New Hampshire, U.S.A. — As widely expected, the U.S. Department of Commerce (DOC) has ruled in favor of American solar manufacturers, who accused Chinese rivals of benefiting unfairly from their own export subsidies. Unexpectedly, though, are the modest numbers — just 3 to almost 5 percent countervailing duties (CVD). We’ve read through the decision and asked a handful of industry watchers what the main takeaways should be.
Why Were the Tariffs Lower Than Thought?
Simply put, the Department of Commerce did the math. In its 62-page ruling the DOC lays out in great detail how it determined what the Chinese firms received in subsidies and what could count as unfair, then what extra tariff would be needed to rebalance the equation for U.S. imports. (This was no easy task, as the DOC repeatedly explains that the Chinese government was less than helpful in providing information.) Simple as that.
Similarly, the reason for three levels of tariffs is also based purely on numbers that the DOC had access to regarding Chinese government subsidies. Maxim Group analyst Aaron Chew has a nice graphic showing all the Chinese subsidies that the DOC could identify, and how they impacted specific tariff levels for Suntech and Trina, who were selected in the DOC’s investigation as “mandatory respondents” because they were the two largest producers and exporters to the U.S. based on aggregate value. The chart is tough to read at this size, but you can see there are subsidies for official programs (“Golden Sun,” “Two Free, Three Half”), benefits in policy lending, tariffs/value-added taxes, land use, etc. (“LTAR” is an acronym for “less than adequate remuneration.”)
Trina and Suntech’s different exposure to certain Chinese subsidy programs. (Source: Maxim Group, Department of Commerce)
Note in that graphic, the bar for “polysilicon” is the second biggest chunk of Trina’s determined subsidization, at 0.72 percent. Chew says this number is in reference to Chinese polysilicon supplier GCL Poly, which he dubs “the Intel of solar” because of its ubiquitous influence on the sector and which, he says, has been questioned for its ties to the government. (See below, “How China Will Respond,” for more on GCL’s influence in this case and beyond.)
Do the Lower CVD Tariffs Suggest Anything About the Upcoming Antidumping Decision?
Skeptics and conspiracy theorists, we hear you: it’s all backroom politics, everything is negotiable, trust no one, etc. But let’s assume that the DOC is above-board on this and purely looks at numbers, not like a table-banging House Oversight Committee. Resist the urge to “read-through” into whether these lower-than-expected tariffs pave the way for stiffer antidumping (AD) penalties coming up. These are two related cases, but they’re officially two different investigations with different rules and principles.
That said, antidumping penalties that have been applied in other industries tend to be higher than the CVD ones. So the 20 to 30 percent levels that many in the industry were expecting could very well come true for both cases in aggregate.
What’s the Takeaway for U.S. Solar Manufacturers?
It would seem clear, based on the DOC’s numbers, that Chinese companies aren’t as heavily subsidized as many believed, and thus it’s not having as much of an impact. That’s “a relatively positive outcome” for CASE and its followers who argue this dispute hurts the solar sector overall. On the other hand, it’s still an official determination that Chinese solar suppliers are in fact getting unfairly helped by their government, it’s hurting U.S. companies to a measurable degree, and government intervention is required — so CASM and members, take heart. And maybe that double-read is the way the preliminary ruling was intended.
“It basically shows they’re trying to accommodate everyone, and make everyone happy,” suggests Fatima Toor from Lux Research. “Everybody recognizes that it won’t be a good idea for the U.S. Department of Commerce to put huge tariffs on modules.”
There’s another angle to be played out here: precedence. A favorable U.S. ruling in SolarWorld’s pocket increases the chances that it’ll find sympathy in Europe should it choose to open a case there. “The larger risk is that SolarWorld expands the case to Europe, and/ or Chinese polysilicon retaliates against U.S. and Korean polysilicon companies which have received government incentives,” says Jefferies analyst Jesse Pichel.
What’s also clear is that the tariff cannot mask the broader concerns for global solar markets: it’s a tough business lately, and companies are losing money. Chinese solar stocks that shot up after the DOC ruling was announced, just as quickly fell back to earth within a day as investors realized the bigger picture hasn’t changed. “It is premature to call the decision a victory,” says Pichel. Ultimately the effect of a duty is the same, large or small: Chinese companies will see their costs rise (and thus pricing all the way down the chain), either by shipping Chinese products directly to the U.S. and suffering the tariff, or outsourcing some production to other nations to get around the tariff.
What Will Chinese Suppliers Do?
Chinese firms also have seen this decision coming. Some allegedly ramped up their exports to the U.S. in late 2011 ahead of such a ruling (hence the pending antidumping claim, with possible separate penalties). And they’ve also been preparing ways to get around the tariff by sending some production to other countries before exporting to the U.S., a practice called “tolling.”
And buried within the DOC decision is a key clarification that might help them do just that. The DOC says it will include imports of solar cells made in China, and modules/panels/laminates produced in China or elsewhere from Chinese-made solar cells — but specifically excludes products coming from China that were made from cells produced anywhere else. Thus, Chinese firms could outsource production of the cells themselves, say to neighboring Taiwan just across the strait, or to other nearby Asian countries such as Malaysia or the Philippines — ship the materials out, have the cells made, and then either ship them back to China to be made into modules, or keep them offshore and have modules made and exported from there.
