Monday, October 31, 2011

A Trade War With China Over Solar Panels Will Burn US

A group of US solar-panel manufacturers has recently filed a controversial petition against the Chinese solar industry.

They are accusing China of helping its solar industry by unfairly providing billions of dollars in subsidies as well as cash grants and tax breaks.

The proposed punishment is duties of more than 100 per cent on the price of imported solar panels from China. This would be a big blow to the Chinese manufacturers given 95 per cent of their production is exported, in large part to the US. This year alone Chinese companies are on track to sell US$2 billion (Dh7.34bn) worth of solar panels in the US.

The entire case, led by SolarWorld, smells of hypocrisy. US solar companies have received large subsidies from federal, state and local authorities.

Solyndra, a US solar manufacturer that has recently gone bankrupt, benefited from federal loan guarantees of more than a $500 million. SolarWorld is earmarked to receive $4m in research assistance from the federal government. In total, US federal subsidies for solar power totalled more than $1bn last year.

In truth, both the US and Chinese solar industries have benefited from government assistance. It just so happens the Chinese approach has been more intensive and clearly more successful.

There is also a heavy political dimension to this case. The US is in the midst of a deep economic crisis. Devoid of any real solutions to put forward, US politicians are instead looking for an scapegoat. And the flavour of the day is China.

US politicians are largely getting behind this petition and declaring "China is cheating" and engaging in "rogue practices." With no end in sight for the US' economic malaise, the anti-China protectionist sentiment is likely to continue and spread into other sectors, especially as next year's presidential elections come closer.

History tells us this kind of protectionist stance is flawed. In the end, the biggest loser will be the US solar industry.

China's huge export flows have helped push the price of solar panels down from $3.30 per watt in 2008 to about $1.15 today, a 65 per cent drop. This has helped raise the attractiveness of solar energy among investors and the utilities, thus transforming the US solar market into a $6bn business. It's important to remember the solar panel itself represents less than 40 per cent of the equation. The other 60 per cent consists of supporting equipment such as steel structures and cables, as well as services such as installation and maintenance - all of which are sourced locally.

So when the cost of the solar panel goes up, the ones who suffer are not just the foreign module manufactures but also the local businesses that provide equipment and services to the solar industry.

This protectionist measure would also suppress the US' efforts of becoming less dependent on fossil fuels. Today, solar power generates less than 1 per cent of the US' electricity because it is still more expensive than oil or gas. Any price increase in the technology is likely to shrink solar's slice in the US energy pie, thus making the country all the more dependent on oil and gas.

Even if it were to go through, the anti-dumping tariff would not leave a big dent on the Chinese solar industry over the long term. As the global market for solar panel continues to grow, China would find new markets for its solar panels. This includes China's own domestic market which is set to grow by 150 per cent to 50,000 megawatts over the next 10 years, thus becoming by far the largest solar market in the world.

A more pragmatic approach would have been for the US plaintiffs to ask for more job training aimed at pushing the US solar industry higher up in the value chain. By investing in the services sector, its solar industry as a whole would expand handsomely by drawing on inexpensive solar panels sourced from abroad and services such as design, engineering, installation and maintenance sourced domestically. This way, everyone wins.

Rather than going on the defensive and relying on trade barriers this is the time for the US to show real leadership and make serious investments towards a more sustainable energy future.


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