Commerce Department is scheduled to announce whether it will, for the second time in just over a year, go after Chinese solar-panel makers for what critics contend is those firms’ illegal “dumping” of panels into the U.S. market. The allegation is that Chinese firms are selling their panels at illegally low prices made possible by illegally juicy support from the Chinese government. Chinese exports of solar panels to the U.S. totaled more than $2 billion in 2012, the Commerce Department says.

As a matter of law, the dispute centers on intricate questions about whether China has violated international trade rules in its massive subsidizing of its solar-panel industry. That industry essentially didn’t exist a decade ago, and now it dominates the world market. Western companies—many of them in the U.S.—are going out of business. 

As a matter of politics, the trade fight before the Commerce Department is a no-win for the Obama Administration. Whatever the decision, it will rankle environmentally minded constituents. If the administration doesn’t ratchet up tariffs on Chinese solar makers, it will be accused of speeding the demise of what little solar-panel manufacturing remains in the U.S. That will further erode the administration’s claims that clean energy would bring the country lots of “green” manufacturing jobs. But if the administration ultimately imposes hefty new tariffs on imported Chinese panels—a process that could start tomorrow if the Commerce Department announces that it will launch an investigation—the price of solar power across the country could rise, slowing the advance of a fast-growing, though still niche, green energy source. And that would hurt the firms that are succeeding best in the U.S. solar business today—not those making the panels, but those bolting them onto American rooftops. Those companies benefit from cheap solar panels. And solar panels’ prices today are being set by the manufacturing cost—fair or not—in China.

Reminders of the difficulty of rolling out renewable energy have, of late, come on strong.1 To take one example, last Wednesday, Bloomberg New Energy Finance, an industry analyst, reported that global “clean energy” investment fell 11 percent in 2013, to $254 billion, its second straight year of decline. A main cause of the investment drop, the Bloomberg report said, was that the cost of solar panels fell. Even as the quantity of solar panels installed worldwide grew by about 20 percent, Bloomberg said, less money was needed to pay for them. That’s largely a result of what has happened over the past two years with the solar industry in China—the same events that have sparked the dispute on which the Commerce Department will weigh in tomorrow. 

U.S. angst about the dominance of China’s solar panel industry arose back in September 2011, when Solyndra, the California-based solar-panel maker, filed for bankruptcy. It was unable to build a viable business around the cylindrical solar panels it had designed, in part because less-sophisticated but cheaper Chinese-made solar panels were flooding the market. 

The following month, SolarWorld Industries America Inc. (a U.S. subsidiary of German solar-panel maker SolarWorld AG) filed a complaint with the Commerce Department. SolarWorld alleged Chinese companies were violating trade laws by “dumping” their panels onto the U.S. market—selling them below cost to grab market share. The Chinese companies could afford to do this, SolarWorld claimed, because they were getting massive and unfair subsidies from various levels of government in China. 

A year later, in late 2012, U.S. authorities issued a final ruling, imposing duties averaging about 31 percent on Chinese-made solar panels exported to the U.S. But the ruling contained a loophole, and the ink was hardly dry before astute Chinese solar-panel makers began taking advantage of it. Solar panels are made of many parts; a key one is a square-shaped piece called a “cell.” Under the U.S. tariff decision, if a panel’s cells were made outside China, even if the panel itself was then assembled in China, the U.S. tariffs wouldn’t apply. Not surprisingly, following the tariff ruling, Chinese solar-panel manufacturers began shifting cell-making offshore, notably to Taiwan. Then they shipped those cells to their Chinese panel plants, assembled the full panels, and exported the panels to the U.S. Presto: No U.S. tariff.

Chinese companies and the Chinese government have rejected the notion that they’re “dumping” solar panels. Last summer, China upped the ante, imposing preliminary tariffs on polysilicon, a raw material used to make solar cells that is still produced in large amounts in the U.S. and then exported to China. This Monday, two days before the scheduled U.S. Commerce Department ruling, China tightened the screws again, finalizing those tariffs at levels as high as 57 percent for suppliers that produce polysilicon in the U.S. 

There is some precedent for a truce in the solar-panel wars. The European Union fought a similar solar trade battle with China over the past two years, and last month, European governments approved a settlement with Beijing that buys two years of detente. Under the deal, Chinese solar-panel makers that agree, in their European sales, to a specific floor on panel prices and a specific ceiling on panel volume can avoid European tariffs through the end of 2015. Given Europe’s importance as a market for Chinese solar panels, much of the Chinese solar industry has signed up. In the U.S., too, the main solar-industry trade group also has floated a compromise plan.

But it seems at least as likely that, instead of cooling, the U.S. solar fight will boil over. On New Year’s Eve, SolarWorld filed a new trade complaint, this one aimed at closing the loophole in the 2012 tariff decision that allows Chinese solar-panel makers to avert U.S. penalties by using solar cells made in third countries such as Taiwan. It’s this new complaint from SolarWorld that the Commerce Department is scheduled to address tomorrow, announcing whether it will launch an investigation that could lead to tougher tariffs. 

In Washington, plenty of onlookers see money to be made brokering the increasingly nasty geopolitics of solar energy. “No international trade group is better positioned to assist with this matter than that of Orrick, Herrington & Sutcliffe LLC,” the law firm told clients in a note it issued on January 2, two days after SolarWorld filed its latest complaint. Orrick, it explained in its client note, “is one of a small group of firms that can be effective … in this politically charged environment.” Other Washington firms have issued similar missives in recent days. If this trade war intensifies, it may well crimp solar’s contribution to the U.S. energy mix, at least for a time. But it will contribute handsomely to Washington interests’ bottom lines.

Jeffrey Ball writes the  biweekly Resources column at The New Republic and is scholar-in-residence at Stanford University's Steyer-Taylor Center for Energy Policy and Finance, a joint initiative of Stanford's law and business schools.

  1. On January 6, “60 Minutes” aired a segment called “The Cleantech Crash,” arguing that Silicon Valley venture-capital investors and American taxpayers have lost big money on a wrongheaded clean-energy push. The piece generated angry of protest from renewable-energy fans. Among them: Vinod Khosla, a major Silicon Valley clean-energy investor.