The economics of tolling — involving extra shipping, manufacturing, requalification of the products, and shipping back to China — aren’t very attractive if the tariff is only 3 to 5 percent. Maxim’s Chew calculates that tolling adds about 6.5 percent to module production costs (about $0.05/W). But if Chinese companies think the DOC will come back in May with a stiffer set of penalties for antidumping — we’ve heard expectations of anywhere from 10 percent to 100 percent — then setting up tolling would make a lot more sense.
How Will China Respond?
China’s solar triumvirate (Trina Solar, Suntech, and Yingli Green Energy) were quick to acknowledge and applaud the decision, and to criticize “unilateral trade barriers, large or small, [that] will further delay our transition away from fossil fuels at a time when the majority of Americans demand cleaner and more secure energy such as solar.” They also pointed out that this is only one of two decisions forthcoming, with an antidumping ruling expected in mid-May.
China’s government also has chastised the U.S. for pursuing the case, and warned it might move ahead with investigations of its own into U.S. imports. We’ve heard that U.S.-imported silicon material might be eyed first, with the scope possibly widened to involve solar manufacturing equipment. That would eat greatly into a U.S. solar market that was a large net exporter in 2010. (CASM came out with its own updated numbers recently projecting a 2011 net trade deficit for U.S. solar products.) Chew muses that a polysilicon case, pushed by GCL, could very well proceed in China, but that its scope would be narrower than this case (Hemlock would be the primary U.S. target), and likely would not be broadened to include PV manufacturing equipment.
That said, keep in mind that the U.S. government, and Obama specifically, have been more vocal in recent weeks about addressing trade rules with China on a broad scale. Ratcheting up from either side — China investigating solar polysilicon imports, the U.S. expanding to other contested sectors outside of solar — could intensify into a much bigger trade dispute. Then again, that could also create a détente needed to bring both sides back to the table.
What’s the Impact to the US Solar Market?
Ultimately, US demand for solar should be bigger than this dispute. Installations more than doubled in 2011 to 1.8 gigawatts (GW), according to the Solar Energy Industries Organization (SEIA) and GTM Research. Even with tariffs put into place, solar technology suppliers in China and everywhere else recognize the U.S. market’s potential, and will find ways to play in this market. “Trina Solar is committed to providing high-quality modules and services to the United States market for the long term, where we value our customer base and supply chain business partners,” stated Trina chairman/CEO Jifan Gao. “Regardless of the outcome of this proceeding, we remain dedicated to the US solar market,” added Robert Petrina, Managing Director of Yingli Green Energy Americas.
It’s less clear what the ruling means to U.S. solar manufacturers. “If we address unfair trade practices in the U.S. solar market, we can get back to our business of expanding American manufacturing and jobs in the renewable energy sector,” said Carlo Santoro, director of business development at MX Solar, one of the now three public members of the seven-member CASM. “We look forward to getting back to the fair and legal competition that serves everyone best.”
But there’s a reality that must be acknowledged: the U.S. only accounts for 3 percent of global solar PV cell and module manufacturing, points out Paula Mints from Navigant Consulting. Comparatively, China and Taiwan gobbled up 74 percent share of global solar cell production in 2011, up from 63 percent in 2010, according to recent NPB Solarbuzz numbers. It’s not at all clear that tariffs — either the countervailing ones today or antidumping ones later — will significantly shift that paradigm. Assuming solar panel average selling prices of $1.20, that means Chinese-made modules would tack on just a few additional pennies to compete in the U.S. market. For some perspective, a 3 to 5 percent pricing swing could easily be washed out solely by shifts in currency valuations.
Also note that a 3 to 5 percent CVD only brings prices back to where they were in early January — which doesn’t exactly rewrite the competitive landscape for SolarWorld et al.
What’s The Next Legal Step?
This solar trade dispute is far from over. This is a preliminary decision by the DOC, which still has to nail down specifics, findings and final tariff levels, etc. It can, however, begin collecting tariffs from this designated preliminary date, holding monies in escrow pending its final ruling, currently scheduled for June 4. If the U.S. International Trade Commission (ITC) also decides (currently scheduled for July 19) on an injury impact of Chinese solar cells, the DOC will issue the CVD order on July 26.
The other legal milestone will be the DOC’s ruling, currently set for May 17, on whether the Chinese suppliers flooded the U.S. market with solar goods (“dumping”) to gain an unfair cost advantage. (The ITC already gave a preliminary affirmative for antidumping back in December.) There are two important aspects to this decision: did they dump, and was there enough injurious impact to U.S. firms to make the penalty retroactive. Some think the DOC likely will rule in favor of antidumping, and likely with a stiffer penalty than the CVD ruling (as has happened in such cases in other industries). But the retroactivity likely won’t be applied, however, given a higher burden of proof, and the fact that a confirmed surge in solar imports could be reasonably explained as reacting to the expiration of U.S. incentives at the end of 2011. (Efforts continue, meanwhile, among U.S. renewable energy proponents to revive both the 1603 Treasury grant and Investment Tax Credit [ITC].)
Many solar PV experts weighed in on the new tariff this week at PV America in San Jose, Calif. and RenewableEnergyWorld.com was there to capture some of their thoughts on video. Check out coverage of the show, with commentary from industry CEOs, manager and more, here.