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Solar Panels: When Trade, the Environment, and Geopolitics Collide

by | June 12th, 2013 | 05:12 pm
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What happens when policy goals in one area collide with goals in another? This occurred when US and European manufacturers of solar panels squared off with environmental and geopolitical interests over cheap Chinese products. In the United States, domestic producers of solar panels succeeded in raising tariffs on Chinese imports, even though their victory made solar energy more expensive and less competitive for American consumers. A similar scenario was repeated last week when the European Union imposed antidumping duties on Chinese panel manufacturers.

Green energy has been a primary goal of the developed world for years. The European Union aims to get 20 percent of energy from renewables by 2020, up from 13 percent in 2010. The United States has similar goals, with calls for renewable energy reaching 25 percent of the nation’s electricity by 2025. The goal is to reduce reliance on fossil fuels and their devastating effect on the environment and global warming. Using government promotions, Germany, Denmark, Portugal, Spain, Australia, and other countries have reached grid parity, where solar electricity is price competitive with other sources.

Given popular support for lowering our dependence on fossil fuels, what could be better than cheap solar panels? The price of silicon, the main input to solar panels, has more than halved over the last couple of years. Partly as a result there is a glut of panels and falling prices. When prices fall, a lot more people use them, creating jobs for installation companies and permanently eliminating pollutants derived from fuels that produce greenhouse gases.

There is a political angle as well. Oil is in limited supply, and subject to high price volatility. It also comes disproportionately from undemocratic countries like Iran, Russia, and Venezuela. Lowering the cost of renewables puts downward pressure on the price of this close substitute, in turn restraining the political and economic power of its proprietors. What could be better from a geopolitical perspective than less money flowing to these oil producers with the use of more rapid solar installation, and increased self-sufficiency?

Overall, cheap solar panels address a host of global concerns in a sustainable way.

Why then are the United States and European Union raising prices? The concern from manufacturers is that panels originating from China are being sold below cost or produced with the benefit of unfair government subsidies and harming domestic producers, who are losing market share. The United States has tariffs of 24 to 36 percent on a host of Chinese producers. The European Union just implemented 11.8 percent tariffs to be followed after two months by a six-fold increase, unless Chinese firms unilaterally increase prices.

Unfortunately, there is little evidence that such policies save companies or protect many jobs. There is an abundance of evidence that welfare is harmed via higher prices. Evidence from US manufacturing firms shows that contingent protection primarily succeeds in inflating the prices and markups of competing domestic firms, while slowing the reallocation of resources to the most productive firms (Pierce 2011). Temporary tariffs also disrupt production and jobs in upstream industries—such as solar panel installation and maintenance (as highlighted by Gary Hufbauer in a related RealTime piece). Finally, they typically spark costly retaliation, which has already happened in this case, with China threatening duties on imports of French wines.

Most worrisome, along these lines, is the rapid spread of antidumping as a World Trade Organization-sanctioned remedy across the globe. From 1985 to 1994, Australia, Canada, the European Union, and United States (the traditional users) accounted for three-quarters of investigations. A decade later, they make up only one-third, as countries like India, Argentina, Turkey, and Mexico, among others, have begun using this instrument (Bown 2007). [pdf]

One policy alternative under consideration is a unilateral Chinese price increase, potentially with an import quota. From a welfare perspective, this is even more damaging to the United States and European Union, as it suffers all of the same problems as standard duties but shifts rents from protection—what would otherwise accrue to the United States and European Union as tariff revenue—to Chinese producers (see Gary Hufbauer’s discussion of this misguided fix).

Economists that support contingent protection typically do so on the argument that it provides temporary assistance in difficult times, thus allowing long-term reciprocal liberalization through the World Trade Organization (WTO) to go deeper. Indeed, the developing world resorted to antidumping duties after lowering their applied most-favored-nation (MFN) tariffs. But, antidumping and countervailing duties remain costly remedies that should be used with extreme care if at all. Otherwise they may reverse years of difficult negotiation.

In this particular case, solar panels, there are important spillovers to the environment and security that make welfare costs that much greater, which should prevent the taxing of this critical energy source.