Tariffs on Chinese Solar Panel Imports: Why So Low?

A friend of mine, who has held senior positions in the Congress and the Commerce Department, used to warn against attributing any Machiavellian logic to U.S. government actions. Most decisions, he rightly points out, are the product of large bureaucracies that operate more or less on auto-pilot.

So I offer the following scenario with some trepidation, in an effort to explain the surprising Commerce decision last week to levy very small  tariffs on imports of Chinese solar panels.

First, some background. Last year a group representing seven U.S. solar cell manufacturers brought a complaint to the Commerce Department seeking tariffs on Chinese imports, charging that Chinese companies were receiving unfair government support and/or selling below cost in the U.S. to gain market share. Chinese makers of photovoltaic (PV) modules, which are the dominant solar technology, now control nearly half of a fast-growing global market, while the U.S. share has fallen from more than 40 percent in the mid-1990s to just 7 percent. The case was led by SolarWorld, a German company that manufactures globally and has recently ramped up production in Oregon, helped by state business and energy tax credits.

There is plenty of evidence that China’s dominance is in part due to government subsidies which have led to a glut in supply, most of which is exported. A recent study from the National Renewable Energy Laboratory suggests that, given shipping costs, Chinese PV module makers would not be competitive in the U.S. market without subsidies.

So it was more than slightly perplexing to see the Commerce Department’s preliminary decision last week in the subsidy portion of the case, which imposed duties ranging from just 2.9 to 4.7 percent. Share prices for the leading Chinese solar companies shot up as soon as the decision was announced because the market had expected much higher penalties, at least in double digits. What gives? There could indeed be reasons internal to the black art of calculating unfair trade subsidies, and the decisions are supposed to be made based on evidence and expert calculations, not political pressures. Scott Lincicome, a trade attorney with White & Case, told Reuters that the high volume of Chinese solar panel exports and the generally low interest rates worldwide may have diluted the effects of any Chinese government subsidies. Other alleged subsidies--such as land and energy costs and government support for R & D--remain under investigation by the Commerce Department, so the duties could well be higher when the final determination is announced in June. There is also a separate but related anti-dumping investigation that could also result in steeper tariffs when the preliminary determination is announced in May.

This is all quite plausible. But here’s another explanation. The Obama administration has absolutely no desire to impose punitive duties that would actually impede the sale of Chinese solar modules. The power generated by new solar installations in the United States last year was twice the level added in 2010, largely due to falling panel prices, as well as U.S. government production subsidies and consumer tax breaks that have made solar more competitive with conventional sources. Expanding the use of renewable energy is among the administration’s highest priorities. Indeed, when the duties were announced last week by the Commerce Department, President Obama was touring a Nevada solar facility that is the largest PV plant in the United States. Slapping hefty tariffs on Chinese PV imports would undermine that policy.

At the same time, however, the Obama administration does not want to see the few remaining U.S.-based panel  makers driven out of business by cheap imports, and key administration allies like Senator Ron Wyden (D-OR) and House Ways and Means Committee ranking member Sander Levin (D-MI) have been pressing for aid to the industry.

What to do? Well, on February 29, the board of the U.S. Export-Import Bank, the U.S. government’s export credit finance agency, approved an $81 million loan guarantee to SolarWorld, which means that most of the production from the company’s Oregon facility will be exported to Canada. The bank did not put out a press release, and it generated no media coverage, though the decision was public. Indeed Fred Hochberg, the Obama-appointed president of the bank, tweeted to his followers (of which I am one) that the board had “Approved $81 m to export @SolarWorldUSA solar panels to Canada; transaction supports 1500 jobs in Hillsboro, Oregon.” The bank says the financing will allow for a long 18-year repayment term for exports to the Stardale Solar PV Project in southwest Ontario, which is providing energy to the Ontario Power Authority. The project is owned by Innergex Renewable Energy of Quebec, and the loan will be made by the Bank of Tokyo-Mitsubishi.

The Ex-Im loan guarantee is hardly unusual. Indeed it fits within the bank’s mandate to support environmentally beneficial projects, and SolarWorld and other U.S. companies such as FirstSolar have also received generous support from the bank in the recent past. But the February loan guarantee has the added benefit of largely taking care of SolarWorld’s near-term  competitive problems. SolarWorld can export panels to Canada, and the low duties imposed by Commerce mean that the flow of cheap Chinese solar panels for installation in the United States will be largely unimpeded. It is, as governments love to say, a “win-win."

Coincidence? Maybe, but a rather happy one for the Obama administration.