Trade Wars & Chinese Solar Power

In the third quarter of 2011, many Chinese (NYSEARCA:FXI) solar manufacturers faced dangerously declining profit margins due to overcapacity.  With subsidies from the Chinese Ministry of Finance (NYSEARCA:CHIX), Chinese photovoltaic panels glutted the world market with excess supply, threatening the livelihood of US and German solar firms (NYSEARCA:TAN) and eventually Chinese firms, too.  The outlook for 2012 is much brighter, however. Domestic demand for panels within China is growing and is predicted to mop up the excess supply.  This increasing domestic demand coupled with an anti-subsidy case under review by the US Department of Commerce—where petitioners are proposing a tariff on Chinese solar products to counter China’s questionable subsidies—will certainly keep industry insiders and investors on their toes throughout the year.

Despite the third quarter slump, China’s installed solar photovoltaic installations in 2011 grew a staggering 500 percent.  Even as solar markets soared in Japan and India, China by far leads the way with 48 percent of Asia’s solar market.  Two of China’s top five solar panel manufacturers (NYSEARCA:CHIE) believe that 2012 will solve the problem of overcapacity from the past year, as increased domestic demand within China is expected to ease the supply glut.  Shi Zhenrong, CEO of Suntech Power Holding Co., predicts China will install at least 4 gigawatts in 2012, while Trina Solar Ltd. CEO Gao Jifan predicts 5 gigawatts.

Some observers even speculate that China could pass Germany—which added 7.5 gigawatts of solar capacity in 2011—to become the largest new-photovoltaic-capacity country by the end of 2012.  In 2011, China installed 2.2 gigawatts of new solar capacity.  Due to increased domestic installations, China’s solar stocks spiked this past week to a five-month high with Yingli Green Energy Holding Co. and Trina Solar Ltd. jumping 20 percent and 19 percent, respectively.  With a national target of 15 gigawatts of installed solar capacity by 2015, China is on track to accelerate its already breathtaking growth in renewable energy (NYSEARCA:GEX).

China is currently home to three-fifths of the world’s solar panel production (NYSEARCA:TAN), exporting many of the subsidized panels to Europe and the US.  Thus, it was no surprise when on October 19, 2011 the US arm of Germany-based SolarWorld—along with six other anonymous solar companies—filed petitions with both the US Department of Commerce and the US International Trade Commission alleging that Chinese photovoltaic cells and modules of less than fair value were injuring the domestic solar industry.  The Department of Commerce has twice delayed the case, but is expected to deliver a ruling on March 2nd.  If the Department of Commerce finds that Chinese solar subsidies have indeed violated the rules of free trade, the US government may enact tariffs on the importation of Chinese solar products in order to protect domestic industry, potentially provoking the solar trade war that has been abuzz in the media.

In an independent study published late last month, the Brattle Group found that “possibly over 60,000 jobs are expected to be placed at risk as a result of a U.S. tariff.”  A 100 percent tariff would likely have two effects.  First, it would substantially delay the growth of demand for photovoltaic systems in the US, leading to as many as 50,000 fewer new jobs by 2014.  Second, it would likely provoke a retaliatory tariff from China on US exports of polysilicon—the material necessary for photovoltaic panels—which could cost the US another 10,000 jobs.  (In 2010, the US exported $827 million of polysilicon to China.)  If this back-and-forth tariff jousting were to occur, it would significantly dampen the growth of both the US and China’s solar industries, which have become more and more intertwined over the past few years.

While some fear that China is attempting to dominate the US solar market, it is important to remember that the US is a net exporter overall of solar technology and maintains a positive trade balance with China in the solar sector.  Joanna Lewis, a China energy expert at Georgetown University, reminds us that while China may produce more panels, the US still is a leading exporter of polysilicon and the capital equipment (i.e., production line machinery) necessary for manufacturing solar modules.  If a trade war results, the solar sectors of both countries will likely still grow, albeit much more slowly.  But if the US and China can continue to complement each other and engage in more energy cooperation projects, we may soon see phenomenal growth in the solar markets of both countries.  For the moment, however, we will have to wait and see whether US and Chinese politicians want to escalate this bickering into an all-out trade war.