Sea change
The global solar PV industry is on the cusp of one of its greatest changes. In a development that has divided the industry, the European Union will make a preliminary decision by June 6th 2013 on whether or not to impose tariffs on imports of Chinese PV cells and modules. In September 2013, the EU will issue a preliminary anti-subsidy ruling on these imports.
The imposition of duties at the expected level, which is an average of 47% for anti-dumping alone, will doubtless have tremendous impacts up and down the value chain both in the EU and globally. But what exactly will those impacts be? Are tariffs fair? Are they necessary? And how did we get here?
These are the issues that Solar Server will explore in our review of the solar trade war.
Overcapacity and declining demand
The global PV industry has been suffering from a crushing overcapacity, following massive new production put online beginning in 2010. Even in the first half of 2011 these very heavy investments in new capacity had already outstripped demand, resulting in large inventories and falling prices. This in turn led to collapsing margins, heavy losses, layoffs, plant closures and bankruptcies, particularly in the EU.
Even by 2011, Chinese PV manufacturing capacities were well in excess of global consumption, let alone Chinese consumption
While the US, EU and Asia all added significant capacity during this period, by far the largest capacity expansion was in China, to support an export-oriented market. A study by Goldman Sachs and EU Pressedienst finds that Chinese PV module manufacturing capacity reached an estimated 45 GW in 2011, more than 150% the size of total global market demand at 28 GW.
And while the global PV industry grew rapidly in 2010 and 2011, circumstances changed in 2012. The world's largest market, Germany, introduced modest feed-in tariff reductions, and Italy greatly limited its feed-in tariff for medium-to-large PV plants under the Conto Energia V.
While different analysts have different estimates of the 2012 market, most place growth at around 10%. While this would be an outstanding success for most industries, the PV industry had been growing at an average of roughly 40% annually for a decade. The result was disaster for PV companies along the value chain that were accustomed to the global PV market doubling every two years.
Background: the WTO and global free trade
In order to really understand the global solar trade war, one must look deeper than the roller-coaster growth of the global PV industry, as the circumstances of the industry exist within much larger developments in early 21st century.
The actions of nations and multi-national bodies in this trade case and even the way that we think about trade are defined by global trade agreements, most notably under the World Trade Organization (WTO), which was formed in 1995 to both supervise and liberalize international trade. The WTO and its predecessor, the Global Agreement on Trade and Tariffs (GATT) did more than establish common rules. They specifically forbade governments from protecting industries from foreign competition, whether in the form of protective tariffs or preferential subsidies.
This has impacted global trade flows, and intensified the role of developing nations as a source of low-cost goods for wealthy nations. One result has been enormous trade deficits in goods between the US and China and the EU and China.
One impact of the WTO and other measures to liberalize trade has been to intensify the role of developing nations as sources of low-cost goods
While this was a focal point of protesters at various WTO rounds, during the times of economic prosperity in the late 1990's and early 2000's such concerns were marginalized. While some areas in the first world suffered deindustrialization, this was widely interpreted as part of a shift from an emphasis on goods to services, and few worried excessively as employment was generally high and economies were booming.
In 2008, everything changed. The global economic recession brought intensified demands for job creation, and suddenly the manufacturing industries which had left the US and the EU were sorely missed.
The global transition to renewable energy holds the promise of creating those jobs on a large scale. However, when manufacturing processes become easily replicated, they tend to go to locations with lower production costs, particularly under the legal framework of global free trade.
US – China trade war
With its low wages, weak currency, lack of environmental enforcement and heavy government support of industry, China has been perhaps the largest recipient of this global shift. Meanwhile, the United States has been hemorrhaging manufacturing jobs for decades.
The United States' trade investigation into Chinese PV imports must been seen in this light. During the last decade, the US-China trade deficit in goods has gone from USD 100 billion to over USD 300 billion annually.
Under the rules of global free trade, prohibitions on predatory pricing to drive competition out of business and preferential subsidies for domestic industries provide the tools that a nation can use to protect itself, via anti-dumping and countervailing duties. While the trade deficit has grown higher and higher year after year, the United States has launched hundreds of anti-dumping investigations against the nation of China.
While Deng Xiaopeng led China a series of market-oriented reforms beginning in 1978, the nation retains a fundamentally different understanding of the relationship between government and industry
However, China is not a market economy. It is a nation founded on the ideas of Marx, Lenin and Mao. And while the nation has taken a remarkably free-market turn since the rise of Deng Xiaopeng and “Socialism with Chinese characteristics”, including joining the WTO in 2001, the organization's market fundamentalist approach is not in line with the principles on which Chinese society operates.
China selects industries that are in the national interest to support and generously assists them, through a variety of mechanisms. Is China unfairly subsidizing its industries, and attempting to dominate global trade by driving out competition? Or do they merely have a more successful model for supporting the rapid growth of industry, based on a different ideology?
