China subsidized solar panels, US finds. Are tariffs the right response?

In a move with potential to spark a trade war, the Commerce Department ruled Tuesday that US solar panel manufacturers are being victimized by Chinese manufacturers dumping cheap panels in North America that were unfairly subsidized by the Chinese government.

Amid an ongoing investigation, Commerce determined that Chinese producers and exporters have received subsidies ranging from 2.90 percent to 4.73 percent, a smaller advantage over US manufacturers than many analysts had expected. Commerce will now direct tariffs to be collected on Chinese imports.

The Obama administration argues that dumping of under-priced solar panels is a violation of World Trade Organization rules that has come at a high cost to US panel manufacturers. Several have already been forced to close domestic manufacturing facilities even though 2011 was one of the best years ever for US solar panel sales.

While the US remains a leader in the production of thin film – an advanced type of solar-electric panel technology – at least 12 US manufacturers that made more conventional photovoltaic panels have laid off employees, shut down plants or filed for bankruptcy during the past two years, according to the Coalition for American Solar Manufacturing. The group of seven US manufacturers filed trade petitions last year against two Chinese silicon solar PV manufacturers, leading to the Commerce investigation.

"Essentially, China is trying to corner the market," Elijah Sonnier, quality manager at MX Solar USA, a panel manufacturer in Somerset, N.J., and one of the seven coalition companies, said this month. "They corner the market and push everyone else out, and then they set their own prices."

Despite the smaller than expected advantage announced by the Commerce Department, a spokesman for one coalition company said he expects the estimation of the Chinese subsidy to grow as the investigation continues.

"So far it's been determined that fully 10 subsidy programs the Chinese are using are illegal under US and international trade law," Ben Santarris, a spokesman for SolarWorld Industries America in Hillsboro, Ore., says in an interview. "It's just the first step in a multi-step process. It's not unusual for preliminary determinations to come in at these levels or for the numbers to change significantly between the preliminary and final determination."

In a January finding in the runup to Tuesday’s announcement, the Commerce Department's International Trade Administration determined that Chinese manufacturers had apparently dumped "massive" quantities of solar panels into the US market that were sold far more cheaply than US-made panels. According to the finding, the lower price was mainly because the panels were heavily subsidized by dozens of low-cost Chinese government loan programs and other subsidies.

The Commerce finding parallel's a separate Stanford University analysis for the National Renewable Energy Laboratory based in Golden, Colo. released last month. It found that Chinese solar panel manufacturers had only about a one percent cost advantage – if subsidies were excluded – and would actually have exceeded the cost of US-made panels by 5 percent when ocean transportation costs were included.

The preliminary Commerce finding – which comes without fanfare as a "fact sheet" rather than a press announcement and included no formal comment from a commerce official – comes at a politically delicate moment for the Obama administration, which would like to avoid a trade war with China during an election year.

As a result of the finding, tariffs on Chinese solar panel imports will be levied retroactively back to December and US Customs and border protection officers will be instructed to slap tariffs on any new Chinese solar panels entering the US. But whether that will be sufficient to keep US manufacturers afloat remains to be seen.

"Definitely everybody knows that what the Chinese charge for modules is very close to their production costs," says Fatima Toor, a solar industry analyst with Lux Research, a Boston-based renewable energy market research firm. "That's because they have government backing and government support to help them survive. They can get away selling near cost, while it's hard if you are a US manufacturer to do that."

Solar industry analysts have predicted for years that a "solar industry shakeout" was coming. Those companies left standing after the predicted savage price competition would be the big winners in the global market in the long run.

But will US manufacturers be there when the dust settles?

US solar panel installations more than doubled in number last year over 2010 figures to reach 1,855 megawatts, the Solar Energy Industries Association reported this month. Overall, US solar panel capacity now stands at about 4 gigawatts – about the same as four nuclear power reactors.

That should have been great news for US-based makers of solar panel wafers and cell manufacturers with close proximity to one of the hottest solar markets on the planet. Instead, the US market was swamped in the second half of 2011 with Chinese solar panels far cheaper that those made by US manufacturers, the coalition argues.

Solar photovoltaic module production in the US dropped from 1,273 megawatts in 2010 to 1,219 MW in 2011 "as a result of global oversupply and the shuttering of a number of production facilities," according to a 2011 year-in-review study conducted for the Solar Energy Industries Association by GTM Research.

At the same time, imports of Chinese solar cells and modules into the US in 2011 more than doubled, with their value soaring from $1.5 billion to $3.1 billion in the same time period, the Commerce Department found.

Amid that flood, US-based SpectraWatt, founded in 2008, closed last year. Evergreen Solar Inc. and Solyndra, the California company that received a $535 million federal loan guarantee, shut last year, too. Sanyo last month said it plans to close its solar ingot and wafer factory in Carson, Calif., laying off about 140 workers.

But there's doubt that the new tariffs will do much. Even with new US trade sanctions, Chinese solar manufacturers are shifting assembly lines to Taiwan, Malaysia, Indonesia, and the Philippines, industry analysts say.

In an apparent bid to cut off that end-around, Commerce also announced a clarification of the scope of its investigation to cover not only imports of solar cells produced in China and solar panels produced in China from Chinese-made solar cells, but also imports of solar panels produced outside of China from solar cells produced in China.

Will that stop the flood of cheap panels? Probably not, Toor says.

Instead of tariffs, she says, the US should consider subsidizing the manufacturing of polysilicon – the high-purity raw material for solar cells. That would, she says, help ensure domestic manufacturers' survival.

"It's going to be hard for US companies to produce at a cost per watt advantage unless they get cheaper polysilicon," she says. "That's where the US government needs to focus its support, not on higher tariffs."

Commerce is scheduled to conclude its investigation and release its findings in June.