Jeff Frankel
wrote an interesting blog about
trade policy: Solar Panel Dumping.  So called "Infant industry arguments" have been justifying anti-dumping tariffs dating back to Alexander Hamilton's Report on Manufactures", which he
drafted in 1790 to stimulate the US
economic independence from Great
Britain. 

At the core of the infant industry argument is the belief that nascent
industries may not have achieved the
necessary scale, yet, to compete with
established industries abroad, or, that sufficient production volume is required
to generate learning-by-doing to sufficiently lower production costs.

Below is
an edited version from Frankel's blog – it focuses on Chinese subsidies, but neglects to discuss in detail the huge subsidies that the US provides to
its own solar industry. The US federal government spent Over $100 billion dollars (more than is entire spending on education!) on solar and wind subsidies, to generate a list of subsidy recipients that is a mile long. On top of that, US states have their
own subsidies.

The huge difference is that China
subsidizes production (and hence the low cost of solar panels) while the US largely subsidizes consumption (rebating the cost of expensive panel installations to households, and
guaranteeing huge solar electricity subsidies
of up to 54 cent per KWH). 

Protectionist Clouds Darken Sunny Forecast for Solar Power

On
July 27 negotiators reached a compromise settlement in the world’s largest
anti-dumping dispute, regarding Chinese exports of solar panels to the European
Union.   China
agreed to constrain its exports to a minimum price and a maximum
quantity.   The solution is restrictive relative to the six-year
trend of rapidly Chinese market share (which had reached 80% in Europe), and plummeting prices.  But it is less
severe than what had been the imminent alternative:
 EU tariffs on Chinese solar panels had been set to rise sharply on August
6, to 47.6%, as the result of a “finding” by the EU Trade Commissioner that China had been
“dumping.”   The threat of likely retaliation by China helped
persuade the Europeans to back off from their determination to impose such high
protective walls around their own solar panel industry. 

The
China-EU dispute parallels a similar one running between China and the United States.  Last fall,
tariffs went into effect against US imports of Chinese solar panels, at
24%-36%, after the Commerce Department “found dumping” into the American
market.  China has
already retaliated in a targeted way: imposing tariffs, which could reach
prohibitive levels in excess of 50%, on imports from the US of
polysilicon.  (It had not yet done the same on imports from the EU.) 
China
cited its own finding of US dumping of polysilicon into its market.  The
material is a key input into the production of solar panels, which gives poetic
justice to its choice as target of retaliation.

Trade could be the savior of solar power

The
solar power industry is a perfect example of how trade can have beneficial
effects on air quality.  Most Europeans, and many Americans, would in
principle like to be able to get more of their energy from renewable sources
like solar power — but not so much if the cost is exorbitant.  Skeptics of
solar power have long argued that its share in electricity generation cannot
rise above a few percentage points without massive subsidies, because it is too
costly unaided to compete with alternatives such as coal.  Proponents, for
their part, have long made sunnier forecasts, arguing that if moderate
subsidies were used temporarily to expand the solar industry, economies of
scale and learning-by-doing would then bring down costs sharply. 

But
proponents have focused too much on subsidies by their own governments and paid
insufficient attention to the contribution of international trade.  Trade
has been a very positive development in the industry of solar power generation
in recent years, as the bonanza of cheap solar panels from China had
helped keep down costs.  Conversely, the new protectionism in solar panels
is a negative development.  Remarkably, European imports of products that
facilitate renewable energy are apparently now the target of almost ¾ of the
Trade Defense Instruments currently in force in the EU (by import value; Kasteng, 2013).

High
subsidies had also helped drive the European industry until recently.  But
the subsidies were unsustainably expensive and have now been cut back for
budget reasons.  With the loss of subsidies and the loss of cheap solar
panels from China, the share of solar power in Europe will far short of environmentalists’
goals.  (Of course the loss of subsidies also helps explain why hard-hit
European solar panel makers lobbied for protection against imports from China.)

