For nine months, the entire U.S. solar industry was focused on the threat of trade action on imported solar cells and modules through the Section 201 process. And while the final tariff-rate quota announced on January 22 was less severe than initially feared, it turns out that this was only the first of several trade investigations to affect the U.S. solar industry and market.
Since the filing of the Section 201 tariffs, the nation has also seen a ruling imposing tariffs on steel and aluminum, as well as a proposal to slap tariffs on more than 1,000 items imported from China as the result of a separate investigation. And while to date few products used in the solar industry have been named in the new Section 301 process, the combination of all three trade investigations, coupled with the looming retaliation from multiple nations makes for a real trade war in which solar is caught in the middle.
But this trade war is much larger than solar, and the U.S. federal government’s approach to international trade has broad ramifications. Many more industries are likely to be involved, and the main affects are likely yet to come.
The final tariffs and quotas under the Section 201 process are not nearly as severe as what the petitioners had asked for. This is in part due to an exemption for the first 2.5 GW of cells coming into the United States, but more the result of an ad valorem rate of only 30%, not the 50% that the petitioners had requested.
But this does not mean that the solar industry is not affected. The uncertainty raised by the process itself has interrupted the market, as developers and off-takers could not plan future projects when they did not know what PV modules were going to cost.
GTM Research Head of Americas Research MJ Shiao told pv magazine that in response to the investigation many developers froze their pipelines for the rest of 2017.
And while developers were able to plan again after the tariff ruling in January, the industry then had to deal with the 30% tariffs themselves, as well as a shortage of modules, given that existing stock was rushed into the United States in advance of the duties.
“The supply chain is totally chaotic” explains Tony Clifford, the chief development officer for Standard Solar. Clifford says that due to the shortage, the price of modules is higher than it should be when accounting for the 30% import duty, often over $0.50 per watt.
All of this means delays in projects, especially those that have flexible start dates and can wait for prices to come back down. This in turn causes problems for construction contractors, like Swinteron Renewable Energy. Swinerton General Manager George Hershman says that contractors like his that have fixed asset costs and equipment are particularly affected.
He notes that this effect is especially problematic in terms of staffing, as construction contractors typically cannot afford to keep workers on when they have no work for them, but then must quickly re-hire when they have projects.
The consensus of developers and engineering, procurement and construction (EPC) contractors that pv magazine spoke with is that the slow-down of their businesses will last through the end of the year. Given typical timelines for construction, this roughly meshes with the estimate by GTM Research that the most significant impact on installations will be in 2019.
“Everybody is feeling the impact that we are for our 2017, 2018 fiscal years,” says Swinerton’s Hershman.
These developers and EPCs were also not clear whether the market interruption due to the uncertainty caused by the investigation is having a bigger affect, or the tariffs themselves. GTM Research is on the side of the tariffs representing more damage over the full four years, however any such affects will be less visible than the obvious hiccup in 2018 and 2019.
In the residential and small commercial sector the effect on installations is expected to be more muted, and here various market participants have indicated that the cost of the tariffs will be absorbed by developers and installers,
Steel and aluminum tariffs
Just as the U.S. solar industry was adapting to the new reality of life under the Section 201 tariffs, in March President Trump announced a new set of global import duties on steel and aluminum, again using a little-known section of U.S. trade law.
IHS Market has estimated a 1-3 cent per watt impact on system prices from these tariffs, with a larger affect again on utility scale projects. However, as with any system of duties the affect on any given manufacturer or product depends on the exact products covered. While the tariffs will affect steel and aluminum used in wiring, transformers, posts for ground-mounted PV plants, tracker torque tubes and battery housing containers, they appear to be less focused on many of the finished steel projects used by U.S. racking, tracking and mounting systems makers, as well as module makers.
Another factor is that products from Canada, a major steel producer, are exempt from these duties. But George Hershman of Swinerton notes that even with the limited scope, steel and aluminum duties are still having effects.
“We are seeing immediate price increases across the board in steel now,” Hershman told pv magazine. He also notes that a lack of clear definition in the tariffs is causing uncertainty. “We are in a position now where manufacturers are taking the most careful approach possible, because they don’t know who is in and who is out, what is going to be included, what is a finished product,” explains Hershman.
