It’s Not Always Sunny in D.C.
May 12, 2022
The Scholl Chair in International Business has spent considerable time over the past 18 months working at the intersection of climate and trade policy and trying to develop climate alternatives that will not contravene trade rules. In the process of doing that, the program has embarked on an effort to bring environmental and trade experts together in an effort to get them to speak the same language to facilitate agreement. At those meetings, there were fundamental differences in point of view. Trade experts argued there is a rules-based trading system, and that climate mitigation policies should be—and can be—constructed in ways that conform to the rules. The environmental experts argued that the world is in an existential climate crisis, the situation is rapidly getting worse, and the best course is to change the rules to more easily pursue climate goals.
Nothing illustrates that divide better than the current investigation involving the possible circumvention of tariffs on solar panels from China by shipping them from other countries. In the following dialogue, Bill Reinsch takes the trade position, and Emily Benson takes the environment position. There is no conclusion. The reader is left to decide who made the stronger case.
Contours of the Case
On February 8, 2022, Auxin Solar Inc. requested that the U.S. Department of Commerce initiate an investigation into whether solar cells and modules produced in Cambodia, Malaysia, Thailand, and Vietnam are circumventing the antidumping and countervailing duties (AD/CVDs) on those products from China. The first AD/CVD investigation of solar cells dates to 2011. The current antidumping rate for China-wide solar products is 238.95 percent, which could have incentivized Chinese producers to circumvent the tariffs by accelerating production in Southeast Asia. In short, Auxin is arguing that China is not playing by the rules, that it is in effect laundering those products through third countries, and that unfair competition from China is harming the competitiveness of the U.S. domestic solar industry. On March 25, 2022, the Department of Commerce initiated circumvention inquiries covering Cambodia, Malaysia, Thailand, and Vietnam. The four countries supply roughly 80 percent of U.S. solar panels and parts, meaning that adding significant tariffs on imports from those countries will significantly shape outcomes in the U.S. solar industry. A preliminary finding is due in August, with a final report expected in January 2023.
A bipartisan group of officials were quick to decry the investigation as harmful to the U.S. solar industry, bringing together Democratic Governor Gavin Newsom of California and Republican Governor Eric Holcomb of Indiana, who wrote to Commerce Secretary Gina Raimondo to express alarm regarding the impacts of the investigation. Governor Newsom’s letter to Secretary Raimondo laid out the dangerous climate implications of the investigation: “Given the threat posed to the grid from extreme heat, wildfires and a severe drought that has reduced our hydroelectric generation capacity, we need to accelerate, not slow down the deployment of clean energy and storage projects.” Governor Holcomb, in his letter, urged the Department of Commerce “to restore clarity and certainty regarding solar products, so the State of Indiana, our utilities, and other private sector partners can better understand and plan for an economical energy transition, in which solar is poised to play a key role.”
The effects of the investigation have already slowed several new renewable energy projects in Indiana, a state slated to host the country’s largest solar farm, covering 13,000 acres and consisting of 2.85 million panels. Northern Indiana Public Service Company (NIPSCO) has argued that the Department of Commerce’s investigation has led to market upheaval, leading to an estimated 18-month delay of NIPSCO’s planned solar projects. As a result, NIPSCO will keep two coal plants running through 2025 instead of 2023. The Solar Energy Industries Association (SEIA), meanwhile, found that more than 315 projects are being canceled or delayed due to uncertainty caused by the investigation.
In a comprehensive poll following the commerce department’s announcement of the investigation, SEIA compiled industry sentiments about the possible effects of the investigation. SEIA data shows that 83 percent of U.S. solar companies report being notified of canceled or delayed panel supplies since the investigation announcement. Among domestic manufacturers, 80 percent anticipate that the investigation will have “severe devastating impacts” on their business, while 70 percent reported that at least half of their solar and storage workforce is at risk. SEIA estimates that an affirmative finding could endanger 100,000 jobs, including 18,000 manufacturing jobs. Energy consulting firm Rystad had initially estimated that the United States would add 27 gigawatts of solar energy this year, but has since revised its estimates to 10 gigawatts.
