The solar trade war between the U.S. and China has reached its peak after China slapped another 6.5% anti-dumping tariff on polysilicon imports from the U.S. on top of 53.7% to 57% anti-dumping tariffs put in place in July. China was responding to 2.9%-4.73% anti-subsidy and 31.14%-249.96% anti-dumping tariffs placed on Chinese solar cell manufacturers last year.
Given that the U.S. made its investigation very narrow in nature, Chinese manufacturers have been able to get around tariffs by buying cells from outside of China, or "tolling." The end effect wasn't anywhere near a 35% increase in cost, more like $0.05 or so per watt, or less than 10% of a module's cost.
But the U.S. tariffs were still enough to result in retaliation from China and U.S. polysilicon suppliers will now face at least 60.2% tariffs, depending on the company. The irony of Chinese tariffs on the U.S. is that we're a major supplier of polysilicon, the key raw material used in making solar cells. Before tariffs, the U.S., South Korea, and Europe supplied 80% of China's polysilicon, so this will do nothing but raise costs for Chinese manufacturers.
What has this trade war done to help China or the U.S.? In the big picture the answer is: absolutely nothing. Higher polysilicon costs will raise costs for Chinese manufacturers, and higher panel costs won't help improve U.S. solar installations. A negotiated solution would be best for everyone.
Solar Energy Industries Association wants to help
In the interest of helping the industry as a whole, the SEIA has proposed a solution. It wants China and the U.S. to both drop tariffs on solar materials and in exchange the Chinese solar industry would use the money currently being spent on third-country cell manufacturing to fund a Solar Development Institute, intended to expand the U.S. solar market in the United States.
This is modeled after a fund developed to help Brazilian farmers harmed by U.S. cotton subsidies, so we've seen it work before. This may not be a perfect solution, but it's a novel option and one that I haven't heard discussed in the industry.
Who would feel the impact?
If a negotiated solution was reached, would Chinese manufacturers such as Trina Solar (NYSE: TSL ) , Yingli Green Energy (NYSE: YGE ) , and Suntech Power (NASDAQOTH: STPFQ ) feel the impact?
They may benefit from lower costs for polysilicon, depending on their current supply sources and costs. Trina and Yingli both make some of their polysilicon in-house, and it's unclear what Suntech will end in-house after restructuring the company. At the least, it would only help their costs.
The downside is that the costs incurred by "tolling" solar cells would be placed in a fund to benefit U.S. manufacturers, not help Chinese suppliers sell more panels in the United States. If there's little upside in polysilicon savings, then there's little incentive for China to accept this proposal. We'll find out more about the polysilicon tariff impact when Q3 results are released, but I don't expect an abnormally large increase in costs.
From the U.S. side, the proposed deal would be a win for polysilicon suppliers and likely a wash for manufacturers like SunPower (NASDAQ: SPWR ) and First Solar (NASDAQ: FSLR ) , which are U.S. companies but do most of their manufacturing in Asia. There would be little reason for U.S. companies to oppose the solution, partly because it's built to benefit them, but there's also little benefit for most companies to put weight behind it.
The solar war is at a standstill
While the SEIA may see its solution as a win-win, I don't see much incentive for either side to budge at the moment. There's little in the proposed solution for Chinese manufacturing, barring a jump in costs or a reduction in quality because of polysilicon tariffs. There's also little incentive for U.S. solar panel manufacturers or solar installers to push for this plan. The big beneficiary is U.S. polysilicon suppliers, and they'll have to convince everyone else to play along.
I see this as a standstill, which won't be resolved until one side or the other has a real incentive to give in and drop tariffs.
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