It is important to note that while these tariffs affect solar, any changes in market prices for steel will also have a significant impact on new gas plants and pipelines. And with large-scale solar plus storage projects already threatening the market for new gas projects, there could be an unexpected upside for clean energy.
Section 301 and retaliation
If Section 201, steel and aluminum were not enough, the zealous trade warriors in the Trump Administration were simultaneously pursuing another trade case, under Section 301 of the U.S. Trade Act of 1974. Section 301 allows the United States to pursue retaliatory trade sanctions on foreign governments that our officials believe have violated international trade agreements and who burden or restrict U.S. commerce.
This case initially flew somewhat under the radar of many in the solar industry, but burst into prominence when the Trump Administration announced plans to impose 25% tariffs on over 1,000 products imported from China, many of which are related to technology industries.
Chinese inverter makers were among those relieved when the list did not include PV cells, modules, inverters or lithium-ion batteries. However, at the time of writing there were rumors that more products may be added later.
Like the other sets of tariffs, Section 301 put some projects on pause, if more briefly. But while it was not a direct hit on the solar industry, it has brought a swift response from China, which has vowed a $50 billion retaliation on U.S. goods. The steel and aluminum tariffs have prompted similar threats from the EU, and along with this Japan and Korea have filed with the WTO for permission to retaliate over Section 201.
This could definitely be damaging to the larger economy, but is not expected to hit solar much. The reason is that China has already retaliated against 2012 tariffs on solar cells with its own polysilicon tariffs which have decimated U.S. production, with both Hemlock Semiconductor and REC Silicon shut out of the Chinese market.
Manufacturing and trade flows
Perhaps the greatest tragedy of the Section 201 tariffs is that while they are damaging the U.S. solar market, they are unlikely to actually achieve their stated purpose in terms of creating a meaningful revival in U.S. cell and module manufacturing. While a number of modest expansions were announced following the January ruling, the largest crystalline silicon facility – JinkoSolar’s plan for factories in Jacksonville, Florida – has dramatically contracted to only one factory with 200 workers.
The United States will continue to import large volumes of PV modules as well as cells from Asia, tariffs or no, just as we import clothes, steel, cars, electronics and other items. The U.S. has seen a massive trade deficit in goods for decades, which reflects the widespread offshoring of manufacturing. If we want to reverse that multi-decade trend, it will take far more than a few tariffs.
As documented in two anti-subsidy trade cases in 2012 and 2014, China’s dominance of the global solar manufacturing landscape is in no small part the result of its specific program to do so as outlined in multiple five-year plans, and a wide array of supports at all levels of the government that it has employed to this end. The United States has nothing similar in terms of industrial policy, and such comprehensive support for any kind of manufacturing is not being contemplated by either party.
Ghosts of trade wars past
Instead, the United States appears to be returning to an earlier period in International relations, and it is not an accident that current U.S. Trade Representative Robert Lighthizer served as deputy trade representative in the Reagan Administration. Arizona State University Professor Glenn Fong is an expert on technology, trade and industrial policies, and his research includes this period.
“(Lighthizer) is bringing back many of the measures that the Reagan Administration was famous for,” Professor Fong told pv magazine. He describes this as “managed trade” as opposed to free trade, and casts the Trump Administration’s actions as an “opening shot for a negotiated outcome”.
“Back in the 1980s we had a car agreement, a steel agreement, a TV agreement,” recalls Fong. He notes that this made trade both highly political and unpredictable. “You get the concession, but it drives these unintended effects.”
In the 1980s the target of many trade actions was Japan, and Fong notes that the United States had more leverage over Japan then than we do over China now. “I would not bet a lot of money that this would break China,” he predicts.
Part of the reason is that the Chinese are simply not playing by the same rules, or with the same assumptions, as the United States is. “Our only response to the industrial policies of other countries is to depart from free trade and build trade walls,” laments Fong.
Trade wars typically negatively affect all participants, and here Fong references the Smoot-Hawley Tariff Act of 1930, which is widely credited with worsening the Great Depression. “Everyone loses,” notes Fong. “Even a little trade war both sides lose. There’s no rebalancing. Trade wars lead to hot wars.”
So while the tariffs on solar cells and modules have been problematic for the U.S. solar industry, with President Trump engaging in economic combat with multiple other nations, this may be the least of America’s problems.