A Defense of the Climate Agenda
The Biden administration has famously pursued a “whole-of-government” approach to combating climate change, although it has repeatedly demonstrated a reluctance to use trade policies to exact climate outcomes. However, the Biden administration has indicated its plans to eschew an affirmative agenda and to prolong the previous administration’s trade policies that have alienated allies, perplexed the private sector, and restrained renewable deployments. In the first increase of U.S. coal consumption since 2013, U.S. coal plants are slated to burn 23 percent more coal this year. Utilities’ consumption of coal dropped 36 percent under the Trump administration. As Will Wade of Bloomberg noted, “Donald Trump vowed to revive the coal industry, but it’s President Joe Biden who’s seeing a big comeback of the dirtiest fossil fuel.”
To meet the Biden administration’s ambitious goal of zero emissions from electricity by 2035, it needs to pursue trade policies that promote, not depress, the deployment of renewable power. It does not materially matter if the U.S. solar industry is “hyperventilating” about the possible effects of an affirmative finding in the investigation; responding to risk is a key feature of economics. In this case, the risk of duties being imposed retroactively has created a risk factor great enough to deter countries from shipping their goods to the United States.
Government decisions and policies affect markets and shape supply and demand. As companies have frequently opined with regards to the steel and aluminum tariffs, a healthy and competitive private sector requires policy predictability. As they have also pointed out, attempting to reshore an entire industry would take years, increases costs, and reduce U.S. competitiveness. An effective climate change strategy demands growth, not contraction, as I noted in this piece about the perils of degrowth on decarbonization goals. Economic contraction will hurt new investments and the ability of the United States to compete in climate change technologies. The United States government should pursue policies that encourage growth in these industries and forgo policies that lead to uncertainty, job loss, and emissions increases.
This is at the heart of the question of whether the rules are equipped to deal with the climate crisis.
Significantly overhauling the international trading system to create a new one is not the most effective way to proceed. In some cases, existing laws need to be improved and fine-tuned. Legislators have not shied away from amending laws in order to promulgate policies that better reflect the U.S. agenda. In 1988, Representative Howard Berman (D-CA) amended the International Emergency Economic Powers Act (IEEPA) to ensure that U.S. sanctions authority would not restrain the dissemination of pro-democracy content abroad. Similarly, to protect the intergenerational arc of U.S. interests, legislators should now codify policies that facilitate the cheaper and more rapid deployment of renewables.
In this case, Congress should pursue targeted legislation in the public interest that restrains the ability of the executive branch to levy tariffs on solar products. Such legislation would fall far short of more meaningful trade and commitments, such as renegotiating a comprehensive agreement to liberalize environmental goods and services, but it would communicate to the international community a prioritization of climate change policy while also protecting U.S. jobs. It would also enhance the credibility of U.S. climate negotiators ahead of the fall G20 ministerial and the 27th UN Climate Change Conference of Parties (COP27) in Sharm El-Sheikh.
Overall, trade experts are in a fight to prove that trade rules can play a role in mitigating climate change and spurring green growth. This type of investigation harms that cause, damaging the integrity of U.S. trade law overall. The United States, at least on paper, is not a country of minority rule, and that should apply broadly to national decarbonization policies. To safeguard our climate, U.S. competitiveness, and public perception of the utility of trade tools to promote positive outcomes, legislators should consider introducing measures that would prevent these harmful investigations from occurring in the first place.
A company with 35 employees pursuing a Hail Mary at the expense of the overwhelming majority of the U.S. solar industry is not what U.S. trade laws are intended to encourage. It is true that in this instance the U.S. government is attempting to combat unfair trade practices. But the most unfair outcome of these policies is that they risk denying future generations a future at all.
A Defense of Rules-Based Trade
If the commerce investigation confirms circumvention is occurring, then tariffs will be imposed on imports from some or all of the four countries, and the consequence will be, as Emily describes, a significant reduction in module and panel imports that will retard our efforts to convert to solar energy. Nor is there much doubt that China is circumventing the tariffs on its own production by channeling exports through the four countries. However, that latter statement remains to be proved, and the United States should not lose sight of the possibility that the investigation could conclude that duties are not warranted, most likely because the materials coming from China have been sufficiently transformed in the other countries to make them legitimately products of those countries.
