Trade Fights And Politics

It was no surprise that China responded to the US decision to impose countervailing tariff duties on sale of imported photovoltaic panels from China. We expected more of a tit for tat action sticking it to some US interest in China in roughly equal proportion to the insult of the duties imposed by the US. Maybe China is waiting for maximum impact before it yells GOTCHA!  Like an October surprise designed to drive President Obama crazy, China is capable of imposing countervailing pressure.

The US is upping the ante by now taking the same countervailing duties track for wind turbine towers imported from China based upon complaints that China is dumping steel and below market prices.

Trade fights rarely are just about trade. They almost always are about politics geopolitical or domestic. This seems more about domestic US politics in an election year, and domestic Chinese politics in a leadership transition year. Both sides are looking to score points at home and act tough abroad.

It all gets more complicated than falling prices for solar photovoltaic panels. We see more  practical impacts of the US countervailing duties in earnings reports from Yingli Green Energy, Trina and Suntech all widely expected to take a beating from the requirement to account for the expected duties thus reducing earnings and gross margins. With average countervailing PV duties of 31% for the targeted Chinese companies it is going to take a lot of production costs reductions to make that up especially in a falling price market.

As I thought writing this story I kept looking for an appropriate Chinese proverb to anchor my commentary. I found this:

This proverb literally means “A spark can start a fire that burns the entire prairie.”  And that seems appropriate for the fragile and complicated economic times we live in today.

The US has both benefited from and been bruised by China’s export growth. On the one hand it brings us products like the photovoltaic panels in question that are of good quality at prices we could not get here at home. Low priced panels drive down the cost of solar energy, increase its market share and help achieve our goals for reduced greenhouse gas emissions and more sustainable energy production. There is much to like in that outcome.

On the other, there has been an awkward unevenness in our trade relationships where China largely has unfettered access to US markets to sell its goods, yet it protects its home markets and manufacturers in ways that disadvantage US companies seeking access to the growing Chinese market. This uneven trading behavior has been tolerated by the rest of the world for some time and China has milked it for all it was worth—and that was A LOT!

But harder economic times mean that the emerging markets are finding less patience with their quirks and protections in the struggling developed markets. Energy has been one of those areas that tend to level the playing field. China has an insatiable appetite for energy to keep its export economy growing fast enough to withstand the macroeconomic adjustments taking place around the world. A slowing Chinese economy is a worrisome thing for all of us.

That brings my back to photovoltaic panels. China captured global market leadership in PV panels by suctioning up feed in tariff subsidies in the EU and taking competitive advantage of the US state renewable portfolio standards requiring regulated utilities to buy solar and wind energy thus creating demand and the US government willingness to spend tax money to subsidize such projects.

Hey—wasn’t that what the US accused China of doing?

Now we have PV panel makers around the world unable to compete with China’s low prices—kept low, in part, by manufacturing subsidies from China. Those producers are forced to dump PV panels on an already oversupplied global market with weak demand thus causing PV prices to fall further. In fact in 2011 they fell up to 70% in some places.

In the EU those feed in tariffs are no longer sustainable as the cumulative costs hit country budget deficits and utility rates hard. In the US many states are nearing their renewable portfolio standard targets and few are following California’s lead higher with our 33% RPS goal. Most will declare victory and let the market work, if they are smart.

And then there is this—-why should we subsidize the purchase of the oldest PV technology with the lowest relative efficiency with tax payer money in a falling price, near grid parity market no matter where it is produced?

DUH!

There is a better answer. The US should drop the countervailing duties on China—and at the same time drop all the US subsidies of and mandates for PV panel purchase, installation and operation—and let the markets work. That way if China wants to continue to subsidize American utilities, business and homeowners who continue to purchase PV panels—with its own money, take it.