Foreign Policy

Still time to avoid collateral damage in U.S.-China solar trade dispute

On December 15, the Department of Commerce is scheduled to make final recommendations in a long-running trade dispute between SolarWorld Americas Inc. and Chinese competitors unfairly selling solar energy products on the U.S. market. The Commerce Department should wake up before it walks off a cliff and inserts fatal legal and trade policy flaws into its decision, sideswiping at least two American companies – Suniva Inc. and Hanwha Q CELLS USA (my firm represents Hanwha Q CELLS) – that make solar products outside of China.

On October 3, Commerce abruptly proposed expanding the case’s scope to sweep in any products merely assembled in China, regardless of where the bulk of manufacturing occurred. Its novel expansion of the case would be an unprecedented departure from past practice, which could run afoul of U.S. commitments at the World Trade Organization (WTO). The move would also change the rules in the middle of the game for U.S. solar companies that had made business decisions according to decades of settled case law.

{mosads}These punitive tariffs would threaten the growth of the U.S. solar industry – now accounting for over 142,000 American jobs – as well as the Administration’s  goals for renewable energy development, including a recent landmark U.S.-China climate change agreement announced November in Beijing.

A little history: in October 2012, Commerce ruled in favor of SolarWorld, the Oregon-based subsidiary of the Bonn, Germany-headquartered SolarWorld AG, that Chinese photovoltaic cell manufacturers were improperly benefitting from government subsidies and “dumping” goods in the U.S. below fair market value.  In January 2014, Commerce agreed to explore additional duties on a wider scope of Chinese products to address an alleged loophole involving products made in part in Taiwan.  But out of the blue, Commerce proposed on October 3rd to broaden the scope beyond recognition based on no request by SolarWorld. Commerce is now proposing to throw out its current “two out of three” criteria for defining scope of imported goods, in which, two of the three manufacturing steps must be conducted inside  China, for the product to be considered manufactured in China.

Instead, any products, regardless of manufacturing origin, which undergo final assembly in China would now be subject to anti-dumping and countervailing duties. This would be an unprecedented application of the law, which establishes that merchandise must be “produced” and “originated” in the country covered by the unfair trade petition. To meet the definition of production and origination, merchandise must normally be “substantially transformed” in that country, a far more involved process of adding value to a product than simple assembly. Commerce itself has reaffirmed this threshold, including in its own initial investigation of SolarWorld’s complaint.

Apart from the legal requirements, the equities are overwhelmingly against the scope expansion.  SolarWorld has not alleged that the added merchandise is unfairly traded, and Commerce has not investigated whether it is unfairly traded.  Finally, the proposed Commerce determination flies in the face of WTO requirements and could be subject to challenge in an international settlement proceeding. Under WTO rules, member countries have the right to be secure in the knowledge that their products won’t be the target of penalties intended to be imposed on another country.

For example, Hanwha Q CELLS USA manufactures cells in Malaysia prior to assembly in China. If the Commerce Department scope expansion is finalized next month, it means punitive tariffs on Malaysian imports, which have nothing to do with the scope of this investigation. In Suniva’s case, duties could be imposed on U.S.-manufactured solar products – completely undermining the original intention of the petition: to protect, not harm, U.S. production.  

Trade spats featuring the U.S. and China are nothing new, nor is the battle over government subsidies to Chinese solar manufacturers. What is new is the Commerce Department’s move to change the rules in the middle of the game, hurting the domestic solar industry, undermining U.S. climate change goals, and risking a prolonged trade dispute at the WTO. Fortunately, there’s still time for Commerce to change its mind. An optimal outcome to the US-China solar trade war is a negotiated settlement which would be carefully crafted to avoid inserting the dramatically increased and fatally flawed proposed scope expansion.

Stern is founder of The Stern Group, a Washington D.C.-based nonpartisan international advisory firm. Stern was chairwoman of the International Trade Commission from 1984-1986 and served a nine-year term as an ITC commissioner. The Stern Group does not represent Suniva and Stern’s comments are not attributable to Suniva or their position on the trade case.

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