Assuming that doesn’t happen, then the United States is left with a clear-cut case of conflicting priorities. The items are being unfairly traded under U.S. law, which is consistent with World Trade Organization (WTO) rules, and they should be subject to a tariff that offsets the benefit they are receiving, and which protects their domestic competitors from China’s unfair actions. Not to do so would undermine a century-old domestic law and international trade rules, sacrifice a U.S. industry that has been severely damaged by unfair Chinese competition, and undermine what has been a political consensus in the United States in support of strong action against unfair trade practices wherever they occur.
At the same time, taking those actions will slow down the march to solar and probably cost more jobs in the installing industry than will be preserved or created in the manufacturing industry.
One question is whether the survival of a domestic solar panel manufacturing industry matters. The challenge China has presented in recent years has led to the conflation of trade with national security, where protection or adverse trade actions are justified as necessary to protect security rather than simply on economic grounds. Some have argued that is so in the solar case; this is an industry the United States needs to maintain and grow domestically so it is not dependent on imports, particularly from China. Sometimes that is an easy question. U.S. security is not likely to be imperiled if it did not manufacture T-shirts domestically. Likewise, the United States could probably survive if it did not manufacture solar panels, although that could be a decision it would come to regret in 20 years when China has a monopoly and decides to deny it access because of some other action it has taken. U.S. law, however, does not provide any policy flexibility here. The president or secretary of commerce has no authority to mitigate the tariffs if circumvention is found, and the strategic significance of the industry cannot be taken into account in the investigation.
Since there is no option for relief on policy grounds, the environmental side argues for creating one—enacting a law that would permit tariffs to be waived in a case like this. Doing that would not conflict with WTO rules, since nations are almost always permitted to do less than what the rules permit. It would, however, undermine U.S. trade laws and open the door to many arguments about what other cases should be able to benefit from such a law.
That is the fundamental problem with the environmental argument. It is essentially an argument that the end justifies the means—that the goal of climate mitigation is so important the United States should ignore U.S. law and China’s cheating in order to help achieve it. But the end-means argument is a slippery slope. If it is done on climate, it opens the door to a thousand other requests. “Important” is in the eye of the beholder, and there will inevitably be no shortage of other people arguing that their cause is also important, and the trade laws should be waived for them as well.
As a result, I end up a trade purist. Trade laws are important. They have been crafted over a long period of time to deal with unfair practices and also to build and maintain the political coalition for trade liberalization, which is based on making sure that the victims of free trade are taken care of. Therefore, the United States should simply avoid the slippery slope, respect the trade laws, and deal with the consequences. In the solar case, it is a consolation that the predictions of long-term doom from the panel installation industry will prove to be overstated. It is normal in an unfair trade case for panic to set in when an investigation begins. Imports often drop significantly because foreign manufacturers are uncertain about their potential liability and want to wait to see the outcome. Once there is an outcome, which in this case will preliminarily be in August, if not before, imports usually begin to return, albeit at higher prices. So, the long-term result is not likely to be about availability of panels, but about their price. Price increases, of course, have a market impact, but they are also something the government can mitigate through subsidies, if it wishes to do so.
This debate is not about remaking trade architecture. It is about whether to fine-tune existing trade rules. One side argues that unfair trade practices require the application of appropriate remedies when they are found. The other side argues for legal flexibility during a time of immense environmental crisis. The trade side argues that the possible outcome of an affirmative determination is not as dire as predicted, and that climate exemptions would invite a slippery slope that would facilitate a deluge of petitioners seeking weakened enforcement against unfair trade practices.
What emerges from this solar panel policy debate is that trade is a useful tool for redressing unfair trade practices, but it can also have larger policy consequences that are negative. Differences persist regarding what should prevail.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. Emily Benson is an associate fellow with the Scholl Chair program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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