On May 17, 2012, the Commerce Department announced that imports of Chinese photovoltaic cells (solar cells) will be subject to preliminary anti-dumping duties (ADDs) of 31 percent. This penalty tariff will be applied, along with new countervailing duties (CVDs) ranging from 2.9 to 4.7 percent, to all imports of Chinese crystalline silicon photovoltaic cells, even when assembled into panels outside the People’s Republic. While the announcement of ADDs comes as no surprise, the size of the penalty is alarming and may spark more trade friction between the two largest economies in the world.
Equally important, ADDs of 31 percent and more highlight the tension between two worthy public policy objectives. On the one hand, trade remedy policies in the form of certain duties on imports are designed to shield US firms from unfair foreign competition. On the other, environmental policies designed to encourage renewable energy and limit the emission of greenhouse gases are hurt when alternatives to fossil fuels are made more expensive. The solar cell case also underlies the lopsided ADD process, which gives no legal standing to downstream industries—in this case installers of solar cells—that will lose jobs when they have to pay penalty duties on imported components.
CVD and ADD investigations were launched on October 19, 2011 when the Coalition for American Solar Manufacturing (CASM) filed official complaints, both with the US Department of Commerce (DOC) and the US International Trade Commission (ITC), charging unfair and injurious trade practices by China in the crystalline silicon solar industry. CASM is led by SolarWord—a German company with considerable US operations—and six other unnamed companies that manufacture solar panels in the United States.
In December 2011, the ITC (which determines the extent of “injury” in anti-dumping, or AD, cases) found that “there is a reasonable indication that a US industry is materially injured by reason of imports of crystalline silicon photovoltaic cells and modules from China that are allegedly subsidized and sold in the United States at less than fair value.” The bifurcated US trade remedy process then shifted back to the Commerce Department to determine the rate of CVDs (which seek to offset subsidies) and ADDs (which seek to offset discriminatory pricing or sales below cost). In March 2012, Commerce preliminarily imposed countervailing duties ranging from 2.9 percent to 4.73 percent . The preliminary determination on ADDs issued on May 17, 2012, will tack an additional 31 percent rate. Both determinations are subject to a final Commerce review, expected to be completed in October 2012, which could remove, reduce, or increase penalties.
The size of ADDs partly reflects the Commerce Department’s unusual AD margin calculation method, which applies only to China and a few other countries. Under China’s Protocol of Accession to the WTO, China can be treated as a “non-market economy” by other WTO members.1 Applying this designation in ADD cases, the United States uses the costs and prices of a “surrogate country”—not Chinese costs and prices—to calculate the ADD margin. In the past, India was used as China’s surrogate. Last year Commerce decided to switch China’s surrogate for future ADD cases. In the solar case, China’s new surrogate was Thailand. The use of a surrogate country obviously introduces artificial constructs into the calculation of AD margins.2
Lessons From Tires
Like the Chinese tires case of 2009, the solar panel CVD and AD cases represent a high profile application of trade remedies to benefit US firms hurt by imports. Unlike the tires case, however, there is virtually no presidential discretion in an AD or CVD case. Otherwise similarities can be found. On September 26, 2009, President Obama subjected imports of Chinese tires to an additional 35 percent ad valorem “safeguard” tariffs in the first year (dropping to 30 percent ad valorem in the second year, and 25 percent ad valorem in the third year). On generous assumptions, that initiative saved a maximum of 1,200 manufacturing jobs. But the total cost to American consumers from higher prices resulting from the tire safeguard tariffs was $1.1 billion in 2011. Thus the cost per job saved was at least $900,000. Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home. In addition, the tire case appears to have sparked a retaliatory Chinese case again US chicken exports, which probably cost US producers about $1 billion of lost exports.
Similar Costs, Bigger Risks
By value of imports, US solar market imports are similar to tire imports. In 2010, US imports of solar products covered by ADD and CVD penalties were $1.5 billion. In that same year, when tire safeguards were already in place, US imports of Chinese tires were around $1 billion. Since the solar measures are similar in size and the penalty tariffs are roughly the same, it is possible that the direct costs to consumers in the solar case will be similar to the tire costs.
The Coalition for Affordable Solar Energy (CASE)—some 700 members comprising manufacturers of solar panels, solar developers, system owners, retailers, installers, engineers, and companies involved in innovation, engineering, and production—strongly opposed the AD and CVD actions. As mentioned, under the ADD and CVD laws, CASE had no legal standing to contest the imposition of penalty duties. Nevertheless, CASE pointed out that the “US is a net-exporter of solar products to China by $200 million and to the world by about $2 billion; a trade war would put that at risk.” Also, solar cells are upstream components in an industry where the majority of workers are engaged in downstream installation. Overall, the number of solar industry employees is approximately 100,000. Of those, about 52 percent work in installation.3 Increasing the price of solar panels in the US market will decrease the demand for installation. A study by the Brattle Group, commissioned by CASE, estimates that “a tariff of 50 percent will result in between 14,877 and 43,178 fewer [US] jobs in 2014, even accounting for production job increases [in the US solar manufacturing industry].” The Brattle Group speculates that “the Chinese government may retaliate if a tariff is imposed on its cells and modules by imposing a tariff on US products…a retaliation policy from China would likely take the form of a tariff on US polysilicon exports.... In 2010 the US exported approximately $863 million of polysilicon products to China. A reduction in demand of this magnitude could result in additional job losses of 10,881, bringing the total job losses up to as many as 60,000 .” Li Junfeng, a senior Chinese government official, has proposed a retaliatory tariff on polysilicon products.4 These retaliatory consequences are probably exaggerated, but they cannot be ignored.
More fundamentally, the solar cell case highlights two big defects in the US law that governs ADD and CVD cases. First, downstream users of the affected product have no legal standing in ITC hearings to argue the potential injury that they will suffer if penalty duties are imposed. They should be given a voice in ITC proceedings. Second, there is a legal vacuum when trade remedy policy conflicts with environmental policy. Greenhouse gas emissions are a global problem and will require global solutions. Raising the cost of US solar energy is a step in the wrong direction. In a case like this, the Environmental Protection Agency should have legal standing to argue the environmental consequences before the ITC.
Our bottom line is that US anti-dumping and countervailing duty laws should be reformed to correct the distorted process that only considers the impact of foreign practices on competing domestic firms. The laws should call for a balanced evaluation that also considers the impact of penalty duties on downstream domestic industries and, in unusual cases like solar cells, their environmental consequences.
1. The “non-market economy” designation automatically expires on December 31, 2015.
2. Kevin P. Gallagher and Kelly Sims Gallagher claim in a recent post in the Financial Times that “prices of Chinese-made PV modules in China are lower than they are outside of China, so it’s hard to see how they are ‘dumping’ on the U.S. market.”