The split along the value chain
Over the last few years China has moved to dominate crystalline silicon (c-Si) PV production, particularly the PV cell and module segments. The nation has not yet been as successful in producing polysilicon, manufacturing equipment or inverters. The first two are particularly important, as Chinese manufacturers need both to produce PV products.
Large polysilicon manufacturing remains concentrated in the United States and Germany
Large companies including Wacker Chemie, Hemlock Semiconductor and REC ASA continue to produce polysilicon in Germany and the United States for Chinese manufacturers at a massive scale with low production costs. The technology and capital demands of high-purity polysilicon production make this industry difficult to replicate.
Likewise, the world's largest PV equipment makers have traditionally been rooted in high technology/knowledge clusters in the United States, Germany and Switzerland. The world's largest inverter makers, including market leader SMA, are centered in Germany, the United States and France.
The price collapse in c-Si PV, led by this overproduction, has been beneficial to PV markets in Europe and particularly the United States, where incentives are not as strong and price is a critical factor. While it has decimated manufacturers, many in the industry cheered low PV prices for their role in making the technology an increasingly competitive source of power.
Because of this geographic split and these economic factors, trade action is deeply unpopular among sections of the PV value chain in both Europe and the United States, including not only the upstream makers of polysilicon and manufacturing equipment, but also many developers and system integrators.
Jigar Shah became the public face of the movement against US tariffs on Chinese PV imports
The result is a deep division within the PV industries, with trade groups opposed to tariffs emerging both in the US and EU, to counter SolarWorld-led trade groups the Coalition for American Solar Manufacturing (CASM) and EU ProSun. In the United States, solar industry pioneer and celebrity Jigar Shah became the public face of opposition to the tariffs as spokesman for the Coalitiona for Affordable Solar Energy (CASE).
The US trade case
All of these issues came to a head in the US trade case, which SolarWorld initiated in late 2011. Over the next year, both sides presented studies emphasizing their case, and both predicted disaster if the opposition was successful.
An early decision to limit the scope of US anti-dumping and anti-subsidy investigations to PV cells greatly modified the impacts of punitive tariffs.
On November 7th, 2012 the US International Trade Commission upheld an earlier decision by the Department of Commerce to levy anti-dumping and countervailing duties for a combined total of 24% - 255% on Chinese PV, as the United States has done with hundreds of other commodities. Duties were not imposed retroactively. More importantly, early in the investigation the scope was limited to PV cells, whether or not they were assembled into modules.
Americans have a habit of over-estimating their nation's importance in the world, and the public discourse surrounding the trade case was no exception. In part due to with the limited scope of the investigation, and in part due to the limited size of the US PV market – only 11% of the global total in 2012 – the impact on the global solar industry was nominal.
While the increase in PV module prices – feared by some, hoped for by others – never came to pass, the trade case did impact trade flows. Here the module loophole was critical. Chinese producers who continued to sell into the United States did so largely by sourcing cells from Taiwan. Also, US imports from Malaysia, the Phillipines and Vietnam boomed.
Furthermore, China has been quite open about retaliation over these tariffs, and has begun an anti-dumping investigation into US and EU polysilicon.
Domestic content and national interest
The US – China trade case has been far from the only trade conflict in the global solar industry. Different nations have taken different steps to protect their interests in having strong domestic industries. As has been pointed out by opponents of tariffs, governments in the United States, China and the EU all provide differing degrees of support to domestic industries.
However, in order to secure manufacturing jobs, many governments have taken a further step and have written into their incentive and payment structures the requirement that participating PV and other renewable energy projects use domestically produced components.
This was led by Ontario, which wrote into its landmark 2009 feed-in tariff the requirement that all participating plants utilize a certain portion of domestically produced equipment – 60% in the case of PV. Other nations have followed suit, with India requiring domestically produced modules in Phase 1 of its National Solar Mission (NSM), but leaving a loophole for thin-film PV. Even the United States included a domestic content provision for projects funded through the American Recovery and Reinvestment Act of 2009 (the “stimulus”).
This bold economic nationalism brought an estimated 20 manufacturing facilities along the value chain to Ontario. However it has not been as popular with exporting nations. Both Japan and the EU objected to Ontario's domestic content requirement before the WTO.
In October and December 2012 the WTO ruled that the policy constituted a forbidden barrier to trade, which has led to Ontario scrapping the feed-in tariff policy for PV plants larger than 500 kW. The United States has likewise begun the process of investigating India over its domestic content.
France Minister of Ecology Delphine Batho admits that her feed-in tariff bonus for EU PV modules is likely illegal under the WTO (Image courtesy Ministry of Ecology, Sustainable Development and Energy)
There are contextual details worth noting here. The Japanese market is difficult to access for foreigners and Japanese consumers place a premium on Japanese brands, so there is no real need of a domestic content provision. And in perhaps the most opportunistic move in this story to date, after the EU won its WTO case against Ontario's domestic content requirement, French Minister of Energy, Climate and Sustainable Development Delphine Batho announced a 10% feed-in tariff bonus for EU-made modules.
