24 january 2018

[4C Note: the graphs in the original article are informative. Click here to see them.]

Trump's Solar Tariff Is Bad, But Not a Huge Deal

Because costs are falling so fast, the penalty on imported panels won't matter much
by Noah Smith, Bloomberg, January 24, 2018,

President Donald Trump has imposed 30 percent tariffs on solar panels made outside the U.S. It’s hard to tell why he’s doing this. It could be a protectionist move, or it could be designed to hurt renewable energy and protect the dying coal industry. But whatever the reason, the consequences probably won’t be severe. The solar revolution is happening so fast that the tariff will make little difference.

On one hand, the solar tariffs could be the beginning of Trump’s long-awaited attempt to make American manufacturing competitive again. China, which Trump has named as the U.S.’s main trade rival, has long subsidized its solar-panel manufacturing industry. U.S. manufacturer Solyndra, famous for going bust after being receiving large government loans, claimed to have been undercut by the flood of cheap panels from China. In 2012 and 2014, the U.S. government under President Barack Obama hit the Chinese solar industry with tariffs even higher than the one just announced by Trump. The European Union recently followed suit.

Solar Energy

So the idea of protecting the solar industry from overseas rivals with unfair advantages isn't new. The only difference is that while Obama’s tariffs were focused on China specifically, Trump’s apply to all foreign producers. U.S. solar manufacturers such as First Solar will obviously be helped by the tariffs. Asia, which manufactures most of the panels installed in the U.S., would seem to be the obvious loser:

But in the age of globalization and supply chains, things aren’t so obvious. A number of U.S. solar manufacturers, such as SolarWorld and Suniva, are foreign-owned -- the majority shareholder in Suniva is Chinese. Some of the increased profits flowing to companies that make panels in the U.S. will head overseas.

The tariff will create a number of less-obvious losers as well. Falling solar costs will eventually lower the price of electricity for U.S. companies -- even when electricity users don’t switch to solar, lower costs can force natural gas, coal and nuclear plants to cut prices to remain competitive.

Cheaper electricity, in turn, gives American industry a boost. U.S. workers earn much higher salaries than workers in China and other developing countries, meaning that U.S. manufacturers can’t rely on cheap labor costs for their competitive advantage. Instead, they have to compete by having better technology and more capital equipment. This is why the shale-gas revolution was such a boon for U.S. manufacturers. Solar power promises to be even cheaper. Yet by slowing this process, solar tariffs could postpone the day when U.S. manufacturing comes back into its own.

Of course, making solar power more expensive might be the whole point. Trump has repeatedly promised to save the dying U.S. coal industry, and solar is one of its rising competitors. The administration had even proposed a rule that would have forced many electricity providers to use coal, which was rejected by regulators. Solar tariffs -- which would help U.S. solar manufacturers but hurt consumers of solar power -- could be another way for Trump to delay the day of reckoning for his favorite industry.

Because the U.S. now imports most of its panels, the import tax will probably hurt more American companies than it will help. But the overall impact is unlikely to be large because solar panel manufacturing costs have been dropping so fast that more expensive foreign imports will be merely a bump on the road. In 2017, a solar module producing one watt of power cost only around one-fifth of what

The cost of solar modules has fallen dramatically already

Solar panels have become so cheap that they now account for only between a quarter and a third of the cost of solar electricity:

At this point, the march of technology looks to be more important than the vagaries of government policy. Bloomberg Gadfly’s Liam Denning reports that the tariffs will set the cost of solar electricity back by only around one year -- bad, but not much of a bump for a technology undergoing exponential growth.

History bears this out. The tariffs Obama imposed on China didn’t do much to halt the spread of solar:

Meanwhile, though growing fast, solar is still a relatively small part of the U.S. energy mix. Slightly more expensive solar electricity is bad, but will be only a nuisance for U.S. companies. As for the coal industry, cheap natural gas, not solar, is what did it in.

So although Trump’s tariffs are unhelpful, they are also not much of a change from the policies of the past several years. And they’re unlikely to have a big impact on anything except for the profits of a few solar-manufacturing companies. Only if they signal the start of a big protectionist push is there cause to worry. Let's hope Trump will stop here.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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