Solar-loving
Westerners should send Chinese producers of panels a note of thanks for their
contribution to keeping solar power viable, rather than letting the US and EU governments impose barriers or
blackmail China
to restrain the exports “voluntarily.”   Apparently western producers
of polysilicon, for their parts, are more efficient than Chinese producers, and
so they too should be sent a note of thanks by anyone favoring solar power,
rather than being penalized in anti-dumping battles.   Efficient
production in our globalized world economy means different countries
specializing in different stages of the process (Deutch and
Steinfield, 2013).

What
is “dumping”?

But
surely “findings of dumping” warrant some response, even if the ensuing damage
goes beyond the cause of international trade and growth and falls on a
specially valued activity like solar power?  Actually, no. 

“Dumping”
into a foreign market in such cases is defined as selling at a price below
cost. (It used to be defined only as selling in the foreign market at a price
below the home market price.  But the United States wasn’t finding enough
cases of dumping under the old definition and so changed it.) 

Why
would any producing country sell below cost, a recipe for losing
money?   How does one measure cost, anyway?  And why do I keep
putting those quotation marks around “finding,” “dumping,” and “cost”? 
The answers to these questions are closely related.

First,
the motive for “selling below cost.”  Even those who are generally
sympathetic to trade and markets are often given the impression that
anti-dumping laws are laws against “predatory pricing:”  a large producer
is selling below cost in order to drive its competitors into bankruptcy, under
a plan subsequently to exploit the absence of competition to raise the price and
reap monopoly profits.  But in fact, that is not even the way anti-dumping
laws are usually written, let alone applied.  To put it simply,
anti-dumping proceedings, such as the US and EU tariffs against Chinese
solar panels, are a means of reducing competition, not of
fostering it.  

If
predatory pricing is not the producers’ motive for selling below cost in these
cases, then what is?   This leads us to the second question, the
definition of cost.  The world solar panel industry has a glut of
productive capacity on all three continents: in China,
in Europe, and in the US. 
As a consequence, the competitive market intersection of supply and demand
occurs at a global price that is below long run average cost per unit, which is
defined to include a share of the cost that has already been incurred in
building the factories.  But that global market price is not below the
short run cost of keeping the factories running once they are built.  In
other words, it is at what economists call Marginal Cost, though
below Average Cost.   Producers sell at prices where they lose money
because, having already built the factories they will lose even more money
if they charge above the competitive market price or if they shut down
production altogether.   That low price is the appropriate
competitive outcome.  When the US or EU government finds that China is
“dumping” solar panels below cost, or when China finds that the US is “dumping”
polysilicon below cost, they are using the irrelevantly high measure of average
cost instead of marginal cost.   By this criterion, dumping occurs
every time a store has a clearance sale.

A
precedent

Some
have compared the accusations of dumping in the solar panel case, and the
subsequent avoidance of anti-dumping tariffs by means of negotiated agreements
to limit exports, to past “Voluntary Export Restraints” (VERs) or “Orderly
Marketing Arrangements” (OMAs) in the steel and consumer electronic industries,
especially those that Japan agreed to apply to its exports to the United States
in the 1980s.  But an even more illuminating precedent is Japan’s VERs on
exports of autos around that same time.  American automakers had found it
harder and harder to compete against imports of Japanese autos that were not
only better value for the money, but were also smaller and more
fuel-efficient.  Antidumping cases and VERs under the Reagan
Administration gave temporary protection.  When free trade was eventually
restored, the increasing imports of fuel-efficient Japanese autos benefited
both American pocketbooks and air quality.  The healthy competition even
forced a slimmed down American auto industry to become more efficient.

Trade
was good for the environment in the case of automobiles thirty years
ago.   The same is true of trade in solar equipment today.  Westerners
should celebrate the contribution of trade to reducing the cost of solar power,
not block it with protectionist anti-dumping measures.