When confronted with the precedent set by the recent EU decision against domestic content, Minister Batho responded that while such a move was forbidden by the WTO, it would take years to issue a ruling.
The center of the global conflict
Thus the current trade case before the EU can be seen as part of a global solar trade war, with many nations attempting to secure better conditions for their domestic solar manufacturing industries, and to stop the policies of other nations that would favor their industries.
And of all these conflicts, the case before the European Commission (EC) is the most critical, as it involves the world's largest single PV market – the EU, and the world's largest PV manufacturer, China. And unlike the US case, the EU is preparing to levy duties on silicon wafers, PV cells and modules.
The size of these duties is also significant. While there has been no official statement by the EC at the time of writing this article, various media sources have reported that the EC plans to issue a preliminary ruling of anti-dumping duties between 37.2% and 67.9% on Chinese PV imports.
Unlike the US trade case, EU tariffs will undoubtedly have a major impact on global trade flows. But what that impact will be remains a subject of debate.
A number of market analysts are predicting significant damage to European PV markets, particularly the large ground-mounted segment
The Alliance for Affordable Solar Energy released a report in February 2013 by Prognos AG which found that EU tariffs on Chinese PV products would could put 218,000 EU jobs and USD 25 – 36 billion of value at risk.
This study was immediately rejected by EU ProSun, stating that similar studies were done in the United States and that the feared results did not come to pass, that Prognos' methodology was unclear, and that the report did not factor in China's plans to dominate both polysilicon production and PV equipment manufacturing.
However, IHS and pvXchange have also predicted major damage to the EU and global industry, with both predicting that large PV plants will become untenable. Martin Schachinger of pvXchange has gone so far as to state that if tariffs are imposed, the European PV market “will come to an abrupt halt”.
IHS also predicts that Chinese PV modules will be priced out of the market, and that price increases will partially be borne by companies in other parts of the value chain. Another question is the benefit of this case to EU PV cell and module manufacturers, as many have already gone out of business.
China is not sitting idly by while all of this happens. The nation's Ministry of Commerce has repeatedly stated that it will take action to protect its interests, and has stated that it will issue a ruling on EU and US polysilicon following the EU's ruling on PV imports.
Trade as war
SolarWorld has attempted to make China's alleged dumping and subsidies into a moral case, with frequent appeals to nationalism. Likewise, the opponents of tariffs have relied on lofty arguments about the inherent virtues of free trade, forgetting that this ideology is what led us to a world where manufacturing is concentrated in China and other low-wage nations.
Ideology is frequently used to justify self-interest, and trade policy can also be seen as merely another arena of international conflict. Despite all the ideological arguments of companies, organizations and nations, as France and the United States have shown, all will play both sides when it suits their self-interest.
Germany and the UK have come out strongly against the imposition of tariffs. Such positions are also not ideological, and must be seen in light of the real threat of broad retaliation from China, the EU's largest trading partner. Such concerns are not limited to solar, as the EU is currently investigating a similar trade case over imported Chinese telecom equipment.
Duties or negotiation?
Despite media reports describing a “vote”, the EU Trade Commission has been clear that the opinions of EU member states are only recommendations. EU Trade Commissioner Karel De Gucht has accused China of pressuring EU member states, and further noted that his office is immune to such pressures and will decide the case on its merits alone.
Many actors find the imposition of preliminary duties on June 6th, 2013 likely. However, even if preliminary decisions are made in favor of duties, both the anti-dumping and countervailing duty cases still require final rulings.
EU Trade Commissioner Karel De Gucht has stated that his office is immune to political pressures
In between the preliminary and final rulings, the EU has the option to negotiate the outcome with China. Commissioner De Gucht has expressed that he is open to such negotiations, which are sought by both Germany and the UK.
Ultimately, The EU has come too far politically to return to the previous state of unlimited Chinese PV imports. Whether it is the result of tariffs or negotiation, limits will be placed to some degree. The question is how, and to what degree.
China's PV trade conflicts with the US and the EU may have already had a significant impact, one which is often not associated with this trade war. As the threat of tariffs has loomed over the past few years, China has greatly increased its policies to support its domestic PV market, with the result that the nation will be the second largest PV market globally in 2013, and could be the world's largest PV market in 2014.
For a case of this magnitude, the results are hard to predict, but certain outcomes are inevitable. The global solar industry will be disrupted to some degree. In the end, trade actions will have a similar effect to protectionist policies, in that they will support a greater degree of localized manufacturing. And whatever the case, the global solar industry will adapt to these changes and continue its inevitable path of growth.
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