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Could Tariffs on Chinese Solar Panels Do More Harm than Good?

In the short term, tariffs will help U.S. solar panel makers. But they could have unintended consequences.

The U.S. Department of Commerce imposed new tariffs on solar panels imported from China today, in response to claims that the Chinese government is unfairly subsidizing its solar panel makers’ exports.

The claims alleges that China is engaged in unfair trade practices, such as granting subsidies in the form of low-interest loans in a way that affects exports. To make up for these subsidies, the companies requested tariffs that would more than double the price of solar panels imported from China. The tariffs announced today were small in comparison: between 2.9 percent and 4.73 percent. But stiffer tariffs may be levied in May, when the Department of Commerce announces a decision on a second part of the trade case.

A flood of low-price Chinese solar panels, which helped drive down overall prices for solar panels by 50 percent over the last year, has hurt U.S. solar panel manufacturers, some of which went bankrupt last year because they couldn’t compete. This has drawn attention to China’s policy and fueled broader criticism of China’s trade practices.

But the real story is more complicated. For one thing, cheap Chinese panels have been a boon to installers of solar panels in the United States. In 2011, solar panel installations doubled in the U.S., driven in large part by a plentiful supply of cheap solar panels made in China. Because installation companies employ large numbers of people, China’s policy may have actually helped the U.S. solar industry, at least in the short term.

The small tariffs imposed today aren’t expected to have a big effect, but large tariffs could slow the growth of solar installations in the U.S. and hurt solar installers. A recent study by the Brattle Group estimated that tariffs of 50 percent to 100 percent would increase prices for solar panels—relative to what they were expected to be—by 25 percent to 30 percent over the next two to three years, and eliminate thousands of potential installation jobs in the United States.

The precise effect that tariffs could have on panel prices is hard to determine because there is more than enough supply worldwide to make up for a loss of solar panels from China, says Shayle Kann, managing director for solar at GTM Research. “It’s possible that you would see prices flatten out in the U.S. while they otherwise would have gone down,” he says. “There might be a slight increase. But it’s hard to call.”

Still, Kann says, tariffs could be “disruptive.” Between 40 percent and 50 percent of planned solar installations in the U.S. were going to use solar panels from China. “If you impose an import tariff on something like 50 percent of the market, you’re going to have a substantial impact,” he says. “There’s no way to avoid that.”

The tariffs could also backfire by hurting U.S. companies that supply solar manufacturing equipment and materials to China. In 2010, the value of these exports exceeded that of imported solar panels from China by hundreds of millions of dollars, according to GTM Research.

China may also retaliate by placing tariffs on U.S. silicon and equipment. If this happens, the Brattle Group guesses that this could cause job losses of up to 60,000 in the U.S. by 2014.

So in the short term, the only ones to benefit from the tariffs would be solar panel manufacturers in the U.S., which account for a small fraction of the total domestic solar industry workforce. The Brattle study concludes that the damage to installers and consumers from higher prices would far exceed the benefit to solar panel manufacturers.

However, some experts argue that over the long term, tariffs could result in lower-priced solar panels and help U.S. installers and manufacturers alike. Supporters of the tariffs make two basic arguments. The first is that without tariffs, unfair trade practices in China will drive other manufacturers out of business, reducing competition and reducing the incentive for Chinese companies to invent better solar panels. Imposing tariffs would allow more solar panel manufacturers to survive worldwide and, according to this logic, increase competition.

The other argument is that unfairly subsidizing solar panel exports makes it more difficult for companies with new technologies to break into the market. While new technologies may promise lower costs eventually, they’re typically more expensive at first. Higher prices—driven by tariffs—could make it easier for companies with new technology to become profitable.

But, of course, such tariffs would not help companies in China with innovative technologies. It’s also unclear whether the tariffs will raise prices enough for new technologies to succeed. Subsidies that create a market for solar panels—such as the feed-in tariffs in Germany—could have a greater impact, by increasing demand for solar panels. Companies such as First Solar, which developed a new kind of solar panel that doesn’t use silicon, were helped by high demand that kept prices artificially high in the mid-2000s. Melanie Hart, a policy analyst at the Center for American Progress, calls both for tariffs and for policies to increase demand.

What is certain is that continued innovation is necessary if solar power, which amounts to less than 1 percent of the U.S. electricity supply, is to become a major source of electricity. Solar panels have become much cheaper, but the cost of solar panel installations in the U.S. is still far too high to compete with fossil-fuel power plants. New technologies are needed to improve solar panel efficiency without increasing manufacturing costs. This would lower the cost per watt of solar panels and reduce installation costs because fewer panels would be needed per installation.

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