U.S.-China solar trade dispute: Short-term profit vs. long-term viability

The United States and China are locked in a protracted solar trade war that has caused controversy within the solar industry. While some deride the war as harmful, the United States must continue to aggressively fight with all means necessary. Not taking action is irresponsibly shortsighted and threatens the long-term viability of the global solar industry.

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The first shot in this "trade war" was fired by China. Rather than building a robust solar industry through innovation and fair competition, China unleashed an arsenal of illegal, "green mercantilist" policies, including unfair subsidies to domestic firms, dumping products below market prices, stealing trade secrets from competitors through cyberattacks, and other forms of espionage.

Beginning in earnest in 2009, artificially cheap Chinese solar products flooded the market and decimated U.S. solar manufacturing. China went from exporting very little solar products to the United States before 2009 to shipping 49 percent of the solar panels deployed in America in 2013. Over 25 U.S. solar manufacturers have gone bankrupt or been forced to lay off workers since China revved up its green mercantilism. And China's rise has failed to produce significant innovations in new solar technologies. Rather, it's locked in first-generation crystalline-silicon panels.

Fast forward to today and the United States is finally fighting back. On June 3, in response to a petition by SolarWorld, the Department of Commerce (DOC) issued a "preliminary determination" that China's solar subsidies violate international trade rules.

As a result, the DOC will levy tariffs ranging from 18 to 35 percent on Chinese solar imports. This comes after it levied similar tariffs in 2012, but left a loophole that allowed Chinese firms to circumvent the tariffs by outsourcing solar cell manufacturing to Taiwan. Additional determinations will be made this week to counter Chinese and Taiwanese solar companies dumping products below market costs.

The tariffs are expected to increase the cost of Chinese crystalline solar exports by at least 14 percent, erasing the artificially competitive edge China holds over U.S. manufacturers. In fact, without government subsidies, it's estimated the top six solar companies in China would immediately go bankrupt.

The response from some parts of the solar industry has been negative. The critics' argument is simple — it's all about solar deployment. The lifeblood of the solar installation industry is cheap solar panels manufactured by China. Take Chinese panels or any other tax credit or subsidy away and solar deployment growth slows because solar isn't yet competitive with fossil fuels. It doesn't matter where the solar panels come from as long as they're cheap — no questions asked.

This point of view is wildly shortsighted. The problem isn't that China is dominating the solar market; it's how China is dominating the market at the cost of global solar innovation. There's less incentive for firms to invest in innovation when existing innovative solar companies can hardly make a profit against subsidized Chinese competitors.

According to Cheng Zheng and Daniel Kammen, solar firm research and development (R&D) investments have been declining since 2011. The authors connect this trend to two causes: manufacturers cutting R&D programs to make up for the low-margins of Chinese-made solar panels, and U.S. solar manufacturer bankruptcies and acquisitions wiping out smaller firms that were much more innovative than their Chinese competitors.

Don't expect Chinese firms to make up the solar innovation gap either: The top seven Chinese solar manufacturers invest, on average, a mere 1.25 percent of sales back into R&D. That's over 16 times less than biotechnology firms or six times less than electronics firms. The lack of investment shows: Chinese clean energy firms patent 72 percent less than United States firms with most of their energy-related patents going towards mature fossil fuel technologies.

Realistically, the solar trade dispute can play out in three ways. One, the United States backs off and lets China continue gaming the solar market. Solar installers continue getting their bargain basement panels, but industry innovation dries up. Cost declines diminish from economies of scale and deployment declines over time.

Two, the United States and SolarWorld agree to a settlement with China to end the trade war. While this is the leading proposal from many within the solar industry, it's likely a hollow solution. China is already reneging on its recent negotiated solar trade settlement with the European Union and continues to dump solar products in the EU below their agreed upon level. A similar U.S.-China deal would be no different.

Third, the United States continues to aggressively prosecute China's mercantilist policies. Solar prices level off for a time, but more solar manufacturers outside of China become globally competitive. The market produces a stronger incentive to innovate, leading to more investment. Costs begin declining again and U.S. deployment continues to increase.

While the solar industry wants this trade dispute to end as quickly as possible, the United States must take the long view and aggressively take on China's solar mercantilism. If China continues to hinder solar innovation, the industry may not only be locked into first-generation solar technology, but also locked into long-term industry decline.

Stepp is executive director of the Center for Clean Energy Innovation. Wein is a trade policy analyst at the Information Technology and Innovation Foundation.

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