Global markets are wondering: What will happen as the U.S.-China trade war escalates?
One need look no further than the solar industry to know that we have been here before, and that trade wars create disruptions that jeopardize all countries involved.
On August 1, President Trump announced that he would impose 10 percent tariffs on $300 billion of imported Chinese goods if the two countries do not reach a trade deal by September 1. This new round of tariffs is in addition to the current tariffs of 25 percent on $250 billion of Chinese imports.
Soon after the new tariff announcement, China threatened to retaliate by imposing further tariffs on agriculture imports from the U.S. The trade tension between the world’s largest two economies has sent a shock wave through the global economy.
The solar industry has lessons about what comes next for both countries.
The rearview mirror
The U.S. was once a stronghold of solar cell and module manufacturing. It accounted for around a quarter of global solar module shipments in the early 2000s.
However, the rise of the Chinese solar PV manufacturing industry in the 2000s changed the global solar PV supply landscape: The market share of U.S.-made solar panels decreased significantly as Chinese brands rose to prominence.
What followed was seven years of solar trade wars.
- In 2012, the U.S. Department of Commerce imposed the first round of antidumping and countervailing duties (AD/CVD) on imported solar panels from China.
- In 2014, further tariffs were imposed on Chinese manufacturers, and new tariffs were imposed on Taiwanese solar cell manufacturers as they were seen as a back door for Chinese manufacturers to circumvent the 2012 tariffs.
- In January 2018, soon after President Trump took office, he imposed a 30 percent tariff with a four-year stepdown on solar panel imports from China under Section 201 of the Trade Act of 1974.
- In September 2018, under Section 301 of the Trade Act of 1974, the Trump administration imposed 10 percent tariffs on $325 billion of Chinese imports, among which are solar module components such as inverters, junction boxes and backsheets.
- In May 2019, the Trump administration increased the Section 301 tariff level from 10 percent to 25 percent.
Three lessons
The solar panel supply chain between the U.S. and China is now laden with trade barriers. Three lessons from the solar trade war can shed light on what's to come as broader trade tensions escalate.
- Tariffs raise prices on U.S. consumers.
Tariffs not only increase the purchase prices of goods, but they also create a supply shortage, which can further drive up prices. The evidence is clear in today’s U.S. solar market, where the price of solar modules is about 20 percent higher than in major European markets, 40 percent higher than the price in Japan, and about 50 percent higher than the price in China.
With the pending 10 percent tariff on a wide-ranging list of goods from China, U.S. consumers must be prepared to pay higher prices for products like shoes, toys and smartphones.
- Tariffs are effective in delivering the original promise: hurting the target country’s exports.
With tariffs in place, Chinese and Taiwanese solar panel makers found it uneconomical to sell directly to the U.S. They were forced to move their manufacturing capacities overseas to countries in Southeast Asia like Vietnam and Malaysia.
This was seen as a disruption to their business operations. Chinese and Taiwanese manufacturers had to make a tradeoff between the lowest-cost production at home and a tariff-free but higher-cost production environment in Southeast Asia. This led to reductions in business investment at home, fewer job opportunities, and a drop in solar-sector GDP.
If the new 10 percent tariffs on consumer goods go into effect, one can expect to see similar dynamics. China’s economy will take a hit — a bigger hit than the solar trade war could ever impose, as some manufacturing capacity and the associated capital move from China to other low-cost countries.
However, this time, not only will Chinese companies have to reshuffle manufacturing strategies, but U.S.-based multinationals such as Apple, Gap and Nike may have to take a hard look at their sizable production operations in China.
Expensive decisions to move operations to other countries may have to be made to circumvent the tariffs. Third-party countries stand to benefit from the trade tension as they may become new outsource destinations.
- Last but not least, trade wars are like a game of tug-of-war — tariffs invite more tariffs.
Shortly after the U.S. imposed the first round of AD/CVD tariffs, the Chinese retaliated by imposing tariffs on U.S.-made polysilicon, a key feedstock for solar panel manufacturing. It has been seven years since the retaliatory tariffs, and since that time the U.S. has watched its polysilicon industry take a nosedive.
U.S. silicon exports to China dropped dramatically as China grew its domestic production from 93,000 metric tons to 254,000 metric tons between 2012 and 2018. REC Silicon, a Norwegian company and a global top-three silicon maker, was forced to announce that it will shut down one of its two U.S.-based facilities this year if the tariff on polysilicon is not removed by the Chinese, causing 100 workers to lose their jobs.
Solar's cautionary tale
History is repeating itself now that China and the U.S. are engaging in a trade war at a much larger scale.
China has retaliated against the U.S. by first imposing tariffs on $60 billion worth of American imports shortly after the Section 301 tariffs increased to 25 percent in May of this year. The latest retaliation came shortly after the announcement of the pending 10 percent tariff on more Chinese exports.
China threatened to “halt all purchases of U.S. agriculture imports” by state buyers in early August. Before the trade war started, American farmers sold $19.5 billion worth of produce to China in 2017. It fell to $9.1 billion in 2018. Now, they may lose it all. Although the Trump administration has plans to provide financial aids to farmers, American taxpayers are on the hook to provide the $16 billion called for by the farm bill.
It is not just farmers that may be crippled by the trade war; many more industries face tariffs from China. Chemical companies, industrial equipment manufacturers and heavy machinery makers will not be able to access the Chinese market at a profitable level.
What happened to the U.S. polysilicon manufacturers as a result of the solar trade war could happen again to a broader array of American companies, especially those in the manufacturing sector. While American companies are shut off from China, domestic Chinese competitors will be able to polish their skills, build domestic market presence, and eventually drive production costs down to a level where Western companies will not be able to compete.
As the global economy enters this uncertain era of trade, the solar energy industry offers a cautionary tale of what could happen next. Trade wars are costly, for both the countries that initiate them and the target countries. Consumers are often left to pay the bill; companies will have to engage with unintended strategic pivots to stay afloat; industries will be caught in the crossfire and could lose a sizable chunk of the market. Worse, they could lose competitive advantages in certain markets altogether in just a few years' time.
Trade wars vividly illustrate the interdependent nature of the modern global economy. A zero-sum mindset results in a lose-lose situation.
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Xiaojing Sun is a senior research analyst at Wood Mackenzie Power & Renewables.